SAMAR COLLEGES, INC.

Catbalogan City, Samar

COLLEGE OF BUSINESS AND MANAGEMENT

INDIVIDUALIZED LEARNING
MATERIAL (ILM)
BA CORE 2 GOOD GOVERNANCE AND SOCIAL
RESPONSIBILITY

PRE-FINAL COVERAGE
Part 1 CORPORATE SOCIAL RESPONSIBILITY
Lesson 1: The Concept of Corporate Social Responsibility
Lesson 2: Potential Challenges of Corporate Governance
Lesson 3: Concept of Good Governance
PRE-FINAL EXAMINATION
FINAL COVERAGE
Part 2 ETHICAL ISSUES AND PROBLEMS IN THE BUSINESS WORLD
Lesson 4: Ethics, Values and Moral in Governance
Lesson 5: Individuals Influences on Ethical Behavior
Lesson 6: Situational Influences on Ethical Behavior

FINAL EXAMINATION

Prepared by
Mr. NICANOR T. BINGHOY, MBA.
CBM-College Instructor

LESSON 1

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 THE CONCEPT OF CORPORATE SOCIAL RESPONSIBILITY

Corporate Social Responsibility is a management concept whereby companies

integrate social and environmental concerns in their business operations and
interactions with their stakeholders. CSR is generally understood as being the way
through which a company achieves a balance of economic, environmental and social
imperatives (“Triple-Bottom-Line- Approach”), while at the same time addressing the
expectations of shareholders and stakeholders. In this sense it is important to draw a
distinction between CSR, which can be a strategic business management concept, and
charity, sponsorships or philanthropy. Even though the latter can also make a
valuable contribution to poverty reduction, will directly enhance the reputation of a
company and strengthen its brand, the concept of CSR clearly goes beyond that.

Key CSR issues: environmental management, eco-efficiency, responsible sourcing,

stakeholder engagement, labor standards and working conditions, employee and
community relations, social equity, gender balance, human rights, good governance,
and anti-corruption measures.

A properly implemented CSR concept can bring along a variety of competitive

advantages, such as enhanced access to capital and markets, increased sales and
profits, operational cost savings, improved productivity and quality, efficient human
resource base, improved brand image and reputation, enhanced customer loyalty,
better decision making and risk management processes.

Understanding Corporate Social Responsibility (CSR)

Corporate social responsibility is a broad concept that can take many forms depending
on the company and industry. Through CSR programs, philanthropy, and volunteer
efforts, businesses can benefit society while boosting their brands.

As important as CSR is for the community, it is equally valuable for a company. CSR
activities can help forge a stronger bond between employees and corporations, boost
morale and help both employees and employers feel more connected with the world
around them.

For a company to be socially responsible, it first needs to be accountable to itself and

its shareholders. Often, companies that adopt CSR programs have grown their
business to the point where they can give back to society. Thus, CSR is primarily a
strategy of large corporations. Also, the more visible and successful a corporation is,
the more responsibility it has to set standards of ethical behavior for its peers,
competition, and industry.

Corporations as Responsible

A Civil Action was originally a novel, but more people have seen the movie, which was
distributed by W. W. Hodkinson’s old company, Paramount. One of the memorable
scenes is John Travolta playing a hotshot lawyer speeding up a rural highway to
Woburn, Massachusetts. He gets pulled over and ticketed. Then he continues on his
way to investigate whether there’s any money to be made launching a lawsuit against
a company that allowed toxic industrial waste to escape into the town’s aquifer. The
polluted water, Travolta suspects, eventually surfaced as birth defects. After checking
things out, he races his Porsche back to Boston at the same speed. Same result.A Civil
Action, directed by Steven Zaillian (New York: Scott Rudin, 1998), film.

Three Approaches to Corporate Responsibility

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According to the traditional view of the corporation, it exists primarily to make profits.
From this money-centered perspective, insofar as business ethics are important, they
apply to moral dilemmas arising as the struggle for profit proceeds. These dilemmas
include: “What obligations do organizations have to ensure that individuals seeking
employment or promotion are treated fairly?” “How should conflicts of interest be
handled?” and “What kind of advertising strategy should be pursued?” Most of this
textbook has been dedicated to these and similar questions.

While these dilemmas continue to be important throughout the economic world, when
businesses are conceived as holding a wide range of economic and civic
responsibilities as part of their daily operation, the field of business ethics expands
correspondingly. Now there are large sets of issues that need to be confronted and
managed outside of, and independent of the struggle for money. Broadly, there are
three theoretical approaches to these new responsibilities:

1. Corporate social responsibility (CSR)

2. The triple bottom line
3. Stakeholder theory

Corporate Social Responsibility (CSR)

The title corporate social responsibility has two meanings. First, it’s a general name
for any theory of the corporation that emphasizes both the reponsibility to make
money and the responsibility to interact ethically with the surrounding community.
Second, corporate social responsibility is also a specific conception of that
responsibility to profit while playing a role in broader questions of community welfare.

As a specific theory of the way corporations interact with the surrounding community
and larger world, corporate social responsibility (CSR) is composed of four obligations:

1. The economic responsibility to make money. Required by simple economics,

this obligation is the business version of the human survival instinct.
Companies that don’t make profits are—in a modern market economy—doomed
to perish. Of course there are special cases. Nonprofit organizations make
money (from their own activities as well as through donations and grants), but
pour it back into their work. Also, public/private hybrids can operate without
turning a profit. In some cities, trash collection is handled by this kind of
organization, one that keeps the streets clean without (at least theoretically)
making anyone rich. For the vast majority of operations, however, there have to
be profits. Without them, there’s no business and no business ethics.
2. The legal responsibility to adhere to rules and regulations. Like the previous,
this responsibility is not controversial. What proponents of CSR argue, however,
is that this obligation must be understood as a proactive duty. That is, laws
aren’t boundaries that enterprises skirt and cross over if the penalty is low;
instead, responsible organizations accept the rules as a social good and make
good faith efforts to obey not just the letter but also the spirit of the limits. In
concrete terms, this is the difference between the driver who stays under the
speed limit because he can’t afford a traffic ticket, and one who obeys because
society as a whole is served when we all agree to respect the signs and
stoplights and limits. Going back to John Travolta racing his Porsche up and
down the rural highway, he sensed none of this respect. The same goes for the
toxic company W. R. Grace Incorporated as it’s portrayed in the movie: neither
one obeys regulations and laws until the fines get so high they’ve got no choice.
As against that model of behavior, a CSR vision of business affirms that
society’s limits will be scrupulously obeyed, even if the fine is only one dollar.
3. The ethical responsibility to do what’s right even when not required by the
letter or spirit of the law. This is the theory’s keystone obligation, and it

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 depends on a coherent corporate culture that views the business itself as a
citizen in society, with the kind of obligations that citizenship normally entails.
When someone is racing their Porsche along a country road on a freezing
winter’s night and encounters another driver stopped on the roadside with a
flat, there’s a social obligation to do something, though not a legal one. The
same logic can work in the corporate world. Many industrial plants produce, as
an unavoidable part of their fabricating process, poisonous waste. In Woburn,
Massachusetts, W. R. Grace did that, as well as Beatrice Foods. The law
governing toxic waste disposal was ambiguous, but even if the companies
weren’t legally required to enclose their poisons in double-encased, leak-proof
barrels, isn’t that the right thing to do so as to ensure that the contamination
will be safely contained? True, it might not be the right thing to do in terms of
pure profits, but from a perspective that values everyone’s welfare as being
valuable, the measure could be recommendable.
4. The philanthropic responsibility to contribute to society’s projects even when
they’re independent of the particular business. A lawyer driving home from
work may spot the local children gathered around a makeshift lemonade stand
and sense an obligation to buy a drink to contribute to the neighborhood
project. Similarly, a law firm may volunteer access to their offices for an
afternoon every year so some local schoolchildren may take a field trip to
discover what lawyers do all day. An industrial chemical company may take the
lead in rehabilitating an empty lot into a park. None of these acts arise as
obligations extending from the day-to-day operations of the business involved.
They’re not like the responsibility a chemical firm has for safe disposal of its
waste. Instead, these public acts of generosity represent a view that businesses,
like everyone in the world, have some obligation to support the general welfare
in ways determined by the needs of the surrounding community.

The Triple Bottom Line

The triple bottom line is a form of corporate social responsibility dictating that
corporate leaders tabulate bottom-line results not only in economic terms (costs
versus revenue) but also in terms of company effects in the social realm, and with
respect to the environment. There are two keys to this idea. First, the three columns of
responsibility must be kept separate, with results reported independently for each.
Second, in all three of these areas, the company should obtain sustainable results.

The notion of sustainability is very specific. At the intersection of ethics and

economics, sustainability means the long-term maintenance of balance. As elaborated
by theorists including John Elkington, here’s how the balance is defined and achieved
economically, socially, and environmentally:

 Economic sustainability values long-term financial solidity over more volatile,

short-term profits, no matter how high. According to the triple-bottom-line
model, large corporations have a responsibility to create business plans
allowing stable and prolonged action. That bias in favor of duration should
make companies hesitant about investing in things like dot-coms. While it’s
true that speculative ventures may lead to windfalls, they may also lead to
collapse. Silicon Valley, California, for example, is full of small, start-up
companies. A few will convert into the next Google, Apple, and Microsoft. What
gets left out, however, of the newspaper reports hailing the accomplishments of
a Steve Jobs or a Bill Gates are all those other people who never made it—all
those who invested family savings in a project that ended up bankrupt.
Sustainability as a virtue means valuing business plans that may not lead to
quick riches but that also avoid calamitous losses.

