Ethics and Governance - Sessions

Ethics and Governance (MMBA640L)
Sessions
Things to keep in mind …
 70% attendance rule … Debarment … One supplementary … Max grade D

 Evaluation components:
 Group project, Mid-semester, End-semester
 Project to be in groups of 2 students; At most one group of 3 allowed if the class
strength is not exactly divisible by 2
 For each group, 1 student will be chosen randomly. Others to join by collective
consensus.
 Project topics will be allotted after session 8
Ethics and Governance 2 credits
Contact hours 28
 When in physical class: Component Weight
 No mobiles Group project 35
 No late coming Mid-semester examination 25
 When in online class: End-semester examination 40
 No disturbance while in class Total 100
 In either mode: Interact and participate in discussions
2 (c) 2016, 2019 Milind Padalkar 13 May 2021

Module 1 – Introduction to ethics

Train problem
 You observe a runaway train whose breaks have failed.

 Ahead on the track, you see five people working, who cannot move.
 There is a branch line, on which one person is working. This person cannot move.
 You see a linesman who can switch the rushing trolley from main line to the branch.
 The linesman is oblivious to the rushing train but will listen to you.
 You have two choices:

1. Do nothing
2. Tell the linesman to switch the line
 You must decide immediately. You cannot warn anyone.

 What will you do?
4 (c) 2019 Milind Padalkar 13 May 2021

Train problem – class discussion
 Why did you choose what you chose?

Modified train problem
 Same as before: A runaway train whose breaks have failed; Five immobile workers
ahead on the track; One immobile worker on a branch line; A linesman who can
switch the main line to branch but cannot see the train.
 You are observing from an overhead bridge. Linesman only listens to you. But the
train is too close for him to switch.
 There is a very fat man by your side also observing the train. If the fat man falls in
front of the train, the train will stop, but will kill the fat man.
 You have only two choices:
1. Do nothing
2. Pick the fat man and throw him on the track.
(Assume that you can pick him up)
 You must decide immediately.


Modified train problem – class discussion

Further modified train problem … 1
 Same as before: A runaway train whose breaks have failed; Five immobile people
ahead on the track; One immobile person on a branch line; A linesman who can
switch the main line to branch but cannot see the train; Train too close for linesman
to act; Fat man by your side on the bridge
 You strongly suspect that the fat man is a rapist-murderer who has been convicted
to death by hanging but has escaped from the prison.

1. Do nothing
2. Pick the fat man and throw him on the track.


 Same as before: A runaway train whose breaks have failed; Five immobile workers
ahead on the track; One immobile worker on a branch line; A linesman who can
 The fat man ran an investment scheme in which you have lost a lot of money. In
the court case however, he has been exonerated.

 Do nothing
 Pick the fat man and throw him on the track.


 Same as before: A runaway train whose breaks have failed; Five immobile people
ahead on the track; One immobile person on a branch line; A linesman who can
 The fat man is unknown to you. However, one of the five workers on the main
track tortured his wife for dowry. His wife committed suicide by burning herself.
 Do nothing
 Pick the fat man and throw him on the track.


Further modified train problems – class discussion

Are these problems only theoretical or unreal?
 Can you think of similar problems from current events?

What is the solution to the train problem?
 The train problem presents an ethical dilemma. A dilemma is a situation which

throws up many seemingly correct alternative solutions to the problem.
 An ethical dilemma is about how to decide and what actions should one take.
 You can defend every solution on arguments that appear sound (at least to you!).
 When we search for the solution to such dilemmas, we are forced to examine our
own set of beliefs, views, opinions, and values.
 During the search, we must confront our life positions with honesty. (We cannot
cheat ourselves!)
 We are forced to reflect, introspect and interrogate ourselves.
 Any search for an objective solution to an ethical dilemma leads us into a subjective
personal domain.
 Both the process of search, and the solution itself tell us nothing about the
situation. It says everything about who we are.
 The solution is not important. What is important is: Who we are, and who we
should be.

The many meanings and facets of ethical positions
 Every ethical dilemma forces a deep examination personally-held positions.

 Ethical situations are complex because they make us wrestle with many contrasting
ideas.
 In doing so, we face multiple terms with complex, overlapping meanings:
 Ethical/unethical
 Morality/Immorality
 Virtue/vice
 Values/Corruption (different from bribery)
 Justice/Injustice
 Fair/Unfair
 Right/wrong (as in action), Rights/dispossession (as something that you own)
 Good/bad
 Notice how the terms are specified in paired binary juxtapositions. What
complicates discussions are many middle grounds … the ‘shades of grey’.

Class discussion
 Describe what ethics means to you. Can you define it?
 Describe what morality means to you. Can you define it?

Module 2 – Theoretic foundations of ethics

What is ethics?
 “Ethics” comes from the Greek word ETHIKOS or ETHOS

 ETHIKOS means Conduct, Custom, Habit, or Character.
 Due to its complexity, ethics does not have a single accepted definition.
 Let’s look at a few common definitions:
 Study of what is right conduct, or good conduct
 Science of ideals in human life
 Science of moral judgment
 Science of morals in human conduct
 Study of general nature of morals and of specific moral choices
 To summarize:
 Concept of Ethics revolves around judgment, choice, action, conduct
 Accompanied by adjectives such as ‘good’, ‘moral’, ‘right’, ‘ideal’, ‘fair’,
‘just’.
Distinction between ethics and morality … 1
 Over time, Ethics and Morality have becomes synonymous and often are
used interchangeably.
 But they are quite different in many ways.
 “Morality” is derived from the Latin word MORALITAS.
 MORALITAS means Manners, Ways, Character.
 A person who is moral or ethical is understood as a ‘good’ person.
Someone who is immoral or unethical is understood as a ‘bad’ person.
 Human actions that are moral or ethical are ‘right’ thing to do. Immoral or
unethical acts are ‘wrong’ things to do.
 So, the terms ‘good/bad’ generally reflect character of people, whereas
the terms ‘right/wrong’ are used to describe their actions.
 Generally, ethics is study of ‘right’ and wrong human actions in groups.
 Generally, morality describes the goodness in human nature, disposition,
character. ‘Character’ is normally not associated with ethics.

Distinction between ethics and morality … 2
Ethics Morality
Describes code of right action Prescribes norms of good behaviour
Applies to groups and social settings Applies to individuals and their character
Constructed from social contexts Cultural or civilizational, evolved over time
Relative, changeable, adaptable Inherited, hard to change
Recommendatory, negotiated, accepted Prescriptive, internalized, part of belief or
through collective agreements faith systems
 Can you contrast the two terms for the following?

1. King Harishchandra was known for adherence to honesty and truth.
2. Rama accepted exile for 14 years to honor his father’s wishes.
3. Shakuni played with loaded dice to ensure that Yudhishthira lost the betting game
4. Dronacharya asked for Eklavya’s thumb when he became aware of Eklavya’s
archery skills.
Class discussion

Class discussion
Ethics Morality
 During the 2nd World War, many rich Jews had deposited large sums of money
and precious items with Swiss Banks. The Jews were killed during the holocaust.
The banks made no attempt to contact their descendants and return the property.
Banks claim that it is not their responsibility to contact the descendants.
 Partho Dasgupta – ex-CEO of BARC was in the news for colluding with Republic TV
chief Arnab Goswami for fixing the channel TRP ratings. It is also claimed that he
borrowed Rs 54 lakhs interest-free from his company to purchase a Mercedes car
for himself.
Class discussion

Class discussion
Ethics Morality
 Can you propose examples of unethical or immoral acts from everyday social,
political, economic life?

Class discussion

Ethics, Morality, Law … 1
 Is Law distinct from Morality or Ethics?

 All of them provide rules, prescriptions, guidelines, to control human behavior and
actions. So how are they different?
 In relation to Law: Morality may be stated as “imperfect social generalizations
based on commonly agreed notions and emotions”; whereas Law is the
“statements of circumstances by which public force may be applied to men for the
common good”. 1
 Law ensures preservation of unity and order necessary for a society to achieve it
stated or unstated goals. Such goals are invariably to achieve ‘common good’ –
variously stated as peace, prosperity, protection of life, limb and property, etc.
 Who can promulgate the law? “him who has the care of the community”. 2
 How such law may be promulgated? “by natural reason, common tradition,
autocratically, theologically, or by common agreement”.
1 Justice Oliver Wendell Holmes – an eminent American jurist

2 Scheller (1952), Marquette Law Review

 Morality refers to ordering of human actions among each other, or to some end.
 The idea of ‘Value’ is at the heart of morality.
 Value can be viewed as something that is ‘good’ in outcomes. The end objective is
an important consideration in value.
 Thus, values are the driving force for any moral system.
 Concept of God has dominated the discourse from the earliest times.
 It is not surprising, that the ‘good outcome’ (value) has meant happy afterlife, to be
free of sin, and ultimate reunion with God (Swarga, Moksha, Jannat, Heaven etc.)
 Therefore, concept of morality has been largely driven by theological thinking.
 Values are bound within their geographical, cultural contexts. They also have a
temporal (i.e. time) dimension.
 Morality is an imposition of a social order towards regulation of human life, i.e. the
rule of the reason. 3

 Morality and Law are related, but distinct concepts. 4

 Both refer to virtues and values which constitute common good.
 But Morality encompasses all virtues and discourages all vices.
 Law touches the grossest of those vices which affect the working order of the society. It
cannot regulate all human behavior. For example, Law does not command an observer to
feed a starving child, but morality will do so.
 Both Morality and Law impose moral obligations.
 But those imposed by Law are cruder.
 Reporting domestic abuse by a neighbor is not a legal obligation, but it is a moral one.
 Equality is a prime consideration in moral systems. Equality essentially means
interchangeability of humans in a situation. “I will not do to you, what I would not
like you to do to me”.
 Law cannot override moral principles of equality. No law can be phrased to grant
unconditionally unequal punishments for similar actions.
 Therefore, Law is an explicit codification of minimally agreed moral positions.

