Professional Documents
Culture Documents
Corporate Governance
Corporate Governance
OJASWINI TRIPATHI
Windows User
Introduction
Corporate governance is basically maintaining the health and hygiene of the company as
observed in the Cadbury Committee, in order to achieve this there is a need to ensure that the
is no arbitrary actions taken by the company officials to ensure that none of the stakeholders
are left dissatisfied. To get to know the operations of the company, information is required.
The shareholders and the management have conflict of interest, There is an immense amount
of information necessary for a person to trust a company with their money. This information is
regarding to whether their earnings will be used with the view with which they were intended
to be used or not and whether there operations of the company are such that their returns from
the company is increasing or decreasing. The shareholders in a company have the opinion that
the management has no regard to their money in the company and they will act
Hypothesis:
The Business ethics form the basis of all the corporate governance and are indispensible to
the company for maintaining corporate governance standards in long run.
Research questions
1. Whether the business ethics play a pivotal role in the maintenance and the integrity of the
financial performance of the companies, which in turn increases the level of corporate
governance?
2. Whether the ethical independence is linked to the independence of the management of the
company?
3. Whether there is any lacuna in the present provisions that need improvement to improve
corporate governance?
Objectives:
1. To analyze the theoretical basis of business ethics, with regard to corporate governance.
2. To analyze the laws, rules and regulations implemented by management and stakeholders to
promulgate the principles of ethical corporate governance with specific reference marketing
4. To analyze the functioning of business ethics and corporate governance in the Indian
scenario and the regulations implemented in this regard.
Literature Review:
101 Annals of the American Academy of Political and Social Science (1922)
Simple Code of Business Ethics, A
The literature discusses a simple code of business ethics documents and the solicitation of
bribes. It provides that "trade custom" shall not be adritissible or constitute a defense. It is
rousing the better business sentiment of the country..Through the Commercial Standards
Washington State Bar News, Vol. 45, Issue 6 (June 1991), pp. 11-16
The article discusses the role of lawyer as Lawyers have a key role to play in preparing such
newer, more inspira-business valuations and economic analyses for business valuation
research. The standards of conduct of company, is in nine parts and include the following: An
overview of the business ethics program, requirements for training, and guidance on how to
resolve business ethics questions and concerns; Guidance on acceptable and unaccept- able
activities in marketing products and services to government and commercial customers, and
procedures regarding the disclosure and use of proprietary information; Guidelines about
offering business courtesies or gratuities to commercial customers and to federal, state, local,
and foreign government employees or representatives; Procedures to assist employees in
avoiding activities or personal interests that could influence their objectivity in performing
company responsibilities.
Community, Business Ethics, and Global Capitalism
American Business Law Journal, Vol. 38, Issue 2 (Winter 2001), pp. 215-260
Mayer, Don
The scope of the study is the analysis of the auditors and audit committees functioning in
Indian Corporate System and also how the working contributes to the corporate governance of
the companies as well.
Significance:
There is a lot on emphasis placed on the business ethics and their contribution to compliance
and to corporate governance. Business ethics are required to bridge the gap between the
management and the shareholders as well as the external environment to the company
consisting of various stakeholders like customers, government, Stock Exchanges, potential
The limitations of the study is that the researcher will focus on the Indian Legal scenario and
comparison to the UK and US legislations with regard to business ethics in relation to
corporate governance and not an in-depth analysis of the other countries scenario .
Research Methodology:
A doctrinal methodology of research will be followed by the researcher and will include
sources like research papers, new paper articles and will refer to various resources available
such as books, newspaper articles and also by various authors.
Contents
UNIT 1: ETHICAL THEORIES AND APPROACHES:
Modern Decision
Making………………………………………………………………………………..9
Purpose…………………………………………………………………………………………….........1
1
Importance…………………………………………………………………………………………… .
11
Mechanism-
Benefits…………………………………………………………………………………...13
Theories…………………………………………………………………………………………………
15
Evolution………………………………………………………………………………………………..2
0
Current Developments…………………………………………………………………………………
Introduction
At all times, wise men and religions all over the world have considered “value centered
perfection” and not “material success” as the ultimate goal of every human being.
Unfortunately with passage of time, we started witnessing a degradation of values ethics
forgetting the wise teachings, associating material success and fame as highest achievement.
Let us draw a distinction between Ethics and Morals. The word “Moral” is defined as relating
to principles of right and wrong. Although both words are broadly defined in contemporary
English as having to do with right and wrong conduct, the rood word for ethics is the Greek
word “Ethos” meaning “Character”, while the root word of Moral is Latin “Mos” meaning
1
Steven Mintz, Defining Ethics, EthicsSage (Dec 21, 2010), https://www.ethicssage.com/2010/12/what-is-
ethics.html#targetText=The%20term%20ethics%20is%20derived,that%20which%20is%20%E2%80%9Cgood.
%E2%80%9D&targetText=There%20are%20various%20ways%20to,right%E2%80%9D%20and
%20%E2%80%9Cwrong.%E2%80%9D.
Ethics is a set of standards or a code or a value system worked out from human reason and
experience, by which free human actions are determined as ultimately right or wrong, good or
evil. Ethics may be defined as the science of the Highest Good. It is the science of the supreme
ideal of human life.3
Nature of Ethics
Ethics refers to standards of behavior that tell us how human beings ought to act in the
many situations in which they find themselves in different roles.
Ethics is not the same as feelings. Feelings provide important information for our
ethical choices.
Ethics is not religion. Many people are not religious but ethics applies to everyone.
Ethics is not following law. A good system of law does incorporate many ethical
standards.
Ethics is not following culturally accepted norms.
Ethics is not science. Social and natural science can provide important date to help us
make better ethical choices. But science alone does not tell us what we ought to do.
Y
Ethical Principles
The following are the Principles of Ethics:
1. Beneficence: the principle of beneficence guides the ethical theory to do what is good.
This priority to “do well” makes an ethical perspective and possible solution to an
ethical dilemma acceptable.
2. Least harm: it deals with situations in which neither choice is beneficial. In this a
person should choose to do the least harm possible and to do harm to the fewest people.
3. Respect for Autonomy: this principle states that an ethical theory should allow people
to reign over themselves and to be able to make decisions that apply to their lives. It
means people should have control over their lives.
2
Id.
3
Id.
2. The rights & Duties approach (Deontological approach): other philosophers and
ethicists suggest that the ethical action is one that best protects and respects the moral
rights of those affected. This approach starts from the belief that humans have a dignity
based on their human nature per se or on their ability to choose freely what they do
with their lives. On the basis on such dignity, they have a right to treated as ends and
not merely as means to other ends.
4
Ofurum, UgonnaAugustina, Gabriel Justin MgbechiOdinioha, Multidimensional Ethical Dilemmas of
Contemporary Organizations: A Literature Review, International Journal of Innovation and Economic Development
5, no.3 (2019): 7-21.
5. The Virtue approach: A very ancient approach to ethics is that ethical actions ought
to be consistent with certain ideal virtues that provide for the full development of our
humanity. These virtues are dispositions and habits that enable us to act according to
the highest potential of our character and on behalf of values like truth and beauty,
honesty, courage, compassion, generosity, tolerance, love, fidelity, integrity, fairness,
selfcontrol, and prudence are all examples of virtues.
Business Ethics
Should a business entity be ethical? Experts often retort that business ethics is a contradiction
in terms because of the inherent inconsistency between ethics and the self interest motive of
profit. On the contrary it is now a well accepted fact that ethical behavior creates a positive
motive of profit.Business ethics5 is the study of what constitutes right or wrong in business.
Business ethics refers to the application of ethics to business. Business ethics then has to do
with the authenticity and integrity of an enterprise. To be ethical is to follow the business as
well as the cultural goals of the corporation, its owners, its employees and its customers.
5
SyedaMayeshaTulJannat, Zoeb Ur Rahman, Dr. Rajendra Kumar,Critical investigation on how business ethics can
have a positive impact on employee retention in the Ready-Made Garments(RMG) sector of Bangladesh, Quest
Juornals (june 10, 2019), http://www.questjournals.org/jrbm/papers/vol7-issue4/A07040116.pdf
Van Wart, Montgomery. "The Sources of Ethical Decision Making for Individuals in the Public Sector." Public
6
8
Oluwatobi, Applying the "Eight Steps To Sound Ethical Decision Making" To A Real Or Possible Ethical
Situation, Homework Market (March 03, 2019), https://www.homeworkmarket.com/questions/applying-the-eight-
steps-to-sound-ethical-decision-making-to-a-real-or-possible-ethical-situation.