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  Social sustainability values balance in people’s lives and the way we live. A
world in which a few Fortune 500 executives are hauling down millions a year,
while millions of people elsewhere in the world are living on pennies a day can’t
go on forever. As the imbalances grow, as the rich get richer and the poor get
both poorer and more numerous, the chances that society itself will collapse in
anger and revolution increase. The threat of governmental overthrow from below
sounds remote—almost absurd—to Americans who are accustomed to a solid
middle class and minimal resentment of the wealthy. In world history, however,
such revolutions are quite common. That doesn’t mean revolution is coming to
our time’s developed nations. It may indicate, however, that for a business to be
stable over the long term, opportunities and subsequently wealth need to be
spread out to cover as many people as possible.

 The fair trade movement fits this ethical imperative to shared opportunity and
wealth. Developed and refined as an idea in Europe in the 1960s, organizations
promoting fair trade ask businesses—especially large producers in the richest
countries—to guarantee that suppliers in impoverished nations receive
reasonable payment for their goods and services even when the raw economic
laws of supply and demand don’t require it. An array of ethical arguments may
be arranged to support fair trade, but on the front of sustainability, the lead
argument is that peace and order in the world depend on the world’s resources
being divided up in ways that limit envy, resentment, and anger.

 Social sustainability doesn’t end with dollars; it also requires human respect.
All work, the logic of stability dictates, contains dignity, and no workers deserve
to be treated like machines or as expendable tools on a production line. In
today’s capitalism, many see—and the perception is especially strong in Europe
—a world in which dignity has been stripped away from a large number of
trades and professions. They see minimum wage workers who’ll be fired as soon
as the next economic downturn arrives. They see bosses hiring from temporary
agencies, turning them over fast, not even bothering to learn their names. It’s
certainly possible that these kinds of attitudes, this contempt visible in so many
workplaces where the McJob reigns, can’t continue. Just as people won’t stand
for pennies in wages while their bosses get millions, so too they ultimately will
refuse to accept being treated as less dignified than the boss.
 Environmental sustainability begins from the affirmation that natural resources
—especially the oil fueling our engines, the clean air we breathe, and the water
we drink—are limited. If those things deteriorate significantly, our children
won’t be able to enjoy the same quality of life most of us experience.
Conservation of resources, therefore, becomes tremendously important, as does
the development of new sources of energy that may substitute those we’re
currently using.

Stakeholder Theory

Stakeholder theory, which has been described by Edward Freeman and others, is the
mirror image of corporate social responsibility. Instead of starting with a business and
looking out into the world to see what ethical obligations are there, stakeholder theory
starts in the world. It lists and describes those individuals and groups who will be

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affected by (or affect) the company’s actions and asks, “What are their legitimate
claims on the business?” “What rights do they have with respect to the company’s
actions?” and “What kind of responsibilities and obligations can they justifiably
impose on a particular business?” In a single sentence, stakeholder theory affirms
that those whose lives are touched by a corporation hold a right and obligation to
participate in directing it.

In practical terms, however, a strict stakeholder theory—one insistently bestowing the

power to make ethical claims on anyone affected by a company’s action—would be
inoperable. There’d be no end to simply figuring out whose rights needed to be
accounted for. Realistically, the stakeholders surrounding a business should be
defined as those tangibly affected by the company’s action. There ought to be an
unbroken line that you can follow from a corporate decision to an individual’s life.

Once a discrete set of stakeholders surrounding an enterprise has been located,

stakeholder ethics may begin. The purpose of the firm, underneath this theory, is to
maximize profit on a collective bottom line, with profit defined not as money but as
human welfare. The collective bottom line is the summed effect of a company’s actions
on all stakeholders. Company managers, that means, are primarily charged not with
representing the interests of shareholders (the owners of the company) but with the
more social task of coordinating the interests of all stakeholders, balancing them in
the case of conflict and maximizing the sum of benefits over the medium and long
term. Corporate directors, in other words, spend part of the day just as directors
always have: explaining to board members and shareholders how it is that the current
plans will boost profits.

REVIEW QUESTIONS

1. For corporate advocates of the specific CSR theory, what are the responsibilities
the corporation holds, and how are conflicts between those responsibilities
managed?
2. Create a hypothetical situation in which philanthropy would not be required of
a corporation by CSR theory.
3. What does sustainability mean within each of the three columns of the theory of
the 3. triple bottom line?
4. How does the fair-trade movement fit together with the triple-bottom-line theory
of corporate responsibility?
5. Who are the stakeholders in stakeholder ethics?
6. What does it mean for a corporate director to “balance stakeholder interests”?
7. What basic elements do CSR, the triple bottom line, and stakeholder theory
have in common?

LESSON 2

POTENTIAL OF CORPORATE GOVERNANCE

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Rules are critically important in business. A quick look at scandals like Enron and
WorldCom shows just what can happen when a business goes too far in pursuing its
self-interest and breaks its own internal guidelines. Corporate governance,
encompassing all the principles of open and responsible management, is a way of
ensuring that a company keeps within clear ethical lines. It has been top of the
policymaker's agenda for some time now, but can be a challenge for businesses on
several levels.

Corporate Governance?

If you understand a company as a union of some extremely diverse interest groups –

employees, owners, investors, managers, business partners, creditors and customers –
then it's clear that you're going to need a system for realizing the best possible
handling of relationships between the individual groups so no one gets cheated or
exploited. That's essentially the idea behind corporate governance. The technical
definition is a system of processes, policies and rules that direct and control a
company's behavior. Essentially, it's a code of conduct in business for the good
management of companies.

What Are the Basic Principles of Corporate Governance?

Originally, corporate governance was put in place to stop entrepreneurs and owners
acting abusively or even criminally on behalf of a company. This is still a key objective
today, but the concept has evolved to include all the ways a company should behave
in order to foster the trust of investors and other stakeholders. Some of the key aims
of corporate governance include:

 Giving stakeholders confidence that the business is being run to important legal
standards so that it never violates applicable laws or regulations, including the
unwritten rules of good, ethical behavior.
 Providing transparency in the company's decision-making processes both in
good and bad times.
 Regulating efficient cooperation between a supervisory board of directors and
the management of a company.
 Ensuring the company exercises prudence in strategy-setting and decision-
making so that the best interests of all stakeholders are taken into account.
 Providing a framework for action if there's a violation of the company's code of
conduct.
 Ensuring the company is geared toward long-term value creation, not short-
term gains.
When the company's management works according to a well-defined corporate
governance structure, the well-being of everyone involved in the company should
automatically be taken care of.

Key Elements of Corporate Governance?

The key principles of good corporate governance differ depending on the country,
industry, regulator and stock exchange. However, most codes of governance include
several major characteristics:

Independent leadership: Companies should have an independent leadership to oversee

and guide management, such as an independent chairperson or a lead independent
director. An owner who selects friends and family members to sit on the board with
him runs the risk of nepotism and prejudice. Independent judgement is almost always
in the best interest of the company and its stakeholders.

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Transparency: One of the fundamental objectives of corporate governance is for
organizations to develop transparent business practices and a solid structure and
organization so that it can trace all the company's dealings effectively. Another aspect
of transparency is the company should provide free and easy-to-understand
information to everyone who may be affected by the company's corporate governance
policies, such as clear financial reports. That way, everyone can understand the
company's strategies and track its financial performance.

Consensus building/ stakeholder relations: The company should consult with the
different categories of stakeholders in an ongoing discourse to reach a consensus of
how it can best serve everyone's needs sustainably.

Accountability: Consensus building goes hand-in-hand with the principle of

accountability, which says the company must be accountable to those who are
affected by its decisions. Precisely who is accountable for what should be written down
in the company's code of conduct. Large companies often keep corporate governance
web pages that indicate specific things the company is doing to meet the expectations
of each stakeholder group.

Inclusion or corporate citizenship: The principle of inclusion and corporate citizenship

maintains, enhances or generally improves the well-being of all the stakeholder
groups. This element of corporate governance typically includes an aspect of social
and environmental responsibility, such as using the company's human, technological
and natural resources responsibly and acting for the benefit of the community as a
whole. Corporate citizenship provides a compelling message regarding the company's
value to society.

The rule of law: The company shall operate within the legal frameworks that are
enforced by regulatory bodies, for the full protection of stakeholders.

Who Is Responsible for Corporate Governance?

The board of directors is pivotal for the governance of its company. The board's role is
to set the company's strategic direction, provide the leadership to put those strategies
into effect and supervise the management of the company. Consequently, corporate
governance is about the way the board behaves and how it sets the values of the
business. This is different from the daily operational management of the company by
executives.

What Are the Issues in Corporate Governance?

Good governance is an ideal which is difficult to achieve in its totality. For the
implementation of a rigorous corporate governance code, companies and institutions
must come together regionally and internationally to draft corresponding guidelines.
One of the main issues, at least in the U.S., is that plenty of well-intentioned people
have brought their ideas and experiences to the policy-making table but it hasn't
resulted in any clear-cut framework.

What Are the Challenges of Corporate Governance?

The main problem with corporate governance is that it doesn't stand alone; it has to
work in conjunction with a company's mission and values statement to give directors
and stakeholders a clear guide about how they should behave. There are several
problems that a business might struggle with as follows:

Conflicts of interest: A conflict of interest occurs when a controlling member of the

company has other financial interests that could influence his decision-making or

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conflict with the objectives of the company. For example, a board member of a wind
turbine company who owns a significant amount of stock in an oil company is likely to
be conflicted, because she has a financial interest in not representing the
advancement of green energy. Conflicts of interest erode the trust of stakeholders and
the public and potentially open the business up to litigation.

