Understanding ethics

Ethics can be defined as the science of character of a person expressed as right or wrong conduct of action.

Nature of Ethics
Ethics is a subject that deals with human being. The question of ethics arises, as human beings are associated with values and morals. Experts were of the opinion that ethics is more of a science than an art Ethics is normative science Ethics deals with human conduct that is voluntary and not forced

Objective of Ethics Ethics deals with human behavior. It assesses any act or decision taken by
an individual is moral or not To establish moral standards and norms of behavior To judge human behavior based on these standards and norms To asses a human behavior and express an opinion about it To set standard / code for moral behavior and make recommendations about desired behavior

Business Ethics
Business can be defined as a primary economic institution through which people in modern society carry on the task of producing, distributing good and services. While business ethics refers to the application of ethical judgment to business activities.

Morality
We can define morality as the standards that an individual or a group has about what is right and wrong, or good or evil. Moral Standards The norms about the kind of actions believed to be morally right and wrong as well as values placed on the kind of objects believed to be morally good and morally bad. Exam. Always tell the truth, It is wrong to kill innocent people Moral Values can usually can be expressed as statements describing objects or features that have worth such as Honesty is good and Injustice is bad.

Ethical absolutism People with ethical absolutism view that there is single moral standard that is absolute and does not change. They oppose the cultural relativism and non-cognitive relativism i.e. subjectivism. ( Example When in Rome one should do what one would do at home) Ethical relativism People who support ethical relativism argue that there is no universal set of principles by which to judge morality. Each society has its own rules and it is inappropriate to compare ethical rules of one society with that of another. Relativists rule out the possibility of discussion across society on ethical issues. (Example When in Rome do what Romans do) Ethical subjectivism - Morally correct decision often depends on the circumstances of the person making it. Even with the same moral standards two individuals may consider different decisions to be appropriate, if their individual circumstances are different. Ethical subjectivism argues that what is ethically right or wrong for an individual depends on the ethical principals he or she has chosen.

Ethical Theories
Ethics is the field of enquiry. Morality is the object of that enquiry, the code or code of behavior acceptable within a particular group at a particular time. Metaethics can be defined as the study of origin and meaning of ethical concepts Metaethcis deals with > Metaphysical issues > Psychological issues > Linguistic issues Normative ethics is that branch of ethics that guides human conduct which must be > Prescriptive > Universal > Overriding > Public > Practical

There are three set of normative ethics, each with own set of moral principles Teleological Ethical Theory is also called Consequentialist Theory Teleological theories hold that *an action is considered morally correct if the consequences of that action are more favorable than unfavorable. Draw back - GOOD, BAD, RIGHT & WRONG Three definitions of good gives a different consequentialist moral theory > Egoism *only to the individual performing the action > Utilitarianism * to everyone > Altruism *to everyone except the individual Deontological Ethical Theory > Duties to God, including honoring him and praying to him > Duties to oneself includes preserving ones life and sharing happiness > Duties to others, including family duties, social duties and political duties. Virtue Ethics
Virtue may be defined as disposition of character that an individual desires in himself or others.

Virtue ethics emphasizes character development rather than articulation of abstract moral principles that guide actions Applied Ethics DEALS WITH CONTROVERSIAL MORAL ISSUES

Value orientation of the firm

The important aspects that managers and entrepreneurs have to consider and which are core to their activities are: Ensuring proper systems of corporate ethics and values in enterprise
Definite understanding of questions related to compliance Serving the community by looking into the needs of economically and socially disadvantages Bringing products that are environmentally friendly

Lockes Theory of Rights Rights can be defined as something to

which one has a just claim: as a A - Power or privilege to which one is justly entitled B i) the interest that one has a piece of property often used as plural ii) plural: the property interest possessed under law or custom and agreement in an intangible thing especially of a literary and artistic nature iii) something one may claim as due.

Moral rights are a subset of rights of creator of copyright work, including right for attribution, right to have work published anonymously or pseudonymously, and right to integrity of work.

 Legal rights - are clearly rights exist in legal system Positive rights Since the concept of rights limit the action from Government, only way to circumvent them is by adding new rights that is superior to others. The concept of positive rights were developed to replace the old one. Exam. a right to health care Negative rights are rights typically not to be subjected to certain conditions such as freedom of speech or autonomy. Negative rights impose duties on others to leave you alone and let do the things that are important to you. Like speak your mind or make your own decision.

Kantian right and categorical imperative (Immanuel Kants categorical imperative) is something we are fundamentally required to do irrespective of how we feel of doing it, even others around telling us completely different. In other word we must do this.  The categorical imperative is also a priori which mean it will always be, and have always been morally good.

 As such we have a duty to recognize (and accept) its moral validity.  This means categorical imperative is not good on the basis of any effect (or consequences) it might produce or even because someone (something) else tells us that is good to do it. It is simply good in itself and this is all.

Theory of Justice attempts to solve the problem of distributive

justice by utilizing the device of the social contract. Issues involving questions of justice and fairness are usually divided into three categories. Distributive justice is concerned with fair distribution of societys benefits and burdens. Retributive justice refers to just imposition of punishment or penalties to those who do wrong Compensatory justice concerns the just way of compensating people for what they lost when they were wronged by others.

Ethics of care - Ethics that empathizes caring for concrete well-being

of others those who are near to us.

Law and Morality Lawrence Kohlberg model grouped three

stages of moral development in three levels Level one : Pre-conventional stages > Stage one: Punishment and obedience orientation > Stage two: Instrument and relativity orientation Level two: Conventional stages > Stage three: Impersonal concordance orientation > Stage four : Law and order orientation Level three: Post conventional, autonomous or principled stages > Stage five: Social contract orientation > Stage six: Universal ethical principal orientation

Carol Gilligan model claimed two different ways to approach moral issues First - Male approach that Kohlberg theory emphasizes Second  Female approach to moral issues that Kohlberg does not recognize.  Gilligan claimed, a) that female tend to see themselves as part of a web of relationships with family and friends, when encounter moral issues, avoiding hurt to others in these relationships, and caring for their well being. b) For women, morality is primarily a matter of caring and being responsible for others with whom one is involved in personal relationships, not adhering to impartial and impersonal rules.

