CORPORATE GOVERNANCE AND ETHICS

Module-1

Submitted to : Submitted by
Dr. Madhu Lal Lakshmi M S
Professor S1 MBA
SMBS

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 CONTENTS

Module I:

Corporate governance an overview:

 Public governance system

 Different views, different systems

 Public governance structure

 Meaning and definition of corporate governance

 Historical perspective

 CG in various countries

 4 P’s of CG

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  Governance :

The term governance deals with all the process of governing, which mainly include actions taken by
government of a state, by a market or by a network upon the formal and informal organisations and social
system .They act as the legitimate authority. Basically Governance is the way rules, norms and actions
are structured, sustained, regulated and held accountable. There will be governing bodies in each systems
and their responsibility is to make binding decisions by establishing laws. The various types of
governance can be public governance, global governance, non-profit governance, corporate governance,
project governance, environmental governance, internet governance, Information technology governance,
regulatory governance, participatory governance, multilevel governance, meta governance, and
collaborative governance. In business and outsourcing relationships, Governance frameworks are built
into relational contracts that can make long-term collaboration and innovation. So the governance can be
stated as the dynamic interaction between the people, structure, processes and traditions that support the
exercise of legitimate authority in provision of sound leadership, direction, oversight, and control of an
entity in order to ensure that its purpose is achieved, and that there is proper accounting for the conduct of
its affairs, the use of its resources, and the results of its activities.

Democratic governance is giving citizens a say in how decisions are made its fundamental duty is to
ensure that democracy delivers for all of society. Strong democratic governance is characterized by
transparency and accountability in both the public and private sectors. In a democratic country, a
government is the system through which powers are exercised and shared by the Legislature, Executive
and the Judiciary with the goal of improving the quality of life for all citizens.

Seven pillars of democratic governance :

 Legitimacy
 Participation
 Responsible stewardship
 Ethical conduct
 Transparency 
 Predictability

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 Accountability 

1. Legitimacy : The word legitimacy means lawfulness or  legality or rightfulness. It is one of the
major pillars of democracy because the absence of legitimacy means that the people did not
legally assign political powers to their leaders to govern them.

2. Participation (or engagement) : It is the involvement of all the key stakeholders, members
and shareholders in planning , decision processes and evaluation . This allows a governing
body to obtain reliable information. Provides feedback by users of public services necessary for
monitoring access to, and quality of, services. And it clearly defines the lines of accountability
3. Responsible stewardship : A steward is defined as someone who protects and takes care of the
needs of others. Under the stewardship theory, company executives protect the interests of the
owners or shareholders and make decisions on their behalf.
4. Ethical conduct : It includes respect, honesty, openness, integrity, trustworthiness and fairness in
all interactions; commitment to the spirit as well as the letter of laws, rules, regulations, norms and
traditions; service to the benefit of primary beneficiaries above service to self; and leadership by
example.
5. Transparency : requires timely access by electors, shareholders, members, and other key
stakeholders to low-cost, relevant, reliable information about finances, products or services,
management of resources, and decision processes. Transparent procedures in organizations may
include open meetings, accurate disclosure of financial and other critical performance indicators,
compliance with freedom of information legislation, and ready accessibility of annual reports and
audited financial statements.
6. Predictability : refers to the conduct or actions of elected officials/board members and appointed
staff. Predictability results primarily from laws, regulations and role definitions that are clear, and
known in advance; are fair; and uniformly and effectively enforced. It is essential to stakeholder
confidence and public trust that stewardship and fiduciary responsibilities will be properly
exercised, that business will be conducted ethically and that projected results are realistic.
Predictability encompasses the notion of “promise keeping” captured in the familiar words of
Canadian poet Robert Service: “A promise made is a debt unpaid.”
7.  Accountability is the capacity of electors, shareholders, and organizational members to call
decision-makers to account for their actions. Effective accountability has two components:
“answerability” and “consequences.” The first is the requirement to respond periodically to

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 questions concerning one’s official actions. The second is the need for the acknowledgement of
achievements or shortcomings…rewards for achievements, and the application of deterrent
sanctions for breach of rules or serious deficiencies in performance.
 Public Governance :

Public governance refers to the formal and informal arrangements that determine how public decisions
are made and how public actions are carried out, from the perspective of maintaining a country’s
constitutional values when facing changing problems and environments. The principal elements of good
governance refer to accountability, transparency, efficiency, effectiveness, responsiveness and rule of
law. There are clear links between good public governance, investment and development. The greatest
current challenge is to adapt public governance to social change in the global economy. Thus the evolving
role of the State needs a flexible approach in the design and implementation of public governance. Public
governance is important for investors and their businesses. It helps build trust and provides rules and
stability needed for planning investment in the medium and long term. It facilitates a smooth and
productive interaction between the State and the general public, no longer based on rigid traditional
“control and command” approaches, but on flexibility, guidance, communication and persuasion. Public
governance is currently more participative and transparent. Regulatory clarity and certainty are valued by
businesses and citizens. Innovative mechanisms to monitor and evaluate public management are
commonly used to improve transparency and build credibility, important determinants of investment.

 Public governance Views :

Public governance as the overall process of decision-making and implementation in solving public
problems in a country, where public agencies or institutions initiate the process or are at least partially
involved in the process. Under this definition, public governance can be classified into three modes
according to the outcome: legal governance, performance-based governance, and consensus-oriented
governance. Legal governance is a mode of governance close to Max Weber’s bureaucracy.
Performance-based governance has focuses on how effectively and/or efficiently policy goals are
achieved through decision-making and implementation. Finally, consensus-oriented governance is a
mode of governance that calls for a political process to deal with various and conflicting interests.
These three modes are different in terms of: who decides; the role of bureaucrats; the methods of
decision making; and the nature of the interactions among actors. The critical factors that have a
significant impact on the outcome of governance vary with each mode. Although in the real world,

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 these three modes are often mixed and interrelated, it is necessary to distinguish them because it helps
systematically analyze the phenomenon of governance.
 Governance is not just about how a government and social organizations interact, and how they relate
to citizens [Graham, Amos, Plumptre 2003], but it concerns the State’s ability to serve citizens and
other actors, as well as the manner in which public functions are carried out, public resources are
managed and public regulatory powers are exercised [European Commission 2003].

 Public governance represents more than a means of providing common good, as it can be related to
the government capacity to help their citizens’ ability to achieve individual satisfaction and material
prosperity. Therefore, governance could be compared to the management, supply, and delivery of
political goods to citizens of a nation-state. Political goods are various, and they include human
security, rule of law, political and civil freedoms, medical and health care, schools and education,
communication networks, money and banking system, fiscal and institutional context, support for
civil society, or regulating the sharing of the environmental commons [Rotberg 2004-05] [Besancon
2003]. The practice of governance is also ruled by community values, informal traditions, accepted
practices, or unwritten codes of conduct [Plumptre].

 Public governance system :

 Communism :

In its purest form, Communism refers to the idea of common, public ownership of the economy, including
infrastructure, utilities, and means of production. Communism, as idealized by thinkers Karl Marx and Friedrich
Engels, denotes an absence of class divisions, which inherently requires the subversion of the ruling class by the
working class. As such, communism often incorporates the idea of revolutionary action against unequal rule.
Communism often positions itself as a counterpoint to the economic stratification underlying capitalism. This
resistance to stratification sometimes also takes the form of a single-state authority, one in which political
opposition or dissidence may be restricted. This may manifest in some communist states as a more authoritarian
form of governance, as typified by the Soviet brand of communism that swept the globe during the mid-20th

century.

 Democracy

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Democracy refers to a form of government in which the people are given a direct role in choosing their
leadership. Its primary goal is governance through fair representation, a system in which no single force or entity
can exercise unchecked control or authority. The result is a system which requires discourse, debate, and
compromise to satisfy the broadest possible number of public interests. Democracy is typified by fair and free
elections, civic participation, protection of human rights, and the rule of law.

 Meritocracy

Meritocracy refers to a system in which authority is vested in those who have demonstrated the merits deemed
pertinent to governing or public administration. Often, these merits are conferred through testing and academic
credentials and are meant to create an order in which talents, abilities, and intellect determine who should hold
positions of leadership and economic stewardship. The result is a social hierarchy based on achievement.

 Republicanism

Republicanism, the form of government — not to be conflated with the Republican political party specific
to U.S. politics — refers to a system in which power is vested in the citizenry. In technical definition, a
republic is a nation in which the people hold popular sovereignty through the electoral and legislative
processes as well as through participation in public and civic life. In its earliest form, the republic was
perceived as a counterbalance to monarchy, an approach which merged monarchy and aristocracy with
some trappings of democracy.

 Socialism

Socialism refers to a form of government in which the people own the primary means of production. A
counterpoint to the competitive nature and unequal proclivities of capitalism, socialism has existed in
many forms and to widely variant degrees of strictness throughout history and around the world. From
small communal societies to state-level governments that provide encompassing public services such as
universal healthcare, the concept of socialism permeates governments the world over. By contrast to the
less compromising and often more authoritarian nature of communism, socialism tends to be a malleable
concept. Some adherents view socialism as referring to a strict policy of shared ownership and equal
distribution of resources, while others believe free market capitalism can coexist with socialist forms of
public administration. To wit, the Social Security system of the declaratively capitalist United States is
inherently socialist in nature.

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 Public governance structure :

Administration : Public Adminstration is regarded as an instrument of change and is expected to

accelerate the process of development. In India the government has undertaken the task of levelling down
the economic inequalities, spreading education among all abolishing untouchability securing equality of
status, rights of women and effective and all round economic and industrial development. Public
administration is "centrally concerned with the organization of government policies and programs as well
as the behaviour of officials (usually non-elected) formally responsible for their conduct". Many non-
elected public employees can be considered to be public administrators, including heads of city, county,
regional, state and federal departments such as municipal budget directors, human resources (HR)
administrators, city managers, census managers, state mental health directors, and cabinet secretaries.
Public administrators are public employees working in public departments and agencies, at all levels of
government.

Legislation : Legislation is law which has been promulgated (or " enacted ") by a legislature or other
governing body or the process of making it. Before an item of legislation becomes law it may be known
as a bill, and may be broadly referred to as "legislation", while it remains under consideration to
distinguish it from other business.

Judiciary : The judiciary (also known as the judicial system, judicature, judicial branch, judicative
branch, and court or judiciary system) is the system of courts that adjudicates legal disputes and
interprets, defends and applies law in legal cases. The judiciary is the system of courts that interprets,
defends and applies the law in the name of the state. The judiciary can also be thought of as the
mechanism for the resolution of disputes.

Corporate governance :
The word governance comes from the Latin word “gubanare” which means “to steer”. The ordinary
meaning of governance is “the manner of directing and controlling the actions and affairs of an entity.
Meaning of Corporate governance : “An internal system encompassing policies, processes and people,
which serves the needs of shareholders and other stakeholders, by directing and controlling management
activities, with good business savvy, objectivity, accountability and integrity. Sound corporate

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governance is reliant on external market place commitment and legislation, plus a healthy board culture
which safeguards policies and processes “by Gabrielle O’Donovan.

The Organisation for Economic Cooperation and Development (OECD) defines corporate governance as:

Corporate Governance involves a set of relationships between a company’s management, its board, its
shareholders and other stakeholders. Corporate Governance also provides the structure through which the
objectives of the company are set, and the means of attaining those objectives and monitoring
performance are determined. (OECD, 2015)

Corporate governance is not just corporate management; it is something much broader to include a fair,
efficient and transparent administration to meet certain well-defined objectives. It is a system of
structuring, operating and controlling a company with a view to achieve long term strategic goals to
satisfy shareholders, creditors, employees, customers and suppliers and complying with the legal and
regulatory requirements, apart from meeting environmental and local community needs. When it is
practised under a well laid out system, it leads to the building of a legal, commercial and institutional
framework and demarcates the boundaries within which these functions are performed. (Arya, Tandon
and Vashisht, 2003)Corporate governance mainly consists of two elements i.e., A long-term relationship,
which has to deal with checks and balances, incentives of managers and communications between
Management and investors. The second element is a transactional relationship involving matters relating
to disclosure and authority. In other words, 'good corporate governance' is simply 'good business'.

A system through which powers are exercised and shared by different stakeholders and groups to ensure
the achievement of the entity’s goals. Conscious, deliberate and sustained efforts by the corporate entity
to strike a judicious balance between its own interests and those of various constituencies of the
environment in which it is operating. All efforts to enhance the accountability of board members to
shareholders and ethical efforts and fair play to achieve corporate success. Distilled from the above
definitions, Corporate Governance is therefore a system by which companies or entities are directed and
controlled in order to achieve their goals.