Class exercise
 Can you list actions that are moral but illegal?
 Can you list actions that are legal but immoral?

Justice, Fairness, Law … 1
 Justice and Fairness are other terms that often come up when discussing ethical or
moral positions.
 Justice is different from fairness.
 Justice is the operationalization of jurisprudence (body of rules, laws, tenets)
which binds the conduct of individuals, groups, organizations, and institutions.
 Justice is enforced upon the human behaviors and actions through the mechanism
of Law administered through courts.
 Law is simply an explicit codification of enforceable prescriptions for human
actions and behaviors.
 Courts themselves may be:
 Institutions deriving legitimacy from political authority of the state (judiciary),
 Institutions deriving legitimacy from theological/scriptural sources (e.g. Vatican, Peeth,
Akal Takht, Fiqh Schools such as Hanafi, Maliki, Shafi, Hanbali etc., Rabbinic courts)
 Idiosyncratic/autocratic arrangements such as Panchayat, King’s court, Moulavi etc.
 Justice – through Law is publicly enforceable.

Justice, Fairness, Law … 2
 Since justice is operationalized through stated law, it is associated with its

adherence to law.
 Whether a sentence of punishment or a resolution of dispute are just, is measured
by how well the decisions comply with the law.
 In contrast, fairness refers to a set of commonly agreed expectations that guide
our behaviors and actions; and expect such from others.
 Thus, fairness is adjudged by the receiver of justice and by the observers. It goes
beyond what the law dictates.
 Justice – through Law is publicly enforceable.
 Fairness is not publicly enforceable. But it is examined through an inter-subjective
lens of moral integrity. It is subject to perceptions and discourses.
 For instance: The law states that ancestral property should be distributed equally.
 Therefore, equal distribution of ancestral assets among the inheritors is just.
 But descendants who have contributed more to the assets will not perceive it as fair.
 Discussion: Think of an action that is legal but unfair. Think of an action that is fair
but illegal.
Concept of justice & fairness – Equity, Equality, Need
 Justice is about the allocation of scarce resources to the claimants.

 By “resources”, we do not mean only material things.
 A parent discriminating between the children is distributing affection as a resource.
 Promotion to higher position is a scarce resource in the organizations.
 While justice is administered through laws, fairness may be evaluated through
three different considerations:
 Equity-based: Allocation in proportion to the contribution.
 Equality-based: Allocation equally among all receivers.
 Needs-based: Allocation in proportion of the receivers’ needs.
 Simplest example of equity is the wage or salary. Person who contributes more or
achieves more gets more wage.
 Example of equality is your voting right. Every citizen has an equal vote.
 Subsidies, or job reservations is an example of needs-based distribution of scarce
resources.
 Can you cite more examples of Equity, Equality and Needs-based allocation?

Types of justice … Distributive justice
 Justice, as the allocation of scarce resources involves:

 Outcome of the allocation (distribution)
 Process of deciding the allocation (rules and procedures)
 Therefore, justice can be seen broadly in two categories: Distribution justice, and
Procedural justice.
 In distributive justice, the judge (allocator) is concerned about the fairness of the
outcomes of an action.
 The fairness in distributive justice depends upon the type of consideration applied:
Equity, Equality, or Needs-based.
 However, the receiver of the judgment (outcome) will independently and always
examine its fairness.
 This sets up a conflict due to differing views of the giver and the receiver.
 Discussion: Consider the case of 2019 Hyderabad gang rape of Dr Priyanka Reddy.
The rapist-murderers were caught by the police and killed in an encounter nine
days after the murder. Was this fair?
Procedural justice
 Procedural justice is concerned with the rules and procedures that are followed to
attain the outcome.
 The focus is not on the outcomes or their fairness, but on adherence and
compliance with the defined process.
 The rules and procedures are objectively framed.
 This means the procedures do not depend upon:
 Specific case facts
 Conditions or the frames of mind of the receivers
 Conditions or the frames of mind of the giver (judge)
 Status, or prestige of the parties.
 The outcomes are presumed to be fair and correct, if the procedures are diligently
followed.
 Discussion: Consider the case of 2012 rape-murder of Jyoti Singh (AKA Nirbhaya).
The killers were hanged in March 2020. Was this fair?

Other types of justice systems
 Distributive and procedural justice form the two main streams of jurisprudence in
modern societies.
 Both systems co-exist in a business organization. For example, performance
appraisals are procedural justice, while pay revisions are distributive justice. Labour
laws are procedural and act to restrain managerial excesses.
 Other forms of justice systems that are not supported or recognized in modern
societies are:
 Retributive justice: Best summarized by “An eye for an eye, and a tooth for a tooth”. The
victim extracts compensation in proportion to grievance or damage caused. The state is
either absent or legitimizes the delivery by remaining a consenting party. This is a form of
plain revenge and was practiced in pre-historic societies.
 Communitarian justice: Also called tribal justice. The community elders act as the judges to
frame and deliver justice. It has no legal recognition in modern societies, however the
practice continues due to the state being a mute spectator, negligent, or absent.
 Discussion: Consider the concept of ‘blood money’ in the Middle Eastern

countries. What kind of justice does it fall under?

Snippets from history – Distributive or Procedural?
… Those (government servants) who seize valuable articles or precious stones from
either mines or any great manufactories shall be beheaded. Those who seize from
manufactories or from the king’s granaries articles of 1/16 to ¼ pana in value shall be
fined 12 panas; of ¼ to ½ pana in value 24 panas; of ½ to ¾ pana in value 36 panas; …
Those who seize articles of 8 to 10 panas shall be put to death.
Taken from Chapter 9 in the book “The removal of thorns”, Arthashatra
Note: Artisans were paid 10 panas per month; the labourers were paid 5 panas per month
(Chapter 3 in the book “The conduct of courtiers”)
… When government revenue officers (Arthacharya) commit offences such as violation

of sacred places (Teerthaghaat) or pickpocketing (Granthi bheda): For the 1st offence
their thumb or little finger to be cut off or a fine of 54 panas; For the 2nd offence, the
index finger or all useful fingers to be cut off or a fine of 100 panas; For the 3rd
offence, the entire right hand (Dakshin Hasta) to be cut off or a fine of 400 panas; For
the 4th offence, they shall anyway be put to death.
Taken from Chapter 10 in the book “The removal of thorns”, Arthashastra

Snippets from history – Distributive or Procedural?
… Any person who aims at the kingdom, who forces entrance into the king’s harem,
who instigates wild tribes or enemies (against the king), or who creates disaffection in
forts, country parts, or in the army, shall be burnt alive from head to foot. If a
Brāhman does similar acts, he shall be drowned.
Taken from Chapter 11 in the book “The removal of thorns”, Arthashatra
… [Shahjahan] kept his eye on his officials, punishing them rigorously when they fell
short in their duty. This was the reason that he kept at his court an official with several
baskets full of poisonous snakes. He would order that in his presence they should be
made to bite any official who had failed to administer justice, leaving the culprit lying
in his presence till the breath left him. … Others who had deserved death were
ordered to be thrown to mad elephants, who tore them to pieces.
Taken from Storia do Mogor, Vol 1 by Niccolao Manucci, p. 190-191
What are the key take-aways?

Key points to note … 1
 Distributive justice has long history. It has seeped in all cultures – Eastern,
Middle-eastern, and Western cultures.
 It is the easiest to understand if you are an uninvolved party. What if you
are an involved party? Will it be fair to you?
 What if an innocent person is punished? Or a guilty person rewarded?
 Concern about wrongful justice (miscarriage) is quite ancient:
 “Better 100 guilty men at liberty than one innocent in prison” (ancient Greek
thought)
 “Let 20 evildoers escape death through pity, than one man unjustly condemned”
(Judge Fortesque, 1471 CE)
 “Let 10 guilty escape than one innocent suffer” (English jurist Blackstone 1765
CE)
 Due to a line of influential thinkers, English law moved towards procedural
justice; However, distributive justice remained the mainstay in most other
societies.
Key points to note … 2
 The moral dimension of justice remained relatively unattended until 1971

publication of Rawls’ ‘A theory of justice’.
 Rawls’ work strengthened the concept of impartiality and “equality in the
eyes of law” as moral dimensions of law and justice.
 His work influenced societies beyond Anglo-Saxon cultures and established
the principles of procedural justice in global courts.
 In the last 50 years, the concepts of distributive and procedural justice
have been researched extensively on the criteria of fairness.
 Research tells that procedural justice systems are found to be fairer:
 Employee thefts as a response to underpayment inequity are reduced when
under a culture of procedural justice. (Vis-à-vis hire and fire culture)
 ‘Gaming’ in performance evaluations reduces under procedural rigour.
 Parties respond better and achieve better outcomes in negotiations, or conflict
resolution under procedural justice as compared to distributive justice
(collective bargaining).

What makes ethical dilemmas complex?
 Ethics, morality, justice and law are intertwined concepts.

 They touch a large part of our individual, social, economic, and political life.
 Complexity comes from the broad scope of the topic, and the interlinkages.
 Ethics arises from the essence of human existence.
 There exists an unresolved and an irreconcilable conflict between the self and the
collective. The conflict is entirely rational.
 The individual seeks to maximize gains for self. He wants to be free to think, act, and
pursue his goals.
 He recognizes that the resources to fulfill his goals are limited, and others have identical
goals. Naturally, he must compete with them.
 But he needs the collective (family, group, tribe, clan, society, state) for his security. For
this, he must curb some of his freedoms and subordinate himself to the collective.
 Also, he knows that cooperation (organization) offers greater gains to him than he can
obtain by himself. E.g. hunting game in the wild
 He cannot grant unrestrained liberty to others, nor can tolerate complete subordination.
 Hence compete-vs-cooperate continues to dominate his social life with no clear
answers.