Managing Business Ethics Organization and its customers:

Product safety and liability Product information Intellectual property rights Acts Advertisement and regulation Consumer rights and Consumer Protection Act

Product safety - Implied and express claims of products safety refer to a degree of risk associated with using a product a) Risk of bodily harm to users are not unreasonable when consumers understand that risks exist, can appraise their probability and severity , know how to cope with them, and voluntarily accept them to get the benefits they could obtain in less risky way. b) But preventable risk is not reasonable, i) when consumers do not know it exists; or ii) when, through aware of it, consumers are unable to estimate its frequency and severity; or

iii) when consumers do not know how to cope with it, and hence are likely to incur harm unnecessarily; or iv) Risk is unnecessary in that it could be reduced or eliminated at a cost in money or in the performance of the product that consumers would willingly incur if they know the facts and were given the choice. Product Liability - This theory hold that that a manufacturer should pay the cost of any injuries sustained through defects in products , even when manufacturer exercised all due care in the design and manufacture of the product and has taken all reasonable precautions to warn users of every foreseen danger. The theory is a strong version of the doctrine of caveat vendor: let the seller take care This has formed the basis of the legal doctrine of strict liability

Product information The manufacturer should fix levels , notices, or instructions on the
product that will warn the user all danger s involved in using or misusing the items and that will enable the user to guard him or her against injury. These instructions should be clear and simple, warning of any hazards involved in using or misusing the product should also be clear, simple and prominent. In the case of drugs, manufacturers have a duty to warn physicians of any risks or dangerous side effects that research or prolonged use have revealed.

Intellectual Property Rights (IPR) Intellectual property is property that consists of an abstract and non-physical object, such as a software program, a song, an idea, an invention, a recipe, a digital image or sound, a genetic code, or any form of information.
IPR Act - The Indian copyright act 1957, was came into effect in 1958. This has been amended five times i.e. in 1983, 1984, 1992, 1994 and 1999, with amendment in 1994 being most substantial. Prior to the act of 1957, the law of copyright in India was governed by Copyright Act of 1914, which was an extension of British Copyrights Act 1911 in India.

Advertisement - Advertising is a form of communication, it can be

as truthful or deceptive as any other form of communication. Most criticisms of advertising focus on deceptive aspect of modern advertising. Regulations on Advertisement in India - MRTP Act, 1969 was amended in 1984 to introduce a chapter of unfair trade practices. One of the provisions constitutes and representations which give false or misleading facts disparaging goods, services or trade of any person to be an unfair trade practice. Consumer Protection Act, 1986 - defines the right to consumer as the right to be assured, wherever possible to have access to a variety of goods and services at competitive prices. As per this Act, the Consumer Rights is defined as the right to be protected against marketing of goods and services which are hazardous to life and property. Specially significant in such areas of healthcare , food processing and pharmaceuticals. This right spans across any domain that could have serious impact on consumer health or well being such As automobile, travel, domestic appliances, housing etc.

Organization and its employees Ethical issues

Drug and alcohol Employee thefts Conflicts of interest Quality control Discrimination Misuse of propriety information Fiddling of expense accounts Plant closure and lay-off Misuse of company assets Environmental pollution Misuse of other information Industrial espionage Inaccuracies in documents and records Receiving excess gifts and entertainment False or misleading advertisements Receiving back handlers Insider trading Relations with local communities Antitrust issues Bribery Political contribution and activities Improper relationship with local government personnel Improper relationship with national government personnel Inaccurate charging to government bodies

Discrimination at workplace
Utility Rights Justice Practices
> Recruitment > Screening > Promotions > Conditions of employment > Discharge

Sexual harassment Affirmative action is designed to achieve a more representative distribution of minorities and women within the firm by giving preferences to women and minorities. The utilization analysis will identify the real practice of affirmative action in company. Reinforcing and structuring ethics in organization
Theory of corporate moral excellence Ethics and stakeholders theory Ethics and corporate governance

Theory of corporate moral excellence focuses on two aspects: corporate culture and ethical behavior. Culture is based on values Corporate values Espoused values - Values in practice Michael Hoffman proposed the theory of corporate moral excellence by judging the ethical nature of the organization

Clutterbuck proposed
    The need for an ethics auditor in the organization The need to disclose exception of employee behavior The need for support of ethical behavior of the organization The need for reward systems to encourage ethical behavior

Ethics and stakeholders theory - states that paying attention to the needs to the needs and rights of all stakeholders of a business is a useful way of developing ethically responsible behavior by managers. Ethics and Corporate Governance The theory of ethics and CG deals with the determination of what is right, fair, proper, and just in decisions and actions that affect stakeholders.

Code of conduct A corporate code refers to the policy statements

that lay down a companys ethical standards. These are designed to govern the conduct of employees in the organization

Employee responsibility in the organization

Develop relationship and maintain harmony with the organization

Maintain agreed working protocol Organization & natural environment Environment protection
There are three approaches concerning moral responsibility of Environment Anthropocentrism approach focuses on the utility that human being can derive by protecting the environment Anxiological approach refers to the moral responsibility to protect the animals Eco-centric approach is a radical approach in environmental responsibility, i.e. stopping all degradation & improving environment

The Environment Protection Act,1986, came into force soon

after Bhopal Gas Tragedy and was considered umbrella legislation as it filled many gaps in existing Indian laws. Water
1882 The Easement Act allows private rights to use of ground water and also suggests that all ground water belong to state and is a state property 1897 Indian Fisheries Act prohibits the use of explosives / poison for fishing 1956 River Boards Act enables state to enroll central government in setting up Advisory River Board to resolve interstate issues. 1970 The Merchant Shipping Act aims to deal with waste arising from ships along with the costal areas within a specified radius. 1974 The Water (Prevention and Control of Pollution) Act establishes an institutional structure for preventing and abating of water pollution. 1977 The Water (Prevention and Control of Pollution) Cess Act provides for the levy of cess or fees on water consuming industries and local authorities. 1978 The Water ( Prevention and Control of Pollution) Cess Rules contain the standard definitions and indicate the kind of and location of water is required to be affix 1991- Costal regulation Zone Notification puts regulation s on various activities on protection of back waters and estuaries

Air
1948 The Factories Act and Amendment in1987 was first to express concern of the working environment to the workers 1981 Air (Prevention and Control of Pollution) Act provides for the control and abatement of air pollution 1982 Air (Prevention and Control of Pollution) Rules defines the procedures of the meetings of the boards and the powers entrusted to them 1982 Atomic Energy Act deals with radioactive waste 1987 = Air (prevention and Control of Pollution) Amendment Act empowers the central and state pollution boards to meet the grave emergencies of air pollution 1988 Motor Vehicle Act states all hazardous waste to be properly packaged , labeled and transported.