There are three key players in a corporation: The Board of directors, management, and shareholders.
The mission of the board of directors is to select a chief executive officer (CEO), to monitor and evaluate
the CEO’s performance and planning process, to delegate the responsibilities, and making decisions rights
to the CEO. Management directed by the CEO is responsible for setting and following a company’s
strategy, strategic planning, risk management, and financial reporting to the board. Shareholders supply

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their finance by buying a corporation’s stock and receive some financial return, shareholders do not
participate in day-to-day management, but they have a right to elect a representative to the board and to
be informed on business decisions

The Core Concepts of Corporate Governance :

- Accountability
- Fairness
- Transparency
- Independence
- Sustainability
- Good board practices
- Control environment
- Board commitment
- Openness
- Reputation
- Stakeholder interface

 Accountability : Ensures that Management is accountable to the Board; and the Board is accountable
to the shareholders.
 Fairness: Means impartiality or lack of bias. Refers merely to the way companies and their officers
treat stakeholders with some disabilities such as minority shareholders, employees, foreign investors,
as against the dominant players such as majority shareholders. Provide effective redress for violations
 Transparency: Ensures that: timely accurate disclosure of all material matters, including the financial
situation, performance, ownership and corporate governance is made. The company’s registry filings
are up to date. High quality annual reports are published. Web based disclosure is in place.
 Independence: Ensures that: procedures and structures are in place so as to minimize or avoid
conflicts of interest.
 Sustainability: The World Commission on Environment and Development 1987 which defines
sustainability as: “Development that meets the needs of the present without compromising the ability
of future generations to meet their own needs”.
 Openness: Willingness to give all stakeholders information, except that which is commercially
sensitive. Information about current developments in the company’s affairs must be provided
timeously through newspapers, radio and television, websites, etc.

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 Reputation: Being the character generally ascribed to a company or organizational entity. May be
good or bad. For a listed company, a good reputation is a key asset because it helps to enhance the
shareholder value.
 Stakeholder interface: Well defined shareholder rights . Recognizes stakeholder rights, i.e. the rights
of all those with an interest in the entity and its operations, e.g. employees, the community, suppliers,
customers, etc. Encourages cooperation between the company and its stakeholders in creating wealth,
jobs and economic stability.
 Good Board Practices: This entails Clear definition of roles and authorities of stakeholders. That
duties and responsibilities of the directors are understood.
 Business ethics: i.e. Established values and principles the entity uses are in place to inform and
conduct its activities. That business ethics permeates a company’s culture and drives its strategy,
business goals, policies and activities. The formulation of the entity’s business ethics code.
 Control Environment: Internal control procedures must be in place. Risk management framework
must be present. .Disaster recovery systems must be in place. Management information systems must
be established. Compliance framework must be established.
 Board Commitment: Ensures that The Board discusses corporate governance issues and creates a
corporate governance committee with a corporate governance champion. A corporate governance
code has been developed. A code of business ethics has been developed.

Four approaches in the practice of corporate governance do exist, namely:

 The Shareholder Value Approach

 Stakeholder Approach
 Enlightened Shareholder Approach
 Integrated Approach

The Shareholder Value Approach : Which is a well-established view supported by the Company Law
in most advanced economies. Expresses the view that a Board should govern entities in the best interests
of all shareholders. Says the main objective in governing and controlling entities should be to maximize
the wealth of shareholders by share price and dividend growth.

Stakeholder Approach : (practised in Zimbabwe) which Expresses the view that directors should run
entities in the interests of all stakeholders of the company. Is also called the “Pluralist Approach”.

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is concerned with creating a balance between economic and social goals and between individual and
communal goals.Argues that sound corporate governance should recognize the following –

o Economic imperatives faced by companies or entities in competitive markets.

o Efficient use of resources through sound investment.
o Board accountability to shareholders for the stewardship of company resources.
Argues that the aim of corporate governance should be to recognize the interests of other individuals,
companies and society’s interests in addition to the interests of shareholders of the company in the way
entities are governed, directed and controlled. However the stakeholder approach enjoys very little
coordinated legislative support. It finds very little support in company law. Rather support is found in
scattered legislation such as the Employment Law, Health and Safety Legislation and Environmental
Law.

Enlightened Shareholder Approach: which, Advocates that directors of a company should pursue the
interests of their shareholders in any enlightened and inclusive way. Argues that directors should also
look to both long term and short term objectives of the company. Argues that managers should maintain
productive relationships with all stakeholders of the entity. Like the stakeholder approach, the
enlightened shareholder approach lacks the coordinated company law support. Further it is argued that
shareholders do not fit the image of the enlightened investor. We have a basket of both rogue and
polished investors in shareholders we have in Zimbabwe. It is further argued that most shares in public
companies are owned by institutional investors who are themselves relatively unaccountable to their
shareholders, e.g. Pension Funds, Insurance Companies, Medical Aid Societies, etc.

Integrated Approach : Which was advocated by all the three King Reports especially in the area of
reporting and disclosures.Takes the view that companies have a wide range of stakeholders whose views
should be considered and that corporate governance should encourage participation by all the
stakeholders.

Ideal approach is : In practice the shareholder value approach to corporate governance is

generally accepted. However in 1998, the UK Company Law Review Steering Group made a case for the
inclusion of the enlightened shareholder and pluralist concepts in the UK Company Law which was shot
down by the Law Society of England and Wales which argued that Company Law should not be used to
implement social and cultural changes and that there is enough scope and flexibility in the then existing
law to apply plural and enlightened shareholder concepts.Besides the Law Society of England and Wales

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argued that the pluralist approach damages share values since any decisions or actions taken to further the
interests of stakeholders might reduce the return on investment.

Despite these criticisms, it is becoming increasingly clear that the stakeholder and pluralist approach is
taking centre stage. Directors must govern and direct companies in ways which best suit the interests of
the entities they preside over.

Historical perspective :

Corporate Governance is a young discipline that has grown out of deep seated concerns raised
by spectacular and well publicized corporate failures. A selected country specific approach is
taken in analyzing how corporate governance developed in response to corporate failures. Such
corporate failures worldwide were caused inter alia by insider loans, compensation scandals,
fudging financial statements, inefficient and unethical conduct of external auditors for companies
and closed decision making processes leading to corruption and waste.
1) United Kingdom
Corporate scandals provoked a response through voluntary codes as opposed to the USA legislated
approach.

 The first report on corporate governance was the Cadbury Report which was published in 1992 and
included a code of best practices and some aspects of corporate governance. The next report was
called the Myners Report which was produced by a Committee chaired by Paul Myners in 1995.
 The next report was the Hampel Report which was drafted in 1995 by Sir Ronald Hampel. Its sole
task was to review the recommendations of the Cardbury and Greenbury Committee Reports. The
report was finally published in 1998 and covered the following corporate governance issues:
a. The ideal composition of the Board and roles of directors.
b. Directors’ remuneration.
c. The role of shareholders, particularly the institutional investors.
d. Communication between the company and its shareholders.
e. Financial reports
f. Auditing and financial statements.

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  The next effort on corporate governance saw the birth of the combined code. The combined code
was born out of the need to combine all efforts on corporate governance in the UK. Provided for
periodic reviews of its terms to take account of changes in corporate governance in the UK.
 Early in 2009 Sir John Walker prepared the latest code on corporate governance for the UK. It is
a review of all developments on corporate governance to date. This effort has delivered the new
2010 UK code of best practice of corporate governance

So, in the UK, corporate failures and scandals provoked the crafting of voluntary codes as well as some
attempts at the legislated approach on corporate governance.

2) Germany :

In Germany the Cromme Code (This code was produced by : Government Commission on the German
Corporate Governance Code)was developed as best practice for German companies to attract foreign
investments.

3) India :
In India corporate failures caused by fudging of annual financial accounts among others gave birth
to the crafting of more than five (5) codes on corporate governance and these are:

 “The desirable corporate governance in India” – a code on the confederation of Indian industries,
published in April 1998.
 Report “Kumar Manglam Birla” on corporate governance published by the Sebi Committee in May
1999.
 Summary Report of the Consultative Group of Directors of Bank/Financial Institutions – published
by the Ganguly Committee in April 2002.
 Summary Report on corporate audit and governance prepared by the Nareen Chandler Committee in
December 2002.
 The Code on Corporate Governance prepared by SEBI Committee chaired by Narayanamurthy
published on 8 February 2003.

4) South Africa :

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  In South Africa, there has been the King I, II & III Reports on Corporate governance. The King
III Report anticipates the implementation of a new Companies Act of South Africa. King III is a
revolutionary code on corporate governance. It was published in September 2009. It addresses
new concepts such as governance of risk, information technology risk and integrated reporting and
disclosure. It is one of the latest codes on corporate governance including the June 1 2010
Malawian code and both a must read for all of you.
 Last but not least, Zimbabwe is not spared of corporate scandals and failures. In 2003 scandals
rocked the banking sector involving allegations of insider loans and fudging of company financial
accounts. The problems persist to this very day. eg the Renaissance bank 2011.
 Earlier Minor L in 1999, had published a code entitled “Principles of Corporate Governance
Manual of Best Practices in Zimbabwe” which was largely ignored. There was no buy in.
 Lately in September 2009, Zimbabwe Leadership Forum and the Institute of Directors Zimbabwe
launched a corporate governance code drafting effort which is gaining momentum.
 The corporate governance frame work for state owned enterprises and parastatals published
November 2010. This is public sector driven initiative.

International Aspects of Corporate Governance

On the international scene, best practice guildelines on corporate governance have been developed, e.g.

Principles for Corporate Governance in the Commonwealth, known as the CACG

Guidelines.
Organisation for Economic Cooperation and Development, known as the OECD Principles
of Corporate Governance
Guidelines on Corporate Governance by the International Institute of Chartered Secretaries
and Administrators focusing on directors and company secretaries.

These guidelines as well as other codes are found in a book called “Corporate Governance” by Brian
Coyle .Corporate governance continues to evolve across the world. New legislation, new codes and
revised codes will no doubt come on stream

CG in various countries :

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While all systems have the same objective and have origins in similar legal frameworks, the framework,
rights and make-up of governance structures can vary considerably.

For example, in the US, shareholders elect a board of directors, who in turn hire and fire the managers
who actually run the company. In Germany, the board is not legally charged with representing the
interests of shareholders, but is rather charged with representing the interests of stakeholders, including
workers and creditors as well as the shareholders. It also usually has a member of the labour union on the
board.

In the UK, the majority of public companies voluntarily abide by the Code of Best Practice on corporate
governance. It recommends there should be at least three outside directors and the board chairman and the
CEO should be different individuals.

Japan’s corporate boards are dominated with insiders – loyal managers who cap off their careers with a
stint inside the boardroom – and they are primarily concerned with the welfare of keiretsu (parent
company) to which the company belongs.

China has colossal corporate structures where businesses have parent, grandparent and even great-
grandparent companies. Each level has a board and Communist Party officials usually have a seat. In
India, the founding family members usually hold sway over the board.

1. India :

SEBI formally established the Committee on Corporate Governance in May 1999, chaired by Shri Kumar
Mangalam Birla. The report of the Kumar Mangalam Birla Committee on Corporate Governance was
published in 2000. The report emphasizes the importance of corporate governance for future growth of
the economy and the capital market. Three key aspects underlying corporate governance are defined as
accountability, transparency, and equality of treatment for all stakeholders in terms of information. The
recommendations of the SEBI are split into mandatory requirements, which are essential for effective
corporate governance, and non-mandatory requirements.

Board of Directors

Board in Indian companies should comprise of the Executive Directors and Non-Executive Directors and
Independent Directors. The code recommends not less than 50 percent of the board should be comprised
of the Non-Executive Directors, where there is a non-executive chairman, and at least one-third of the

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board should comprise independent directors, where there is an executive chairman, and finally at least
half the board should be independent, the latter being mandatory.

Nominee Directors

The Indian system allows nominee directors appointed by the financial or investment institutions to
protect their investment in the company. Such directors should have the same responsibility as other
directors and be accountable to the shareholders.

Chairman of the Board

The roles of the chairman and the chief executive are different, the code identifies the roles as related and
may be combined and performed by one person.

Audit Committee

The audit committee has many mandatory recommendations, like the committee should comprise at least
three members, all of them being the non-executive directors. The audit committee is empowered to seek
external advice as appropriate and to seek information from any employee.

Remuneration Committee

Remuneration committee is set up to decide on the remuneration of the executive directors. Committee
should be comprised of at least three non-executive, chaired by an independent director. All the
remuneration package of the directors must be disclosed in the annual report with details on all the
elements including the fixed salary and performance based incentives. Another mandatory requirement is
that the board of directors must decide on the remuneration package of the non-executive directors.

Board Procedures

Board Meetings should be held a minimum of 4 times in a year with a maximum of 4 months between
two meetings and that a director must not be involved in more than 10 committees or act as a chairman in
more than 5 committees.

Management
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Management should ensure smooth day – to – day activities of the company. There should be disclosure
of the company’s performance, position and other things of interest to shareholders in the annual report.

Shareholders

Shareholders are allowed to be able to participate in the annual general meeting, therefore whenever there
is a new appointment of a director it must be in the knowledge of the shareholders about the same.

Manner of Implementation

Companies must have a separate section on Corporate Governance in its annual report. Non-compliance
of any recommendations should be highlighted and explained.

The Indian code is rather complex as compared to UK and Germany as it has a number of mandatory and
non-mandatory recommendations in its code. Although India has good recommendations on corporate
governance code but still the acceptance of code in many companies is still lagging.