Governance standards: A board can have all the equitable rules and policies it likes
but if it can't propagate those standards throughout the business, what chance does
the company have? Resistant managers can subvert good corporate governance at the
operational level, leaving the business exposed to state or federal law violations and
reputational damage with stakeholders. A policy of corporate governance needs a clear
enforcement mechanism, applied consistently, as a check and balance against the
actions of executive staff.

Short-termism: Good corporate governance requires that boards should have the right
to manage the company for the long-term, to create sustainable value. This is
problematic for a couple of reasons. First, the rules governing a listed company's
performance tend to prioritize short-term performance for the benefit of shareholders.
Managers face an unrelenting pressure to meet quarterly earnings targets, since
dropping the earnings per share by even a cent or two could hit the company's stock
price. Sometimes a company has to go private to achieve the kind of sustainable
innovation that cannot be achieved in the glare of the public markets.

The second problem is that directors only sit on boards for a brief period and many
face re-election every three years. While this has some benefits – there's an argument
that directors cannot be considered independent after 10 years of service – short
tenures could rob the board of long-term oversight and critical expertise.

Diversity: It's common sense that boards should have an obligation to ensure the
proper mix of skills and perspectives in the boardroom, but few boards take a hard
look at their composition and ask whether it reflects the age, gender, race and
stakeholder composition of the company. For example, should workers be given a
place on the board? This is the norm across most of Europe and evidence suggests
that worker participation leads to companies having lower pay inequalities and a
greater regard for their workforce. It's a balancing act, however, as companies may
focus on protecting jobs instead of making tough decisions.

Accountability issues: Under the current model of corporate governance, the board is
positioned squarely between shareholders and management. Authority flows from the
shareholders at the top and accountability flows back the other way. In other words,
it's shareholders – not stakeholders generally – who are most protected by corporate
governance and shareholders – not stakeholders – who get to withhold critical votes
unless certain reforms are implemented.

While it's certainly not undesirable to have the actions of the board checked by
shareholders in this way, the future of corporate governance is perhaps more holistic.
Companies can and do have ethical obligations to their communities, customers,
suppliers, creditors and employees, and must take care to protect the interests of non-
owner stakeholders in the company code of conduct.

Guiding Principles of Corporate Governance

Business Roundtable supports the following core guiding principles:

1. The board approves corporate strategies that are intended to build sustainable
long-term value; selects a chief executive officer (CEO); oversees the CEO and
senior management in operating the company’s business, including allocating

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 capital for long-term growth and assessing and managing risks; and sets the
“tone at the top” for ethical conduct.
2. Management develops and implements corporate strategy and operates the
company’s business under the board’s oversight, with the goal of producing
sustainable long-term value creation.
3. Management, under the oversight of the board and its audit committee,
produces financial statements that fairly present the company’s financial
condition and results of operations and makes the timely disclosures investors
need to assess the financial and business soundness and risks of the company.
4. The audit committee of the board retains and manages the relationship with the
outside auditor, oversees the company’s annual financial statement audit and
internal controls over financial reporting, and oversees the company’s risk
management and compliance programs.
5. The nominating/corporate governance committee of the board plays a
leadership role in shaping the corporate governance of the company, strives to
build an engaged and diverse board whose composition is appropriate in light of
the company’s needs and strategy, and actively conducts succession planning
for the board.
6. The compensation committee of the board develops an executive compensation
philosophy, adopts and oversees the implementation of compensation policies
that fit within its philosophy, designs compensation packages for the CEO and
senior management to incentivize the creation of long-term value, and develops
meaningful goals for performance-based compensation that support the
company’s long-term value creation strategy.
7. The board and management should engage with long-term shareholders on
issues and concerns that are of widespread interest to them and that affect the
company’s long-term value creation. Shareholders that engage with the board
and management in a manner that may affect corporate decision-making or
strategies are encouraged to disclose appropriate identifying information and to
assume some accountability for the long-term interests of the company and its
shareholders as a whole. As part of this responsibility, shareholders should
recognize that the board must continually weigh both short-term and long-term
uses of capital when determining how to allocate it in a way that is most
beneficial to shareholders and to building long-term value.
8. In making decisions, the board may consider the interests of all of the
company’s constituencies, including stakeholders such as employees,
customers, suppliers and the community in which the company does business,
when doing so contributes in a direct and meaningful way to building long-term
value creation.

This post is intended to assist public company boards and management in their efforts
to implement appropriate and effective corporate governance practices and serve as
spokespersons for the public dialogue on evolving governance standards. Although
there is no “one size fits all” approach to governance that will be suitable for all U.S.
public companies, the creation of long-term value is the ultimate measurement of
successful corporate governance, and it is important that shareholders and other
stakeholders understand why a company has chosen to use particular governance
structures, practices and processes to achieve that objective. Accordingly, companies
should disclose not only the types of practices they employ but also their bases for
selecting those practices.

I. Key Corporate Actors

Effective corporate governance requires a clear understanding of the respective roles of

the board, management and shareholders; their relationships with each other; and
their relationships with other corporate stakeholders. Before discussing the core

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guiding principles of corporate governance, Business Roundtable believes describing
the roles of these key corporate actors is important.

 The board of directors has the vital role of overseeing the company’s
management and business strategies to achieve long-term value creation.
Selecting a well-qualified chief executive officer (CEO) to lead the company,
monitoring and evaluating the CEO’s performance, and overseeing the CEO
succession planning process are some of the most important functions of the
board. The board delegates to the CEO—and through the CEO to other senior
management—the authority and responsibility for operating the company’s
business. Effective directors are diligent monitors, but not managers, of
business operations. They exercise vigorous and diligent oversight of a
company’s affairs, including key areas such as strategy and risk, but they do
not manage—or micromanage—the company’s business by performing or
duplicating the tasks of the CEO and senior management team. The distinction
between oversight and management is not always precise, and some situations
(such as a crisis) may require greater board involvement in operational matters.
In addition, in some areas (such as the relationship with the outside auditor
and executive compensation), the board has a direct role instead of an oversight
role.
 Management, led by the CEO, is responsible for setting, managing and
executing the strategies of the company, including but not limited to running
the operations of the company under the oversight of the board and keeping the
board informed of the status of the company’s operations. Management’s
responsibilities include strategic planning, risk management and financial
reporting. An effective management team runs the company with a focus on
executing the company’s strategy over a meaningful time horizon and avoids an
undue emphasis on short-term metrics.
Shareholders invest in a corporation by buying its stock and receive economic benefits
in return. Shareholders are not involved in the day-to-day management of business
operations, but they have the right to elect representatives (directors) and to receive
information material to investment and voting decisions. Shareholders should expect
corporate boards and managers to act as long-term stewards of their investment in the
corporation. They also should expect that the board and management will be
responsive to issues and concerns that are of widespread interest to long-term
shareholders and affect the company’s long-term value. Corporations are for-profit
enterprises that are designed to provide sustainable long-term value to all
shareholders. Accordingly, shareholders should not expect to use the public
companies in which they invest as platforms for the advancement of their personal
agendas or for the promotion of general political or social causes.

Some shareholders may seek a voice in the company’s strategic direction and decision-
making—areas that traditionally were squarely within the realm of the board and
management. Shareholders who seek this influence should recognize that this type of
empowerment necessarily involves the assumption of a degree of responsibility for the
goal of long-term value creation for the company and all of its shareholders.

II. Key Responsibilities of the Board of Directors and Management

An effective system of corporate governance provides the framework within which the
board and management address their key responsibilities.

Board of Directors

A corporation’s business is managed under the board’s oversight. The board also has
direct responsibility for certain key matters, including the relationship with the

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outside auditor and executive compensation. The board’s oversight function
encompasses a number of responsibilities, including:

 Selecting the CEO. The board selects and oversees the performance of the
company’s CEO and oversees the CEO succession planning process.
 Setting the “tone at the top.” The board should set a “tone at the top” that
demonstrates the company’s commitment to integrity and legal compliance.
This tone lays the groundwork for a corporate culture that is communicated to
personnel at all levels of the organization.
 Approving corporate strategy and monitoring the implementation of strategic
plans. The board should have meaningful input into the company’s long-term
strategy from development through execution, should approve the company’s
strategic plans and should regularly evaluate implementation of the plans that
are designed to create long-term value. The board should understand the risks
inherent in the company’s strategic plans and how those risks are being
managed.
 Setting the company’s risk appetite, reviewing and understanding the major
risks, and overseeing the risk management processes. The board oversees the
process for identifying and managing the significant risks facing the company.
The board and senior management should agree on the company’s risk
appetite, and the board should be comfortable that the strategic plans are
consistent with it. The board should establish a structure for overseeing risk,
delegating responsibility to committees and overseeing the designation of senior
management responsible for risk management.
 Focusing on the integrity and clarity of the company’s financial reporting and
other disclosures about corporate performance. The board should be satisfied
that the company’s financial statements accurately present its financial
condition and results of operations, that other disclosures about the company’s
performance convey meaningful information about past results as well as future
plans, and that the company’s internal controls and procedures have been
designed to detect and deter fraudulent activity.
 Allocating capital. The board should have meaningful input and decision-
making authority over the company’s capital allocation process and strategy to
find the right balance between short-term and long-term economic returns for
its shareholders.
 Reviewing, understanding and overseeing annual operating plans and budgets.
The board oversees the annual operating plans and reviews annual budgets
presented by management. The board monitors implementation of the annual
plans and assesses whether they are responsive to changing conditions.
 Reviewing the company’s plans for business resiliency. As part of its risk
oversight function, the board periodically reviews management’s plans to
address business resiliency, including such items as business continuity,
physical security, cybersecurity and crisis management.
 Nominating directors and committee members, and overseeing effective
corporate governance. The board, under the leadership of its
nominating/corporate governance committee, nominates directors and
committee members and oversees the structure, composition (including
independence and diversity), succession planning, practices and evaluation of
the board and its committees.
 Overseeing the compliance program. The board, under the leadership of
appropriate committees, oversees the company’s compliance program and
remains informed about any significant compliance issues that may arise.