Sustainable development is development that meets the needs of of the present generation without compromising the ability of future generation to meet their own needs. It contains two concepts
the concept of needs in particular refer to the essential needs of the worlds poor to which overriding priority should be given the idea of limitations imposed by the state of technology and social organizations, on environments ability to meet present and future needs

Green Marketing
According to The American Marketing Association, green marketing is the marketing of products that are presumed to be environmentally safe. In short products that are considered environmentally responsible. There are three Rs of environmentalism namely- Reduce, Reuse and Recycle. Companies are classified on the basis of utilization of these elements into four categories Lean green Companies that adopt green practices but do not focus on publicizing these initiatives. Example, Godrejs Natures Basket. Defensive green - The marketers that use green marketing as a precaution to avoid crisis situation or to counter the competition. Example Nestle Indias infant food marketing Shaded green - The companies that adopt shaded green strategy invest in long-term, environmental friendly processes that require significant financial and non-financial dedication. Example ITCs environment friendly multipurpose paper. Extreme green Extreme green companies adopt green marketing mix in the holistic manner. They integrate environment concerns in their overall marketing strategy. Example, Tamil Nadu Newsprints & Papers L

Environment and social impacts on projects Environmental sustainability Economic sustainability Socio-political sustainability Ethical issues in Marketing
Empirical evidence - Conduct of business - Employee relations - Social responsibility - Environmental concern Ethical Issues in Marketing Strategy Ethical issues in Marketing mix > Product > Price > Place > Promotion > People, physical evidence and process Ethical issues in Market Research
Cont.

Ethical issues in Finance

Importance of financial statements > Determining the key elements of the business like the objectives of the firm and see how they are defined and measured. > Making sure that the funds are allocated to different activities on the basis of their importance. > Frame rules that have a positive effect on business activities. It is important to ensure that each project or department is allotted its fair share of funds and that projected earning of the project or department are in accordance with the funds allocated to it. Ethical issues in mergers and acquisitions > Hostile takeovers - POISON PILLS GREENMAIL GOLDEN PARACHUTE PEOPLE PILL SAND BAG

Ethics in Global contexts Culture as a Factor of business

Adapting Ethical systems to a Global Framework Global values MNCs

Corporate Social Responsibility(CSR) According to Keith

Davis Social responsibilities refer to businessmans decisions and actions taken for reasons at least partially beyond the firms technical and economic interest Trusteeship Concept of Mahatma Gandhi Wealth created by someone has to be ploughed back for the benefit of the society Multiple stakeholders theory Balancing ethical responsibility among multiple organization stakeholders Social Responsibility of Business Debate for and Against (Refer separate Slides) London Benchmarking Group - London benchmarking group (LBG) was formed in September 1994. It comprises of senior community affair managers from leading UK headquartered companies. It was established to meet the need for accurate and comparable information about how companies define, fund and manage their community involvement activities. LBG produced LBG Model in 1997 which was tested on 18 companies across different industry sectors

 The model provides a basis to decide, what is, and what is not corporate community investment This was devised on three main motives for corporate community investment (charitable gifts, community investment and commercial initiative in the community) and distinguishes between input costs and output costs. The model is increasingly being adopted in the UK and internationally as a benchmark-able standard. Ackermans Model - Robert Ackerman emphasized the Micro level analysis of CSR, and tried to show that how individual companies can be more socially responsible. He described the three phases through which companies commonly tend to pass in developing a response to social issues. Phase I CEO will identify the problem Phase II Company hires the staff to study the problem and suggest solution Phase III Division managers implement the solution Where the enlightened companies can make best information available. Being responsive may well be the only responsible course action

Carolls four part Model Four basic responsibilities

Economic responsibilities Firm must produce the goods and / or provide services that society wants and must sell them at a profit Legal responsibilities are also basic as firms should operate within the law Ethical responsibility refers to behavior by the firm that is expected by society but not codified into law. These responsibilities are not well defined, where in specific situation they are clear. Discretionary responsibilities encompasses voluntary activities undertaken for the public good. It refers to the voluntary contribution of the business to the social cause like involvement in community development or other social program.

Indices for CSR National and International indexes have been created to
assess companies against a corporate social responsibility framework. Inclusion on an index in this guide is based on level of performance with respect to sustainability. Business in Environment : BiE, also known as the Environment Index, benchmarked against companies against their peers, and against all companies that participated in the index, on the basis of their environmental performance in key impact areas.

 These reports are produced annually and provide the detail results of the index. They include average scores and analysis sector results for a variety of environment issues, recognizing areas where companies have performed well and areas for further improvement These are essential reading in stock exchanges where companies interested in emerging environmental issues and the performance of companies and sectors that have participated in the index. Dow Jones Sustainability Group Index - A collection of indexes that track the financial performance of the leading sustainabilitydriven companies worldwide. Tomorrow Index - This index meant for companies who are building beyond where its stands tomorrow. An index of corporate sustainability to provide CSR. Business of Mohammad Yunus Yunus defined this a social business, which is non-loss, non-dividend company designed to address a social objective within the highly regulated marketplace of today.

 It is distinct from a non-profit because the business seek to generate a modest profit, but this will be used to expand the companys reach, improve the product or service Yunus proposed two types of social business Type I social businesses focuses on providing a product or service with a specific social, ethical or environmental goal example Grameen bank Type II social business is a profit oriented business that is owned by the poor or the other under-privileged parts of the society, who can gain through receiving direct dividend or by direct benefits. Grameen bank, being owned by poor fall in both categories. While Grameen Danone is a social mission is to address malnutrition in Bangladesh, by providing products, like yoghurt with many nutrients to the poor at an affordable price.