2. The American national system of corporate governance :

CG in the United States is often associated with the recent initiatives taken in the wake of corporate
scandals such as Enron and MCI. While the recent initiatives are undoubtedly important, their
significance can best be understood in the context of the existing frameworks under corporate and
secureties law.

The current initiatives in the United States (i.e. the recently adopted CG provisions in the listing
requirements for the New York Stock Exchange (NYSE) – and the provisions of the Sarbanes–Oxley Act
of 2002 – often called “Sarbanes–Oxley”) in important ways simply add to the governance measures
already in place pursuant to corporate law and securities regulation in the United States.

 Corporate law in the United States: agency:

The provisions of corporate law can be divided into three large topics:

corporate formation,
corporate constitutions and
the potential personal liability of corporate directors and officers.

First, corporate law in the United States contains provisions concerning the formation of
corporations. In general, corporations are formed when one or more investors transfer assets into a

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 separate account (i.e. the corporation) and, in exchange the investors are granted a divisible common
interest (i.e. shares) in that account. The result of these two, simultaneous operations is the separation of
share ownership from both corporate ownership of those assets and from corporate control of those assets.

Second, corporate law contains provisions concerning corporate constitutions. Such provisions
deal with each corporation’s arrangements for the exercise of control over the corporation’s accounts, i.e.
arrangements for proposing, making and implementing decisions concerning the disposition of corporate
assets.

Third, corporate law contains provisions concerning directors’ and officers’ personal liability for
actions taken in their corporation’s name and for its account. These provisions of corporate law are taken
largely from rules of agency law

Special issues under corporate law in the United States:

In addition to the foregoing general observations on corporate law in the United States, it is important
to understand some special issues raised by the NYSE listing requirements, Sarbanes–Oxley and CG
initiatives in general.
 There is no national corporate law :
The most important special issue about corporate law in the United States is that there is no federal
corporate law in the United States. Under the US constitution, the power to enact corporate laws is a
power reserved for many states in the United States. The most important corporate law in the United
States is in the law of the State of Delaware
 Obligations of trust :

To the extent that corporate officers can make and implement decisions without first consulting with
directors or shareholders, their relationship to their corporations is based on trust. Since corporate officers
make and implement practically all decisions in the ordinary course of a corporation’s business without
consulting or even informing shareholders or directors beforehand, the trust placed incorporate officers is
considerable. In fact, shareholders typically do not learn about their officers’ individual decisions even
after those decisions are made and implemented.

 Directors’personal liability to their corporations :

Directors are subject to the duty of loyalty and the duty of care, just as officers are subject to those duties.
There is, however, an important difference. The standards applied to corporate officers are “professional”
standards while the standards applicable to directors are lower, “unprofessional” standards. In other
19
words, corporate officers are expected to demonstrate the care and loyalty of corporate officers. Corporate
directors, on the contrary, are only expected to demonstrate the care and loyalty of a reasonable person.

 Delegations of authority

Delegations of authority are fundamental to the creation of corporate organizations. The shareholders’
delegation of all corporate management to directors is the initial delegation necessary for corporate
formation. The next delegation of authority is the directors’ delegation to the CEO of all corporate
management in the ordinary course of business. Subsequent delegations are made by the CEO to other
corporate officers, all in the manner previously described.

 Shareholder derivative actions :

Generally, there are no government agencies in the United States to enforce officers’ personal liability to
their corporations. Instead, in the United States the enforcement of such personal liability depends on
legal action by corporations against their officers. Needless to say, such action presents significant
difficulties.
Typically, shareholders are not allowed to sue in their own names; they are required to sue in th
corporation’s name. In addition, shareholders holding a relatively small percentage of outstanding shares
are not allowed to sue; their lawsuits are subject to annulment by the corporation’s independent directors;
and they risk having to pay all expenses if they do not prevail in their claims against the corporate
officers.

3) The Canadian national system of corporate governance :

Canada has chosen to adopt a principle-based governance framework, where a consensus is reached
among diverse players (including regulators, investors, corporations and governments) on the overarching
principles4 that CG aims to achieve, then guidelines5 are promulgated (by regulators or self-regulating
organizations in sectors and industries) to guide corporations, and finally practices are selected by
individual corporations based on their own needs, then disclosed publicly to ensure effective capital
markets.

Canada’s CG players

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A key advantage to principle-based governance is that it helps organizations address difficult choices
posed by competing governance values or viewpoints. This is especially true in Canada where governance
choices are influenced by a diverse group of corporate leaders, or governance “players”:

Canada’s CG performance :

 Leadership and stewardship

Leadership and stewardship are the starting points of CG. These include basic steps such as setting the
strategic direction, stewarding shareholder and stake- holder resources, overseeing risk and prioritizing
objectives, and putting corporate leadership in place.

 Strategic planning and risk management

Boards of directors work hand-in-hand with management to assume responsibility for setting the strategic
direction and adopting a strategic planning process. Ultimately, these leaders must ensure that all of the
activities of the corporation are aligned with and work toward the accomplishment of the strategic vision
and mission of the corporation.

 Board and CEO selection and succession

Having the right people at the top of a corporation, people with character, skills, competencies,
engagement and the right degree of independent-mindedness, is an essential ingredient in both the
structural and cultural dimensions of CG. Choosing the best individuals to lead the corporation, its board
and CEO, is “where good governance begins.”

Empowerment and accountability

The board delegates authority to management to manage the organization, and ensures further delegation
of authority to the lowest levels of the firm compatible with their capabilities (Principle of
Empowerment). The board holds the CEO accountable for the organization’s success, compatible with
delegated authority, and is in turn accountable to the principals (Principle of Accountability).
Empowerment and Accountability encompass these CG performance areas:
 articulating right roles and responsibilities
 the board and executive functioning effectively together ensuring accountability of the board and
executive.
 Allocating responsibilities
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At the heart of successful governance is the appropriate balancing of roles among the board, management
and shareholders. When these roles are out of balance, significant risks are taken which may contribute to
or lead to failure of the corporation. Many boards in Canada are routinely examining and formalizing
roles and responsibilities of boards and executives. Better performance and stronger boards are reflective
of many corporations that have succeeded in implementing assessment and evaluation systems.
Identifying the ongoing specific responsibilties and goals to be assigned to the CEO, chair, board and
committees is the crux of this process.
 Communications and disclosure
The next CG principle involves ensuring an effective flow of information both within the corporation and
with its external stakeholders, including the share- holders. The board ensures an effective two-way
system of information flow in the organization – gathering credible information from, and directing
management. “The board of directors of every corporation should explicitly assume responsibility for the
following matters:
 a communications policy for the corporation
 the integrity of the corporation’s internal control and
 management information system.
Communications and Disclosure encompass these CG performance areas:
 collecting information with integrity,
 effectively communicating: two-way and proactively,
 effectively reporting: with transparency, clarity and accountability.

 Service and fairness

The board is a servant, ensuring fairness in service to all stakeholders – beginning with management and
employees, through customers and shareholders, to stakeholders and communities’ The board balances
the commercial, financial, fiduciary interests of the principals, with the social, environmental, cultural
expectations of stakeholders. Service and Fairness encompass these CG performance areas:
 Dealing fairly with clients, staff and others,
 Conducting business ethically and professionally with integrity,
 Promoting sustainable development and environmental best practice.
4) Japan :
In Japanese practice of doing business, it is common to form industrial and financial conglomerates,

22
where a big financial institution is combined with an industrial company; consequently, in the structure of
corporate governance, the representative of a big financial partner (a bank) is included . A corporation’s
structure is characterized by a common (industrial and financial) usage of loan and share capital, informal
channels of communication and sharing information, and cross shareholdings. Most Japanese
corporations do not involve any outsider board members, as a rule; the board of directors consists of
representatives of a company and main shareholders. In addition, the government plays an important role
in the management as well; the government is involved in strategic planning and ensures the
representation (formal or informal) of its interests in a board of directors. A corporation’s goals are
formed for the satisfaction of shareholders’ needs accompanied with promoting governmental interests.
According to Japanese model, shareholders are responsible for making divisions on
1. dividend payments,
2. distribution of net profit,
3. election of the board of directors,
4. appointment of auditors,
5. changes to the charter,
6. emerges and acquisitions, a corporation’s reorganization,
7. directors’ and auditors’ benefits, etc.
5) Thailand
Thailand represents an insider-dominated system of corporate governance with an emerging stock market.
.Asian crisis has been attributed to corporate governance weaknesses, among other factors. Indeed, the
whole crisis emanated from Thailand. In Summer 1997 there was a devaluation of the Thai baht,
following a collapse of the property market. Following the crisis there was, as in many of the other Asian
economies, significant expropriation of minority shareholder wealth. In the case of Thailand, managers in
the Bangkok Bank of Commerce transferred huge funds offshore to companies under their control
(Johnson et al., 2000). Since the Asian financial crisis, Thailand has been one of many countries to
produce a code of best practice for the directors of listed companies (SET, 1998). Indeed, corporate
governance weaknesses have been used partly as a scapegoat by the authorities in many countries since
1997
 The Core Principles Of Good Corporate Governance :

The four P’s of Corporate governance :

Accountability

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 Fairness
Transparency
Responsibility
Accountability :
Corporate accountability refers to the obligation and responsibility to give an explanation or reason for
the company’s actions and conduct.
 The board should present a balanced and understandable assessment of the company’s position
and prospects;
 The board is responsible for determining the nature and extent of the significant risks it is willing
to take;
 The board should maintain sound risk management and internal control systems;
 The board should establish formal and transparent arrangements for corporate reporting and risk
management and for maintaining an appropriate relationship with the company’s auditor, and
 The board should communicate with stakeholders at regular intervals, a fair, balanced and
understandable assessment of how the company is achieving its business purpose

Fairness :

Fairness refers to equal treatment, for example, all shareholders should receive equal consideration for
whatever shareholdings they hold. In the UK this is protected by the Companies Act 2006 (CA 06).
However, some companies prefer to have a shareholder agreement, which can include more extensive and
effective minority protection.In addition to shareholders, there should also be fairness in the treatment of
all stakeholders including employees, communities and public officials. The fairer the entity appears to
stakeholders, the more likely it is that it can survive the pressure of interested parties.

Transparency :
A principle of good governance is that stakeholders should be informed about the company’s activities,
what it plans to do in the future and any risks involved in its business strategies.Transparency means
openness, a willingness by the company to provide clear information to shareholders and other
stakeholders. For example, transparency refers to the openness and willingness to disclose financial
performance figures which are truthful and accurate.Disclosure of material matters concerning the
organisation’s performance and activities should be timely and accurate to ensure that all investors have
access to clear, factual information which accurately reflects the financial, social and environmental

24
position of the organisation. Organisations should clarify and make publicly known the roles and
responsibilities of the board and management to provide shareholders with a level of accountability.
Transparency ensures that stakeholders can have confidence in the decision-making and management
processes of a company.

Responsibility :

The Board of Directors are given authority to act on behalf of the company. They should therefore accept
full responsibility for the powers that it is given and the authority that it exercises. The Board of Directors
are responsible for overseeing the management of the business, affairs of the company, appointing the
chief executive and monitoring the performance of the company. In doing so, it is required to act in the
best interests of the company.Accountability goes hand in hand with responsibility. The Board of
Directors should be made accountable to the shareholders for the way in which the company has carried
out its responsibilities.

 FUTURE PROSPECTS FOR CORPORATE GOVERNANCE:

 To highlight the frauds and irregularities in the corporate sector the issues of governance,
accountability and transparency in the affairs of the company
 As well as about the rights of shareholders and role of Board of Directors have never been as
prominent as it is today.
 With the integration of Indian economy with global markets, industrialists and corporations in the
country are being increasingly asked to adopt better and transparent corporate practices.
 The degree to which corporations observe basic principles of good corporate governance is an
increasingly important factor for taking key investment decisions.
 If companies are to reap the full benefits of the global capital market, capture efficiency gains, benefit
by economies of scale and attract long term capital, adoption of corporate governance standards must
be credible, consistent, coherent and inspiring.

Module 2

THEORETICAL BASE OF CORPORATE GOVERNANCE MODELS

25
Anglo-American Model

Under the Anglo-American Model of corporate governance, the shareholder rights are recognized and
given importance. They have the right to elect all the members of the Board and the Board directs the
management of the company. Some of the features of this model are:

This is shareholder-oriented model. It is also called Anglo-Saxon approach to corporate governance being
the basis of corporate governance in Britain, Canada, America, Australia and Common Wealth Countries
including India

Directors are rarely independent of management

Companies are run by professional managers who have negligible ownership stake. There is clear
separation of ownership and management.

Institution investors like banks and mutual funds are portfolio investors. When they are not satisfied with
the company’s performance, they simple sell their shares in market and quit.

The disclosure norms are comprehensive and rules against the insider trading are tight

The small investors are protected and large investors are discouraged to take active role in corporate
governance.