CEO and Management

The CEO and management, under the CEO’s direction, are responsible for the
development of the company’s long-term strategic plans and the effective execution of

P a g e 12 | 34
the company’s business in accordance with those strategic plans. As part of this
responsibility, management is charged with the following duties.

 Business operations. The CEO and management run the company’s business
under the board’s oversight, with a view toward building long-term value.
 Strategic planning. The CEO and senior management generally take the lead in
articulating a vision for the company’s future and in developing strategic plans
designed to create long-term value for the company, with meaningful input from
the board. Management implements the plans following board approval,
regularly reviews progress against strategic plans with the board, and
recommends and carries out changes to the plans as necessary.
 Capital allocation. The CEO and senior management are responsible for
providing recommendations to the board related to capital allocation of the
company’s resources, including but not limited to organic growth; mergers and
acquisitions; divestitures; spin-offs; maintaining and growing its physical and
nonphysical resources; and the appropriate return of capital to shareholders in
the form of dividends, share repurchases and other capital distribution means.
 Identifying, evaluating and managing risks. Management identifies, evaluates
and manages the risks that the company undertakes in implementing its
strategic plans and conducting its business. Management also evaluates
whether these risks, and related risk management efforts, are consistent with
the company’s risk appetite. Senior management keeps the board and relevant
committees informed about the company’s significant risks and its risk
management processes.
 Accurate and transparent financial reporting and disclosures. Management is
responsible for the integrity of the company’s financial reporting system and the
accurate and timely preparation of the company’s financial statements and
related disclosures. It is management’s responsibility—under the direction of
the CEO and the company’s principal financial officer—to establish, maintain
and periodically evaluate the company’s internal controls over financial
reporting and the company’s disclosure controls and procedures, including the
ability of such controls and procedures to detect and deter fraudulent activity.
 Annual operating plans and budgets. Senior management develops annual
operating plans and budgets for the company and presents them to the board.
The management team implements and monitors the operating plans and
budgets, making adjustments in light of changing conditions, assumptions and
expectations, and keeps the board apprised of significant developments and
changes.
 Selecting qualified management, establishing an effective organizational
structure and ensuring effective succession planning. Senior management
selects qualified management, implements an organizational structure, and
develops and executes thoughtful career development and succession planning
strategies that are appropriate for the company.
 Business resiliency. Management develops, implements and periodically reviews
plans for business resiliency that provide the most critical protection in light of
the company’s operations.
 Risk identification. Management identifies the company’s major business
and operational risks, including those relating to natural disasters,
leadership gaps, physical security, cybersecurity, regulatory changes
and other matters.
 Crisis preparedness. Management develops and implements crisis
preparedness and response plans and works with the board to identify
situations (such as a crisis involving senior management) in which the
board may need to assume a more active response role.

III. Board Structure

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Public companies employ diverse approaches to board structure and operations within
the parameters of applicable legal requirements and stock market rules. Although no
one structure is right for every company, Business Roundtable believes that the
practices set forth in the following sections provide an effective approach for
companies to follow.

Board Composition

 Size. In determining appropriate board size, directors should consider the

nature, size and complexity of the company as well as its stage of development.
Larger boards often bring the benefit of a broader mix of skills, backgrounds
and experience, while smaller boards may be more cohesive and may be able to
address issues and challenges more quickly.
 Composition. The composition of a board should reflect a diversity of thought,
backgrounds, skills, experiences and expertise and a range of tenures that are
appropriate given the company’s current and anticipated circumstances and
that. collectively, enable the board to perform its oversight function effectively.
 Diversity. Diverse backgrounds and experiences on corporate boards,
including those of directors who represent the broad range of society,
strengthen board performance and promote the creation of long-term
shareholder value. Boards should develop a framework for identifying
appropriately diverse candidates that allows the nominating/corporate
governance committee to consider women, minorities and others with
diverse backgrounds as candidates for each open board seat.
 Tenure. Directors with a range of tenures can contribute to the
effectiveness of a board. Recent additions to the board may provide new
perspectives, while directors who have served for a number of years bring
experience, continuity, institutional knowledge, and insight into the
company’s business and industry.
 Characteristics. Every director should have integrity, strong character, sound
judgment, an objective mind and the ability to represent the interests of all
shareholders rather than the interests of particular constituencies.
 Experience. Directors with relevant business and leadership experience can
provide the board a useful perspective on business strategy and significant
risks and an understanding of the challenges facing the business.
 Independence. Director independence is critical to effective corporate
governance, and providing objective independent judgment that represents the
interests of all shareholders is at the core of the board’s oversight function.
Accordingly, a substantial majority of the board’s directors should be
independent, according to applicable rules and regulations and as determined
by the board.
 Definition of “independence.” An independent director should not have
any relationships that may impair, or appear to impair, the director’s
ability to exercise independent judgment. Many boards have developed
their own standards for assessing independence under stock market
definitions, in addition to considering the views of institutional investors
and other relevant groups.
 Assessing independence. When evaluating a director’s independence, the
board should consider all relevant facts and circumstances, focusing on
whether the director has any relationships, either direct or indirect, with
the company, senior management or other directors that could affect
actual or perceived independence. This includes relationships with other
companies that have significant business relationships with the company
or with not-for-profit organizations that receive substantial support from
the company. While it has been suggested that long-standing board

P a g e 14 | 34
 service may be perceived to affect director independence, long tenure, by
itself, should not disqualify a director from being considered
independent.
 Election. Directors should be elected by a majority vote for terms that are
consistent with long term value creation. Boards should adopt a resignation
policy under which a director who does not receive a majority vote tenders his
or her resignation to the board for its consideration. Although the ultimate
decision whether to accept or reject the resignation will rest with the board, the
board and its nominating/corporate governance committee should think
critically about the reasons why the director did not receive a majority vote and
whether or not the director should continue to serve. Among other things, they
should consider whether the vote resulted from concerns about a policy issue
affecting the board as a whole or concerns specific to the individual director and
the basis for those concerns.
 Time commitments. Serving as a director of a public company requires
significant time and attention. Certain roles, such as committee chair, board
chair and lead director, carry an additional time commitment beyond that of
board and committee service. Directors must spend the time needed and meet
as frequently as necessary to discharge their responsibilities properly. While
there may not be a need for a set limit on the number of outside boards on
which a director or committee member may serve—or for any limits on other
activities a director may pursue outside of his or her board duties—each
director should be committed to the responsibilities of board service, and each
board should monitor the time constraints of its members in light of their
particular circumstances.

Board Leadership

 Approaches. U.S. companies take a variety of approaches to board leadership;

some combine the positions of CEO and chair while others appoint a separate
chair. No one leadership structure is right for every company at all times, and
different boards may reach different conclusions about the leadership
structures that are most appropriate at any particular point in time. When
appropriate in light of its current and anticipated circumstances, a board
should assess which leadership structure is appropriate.
 Lead/presiding director. Independent board leadership is critical to effective
corporate governance regardless of the board’s leadership structure.
Accordingly, the board should appoint a lead director, also referred to as a
presiding director, if it combines the positions of CEO and chair or has a chair
who is not independent. The lead director should be appointed by the
independent directors and should serve for a term determined by the
independent directors.

Lead directors perform a range of functions depending on the board’s needs,

but they typically chair executive sessions of a board’s independent or
nonmanagement directors, have the authority to call executive sessions, and
oversee follow-up on matters discussed in executive sessions. Other key
functions of the lead director include chairing board meetings in the absence of
the board chair, reviewing and/or approving agendas and schedules for board
meetings and information sent to the board, and being available for engagement
with long-term shareholders.

Board Committee Structure

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An effective committee structure permits the board to address key areas in more depth
than may be possible at the full board level. Decisions about committee membership
and chairs should be made by the full board based on recommendations from the
nominating/corporate governance committee.
The functions performed by the audit, nominating/corporate governance and
compensation committees are central to effective corporate governance; however, no
one committee structure or division of responsibility is right for all companies. Thus,
the references in Section IV to functions performed by particular committees are not
intended to preclude companies from allocating these functions differently.
The responsibilities of each committee and the qualifications required for committee
membership should be clearly defined in a written charter that is approved by the
board. Each committee should review its charter annually and recommend changes to
the board. Committees should apprise the full board of their activities on a regular
basis.
Board committees should meet all applicable independence and other requirements as
to membership (including minimum number of members) prescribed by applicable law
and stock exchange rules.