Complexity of Ethical Issues Ethical problems as Managerial dilemmas > A conflict between an organizations economic

performance (measured by revenues, costs and profits) and its social performance(stated in terms of obligations to persons both inside and outside the organization)

Managerial ethics and individual decisions Ethical analysis and an unethical case Ethical analysis and ethical dilemmas The Prisoners dilemma
Cooperation is usually analyzed in Game Theory by means of a non-zerosum game called the Prisoners Dilemma (Axelrod, 1984). The two players in the game can choose the between the moves either co-operate or defect. The idea that each players gains when both cooperate, But if only one of them Cooperates and other defects will gain more. If both defects both loose (or gain little) but not as much as the cheated cooperator whose cooperation is not returned.

 Solving ethical dilemma Managerial Integrity and decision making > Pricing of checking accounting practices > Exaggerated or misleading claims in Advertising > Misuse of Frequent Flyer discounts and trips > Working conditions in a Manufacturing plant > Customer service and declining product quality > Workforce reduction > Property tax reduction > Environmental pollution > Child labor > Wages > Bribery

Ethical Decision Making - Refer separate slides Ethical Leadership Personal integrity and self development Wisdom based-leadership

Evolution of Corporate Governance (CG) - History of corporate forms and models

> An integral part of capitalism is the business corporation which was developed from the sixteenth century joint stock company and acquired its current characteristics during nineteenth century. > It is known as corporation in USA and public limited company in India. > The corporation / company consists of shareholders who contribute capital and own the corporation but whose liability for the act is limited to their contribution to the share capital of the company > The law allows anyone the privilege of forming a company, public or private for any purpose

Company Form of organization conducive to efficiency

> The law enables the organization of economic activity, be it production, trade or provision of services with limited liability through the establishment of a company > It has the same rights to buy and sell and make contracts as a person would have > This is an improvement over the propriety and partnership form of business organization > If the firm has wider participation it enjoys the benefit of access to capital market

Issues in corporate Governance - Ethical issues - Efficiency issues - Accountability issues

The growing scale of corporation and their style of functioning have raised many issues that must be addressed by corporate governance. Some of these are: The growth of private companies The magnitude and complexity of corporate groups Importance of institutional investors Rise in hostile activities of predators (take over) Insider trading Litigation against directors Needs for restructuring of board Changes in auditing practice

Definition of corporate governance - Corporate governance is the system by which business corporations are directed and controlled Difference between corporation and corporate governance
CORPORATE GOVERNANCE 1.External focus 2.Governance assumes an open system 3.Strategy oriented 4.Concerned with where the company is going CORPORATE MANAGEMENT 1. Internal focus 2. Management assumes a closed system 3. Task Oriented 4. Concerned with getting the company there

Theories of corporate governance The first theory of corporate governance (theory of McGregor) The stewardship theory (theory of Donanldson and Davis) was also based on same belief.

McGregor Theory Y of human behavior

- The management of a corporation is responsible for productive use of
its resources in best possible way to accomplish corporate goals. - Employees by nature are not averse to behaving in accordance to corporation requirements - Every employees has an in-built motivation to behave in way that will help the corporation to achieve its objectives

Some of the reasons put forth by critics of Stewardship theory Separation of ownership form management
There is no single shareholder who holds a major chunk of equity capital The inability of small investors to directly monitor the activities of the corporation in which they have invested. Control over the corporation changing from the owners to the management Divergent interests of the owners and management This assumption gave rise to Agency Theory which assumes that the agent manager will not always take decisions that will maximize long-term owner value. It further states that agents/managers/employees cannot be trusted to act for the best interest of the shareholders and should be monitored and controlled to ensure that they follow the set policies, procedures and plans for the organization.

Corporate objectives and goals Ownership pattern - Issues in managing public limited firms Major features of a public limited company (PLC) are, > Ownership is determined by the ownership of companys share. PLCs are
valued on a stock exchange where their shares are listed and traded, and > Shareholders control the company they own Voting rights of shares depend of voting rights attached to the shares

Agency Problems agency problem exists because managers

might misuse their position and there are costs associated with prevention of abuse. Corporate governance has to subordinate managers interest to that shareholders. Since, shareholders are the residual claimants they have the greatest incentive to ensure the success of the corporation Stewardship concept

Nature and evolution of corporate governance

Global and National Perspectives Global CG Models Anglo- American Model
Board of Directors (Supervisors) Appoints and supervises
Elect

Corporate Structure

Shareholders (Owners) Own Creditors

Officers ( Managers) Manage Company

Lien

Stakeholders Hold stake

Structural framework

Legal System

German Model / French Model (modified)

Corporate structure

Supervisory Board Appoints and Supervise Reports to

Appoint 1/2

Employees and Labor unions Managing Board (Including Labor relations)

Independently runs day to day Appoint 1/2 Shareholders (own) Company own

Japanese model of corporate governance

Corporate structure

Supervisory Board
(including president) Ratifies Consults

Appoint

Shareholder

own

President
Consults Provide Mangers Monitors and act in emergencies

Executive Management
(Primary board of Directors) Manages Loans

Banks

Company

Claims of various stakeholders

Stakeholders may be
Any group of people who have a stake in the business Those who are vital to the survival and success of the organization Any group that is affected by the activities of the organization

Based on the relationship with the organization stakeholders can be categorized as:
Internal stakeholders External stakeholders

Internal stakeholders are > Shareholders > Employees > Management

Share holders > Shareholders responsibility

Maintaining good relationships with top management Exercising their voting rights Similarly, the organization must honor the trust of the shareholders. Therefore, the responsibilities of the organization towards the shareholders are: > Managing company efficiently in order to secure a fair and competitive return on the owners investment > Disclosing relevant information to shareholders, subject only to legal requirements and competitive constraints. > Conserving, protecting and increasing the shareholders assets. > Respecting the shareholders requests, suggestions, complaints, and formal resolutions.