German Model

This is also called European Model. It is believed that workers are one of the key stakeholders in the
company and they should have the right to participate in the management of the company. The corporate
governance is carried out through two boards; therefore, it is also known as two-tier board model. These
two boards are:

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1. Supervisory Board: The shareholders elect the members of Supervisory Board. Employees also
elect their representative for Supervisory Board which are generally one-third or half of the Board.

2. Board of Management or Management Board: The Supervisory Board appoints and monitors the
Management Board. The Supervisory Board has the right to dismiss the Management Board and re-
constitute the same.

Japanese Model

Japanese companies raise significant part of capital through banking and other financial institutions. Since
the banks and other institutions stakes are very high in businesses, they also work closely with the
management of the company. The shareholders and main banks together appoint the Board of Directors
and the President. In this model, along with the shareholders, the interest of lenders is recognized.

Indian Model

In India there are mainly three types of companies’ viz. private companies, public companies and public
sector undertakings. Each of these companies has distinct kind of shareholding pattern. Thus, the
corporate governance model in India is a mix of Anglo-American and German Models.

Principles of corporate governance

corporate governance tends to refer to principles raised in three documents released since 1990: The
Cadbury Report (UK, 1992), the Principles of Corporate Governance (OECD, 1999, 2004 and 2015), and
the Sarbanes–Oxley Act of 2002 (US, 2002). The Cadbury and Organization for Economic Co- operation

27
and Development (OECD) reports present general principles around which businesses are expected to
operate to assure proper governance. The Sarbanes– Oxley Act, informally referred to as Sar box or Sox,
is an attempt by the federal government in the United States to legislate several of the principles
recommended in the Cadbury and OECD reports.

 Rights and equitable treatment of shareholders

Organizations should respect the rights of shareholders and help shareholders to exercise those rights.
They can help shareholders exercise their rights by openly and effectively communicating information
and by encouraging shareholders to participate in general meetings.

 Interests of other stakeholders

Organizations should recognize that they have legal, contractual, social, and market driven obligations to
non-shareholder stakeholders, including employees, investors, creditors, suppliers, local communities,
customers, and policy makers.

 Role and responsibilities of the board

The board needs sufficient relevant skills and understanding to review and challenge management
performance. It also needs adequate size and appropriate levels of independence and commitment.

 Integrity and ethical behavior

Integrity should be a fundamental requirement in choosing corporate officers and board members.
Organizations should develop a code of conduct for their directors and executives that promotes ethical
and responsible decision making.

 Disclosure and transparency

Organizations should clarify and make publicly known the roles and responsibilities of board and
management to provide stakeholders with a level of accountability. They should also implement
procedures to independently verify and safeguard the integrity of the company's financial reporting.

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Disclosure of material matters concerning the organization should be timely and balanced to ensure that
all investors have access to clear, factual information.

Essential Elements of good Corporate Governance

❖ Director independence and performance

The Board of Directors plays a key role in company oversight, including:

• driving long-term strategic vision, and appointing and overseeing the Chief Executive Officer.

The most effective boards have a majority of independent directors who are able to supervise company
management and independent committees for the benefit of shareholders. These directors should attend
the meetings and be prepared to discuss key issues. They also should be evaluated based on how long
they have served on a particular board. Long-tenured directors can become too entrenched in a company
to be considered truly independent.

 A focus on diversity

Studies have shown that companies with more diversified boards are more risk averse, have less volatile
stock returns, and are more likely to pay dividends. So, it can be argued that diversity by gender, age, and
minority representation should be a key goal for the composition of every company’s board and senior
management ranks.

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 Regular compensation review and management

Another essential element of corporate governance is the review and management of compensation at
both the board and executive management levels.

The scope and method of management compensation should be considered as well, with proxy statements
a good source of information about executive compensation plans. Institutional Shareholder Services
(ISS), a proxy voting recommendation service, has established these five compensation guidelines as part
of their proxy voting principles:

• Pay should be aligned with performance, with an emphasis on the long term.

• Avoid “paying for failure,” by avoiding guaranteed compensation and excessive severance
packages.

• Create an independent compensation committee for effective oversight.

• Ensure transparent and comprehensive compensation disclosures.

• Manage payments made to nonexecutive directors. Overpaid nonexecutive directors may not
make independent judgments on managers’ compensation and performance.

❖ Auditor independence and transparency

A review of audit practices and company accounting can also signal problems to come. Auditors should
be independent (with no financial interest in a company) with the majority of their revenues derived from
audit activities, not consultation services. Accounting issues should be handled in a transparent manner,
with complete, detailed information and reports always available to the board and measures put in place
to prevent recurrence of any questionable findings.

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❖ Shareholder rights and takeover provisions

Investors should consider shareholder rights as a key element of good governance as well.

• Do all shareholders hold equal voting rights or is one share class advantaged over the other?

Multiple shares/classes do not necessarily indicate poor governance, but they are a factor to consider. In
the information technology sector, for example, it is common for company founders and insiders to hold
shares that have greater voting rights than outside investors.

• Do shareholders have access to place proposals on proxy ballots or nominate directors?

A company’s record of dealing with shareholder proposals that receive a majority of votes may also be an
indicator of how a company deals with its shareholders.

• What actions can a board take without shareholder approval, such as amending company bylaws?

Are there plans in place, such as poison pills, that can make it difficult for a company to be acquired?
How is management rewarded in the event of a takeover?

Takeover provisions should be reviewed and shareholders should have adequate rights to vote on these
provisions.

❖ Proxy voting and shareholder influence

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Increasingly, investors are using proxy voting as a means to influence a board’s corporate oversight as
well as its commitment to improving its governance on issues such as climate change, income inequality,
and shareholder proxy access.

Shareholders must have the ability to use their votes to send a message to the board by withholding votes
for the directors in cases where the company has delayed taking action on winning shareholder proposals,
failed to deal with a director’s poor performance, or did not improve board accountability and oversight.

Letter writing campaigns also can be successful in lobbying for change in a company’s corporate
governance and, in some cases, have taken the place of putting proposals on shareholder ballots.

Pension funds and asset managers, for example, may join forces to successfully use letter writing to bring
about new voting measures, including majority voting, repealing classified boards, and removing
supermajority voting provisions.

Corporate Governance in India Past, Present & Future

Good corporate governance in the changing business environment has emerged as powerful tool of
competitiveness and sustainability. It is very important at this point and it needs corporation for one and
all i.e., from CEO of company to the ordinary staff for the maximization of the stakeholders’ value and
also for maximization of pleasure and minimization of pain for the long-term business.

Global competitions in the market need best planning, management, innovative ideas, compliance with
laws, good relation between directors, shareholders, employees and customers of companies, value based
corporate governance in order to grow, prosper and compete in international markets by strengthen their
strength overcoming their weaknesses and running them effectively and efficiently in an efficient and
transparent manner by adopting the best practices.

Corporate India must commit itself as reliable, innovative and prompt service provider to their customers
and should also become reliable business partners in order to prosper and to have all round growth.

Corporate Governance is nothing more than a set of ideas, innovation, creativity, thinking having certain
ethics, values, principles etc. which gives direction and shape to its people, employees and owners of
companies and help them to flourish in global market.

32
Indian Corporate Bodies having adopted good corporate governance will reach themselves to a
benchmark for rest of the world; it brings laurels as a way of appreciation. Corporate governance lays
down ethics, values, and principles, management policies of a corporation which are inculcated and
brought into practice. The importance of corporate governance lies in promoting and maintains integrity,
transparency and accountability throughout the organization.

Corporate governance has existed since past but it was in different form. During Vedic times kings used
to have their ministers and used to have ethics, values, principles and laws to run their state but today it is
in the form corporate governance having same rules, laws, ethics, values, and morals etc. which helps in
running corporate bodies in the more effective ways so that they in the age of globalization become global
giants.

Several Indian Companies like PepsiCo, Infuses, Tata, Wipro, TCS, and Reliance are some of the global
giants which have their flag of success flying high in the sky due to good corporate governance.

Today, even law has a great role to play in successful and growing economy. Government and judiciary
have enacted several laws and regulations like SEBI, FEMA, Cyber laws, Competition laws etc. and have
brought several amendments and repeal the laws in order that they don’t act as barrier for these corporate
bodies and developing India. Judiciary has also helped in great way by solving the corporate disputes in
speedy way.

Corporate bodies have their aim, values, motto, ethics and principles etc. which guide them to the ladder
of success. Big and small organizations have their magazines annual reports which reflect their
achievements, failure, their profit and loss, their current position in the market. A few companies have

also shown awareness of environment protection, social responsibilities and the cause of upliftment and
social development and they have deeply committed themselves to it. The big example of such a company
can be of Deepak Fertilizers and Petrochemicals Corporation Limited which also bagged 2nd runner up
award for the corporate social responsibility by business world in 2005.

Under the present scenario, stakeholders are given more importance as to shareholders, they even get
chance to attend, vote at general meetings, make observations and comments on the performance of the
company.

33
Corporate governance from the futuristic point of view has great role to play. The corporate bodies in
their corporate have much futuristic approach. They have vision for their company, on which they work
for the future success. They take risk and adopt innovative ideas, have futuristic goals, motto, and future
objectives to achieve.

With increase in interdependent and free trade among countries and citizens across the globe,
internationally accepted corporate governance standards are of paramount importance for Indian
Companies seeking to distinguish themselves in global footprint. The companies should always keep
improving, enhancing and upgrading themselves by bringing more reliable integrated product and service
quality. They should be more transparent in their conduct.

Corporate governance should also have approach of holistic view, value-based governance, should be
committed towards corporate social upliftment and social responsibility and environment protection. It
also involves creative, generative and positive things that add value to the various stakeholders that are
served as customers. Be it finance, taxation, banking or legal framework each and every place requires
good corporate governance.

Hence corporate governance is a means and not an end, corporate excellence should be end.

Legal frame work of CG-Stakeholders of CG

The Indian statutory framework has, by and large, been in consonance with the international best
practices of corporate governance. Broadly speaking, the corporate governance mechanism for companies
in India is enumerated in the following enactments/ regulations/ guidelines/ listing agreement:

1. The Companies Act, 2013 inter alia contains provisions relating to board constitution, board
meetings, board processes, independent directors, general meetings, audit committees, related party
transactions, disclosure requirements in financial statements, etc.

2. Securities and Exchange Board of India (SEBI) Guidelines: SEBI is a regulatory authority having
jurisdiction over listed companies and which issues regulations, rules and guidelines to companies to
ensure protection of investors.

34
3. Standard Listing Agreement of Stock Exchanges: For companies whose shares are listed on the
stock exchanges.

4. Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI): ICAI is an
autonomous body, which issues accounting standards providing guidelines for disclosures of

financial information. Section 129 of the New Companies Act inter alia provides that the financial
statements shall give a true and fair view of the state of affairs of the company or companies, comply with
the accounting standards notified under s 133 of the New Companies Act. It is further provided that items
contained in such financial statements shall be in accordance with the accounting standards.

5. Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI): ICSI is an
autonomous body, which issues secretarial standards in terms of the provisions of the New Companies
Act. So far, the ICSI has issued Secretarial Standard on "Meetings of the

Board of Directors" (SS-1) and Secretarial Standards on "General Meetings" (SS-2). These Secretarial
Standards have come into force w.e.f. July 1, 2015. Section 118(10) of the New Companies Act provide
that every company (other than one person company) shall observe

Secretarial Standards specified as such by the ICSI with respect to general and board meeting

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MODULE 3

CORPARATE GOVERNANCE IN INDIAN SCENARIO

Evolution of Corporate Governance in India

In 2000, the SEBI came up with Clause 49 of the Listing Agreement, which all the listed companies on a
stock exchange need to sign, that dealt with the issues of corporate governance based on the
recommendations of Kumara Mangalam Birla Committee.

The Clause initially dealt with issues such as protection of investors' interests, promoting transparency,
adhering to international standards of information disclosure etc. among others. It was subsequently
amended under the recommendations of various expert committees. For instance, based on Naresh
Chandra Committee recommendations - the procedure for appointing auditors, the norms dealing with the
relationship between auditor firm and the company etc. were amended. Later, based on Narayana Murthy
Committee recommendations, the quality of financial disclosure, the responsibility of the audit committee
was amended.

In 2013, the government introduced the new Companies Act which deals with corporate governance in a
comprehensive manner.

Securities and Exchange Board of India (SEBI) in 1999 set up a committee under Shri Kumar Mangalam
Birla, member SEBI Board, to promote and raise the standards of good corporate governance. The
primary objective of the committee was to view corporate governance from the perspective of the
investors and shareholders and to prepare a ‘Code’ to suit the Indian corporate environment. The
committee divided the recommendations into two categories, namely, mandatory and non- mandatory.

Mandatory Recommendations

36
• The mandatory recommendations apply to the listed companies with paid up share capital of 3
crore and above.

• Composition of board of directors should be optimum combination of executive & nonexecutive

directors.

• Audit committee should contain 3 independent directors with one having financial and accounting
knowledge.

• Remuneration committee should be setup

• The Board should hold at least 4 meetings in a year with maximum gap of 4 months between 2
meetings to review operational plans, capital budgets, quarterly results, minutes of committee’s meeting.