5. Obtain consultation.
Do you know where to go to obtain consultation with professionals who are
knowledgeableabout ethical issues?
Assuming that vou will consult with a colleague or a supervisor, what would you
expect fromthis consultation?
What kinds of questions do you want to ask of those with whom you consult?
With whom do you seek consultation? Do you consult only with those who share
yourorientation, or do you look for consultants with different perspectives?
How can vou use the consultation process as an opportunity to test the justification of a
course ofaction you are inclined to take?
What kinds of information do you document when you consult?
When you do make use of a consultation process, do you inform your client about this?
Are thereany ways you might include the client in this consultation process?
The concept of corporate governance is gaining momentum because of various factors as well
as the changing business environment. The EEC, GATT and WTO regulations have also
contributed to the rising awareness and are compelling us to think in terms of adhering to the
good governance practices. Corporate governance, by the very nature of the concept, cannot be
exactly defined. However, there can be no two opinions that “effective accountability to all
shareholders is the essence of corporate governance.” The following definition should help us
to understand the concept better. “Corporate governance is not just corporate management; it is
something much broader to include a fair, efficient and transparent administration to meet
certain well-defined objectives.9 It is a system of structuring, operating and controlling a
company with a view to achieve long term strategic goals to satisfy shareholders, creditors,
employees, customers and suppliers, and complying with the legal and regulatory
requirements, apart from meeting environmental and local community needs. When it is
9
RuchiKulkani and BalasundramManiam, Corporate Governance — Indian Perspective, IJTEF (2014),
http://www.ijtef.org/papers/399-A10004.pdf.
Corporate leadership and its mindset would also determine the sort of governance that would
ultimately evolve. In India, the question of corporate governance has come up mainly in the
wake of economic liberalization and deregulation of industry and business, as well as the
demand for a new corporate ethos and stricter compliance with the law of the land. 12 In the
context of the unique situation in India where the financial institutions hold substantial stakes
in companies, the accountability of the directors, including nonexecutive directors and
nominees, has come into sharp focus.”
10
Id.
11
BasiaHellwig, Know Your Shareholder Rights,Investopedia (May 30, 2019),
https://www.investopedia.com/investing/know-your-shareholder-rights/
12
Nwosu M. Eze , Eze-Nwosu P. Chiamaka, Corporate Governance And Leadership: Is There A Nexus?, IOSR-JBM
(Apr. 2016), http://iosrjournals.org/iosr-jbm/papers/Vol18-issue4/Version-1/A1804010108.pdf
Definition:
The root of the word governance is from ‘gubernate’ which means to steer. Corporate
governance would mean to steer an organization in the desired direction. The responsibility to
steer lies with the board of directors/governing board. Corporate or corporation is derived from
Latin term “corpus” which means a “body”. Governance means administering the processes
and systems placed for satisfying stakeholder’s expectation. When combined Corporate
Governance means a set of systems procedures, polices, practices, standards put in place by a
corporate to ensure that relationship with various stakeholders is maintained in transparent and
honest manner.
There is no universal definition of corporate governance. Some good definitions are given
hereunder for better understanding:-
“Corporate governance is concerned with the way corporate entities are governed, as distinct
from the way businesses within those companies are managed. Corporate Governance address
the issues facing Board of directors such as the interaction with top management and
relationships with the owners and others interested in the affairs of the company” – Robert Ian
Tricker (who introduced the words corporate governance for the first time in his book in
The Cadbury committee has also defined the term “Corporate Governance” and according to
the committee, it means, “(It is) the system by which companies are directed and controlled.”
It may also be defined as a system of structuring, operating and controlling a company with the
following specific aims:-
(i) Fulfilling long-term strategic goals of owners;
(ii) Taking care of the interests of employees;
(iii) A consideration for the environment and local community;
(iv)Maintaining excellent relations with customers and suppliers;
(v) Proper compliance with all the applicable legal and regulatory requirements.
We may also note what the CII constituted committee has to say on the definition, “Corporate
governance deals with laws, procedures, practices and implicit rules that determine a
company’s ability to take informed managerial decisions vis-à-vis its claimants–in particular,
its shareholders, creditors, customers, the State and employees. There is global consensus
about the objective of ‘good corporate governance: maximizing long-term shareholder value.”
13
Caroline Banton, Shareholder vs. Stakeholder: What's the Difference?,Investopedia (Apr 14, 2019),
https://www.investopedia.com/ask/answers/08/difference-between-a-shareholder-and-a-
stakeholder.asp#targetText=Shareholders%20are%20always%20stakeholders%20in,than%20stock%20performance
%20or%20appreciation.
According to ICSI, “We may define ‘corporate governance as a blend of rules, regulations,
laws and voluntary practices that enable companies to attract financial and human capital,
perform efficiently and thereby maximize long term value for the shareholders besides
respecting the aspirations of multiple stakeholders including that of the society.”
14
Institute of Company Secretaries of India, Ethics Governance and Sustainability, ISCI (Feb 2, 2016),
https://www.icsi.edu/media/webmodules/PP-EGAS-2016%20-%20Full%20Book%20(2)%2002feb2016.pdf.
15
Gaurav Akrani, Importance of Corporate Governance - Need & Significance,Kalyna City Life (Aug 10. 2011),
https://kalyan-city.blogspot.com/2011/10/importance-of-corporate-governance-need.html.
Better access to global Market:Good corporate governance systems attract investment from
global investors, which subsequently leads to greater efficiencies in the financial sector.
Combating Corruption: Companies that are transparent, and have sound system that provide
full disclosure of accounting and auditing procedures, allow transparency in all business
transactions, provide environment where corruption will certainly fade out. Corporate
governance enables a corporation to compete more efficiently and prevent fraud and
malpractices within the organization.
Easy Finance from Institutions:Several structural changes like increased role of financial
intermediaries and institutional investors, size of the enterprises, investment choices available
to investors, increases competition, and increased risk exposure have made monitoring the use
of capital more complex thereby increasing the need of good corporate governance.
Accountability: Investor relations are essential part of good corporate governance. Investors
have directly/ indirectly entrusted management of the company for the creating enhanced value
for their investment. The company is hence obliged to make timely disclosures on regular
basis to all its share holders in order to maintain good investor’s relation. Good corporate
governance practices create the environment where boards cannot ignore their accountability
to these stake holders.
Corporate Transparency
Responsibility Governance
Acco
unta
bility
Dimensions:
Dimensions
16
Id.
17
Id.
4. Board Skills: to be able to undertake its functions efficiently and effectively, the board
must possess the necessary blend of qualities, skills, knowledge and experience. Each
of the directors should make quality contribution. A board should have a mix of the
following skills, knowledge and experience:
Operations or technical expertise, commitment to establish leadership
Financial skills
Legal skills
Knowledge of government and regulatory requirement
5. Board appointments: To ensure that the most competent people are appointed in the
board, the board positions should be filled through the process of extensive search. A
well defined and open procedure must be in place for reappointments as well as for
appointment of new directors. Appointment mechanism should satisfy all statutory and
administrative requirements. High on the priority should be an understanding of skill
requirements of the board particularly at the time f making a choice for appointing a
new director. All new directors should be provided with a letter of appointment setting
out in detail their duties and responsibilities.
6. Board induction and training: directors must have a broad understanding of the area
of operation of the company’s business, corporate strategy and challenges being faced
by the board. Attendance at continuing education and professional development
programmes is essential to ensure that directors remain abreast of all developments,
which are or may impact on their corporate governance and other related duties.
8. Board Meetings:directors must devote sufficient time and give due attention to meet
their obligations. Attending board meetings regularly and preparing thoroughly before
entering the boardroom increases the quality of interaction at board meetings. Board
meetings are the forums for board decision making. These meetings of board meetings
are dependent on carefully planned agendas and providing relevant papers and
materials to directors sufficiently prior to board meetings.
10. Strategy Setting:the objectives of the company must be clearly documented in a long
term corporate strategy including an annual business plan together with achievable and
measurable performance targets and milestones.