Employees > Responsibility of Employees and Employers

Some specific responsibilities of organization towards their employees are:

To provide adequate compensation To provide working conditions that respect each employees health and dignity To be honest in communications with employees and open in sharing information To listen to and, where possible, act on employee suggestions, ideas, requests, and complaints. To engage negotiations when conflicts arises. To avoid discriminatory practices and guarantee equal treatment and opportunity regardless of gender, age, race, and religion. To protect employees from avoidable injury and illness in the workplace. To encourage and assist employees in developing skills and knowledge that are required for accomplishing the task.

Management

External stakeholders > Consumers > Suppliers > Creditors > Competitors Responsibility of business corporations towards consumers are: 5 Rs
Right Quality Right quantity Right time Right place Right Price

Responsibility towards suppliers Seek fairness and truthfulness in all activities, including pricing and licensing. Cont.

 Ensure that business activities are free from coercion and unnecessary litigation. Foster long-term stability in the supplier relationship in return for value, quality, competitiveness and reliability Share information with suppliers and integrate them in the planning processes; Pay suppliers on time and in accordance with the agreed terms of trade; and Seek, encourage and prefer suppliers and sub-contractors whose employment practices respect human dignity.

Creditors Government Community

A firms responsibility towards society include: Respecting human rights and democratic values. Supporting public policies and practices that promote human development through harmonious relations between business and other segments of society. Collaborating with such activities that aim at improving the standards of health, education, workplace safety and economic well-being. Promoting and stimulating sustainable development and playing a leading role in preserving and enhancing the physical environment and conserving the earths resources. Supporting peace, security, diversity and social integration; respecting the integrity of local cultures Encouraging charitable donations, educational and cultural contributions and employee participation in community and civic affairs

Why Governance? - Change in eighties

> Deregulations of financial markets contributed to finance driven governance
> Merger activity became an important source of profits for the finance sector > Towards the end of 80s there were no underline pressures or incentives > Volatility was generated endogenously > Takeover activity itself became a powerful tool for speculation > Speculators invested in stocks of takeover target for higher earnings > Valuation was not based on future earning ability, but on break up value, dismember parts and sold off.

Reports of Committees on Corporate Governance Cadbury Committee Report Greenbury report Hampel report OECD Report

Cadbury Committee Report Committee set up in May 1991

The recommendations made by the Cadbury Committee on 27th May 1992 are as follows: Decision making power should not be vested in a single person, i.e. there should be separation of roles of chairman and CEO. Non-executive directors should act independently while giving their judgment on issues of strategy, performance, allocation like resources and designing codes of conduct. A majority of directors should be independent non-executive directors , i.e. they should not have any financial interests in the company. The term of a director should not exceed three years. This can be extended only with the prior approval of the shareholders. There should be full transparency in matters relating to directors emoluments . There should be a judicious mix of salary and performance related pay. A remuneration committee made up wholly or largely to non-executive directors, should decide on the pay of the executive directors. The interim company report should give the balance sheet information duly reviewed by the auditor.

 The pension funds should be managed distinct from the company There should be a professional and objective relationship between the board and the executives. Information regarding the audit fee should be made public and there should be regular rotation of auditors

Greenbury Report (1995) showed concern about Directors

remuneration.

Hampel Report (1998) - Made a review of Cadbury report.

Recommended no need to revolutionize the CG systems in UK. It aimed to harmonize the Cadbury and Greenbury recommendations

OECD Report On 27th-28th April 98, OECD Ministers asked

OECD to develop a set of Corporate Governance principles that would be useful for its members and non-members countries. The principles by OECD fall into five broad areas:

The rights of the shareholders

The equitable treatment to shareholders The role of stakeholders Disclosure and transparency The responsibilities of board

Sarbanes Oxley Act (SOX Act.) July 2002 Adopted for changes virtually in every areas of Corporate Governance particularly in areas of Auditor independence
Conflicts of interest Corporate responsibility Enhanced financial disclosures and penalties

The aim of the SOX Act was to clean up the auditing process. It sets up a Public Company Accounting Oversight Board to oversee auditors > It makes it unlawful for accounting firms to offer a number of other kind of services to companies whose accounts they audit > It demands that directors sitting on corporate audit committees (who are responsible for choosing the firms auditors) be independent.

Internal Corporate Governance Mechanism Board Style and structure Types of Directors
Executive directors Non-executive directors Nominee directors Representative directors Alternative directors Shadow directors Associate directors

Types of Board structure

All- Executive board Majority executive board Majority outside board Two tier Supervisory board

Governance
Board

Management

All- Executive Board

Governance

Board
Management

Majority-Executive Board

Governance
Board Management

Majority outside board

Two-tier Supervisory Board Advisory Boards Issues in designing a board

The board size The role of chairman and the chief executive Duality in subsidiary company board

Board Styles Rubber stamps boards

Representative boards Country club boards Professional board

Functional Committees of the board  Audit committee

 Remuneration committee  Nomination committee

HIGH
Country Club board Professional board

Concern for relations among Directors

Rubber stamp board

Representative board

LOW

Commitment to effective communication

HIGH

Corporate governance Roles and responsibilities of Directors (Code of conduct) Role of directors The Performance role
The Conformance role

Responsibilities of directors common responsibilities world over Responsibilities to shareholders

Obligation to maintain honesty and integrity

Legal aspects and liabilities of directors Misrepresentations in offer documents and annual accounts
Failure to refund subscription money to investors Contravention of law

Duties of Directors Exercise care in the discharge of functions as directors

Attend board meetings and devote sufficient time and attention to the affairs of the company Not to be negligent and not to commit or let others commit tortliable acts Act in the best interest of the company and its stockholders and customers Not to misuse power Protect interests of creditors Maintain confidentiality Not to make secret profits and make good loss, if accrued due to breach of duty, of negligence Not to exercise powers for collateral purpose Not to waste company assets

The role of the chairman > Relationship with the CEO > Relationships with executive directors > Relationships with non-executive directors Functions of the chairman To set standards and ensure that policies and practices are in place
To ensure that the directors make good decisions. To make sure that directors are continuously upgraded to the levels required by investors to meet current and future needs of the company. To act decisively in times of crisis To act as a representative of the company

Role of CEO Relation with the chairman Relation with directors

Functions of the CEO To assist executive directors in formulating strategic proposals

that have to be endorsed by the board To provide leadership and direction to all his executive directors. To develop a plan for implementing the strategy formulated by the board and /or management, and to convince the non-executive directors that the strategy can work. To act as representative of the executive directors when interacting with the non-executive directors. To present the company to major investors, the media and government. To be a source of inspiration, leadership and direction to the employees , customers and suppliers To be able to identify the situations that requires intervention.