• Director shall not be a member of more than 10 committee and shall not act as chairman of more
than 5 committees across all companies

• Management discussion and analysis report covering industry structure, opportunities, threats,
risks, outlook, internal control system should be ready for external review

• Any Information should be shared with shareholders in regard to theirinvestments.

Non-Mandatory Recommendations

The committee made several recommendations with reference to:

• Role of chairman

• Remuneration committee of board

37
• Shareholders’ right for receiving half yearly financial performance.

• Postal ballot covering critical matters like alteration in memorandum

• Sale of whole or substantial part of the undertaking

• Corporate restructuring

• Further issue of capital

• Venturing into new businesses

These recommendations were to apply to all the listed private and public sector companies, their
directors, management, employees and professionals associated with such companies. The Committee
recognizes that compliance with the recommendations would involve restructuring the existing boards of
companies. It also recognizes that smaller ones will have difficulty in immediately complying with these
conditions

Issues in Corporate Governance in India

 Stressed balance sheets

The bad debt problem (NPAs), which has affected the corporate sector, is as much an outcome of bad
corporate governance as it is due to the vagaries of the business cycle. Many expensive acquisitions were
made in the last decade by companies without a proper approval from the shareholders. As a result, few
of them paid off for the shareholders.

 The composition of the Board

The Companies Act, 2013 introduced several good corporate governance provisions such as, one-third of
the company board should comprise of Independent Directors, the board should have at least one-woman
Director, the constitution of Audit Committee within the board etc. However, several companies still
haven't appointed woman directors in their boards while some of them have named the women family
members or friends of promoters as directors.

 Role of Independent Directors

38
Independent Directors were supposed to enhance the accountability of the board to the shareholders. As
part of the Audit Committees, they were to ensure that the financial disclosure process was carried out as
per the law. However, it was observed that they had failed to make their mark on company boards. Many
of them fail to stand up to promoters' decisions if they find it to be against the interest of all the
stakeholders. The main reason for their weakness is their removal process - they can be easily removed by
the promoters or majority shareholders, affecting their independence.

 The conflict between promoters and management since many companies are family-owned
enterprises, the promoters as majority shareholders continue to exercise disproportionate influence over
business decisions. This sometimes leads to a conflict between the promoters and the management, which
is responsible for the day-to-day functioning of the company. Recent instances of ousting of Tata group
chairman by Tata Sons, and the forced exit of the CEO of Infosys, both due to differences between the top
management and the promoters, have highlighted the weaknesses in our corporate governance norms.
This conflict has also reflected the weaknesses in succession planning by the founders/promoters, many
of them inherent inhibitions to let go of control over their companies.

 Executive Compensation

According to the new Companies Act, the nomination and remuneration committee of the Board
(comprising a majority of independent directors) is to decide on the compensation to key employees. This
needs to be approved by the shareholders. However, the top employees are paid exorbitant remuneration
in certain instances where they allow a significant say to the promoters as quid pro quo. On the other
hand, many small companies fail to offer competitive remuneration to attract talented professionals.

Sometimes, exorbitant remuneration to the top employees can become an issue of conflict between
promoters and management, like the case of Infosys.

Corporate Governance Rating Definition

39
Corporate governance is defined as a set of rules, mechanisms and practices that inform how a
corporation is being operated or managed. Essentially, corporate governance drives transparency, fairness
and accountability between a company and its customers, shareholders, suppliers, financiers, executives,
government and the community. A corporate governance rating refers to the status of a company with
respect to the adoption of corporate governance practices. This rating is the final opinion regarding the
important a corporation attached to corporate governance by looking at the

information they provide to stakeholders, relationship with financiers, customers, suppliers, the
community and others.

The CGRS works towards the following objectives:

• Elevate existing corporate governance and corporate integrity practices in Nigeria, thus improving
the overall perception and trust in the Nigerian capital market and business practices.

• Bring both integrity and transparency into the listed companies through the rating and ranking of
the most compliant companies.

• Provide companies with an incentive to develop better governance practices.

• Provide an opportunity for companies to differentiate themselves in the marketplace.

• The ratings form part of the criteria for being listed on a Premium Board and Corporate
Governance Index.

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Enron Fraud Case Summary

Enron was formed in 1985, following a merger between Houston Natural Gas Co. and Omahabased Inter
North Inc. Following the merger, Kenneth Lay, who had been the chief executive officer (CEO) of
Houston Natural Gas, became Enron's CEO and chairman and quickly rebranded Enron into an energy
trader and supplier. Deregulation of the energy markets allowed companies to place bets on future prices,
and Enron was poised to take advantage. In 1990, Lay created the Enron Finance Corp. To head it, he
appointed Jeffrey Skilling, whose work as a McKinsey consultant had impressed Lay. Skilling was at the
time one of the youngest partners at McKinsey. Skilling joined Enron at an auspicious time.

One of Skilling's early contributions was to move Enron from a traditional historical cost accounting
method to a mark to market (MTM) accounting method, for which the company got official SEC approval
in 1992. MTM is a measure of the fair value of accounts that can change over time, such as assets and
liabilities. MTM aims to provide a realistic appraisal of an institution's or company's current financial
situation. It is a legitimate and widely-used practice. However, it can be manipulated, since MTM is not
based on "actual" cost but on "fair value," which is harder to pin down. Some

believe MTM was the beginning of the end for Enron, as it essentially started logging estimated profits as
actual ones.

By the fall of 2000, Enron was starting to crumble under its own weight. CEO Jeffrey Skilling had a way
of hiding the financial losses of the trading business and other operations of the company it was called
MTM accounting. This is a technique used where you measure the value of a security based on its current
market value, instead of its book value. This can work well when trading securities, but it can be
disastrous for actual businesses.

In Enron's case, the company would build an asset, such as a power plant, and immediately claim the
projected profit on its books, even though it hadn't made one dime from it. If the revenue from the power
plant was less than the projected amount, instead of taking the loss, the company would then transfer the

41
asset to an off-the-books corporation, where the loss would go unreported. This type of accounting
enabled Enron to write off unprofitable activities without hurting its bottom line.

The MTM practice led to schemes that were designed to hide the losses and make the company appear to
be more profitable than it really was. To cope with the mounting liabilities, Andrew Fastow, a rising star
who was promoted to CFO in 1998, came up with a deliberate plan to make the company appear to be in
sound financial shape, despite the fact that many of its subsidiaries were losing money.

Fastow and others at Enron orchestrated a scheme to use off-balance-sheet special purpose vehicles
(SPVs), also known as special purposes entities (SPEs) to hide its mountains of debt and toxic assets from
investors and creditors. The primary aim of these SPVs was to hide accounting realities, rather than
operating results. Enron would transfer some of its rapidly rising stock to the SPV in exchange for cash or
a note. The SPV would subsequently use the stock to hedge an asset listed on Enron's balance sheet. In
turn, Enron would guarantee the SPV's value to reduce apparent counterparty risk.

Although their aim was to hide accounting realities, the SPVs weren't illegal, as such. But they were
different from standard debt securitization in several significant – and potentially disastrous – ways. One
major difference was that the SPVs were capitalized entirely with Enron stock. This directly
compromised the ability of the SPVs to hedge if Enron's share prices fell. Just as dangerous was the
second significant difference, Enron's failure to disclose conflicts of interest. Enron disclosed the SPVs'
existence to the investing public, although it's certainly likely that few people understood them, but it
failed to adequately disclose the nonarm's length deals between the company and the SPVs.

Enron believed that its stock price would keep appreciating, a belief similar to that embodied by Long-
Term Capital Management, a large hedge fund, before its collapse in 1998. Eventually, Enron's stock
declined. The values of the SPVs also fell, forcing Enron's guarantees to take effect.

In addition to Andrew Fastow, a major player in the Enron scandal was Enron's accounting firm Arthur
Andersen LLP and partner David B. Duncan, who oversaw Enron's accounts. As one of the five largest
accounting firms in the United States at the time, Andersen had a reputation for high standards and
quality risk management.

However, despite Enron's poor accounting practices, Arthur Andersen offered its stamp of approval,
signing off on the corporate reports for years, which was enough for investors and regulators alike. This

42
game couldn't go on forever, however, and by April 2001, many analysts started to question Enron's
earnings and their transparency.

Arthur Andersen was one of the first casualties of Enron's prolific demise. In June 2002, the firm was
found guilty of obstructing justice for shredding Enron's financial documents to conceal them from the
SEC. The conviction was overturned later, on appeal, however, the firm was deeply disgraced by the
scandal, and dwindled into a holding company. A group of former partners bought the name in 2014,
creating a firm named Andersen Global.

Several of Enron's execs were charged with a slew of charges, including conspiracy, insider trading, and
securities fraud. Enron's founder and former CEO Kenneth Lay was convicted of six counts of fraud and
conspiracy and four counts of bank fraud. Prior to sentencing, though, he died of a heart attack in
Colorado.

Enron's former star CFO Andrew Fastow plead guilty to two counts of wire fraud and securities fraud for
facilitating Enron's corrupt business practices. He ultimately cut a deal for cooperating with federal
authorities and served a four-year sentence, which ended in 2011. Ultimately, though, former Enron CEO
Jeffrey Skilling received the harshest sentence of anyone involved in the Enron scandal. In 2006, Skilling
was convicted of conspiracy, fraud, and insider trading.

world com fraud

The WorldCom scandal was a major accounting scandal that came to light in the summer of 2002 at
WorldCom, the USA's second largest long-distance telephone company at the time. From 1999 to 2002,
senior executives at WorldCom led by founder and CEO Bernard Ebbers orchestrated a scheme to inflate
earnings in order to maintain WorldCom's stock price. The fraud was uncovered in June 2002 when the
company's internal audit unit, led by vice president Cynthia Cooper, discovered over $3.8 billion of
fraudulent balance sheet entries. Eventually, WorldCom was forced to admit that

it had overstated its assets by over $11 billion. At the time, it was the largest accounting fraud in
American history.

The case discusses the accounting frauds committed by the leading US telecommunications giant,
WorldCom during the 1990s that led to its eventual bankruptcy. The case provides a detailed description
of the growth of WorldCom over the years through its policy of mergers and acquisitions. The case

43
explains the nature of the US telecommunications market, highlighting the circumstances that put
immense pressure on companies to project a healthy financial position at all times. The case provides an
insight into the ways by which WorldCom manipulated its financial statements. The case also describes
the events that led the company to file for reorganization under Chapter 11 of the U.S. Bankruptcy Court
in 2002.

American International Group Scam

In the first case against AIG for American International Group Scam, in September 2003, the SEC had
made accusations of fraud for selling sham insurances for enabling itself to report false and misleading
financial information to public. This matter was settled by imposing a penalty of $10 million civil penalty
on AIG.

In the first case against AIG for American International Group Scam, in September 2003, the

SEC had made accusations of fraud for selling sham insurances for enabling itself to report false and
misleading financial information to public. This matter was settled by imposing a penalty of $10 million
civil penalty on AIG.

• There have been sham transactions in order to inflate the reserves.

• Fake transactions have been created to conceal losses by converting them into capital losses.

• Misled the Insurance Department about offshore affiliates of AIG.

• Improper reporting of worker’s compensation premiums

The United States District Court of Southern District of New York held the company guilty on all
charges. The SEC alleged that from 2000 to 2005 AIG falsified its financial statements through a variety
of sham transactions to false a rosy picture of AIG’s financial result to analysts. It restructured two sham
transactions with GRC to add a total of $500 million in the loss accounts of AIG. During the period of
fraud, AIG sold its shares in a stock-for-stock corporate acquisition.

The violations- AIG, by the foregoing acts, directly or indirectly, as a company or by the officers as
individuals, is engaged in practices and course of business which constitutes violations of various
provisions of the Securities Act, 1933, the Exchange Act, 1934. The SEC in its complaint to the Court
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was seeking a permanent restraint on AIG’s actions violating the said laws for all this time. AIG made use
of the means and instrumentalities of interstate commerce, or of the mails, in connection with the
transactions, acts, practices and course of business. Further, AIG circumvented the system of internal
accounting and knowingly falsified the records related to accounts of the company.

How was it caught- The Attorney General’s office and the Insurance Department were investigating the
AIGs accounts for bid-rigging. Bid rigging is a commercial contract which is already given to one party
for the sake of formality, other parties are also present at the bidding. It is a common practice in the
insurance market, which was under the probe by Insurance

Department and Attorney General’s office. A whistle-blower probably gave a tip off of the possible scam
to the SEC in the year 2005, after which the SEC joined the other two in the probe as well. The Attorney
General and Insurance Superintendent sued AIG and its former Chairman and CEO Greenberg under
various charges of fraud. American International Group

Scam

Baring Bank Case

When the smoke finally clears from the recent corporate collapses, the image in the mirror may not be an
Enron or a WorldCom but it could be the infamous shortfalls in operations risk management that appear
not only to be at the core of the failures but are reminiscent of the factors leading to the Barings Bank
debacle.

Though the culprit in the Barings case, Nick Leeson, was several layers below the top executives in the
recent catastrophes, poor operations risk controls allowed him to commit frauds similar to what we're
seeing today.