Marketing ethics is the systematic study of how moral standards are applied to marketing
decisions, behaviors,and institutions. Because marketing is a process inherent to most
organizations, marketing ethics should be viewed as a subset of business ethics; thus, much of
what is written about business ethics applies to marketingethics as well.18 At the outset, it is
also useful to distinguish between positive and nonnative marketing ethics. Positive marketing
ethics looks at marketing practices from the standpoint of "what is." For example, specifying
the percentage of organizations that have codes of ethical marketing practice or tracking
thenumber of violations that deal with deceptive advertising would be examples of positive
marketing ethics. Incontrast, normative marketing ethics deals with how marketing ought to
operate according to some moralstandard or theory. 19 The sort of moral standards (or theories)
applied to marketing situations involve the usualmoral frameworks commonly applied when
evaluating business ethics (e.g., utilitarianism, duty-based theories,virtue ethics). When the
words "marketing ethics" appear in the general media or business press, the reports typically
describe a marketing strategy, tactic, or policy that some constituency feels is "unfair" or
"exploitive" or "deceptive." Often, the subsequent discussion Tums to how marketing practices
might become more consumer-friendly, socially compatible, or put in philosophical terms,
18
Caner &Banu, An Overview and Analysis of Marketing Ethics, HrMars (November 2014),
http://hrmars.com/hrmars_papers/An_Overview_and_Analysis_of_Marketing_Ethics.pdf.
19
Id.
Marketing practice
At the heart of marketing ethics are decisions that marketing practitioners make about ethical
questions. Ethical questions most often arise in marketing when a stakeholder group or some
segment of the public feelsthat the actions taken by some (or many) marketers might be judged
to be morally inappropriate. Currently,for instance, many consumers feel that spam advertising
over the Internet is far too prevalent and/or that product rebates have too often been
intentionally made to be difficult to redeem. Similarly, other ethical questions occur when
marketing managers believe that they might be compromising their own personal values in the
quest for increased organizational profit. Insuch situations, marketers are often evaluating
whether they should take business actions that they feel ought not to be done from the
standpoint of personal ethics that they hold-the essence of an ethical dilemma. 22
20
Id.
21
Id.
22
Jacob Darbonne, The Ethics Of Marketing And Advertising, Bartleby Research (Aug 26, 2105),
https://www.bartleby.com/essay/The-Ethics-Of-Marketing-And-Advertising-P3RUJ4LJF9LX.
Most generic areas of marketing practice provoke substantial ethical comment and discussion.
These areas include marketing segmentation, marketing research, product development,
pricing, distribution, personal selling, and advertising. In the paragraphs below, a sampling of
marketing issues, often suggesting ethical questions from these areas of marketing practice is
briefly reviewed to illustrate both the nature and the scope of marketing ethics in the conduct
of business operations.25
Market Segmentation
One of the basic strategies of marketing campaigns involves the division of the mass market
into "segments" followed by the development of specific offerings to appeal to the selected
"target market."Ethical questions especially surround the target marketing of segments that
include potentially vulnerable populations such as children, the elderly, the impoverished, and
marketing illiterates. The "ethical issue" at focus here centers on whether marketers have too
much "power" over certain groups who are not prepared to independently participate in the
marketplace.
23
Id.
24
Id.
25
Id.
Additional ethical issues arise owing to the fact thatmarketing research often involves contact
with thegeneral public, usually through the use of surveys thatare increasingly being conducted
online. Because marketingresearch activity relies heavily on publicly submittedinformation,
some of which is personallysensitive, marketing research is ripe for ethical abuseor misuse. As
survey research has become digitized,researchers have gathered substantial records
aboutconsumer product and service usage as well as theirsatisfaction. As a result, the issue of
consumer privacyis at the forefront of marketing research ethics. It ishoped that the coming
decade will yield definitiveanswers about the extent of privacy protection thatconsumers can
expect when shopping online. Second,most marketing research is conducted by for-
profitorganizations to aid decision making within corporations.
As a result, the profit motive may causeresearchers or their clients to compromise the
objectivityand precision of the research that is undertaken.Researchers inherently want to
provide support for theoutcomes their sponsors hope to find. Clients basicallywant the research
they conduct to tell the best possiblestory about their company and their products. It shouldnot
be surprising then that marketers sometimes fall tothe temptation of misusing market research
informationby manipulating or exaggerating the results.
Deceptive pricing practices cause customers to believe that the price they pay for some unit of
value in a product or service is lower than it really is. The deception might take the form of
making false price comparisons, providing misleading suggested selling prices, omitting
important conditions of the sale, or making very low price offers available only when other
items are purchased as well. Promotion practices are deceptive when the seller intentionally
misstates how a product is constructed or performs, fails to disclose information regarding
pyramid sales (a sales technique in which a person is recruited into a plan and then expects to
make money by recruiting other people), or employs bait-and-switch selling techniques (a
technique in which a business offers to sell a product or service, often at a lower price, in order
to attract customers who are then encouraged to purchase a more expensive item)27. False or
greatly exaggerated product or service claims are also deceptive. When packages are
intentionally mislabeled as to contents, size, weight, or use information, that constitutes
deceptive packaging. Selling hazardous or defective products without disclosing the dangers,
failing to perform promised services, and not honoring warranty obligations are also
considered deception.28
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 customers30. Beyond the target audience, however, marketers should
understand that there are others who are not customers who might receive their appeals and see
their images and be offended.
Direct marketing is also undergoing closer examination. Objectionable practices range from
minor irritants, such as the timing and frequency of sales letters or commercials, to those that
are offensive or even illegal. Among examples of practices that may raise ethical questions are
persistent and high-pressure selling, annoying telemarketing calls, and television commercials
that are too long or run too frequently. Marketing appeals created to take advantage of young
or inexperienced consumers or senior citizens including advertisements, sales appeals
disguised as contests, junk mail (including electronic mail), and the use and exchange of
mailing list say also pose ethical questions. In addition to being subject to consumer-protection
laws and regulations, the Direct Marketing Association provides a list of voluntary ethical
guidelines for companies engaged in direct marketing.
Ethical questions may also arise in the distribution process. Because sales performance is the
most common way in which marketing representatives and sales personnel are evaluated,
performance pressures exist that may lead to ethical dilemmas. For example, pressuring
vendors to buy more than they need and pushing items that will result in higher commissions
are temptations. Exerting influence to cause vendors to reduce display space for competitors'
products, promising shipment when knowing delivery is not possible by the promised date, or
paying vendors to carry a firm's product rather than one of its competitors are also unethical.32
Research is another area in which ethical issues may arise. Information gathered from research
can be important to the successful marketing of products or services. Consumers, however,
may view organizations' efforts to gather data from them as invading their privacy. 33 They are
resistant to give out personal information that might cause them to become a marketing target
or to receive product or sales information. When data about products or consumers are
exaggerated to make a selling point, or research questions are written to obtain a specific
result, consumers are misled. Without self-imposed ethical standards in the research process,
management will likely make decisions based on inaccurate information.
31
JeenaHennington, Eight Principles Of Advertising Ethics, MDG (April 12, 2011),
https://www.mdgadvertising.com/marketing-insights/eight-principles-of-advertising-ethics.
32
Id.
33
Id.
The proliferation of direct marketing and use of the Internet to market to children also raises
ethical issues. Sometimes a few unscrupulous marketers design sites so that children are able
to bypass adult supervision or control; sometimes they present objectionable materials to
underage consumers or pressure them to buy items or provide credit card numbers. When this
happens, it is likely that social pressure and subsequent regulation will result. Likewise,
programming for children and youth in the mass media has been under scrutiny for many
years.38
34
Yves Evrard&Luiz Henrique Boff, Materialism and Attitudes Toward Marketing, ACR (1998),
http://acrwebsite.org/volumes/8152/volumes/v25/NA-25
35
Id.
36
Michael Brenner, The Ethics of Marketing to Children and Teens, Marketing Insider Group (November 27, 2017),
https://marketinginsidergroup.com/content-marketing/ethics-marketing-children-teens.
37
Id.
38
Id.
Unlike the legal protections in place to protect children from harmful practices, there have
been few efforts to protect minority customers. When targeting minorities, firms must evaluate
whether the targeted population is susceptible to appeals because of their minority status. The
firm must assess marketing efforts to determine whether ethical behavior would cause them to
change their marketing practices.42
Honesty45—to be truthful and forthright in our dealings with customers and stakeholders.
We will tell the truth in all situations and at all times.
We will offer products of value that do what we claim in our communications.
We will stand behind our products if they fail to deliver their claimed benefits.