Need for theoretical lens for ethics
 Within the compete-vs-cooperate: There are an infinite number of

positions and choices for actions.
 How should we choose which action(s) are to be preferred?
 Theories are useful because they provide a coherent way of organizing,
structuring and reducing the complexity.
 Theories explain. They answer “Why?”, after organizing the diversity in the
detail (“What”).
 Take for instance, Newton’s theory of gravitation. Without a specific theory,
the motion of objects cannot be understood except figuratively and
through common experience.
 We need theoretical lenses through which ethical situations can be viewed

and understood.

Principles of ethical choices … 1
 Human action is guided by ethical considerations.

 Therefore, principles for these considerations are needed. Four principles:
1. Principle of Beneficence
 Beneficence translates to ‘Doing good to others’.
 Supports those actions which lead to greatest good for others.
 The statement “greatest good for the greatest number of people” belongs to Beneficence.
It is attributed to Bentham, John Stuart Mill, Vilfredo Pareto etc.
 Beneficence is one of the central pillars of trust amongst human beings.
 Discussion:
You are a country of 1000 people. 50 are rich. 250 belong to the middle class. 700 are
poor. You have COVID vaccine only for 50 people. You purchased it from foreign
countries at Rs 10000 per dose, and you must break even, i.e. collect all costs from
people. The rich are willing to pay up to Rs 30000. If you charge more than that, they
will fly out and take it in the foreign country. The middle class can pay only Rs 5000.
The poor cannot pay anything. You cannot borrow money or collect it through taxes or
other means. How will you distribute the vaccine? Assume the vaccine never expires.

Class discussion: Vaccine distribution

2. Principle of Least Harm

 ‘Least Harm’ translates to choosing the action that minimizes harm to others
 This is symmetrically opposite to Beneficence
 Comes into play when one must choose from many bad options, i.e. when no beneficial
option exists.
 “Least harm to least number of people”: Like its counterpart “greatest good for greatest
number”, the decision is essentially an optimal allocation problem.
 Discussion:
You are a country of 100 people. 5 are rich. 20 belong to the middle class. 75 are poor.
To run the country, you must extract taxes equal to 1000 every year from the people.
The rich earn 200/person, the middle class earn 40/person, and the poor earn
10/person.
How will you tax the different types of people?

Class discussion: Taxation problem

3. Principle of Respect for Autonomy (Personal Liberty)

 Recognizes that people are free. They have a right to control their lives and choices.
 Recognizes that every person has had a unique life journey, distinct experiences, different
emotional responses, and different ways of seeing the world.
 The respect for liberty arises from interchangeability principle.
 Discussion:
1. Your best friend, a female, is madly in love with a boy. The boy has proposed
marriage to her. Occasionally, she has noticed a few disturbing traits in the boy.
But being romantically entangled, she hopes that she will be able to induce
positive change in him. Hence, she wants to accept his proposal and has
approached you for your opinion. You know that she wants you to corroborate.
You also know the boy and his family as a disreputable people. What will you do?
2. A very close relative of yours is suffering from a life-threatening disease. The
treatment has a cure rate of about 33%. It is however very expensive and will
impose long indebtedness on you. The relative wants to end life without
treatment. What will you do?
Discussion: Case of the besotted friend

Discussion: Case of medically precarious close relative

 Principle of Justice and Fairness

 Justice and Fairness are different.
 Justice flows out of accepted principles of jurisprudence. It falls in the domain of allocating
rewards or punishments for human actions, or positions.
 Fairness lies in the domain of receiver’s perceptions, judged by moral precepts.
 This principle dictates that an ethical choice should be just as well as fair.
 Discussion:
Case of Akku Yadav’s lynching (Nagpur, 2004): A confirmed rapist-murderer was
lynched in a courtroom by about 200 women, many of whom who he had raped and
had continued to shame and harass in public. The women claimed that the police did
not act. No one was brought to justice for the lynching.5 Was this just? Was it fair?
What would you say about the Vikas Dubey encounter (ref: Kanpur massacre of police
in 2020)
5 https://en.wikipedia.org/wiki/Akku_Yadav
Class discussion: Akku Yadav case

Theories of ethics
 Theories are lenses through which we can examine the ethical decisions.
 A theory represents a philosophy, or “a way of seeing”.
 Philosophy is a particular preference. Hence, theories are neither right, nor wrong.
They’re only ways of seeing and ways of explaining.
 The ‘right or wrong’ belongs to the domain of person, action, or outcomes.
 Therefore, the rationale for our choices belongs to such a theoretical lens.
 Theoretic lenses differ based on where you apply them:
Character, Behaviour, Outcomes,

Person Conduct Utility
 Virtue Ethics: Focuses on the character and intent of the person. The right or wrong is
about being who you are.
 Deontological Ethics: Is concerned with conduct, behavior; and rules and duties. The
right or wrong is about rules determining the action and the action itself.
 Consequentialist Ethics: Focuses on consequences, i.e. the value or impact of outcomes.
The right or wrong is about the outcomes, not the actions or the virtue of the actor.

Virtue theory: Focus on being
 Proposed by Aristotle. Also called Nichomachean Ethics.

 Virtue ethics focuses on the person, the character, the qualities.
 It talks about the morality of the person, not the morality of action. “If the person is
‘good’, then whatever he/she does will be good’.
 Prior to Aristotle, virtue was seen as an absolute quality (Platonic virtue).
 Definition of ‘being good’ became problematic. For instance,
 A knife is good if it is sharp. It is bad when it is blunt and cannot cut well.
 A candle is good if it burns. It is bad when it does not burn.
 Is a candle bad because it cannot cut? Is a knife bad because it cannot burn?
 Goodness in inanimate objects refers to a specific property. In contrast, human
beings have many characteristics.
 A painter is good if she paints well. A good singer sings well. But they can be ‘bad’ people if
they are dishonest.
 An honest person is ‘good’. But he can be a bad cook.
 A thief cares for his family and donates to poor people. Is he a good or a bad person?
 What do we really mean by ‘he is a good man’, or ‘she is a good woman’?
Virtue theory: Aristotle’s relativism
 Aristotle proposed a different argument:

 Virtue cannot be seen as relative to other people. For example, it is meaningless to think
of a person as a bigger or a smaller thief than others.
 It cannot be seen as relative to other aspects of a person. For example, a woman who has
extra-marital affairs can be a good mother.
 We never know about a person unless we know what he has said or done. For example, a
person in coma says nothing and does nothing. Is he virtuous?
 All human conduct focuses on achieving (personal) goals. For each, the goals are good.
 Therefore, virtue must be seen as relative to the purpose and the goal of the human
conduct.
 Aristotle illustrates his argument as follows:
 Why do people work? To earn money.
 Why must people earn money? To support themselves and the family.
 Why must people support the family? To flourish and seek happiness.
 He defines Eudemonia (flourishing, happiness) as the ultimate goal (‘the highest
good’) for everyone. Pursuit of eudemonia must be universally good.
 Should a man pursue happiness by stealing? No, because it harms someone else.
Virtue theory: Aristotle’s middle path
 We seek happiness on its own merits. Not because it gets us something else.
 We also seek honor, pleasure, respect, love by themselves. These are not qualities
that we exchange for something else.
 Aristotle says that man has an absolute right to be happy, and an absolute
obligation to promote happiness for others.
 Virtues: Human attributes (character) which are universally valued across space and
time. Virtues lead to attainment of the highest good in society, i.e. happiness.
 Truthfulness, honesty, integrity, punctuality, thrift, diligence, hard work, perseverance,
courage, fidelity, generosity are examples of such virtues.
 Virtues are necessary to achieve eudaemonia. Virtues drive purposeful conduct to
achieve happiness.
 Middle path: Virtue is a mean between two extreme vices. For example,
 Courage is mean between cowardice and recklessness; Generosity is mean between greed
and wastefulness.
 Virtues are reinforced through scriptures, literature, poetry, folklore, metaphors,
and artistic creations such as films, theatre, sculptures etc. Can you name a few?

Virtue ethics is the longest surviving theory
 Aristotle’s wrote about Virtue ethics in 350 BC. It remained the only philosophy until
18th century, i.e. for nearly 2100 years.
 The focus remained on the “virtuous man” through the centuries. The arrival of
Abrahamic religious orders: Christianity and Islam only reinforced this focus.
 The scriptures in both these orthodoxies prescribe many virtues. Ten Commandments of
Christianity; Charity, Justice, Forgiveness, Honesty, Kindness in Islam
 Indian civilization too had a central focus on virtue (Sheel, Guna, Bhushan):
अश्वस्य भषू णं वेगो मत्तं स्याद गजभषू णम ् । Horse’s virtue is speed, Elephant’s is the strength.
चातुयं भष
ू णं नायाा उद्योगो नरभष ू णम ् ॥ Woman’s is wit and intellect, but industry is true virtue of all.
अक्रोधस्तपसः क्षमा बलवतां धमास्य ननर्वयााजता । Scholar’s virtue is calmness, forgiveness for the mighty.
सवेषामपप सवाकारणममदं शीलं परं भष ू णम ् ॥ Honesty for righteous, but character is the greatest of all.
अद्रोहः सवाभत
ू ेषु कमाणा मनसा गगरा । Not hurting any life form by act, thought, or speech,
अनग्र
ु हश्च दानं च शीलमेतत्प्रशस्यते ॥ Beneficence, and charity are the praiseworthy virtues. 6
 Buddhist thought lists 11 virtues:
 Paramitta (perfection), Daan (charity), Sheel (character), Virakti (renunciation), Pragya (wisdom),
Veerata (energy), Shanti (patience), Satya (truth), Adhishthan (fortitude), Maitra (goodwill), and
Upeksha (equanimity)
6 Taken from Shanti Parva of Mahabharata
Arrival of new theories of ethics: Deontology
 The field of ethics started to change in mid 18th century with the arrival of two
independent philosophies.
 In 1785, the German philosopher Immanuel Kant introduced the concept of
Categorical Imperative as a sole moral motivation of human action. This is now
commonly known as Kantian imperative:
 An objective, rationally necessary principle to unconditionally guide human actions
regardless of natural desires or gains thereof.
 The only thing which is unconditionally good is ‘good will’. In old German, ‘good will’ means a
person whose actions are solely determined by Moral Law.
 Moral Law is based on pure practical reason, i.e. prescriptions to actions or duties.
 According to Kant, all actions based on principles and duties are good regardless of
their outcomes. Such actions are good by themselves.
 The Kantian ethics came to be known as Deontological ethics. Deontological theory is
concerned with rules and duties to determine ethical conduct.
 Means justify the ends in Kantian thought. If the means are good, then the ends are
good.
 Discussion: Can you identify the deontological positions in the train problem?
Consequentialism
 Independently of Kant, the English philosopher Jeremy Bentham took a different