The year was 1995. Nick Leeson, 28, had risen from the working class of Watford, England, to become
the general manager and head trader of Barings Futures Singapore. Barings PLC of London was the
oldest merchant bank in England at 233 years. But due to a combination of Leeson's greed and
45
overreaching ambition, and Barings' serious lack of operations risk controls, the bank would soon
collapse under a $1.4 billion debt.

Leeson was charged with forgeries and misrepresentations that he made to conceal unauthorized deals
while trading on the Singapore International Monetary Exchange (SIME). He served two-thirds of a six-
and-a-half-year sentence in a Singapore jail.

Operations risks include, but aren't limited to: human resource management risk; vendor management
risk; custody of assets risk; accounting and financial disclosure risk; technology risk; physical security,
natural hazard, and environmental risk; fraud and embezzlement risk (internal and external);

legal and political risk; modeling risk; and compliance risk Operations risks can be financially troubling if
not devastating. The corresponding risk to reputation can be long term and even crippling as customers
stay away for months if not years after an operations risk incident. Audit committees, CEOs, senior
management, line-of-business executives, auditors, and fraud examiners must work collectively to control
and mitigate operations risk.

Barings is the poster child for a business that practiced the following seven deadly business control sins.

Lehman Brother case,

On September 15, 2008, Lehman Brothers Holdings Inc filed for bankruptcy. It filed for protection under
Chapter 11 of the U.S. Bankruptcy Code with the United States Bankruptcy Court for the Southern
District of New York. It filed with $639 billion in assets and $619 billion in debt, Lehman’s bankruptcy
filing was the largest in history, as its assets far surpassed those of previous bankrupt giants such as
WorldCom and Enron. Lehman was the fourthlargest U.S. investment bank at the time of its collapse,
with 25,000 employees worldwide

On 15 September 2008, Lehman Brothers Holdings filed for Chapter 11 bankruptcy protection. Its
bankruptcy filing listed debts of $613bn, and named banks from Tokyo, Hong Kong, New York,
Singapore, Taipei and elsewhere as unsecured creditors owed hundreds of millions of dollars. There are
many causes of Lehman Brothers failure, we could divide them to tree categories as follow: Others
Technical causes Corporate governance failures

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Lehman Brothers had weak corporate governance arrangements which failed to safeguard against
excessive risk taking are partly to blame for the economic crisis. Such failures remained hidden in a
prosperous market but the downturn has revealed a number of flaws. The key areas of weakness that have
been highlighted are:

• Corporate risk management;

• Board of directors;

• Remuneration scheme; and • Nomination

One of the main failure cases in Lehman Brothers was the misbehavior of top executives and the inaction
of both the board and the auditing firm (Ernst & Young).

Sathyam case

Satyam computer services ltd was started in 1987 at Hyderabad by the Raju brothers, Rama Raju and
Ramalinga Raju. The company was quite successful. Hence, they went forward to get it listed. The
company got listed in the Bombay stock exchange in 1991. At that time the shares of Satyam ltd were
oversubscribed by 17 times. The company proved to be a master in its field and bagged multiple awards.
Ramalinga Raju became the chairman in 2006 and got the award for the Ernest and Youngest
Entrepreneur in 2007. Soon their annual revenue touched 1 billion and by the end of 2008, it crossed 2
billion. The company spread its wings to 20+ countries and the business bloomed day by day. Or, so it
was believed.

Tensions started when the brothers decided to merge with the company called Matyas. Matyas was held
and managed by Raju's family. The merger of the two companies gave rise to various legal issues leaving
Raju brothers in trouble. Suddenly Raju resigned his position as a chairman and released a confession
letter of 5 pages. In it, he admitted committing a fraud of 7000 crores.

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Why and how did he do that?

The Raju brothers conspired such a huge scam to increase their revenue fictitiously. An increase in
revenue projected a tremendous increase in profits. This attracted a lot of investors which in turn made
the share price reach new heights. The Satyam brothers, who were the founders and promoters of Satyam
companies used this opportunity and sold their holdings at a much higher price. They took a profit of
1200 crores through the sale.

The brothers did this by adjusting and modifying the books and bank statements to act in their favor.
Most companies make use of ERP system for accounting. But the Raju brothers used their strength and
developed their ERP system for accounting purposes. This system, unlike its counterparts, had numerous
loopholes. Hence, the insertion of fictitious invoices and fictitious bank statements became a child’s play
for the brothers. The projected fake bank statements held more money than the actual one. They simply
converted this money into a fixed deposit account. The value of such fixed deposits was roughly around
5000 crores.

The PWC who were the auditors of the Satyam companies failed in their job terribly. They did not verify
the invoices or bank statements. Physical verification wasn’t conducted as well.

Nearly 7,561 fake bills were created and the auditors couldn’t spot it for about 7-8 years.

The board of directors demanded to get those FDs invested in some profitable avenues. That is when the
brothers decided to invest it in Matyas. However, the board did not like the decision. This gave

rise to a lot of problems which made the share prices fall drastically. The company was subjected to
answer numerous questions. The pressure started building up.

Unable to find a new escape plan the brothers decided to confess the truth.

Government’s reaction to it

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“It was like riding a tiger without knowing how to get down without being eaten”, Raju said in one of his
confession letters. The CBI took charge of the case and started the investigation. The Raju brothers and
the auditors were sentenced to prison and were charged a huge sum as a penalty. The company was taken
over by Tech Mahindra. Following the scam, the Government and SEBI took various steps to tighten the
grip on such perpetrators in the future. They brought several new regulations under the Companies Act of
2013. SEBI amended the "clause 49". Now companies are obliged to change their auditors every 10 years.
Several safeguards and protective measures are brought into the picture.

India learned a lot from the Satyam fraud case. Indian laws are still developing. A fraud like that has a
little probability to take place again. Now the big stock market scam is nothing but a story of what not to
do.

Tata finance case

Dilip Sudhakar Pendse was the Managing Director at Tata Finance for five years from June 1996 to May
2001. However, he was fired in 2001 on the charges of siphoning off company funds through two
subsidiaries, Nishkalp Investments and Inshallah Investments. The fraud came to light in April 2001
when SEBI (The Securities and Exchange Board of India) started its enquiries after Tata Finance made an
application to raise Rs 90 crore through a right issue. The investigation revealed that Pendse, conspired
with other officers, was diverting money from deposits of Tata Finance subsidiaries, Nishkalp
Investments and Inshallah Investments, to invest in stocks such as Himachal Futuristic Communications,
Global Tele systems, Veerangana Software, etc. These stocks had crashed during the 2000 dot-com bust.
Anuradha Pendse and Nalini Properties were alleged to have sold shares of Tata Finance in

March 2001 on the basis of unpublished price sensitive information relating to the financial position of
the company. Pendse and Anuradha were alleged to have leaked price sensitive information that Tata
Finance had suffered a loss of Rs 79.37 crore consequent to its investment in Nishkalp Investment. The
SEBI informed the company about Pendse's cheating in 2001. He resigned as director of Nishkalp, which
had run huge losses in investments, in June 2001. Following the SEBI's findings, the Tata Group hired AF
Fergusson as an independent auditor to scrutinize the company's books.

Fergusson concluded that investments in two subsidiaries - Nishkalp Investments and Inshallah

49
Investments - had caused the company a loss of nearly Rs 450 crores. In August 2001, Tata Finance filed
an FIR with economic offences alleging that Pendse had siphoned off huge funds from Nishkalp Trading
Company. Pendse was finally arrested in February 2003 by police in New Delhi following a complaint
filed by Inshallah Investment Ltd, alleging that the former managing director had issued cheques worth
Rs 2 crore to brokers for payment of personal transactions of a former TFL director.

In October 2014, the SEBI had found Pendse guilty of illegal trades and banned him from accessing
capital markets for two years. Pendse promptly appealed to the Securities Appellate Tribunal. In 2014, the
tribunal asked SEBI to hear the case again. In 2016, SEBI again barred Pendse and three other entities
from the capital market for three years for the 2001 manipulation case.

Sahara India Parivar is an Indian conglomerate based in Lucknow. It was founded in the year 1978 by
Subrata Roy in Gorakhpur, where he is based from. Initially, his business was related to capital generation
from public at large by urging them to invest. As his company grew, the Sahara India Parivar Group of
Companies was formed. The Chairman of the group was Mr. Subrata Roy. His main business interest lies
in the field of finance, infrastructure and housing, media and entertainment, consumer merchandise,
information technology etc. The group has been a major investor in sports and was the title sponsor of
Indian national cricket team for years. The group operates more than 5,000 establishments across India
with the employee strength of around 1.4 million in total. It is an unlisted company. There are huge
allegations of having unknown source of capital and various other corrupt practices such as money
laundering, fictitious investors and dummy shares. The Revenue Department already had its eyes on this
company as it became so huge in such a short span of time. The said scam then came into light in the year
2009-10 for the first time.

The Sahara Scam

The matter first came into notice when an Indore based chartered accountant Roshan Lal sent a note to the
National Housing Bank (hereinafter referred to as “NHB”), requesting it to look into the anomalies of
housing bonds issued by the two companies of the Sahara group viz. Sahara India Real Estate Corporation
(SIREC) and Sahara Housing Investment Corporation (SHIC), both being headquartered in Lucknow. His
observation was that the bonds have not been issued as per the law for time being in force. The NHB
forwarded the complaint to the SEBI due to lack of authority to pursue the case. SEBI being the capital
market regulator reviewed the draft red herring prospectus issued by the two companies to raise equity for

50
the real estate company Sahara Prime City Limited through initial public offering. SEBI also received a
similar letter from an Ahmadabad based advocate’s group, Professional Group for Investor’s Protection.
In the probe that was launched by the SEBI on perusal of the complaints, it was found that in the last four
years, the two companies SIREC and SHIC have added Rs. 4,000 Crore and Rs. 32,300 Crore in their
capital pool of which there was no

accountability. On a show cause notice, the companies could not justify this inflow of money. As per their
own prospectus, the two companies were raising huge chunks of money from the public through OFCD.

As per the law, there are two methods for raising capital from the market and for which two types of
markets are created viz. the primary market and the secondary market, for this purpose. Primary market
means and includes methods like public issue, rights issue, private placement, venture capital, bonds
issued by financial institutions and the like. In the secondary market securities issued in the primary
market are sold and bought. It is formed by such investors who deal in financial securities in proverbial
stock exchange. One example of this is the National Stock Exchange (NSE) where the trade of securities
takes place without any involvement of the company which issues the securities.

In the year 2019, the company’s total liability has arisen up to Rs 25,781 crores, without interest in its
entirety. The Apex Court stated that the company is still due to pay Rs. 10,621 crores to meet its total
liability. Subrata Roy is out on parole since 2017 after spending almost two years in jail. In an
unprecedented move, the company was asked to fill a bail bond of Rs 10,000 Crores, on failure of which
he had to spend almost 2 years in jail. Not only this, the law has been strict on the Sahara group generally.
The Supreme Court recently gave its nod for the auction of

Sahara’s flagship property in Maharashtra after it failed to deposit the amount of Rs 750 Crore in the
SEBI – Sahara refund account. The same could not be materialized because of the bad real estate
conditions going on currently. Even though the time limit for the payment given by the Supreme Court
ends this year, the company is failing to make payments and citing fall in the real estate market as the
reason. The Supreme Court is likely to allow some more time to the company for the repayment as it has
specifically stated that it will not involve itself in selling the properties of the Sahara group, as it’s not the
job of the courts to sell assets

51
Module 4

ETHICS

Ethics

Ethics are the moral principles and values that underpin human behavior. Morals are concerned with what
is 'right' or 'wrong'.
52
Objectives of ethics

• Ethics deals with human behavior. It assesses whether a particular act or decision taken by an
individual is moral or not.

• to establish moral standards and norms of the behavior.

• To judge human behavior based on these standards and norms.

• To assess the human behavior and express an opinion or attitude about the behavior.

• To set a standard or code for the moral behavior and make recommendations about the desired
behavior.

Business Ethics

Business ethics explains that business can generate substantial profits if it follows practice.

Due to expansion of business, the application of ethical practices and it0 implication created n need for
practicing business.

• Today, more and more importance is being given to the application of ethical practice es in
business dealings and the ethical implications of business decisions.

• Business has choices or alternatives, such ns to maximize profits increase sales volume and
provide employee benefits end concern for the society.

• However, at times profits and societal responsibilities cannot coexist. This is because while
earning profits business may neglect social responsibilities.

• for instance, some chemical firm driven by profit motive may postpone its investment in social
welfare projects like Effluent treatment plant (ETP), although the industrial waste left into the
environment is hazardous to public health. Thus, it becomes difficult to maximize both profits and social
responsibilities.

53
• This situation results in managerial dilemma, where manager have to choose) between profits for
the organization and social consideration towards the community.

• Any business, if it wants to survive and grow in the long-run must strike a balance between its
social obligations and economic objectives. These obligations may be complex and costly to discharge.

But if the organization wants to be ethical, it has to discharge Its social obligations towards the society.