We will honor our explicit and implicit commitments and promises.
47
Id.
48
Id.
49
Id.
Citizenship50—to fulfill the economic, legal, philanthropic and societal responsibilities that
serve stakeholders in a strategic manner.
We will strive to protect the natural environment in the execution of marketing
campaigns.
We will give back to the community through volunteerism and charitable donations.
We will work to contribute to the overall betterment of marketing and its reputation.
We will encourage supply chain members to ensure that trade is fair for all participants,
including producers in developing countries.
TheEthics of Advertising
Walter Thomson “advertising is anon moral force, like electricity which not only illuminates
but electrocutes, it’s worth to civilization depends upon how it its used”.Commercial
advertising is defined as a form of “information” which means providing information to
consumers.Thus ethics in advertising means a set of well defined principles which govern the
ways of communication taking place between the seller and the buyer. Ethics is the most
important feature of the advertising industry. Though there are many benefits of advertising
but then there are some points which don’t match the ethical norms of advertising.An ethical
ad is the one which doesn’t lie, doesn’t make fake or false claims and is in the limit of
decency.51
Benefits of Advertising52
Economic: useful tool for sustaining honest and ethically responsible competition by
informing people of the availability of rationally desirable new products and services
and improvements in existing ones
Political: helps counteract tendencies toward the monopolization of power by
informing people of the ideas and policy proposals of parties and candidates
50
Id.
51
William M. O’Barr, Ethics and Advertising, Project Muse (Oct 9, 2007), https://muse.jhu.edu/article/221968.
52
Id.
Harms of Advertising53
Economic: misrepresent and without relevant facts; subvert the media by pressure not
to treat of questions that are embarrassing and inconvenient; tout harmful or useless
goods; move people based on non-rational decisions; become a tool of "consumerism";
particularly harmful in economically less developed countries
Political: costs of advertising can limit political competition to wealthy candidates or to
those willing to compromise their integrity; distorts the views and records of opponents
Cultural: corrupt culture and cultural values by contradicting sound traditional values;
can create superficiality, tawdriness, and moral squalor; ignore educational and social
needs of certain segments of the audience; contributes to stereotyping of particular
groups
Moral and religious harms: deliberate appeals to motives of envy, status seeking, and
lust creates vulgar and morally degrading advertising; treat of religion in obnoxious
and offensive manners; can promote morally suspect or perverse products and practices
53
Id.
54
Id.
Unethical advertising55
Advertisement is considered unethical in the following situations;
When it has degraded or underestimated the substitute or rival's product.
When it gives false or misleading information on the value of the product.
When it fails to give useful information on the possible reaction or side effects of the
product.
Ambiguity
Exaggeration
Concealed Facts
Psychological appeal
False Advertising
Harmful Products
Degradation of women
55
Id.
56
Id.
57
Orson Swindle, Combating Deceptive Advertising - The Role of Advertisers, the Media, and the FTC, FTC (April
28, 2003), https://www.ftc.gov/public-statements/2003/04/combating-deceptive-advertising-role-advertisers-media-
and-ftc.
Self-Regulation in Advertising58
Mariane,
58
How self-regulation works and why, Adstandards (August 29, 2016),
https://adstandards.com.au/blog/how-self-regulation-works-and-why.
JUDICIAL APPROACH
One of the earliest cases of trademark and intellectual property infringement, this landmark
case from 1999 laid down the principles that allowed comparative advertising in India under
certain rules. Ramachandran’s Jyothy Laboratories released a television ad that claimed its
new Ujala fabric whitener was better than other blue whiteners because the latter would leave
Reckitt had claimed that while the ad only said “neel", it clearly disparaged their product
Robin Blue which was the market leader in blue whiteners. Also, Jyothi Labs had used Robin
Blue’s packaging and its price of Rs10 to refer to the generic “neel" in its ad, leaving no
ambiguity. In 1999, the Calcutta high court upheld Reckitt’s plea and ordered that Jyothi Labs
to stop airing the offending ads. The judgment laid out the five principles of comparative
advertising, which allowed hyperbole and even lies in claims that one’s product was the best,
59
CS No. 31 of 1996
60
2003(27)PTC 305 Del
bottle labelled “Pappi" and a logo similar to Pepsi’s trademark. The ad urged customers not to
pick Pepsi because it was sweet and therefore meant for children, while Thums Up was a
“strong" drink. The ad also parodied PepsiCo India’s famous “Yeh Dil Maange More" tagline
and the Pepsi roller-coaster ad that the company made famous globally.
In 2003, justice Usha Mehra of Delhi high court upheld part of PepsiCo’s plea and restrained
ads by Thums Up that referred to PepsiCo’s trademark, name and logo, and the roller-coaster
visual associated with its global ad. This judgment also established the three principles by
which to ascertain whether an ad was disparaging—intent, manner and story line of the
This case bears striking similarity to the one HUL and GCMMF are now fighting in Bombay
high court. Emami Ltd, makers of Sona-Chandi Amritprash, ran television ads that claimed
that chyawanprash would harm consumers during summers. Emami’s new product claimed
Dabur accused Emami of disparaging its chyawanprash, saying it was irrelevant that the ad
the total market. In 2004, Delhi high court’s justices U. Mehra and O. Dwivedi ruled that by
asking people not to eat chyawanprash, Emami’s ads were also asking people not to buy Dabur
Chyawanprash. The ads were ruled disparaging and were stopped on Dabur’s plea.
In another case similar to the HUL vs GCMMF one, makers of the Odomos mosquito repellent
cream accused Godrej Sara Lee, maker of Good Knight Naturals cream, of disparaging its
product by advertising that certain repellent creams could cause rashes while Good Knight
Naturals would not, because it contained lavender, tulsi and milk protein.
Dabur argued that the ad did not need to mention Odomos by name to disparage it because the
brand commanded 80% of the repellent cream market. Justices Madan Lokur and Mukta Gupta
said the ad simply promoted Good Knight Natural’s benefits that addressed reasonable
concerns of using any repellent cream—rashes—that Odomos may or may not cause. If this
was disparagement, the justices argued, then no mosquito repellent maker could advertise its
products without denigrating Odomos, which had a market monopoly. The court denied
An advertisement for Vim Liquid run by HUL implied Dettol’s Healthy Kitchen was a “harsh
antiseptic", similar to the flagship Dettol liquid, misleading consumers that the Dettol washing
liquid was unsafe for kitchen use. In 2013, justice M.L. Mehta ruled that HUL’s Vim ad did
disparage Dettol Healthy Kitchen by misusing the ordinary public’s association of “harsh
61
2004(29)PTC 1 (Del).
62
FAO(OS)(COMM) 62/2018
Whistle blowing is reporting the company you work for, or someone above you in the
company hierarchy, for doing something unethical or illegal. there have been laws passed to
protect people who report such behavior, because in the past, they have been subject to
sanctions, such as losing their jobs or being demoted for reporting things that are in the public
interest to be reported.
Whistle-blowing takes place when a government employee, company employee or
independent contractor goes public with claims of illegal or unethical business practices or
activities within his company. Many times, the whistle-blower has attempted to communicate
WHISTLE-BLOWING PROCEDURE65
STAGE 1
An employee who has concerns of malpractice within the Institute should write to their
Line Manager in a sealed envelope marked Confidential, to be opened by the
addressee, detailing the alleged malpractice.
In the event that the concerns involve the individual’s Line Manager or the Principal,
the employee should write to the Registrar or another appropriate senior manager.
STAGE 2
On receiving the document, an appropriate body will be appointed to investigate the
allegation. Dependent on the nature of the concern, internal or external audit may be
the appropriate body toconduct an investigation.
The issues raised may be considered as gross misconduct and a decision may be made
to suspend all or some of those staff who are under investigation on full pay.
Should the allegation be made against the Principal, then the Chair of the Corporation
will take the above action.
3. Investigation Procedure66
63
Leo Martin, How to cultivate a whistleblowing culture, EthicalCorp (May 04, 2017),
http://www.ethicalcorp.com/content/how-cultivate-whistleblowing-culture.
64
Id.
65
Henry Shaw, What is Whistleblowing in Whistle Blowing Policy in Business, HR Helpboard (September 2016),
https://www.hrhelpboard.com/hr-policies/whistle-blower-policy.htm#targetText=The%20Whistle%20blowing
%20policy%20and,given%20in%20the%20Corporate%20Policy.