view about the motivation of human action.
 “Mankind is governed by two masters of nature: Pain, and Pleasure. They alone dictate how
we should think, and what we should do.”… The Principles of Morals and Legislation (1789)
 This line of thinking developed into Consequentialism – measuring the goodness of
an action by its consequences.
 Consequentialist Ethics: If the consequences are ‘good’, then the action is right.
 Also called Utilitarian Ethics. Main principles of Consequentialist Ethics:
 Agent neutral: Objectivity principle, Value of consequences cannot be person-dependent.
 Focus on direct and actual consequences: Indirect or anticipated consequences do not
count. Mere intent is not good enough.
 Maximizing and universal: Choosing the ‘best’ actions, i.e. actions that lead to maximal
consequences, and applicable to all people, not a limited group.
 Belongs to the dictum: Ends justify the means.
 Views the situation as a decision problem, not a duty problem.
 Discussion: Can you identify consequentialist positions in the train problem?

Consequentialist, Deontological, Virtue theories
Consequentialist Ethics Deontological Ethics Virtue Ethics
Timeline 1789 CE to present 1785 CE to present ~ 350 BC to present
Proponent(s) Bentham, Weber, … Kant, Rawls, … Aristotle, Buddha, …
Focus on Outcomes Actions, duties, rules Character of the agent
Anchored to Ends justify the means Means justify the ends Agent justifies everything
Strengths Decision-oriented, aids Prescribes duties, rules, Easily specified, less
in evaluating options Lesser burden on agent context-bounded
Weaknesses Agent’s choice may Duties may lead to morally Does not prescribe basis for
override rights worse outcomes. choice of action
Responsibility for Agent: Ability to choose Prescribed duties Agent: No guarantee ‘good’
moral choice may be imperfect agent will act morally
Pitfalls & traps Agent’s subjectivity Context-bound, Ritualism, Idealistic & romanticized
Moral catastrophe
Pitfall example “Lone man on the Moral catastrophe: Prithviraj Chauhan &
branch line is your son” encounters, holocaust Muhammed Ghori
Jurisprudence Distributive Procedural Community, Precedence
Applications in Restructuring, Corporate frauds, whistle- Selecting leaders,
business rationalization, lay-offs blowers Promotions

Ethics and morality in Indian culture … 1
 India has had a long and deep tradition of scholars and thinkers.
 Indian thought treats Ethics (Sadachar) as different from Morality (Neeti). It clearly
differentiates action from character.
 Indian thought treats salvation (Moksha) as the ultimate human goal. Virtuous character,
righteous conduct are pathways to salvation. The contract is with the self.
 In contrast, the Christian or Islamic life offers contract with God. Virtues, ethics, and morality
come from the teachings of God through his prophets as written down and interpreted.
 Hindu traditions has a dominant focus on conduct and action (Dharma): Dharma here means
the right path and righteous conduct. Not to be confused with ‘religion’ in Abrahamic sense.
 Buddhist thought focuses on virtues and not on conduct.
 Very large body of literature: Includes both scholarly writings (Bhashya, Mimansa)
such as Hitopadesh, Arthashastra, Manusmriti; and metaphor-rich epics such as
Ramayana, Mahabharata, Puranas, Neeti saara, Subhashita traditions etc.
 Many schools (Vidyaa) offering diverse views on virtues and conduct. E.g. Dandneeti
(political science), Anvishaki (philosophy), Trayi (Theology), Vaarta (economics),
Brihaspatya (Atheism) …
 Name the virtues & righteous acts in Indian culture. Where do they come from?
Discussion: Virtues & righteous acts

Ethics and morality in Indian culture … 2
 Indian thought evolved independent of the Western philosophies.

 It is a mixture of Virtue Ethics and Deontology in a balanced manner.
 Primary focus of Hindu thought is on deontology; Buddhist thought primarily focuses
on virtue ethics.
 Consequentialist ethics remained peripheral and sparse. It has not appealed to the
Indian mind.
Consequentialist Ethics Deontological Ethics Virtue Ethics
Dominant in None Hindu thought Buddhist thought
Main proponent Charvak school Many Buddha
Prescriptions Maximize pleasure Follow dharma Be virtuous, follow dhamma
Scriptures e.g. Brihaspatya sutra, Lokayata Manusmriti, Geeta Dhammapada, Jataka tales
Consequences Materialism, Support for Ritualism, Varna Formalism in training, anti-
industry/technology system, Pro-trade industry/technology
Examples यावज्जीवेत्सुखं जीवेत ् ऋणं कृत्वा घत
ृ ं Karmayoga, Manusmriti Lists of 11 virtues, 8 actions,
पिबेत ् ।
भस्मीभूतस्य दे हस्य िुनरागमनं कुतः ।। Hitopadesh, etc. 10 abstinences etc.
 Discussion: Where would you classify Jainism? Why?

Discussion: Jainism

Management lessons from history of ethics … 1
 A primitive tribe cannot progress to a civil society unless people:

 Allow to be governed by a person (king), a body of persons (clan), or an institution
(monarchy, party, parliament, bureaucracy, …)
 Pay taxes as costs of governance
 Abide by laws and agree to receive justice from an independent person or a body.
 Justice, law, and taxation are central to modern society. Ethical and moral norms are
the foundation of all justice and law.
 Thus, ethical and moral norms cast a long shadow on the how the societies form and
progress through time.
 These norms are distilled and memorialized through language devices: epics,
literature, poetry, proverbs; and art forms such as painting, sculpture.
 The practice of management – whether business or societal, must remain anchored
in such norms. Hence, it is necessary for a management student to develop an
understanding of the ethics and morality.
 Modern business organizations are governed by contracts (written), and precedence,
practices, unique ‘ways of working’ (all unwritten). These are the ‘laws’.

 Civilizations dominated by virtue ethics focus on the quality and the character of the
individual. Assumption: Virtuous people will act ethically to get good outcomes.
 By making action as a by-product of virtue, they are unable to build strong systems,
procedures, and organizations. They are inefficient and wasteful.
 By neglecting outcomes, they remain weak in problem-solving, technology, and
innovation. They are easily overwhelmed by competition with better strategy &
technology.
 For instance:
 By the early 8th century, Islam was on the march. Buddhist India (mainly regions of Pakistan,
Afghanistan) easily collapsed against much smaller but technologically superior Arabs and
Turks. Buddhist rulers had severely neglected technologies of warfare. They remained
inwardly focused and paid no attention to events beyond their borders. Buddhist ‘sangha’
remained a congregation without organizational muscle and interfered in the statecraft and
governance. Hence, they were unprepared when the more martial Islamic armies arrived.
 Virtue ethics dominated the Greek civilization. Martial character was upheld as the supreme
virtue (e.g. Sparta). It collapsed due to constant wars between the city-states. (Hollywood
film 300 is about the battle of Thermopylae between the Spartans and the Persians. It shows
the character of 300 Spartans who try to hold off a very large army of Xerxes).

 On the other hand, civilizations and societies dominated by deontology focus on

rules and duties, which are specified uniformly and objectively.
 They assume that adherence to rules and duties is enough to obtain good outcomes.
 Deontology leads to strong, disciplined organizations. But without character, they can
degenerate into ‘machines of evil’ such as Nazis, Stalin’s purges …
 When character and outcomes are defocused, rules and duties create ritualistic
bureaucracies without performance or accountability. For instance:
 Hindu India became overly ritualistic by aligning to deontological Karma Yoga philosophy. By
ignoring outcomes, it lost its problem-solving ability and suffered technological decline. It
was unable to hold against enemies with better technologies e.g. horse-mounted warriors,
cannon, and firearms. As it faced invasions after invasions, it never was able to master the
sciences of materials and warfare. Even today, India cannot make long range artillery guns or
precision sniper guns. It imports them from Sweden, Israel, Austria.
 In 1258 CE, Genghis Khan sacked the Baghdad caliphate. The Islamic civilization never
recovered from the shock. It turned its back on science & technology and became ritualistic.
 Duty-oriented civilizations that are light on character degenerate into negative and cynical
cultures. “Washing your sins in Ganga, so you can sin again”.
 Rules-centricity leads to loss of ability to unlearn and relearn. E.g. Nokia, BSNL, Air India, …
Discussion: Pros and Cons of deontological cultures
 Examples of positives of a duty-centric society or organization:
 Examples of negatives of a duty-centric society or organization:

 Arrival of Social Contract theory in 16th – 17th century (Hobbes, Locke) and
Consequentialist ethics in the 18th century (Bentham) fundamentally changed the
Western civilization. It rapidly became “modern”.
 Societies (or organizations) dominated by consequentialism:
 Focus on goodness of outcomes, and therefore become superior in strategy, innovation,
technology, learning, and efficiency (production).
 Fixing on goodness in outcomes means that they remain free to change rules and duties as
well as the character. They become wealthy and powerful.
 Organizations characterized by consequentialism are marked by agility and adaptability.
 They remain open to change, and handle innovation and technology better than others.
 However, they are less human-centric, since they view workers as resources for production.
Hence people feel devalued in such organizations. … “Hire and fire”, “Use and throw”
 For example:
 Successful, global industrial corporations are not afraid to experiment with business models,
take risks, and innovate. They are always strongly consequentialist. Typically, they are the
leaders in every industry segments such as Apple, IBM, Netflix, Google, TCS, SBI, Reliance …
 They are also more likely to be involved in ethically questionable situations. Can
you name a few such situations?
Discussion: Pros and Cons of consequentialist cultures
 Examples of positives of a consequentialist society or organization:
 Examples of negatives of a consequentialist society or organization:

Discussion: Mignonette case
 Read the case and discuss in the class. What would you have done if you were
Dudley?
The Mignonette
case

Module 3 – Foundations of business

Guild – a structure for production and skill training
 Manufacturing and commerce are two critical pillars of any society. A society that
makes nothing and trades nothing cannot exist.
 Guilds were the structures for production function and trade before industrial era,
i.e. manufacturing by machines and technology. Guilds are as old as the Roman era
– “collegium”.
 Guilds were associations – social clans where membership was by birth, by
invitation or through long apprenticeship only. Closed to general public.
 Formal or structured education existed only for religious scriptures. It did not exist
for production, commerce, or trade, because nothing was written down.
 All skill development occurred through apprenticeship into guilds. Students of
production and trade learnt by observing the masters.
 Apprenticeship was a long affair. It took nearly 12 years for an apprentice to
become an artisan, and another long time before he could be a master artisan.
 Thus, guilds were the only structures for organized production and trade in the pre-
industrial era.
 They were also the only universities for skill development.

Guilds were powerful in pre-industrial societies
 Guilds became prominent in 12th/13th century in Europe. They dominated local

politics, manufacturing, and economy. They even administered cities and towns in
medieval Europe.
 They became moneylenders to the kings and dukes. There were extremely
powerful for nearly 400 years – next only to Vatican. Historical accounts tell us
about the powerful syndicates (lenders to the kings) financing the wars, and
meddling with the statecraft.
 Mainly 2 types of guilds: Merchant guilds for trade, commerce, and finance. And
Craft guilds for production.
 In the 16th century, the political power of the kings expanded in the renaissance era
which saw all-round advances in the arts, sciences, architecture, and technology.
(especially the military and seafaring technology).
 Guilds became irrelevant as machine-based factories started producing at a
dramatically lower cost and at much higher scale. Colonialism emerged in response.
 Guilds continued in India, China, Japan & Middle East until 20th century. Caste
system in India was essentially a guild.
 Discussion: Do guilds continue in India today? Can you name any?
Liability, risk, and the concept of a company
 Until the 15th century, all manufacturing was carried out by guilds. Guilds
consisted of artisans doing work by hand using elementary hand tools.
 Training of the artisans happened by observing under the master artisan. The
trainee was called apprentice. It often took more than 12 years to become an
artisan.
 After invention of steam engine and mechanized power, manufacturing began to
be done by machines in factories. The unit cost of production reduced
dramatically.
 But the machines-based production was entirely different from artisan work:
1. Machines were expensive, requiring large upfront capital. Due to low scale of
production, no master artisan in the guild had the ability to invest.
2. Factories were expensive because they required large land and power generating
systems (steam boilers). This added to the capital cost.
3. Machines produced at high rates of production. So, the investor had to buy large
quantities of raw materials. This required huge working capital.
4. The large stockpiles of finished goods meant a big risk to the investor. What if you could
not sell? That meant unproductive working capital.

Question of liability and the concept of company … 1
 So essentially, capital risk became the roadblock. You could not use the new
technology unless you had large amount of capital acting as the money at risk.
 Under guilds, capital was not a problem. Low production base, low production rates
and practically free labor (apprentice) meant that you did not need much capital.
 Colonialism mitigated the problem to some extent (all of this happened in India and
elsewhere):
 By obtaining the raw materials practically free (looting the colonies through taxation and
currency manipulation). This reduced the working capital for raw materials.
 By creating market monopolies for machine-made products by crushing the local
production. This ensured flow of merchandise to colonies and reduced the risk of unsold
finished goods.
 By getting slave labour to work in factories, farms and plantations. This made cost of
labour practically zero. E.g. Indians in Malaysia, Sri Lanka, Mauritius, West Indies, Africa, …
 Still, the overall problem of the capital risk remained. Technology made better and
better machines producing better goods at faster rates.
 Operating on larger scale meant that it was risky to start manufacturing ventures.
For starting any new ventures, you had to find someone willing to invest.

Question of liability and the concept of company … 2
 Such large financial risk could only be assumed by a sovereign power, e.g. the king.
 From 15th century, “Joint Stock” companies were introduced as monopolies under
the British crown. The risk to capital (liability) of such joint stock companies was
assumed by the British crown. E.g. East India Company
 Thus began the age of capitalism – i.e. societies organized around economics of
capital, finance, and primacy of investor as the bearer of the risk.
 Investor (stakeholder) became central to organizing production and commerce.
 The sovereign could assume unlimited risk, but ordinary investor could not.
Therefore, some mechanism to limit the investor’s liability became necessary:
 First limited liability law was passed by the State of New York in 1811.
 England passed Joint Stock Companies Act 1844, and Limited Liability Act 1855.
 Colonial India passed Companies Act in 1866, amending it in 1882, 1913 & 1942.
 Independent India enacted Companies Act (1956) replacing all related previous
acts. Companies Act (2013) replaced the Companies Act (1956).
 Company as a financially organized unit of production is now a cornerstone of the
modern industrial economy.

The Issue of risk and limitation of liability … 1
 Upfront requirement of large capital poses a serious risk to the investor.

 This reduces his appetite to invest, thus chokes off the economic activity.
 Therefore, he needs an assurance about a) the safety of his investment, and b) a
limitation on the maximum loss that he can incur.
 For this to happen, first we must differentiate between the investors and the
company.
 Investors (shareholders) contribute share capital to the company.
 Company is a distinct entity from its shareholders.
 The shareholders acquire RIGHTS TO THE RESIDUAL CASH FLOWS (profits remaining
after all expenses, interest, depreciation, amortization and taxes are paid off)
 Therefore, what does the company owe to the shareholders?
 The paid-up capital (amount they invested).
 The accumulated RESERVES & SURPLUS (accumulated residual cash flows).
 These amounts are shown on the company’s balance sheet as a liability to shareholders
 The liability of the company to shareholders is limited to the money they have paid
as share capital.
Reporting share capital on the balance sheet (example)

The Issue of risk and limitation of liability … 2
 Company’s liability to its shareholders is limited to the share capital given by its
shareholders. That is the maximum it owes to shareholders.
 On the other hand, if the company incurs large losses and payables far in excess of
its assets, then the shareholders maximum liability to pay is limited to their capital
invested. They cannot be asked to pay more.
 Thus, the limitation of liability operates to protect both the company and the
shareholders.
 Capital is funds given to a company at the risk of investor.
 The investor can provide funds either as an owner, or as a lender, or both as an
owner and a lender.
 Thus, two main categories under which a company can raise capital:
 Equity – also called share or stock
 Debt – also called deposit, debenture, loan
 Equity is the cheapest source of capital for the company.

Categories of capital – Investors as owners … 1
 Ordinary shares: Equity capital has the highest risk to the investor.
 In exchange, the capital-giver receives ownership of the company.
 Company receives capital from many people. It must recognize their ownership in
exact proportions of their contributions.
 To do this, the company issues units, each unit having a certain value (face value or
a nominal value).
 The unit is called equity, share or stock. (Equity = equal treatment)
 The investor receives multiple units equal to his contribution. He is called
shareholder or stockholder.
 “Ordinary” share means the holder has no special status or rights except to the
residual cash flows. Residual cash flow is the money remaining after ALL
OBLIGATIONS are settled. i.e. these are profits after taxes.
 He has rights to the profits and receives them as dividends.
 The only one who has voting rights and controls if he has > 51% support.

Categories of capital – Investors as owners … 2
 Preference shares: This is also equity capital and is the second highest in the
category of risk to the investor.
 Similar to ordinary shares, preference shares are issued as units. The unit is called
preference share.
 The investor receives multiple units equal to his contribution. He is called
preference shareholder or preference stockholder.
 “Preference” share means the holder has a right receive a defined percentage of
profits BEFORE the equity shareholder. i.e. he must be paid first, before paying the
dividends. Preference shares stand between the equity share and debt in terms of
risk.
 It is customary to name preference shares as x% preference shares. This is the
percentage of the face value that will be paid. 4% is typical.
 Like equity shareholder, preference shareholder has no guaranteed dividend.
Dividends will be paid only if the company makes profits and decides against
retaining them fully or partially as Reserves & Surplus.
 He may or may not have voting rights.

Example of types of shares from Tata Steel AR 2017-18
To attract share capital, the

company can create different
classes of shareholders with
minor changes in how they will
be treated.