The checklist of disclosures and compliance compiled by governance audit in such areas:
Composition of board Board procedures Appointment of new director Audit committee Remuneration committee Shareholders committee Previous general meetings and postal ballots Management discussion and analysis report Means of communication Rating of debts / deposits Related party transactions Penalties / enquiries by any statutory authority Information needs shareholders, customers, employees, community Internal control and management assessment thereto Statutory auditors report

Functions of the board > Strategic role of the board

Systematic level strategy
Structural and portfolio strategy Implementation strategy > Policy making role of the board > Monitoring and supervisory roles

Whistle blowers policy

The recommendation of the Committee on CG (2003) that personnel who observe an unethical or improper practice should have access to the audit committee to report is likely to have restraining effect on management (A key provision of SOX is whistle blowing. Board audit committees should provide employees with an anonymous and confidential way to lodge complaints about suspected financial shenanigans in their midst. Employees have to be informed about how the system works.) Whistle blower Act in India Union cabinet passed the bill on Aug.2010, which is officially known as Public Interest Disclosure and Protection to Persons Making the Disclosure Bill, 2010. The proposed Indian law intends to protect the whistleblowers, facilitate disclosure of information and uncover corrupt and deceptive practices that exist in government organization.

Key Features of the Whistleblowers Protection Bill (Indian Law) It will protect the whistle blowers from any discrimination or victimization in their workplace It provides for concealing the identity of a citizen who discloses information about misuse of power and money. Those who reveal the identity of the whistleblowers will be held liable and penalized, by the central vigilance Commission (CVC). The offenders will be liable for imprisonment up to three years and a fine up to Rs 50,000. There will be penalization in case of delays in response, under the Right to Information Act. A fine of Rs 250 will be imposed for everyday of delay beyond the set deadline. There will be penalization for officials who try to mislead CVC The bill provides for addressing complaints against public sector employees and employees of the Central and State Governments. The bill also ensures that honest government officials are not harassed in anyway but those individuals who file false complaints, charges will be liable for imprisonment up to 2 years and fine up to Rs. 30,000.

External Corporate Governance Mechanism Regulators - Ministry of Corporate Affairs, Government of India
Ministrys vision To be a leader and partner in initiatives of corporate reforms, good governance, and enlightened regulation with a view to promote and facilitate effective corporate functioning, investors protection and inclusive growth; empower the Indian citizen and have a global footprint.

Initiatives by Ministry of Corporate Affairs

LAW - Limited liability and partnership Act - Accounting standard - Amendment to Acts governing professionals - Comprehensive revision of Companies Act, 1956 INSTITUTION AND SYSTEMS BUILDING - Indian Institute of Corporate Affairs - Competition commission of India - National Foundation of Corporate Governance - Streamlining Field Organization

 PEOPLE ISSUES

- Rebuilding Indian Corporate law service

- Empowering Investors and citizen

Market Regulator Security and Exchange Board of India (SEBI) SEBI has laid down that the board set up a remuneration committee
to determine on their behalf and on behalf on the shareholders with agreed terms, the company s policy on specific packages for executive directors. It is important for shareholders to be informed of the remuneration of directors of the company SEBI committee on CG (2003) made a mandatory recommendation that compensation of non-executive directors as well as independent directors be fixed by the board and approved by shareholders Issue of stock options to non-executive directors as well as independent directors in any year and in total should be limited and should vest only one year after retirement

Gate keepers All board of directors are prisoners of their gate keepers and only if the boards agents properly advice and warn it, the board can function efficiently? - John Kofee Who are these gate keepers? Third parties (intermediaries) > whos cooperation if of essential > who can prevent misconduct by withholding cooperation Example Accountants and lawyers Bankers Rating agencies Physician, ISPs, Bartenders, Gun dealers

Role of Gatekeepers in CG - gatekeepers

Provide information and certification for directors and investors Have ability to detect and deter misconduct Are relied on effective CG Recent scandals World com, Enron, Satyam due to multiple failure of gatekeepers

Responsibility of gatekeepers gatekeepers role

Is largely a by-product of providing a for free service Imposes a cost on gatekeepers institution and the economy

Conclusion
Each intermediary institution is different, no one-size-fits-all answer is possible Moral responsibilities are linked to legal responsibility / liability The appropriate moral and legal principle is what investor would choice Answer to cost-effective deterrence

Institutional Investors Institutional investors are becoming an

integral part of monitoring the corporate governance in companies
Organizations which pool and invest large sum of money in companies Often act on behalf of others as institutional investor

Type of Institutional investor

Pension fund Mutual fund Investment fund Unit trust Investment bank Hedge fund

Corporate Governance in India The Companies Act. 1956

The central legislation in India Empowers the central government to regulate the formation , financing and winding up companies

The Company Bill, 2004

Introduced to provide the comprehensive review of the company law

Involvement of Institutional Investors PRO

Have significant stake in companies Ability to exercise control on promoters management and prevent abuse Have assess to information and better monitoring capabilities Significant positive stock market performance and corporate governance Research shows companies and countries weak in corporate governance suffer larger collapses when hit by greater volatility Major influence in attracting FDI

Involvement of Institutional Investors CON

Investment objectives and compensation system discourage participation Conflict of interest with primary fiduciary responsibility to own investors and beneficiaries Investors like MFs have short term performance measurement which works against active monitoring

Conclusion Active role should ensure

Board members have adequate experience and are truly independent Executive remuneration, particularly for family members is not excessive Early warning signals are detected from the wealth of information made available to shareholders Companys funds are not diverted to non-core activities or for benefit to related parties Institutional investors should lead share holders in demanding corrective action, where such action is warranted Corporate Raiders create an environment of threat of take over and force the target company to buy back shares at premium i.e. green mail technique. These are countered by - Poison Pills
- Golden Parachute - People Pills - Sand bag