STAGE 3
Any disciplinary acti0n deemed necessary against th0se accused 0f malpractice will be
instigated immediately in acc0rdance with the Disciplinary Pr0cedure.
The empl0yee wh0 raised the c0ncern will be inf0rmed 0f the 0utc0me 0f the
investigati0n.
Where the investigati0n sh0ws that the empl0yee raised c0ncerns f0r pers0nal gain 0r
f0r pers0nal m0tives, disciplinary acti0n will be taken against the empl0yee.
4. Review
This pr0cedure will remain in f0rce until amended 0r withdrawn after c0nsultati0n with staff.
WHAT SHOULD THE PROCEDURE CONTAIN?67
The purp0se 0f the pr0cedure is t0 identify the pr0cess f0r receiving and dealing
66
Id.
67
Id.
Serious Wrongdoing70
The pr0cedure sh0uld identify the definiti0n 0f “seri0us wr0ngd0ing”. Under the Act
68
Henry Shaw, What is Whistleblowing in Whistle Blowing Policy in Business, HR Helpboard (September 2016),
https://www.hrhelpboard.com/hr-policies/whistle-blower-policy.htm#targetText=The%20Whistle%20blowing
%20policy%20and,given%20in%20the%20Corporate%20Policy.
69
Id.
70
Id.
Pr0tecti0n71
The pr0cedure sh0uld rec0rd the pr0tecti0n that will be given t0 empl0yees wh0 make a
discl0sure. Examples include pr0tecti0n against:
· retaliat0ry acti0n by the empl0yer;
· discriminati0n/victimizati0n under the Human Rights Act 1993; and
· Criminal 0r civil liability arising fr0m the discl0sure (unless the whistlebl0wer was
pers0nally inv0lved in the seri0us wr0ngd0ing).
C0nfidentiality72
C0nfidentiality needs t0 be specifically addressed. Generally the pers 0n receiving the
discl0sure w0uld be expected t0 use their best endeav 0rs t0 keep the whistlebl0wer’s identity
secret. H0wever there will be s0me circumstances in which it will be appr 0priate t0 identify
the whistlebl0wer. Under the Act these are:
the whistlebl0wer pr0vides written c0nsent
the pers0n receiving the discl0sure believes that discl0sure 0f identifying inf0rmati0n
is essential:
t0 the investigati0n 0f the discl0sure;
t0 prevent seri0us risk t0 public health 0r safety 0r the envir0nment; 0r having regard
t0 the principles 0f natural justice.
71
Id.
72
Id.
The pr0cedure sh0uld rec0rd that empl0yees are expected t0 exhaust the internal
whistlebl0wing pr0cedure bef0re g0ing 0utside the 0rganizati0n with their discl0sures. S0me
0rganizati0ns may wish t0 specifically list the external “appr0priate auth0rities” t0 wh0m
discl0sures may be made 0nce the internal pr0cedure has been exhausted.
The appr0priate auth0rities named in the Act, t0 wh0 pr0tected discl0sures may be madeare
the:
· C0mmissi0ner 0f P0lice;
· C0ntr0ller and Audit0r-General;
· Direct0r 0f the Seri0us Fraud 0ffice;
· Inspect0r-General 0f Intelligence and Security;
· 0mbudsmen;
73
74
OTHER
When preparing a procedure you should have regard to the following matters:
· Disclosures of serious wrongdoing must be taken seriously;
· A whistle-blowing procedure must comply with the requirements of natural justice;
· Information about the existence of the internal procedure must be published widely
within the organization;
· The procedure should be regularly reviewed to ensure that it is effective.
75
Lauren Hockley, Why is Whistleblowing Important?, Delta Net (Sep. 19, 2018), https://www.delta-
net.com/compliance/whistleblowing/faqs/why-is-whistleblowing-important.
76
Henry Shaw, What is Whistleblowing in Whistle Blowing Policy in Business, HR Helpboard (September 2016),
https://www.hrhelpboard.com/hr-policies/whistle-blower-policy.htm#targetText=The%20Whistle%20blowing
%20policy%20and,given%20in%20the%20Corporate%20Policy.
77
Id.
Advantages79
1: Public Safety: One of the principle reasons to blow the whistle on illegal or unethical
activities is to protect the public, colleagues or others from risk. The more immediate and the
more significant the risk, the more important to take action efficiently. When companies
78
Id.
79
Lauren Hockley, Why is Whistleblowing Important?, Delta Net (Sep. 19, 2018), https://www.delta-
net.com/compliance/whistleblowing/faqs/why-is-whistleblowing-important.
2: Moral Responsibility: Blowing the whistle out of a sense of moral obligation is generally
regarded as the best reason to do so. In his Denver Business Journal article "`Blowing the
Whistle' Requires Courage," Marshall Colt explains that "What motivates you?" is a key
question you should ask before whistle-blowing. If you are attempting to protect the public or
fulfill a sense of moral duty, you are likely justified. If revenge against your organization is the
motive, you may not have a good motivation for action.
Disadvantage 80
1: Retaliation: One of the primary disadvantages of blowing the whistle is the potential
retaliation you face from management and colleagues. Some federal protections are in place to
encourage whistle-blowing, but those offer little support when you show up at the office each
day to a sense of resentment and hate from your co-workers. Colt encourages whistle-blowers
to have a physical and mental escape plan should things turn ugly at the office.
2: Conflicts of Interest: For many potential whistle-blowers, the conflict of interest between
serving one's company, co-workers and friends and protecting the public is very real and
challenging. You must weigh the possible damage to your working relationships and your
career against the merits of blowing the whistle in a given situation. Many people feel a sense
of loyalty to their company that prohibits whistle-blowing. Others simply are too burdened by
the thought of making bold accusations against an employer.81
The purpose of the whistle blowing policy is to encourage employees to disclose any
malpractice or misconduct of which they become aware and importantly to provide protection
for employees who report allegations of such malpractices or misconduct. The policy applies
to all employees, suppliers, agents, contractors and customers of the group. A potential
whistleblower should have good documentation of the evidence of the evidence of wrongdoing
before disclosing it to others. The whistleblower should also be prepared to deal with employer
80
Mike Bothwell, Pros and Cons of Whistleblowing in the Workplace, Whistle Blower Law (Aug 14, 2017),
https://whistleblowerlaw.com/whistleblowing-in-the-workplace/.
81
Id.
UnitV
Ethics in Finance
Ethics in Finance
Ethics in general is concerned with human behavior that is acceptable or "right" and that is not
acceptable or "wrong" based on conventional morality. General ethical norms encompass
truthfulness, honesty, integrity, respect for others, fairness, and justice. They relate to all
aspects of life, including business and finance. Financial ethics is, therefore, a subset of
general ethics.
Ethical norms are essential for maintaining stability and harmony in social life, where people
interact with one another. Recognition of others' needs and aspirations, fairness, and
82
Lauren Hockley, Why is Whistleblowing Important?, Delta Net (Sep. 19, 2018), https://www.delta-
net.com/compliance/whistleblowing/faqs/why-is-whistleblowing-important.
Ethical dilemmas and ethical violations in finance can be attributed to an inconsistency in the
conceptual framework of modern financial-economic theory and the widespread use of a
principal-agent model of relationship in financial transactions.83 The financial-economic theory
that underlies the modern capitalist system is based on the rational-maximizer paradigm,
which holds that individuals are self-seeking (egoistic) and that they behave rationally when
they seek to maximize their own interests. 84The principal-agent model of relationships refers
to an arrangement whereby one party, acting as an agent for another, carries out certain
functions on behalf of that other. Such arrangements are an integral part of the modern
economic and financial system, and it is difficult to imagine it functioning without them.85
The behavioral assumption of the modern financial-economic theory runs counter to the ideas
of trustworthiness, loyalty, fidelity, stewardship, and concern for others that underlie the
traditional principal-agent relationship. The traditional concept of agency is based on moral
values. But if human beings are rational maximizers, then agency on behalf of others in the
traditional sense is impossible. As Duskaexplains it: "To do something for another in a system
geared to maximize self-interest is foolish. Such an answer, though, points out an
inconsistency at the heart of the system, for a system that has rules requiring agents to look out
for others while encouraging individuals to look out only for themselves, destroys the practice
of looking out for others"86
83
Anand G. Shetty, Ethics in Finance, Encyclopedia (Sep. 17, 2019), https://www.encyclopedia.com/finance/finance-
and-accounting-magazines/ethics-finance.