Shares of Tata Steel … description from AR 2017-18

Categories of capital – Investors as lenders … 1
 Secured debt: These are loans from the investors, 3rd parties, banks or other
financial institutions.
 The debt is issued as a ‘commercial paper’ bearing a pre-specified rate of interest;
and is secured through mortgages on company assets.
 Also called bonds, secured bonds, debentures. The bonds are issued in multiple
units, each having specific face value.
 In case of a default, the lender has the right to seek possession and liquidation of
the asset. If the company refuses to cooperate, the lender can move for bankruptcy
proceedings. This is what happened with Essar Steel controlled by the Ruia
brothers, which was finally bought by Arcelor Mittal of France.
 On the balance sheet, the secured debt is shown as long-term debt, or “Long-term
borrowings”.
 As an inducement, the company may issue convertible debentures, i.e. bonds will
be converted into equity shares after a specified time and at a specified price. This
type of issue has been popular with investors. E.g. Reliance during Dhirubhai days.
 Not issued for short-term needs.

Example from Tata Steel AR 2017-18

Categories of capital – Investors as lenders … 2
 Unsecured debt: These are loans from the investors, 3rd parties, banks or other
financial institutions.
 Also called deposits, loans, or simply ‘commercial paper’.
 They are not secured. In case of a default, the lender has no rights to company
assets. The lender can move for bankruptcy proceedings if the company refuses to
pay interest or the loan principal.
 These bear different rates of interest, negotiated from time to time. Typically, these
rates are higher than the market, and higher than the secured debt.
 The higher rates of interest are offered as compensation for the higher risk of this
investment. The defaults are numerous.
 Hence the investor looks at the soundness of the company’s business, its
managerial practices, its reputation as an ethical business etc.
 On the balance sheet, the unsecured debt is shown as short-term debt, or “Current
borrowings”.
 Never used for long-term needs.

Example of unsecured debt Tata Steel AR 2017-18

Concept of paid-up capital
 When a company is formed, it has to file two forms “Memorandum of

Association” and “Articles of Association” with the Registrar of Companies
 In these forms, it must declare the maximum capital they can raise.
 This is called Authorized Capital.
 A part of this can be offered to shareholders. The shareholders agree to

purchase a part of what is offered. This is called Subscribed Capital.
 They need not pay immediately. They can pay in stages.

 At each stage, the company will issue a call letter, whereupon the
subscribers will pay. This is called Call Money.
 The accumulated share capital at any time is called Paid-up capital.

Attracting capital as equity … 1
 Companies can raise more capital as equity and/or debt.

 Attracting as equity capital:
 Company can issue more shares to new shareholders. If for the first time, it is called Initial
Public Offer (IPO). If subsequent issue, it is called Follow-on Public Offer (FPO).
 If a large shareholder wants to liquidate his holding by offering to public, it is called Offer
for Sale (OFS). All public sector companies are privatized through the OFS route, where the
President of India offers shares to the public.
 If a company wants to issue new shares to existing shareholders, it is called a Rights issue.
The existing shareholders have the option, but not the obligation to buy the rights shares.
 The quantity of shares issued cannot exceed the difference between the Authorized and
Subscribed capital.
 In the same way, a company can issue Preference shares to existing or new shareholders.
 The preference shares can offer options to redeem and/or convert to ordinary shares.
These make them more attractive to the investors.
 After issue of new capital, the share price on the market can move in any direction,
depending on the pricing and the returns expected by the markets.
 Company may issue bonus shares (convert part of the Reserves & Surplus) to equity
shares. Issue of bonus share almost always leads to a fall in the market price of the share.
Attracting capital as debt … 2
 Attracting as debt:
 Issue of secured bonds or debentures to public. When issuing these instruments, company
must secure (as collateral) specific assets equal to the value of debt.
 In case the company defaults on interest or principal, the investor can move the courts and
force the company to sell the assets and recover the dues. Defaults on secured
instruments has damaging impact on the market. E.g. IL&FS debt, DHFL bond default
 The company can raise unsecured deposits from public or from banks. These generally
come at a higher rate of interest since there is no security collateral.
 Interest can be compounded or paid out at quarterly/six-monthly/annually depending on
the classes of investors.
 Instruments with exit options are useful for attracting risk-averse investors:
 Redeemable instruments offer redemption after a fixed period, or after minimum holding
period. E.g. Infrastructure bonds such as Konkan Railway
 The company can list the instruments on the stock market. This allows exit-at-will and
provides liquidity to the investors. E.g. REC bonds
 Public sector companies may offer tax-free bonds to finance strategic, long-gestation
projects. E.g. NHAI, REC, PFC
 Rates of interest are adjusted lower or higher depending on the nature of risk.
Attracting capital … 3
 Compound instruments are often more attractive to the investors:

 Issue of convertible debentures allows the company to raise capital at a lower
cost and with no cash outflow on maturity of the instrument. At maturity, the
debentures are converted into ordinary shares.
 This works well, when the company has been able to create a hype about its
shares. Reliance under Dhirubhai Ambani used this route to raise funds at low
cost. Investors rushed in because Reliance share had a cult following.
 Reliance needed large funds to invest into its oil business and used equity price
as a lever. Infosys also created such a share hype that it became a cult. However,
due to its IT exports, it was generating enormous amounts of cash. It did not
need external finances to power its growth.
 Issue of part-redeemable, part-convertible debentures seeks a balance between
bullish and bearish investors. This is typically done by companies whose shares
are not particularly sought after.
 Thus, attracting equity or debt requires careful assessment of investor risk,
and calibration of features to optimize fund raising at lowest possible CoC.

Company types allowed under Companies Act 2013
 Statutory Company: Incorporated under act of parliament: RBI, LIC, SBI etc
 Registered company: Registered with the Registrar of Companies
 Company limited by shares
 Company limited by guarantee
 Unlimited company
 Private Limited company
 Public Limited company
 One person company
 Holding and subsidiary company
 Associate company
 Small company
 Government company
 Section 8 company
 Limitation of liability remains the main consideration in choosing the type.

Module 4 – Corporate fraud

Sources of risk … 1
 Capital structuring and limiting the liability are essential for attracting the capital.
But they are not sufficient to prevent the occurrence of risks.
 Company’s management remains accountable for managing all forms of risk.
 Various risks faced by a business can be categorized into three categories: 1)
Normal business risks, 2) Risks arising from managerial errors or incompetence, 3)
Risks arising from malafide intentions (fraud)
 Normal business risks:
 Competitor actions in customer or labor markets. Many examples …
 Own performance failures, Supply chain conflicts, Supplier defaults. Common in pharma
 Adverse changes in demand markets due to changes in demographics, purchasing power …
 Changes in money markets, interest rates pose risks for highly leveraged companies
 Changes in labor markets such as millennials turning away from STEM disciplines
 Lawsuits and court actions from stakeholders or enforcement agencies. E.g. Yes Bank
 Statutory changes in taxation, import/export regimes, currency exchange rates affect firms
dependent on export/import businesses such as Oil and gas, Gems and jewelery, Food
 Actions by foreign governments, e.g. Indian governments moves against Chinese firms

 Risks arising from managerial errors or incompetence:

 Bad investment decisions are typically example of managerial incompetence.
These include launching into new products/industries, or into new markets, e.g.
Anil Ambani’s foray into power generation, Telecom; Metal Box into bearings
manufacturing; Tata Steel’s acquisition of Corus UK; Entry of Kelloggs, KFC, Taco
Bell into India
 Bad operational decisions constitute a large category of risk. Such decisions
include product strategy, pricing decisions, hiring decisions, bad quality
management, organizational structuring etc. For instance, Honda automotive
strategies esp. Jazz and City, Patni’s organization restructuring, Infosys’s hiring
Vishal Sikka as CEO, Infosys investing into product or product focus, General
Motors launching Chevrolet in India, Beetel telephone instruments …
 Technological obsolescence and failure to act, e.g. BSNL, ITI, Tata Motors in the
heavy vehicles business
 Underinvesting, failing to achieve economies of scale (“growth pains”). This is
the case with most SMEs. Examples can be found from every industry sector.

 The problem of ethics does not arise in normal business risks, or risks arising from
managerial incompetence. The first category can be viewed as an act of nature. The
second as unintentional errors.
 For the normal business risks, good governance means anticipating these risks and
acting effectively. For this to happen, agility in organizational decision making and
implementation is necessary.
 For preventing managerial errors or incompetence, good governance means hiring
right people, ensuring effective organizational structures, collective decision-
making involving experts, and good project planning & execution.
 Ethics comes into play for the third category, i.e. risks of fraud.
 Risks arising from malafide human intentions (fraud):
 Risk of fraud occurs due to intentional actions by employees, contractors,
owners, and managers.
 There are many ways to commit frauds. The effect of such frauds is captured
through different documents and statements.
 It is important to understand how such frauds are committed, and they reflect
on the books of accounts.
Nature of malafide intentions: Corporate fraud
 Every fraud confers an unmerited benefit to the fraudster, at the expense of other
individuals.
 Corporate fraud involves individuals, managers, or owners defrauding companies
(essentially other shareholders).
 Every corporate is required to prepare the statements of accounts such as Profit &
Loss statement, Balance Sheet, Cash Flow Statements, and other financial
disclosures.
 The impact of a fraud is captured within one or more of the above documents.
Therefore, all corporate frauds can be classified according to the following scheme:
A. Profit & Loss account-related frauds
B. Balance Sheet frauds
C. Deliberate mis-statements of accounts
D. Inter-group company transactions
E. Off-book accounting frauds
F. Miscellaneous frauds

Broad typology of corporate fraud
Corporate fraud
Balance Deliberate Inter-group Off-book

P&L related
Sheet misstatements (Related entries
party
Revenue Cost Asset Liability transactions)
frauds related frauds related
Cost shifting, Money Parallel

“Managing” Cost Asset Fake or
capitalization laundering books
revenue inflation & diversion duplicate
through shell
kickbacks & write-off shares
companies
Asset Manipulating
Fake Fake diversion – Share price provisions, Round Off-book
invoices employees parallel rigging under- tripping payroll
supply chain reporting
Mark to Commissions Insider (bad assets)
market on Employee trading Inflating Sale &
welfare CAPEX revenues or lease back
inflation Asset costs
Circular Loan
revaluation Asset sale
sales frauds, Sale/transfer to SPVs
diversion of assets
Tax frauds Tax frauds (shell cos)