Company law take over code SEBI (Substantial acquisition of

Shares and Takeover), Regulation, 2011.
An acquirer, who together with persons acting in concert with him, holds shares or voting rights in a target company entitling them to exercise 25percent or more but less than the maximum permissible non- public share holding , shall be entitled to voluntarily make a public announcement of an open offer for acquiring shares in accordance with these regulations the new code says

FEMA A replacement (post economic liberalization) of FERA became an

Act on 01.06.2000.A significant change was that it made all offences as civil
offences compared to criminal offences as dictated by FERA

Corporate Governance Ratings

At the instances of SEBI two credit rating agencies (CRISIL and ICRA) have launched a unique model for rating CG in an enterprise. The index subsumes the ability/track record of an enterprise in wealth creation, wealth management and wealth sharing The governance audit comprises a special comprehensive audit on the corporate governances and business practices of the company The report of governance audit will help to measure how best a company is governed: excellent - complying with mandatory governance requirements or below average or badly governed or misgoverned company The audit is done mainly on the basis of disclosures keeping in view the information needs of investors , employees, customers and general public. However, the committee on CG (2003) was of the view that corporate governance ratings should not be mandatory

Business Excellence Awards

Rajiv Gandhi National Quality Award - Bureau of Indian Standard CII- EXIM Bank Award or Business Excellence CII & EXIM Bank IMC Ramakrishna Bajaj National Quality Award IRBQA Committee Golden Peacock National Quality Award Institute of Directors

Corporate Governance In India: Corporate form in India 50s to 90s Development of CG in India during 90s and 2000s Various reports on CG CII Report under chairmanship of Rahul Bajaj Kumar Mangalam Birla Committee Report Narayan Murthy Report Naresh Chandra Report JJ Irani Committee report

CII Report - A task force was set up in mid 1996 under the leadership of Rahul Bajaj

Recommendations made by CII Committee are:

1. The full board should meet a minimum of six times a year, preferably at an interval of two months, which should have agenda at least for half days discussion 2. Any listed company with 100 crore or more turnover, should have professionally competent non-executive, independent directors, who should constitute at least 30% of the board if the chairman is a nonexecutive director or at least 50% if the chairman and managing director (MD) is the same person. 3. No single person should hold directorships in more than ten companies. This ceiling excludes directorships in subsidiaries (holding of 50% or more) or associate companies (stake between 25% to 50%) 4. Non-executive directors need to play material role in corporate decision making , maximizing long term shareholder value and become active participants of the board. These excludes those who joined board as experts from technology and science fields. 5. To secure better effort from non-executive directors, companies should pay a commission over and above sitting fees for professional inputs. The present commission is 1% if there is a MD and 3% where there is no MD is sufficient

6.

7.

While re-appointing members of the board, companies should give attendance record of concerned directors. If the director has not been present (absent with or without leave) for 50% or more meetings , then this should be explicitly stated in the resolution that is put to vote. One should not re-appoint any director who has not had the time to attend even one half of the meetings Key information that must be reported and placed before the board must contain > Annual operating plans and budgets, together with up-dated long term plans > Capital budgets, manpower and overhead budgets > Quarterly results for the company as a whole and its operating divisions or business segments > Internal audits reports, including cases of theft and dishonesty of a material nature > Show cause, demand and prosecution notices received from revenue authorities that are considered to be materially important ( more than 1% of net worth) > Fatal or serious accidents, dangerous occurrences, and any affluent or pollution problems

> Default in payment of interest or non-payment of the principal on any public deposit, and/or to any secured creditor or financial institution > Defaults such as non-payment of inter-corporate deposits by or to the company , or materially substantial non-payment of goods sold by the company > Any issue which involves possible public or product liability claims of substantial nature, including judgment or any order which might passed strictures on conduct of the company or taken an adverse view regarding another enterprise that can have negative implications for the company > Details of any joint venture or collaboration > Transactions that involve substantial payment towards goodwill, brand equity , or intellectual property > Recruitment and remuneration of senior officers just below the board level, including appointment or removal of the chief financial officer and the company secretary > Labor problems and their proposed solutions > Quarterly details of foreign exchange exposure and the steps taken by management to limit the risks of adverse exchange rate movement, if material

8. Listed companies with either a turnover of Rs.100 crore or a paid up capital of Rs.20 crore should set up audit committee within two years 9. Under Additional shareholders Information , listed companies should give data on high and low monthly averages of share prices in a major stock exchange where the company is listed for the reporting year; greater details of business segments, up to 10% of turnover, giving share in sales revenue, review of operations, analysis of markets and future prospects 10. Consolidation of group accounts should be optional and subject to financial institutions allowing Companies to leverage on the basis of groups assets and the income tax department using the group concept in assessing corporate income tax 11. Major stock exchanges should gradually insist upon a compliance certificate , signed by CEO and CFO which clearly states that, the management is responsible for the preparation, integrity and fair presentation of the financial statements and other information in the annual report, and which also suggest that the company will continue in the business in the following year; the accounting policies and principles confirm to standard practice, and where they do not, full disclosure has been made of any material departures; the board has overseen the companys systems of internal accounting and administrative control systems either directly or through audit committee (100 crore T.O or 20 PC)

12. For all companies with a paid up capital of Rs.20 crore or more, the quality and quantity of disclosure . A companys GDR issue should be the norm for any domestic issue 13. Government must allow far greater funding to the corporate sector against the security of shares and other paper 14 It should be desirable for financial institutions as pure creditors to re- write theirs covenants to eliminate having nominee directors except in events of serious and systematic debt default and in cases of debtor company not providing six monthly or quarterly operational data to the concerned financial institution 15 If the company goes to more than one credit rating agency, then it must divulge in the prospectus and issue document, the rating of all the agencies that did such an exercise 16 Companies that default on fixed deposits should not be permitted to accept further deposits and make inter-corporate loans or investments until the default is made good , and declare dividends only after the default is made good 17 Reduction in number of companies where there are nominee directors. Many financial institutions have argued that they are in too many companies on the board, where only few operate their tasks properly.

Kumar Managalam Birla (KMB) headed the committee appointed by

SEBI on May 7, 1999. the committee was formed to promote and raise the standard of CG.