84
Id.
85
Id.
86
Norman Bowie & Ronald Duska, Business Ethics, Phil Papers (1992), https://philpapers.org/rec/BOWBE-2.
Most of our needs for financial services management of retirement savings, stock and bond
87
PairotePathranarakul, Conflict of Interest: An Ethical Issue in Public and Private Management, OECD (Sep 28,
2005),http://www.oecd.org/site/adboecdanti-corruptioninitiative/regionalseminars/35592747.pdf.
88
Id.
89
Jack Ryan, What Is the Role of Agency Theory in Corporate Governance?, Investopedia (Jan. 14, 2019),
https://www.investopedia.com/ask/answers/031815/what-role-agency-theory-corporate-
governance.asp#targetText=What%20Is%20the%20Role%20of%20Agency%20Theory%20in%20Corporate
%20Governance%3F&targetText=Agency%20theory%20is%20used%20to,without%20regard%20for%20self
%2Dinterest.
90
Id.
91
Id.
92
Id.
ETHICAL VIOLATIONS
The most frequently occurring ethical violations in finance relate to insider trading,
stakeholder interest versus stockholder interest, investment management, and campaign
financing.93 Businesses in general and financial markets in particular are replete with examples
of violations of trust and loyalty in both public and private dealings. Fraudulent financial
dealings, influence peddling and corruption in governments, brokers not maintaining proper
records of customer trading, cheating customers of their trading profits, unauthorized
transactions, insider trading, misuse of customer funds for personal gain, mispricing customer
trades, and corruption and larceny in banking have become common occurrences.94
Insider trading is perhaps one of the most publicized unethical behaviors by traders. Insider
trading refers to trading in the securities of a company to take advantage of material "inside"
information about the company that is not available to the public. 95 Such a trade is motivated
by the possibility of generating extraordinary gain with the help of nonpublic information
(information not yet made public). It gives the trader an unfair advantage over other traders in
93
Brian Beers, Ethics in Finance: How It Affects Professionals, Investopedia (May 21, 2018),
investopedia.com/articles/financialcareers/09/professional-standards-ethics.asp.
94
Id.
95
Id.
Campaign financing in the United States has been a major source of concern to the public
because it raises the issue of conflict of interest for elected officials in relation to the people or
lobbying groups that have financed their campaigns. The United States has a long history of
campaign finance reform. The Federal Election Commission (FEC) administers and enforces
the federal campaign finance statutes enacted by the Congress from time to time. Many states
have also passed lobbying and campaign finance laws and established ethics commissions to
enforce these statutes.
ETHICAL CODES
Approaches to dealing with ethical problems in finance range from establishing ethical codes
for financial professionals to efforts to replace the rational-maximizer (egoistic) paradigm that
underlies the modern capitalist system by one in which individuals are assumed to be altruistic,
honest, and basically virtuous.96 It is not uncommon to find established ethical codes and
ethical offices in American corporations and in financial markets. Ethical codes for financial
markets are established by the official regulatory agencies and self-regulating organizations to
ensure ethically responsible behavior on the part of the operatives in the financial markets.97
One of the most important and powerful official regulatory agencies for the securities industry
in the United States is the Securities and Exchange Commission (SEC). 98 It is in charge of
implementing federal securities laws, and, as such, it sets up rules and regulations for the
proper conduct of professionals operating within its regulatory jurisdiction. Many
professionals play a role within the securities industry, among the most important of which are
accountants, broker-dealers, investment advisers, and investment companies.99 Any improper
96
Citi CFO, Code of Ethics for Financial Professionals, Citi Group (Oct. 2, 2018),
https://www.citigroup.com/citi/investor/data/codeofethics.pdf
97
Id.
98
James Chen, Securities and Exchange Commission (SEC), Investopedia (May 14, 2019),
https://www.investopedia.com/terms/s/sec.asp
Other rule-making agencies include the Federal Reserve System, the Federal Deposit
Insurance Corporation (FDIC), and state finance authorities. Congress has entrusted to the
Federal Reserve Board the responsibility of implementing laws pertaining to a wide range of
banking and financial activities, a task that it carries out through its regulations. One such
regulation has to do with unfair or deceptive acts or practices. The FDIC has its own rules and
regulations for the banking industry, and it also draws its power to regulate from various
banking laws passed by Congress.
In addition to federal and state regulatory agencies, various professional associations set their
own rules of good conduct for their members. The American Institute of Certified Public
Accountants (AICPA), the American Institute of Certified Planners (AICP), the Investment
Company Institute (ICI), the American Society of Chartered Life Underwriters (ASCLU), the
Institute of Chartered Financial Analysts (ICFA), the National Association of Bank Loan and
Credit Officers (also known as Robert Morris Associates), and the Association for Investment
Management and Research (AIMR) are some of the professional associations that have well-
publicized codes of ethics.
There has been an effort to address the ethical problems in business and finance by
99
Id.
100
Id.
The idea that human beings can be honest and altruistic is an empirically valid assumption; it
is not hard to find examples of honesty and altruism in both private and public dealings. 102
There is no reason this idea should not be embraced and nurtured. If the financial-economic
theory accepts the fact that behavioral motivations other than that of wealth maximization are
both realistic and desirable, then the agency problem that economists try to deal with will be a
nonproblem. For Dobson, the true role of ethics in finance is to be found in the acceptance of
"internal good" ("good" in the sense of "right" rather than in the sense of "physical product"),
which, he adds, is what classical philosophers describe as "virtue that is, the internal good
toward which all human endeavor should strive. He contends: "If the attainment of internal
goods were to become generally accepted as the ultimate objective of all human endeavors,
both personal and professional, then financial markets would become truly ethical"
Insider trading
Insider trading is the trading of a corporation's stock or other securities (such as bonds or stock
options) by individuals with access to non-public information about the company. In most
countries, trading by corporate insiders such as officers, key employees, directors, and large
shareholders may be legal, if this trading is done in a way that does not take advantage of non-
101
Norman Bowie & Ronald Duska, Business Ethics, Phil Papers (1992), https://philpapers.org/rec/BOWBE-2.
102
Steve Tylor, Why Do Human Beings Do Good Things? The Puzzle of Altruism, Psychology Today (Oct. 18, 2013),
https://www.psychologytoday.com/us/blog/out-the-darkness/201310/why-do-human-beings-do-good-things-the-
puzzle-altruism
However, the term is frequently used to refer to a practice in which an insider or a related party
trades based on material non-public information obtained during the performance of the
insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of
trust and confidence or where the non-public information was misappropriated from the
company.104
In the United States and several other jurisdictions, trading conducted by corporate officers,
key employees, directors, or significant shareholders (in the US, defined as beneficial owners
of 10% or more of the firm's equity securities) must be reported to the regulator or publicly
disclosed, usually within a few business days of the trade. 105 Many investors follow the
summaries of these insider trades in the hope that mimicking these trades will be profitable.
While "legal" insider trading cannot be based on material non-public information, some
investors believe corporate insiders nonetheless may have better insights into the health of a
corporation (broadly speaking) and that their trades otherwise convey important information
(such as about the pending retirement of an important officer selling shares, greater
commitment to the corporation by officers purchasing shares).106
The authors of one study claim that illegal insider trading raises the cost of capital for
securities issuers, thus decreasing overall economic growth. However, economists cannot be
confident of this conclusion because data on illegal insider trading is not available; the nature
of the activity renders it impossible to gather data.Insiders can easily profit using "open market
repurchases." Such transactions are legal and generally encouraged by regulators through safe
harbors against insider trading liability.107
SEC Rule 10b5-1 clarified that the prohibition against insider trading does not require proof
that an insider actually used material nonpublic information when conducting a trade;
possession of such information alone is sufficient to violate the provision, and the SEC would
infer that an insider in possession of material nonpublic information used this information
when conducting a trade. However, SEC Rule 10b5-1 also created for insiders an affirmative
defense if the insider can demonstrate that the trades conducted on behalf of the insider were
conducted as part of a pre-existing contract or written binding plan for trading in the future.109
For example, if an insider expects to retire after a specific period of time and, as part of
retirement planning, the insider has adopted a written binding plan to sell a specific amount of
the company's stock every month for two years and later comes into possession of material
nonpublic information about the company, trades based on the original plan might not
constitute prohibited insider trading.