IV. Board Committees

Audit Committee

 Financial acumen. Audit committee members must meet minimum financial

literacy standards, and one or more committee members should be an audit
committee financial expert, as determined by the board in accordance with
applicable rules.
 Over-boarding. With the significant responsibilities imposed on audit
committees, consideration should be given to whether limiting service on other
public company audit committees is appropriate. Policies may permit
exceptions if the board determines that the simultaneous service would not
affect an individual’s ability to serve effectively.
 Outside auditor. The audit committee is responsible for the company’s
relationship with its outside auditor, including:
 Selecting and retaining the outside auditor. The audit committee selects
the outside auditor; reviews its qualifications (including industry
expertise and geographic capabilities), work product. independence and
reputation; and reviews the performance and expertise of key members of
the audit team. The committee reviews new leading partners for the audit
team and should be directly involved in the selection of the new
engagement partner. The committee oversees the process of negotiating
the terms of the annual audit engagement.
 Overseeing the independence of the outside auditor. The committee
should maintain an ongoing, open dialogue with the outside auditor
about independence issues. The committee should identify those
services, beyond the annual audit engagement. that it believes the
outside auditor can provide to the company consistent with maintaining
independence and determine whether to adopt a policy for preapproving
services to be provided by the outside auditor or approving services on an
engagement-by-engagement basis.
 Financial statements. The committee should discuss significant issues relating
to the company’s financial statements with management and the outside
auditor and review earnings press releases before they are issued. The
committee should understand the company’s critical accounting policies and
why they were chosen, what key judgments and estimates management made
in preparing the financial statements, and how they affect the reported financial
results. The committee should be satisfied that the financial statements and

P a g e 16 | 34
 other disclosures prepared by management present the company’s financial
condition and results of operations accurately and are understandable.
 Internal controls. The committee oversees the company’s system of internal
controls over financial reporting and its disclosure controls and procedures,
including the processes for producing the certifications required of the CEO and
principal financial officer. The committee periodically reviews with both the
internal and outside auditors, as well as with management, the procedures for
maintaining and evaluating the effectiveness of these systems. The committee
should be promptly notified of any significant deficiencies or material
weaknesses in internal controls and kept informed about the steps and
timetable for correcting them.
 Risk assessment and management. Many audit committees have at least some
responsibility for risk assessment and management due to stock market rules.
However, the audit committee should not be the sole body responsible for risk
oversight, and the board may decide to allocate some aspects of risk oversight
to other committees or to the board as a whole depending on the company’s
industry and other factors. A company’s risk oversight structure should provide
the full board with the information it needs to understand all of the company’s
major risks, their relationship to the company’s strategy and how these risks
are being addressed. Committees with risk-related responsibilities should report
regularly to the full board on the risks they oversee and brief the audit
committee in cases where the audit committee retains some risk oversight
responsibility.
 Compliance. Unless the full board or one or more other committees do so, the
audit committee should oversee the company’s compliance program, including
the company’s code of conduct. The committee should establish procedures for
handling compliance concerns related to potential violations of law or the
company’s code of conduct, including concerns relating to accounting, internal
accounting controls, auditing and securities law issues.
 Internal audit. The committee oversees the company’s internal audit function
and ensures that the internal audit staff has adequate resources and support to
carry out its role. The committee reviews the scope of the internal audit plan,
significant findings by the internal audit staff and management’s response, and
the appointment and replacement of the senior internal auditing executive and
assesses the performance and effectiveness of the internal audit function
annually.

Nominating/Corporate Governance Committee

 Director qualifications. The committee should establish, and recommend to the

board for approval, criteria for board membership and periodically review and
recommend changes to the criteria. The committee should review annually the
composition of the board, including an assessment of the mix of the directors’
skills and experience; an evaluation of whether the board as a whole has the
necessary tools to effectively perform its oversight function in a productive,
collegial fashion; and an identification of qualifications and attributes that may
be valuable in the future based on, among other things, the current directors’
skill sets, the company’s strategic plans and anticipated director exits.
 Succession planning. The committee, together with the board, should actively
conduct succession planning for the board of directors. The committee should
proactively identify director candidates by canvassing a variety of sources for
potential candidates and retaining search firms. Shareholders invested in the
long-term success of the company should have a meaningful opportunity to
nominate directors and to recommend director candidates for nomination by
the committee, which may include proxy access if shareholder support is broad
based and the board concludes this access is in the best interests of the
company and its shareholders. Although the CEO meeting with potential board

P a g e 17 | 34
 candidates is appropriate, the final responsibility for selecting director
nominees should rest with the nominating/corporate governance committee
and the board.
 Background and experience. In connection with renomination of a
current director, the nominating/corporate governance committee should
review the director’s background, perspective, skills and experience;
assess the director’s contributions to the board; consider the director’s
tenure; and evaluate the director’s continued value to the company in
light of current and future needs. Some boards may undertake these
steps as part of the annual nomination process, while others may use a
director evaluation process.
 Independence. The nominating/corporate governance committee should
ensure that a substantial majority of the directors are independent both
in fact and in appearance. The committee should take the lead in
assessing director independence and make recommendations to the
board regarding independence determinations. In addition, each director
should promptly notify the committee of any change in circumstances
that may affect the director’s independence (including but not limited to
employment change or other factors that could affect director
independence).
 Tenure limits. The committee should consider whether procedures such
as mandatory retirement ages or term limits are appropriate. Other
practices, such as a robust director evaluation process, may make these
tenure limits unnecessary, but they may still serve as useful tools for
ensuring board engagement and maintaining diversity and freshness of
thought. Many boards also require that directors who change their
primary employment tender their resignation so that the board may
consider the desirability of their continued service in light of their
changed circumstances.
 Board leadership. The committee should conduct an annual evaluation of the
board’s leadership structure and recommend any changes to the board. The
committee should oversee the succession planning process for the board chair,
which should involve consideration of whether to combine or separate the
positions of CEO and board chair and whether events such as the end of the
current chair’s tenure or the appointment of a new CEO may warrant a change
to the board leadership structure.
 Committee structure. Annually, the committee should recommend directors for
appointment to board committees and ensure that the committees consist of
directors who meet applicable independence and qualification standards. The
committee should periodically review the board’s committee structure and
consider whether refreshment of committee memberships and chairs would be
helpful.
 Board oversight. The committee should oversee the effective functioning of the
board, including the board’s policies relating to meeting agendas and schedules
and the company’s processes for providing information to the board (both in
connection with, and outside of, meetings), with input from the lead director or
independent chair.
 Corporate governance guidelines. The committee should review annually the
company’s corporate governance guidelines, if any, and make recommendations
about changes in those guidelines to the board.
 Shareholder engagement. The committee may oversee the company’s and
management’s shareholder engagement efforts, periodically review the
company’s engagement practices, and provide to senior management feedback
and suggestions for improvement. The committee and the full board should
understand the company’s efforts to communicate with shareholders and
receive regular briefings on such communications.

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  Director compensation. The committee also may oversee the compensation of
the board if the compensation committee does not do so, or the two committees
may share this responsibility.

Compensation Committee

 Authority. The compensation committee has many responsibilities relating to

the company’s overall compensation philosophy, structure, policies and
programs. To assist it in performing its duties, the compensation committee
must have the authority to obtain advice from independent compensation
consultants, counsel and other advisers. The advisers’ independence should be
assessed under applicable law and stock market rules, and the compensation
committee should feel confident and comfortable that its advisers have the
ability to provide the committee with sound advice that is free from any
competing interests.
 CEO and senior management compensation. A major responsibility of the
compensation committee is establishing performance goals and objectives
relating to the CEO, measuring performance against those goals and objectives,
and determining and approving the compensation of the CEO. The
compensation committee also generally approves or recommends for approval
the compensation of the rest of the senior management team.
 Alignment with shareholder interests. Executive compensation should be
designed to align the interests of senior management, the company and its
shareholders and to foster the long-term value creation and success of the
company. Compensation should include performance-based elements that
reward the achievement of goals tied to the company’s strategic plan but are at
risk if such goals are not met. These performance goals should be clearly
explained to the company’s shareholders.
 Compensation costs and benefits. The compensation committee should
understand the costs of the compensation packages of senior management and
should review and understand the maximum amounts that could become
payable under multiple scenarios (such as retirement; termination for cause;
termination without cause; resignation for good reason; death and disability;
and the impact of a transaction, such as a merger, divestiture or acquisition).
The committee should ensure that the proper protections are in place that will
allow senior management to remain focused on the long-term strategies and
business plans of the company even in the face of a potential acquisition,
shareholder activism, or unsolicited takeover activity or control bids.
 Stock ownership requirements. To further align the interests of directors and
senior management with the interests of long-term shareholders, the committee
should establish stock ownership and holding requirements that require
directors and senior management to acquire and hold a meaningful amount of
the company’s stock at least for the duration of their tenure and, depending on
the company’s circumstances, perhaps for a certain period of time thereafter.
The company should have a policy that monitors, restricts or even prohibits
executive officers’ ability to hedge the company’s stock and requires ongoing
disclosure of the material terms of hedging arrangements to the extent they are
permitted.
 Risk. The compensation committee should review the overall compensation
structure and balance the need to create incentives that encourage growth and
strong financial performance with the need to discourage excessive risk-taking,
both for senior management and for employees at all levels. Incentives should
further the company’s long-term strategic plans by looking beyond short-term
market value changes to the overall goal of creating and enhancing enduring
value. The committee should oversee the adoption of practices and policies to
mitigate risks created by compensation programs, such as a compensation
recoupment, or claw-back, policy.

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 Director compensation. The compensation committee may also be responsible,
either alone or together with the nominating/corporate governance committee,
for establishing director compensation programs, practices and policies.