Typology of corporate frauds (continued)
 Miscellaneous frauds:
 Compliance misdemeanors: Proxy directors, Poor governance practices,
Suppressing of information for statutory disclosures
 Favouritism, bribery to public officials, CXO compensations
 Insurance frauds
 Manipulation of import/export transactions, Letters of credit
 Fraudulent tax refund claims (GST)
 Fraudulent export subsidies
 Types of revenue frauds:
 “Managing” revenue
 Fake invoices
 Mark to Market
 Circular sales (Using cartels or intergroup transactions through shell companies)
 Tax frauds through over- or under-invoicing

Revenue frauds … 1
“Managing” revenue
 Under this practice, the company inflates revenues for the reporting period, i.e.
current financial year. It works as follows:
 Towards the end of financial year, the company issues invoices to customers and
makes “shipments” so that revenue can be recognized for the reporting period.
 The higher revenues shown helps the company meet its guidance targets for the
reporting period.
 It also helps the salespeople to earn commissions for meeting targets.
 It required the customers to collude. After the reporting period is closed, the invoices
may be withdrawn; or the “shipments” are substituted by actual shipments later.
 Some companies also issue fake or dummy invoices, typically to shell companies.
These invoices are never collectible hence it only increases Accounts Receivables on
the balance sheet. No cash comes in.
 Most companies do it to a greater or lesser extent. But this practice is severely
discouraged within ethically sound companies. Market rewards such companies
 Auditors apply standards of revenue recognition to disallow such practices. But
auditors are people too!
Workings of revenue “management”
Question: What are the indicators of this malpractice?

Fake invoices
 Under this practice, the company simply raises fake invoices, i.e. invoices are sent
to customers who do not exist. These invoices are never collected, so you only see
a rise in the receivables on the balance sheet.
 How does the company manage such uncollectible entries?
 After some time, it creates a provision for bad debts and writes them off. This cannot be
done without active connivance of the auditors.
 Another way to mask the rising receivables is bill discounting. Company sells the
receivables to collection agents at a discount. Typically, the collection agents are shell
companies or unlisted group companies so escape public disclosures.
 Many companies maintain parallel books. This is what Satyam Computer Services
did (PwC as the auditor connived with Satyam).
 Eventually, the fraud gets exposed because the fake revenue gets too large to hide
it (Satyam); or because of whistleblower actions (Enron).
 The size of fake invoices in Satyam & Enron was very large. Both used such padded
revenues to increase their share prices. Enron used its high share prices to pledge
its shares to fund the missing cash. It collapsed after the fraud was exposed.
Workings of fake invoices
Question: What are the indicators of this malpractice?

Mark to Market (MTM) – Also called Fair Value accounting

 MTM is an accounting practice of linking the value of the asset to market prices. It
is essentially a balance sheet transaction.
 This practice is common for financial assets. When a company holds shares, listed
bonds, or futures, the assets are valued at changing market prices.
 So how is it used to manipulate revenues? Consider a company in projects business
such as shipbuilding, oil rig construction, or power turbines.
 A project sale is worth many millions of dollars. The product is designed and
installed in phases. Collections happen according to progress milestones over many
years. Thus, a project can be viewed as an asset that generates future cash flows.
 Applying MTM, the company converts future cash flows into NPV, and recognizes
the revenue in the current reporting period. This artificially boosts the revenues,
and makes the companies share prices attractive. The higher share price acts as a
leverage to manipulate share prices, security for loans, or M&As.
 MTM for revenues is highly questionable. Enron used it in its colossal fraud.
 Ethical companies do not use MTM for non-financial assets.

Workings of Mark to Market
Question: What problems do you expect? How will you spot this practice?
Revenue frauds … 4a
Circular sales
 Under this practice, the company sells its product in the market after
artificially routing it through a chain of companies.
 For instance, it is possible for company A to sell a piece of machinery
directly to customers. But before selling the machinery, it will sell it to
company B, and then buy it back from company B at a higher price.
 Now company A has basically the same product, but at a higher cost of
acquisition.
 It may sell it to the customer at an inflated price (price gouging). This is
typical for MNCs who have a dominant or monopoly position in the
industry segment. The extraordinary profits are funneled back to the
overseas parent or used to bribe public officials to land big contracts.
 Price gouging is common in high technology businesses: Defense
equipments, Medical imaging, Ethical drugs, High end earthmoving
equipments such as tunnel boring machines used for metro etc.
Revenue frauds … 4b
 Instead of price gouging, company A may sell its product at a discounted

price and show losses. In this case, the company A will evade taxes.
 In this case, company B will show high profits and cash flows. Profits are
spurious, but the cash flows are real.
 Company B’s extra profits have many uses: Money laundering, Fund
diversions, Share price manipulations, Tax evasion (company B in tax free
zone), bribing public officials, etc. Most of these are unethical and illegal.
 The companies may construct a long chain, i.e. company A → company B
→ company C → company D → company A. The companies can be a cartel
chain, or intergroup companies controlled by company A.
 For masking the fraud, all companies in the chain will show token value
addition through non-essential operations such as packing, storing, etc.
This can be used to hide spurious costs and further reduce taxes.
 Circular sales requires active top management involvement aided by
financial and legal experts.
Workings of circular sales
Tax frauds
 There is a thin line between tax avoidance, tax evasion, and tax fraud:
 Tax avoidance refers to planning the operations (revenues, costs and assets) to minimize
the taxes payable. Tax avoidance exploits legal provisions to save taxes.
 For instance, depreciation is a tax-deductible expense on the P&L. Thus, a company may
want to manage its assets (buy, not lease) to show high depreciation and make itself a
zero-tax company. Reliance in its growth years remained a zero-tax company despite
earning large cash profits. Tax avoidance is legal. Is it ethical?
 Tax evasion is intentional suppression or manipulation of data (overstating costs,
understating profits) to reduce the taxes. Tax evasion is a fraud - both illegal and unethical.
 Tax fraud is an umbrella term that goes beyond evasion, and includes fraudulently claiming
tax refunds, subsidies, duty drawbacks, etc.
 Revenue-based tax frauds are simple. Revenues can be inflated or understated:
 Under-invoicing: Company A sells its product at an artificially lower price to book losses.
By doing this, company A evades taxes. Difference may be collected in tax havens.
 Over-invoicing: Company B over-invoices to inflate revenues. The difference between
regular and inflated price may be paid back in cash or laundered through hawala route. B
may be based in low-tax locations to evade taxes.
Workings of Under-invoicing and over-invoicing
Cost-related frauds … 1
Cost inflation and kickbacks

 Deliberate cost inflation is the largest of the cost-related frauds. It is also widespread.
 The modus operandi is to “work” with vendors, who over-invoice their supplies, so that
higher cost is booked on P&L. Supplier returns the difference to the owners/managers.
 The inflated cost on the P&L leads to suppression of true profits. Thus, the company
pays lower income tax.
 Petty vendors generally return the difference in cash. Such vendors include travel agents,
hoteliers, canteen operators etc. This feeds the black economy.
 Larger vendors often return the difference in kind (land, flats, gems & jewelry etc). Even
larger kickbacks are routed through hawala channels into tax havens where the fraudster
holds secret accounts.
 The fraud is committed at various managerial levels:
 Owners/promoters/CXOs: These frauds bigger in size. Apart from evading taxes, this
essentially involves defrauding other shareholders.
 Individual/departmental managers: Small-sized frauds but they add up quickly to have a
large impact on P&L. Typically, in purchasing and administration departments. Kickbacks
are usually in cash or kind. Poor quality input materials poses a big business risk in such
frauds.
Discussion: How will you look for deliberate cost inflation?

Fake employees
 Showing fake employees to inflate the labour costs is generally seen in manpower-
intensive unorganized sectors. Generally, in such workers are paid in cash. This
creates the room for fake entries and siphon off the funds. E.g. pre-UID MNREGA
 Corporates collude with contractors providing manpower services such as security,
hospitality, healthcare, construction, real estate, etc.
 At petty levels, only the operating managers are involved in the fraud, through active
connivance with HR department. Contractors return the fraudulent monies to the
managers after taking a cut. Prevention requires superior intelligence networks.
 At higher levels, top managements set up contracts for “services”. The monies paid out are
returned back to the top executives, generally in cash. Or,
 The contracts channelize bribes to public officials as ‘consulting fees’ into dummy accounts
typically in the names of relatives of the officials.
 This fraud type is difficult to carry out if the workers are paid through formal
channels such as banks. Then they come under the scrutiny of Income Tax, EPFO,
ESIC, etc., and are easily discovered.
 Fraud reduces substantially with KYC, Aadhar, or PAN cards. E.g. post-UID MNREGA.