108
Hassan Elhais, Insider Trading: Legal or Illegal?,Lexology (April 14 2019),
https://www.lexology.com/library/detail.aspx?g=dc278b96-a04f-4c23-8479-e4a4b56858c7.
109
Id.
110
Id.
For example, illegal insider trading would occur if the chief executive officer of Company A
learned (prior to a public announcement) that Company A will be taken over and then bought
shares in Company A while knowing that the share price would likely rise.In the United States
and many other jurisdictions, however, "insiders" are not just limited to corporate officials and
major shareholders where illegal insider trading is concerned but can include any individual
who trades shares based on material non-public information in violation of some duty of
trust.113 This duty may be imputed; for example, in many jurisdictions, in cases of where a
corporate insider "tips" a friend about non-public information likely to have an effect on the
company's share price, the duty the corporate insider owes the company is now imputed to the
friend and the friend violates a duty to the company if the corporate insider trades on the basis
of this information.
Misappropriation theory114
A newer view of insider trading, the misappropriation theory, is now part of US law. It states
that anyone who misappropriates (steals) information from their employer and trades on that
information in any stock (either the employer's stock or the company's competitor stocks) is
guilty of insider trading.For example, if a journalist who worked for Company B learned about
the takeover of Company A while performing his work duties and bought stock in Company
A, illegal insider trading might still have occurred. Even though the journalist did not violate a
fiduciary duty to Company A's shareholders, he might have violated a fiduciary duty to
Company B's shareholders (assuming the newspaper had a policy of not allowing reporters to
trade on stories they were covering).
Proof of responsibility
Proving that someone has been responsible for a trade can be difficult because traders may try
to hide behind nominees, offshore companies, and other proxies. Nevertheless, the Securities
and Exchange Commission prosecutes over 50 cases each year, with many being settled
administratively out of court. The SEC and several stock exchanges actively monitor trading,
looking for suspicious activity.
Common law
US insider trading prohibitions are based on English and American common law prohibitions
against fraud. In 1909, well before the Securities Exchange Act was passed, the United States
Supreme Court ruled that a corporate director, who bought that company's stock when he knew
it was about to jump up in price, committed fraud by buying but not disclosing his inside
information.118Section 15 of the Securities Act of 1933contained prohibitions of fraud in the
115
Elvis Picardo, How The SEC Tracks Insider Trading, Investopedia (Jun. 25, 2019),
https://www.investopedia.com/articles/investing/021815/how-sec-tracks-insider-trading.asp.
116
Id.
117
Id.
SEC regulations
SEC regulation FD ("Fair Disclosure") requires that if a company intentionally discloses
material non-public information to one person, it must simultaneously disclose that
information to the public at large.120 In the case of an unintentional disclosure of material non-
public information to one person, the company must make a public disclosure promptly.Insider
trading, or similar practices, are also regulated by the SEC under its rules on takeovers and
tender offers under the Williams Act.
JUDICIAL APPROACH
Much of the development of insider trading law has resulted from court decisions.In SEC v.
Texas Gulf Sulphur Co. (1966)121, a federal circuit court stated that anyone in possession of
inside information must either disclose the information or refrain from trading.In 1909, the
Supreme Court of the United States ruled in Strong v. Repide122that a director upon whose
action the value of the shares depends cannot avail of his knowledge of what his own action
will be to acquire shares from those whom he intentionally keeps in ignorance of his expected
action and the resulting value of the shares. Even though in general, ordinary relations between
directors and shareholders in a business corporation are not of such a fiduciary nature as to
118
A Banoff, The Regulation of Insider Trading in the United States, United Kingdom and Japan, Repository (1988),
https://repository.law.umich.edu/cgi/viewcontent.cgi?article=1754&context=mjil.
119
Id
120
Id.
121
2 A.L.R. Fed. 190
122
213 U.S. 419 (1909)
In 1984, the Supreme Court of the United States ruled in the case of Dirks v. SEC123that
tippees (receivers of second-hand information) are liable if they had reason to believe that the
tipper had breached a fiduciary duty in disclosing confidential information and the tipper
received any personal benefit from the disclosure. (Since Dirks disclosed the information in
order to expose a fraud, rather than for personal gain, nobody was liable for insider trading
violations in his case.)The Dirks case also defined the concept of "constructive insiders," who
are lawyers, investment bankers and others who receive confidential information from a
corporation while providing services to the corporation. Constructive insiders are also liable
for insider trading violations if the corporation expects the information to remain confidential,
since they acquire the fiduciary duties of the true insider.
In United States v. Carpenter (1986)124the US Supreme Court cited an earlier ruling while
unanimously upholding mail and wire fraud convictions for a defendant who received his
information from a journalist rather than from the company itself. The journalist R. Foster
Winans was also convicted, on the grounds that he had misappropriated information belonging
to his employer, the Wall Street Journal. In that widely publicized case, Winans traded in
advance of "Heard on the Street" columns appearing in the Journal.The court ruled in
Carpenter: "It is well established, as a general proposition, that a person who acquires special
knowledge or information by virtue of a confidential or fiduciary relationship with another is
not free to exploit that knowledge or information for his own personal benefit but must
account to his principal for any profits derived therefrom."However, in upholding the
securities fraud (insider trading) convictions, the justices were evenly split.
In 1997, the U.S. Supreme Court adopted the misappropriation theory of insider trading in
UnitedStates v. O'Hagan125. O'Hagan was a partner in a law firm representing Grand
123
463 U.S. 646 (1983)
124
484 U.S. 19 (1987)
125
521 U.S. 642, 655 (1997)
The Court specifically recognized that a corporation's information is its property: "A
company's confidential information... qualifies as property to which the company has a right of
exclusive use. The undisclosed misappropriation of such information in violation of a fiduciary
duty...constitutes fraud akin to embezzlement – the fraudulent appropriation to one's own use
of the money or goods entrusted to one's care by another."In 2000, the SEC enacted SEC Rule
10b5-1, which defined trading "on the basis of" inside information as any time a person trades
while aware of material nonpublic information. It is no longer a defense for one to say that one
would have made the trade anyway. The rule also created an affirmative defense for pre-
planned trades.
129
Id.
130
Jason Fernando, The Stock Act, Investopedia (Oct. 9, 2019), https://www.investopedia.com/terms/s/stop-
trading-on-congressional-knowledge-act.asp.
Friedman, laureate of the Nobel Memorial Prize in Economics, said: "You want more insider
trading, not less. You want to give the people most likely to have knowledge about
deficiencies of the company an incentive to make the public aware of that." Friedman did not
believe that the trader should be required to make his trade known to the public, because the
buying or selling pressure itself is information for the market.
Other critics argue that insider trading is a victimless act: a willing buyer and a willing seller
agree to trade property which the seller rightfully owns, with no prior contract (according to
this view) having been made between the parties to refrain from trading if there is asymmetric
information.132 The Atlantic has described the process as "arguably the closest thing that
modern finance has to a victimless crime".
Legalization advocates also question why "trading" where one party has more information than
the other is legal in other markets, such as real estate, but not in the stock market. For example,
if a geologist knows there is a high likelihood of the discovery of petroleum under Farmer
Smith's land, he may be entitled to make Smith an offer for the land, and buy it, without first
telling Farmer Smith of the geological data. Nevertheless, circumstances can occur when the
geologist would be committing fraud if, because he owes a duty to the farmer, he did not
disclose the information; for example, if he had been hired by Farmer Smith to assess the
geology of the farm.133
Advocates of legalization make free speech arguments. Punishment for communicating about a
development pertinent to the next day's stock price might seem to be an act of censorship. If
the information being conveyed is proprietary information and the corporate insider has
contracted to not expose it, he has no more right to communicate it than he would to tell others
131
Carol Roth, It's time to legalize insider trading, CNBC (Jun. 17, 2014), https://www.cnbc.com/2014/06/17/its-
time-to-legalize-insider-tradingwall-streetcommentary.html
132
Id.
133
Id.
There are very limited laws against "insider trading" in the commodities markets if, for no
other reason than that the concept of an "insider" is not immediately analogous to commodities
themselves (corn, wheat, steel, etc.). However, analogous activities such as front running are
illegal under US commodity and futures trading laws. For example, a commodity broker can
be charged with fraud by receiving a large purchase order from a client (one likely to affect the
price of that commodity) and then purchasing that commodity before executing the client's
order to benefit from the anticipated price increase.134
In accordance with EU Directives, Malta enacted the Financial Markets Abuse Act in 2002,
which effectively replaced the Insider Dealing and Market Abuse Act of 1994.The "Objectives
and Principles of Securities Regulation" published by the International Organization of
Securities Commissions (IOSCO) in 1998 and updated in 2003 states that the three objectives
134
Id.