The objective of the K M B committee was to

> Suggest suitable amendments to the listing agreement executed by the

stock exchanges with the Companies and any other measures to improve the standards of corporate governance in the listed Companies, in areas such as continuous disclosure of material information both financial, manner and frequency of such disclosures, responsibilities of independent and outside directors. > Draft a code of corporate best practices > Suggest safeguards to be instituted within the Companies to deal with insider information and insider trading

Recommendation made by KMB Committee are

The board should have an optimum combination of Executive and NonExecutive directors A qualified Audit Committee should be set up by the board or company The board should set up a Remuneration Committee

Cont.

 The board should set up a committee under the chairmanship of nonexecutive director to look into shareholders issues. Board should delegate power to registrars or share transfer agents to expedite the process of share transfers. The CG section of Annual Report should make disclosures on issues related to stakeholders Board meetings should be held at least four times in a year A s part of disclosure, apart from Directors report, management discussion and analysis report should be part of annual report issued to the shareholders. All company related information like quarterly reports should be made available in website for analysis
Cont.

 There should be separate section of CG in the Annual report, with details on level of by the compliance by the Company. Reason for noncompliance if any must be mentioned No Director should be a member more than 10 committee or act as Chairman of more than 5 Companies. It is mandatory to inform the position he / she occupies. The company should provide brief resume, expertise in specific functional areas and names of the companies in which the person holds Directorship. Disclosure to be made by board by the management relating to all material, financial and commercial transactions where they have personal interest. The half yearly disclosure of financial performance including summary of the significant events in last six months should be sent to each shareholders. Cont.

 The financial institutions should under normal circumstances have no direct roles in the decision making in the company. They should not nominate anyone in the board. However, the term lending institution may have nominees in the board. A separate section on compliance with mandatory recommendation of clause 49 should form part of the report and details of non-compliance should be highlighted. A certificate from the auditors on compliance should be form part of the Annual Report and Annual Return and a copy has to be sent to the Stock Exchange.

SEBI constituted a committee on CG under the chairmanship of N.R. Narayana Murthy whose report was presented on 8th February 2003
The issue discussed by the committee (2003) presented are related to

 Audit committee Audit report Independent directors Related parties Risk management Directorship and directors compensation Codes of conduct Financial disclosure

This report has also set out the recommendations of Naresh Chandra Committee (2003) on corporate audit and governance set up by Department of Company Affairs. These relate to
Contingent liabilities CEO / CFO certification Definition of independent directors Independence of audit committee Exemption of independent directors from civil and criminal liabilities under certain circumstances

J. J. Irani Report on Company Law

Management and Board Governance Board of Directors Minimum and Maximum number of Directors Manner of appointment, removal and resignation of Directors Age limit of Directors Independent Directors > The concept and numbers of independent Directors Definition of independent Directors / Attributes of Independent Directors Mode of Appointment of Independent Directors Material Transactions Numbers of Directorships and Alternate Directors Directors Remuneration Sitting fees to Non-Executive Directors Disclosure of Remuneration Remuneration of Non- Executive Directors Board Committees Audit Committee for Accounting and Financial Matters Shareholders Relationship Committee Remuneration Committee Duties and responsibilities of Directors Disqualification of Directors

 Vacation of offices by Directors Resignation by Directors Liabilities of Independent and Non- Executive Directors Knowledge Test Directors and Officers (D&O) Insurance Rights of Independent / Non- Executive Directors Meetings of Directors Related Matters Quorum for emergency meetings Matters to be discussed at a Board Meeting Restrictions of Boards Powers Meetings of Members Demand for Poll Other recommendations Higher deposit amount for notice regarding nominating / appointing a Director Options of buy-back for shareholders of de-listed companies Corporate Structure Key Managerial Personnel Interested Shareholders General Related Party Transactions Directors duty to disclose interest Certain transactions, in which directors are interested, subject to approval

 Disclosure Restrictions on Loan to directors or holding office or place of profit by relative of director Duty on directors to disclose information relating to directorship and shareholding in the company and in other companies

Introduction of CG - Clause 49 in the Listing Agreement issued via circulars dated 21st February, 9th March and 12th Sept 2000 and 22nd January, 16th March and 31st December 2001 Revision of Clause 49 listing agreement with effect from 01.04.2005
1. Board of Directors a) Composition of Board b) Non- Executive Directors compensation and disclosure c) Other provision to as to Board and Committees d) Code of conduct

2. Audit committee a) Qualified and independent audit committee b) Meeting of audit committee c) Powers of audit committee d) Role of audit committee e) Review of information by audit committee 3. Subsidiary companies 4. Disclosures a) Basis of related party transactions b) Disclosure of accounting treatment c) Board disclosure Risk management d) Proceeds form public issues, right issues. Preferential issues etc e) Remunerations of directors f) Management g) Shareholders Money Laundering Corporate Frauds ( Enron, BCCI, WorldCom , Satyam)

Corporate Governance practice in India under companies Act The Ministry of Company Affairs, set up National Foundation for Corporate Governance (NFCG) in partnership with CII, ICSI and ICAI The NFCG has the following Vision and Mission VISION: Be a catalyst in making India the best in Corporate Governance
practices

MISSION: To foster a culture for promoting good governance, voluntary compliance and
facilitate effective participation of different stakeholders To create a framework of best practices, structure, processes and ethics To make significant difference to Indian corporate sector by raising the standard of Corporate Governance towards achieving stability and growth

The NFCG focuses on the following areas

Creating awareness on the importance of implementing good CG practices both at the level of individual corporations and for the economy as a whole. The foundation would provide a platform for quality discussions and debates among academicians, policy makers, professionals and

corporate leaders through workshops, conferences, meetings and seminars Encouraging research capability in area of CG in the country and providing key inputs in developing laws and regulations, which meet the twin objectives of maximizing wealth creation and fair distribution of this wealth. Working with regulatory authorities at multiple levels to improve implementation and enforcement of various laws related to CG In close co-ordination with the private sector, work to instill a commitment to CG reforms to facilitate the development of a CG culture Cultivating international linkages and maintaining the evolution to-wards convergence with international standards and practices for accounting, audit, and non-financial disclosure Setting up National Centers for Corporate Governance across the country, which would provide quality training to Directors as well as produce quality research and aim to receive global recognition.