V. Board Operations

 General. Serving on a board requires significant time and attention on the part
of directors. Certain roles, such as committee chair, board chair and lead
director, carry an additional time commitment beyond that of board and
committee service. Directors must spend the time needed and meet as
frequently as necessary to discharge their responsibilities properly.
 Meetings. The board of directors, with the assistance of the
nominating/corporate governance committee, should consider the frequency
and length of board meetings. Longer meetings may permit directors to explore
key issues in depth, whereas shorter, more frequent meetings may help
directors stay current on emerging corporate trends and business and
regulatory developments.
 Over-boarding. Service on the board of a public company provides valuable
experience and insight. Simultaneous service on too many boards may,
however, interfere with an individual’s ability to satisfy his or her
responsibilities as a member of senior management or as a director. In light of
this, many boards limit the number of public company boards on which their
directors may serve. Business Roundtable does not endorse a specific limit on
the number of directorships an individual may hold, recognizing that decisions
about limits on board service are best made by boards and their
nominating/governance committees in light of the particular circumstances of
individual companies and directors.
 Executive sessions. Directors should have sufficient opportunity to meet in
executive session, outside the presence of the CEO and any other management
directors, in accordance with stock exchange rules. Time for an executive
session should be placed on the agenda for every regular board meeting. The
independent chair or lead director should set the agenda for and chair these
sessions and follow up with the CEO and other members of senior management
on matters addressed in the sessions.
 Agenda. The board’s agenda must be carefully planned yet flexible enough to
accommodate emergencies and unexpected developments, and it must be
structured to maximize the use of meeting time for open discussion and
deliberation. The board chair should work with the lead director (when the
company has one) in setting the agenda and should be responsive to individual
directors’ requests to add items to the agenda.
 Access to management. The board should work to foster open, ongoing dialogue
between management and members of the board. Directors should have access
to senior management outside of board meetings.
 Information. The quality and timeliness of information that the board receives
directly affects its ability to perform its oversight function effectively.
 Technology. Companies should take advantage of technology such as board
portals to provide directors with meeting materials and real-time information
about developments that occur between meetings. The use of technology
(including e-mail) to communicate with and deliver information to the board
should be accompanied by safeguards to protect the security of information and
directors’ electronic devices and to comply with applicable document retention
policies.
 Confidentiality. Directors have a duty to maintain the confidentiality of all
nonpublic information (whether or not it is material) that they learn through
their board service, including boardroom discussions and other discussions
between and among directors and senior management.

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 Director compensation. The amount and composition of the compensation paid
to a company’s non-employee directors should be carefully considered by the
board with the oversight of the appropriate board committee. Director
compensation typically consists of a mix of cash and equity. The cash portion of
director compensation should be paid in the form of an annual retainer, rather
than through meeting fees, to reflect the fact that board service is an ongoing
commitment. Equity compensation helps align the interests of directors with
those of the corporation’s shareholders but should be provided only through
shareholder-approved plans that include meaningful and effective limitations.
Further, equity compensation arrangements should be carefully designed to
avoid unintended incentives such as an emphasis on short-term market value
changes. Due to the potential for conflicts of interest and the duty of directors
to represent the interests of all shareholders, directors or director nominees
should not be a party to any compensation related arrangements with any third
party relating to their candidacy or service as a director of the company, other
than those arrangements that relate to reimbursement for expenses in
connection with candidacy as a director.
 Director education. Directors should be encouraged to take advantage of
educational opportunities in the form of outside programs or “in board”
educational sessions led by members of senior management or outside experts.
New directors should participate in a robust orientation process designed to
familiarize them with various aspects of the company and board service.
 Reliance. In performing its oversight function, the board is entitled under state
corporate law to rely on the advice, reports and opinions of management,
counsel, auditors and expert advisers. Boards should be comfortable with the
qualifications of those on whom they rely. Boards are encouraged to engage
outside advisers where appropriate and should use care in their selection.
Directors should hold advisers accountable and ask questions and obtain
answers about the processes they use to reach their decisions and
recommendations, as well as about the substance of the advice and reports
they provide to the board.
 Board and committee evaluations. The board should have an effective
mechanism for evaluating its performance on a continuing basis. Meaningful
board evaluation requires an assessment of the effectiveness of the full board,
the operations of board committees and the contributions of individual directors
on an annual basis. The results of these evaluations should be reported to the
full board, and there should be follow-up on any issues and concerns that
emerge from the evaluations. The board, under the leadership of the
nominating/corporate governance committee, should periodically consider what
method or combination of methods will result in a meaningful assessment of
the board and its committees. Common methods include written
questionnaires; group discussions led by a designated director, employee or
outside facilitator (often with the aid of written questions); and individual
interviews.

VI. Senior Management Development and Succession Planning

 Succession planning. Planning for CEO and senior management development

and succession in both ordinary and emergency scenarios is one of the board’s
most important functions. Some boards address succession planning primarily
at the full board level, while others rely on a committee composed of
independent directors (often the compensation committee or the
nominating/corporate governance committee) to address this key area. The
board, under the leadership of the responsible committee (if any), should
identify the qualities and characteristics necessary for an effective CEO and
monitor the development of potential internal candidates. The board or
committee should engage in a dialogue with the CEO about the CEO’s

P a g e 21 | 34
 assessment of candidates for both the CEO and other senior management
positions, and the board or committee should also discuss CEO succession
planning outside the presence of the CEO. The full board should review the
company’s succession plan at least annually and periodically review the
effectiveness of the succession planning process.
 Management development. The board and the independent committee (if any)
with primary responsibility for oversight of succession planning also should
know what the company is doing to develop talent beyond the senior
management ranks. The board or committee should gain an understanding of
the steps the CEO and other senior management are taking at more junior
levels to develop the skills and experience important to the company’s success
and build a bench of future candidates for senior management roles. Directors
should interact with up-and-coming members of management, both in board
meetings and in less formal settings, so they have an opportunity to observe
managers directly and begin developing relationships with them.
 CEO evaluation. Under the oversight of an independent committee or the lead
director, the board should annually review the performance of the CEO and
participate with the CEO in the evaluation of members of senior management in
certain circumstances. All nonmanagement members of the board should have
the opportunity to participate with the CEO in senior management evaluations
if appropriate. The results of the CEO’s evaluation should be promptly
communicated to the CEO in executive session by representatives of the
independent directors and used in determining the CEO’s compensation.
VII. Relationships with Shareholders and Other Stakeholders

Corporations are often said to have obligations to stakeholders other than their
shareholders, including employees, customers, suppliers, the communities and
environments in which they do business, and government. In some circumstances, the
interests of these stakeholders are considered in the context of achieving long-term
value.

Shareholders and Investors

 Shareholder outreach. Regular shareholder outreach and ongoing dialogue are

critical to developing and maintaining effective investor relations,
understanding the views of shareholders, and helping shareholders understand
the plans and views of the board and management.
 Know who the company’s shareholders are. The nominating/ corporate
governance committee and the board should know who the company’s
major shareholders are and understand their positions on significant
issues relevant to the company.
 Role of management. Members of senior management are the principal
spokespersons for the company and play an important role in
shareholder engagement. This role includes serving as the main points of
contact for shareholders on issues where management is in the best
position to have a dialogue with shareholders.
 Board communication with shareholders. When appropriate and in
consultation with the CEO, directors should be equipped to play a part
from time to time in the dialogue with shareholders on topics involving
the company’s pursuit of long-term value creation and the company’s
governance. Communications with shareholders are subject to applicable
regulations (such as Regulation Fair Disclosure) and company policies on
confidentiality and disclosure of information. These regulations and
policies, however, should not impede shareholder engagement. Direct
communication between directors and shareholders should be
coordinated through—and with the knowledge of—the board chair, the

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 lead independent director, and/or the nominating/corporate governance
committee or its chair.
 Annual meeting. Directors should be expected to attend the annual meeting of
shareholders, absent unusual circumstances. Companies should consider ways
to broaden shareholder access to the annual meeting, including webcasts, if
requested by shareholders.
 Shareholder engagement. Companies should engage with long-term
shareholders in a manner consistent with the respective roles of the board,
management and shareholders. Companies should maintain effective protocols
for shareholder communications with directors and for directors to respond in a
timely manner to issues and concerns that are of widespread interest to long-
term shareholders.
 Board duties. Shareholders are not a uniform group, and their interests may be
diverse. Although boards should consider the views of shareholders, the duty of
the board is to act in what it believes to be the long-term best interests of the
company and all its shareholders. The views of certain shareholders are one
important factor that the board evaluates in making decisions, but the board
must exercise its own independent judgment. Once the board reaches a
decision, the company should consider how best to communicate the board’s
decision to shareholders.
 Shareholder voting. While some shareholders may use tools such as third-party
analyses and recommendations in making voting decisions, these tools should
not be a substitute for individualized decision-making that considers the facts
and circumstances of each company. Companies should conduct shareholder
outreach efforts where appropriate to explain the bases for the board’s
recommendations on the matters that are submitted to a vote of shareholders.
 Shareholder proposals. The federal proxy rules require public companies to
include qualified shareholder proposals in their proxy statements. Shareholders
should not use the shareholder proposal process as a platform to pursue social
or political agendas that are largely unrelated and/or immaterial to the
company’s business, even if permitted by the proxy rules. Further, a company’s
proxy statement is not always the best place to address even legitimate
shareholder concerns. Shareholders with concerns about particular issues
should seek to engage in a dialogue with the company before submitting a
shareholder proposal. If a shareholder submits a proposal, the company’s board
or its nominating/corporate governance committee should oversee the
company’s response. The board should consider issues raised by shareholder
proposals that receive substantial support from other shareholders and should
communicate its response to all shareholders.

Employees

 General. Treating employees fairly and equitably is in a company’s best interest.