135
Financial Services and Markets Act 2000, Gov. UK (Jun. 15, 2000),
http://www.legislation.gov.uk/ukpga/2000/8/pdfs/ukpga_20000008_en.pdf
The World Bank and International Monetary Fund now use the IOSCO Core Principles in
reviewing the financial health of different country's regulatory systems as part of these
organizations’s financial sector assessment program, so laws against insider trading based on
non-public information are now expected by the international community. 137 Enforcement of
insider trading laws varies widely from country to country, but the vast majority of
jurisdictions now outlaw the practice, at least in principle. Larry Harris claims that differences
in the effectiveness with which countries restrict insider trading help to explain the differences
in executive compensation among those countries. The US, for example, has much higher
CEO salaries than do Japan or Germany, where insider trading is less effectively restrained.138
Ethical Investment
Ethical investment combines the social or environmental considerations of the investor with
their financial objectives. It can be found throughout the industry, in the form of Unit Trusts,
Investment Trusts, pensions and savings schemes, and is growing at an impressive rate.
Traditional ethical funds are involved with a positive and negative selection process, where
money is invested in companies that make a positive contribution to the world and withheld
from companies that do not. This strict screening method has perhaps fuelled the idea that
136
Prevention of Financial Markets Abuse Act - Laws of Malta, Justice Services (Apr 1, 2005),
https://www.google.com/search?
q=Malta+enacted+the+Financial+Markets+Abuse+Act+in+2002&oq=Malta+enacted+the+Financial+Markets+Abuse
+Act+in+2002&aqs=chrome..69i57.878j0j4&sourceid=chrome&ie=UTF-8
137
Iosco, Objectives and Principles of Securities Regulation, FSB (31 May 2017),
http://fsb.org/2017/05/cos_100601/
138
Id.
The first ethical fund was launched in 1984 and there are now around 50 retail ethical funds in
the UK. Further interest in the sector can be seen in the Ethical Investment Research Service
(EIRIS) figures, which state that the ethical funds industry totalled £4 billion in August 2001.
Along with the obvious growth of ethical investment products in the market, the Government
has also started to pay serious attention to the ethical issue by the recent introduction of new
pension regulation. The developments in the ethical sector suggests that we are changing the
way in which we make our investment decisions, thinking more about our influence as
shareholders. Ethical investing begins with your ideas and principles; what issues you believe
to be important. Just as different people have different views on the definition of ethical, not
all funds have the same objective.
Ethical Screening
Companies that are included in the portfolio of an ethical fund are at first 'screened', aprocess
that determines whether the company matches the fund's investment standards and ethical
policy.The investment objective of a fund may have a combination of negative and
positivecriteria, in other words actively avoid those companies, for example, that are known to
harm the environment and invest in companies involved in socially progressive business. Each
fund should clearly state their ethical criteria and provide you with information on the
companies they invest in.According to EIRIS, examples of negative criteria include: animal
testing, gambling, human rights abuses, military production and sale, pornography, alcohol,
genetic engineering, pollution and Third World concerns.
The areas of positive criteria include equal opportunities, environmental programs,
conservation of energy, fair trade, education and training and support of community projects.
Tax planning is the formulation of a system which in its implementation is designed to achieve
a specific result. Economic planning is the privilege of the state tax planning is that of the
subject. Men material and money are the resources available at the disposable of a nation and
to conserve the same the state resorts to economic planning. Tax planning aims to reduce the
outflow of cash resources made available to the government by way of taxes so that the same
may be effectively utilized for the benefit of the individual or the business as the case may be.
Just as sound economic planning is indispensable for a welfare state, a sound tax planning is
equally indispensable for the welfare of the citizen.143
140
Id.
141
Id.
142
Melissa Horton, What are some ways to minimize tax liability?, Investopedia (Mar 14, 2019),
https://www.investopedia.com/ask/answers/040715/what-are-some-ways-minimize-tax-liability.asp
143
Id.
144
Id.
145
Id.
146
Rex L. Marshall, Robert W. Armstrong and Malcolm Smith, The Ethical Environment of Tax Practitioners: Western
Australian Evidence, JSTOR (Sep., 1998), https://www.jstor.org/stable/25073960?seq=1/subjects.
Role of judiciary in enforcing ethical compliance by tax payers: tax payers also tent to distort
ethics by resorting to unfair accounting and business practices like
a. Claiming personal expenditure as business expenditure
b. Claiming capital expenditure as revenue expenditure
c. Treating revenue receipts as capital receipt
d. Accounting for amount paid as salaries as business expenditure by classifying the same
under different account heads like conveyance, tour and travel, employee welfare.
e. Altering the form of transaction
f. Breaking up of large value contracts into smaller contracts to avoid attracting TDS
Provisions.
g. Transferring their income/property to avoid tax.etc.
h. Misclassifying goods and services to avoid excise duty, customs duty and service tax
The tax system in India is generally perceived to be complex and difficult to understand.
Often, these complexities force the assesses to adopt unethical means for avoiding taxes. This
Combating Fraud148
A fraud is an intentional deception made for personal gain or to damage other individual the
related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud
is a crime and also a civil law violation. Defrauding people or entities of money or valuables is
a common purpose of fraud, but there have also been fraudulent ‘discoveries’.
Corruption is among the greatest obstacles to economic and social development. The harmful
effects of corruption are especially severe on the poor, who are hardest hit by economic
decline, most reliant on the provision of public services, and least capable of paying the extra
costs associated with bribery, fraud, and the misappropriation of economic privileges.
Corruption also represents a significant additional cost of doing business in many developing
countries. It undermines development by distorting the rule of law and weakening the
institutional foundation upon which economic growth depends.
Corruption damages policies and programs that aim to reduce poverty, so attacking corruption
is critical to the achievement of IFC's overarching mission of poverty reduction. Countering
corruption is therefore aligned with IFC’s overarching mission to promote sustainable private
sector investment in developing countries, to help reduce poverty and improve people's
147
Iknowledge, Tax Structure in India, Explained, Aegonlife (Aug 20, 2018), https://www.aegonlife.com/insurance-
investment-knowledge/tax-structure-in-india-explained.
148
Barry Robinson&David Carson, Your 10-point plan on how to combat fraud and corruption in your organization,
Delloite (Oct. 21, 2019), https://www2.deloitte.com/ie/en/pages/finance/articles/how-to-combat-fraud.html.
149
Id.
IFC has always expected its staff and clients to maintain the highest standards of ethical
behavior and compliance with the law and is at the forefront of the market and of development
institutions in guarding against fraud and corruption in its work. This approach complements
and supports IFC's determination to act as a leader on sustainability. Avoiding fraud and
corruption is necessary to ensure that IFC's investments are successful, that its resources are
being used effectively, and that its development objectives are met.151
IFC’sSanctions Process sets clear standards and procedures if there are allegations against
clients or partners. These standards have gained broader acceptance. Multilateral Development
Banks (MDBs) have stepped up their fight against corruption with the signing on April 9,
2010, of a joint Sanction Accord with Cross Debarment as a new enforcement tool, greatly
increasing potential penalties for firms engaging in fraud and corruption, and adding a strong
deterrent.152
The World Bank Group is committed to improving governance and fighting corruption in
member countries through the Governance Anti-Corruption framework, which has three main
pillars153:
150
OECD, Fighting Corruption and Promoting Integrity in Public Procurement, Google Books (2005),
https://books.google.co.in/books?id=VzM6eMySpp8C&pg=PA241&lpg=PA241&dq=IFC
%E2%80%99s+Sanctions+Process&source=bl&ots=gxAiHDBQ6d&sig=ACfU3U39gOxoGMAEeLJcDvpPVbj82G2FhA&
hl=en&sa=X&ved=2ahUKEwjK0qa49a3lAhVTYysKHREeBkEQ6AEwCXoECAgQAQ#v=onepage&q&f=false
151
Id.
152
World Bank group, Combating Corruption, World Bank Org. (Oct 4, 2018),
https://www.worldbank.org/en/topic/governance/brief/anti-corruption
153
Id.