Characteristics of business ethics

• Each and every person is individually responsible for the ethical or unethical behavior. The way in
which the person is brought up, the values learnt and the working at atmosphere decides the ethical
standards of people.

• Ethical decisions are voluntary in nature and people have the freedom of choice a free will.

Ethical decisions differ from person to person, time to time and place to place. Due to the socio-
economic changes, the ethical decisions also change. What we considered goo one time is considered bad
at another point of time. Many decades ago, customer care was not given prominence. In the modern age,
customer care is given utmost importance.

• Ethical decisions affect in a widespread way. These ethical decisions; spread to other business
firms across the region, nation and even the globe.

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• Ethical decisions involve a trade-off between the cost and the benefits received. Some ethical
decisions may be costly in the short-run but these decisions may bring good benefits in the long-run. For
example, social responsibility of business brings a tot of benefits to the business firms in the long-run

• Effects of ethical decisions cannot be predicted. For example, disclosure norms like disclosure of
many business results are accepted as good business practices in

• modern days. These ideas were not encouraged in traditional times.

• In most organizations people experience ethical dilemmas. Dilemma means

• choice between two options. When values are in conflict, an ethical examination can help the
managers. Deadlines, sales goals, career advancement are the risk of ethical conduct. These risks have to
be managed effectively.

• Ethics has to be taught to the managers at the corporate doors. Ethical training will boost the
moral climate of the firm.

• Ethics have to be imparted from a very early age. Managers should be trained to get others'
feedback before acting or deciding.

Needs of business ethics

• To improve moral of empl0oyees and reduce absenteeism and labor tour over rate

• To reduce the social tensions created sue too unethical practices of business forms

• To create investor friendly environment To stop various evils which the law cannot stop

• The reconcile strategic corporate interest with moral demand

• For creation of a better society

• For self-satisfaction and enhance quality of life

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Business ethics and profits

Business Ethics and Profit: A Balancing Act

► Survival is the name of any business game.

► If a company wants to survive it has to make profits.

► The term profit in business is appropriate, but only profit is not acceptable any more. Today, every
organization, whether big or small, has to justify its existence in the market place. It is felt that if a
company cannot generate profits, it has no right to exist in the market place.

► A firm that is not performing well is considered as a liability and burden to the society, as it
cannot discharge its responsibilities -to customers, welfare. to its employees, revenue to shareholders and
so on.

► Thus profit is recognized as a characteristic of the success of a business and a justification for its
existence.

► A sick or loss-making company is bound to misuse scarce resources. Such a loss-making company
makes huge liabilities, upsets the business, promotes inefficiency, and finally cannot discharge its social
responsibilities. Considering this situation, it may be unethical for a firm to make loss. Such firms cannot
exist in the market place as they force their employees into economic insecurity.

► To make profit and for the survival of the business, implementing ethics in their course of action
is essential for the management.

► Companies that are doing unethical business are typically focused on the short-term gains.

Companies that have figured out ways to be both ethical and profitable have mastered a sustainable
business model.

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Relation Between Ethics and Profit

► There are broadly two schools of thoughts that exist regarding the relation between ethics and
profit.

► One school of thought believes that ethics are prerequisites for a business to be profitable in the
long run.

► The other thought is that ethics and profit

are mutually exclusive to each other. If a company is ethical, it may not be profitable. It is a common
believe that a profitable company must be necessarily be unethical in some or the other way.

No -profit target is unethical for a company

►if analyzed from a different viewpoint, for a company which is in unethical for it to be not profitable.

► A company that cannot make profit Is misspending the available resources.

► It Is the liability of the company to pay back to the creditors, Its shareholders and employees.

► company resulting in losses upset the economy, promotes Inefficiency and most importantly, does
not contribute towards social responsibility.

► Such companies have no business to force Its employees into economic Insecurity and ambiguity,
which Is highly unethical.

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Balanced Approach

► Companies shall maintain a balance between making profitable business and being ethically
responsible.

► The ethics tine while making profits sometimes gets crossed in effort to maximize profits.
Companies that cross too far over the line may face legal repercussions that can prove costly and can
cause damage to the brand.

► Time and again, it has been proved that it is only ethical organizations that have continued to
survive, grow and become profitable, whereas unethical ones have a pattern of growing quickly and even
more quickly dying and forgotten.

► Ethisphere -global leader in defining and advancing the standards pf ethical business practices,
announced 128 companies representing 21 countries and 50 industries as the world's most ethical
companies ,2019.

► Some of them are IBM, Sony Corporation, Tata Steel, 3M

► IBM's chairman has said, "we know our clients and the consumers they serve expect more than
ground breaking innovation and expertise. They want to work with a partner they trust, and one that
works to make the world better, safer and smarter. We are deeply committed to these values."

Tata steel CEO ft M.D, Mr. V Nardaran said, " the Tata name evokes a sense of trust, credibility and
integrity to many mullions of stakeholders In India and overseas. This equity has been earned through our
conduct and operating principles. This recognition enables us to stay committed to operate with high
ethical standards."
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RELATIONSHIP BETWEEN BUSINESS AND ETHICS

As mentioned by management guru Peter Drucker, “More and more people in the workforce- and mostly
knowledge workers- will have to manage themselves.” The average working life is likely to be fifty years
for knowledge workers. But the average life expectancy of successful business is only about thirty years.
If they want to survive for long, they will have to change their structure, their work, their knowledge and
the kind of people they employ. While the knowledge workers need to identify themselves, their
strengths, the way they work, and their contribution. Today, the culture that facilitates psychological and
spiritual development of the individual and community besides creating a cohesive community which co-
ordinate the creativity, well-being, self-realization, and inner outer unity of a person with himself and
with the stakeholders, environment, society and the humanity as a whole. Classical thinkers like Adam
Smith were of the opinion that the objective of any business was to generate profits only, and business
had no relationship with ethics. While other thinkers expressed that neither the business was an extension
of morality and ethics, nor can business keep itself faraway from ethical practices of the society where it
exists and operates. The various views regarding the relationship of business and ethics are as follows.

I. The Unitarian View of Ethics

According to the Unitarian view, business is a part of moral ethics. If businesses want to exist, survive
and flourish in the long-run, morality and ethics cannot be separated from the operation of the business.
The view also emphasizes, that business should concentrate on society and it has a major role to play in
serving the society and ushering in society welfare.

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ii. The Separatist View of Ethics

Classical economists like Adam Smith and Milton Friedman proposed the separatist view. They were of
the opinion that businesses in order to flourish should concentrate on its goalprofit maximization.
Morality and ethics, they argued has no role in business. Milton was of the opinion that business should
concentrate on production and distribution of goods and service. Social problems are to be tacked by the
government and concerned individual, but not by the firms or businesses. In short, the only aim of
business is to generate profits. According to Adam Smith, business is a distinct entity and does not
include ethics and morality. If ethics were introduced in business, it would lead to imbalance of market
dynamics. This view lays emphasis on business concerns like reducing production costs, optimizing labor
etc. These concerns are relevant to the marketplace, not to ethical and moral issues. Many intellectuals
believe that if ethics morality were given an opportunity to enter into the business arena, then there is a
danger of social values dominating over business values. And this replacement may ruin the efficiency of
the business. These intellectuals also believed that business should concentrate on profits, and managers
should manage or concentrate on the interests of the shareholders. Shareholders should be given the
opportunity in deciding about the effective utilization of resources. In other words, business should focus
on achieving its economic objectives.

iii. The integration View of Ethics

Talcott Persons proposed a view called the integration view. He was of the opinion that ethical behavior
and business should be integrated or combined in a new area called ‘Business Ethics’. He argued that
business being economic entity, has the right to make profits, but at the same time it should discharge the
social obligation. According to this view, business and morality are inter-related and are guided by
external factors like government, market system, law, law, and society. The Government and market
system are related to business i.e., rules laid down by the government directly or indirectly affect the
business, and may thus affect the market system. Similarly, laws will guide business, and decide what is
right or wrong in the business. Business Ethics

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Arguments for business ethics:

1) Holistic approach.

2) Leadership.

3) Employee commitment.

4) Investor loyalty

.5) Customer satisfaction.

6) Business is a co-operative effort.

7) Higher profits.

8) Changing mindset of shareholders.

Arguments against business ethics:

1) No need for ethics separately.

2) Demand and supply forces only operate.

3) Compliance of law.

4) Conflicts of interest

.5) Profit is the object of business.

6) Poor moral standards of society.

The Evolution of Business Ethics

Most people develop their sense of values and principles from life experiences, spiritual institutions, the
educational process, and their family environment. These are some of the components that shape an
individual’s moral and ethical perceptions.

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Business ethics evolved from a myriad of changes that occurred over time. Ethics is a common way to
determine what it means to be an upstanding citizen, a decent individual, an active participant as a parent,
and is an effective tool for someone with excellent leadership skills.

Ferrell et al. (2013) defined the term “ethics” as the analysis of the nature and basis of morality where
moral judgments, standards, and rules of conduct are identified and addressed. Business ethics, therefore,
consists of the values, ideals, and standards that guide behavior in a business climate. In this arena,
organizations define specific principles that outline pervasive behavioral boundaries which are all-
encompassing and absolute (Ferrell, Fraedrich, & Ferrell, 2013). In short, principles are used to develop
norms that are socially accepted and enforced based on values like honor, accountability, and trust.

There were many events that occurred to impact change in business philosophies and reporting practices.
Ferrell et al. (2013) postulated that initially, ethical issues as they related to business situations were
discussed within the domain of philosophers and theologians in churches, synagogues, mosques, and
other spiritual institutions. It is here where subjects like fair wages, labor, and the morality of capitalism
were contemplated (Ferrell, Fraedrich, & Ferrell, 2013). The issues workers faced in the 1920s, for
instance, brought attention to harsh working conditions and child labor laws. During this period, the
concept of capitalism played an integral part in the evolution of business ethics. For example, a
progressive movement provided citizens with what was defined as The Living Wage. The purpose of this
movement was to encourage businesses to adopt policies that allocated sufficient income for workers to
provide for their education, recreation, health, and retirement. By the 1930s, it evolved into what was
known as The New Deal, in which businesses were asked to work closely with legislators to raise the
family income. By the 1950s, President Truman transformed the plan into what became known as A Fair
Deal. This plan addressed important concerns like civil rights and ethical issues regarding environmental
responsibility.

The 1960s

The social and political movements of the 1960s also brought forth major changes in the evolution of
business ethics. Ferrell et al. (2013) point out that focus during that period evolved around environmental
issues, civil right issues, increased employee/employer tensions, and the rising epidemic of alcohol and
drug consumption (Ferrell, Fraedrich, & Ferrell, 2013). In 1962, for example, President Kennedy’s
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message to US citizens was focused on the protection of consumer interests. He proposed a plan that
introduced four basic consumer rights to help protect the public: (a) the right to safety, (b) the right to be
informed, (c) the right to choose, and (d) the right to be heard. These eventually became known as the
Consumer Bill of Rights and had a huge impact on the evolution of business ethics.

The 1970s

The issue of business ethics continued to evolve and, as a result, began to emerge as a new field of study.
Institutions popped up that offered more research, education, and training. Ferrell et al. (2013) contend
that theology and philosophy also laid the groundwork for ethical behavior in the 1970s and identified a
set of moral values that were acceptable with respect to business activities. Based on those foundations,
professionals began the education process to teach and write about corporate social responsibilities
offering practical strategies (Ferrell, Fraedrich, & Ferrell, 2013). Most leaders believed it was an
organization’s obligation to maximize their positive impact on shareholders and consumers while
minimizing their negative effects. During this period, employees were militant about ethical issues,
human rights, cover-ups (following the Watergate Scandal), disadvantaged consumers, and

transparency issues. These were a few of the relevant components that helped shaped business ethics at
the time.

The 1980s

Incidents like bribery, illegal contract practices, influential peddling, deceptive advertising, and financial
fraud shaped the development of business ethics in the 1980s. Ferrell et al. (2013) studies revealed the
military developed called the Defense Industry Initiative (DII) to addresses some of these issues in their
own industry. It was designed to guide corporate support for ethical conduct in the armed forces. Six
principles of this initiative included: (a) the support of a code of conduct, (b) ethical training for
employees, (c) an open atmosphere for employees to report violation without fear of retribution, (d)
inclusion of internal audits with effective reporting, (e) the preservation of integrity in the defense
industry, and (f) adopting a philosophy of public accountability (Ferrell, Fraedrich, & Ferrell, 2013).
These initiatives have been adapted in many of today’s most successful organizations.

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The 1990s

Business ethics serves to question the morality of business practices. Unsafe working conditions and
sweatshops were brought to the forefront of ethical business practices in the 1990s because of outsourcing
practices to underdeveloped third world countries that a growing number of corporations were engaged
in. For example, Ross (2007) disclosed that some privately owned factories in China worked their staffers
twenty-seven out of thirty days, eleven hours a day, to satisfy the growing demands of the expanding
global market (Ross, 2007). In addition to the atrocities committed in sweatshops, the rise of corporate
liability for personal damages also played an integral role in the evolution of business ethics. This was
due to the exposure of illicit practices by the tobacco industry and the ethical misconduct from the fraud
and financial mismanagement scandals that were exposed. To tackle this, Bill Clinton’s administration set
the climate that ushered the development of ethical compliance programs based on the principles outlined
by the DII. These programs codified legal incentives to reward companies for being accountable and
taking measures to prevent misconduct by implementing strategies to monitor internal legal and ethical
practices.