Companies should have in place policies and practices that provide employees
with appropriate compensation, including benefits that are appropriate given
the nature of the company’s business and employees’ job responsibilities and
geographic locations. When companies offer retirement, health care, insurance
and other benefit plans, employees should be fully informed of the terms of
those plans.
 Misconduct. Companies should have in place and publicize mechanisms for
employees to seek guidance and to alert management and the board about
potential or actual misconduct without fear of retribution. As part of fostering a
culture of compliance, companies should encourage employees to report
compliance issues promptly and emphasize their policy of prohibiting retaliation
against employees who report compliance issues in good faith.
 Communications. Companies should communicate honestly with their
employees about corporate operations and financial performance.

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Communities, the Environment and Sustainability

 Citizenship. Companies should strive to be good citizens of the local, national

and international communities in which they do business; to be responsible
stewards of the environment; and to consider other relevant sustainability
issues in operating their businesses. Failure to meet these obligations can
result in damage to the company, both in immediate economic terms and in its
longer-term reputation. Because sustainability issues affect so many aspects of
a company’s business, from financial performance to risk management,
incorporating sustainability into the business in a meaningful way is integral to
a company’s long-term viability.
 Community service. A company should strive to be a good citizen by
contributing to the communities in which it operates. Being a good citizen
includes getting involved with those communities; encouraging company
directors, managers and employees to form relationships with those
communities; donating time to causes of importance to local communities; and
making charitable contributions.
 Sustainability. A company should conduct its business with meaningful regard
for environmental, health, safety and other sustainability issues relevant to its
operations. The board should be cognizant of developments relating to
economic, social and environmental sustainability issues and should
understand which issues are most important to the company’s business and to
its shareholders.

Government

 Legal compliance. Corporations, like all citizens, must act within the law. The
penalties for serious violations of law can be extremely severe, even life
threatening, for corporations. Compliance is not only appropriate—it is
essential. The board and management should be comfortable that the company
has a robust legal compliance program that is effective in deterring and
preventing misconduct and encouraging the reporting of potential compliance
issues.
 Political activities. Corporations have an important perspective to contribute to
the public policy dialogue and discussions about the development, enactment
and revision of the laws and regulations that affect their businesses and the
communities in which they operate and their employees reside. To the extent
that the company engages in political activities, the board should have oversight
responsibility and consider whether to adopt a policy on disclosure of these
activities.

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LESSON 4

ETHICS, VALUES AND MORAL IN GOVERNANCE

ETHICS or moral philosophy is a branch of philosophy that "involves

systematizing, defending, and recommending concepts of right and wrong behavior".
The field of ethics, along with aesthetics, concerns matter of value, and thus
comprises the branch of philosophy called axiology.

Ethics seeks to resolve questions of human morality by defining concepts such as

good and evil, right and wrong, virtue and vice, justice and crime. As a field of
intellectual inquiry, moral philosophy also is related to the fields of moral psychology,
descriptive ethics, and value theory.

Three major areas of study within ethics recognized today are:

1. Meta-ethics, concerning the theoretical meaning and reference of moral

propositions, and how their truth values (if any) can be determined
2. Normative ethics, concerning the practical means of determining a moral course
of action
3. Applied ethics, concerning what a person is obligated (or permitted) to do in a
specific situation or a particular domain of action.

Ethics deals with such questions at all levels. Its subject consists of the fundamental
issues of practical decision making, and its major concerns include the nature of
ultimate value and the standards by which human actions can be judged right or
wrong.

The terms ethics and morality are closely related. It is now common to refer to ethical
judgments or to ethical principles where it once would have been more accurate to
speak of moral judgments or moral principles. These applications are an extension of
the meaning of ethics. In earlier usage, the term referred not to morality itself but to
the field of study, or branch of inquiry, that has morality as its subject matter. In this
sense, ethics is equivalent to moral philosophy.

Although ethics has always been viewed as a branch of philosophy, its all-embracing
practical nature links it with many other areas of study, including anthropology,
biology, economics, history, politics, sociology, and theology. Yet, ethics remains
distinct from such disciplines because it is not a matter of factual knowledge in the
way that the sciences and other branches of inquiry are. Rather, it has to do with
determining the nature of normative theories and applying these sets of principles to
practical moral problems.

VALUES

Generally, value has been taken to mean moral ideas, general conceptions or
orientations towards the world or sometimes simply interests, attitudes, preferences,
needs, sentiments and dispositions.

It has a major influence on a person’s behavior and attitude and serves as broad
guidelines in all situations.

Actually, the value represents basic convictions that a specific mode of conduct or
end-state of existence is personally or socially preferable to an opposite or converse
mode of conduct or end-state of existence.

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Values defined in Organizational Behavior as the collective conceptions of what is
considered good, desirable, and proper or bad, undesirable, and improper in a culture.

Some common business values are fairness, innovations and community involvement.

According to M. Haralambos, “A value is a belief that something is good and

desirable”.

According to R.K. Mukherjee, “Values are socially approved desires and goals that are
internalized through the process of conditioning, learning or socialization and that
become subjective preferences, standards, and aspirations”.

According to Zaleznik and David, “Values are the ideas in the mind of men compared
to norms in that they specify how people should behave. Values also attach degrees of
goodness to activities and relationships”.

According to I. J. Lehner and N.J. Kube, “Values are an integral part of the personal
philosophy of life by which we generally mean the system of values by which we live.
The philosophy of life includes our aims, ideals, and manner of thinking and the
principles by which we guide our behavior”

According to T. W. Hippie, “Values are conscious or unconscious motivators and

justifiers of the actions and judgment”

A value is a shared idea about how something is ranked in terms of desirability, worth
or goodness. Sometimes, it has been interpreted to mean “such standards by means of
which the ends of action are selected”.

Sometimes, it has been interpreted to mean “such standards by means of which the
ends of action are selected”.

Thus, values are collective conceptions of what is considered good, desirable, and
proper or bad, undesirable, and improper in a culture.

Familiar examples of values are wealth, loyalty, independence, equality, justice,

fraternity and friendliness.

Familiar examples of values are wealth, loyalty, independence, equality, justice,

fraternity and friendliness. These are generalized ends consciously pursued by or held
up to individuals as being worthwhile in them.

It is not easy to clarify the fundamental values of a given society because of their sheer
breadth.

Characteristics of Values

Values are different for each person.

These can be defined as ideas or beliefs that a person holds desirable or undesirable.

The variability in that statement is, first, what a person could value, and second, the
degree to which they value it.

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Values may be specific, such as honoring one’s parents or owning a home or they may
be more general, such as health, love, and democracy. ‘Truth prevails”, “love thy
neighbor as yourself, “learning is good as ends itself are a few examples of general
values.

Individual achievement, personal happiness, and materialism are major values of

modem industrial society.

It is defined as a concept of the desirable, an internalized creation or standard of

evaluation a person possesses.

Such concepts and standards are relatively few and determine or guide an individual’s
evaluations of the many objects encountered in everyday life.

The characteristics of values are:

 These are extremely practical, and valuation requires not just techniques but
also an understanding of the strategic context.
 These can provide standards of competence and morality.
 These can go beyond specific situations or persons.
 Personal values can be influenced by culture, tradition, and a combination of
internal and external factors.
 These are relatively permanent.
 These are more central to the core of a person.
 Most of our core values are learned early in life from family, friends,
neighborhood school, the mass print, visual media and other sources within the
society.
 Values are loaded with effective thoughts about ideas, objects, behavior, etc.
 They contain a judgmental element in that they carry an individual’s ideas as to
what is right, good, or desirable.
 Values can differ from culture to culture and even person to person.
 Values play a significant role in the integration and fulfillment of man’s basic
impulses and desire stably and consistently appropriate for his living.
 They are generic experiences in social action made up of both individual and
social responses and attitudes.
 They build up societies, integrate social relations.
 They mold the ideal dimensions of personality and depth of culture.
 They influence people’s behavior and serve as criteria for evaluating the actions
of others.
 They have a great role to play in the conduct of social life. They help in creating
norms to guide day-to-day behavior.

The values of a culture may change, but most remain stable during one person’s
lifetime.

Socially shared, intensely felt values are a fundamental part of our lives. These values
become part of our personalities. They are shared and reinforced by those with whom
we interact.

Since values often strongly influence both attitude and behavior, they serve as a kind
of personal compass for employee conduct in the workplace.

These help to determine whether an employee is passionate about work and the
workplace, which in turn can lead to above-average returns, high employee
satisfaction, strong team dynamics, and synergy.

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Types of Values

The values that are important to people tend to affect the types of decisions they
make, how they perceive their environment, and their actual behaviors.

There are two types of values;

1. Terminal Values.
2. Instrumental Values.

Importance of Values

 Value is the foundation for understanding the level of motivation.

 It influences our perception.
 Value helps to understand what ought to be or what ought not to be.
 It contains interpretations of right or wrong.
 These influence attitudes and behavior.
 It implies that certain behaviors on outcomes are preferred over others.
 These allow the members of an organization to interact harmoniously. These
make it easier to reach goals that would be impossible to achieve individually.
 These are goals set for achievements, and they motivate, define and color all our
activities cognitive, affective add connective.
 They are the guideposts of our lives, and they direct us to who we want to be.
 Values and morals can not only guide but inspire and motivate a person, give
energy and a zest for living and for doing something meaningful.