Commissions on employee welfare

 Instead of fake employees, managers arrange to receive kickbacks in form of
commissions on outsourcing employee-related functions. Such functions include
travel, hotels, canteens, healthcare, etc.
 The modus operandi is to award contracts to “preferred” contractors who will pay a
‘cut’ out of the business generated. Naturally, such contracts are inflated to cover
the kickbacks in form of cash (most common), gems and jewelery, real estate etc.
 The fraudsters are mostly the operating managers from finance, purchasing,
administration departments.
 This practice is also seen in HR departments in form of kickbacks from the
headhunters. A common practice is to route the applications of new candidates
through headhunting companies even if the candidates are not sourced from such
companies. Headhunters pay a cut (~ 25%-50%) to HR managers from the hiring
fees, which are typically 6-8 weeks of annual CTC.
 This malpractice is quite rampant. How will you detect it?
Cost-based tax frauds are easy to understand. Cost is inflated to reduce taxes and
siphon off the monies. These always happen at the highest management levels.
Asset-related frauds … 1
Asset diversion
 In plain language, this is a theft. It takes three variations:
 Simple theft: Assets (raw materials, machinery, spare parts, finished goods) are stolen and
shown as lost. After some time, they are written off the balance sheet, and a loss is
booked to P&L. Such diversions are common for input materials such as steel, coal,
cement, and petty thefts of spare parts, inventory from retail stores etc.
 Typically, these frauds are committed by lower-level employees and operating managers.
To prevent such thefts, managements must implement better surveillance, inventory
counting, and intelligence networks.
 Asset transfer into shell companies at manipulated prices: Done by the owner/promoters.
Involves moving financial assets such as investments, capitalized items, contracts having
future cash flows; or physical operations, etc., to other group companies that are typically
unlisted real or shell companies. Money laundering happens through this route.
 Asset diversion into parallel private supply chains: This is an organized theft at CXO levels.
The assets are diverted into supply chains set up by the fraudsters. They are then sold off
using forged stationery as legitimate goods in the market, and monies collected into
private bank accounts. For the source company, the inventory records are forged to show
the non-existent assets in warehouses. e.g. 8700 crore fraud at Reebok India in 2012.@
@ https://www.indiatoday.in/business/corporate/story/reebok-india-claims-rs-8700-crore-scam-by-former-md-coo-files-fir-in-gurgaon-103065-2012-05-23

Asset-related frauds … 2
CAPEX inflation
 CAPEX inflation is commonly seen during the project phases such as setting up a
new operation, expansion of existing facilities etc., which require large capital
expenditures.
 Typically done by owners/promoters. The inflation is accompanied by siphoning off
the monies either as cash or laundering into tax havens. It allows the promoters to
take back part of the invested cash. It is used to pay off public officials to clear the
numerous regulatory hurdles. This is a big contributor to the black money and
shadow economy.
 The asset sits on the balance sheet at the inflated value. It casts a long shadow on
the future performance.
 Higher depreciation is charged to P&L in subsequent years. This depresses the net profits
of the company. If it is a listed company, it reduces the share prices. Unless there is a
marketing hype about the company, the PE ratios remain depressed.
 Inflated capital asset value allows higher maintenance to be booked, which creates further
avenues of fraud through fictitious maintenance expenses (outsourcing contracts).
 Lower profits lead to lower income taxes for many years. The government is also cheated.

Liability-related frauds … 1
Loan fraud and diversion

 Loan fraud is the easiest of the frauds. It is also the commonest.
 The modus operandi is simple. The company takes loans from banks, NBFC, or from
public (via deposits, bonds, debentures).
 For the first few years, it services the loans by paying interest. At some time, it
stops paying interest, and blocks attempts by the lenders to recover the loans.
 Before introduction of Insolvency and Bankruptcy Code (IBC) law, it was very
difficult for the lenders to recover the monies. The judicial process used to function
very slowly.
 The financial institutions simply treated these loans as NPAs and wrote them off.
Usually with a quid pro quo with bank officers (e.g. ICICI Bank and Videocon, DHFL).
Small lenders and public investors could not approach courts, so they gave up.
 With IBC, this scenario has changed considerably. After the well publicized Essar
Steel affair, the big lenders have begun paying up. As the prospect of Ruia brothers
losing Essar Steel to Arcelor Mittal became clear, large reverse hawala transfers
from tax havens to India were reported. Many longstanding loans were quietly
settled. Still a lot needs to be done to improve governance.
Liability-related frauds … 2
Share price rigging, manipulation
 Excluded from discussion due to its complexity

Deliberate mis-statements … 1
 Cost shifting
 Cost shifting takes two forms:
 False capitalization: Costs that should be expensed off to P&L are capitalized. This
increases the reported profitability, since P&L does not see the costs.
 This practice happens in two types of companies: a) Company not paying income taxes, so
the higher profits do not involve tax outgo, b) Company facing operational margin pressure
and wanting to show higher profits for the stock market analysts. The shifted cost sits on
the balance sheet as a depreciable/amortizable asset. Reliance in its early years extensively
employed this device as they paid zero income taxes for many years.
 The higher profits lead to inflated share prices (due to higher PE ratios) on the stock
markets, which creates further scope to commit frauds such as price rigging, as was the
case with Enron.
 False expensing of CAPEX: This is the reverse of the above. Costs that should be capitalized
are expensed out to P&L.
 The main reason for this practice is to understate profits and save income taxes. Income
tax department watches the accounts carefully and applies penalties, if found.
 Cost shifting is quite common in SMEs or family-owned businesses. Neither of
these frauds can be carried out without the connivance of auditors.

Deliberate mis-statements … 2a
 Asset impairment
 Assets on balance sheet can lose value in normal business conditions.
 For instance, Tata Motors’ project for producing the Nano car at Singur, West
Bengal had to be cancelled due to political resistance. Investment of around Rs
1400 crores had to be written off. The project investment was an asset on their
balance sheet. (See https://www.thehindubusinessline.com/companies/Singur-issue-Tata-
Motors-seeks-Rs-1400-cr-damages-from-Bengal/article20482179.ece)
 The company may write off such assets and report a loss. This is called asset
impairment. The impairment is done through creating provisions and then writing
them off subject to the accepted accounting standards (IND AS which replaced
Indian GAAP).
 Another example of assets gone bad is Anil Ambani’s telecom venture which
invested in CDMA technology which did not work in India where GSM standard is
the dominant technology. Such assets had to be written off before Jio acquired
control over the ADAG company.
 Asset impairment is normal. This is not a mis-statement. No fraud is involved.

Deliberate mis-statements … 2b
 Manipulating provisions, Underreporting bad assets

 When fraud is involved, bad assets occur from various causes:
 Inventory leakage: Physical inventory does not match the book inventory (inventory on
record) because it is stolen or diverted. E.g. Steel, Coal, Fuel oil, Spares, Finished goods…
 Companies check their physical inventories periodically. This is called cycle counting.
Correct practice is to reduce the book inventory and write-off the difference to P&L as a
loss. Fraudsters skip this step and underreport the bad assets (stolen inventory). The
inventory is continued at the artificially inflated level. E.g. Reebok India where MD & CFO
joined hands to do this type of frauds.
 Bad investments: Company’s investments in other shares or financial instruments etc.,
turn bad. This may happen in the normal course of business (miscalculation by the
company’s treasury department). For instance, the companies who invested surplus cash
into debt funds which had strong weight on DHFL or IL&FS bonds have seen their
investments go bad. Such losses can be hidden by suppressing provisions for bad assets.
 Presence of bad assets on the balance sheet is problematic. It artificially inflates the
shareholder value and distorts the stock prices.
 This type is committed by top managements for manipulating the share prices. It
requires active connivance by the auditors. IL&FS scandal, Yes Bank are examples.
Deliberate mis-statements … 3
 Asset revaluation (tampering with inventory)

 Asset revaluation is the reverse of underreporting assets. It takes two forms:
 Upwards revaluation to fair market price: Typically, financial assets such as shares, bonds,
debt fund, non-current assets such as precious metals, gems, etc. are calibrated to average
market prices on the balance sheet and turned into provisions assets. They are not carried
to the Profit & Loss account, since no cash flow is involved in the revaluation. This is an
accepted accounting practice, hence there is no mis-statement, and no fraud.
 Assets such as land, buildings, real estate must be carried on the balance sheet at historical
cost of acquisition. Accounting principle of conservatism dictates that such assets should
not be revalued. Companies may do this to ‘dress’ the balance sheet. But the practice is
severely discouraged and reported in Auditors’ notes to the Annual Report. While not a
fraud, the practice is not viewed as the right thing to do.
 Revaluation to hide asset diversion: When assets are stolen of diverted, companies can
resort to asset revaluation to hide the loss of assets from the balance sheet. This is a
serious fraud, one that is committed to mask another fraud. Typically, this is done via
“valuing” the inventory at inflated levels so that nothing goes missing on the balance
sheet. Inventory such as steel, coal, metals cannot be physically counted due to very high
costs of assessment. Tampering is done by creating documents to show inventory that
actually does not exist. Top management and auditors are both involved in this fraud.

End of all modules

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Ethics and Governance (MMBA640L)

 70% attendance rule … Debarment … One supplementary … Max grade D

2 (c) 2016, 2019 Milind Padalkar 13 May 2021

Module 1 – Introduction to ethics

 You observe a runaway train whose breaks have failed.

 You have two choices:

 You must decide immediately. You cannot warn anyone.

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 Why did you choose what you chose?

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 You must decide immediately.

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 Why did you choose what you chose?

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 You have two choices:

 You must decide immediately.

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 You have two choices:

 You must decide immediately.

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 You must decide immediately.

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 Why did you choose what you chose?

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 Can you think of similar problems from current events?

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 The train problem presents an ethical dilemma. A dilemma is a situation which

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 Every ethical dilemma forces a deep examination personally-held positions.

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 Describe what ethics means to you. Can you define it?

 Describe what morality means to you. Can you define it?

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Module 2 – Theoretic foundations of ethics

 “Ethics” comes from the Greek word ETHIKOS or ETHOS

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 Can you contrast the two terms for the following?

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 Is Law distinct from Morality or Ethics?

1 Justice Oliver Wendell Holmes – an eminent American jurist

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3 Scheller (1952), Marquette Law Review

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 Morality and Law are related, but distinct concepts. 4

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 Can you list actions that are moral but illegal?

 Can you list actions that are legal but immoral?

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 Since justice is operationalized through stated law, it is associated with its

 Justice is about the allocation of scarce resources to the claimants.

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 Justice, as the allocation of scarce resources involves:

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 Discussion: Consider the concept of ‘blood money’ in the Middle Eastern

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… When government revenue officers (Arthacharya) commit offences such as violation

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What are the key take-aways?

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