The New Millennium

Since the turn of the 21st century, new issues arose that continued to help business ethics evolve, like
cybercrime, product safety, financial misconduct on a global level, theft of intellectual property, and
ethical issues regarding the sustainability of organizations and products. Ferrell et al. (2013) point to the
increased abuses in corporate America that led an outraged public and government to demand an increase
in the level of standard ethical practices in business operations. For example, fraud and mismanagement
in financial institutions led to the development of the Sarbanes Oxley Act (Ferrell,

Fraedrich, & Ferrell, 2013). This new law made securities fraud a criminal offense with stiffer penalties
for corporations engaged in those practices. It also resulted in the creation of oversight boards that require
companies to establish and identify a code of ethics with respect to financial reporting and the
transparency of financial records to shareholders and other interested incumbents.

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The ethical issues leaders face today in a business culture focus on: (a) protecting the environment, (b)
avoiding meltdowns like Enron, (c) the corruption of financial institutions,

(d) making products that do not put the public’s health at risk, (e) keeping sexual harassment out of
the work place, (f) avoiding discrimination, and (g) protecting intellectual property. Boatright (2009)
suggested that law and ethics control two different domains. The law is established to protect public life,
whereas ethics govern private matters (Boatright, 2009). In other words, the laws clearly define a set of
enforceable rules that is applicable to everyone. Ethics on the other hand, are a matter of personal views
that reflect how an individual chooses to navigate their own life. Like many leaders, this researcher
discovered that in the business arena, more than the law must be taken into consideration when making
important decisions and behavioral choices. In short, reliance on the law alone is not enough to make the
most effective decisions to achieve the highest outcomes.

Business ethics evolved from a variety of components that continue to bring about positive change.
Leaders are required to operate within the framework of the law because they provide goods, services,
and jobs, and are organized so that their success is reliant on the efficiency and effectiveness of their
operations and the operators who guide them. In a professional arena, leaders must adhere to the
parameters and legal frameworks established by society and their organization, as well as follow a
standard code of ethics established by their company. The most effective employers understand that a
strong foundation outlines the parameters of ethical practices and is a major contributing factor to
employee commitment, investor loyalty, and consumer satisfaction that effects an organization’s profits
and longevity. Freeman and Wicks (2010) purported that business ethics should not be an option for
leaders. Instead, it should be embraced as an inescapable part of what it means to be a human being and
apply those principles to run a successful organization (Freeman & Wicks, 2010). The findings of this
research conclude that ethics is a way of communicating, behaving, and thinking to help people create
and live better lives. Employers that apply ethical organizational behavior, improve their chances of
making better decisions with the strength and honor of being able to defend their choices. Businesses with
leaders who do not engage in ethical practices do not achieve the same successful long-term outcomes.
That in itself is reason enough to comply.

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Module 5

INDIAN ETHOS FOR MANAGEMENT

Work life in Indian philosophy,

Ethical principles are dictated by the society and underlie broad social policies. These principles when
known, understood and accepted, determine generally the propriety or impropriety of business activities.
Business ethics also relates to the behavior of manager. It can be defined as an attempt to ascertain the
responsibilities and ethical obligations of business professionals. Here the focus is in people, how
individuals should conduct themselves in fulfilling the ethical requirements of business? In this
contention Indian Ethics play an important role by discussion various scriptures of different religion &
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their guidelines & principles towards Business and work life. It also discusses the conduct of a Manager
in an Organization. There are three key reasons why ethics plays a key role in business. First, it is crucial
that ethics have a considerable influence if we want an efficient, smoothly operating economy. Ethics
helps the market to its best. Second, the government, laws and lawyers cannot resolve certain key
problems of business and protect the society: ethics can. Ethics can only resolve futuristic issues such as
technology races ahead much faster than the government.

Regulations almost always lag behind. That company’s social responsibility extends beyond what the

law strictly requires. Third, ethical activity is valuable in itself, for its own sake, because it enhances the
quality of lives and the work we do-business has an ethical responsibility for fairness for humanity, e.g.,
employee.

INDIAN ETHOS FOR WORK LIFE

Ethics of Gita and Upanishad: The Holy Gita is the essence of the Vedas; Upanishads It is a universal
scripture applicable to people of all temperaments and for all times.

Management Guidelines from the Bhagavad Gita

There is an important distinction between effectiveness and efficiency in managing. Effectiveness is

doing the right things and Efficiency is doing things right.

1. Forming a vision.

2. Planning the strategy to realize the vision

3. Cultivating the art of leadership

4. Establishing institutional excellence

5. Building an innovative organization

6. Developing human resources.

7. Building teams and team work

8. Delegation, motivation and communication

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9. Reviewing performance and taking corrective steps when called for

Thus, management is a process of aligning people and getting them committed to work for a common
goal to the maximum social benefit in search of excellence.

Principles of Bhagavat Gita and Upanishad for Business Ethics.

1. Every person has immense potential, energy and talent.

2. Perform without attachment I.e., do your task to the very best as the modus operandi of all
business activities.

3. Emphasis on sacrifice and running the business for the over-all welfare of the mankind and charity
for society as a whole.

4. Character is the real power and wealth. Manager with enriched quality of mind and heart can have
effective management.

5. Work is worship. Do your work without ego and serve other without self-interest.

6. Distribution of duties among employees according to their merit, aptitude and skills.

7. Creating best inter personal relations based on self-esteem, equality and team work. Control of
emotions and feelings and abstention from both love and hate.
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8. Self-management, analysis and criticism help to locate areas of friction and disharmony.

9. Anger leads to confusion which cause failure of memory and consequent destruction of reason.
Silent mind or brain stilling is an effective medium to get sound solutions to management problems

10. Avoid greed, not profit maximization but maintenance of the world order should be the objective
of all sound business policy.

11. Be a patient listener and perform your duties with devotion, humility and sincerity.

Value Oriented Holistic Management

The most valuable human possessions are health, harmony, happiness, wisdom, and above all character
reflecting ethical and human values. When these values are manifested in your thoughts, speech and
actions, you are called a noble and enlightened person. As we think sincerely and constantly, we become.
Our actions and behavior reflect our ideas and feelings. We work not for name, fame, money, power and
status but for greater worth, for cultivating values, for building up strong character, for wisdom so that
our intrinsic values enhance. True greatness is not measured by tangible or extrinsic values such as name
fame, etc. but always greatness in life is to be pure, kind, true, selfless. Health is more important than
wealth.

Character is most important than money.

Values:

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Human and ethical values constitute the wealth of characters. Values express dharma or divine nature as
understood in the East, particularly in the Indian ethos and insight and the ideas of integrity as understood
in the West.

Integrity: Integrity is wholeness, goodness, courage, and self-discipline to live by your inner truth.

Wholeness: Wholeness implies totality, soundness, perfection and completeness. In the West, spirit in
Wholeness is given only a slight reference. It is nearly forgotten. In all of our heart’s chamber lives the
unworshipped God. We are not aware of the divine presence within thought the divine is constantly
looking at the person. Our ego has become the pretended ruler. Ego is the false notion of our mind,
because it is ignorant of the reality.

Goodness: It covers all essential values such as honesty, morality, kindness, fairness, charity, truthfulness,
generosity etc. we need goodness in our thoughts, our speeches, and our actions. ‘Be Good. Do Good’
leads to purification of thoughts, talks and actions associated with good thoughts. Good things do not
happen easily. You have to make them happen.

Courage: In the world of management, courage points out acts of bravery, e.g., deciding not to conceal
something one knows, and needs to be expressed openly. Courage is telling the truth in the face of danger.
You have the guts to go ahead, do something which is risky.

Self-discipline: Self-discipline and self-control indicates that the soul is the boss who takes control of the
mind and directs the mind and the senses to move on the journey to reach the goal known to the master.
When the soul, the individual consciousness, wakes up, we have self-discipline and self- control to deal
with life. The quality of life will now be different. That quality of life will give you

greater harmony, happiness and moderation. Please remember that we need discipline and courage
together to reach our objectives in time.

Living by Inner Truth: Living by inner truth or by inner mind, which is the right instrument within us but
which is not known to us unless we go within, may be regarded as the last ingredient of integrity. It is the
most important of all.

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Inner mind or truth communicates through faint whispers, intuitive thoughts, feeling buried deep within
us. Each one of us possesses this fine instrument and has the capacity to call it forth. We need practice to
tap this cache. It is rediscovery of one’s subtle but true awareness which generally lies in the secret hiding
place. We must turn inwards to interact with our inner mind and live by inner truth as per it’s a dish or
direction. The voice of inner mind can be heard only in silence.

To live by inner truth at work amounts to remain yourself incorruptible, clean and inviolable in this
world, which at present is invaded by total crisis oh human and ethical values. In the business world we
have kickbacks, double dealings, shady behavior and all forms of corruption and fraudulent dealings.
Corruption is world-wide. Let your mind be ruled and guided by your Conscience.

Moral and Ethical Values

The mental contents of a good person are called moral and ethical values. This is also called Daivi
sampati or divine qualities. Values are also called guans. Some of the values are: Fearlessness

Courage

Purity of mind and heart

Integration of thought, action and behavior Generosity

Non-violence Modesty Humility Integrity Charity Loyalty

Calmness

Ethics for transnational business in view of Globalization

Business ethics is a well-institutionalized academic field, which deals with the moral dimension of
business activity. In the context of international business, it means the treating of moral questions of
international cultures and countries. International business should be sensitive to the environment and not

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just selfish for its own profits. Ethically, safety comes first and the profit comes last. The various issues
that ethics target are diverse environmental concerns, animal welfare issues, labor practices, fair trade,
health concerns, genetic modification, patenting of genes, cloning etc. International business is both more
exposed to a variety of ethical conditions as well as in a position to exploit business ethics due to the
sheer size an international company has. The end result of an ethical judgment entails its authenticity
from being morally correct. But moral correction itself is a relative concept and is based upon the cultural
perceptions as well as traditions. The international market and business arena can be ethically segmented
into the die hard, the don’t cares, and the various groups in between. Companies all around the world are
coming under scrutiny from governments, shareholders, customers, trade unions, human-rights groups,
and others to prove that their activities are conducted in ethical ways.

Globalization refers to the shift towards a more integrated and interdependent world economy.
Globalization has brought a lot of people into contact with the world by declining the barriers of the free
flow of goods and services, since the World War II and the dramatic technological change and
development in recent years mainly in the past three decades. This development has made the people
around the world to be connected to each other. Information and money flow quicker than ever.

Products produced in one town are available to the rest of the world. It becomes much easier for anyone
to travel, communicate and do business internationally. Free flow of goods and service s has produced
many opportunities for business. This whole phenomenon has been called globalization.

Relevance of Globalization for Business Ethics

Globalization as defined in terms of the de-territorialization of economic activities is particularly relevant

for business ethics, and this is evident in three main areas – culture, law, and accountability.

• Cultural Issues

As business becomes less fixed territorially, so corporations increasingly engage in overseas markets,
suddenly finding themselves confronted with new and diverse, sometimes even contradicting ethical
demands. Moral values, which were taken for granted in the home market, may get questioned as soon as
corporations enter foreign markets.

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Legal Issues

A second aspect is closely linked to what we said previously about the relation of ethics and law. The
more economic transactions lose their connection to a certain regional territory, the more they escape the
control of the respective national governments. The power of a government has traditionally been
confined to a certain territory

Accountability Issues

Taking a closer look at global activities, one can easily identify corporations as the dominant actors on the
global stage: MNCs own the mass media which influences much of the information and entertainment we
are exposed to, they supply global products, they pay peoples’ salaries, and theypay (directly or
indirectly) much of the taxes that keep governments running. Furthermore, one could argue that MNCs
are economically as powerful as many governments.

Relationship between ethics & corporate governance

Corporate governance requires ethical standard not only to show transparency but also to give power to
voice of minority shareholder and other vulnerable section involve in process. Some of the ethical
standards are:

1)Transparency, accountability and integrity of employers and employee. 2)Reservation to women &other
vulnerable section at higher post to give them voice. 3)Increase in mutual trust between govt and
company & employers and employee.

4)Promotion of ideas that led to overall welfare instead of seeing interest of own company only. Correct
application of ethics in corporate governance will lead to:

1) More understanding and sensitivity between employers and employee. Employers will be
motivated & work hard.

2) Motivation and better understanding will led to surge in company's growth.

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3) Similarly better policy development between government & company. 4)Confidence of minority
shareholder will increase.

5) Voice to weaker section in company.

6) Idea to promote overall welfare will lead to better relation with other companies and easy
management.

Overall, ethical principle will help in growth of company's economic as well as social welfare and may
lay foundation for more effective social order.

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