MORAL IN GOVERNANCE

The notion of “Good Governance” has become the buzzword these days in wake of
globalization. Good governance is commonly described as a style of governance that is
efficient, effective, responsive, corruption free and citizen friendly for ensuring people’s
trust in government and promoting social harmony, political stability and economic
development. Good governance is strictly connected with institutionalized values such
as democracy, observance of human rights and rule of law and greater efficiency
within the public sector. The current concern for good governance and building public
trust in administration has generated the need for following ethical and moral
principles, which emphasize on “justice,” “equity,” “conscience,” and “moral
unambiguity” and give a prominent place to the idea that public servants are
ultimately responsible to the people. In seeking to maintain high standards of ethical
behavior by public administrators, agencies rely on a wide variety of enforcement
mechanisms like codes of ethics, legal regulations, professional rules, and
ombudsmen to oversee ethical standards. Though all have proved useful in some
respects, none can be considered fully satisfactory, at least not in the sense that it
alone can be expected to ensure organizational morality. Codes of ethics need to work
hand in hand with proactive managerial strategies, which in turn need to be bolstered
by external checks on behavior.

With globalization, privatization and transformation of the world into a global village
there is change in the role of the state. The state which was formerly an
interventionist, producer, regulator, and seller, is now called upon to be a facilitator,
promoter, and partner. There is now increasing expectations from governments to
“perform”. The Indian Public Administration system has entered an altogether different
phase. Even in the liberalized era most of the basic goods and services are provided by
the public agencies such as drinking water, electricity, education, health, and so on.
However, the quality of such services is questionable because the bureaucratic
behemoth has not been able to effectively and efficiently deliver those services. The
poor state of public health, the declining standards of education, and so on, have

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raised questions of accountability. The individuals who are spending on behalf of the
government do not own the money but act as guardians of society. Therefore, the
money spent and the services rendered by the civil servants come within the ambit of
accountability to the citizens. The citizens as the customers are paying for the services
being provided by the government agencies; therefore, all such agencies are
accountable to the citizens in their acts of omission and commission.

Corruption in India

India is the 76th least corrupt nation out of 175 countries, according to the
Corruption Perception Index reported by Transparency International. Corruption Rank
in India averaged 75.14 from 1995 until 2015, reaching an all-time high of 95 in 2011
and a record low of 35 in 1995.

According to a Central Vigilance Commission (CVC) Annual Report for 2015 tabled in
the Parliament, during 2015 as many as 928 government and public sector unit
employees were sacked and 5,461 employees handed out major penalties, while
11,711 received minor penalties in 2015 for corruption and misconduct. Punitive
action was taken in 17,172 cases (for all categories of officers). In seven cases,
deterrent action was taken against senior officers, including three IAS, one IPS and
three IRS officers, and sanction of prosecution was granted. As per the CVC Report,
the competent authorities in various organisations have issued sanction for
prosecution against 132 public servants, major penalties have been imposed on 1,832
public servants and minor penalties on 1,346 during 2015. In 2015, the highest
number of punishments, including administrative action against public servants, was
in the Railways (602 officers), State Bank of India (217 officers), Punjab National Bank
(169 officers) and Department of Telecom (134 officers). The Railways issued sanction
for prosecution in 16 cases, Central Board of Excise and Customs in 15 cases and
Punjab National Bank in 10 cases. During 2015, a total of 4,355 cases were received
and 1,751 brought forward from the previous year. The Commission disposed of 4,604
cases—leaving a pendency of 1,502 cases at the end of the year. It has been observed
in the report there was a delay in corruption cases. It takes about eight years to
finalise a major vigilance case from the date of occurrence of irregularity. The
Commission noted that detection of irregularity and its investigation takes on an
average more than two years each—total period of more than 4 years, which is a
significant portion of the entire delay period.

In 2015, ‘Corruption, Bribery and Corporate Frauds’ continued to be ranked as the

topmost risk. According to reported corruption cases in the media from October 2011
to September 2012, the potential losses suffered by the Indian economy stood at INR
364 billion. This excludes some large scams such as 2G, the Commonwealth Games
and mining. Many factors have been attributed to corruption in India, the most
prominent ones highlighted by a number of scholars are: regulations and
authorizations; providing public services and public goods below market prices; low
public sector wages; unstable political institutions and unchecked election costs; a
lack of government accountability and laws that protect whistleblowers; leadership
deficits, specifically lack of political will for reform; and opaque rules, laws, and
procedures. Looking at the state of corruption in India scholars argue that “curbing
corruption in India remains an impossible dream in the foreseeable future”. The
erosion of values at the personal, professional, and societal levels is a matter of
serious concern in India. The Service Conduct Rules, the Code of Conduct, and
various other legislations that are enacted and amended from time to time have helped
civil servants to maintain moral conduct of the highest order and combat corruption.

Efforts to Strengthen the ethical framework

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Accountability to Parliament: India has adopted Parliamentary democracy wherein the
government is responsible to the Parliament which represents the people. The people
through Parliament are sovereign as enshrined in our Constitution. Both the minister
and the civil servant are servants of the people. The administrators are responsible to
the political executives, who in turn are answerable to the Parliament. Besides
administrative accountability there is also accountability in regard to ‘finance’. The
legislature must authorize the executive before the latter can spend any money from
the Consolidated Fund of India or the state.

Judicial Accountability: Because of increase in the State activities, the executive

exercises wide powers. As was rightly observed by Lord Denning: “Properly exercised
the new powers of the executive lead to the Welfare State; but abused they lead to the
Totalitarian State”. The vast discretionary powers conferred on administrative
authorities are required to be properly checked and controlled. If a citizen is aggrieved
with any action or inaction of the administration, he may seek redress through a court
of law. So the presence of independent judicial processes is also important for making
administration accountable. Intensive administration will be more tolerable to the
citizens, and the government’s path will be smoother, where the law can enforce high
standards of legality, reasonableness and fairness. Though the courts have for
centuries exercised a limited supervisory jurisdiction by means of the writs, however
the power of judicial review is a wider remedy to check abuse of discretionary powers
and administrative inaction.

Code of Conduct for Ministers: The Government of India has prescribed a Code of
Conduct which is applicable to Ministers of both the Union and State Governments.
The authority for ensuring the observance of the present Code of Conduct is the Prime
Minister in the case of Union Ministers, the Prime Minister and the Union Home
Minister in the case of Chief Ministers, and the Chief Minister concerned in the case of
Ministers of the State Government. However, it is not comprehensive in its coverage
and is more in the nature of a list of prohibitions. So in strict sense it does not amount
to a Code of Ethics. It is, therefore, necessary that in addition to the Code of Conduct,
there should be a Code of Ethics to provide guidance on how Ministers should uphold
the highest standards of constitutional and ethical conduct in the performance of their
duties. The Code should be based on the overarching duty of Ministers to comply with
the law, to uphold the administration of justice and to protect the integrity of public
life. It should also lay down the principles of minister-civil servant relationship. The
Code of Ethics should also reflect the seven principles of public life enumerated by
Nolan Committee.

The Committee on Ethics of the Rajya Sabha and Lok Sabha: Chapter XXIV of the
Rules of Procedure and Conduct of Business in the Council of States provides for
constitution of the Committee on Ethics to oversee the moral and ethical conduct of
Members. The Committee on Ethics was first constituted by the Chairman of the
House on 4th March, 1997. There is a Committee on Ethics of the LokSabha to
oversee the moral and ethical conduct of Members of that House. A few State
Legislatures such as Andhra Pradesh, Odisha, etc. have adopted Codes of Conduct for
their Legislators.

Disclosure of Interest: In India, disclosure of interest is provided in both Houses of

Parliament, in different ways. It has been ruled by the Chairman of the Rajya Sabha
that a Member having a personal pecuniary or direct interest on a matter before the
House is required, while taking part in the proceedings in that matter, to declare the
nature of interest. The Rule 371 of the Rules of Procedure and Conduct of Business in
the Lok Sabha prescribe that if the vote of a Member in a division in the House is
challenged on grounds of personal, pecuniary or direct interest in the matter to be
decided, the Speaker may examine the issue and decide whether the vote of the
Member should be disallowed or not and his decision shall be final. Furthermore, the

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Handbook for Members provides that a Member having personal, pecuniary or direct
interest in a matter to be decided by the House is expected, while taking part in the
proceedings on that matter, to declare his interest.

Code of Conduct / Ethics for Civil Servants: Code of conduct is supposed to

increase confidence in government by reassuring citizens that private power and
interest do not subvert government decisions. This code is now on the verge of
becoming a panacea for problems that they cannot solve. Despite its existence for a
long period very little is known about how this code of conduct is implemented or how
it functions.

LESSON 5

INDIVIDUALS INFLUENCE ON ETHICAL BEHAVIOR

Multiculturalism in the work force is increasing, and more and more

people want to work for different international companies. But not all of them
are aware that there might be different ethical standards or significantly
different interests. Not all of them are aware that they have to comply with a
company value system which might be different from the one they are used to.
It is a well-known fact that when two or more countries interact, people often
find that their ethics and understanding of social responsibility differ. More
than this, some of these values may be incompatible with their personal moral
belief and ethics (Francesco and Gold 2005: 52).

Ethics is generally seen as a product of a society culture which the members

of a culture follow unconditionally and take it for granted, as they usually
understand and follow the social requirements. Their choices reflect their
decisions. Some anthropologists (Geertz 1973:51) define culture as “systems of
shared meaning and understanding”. In business the situation is totally
different since one of the biggest mistakes is to assume that ethical rules can
be generally applied.

Business ethics vs. individual behavior

In the world of business, the phrase 'business ethics' is generally used to

describe the actions of individuals within an organization, as well as the
organization as a whole. Most of the experts agree that business ethics consists
of written and unwritten codes of principles and values that govern decisions
and actions within a company.

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Business ethics, also known as corporate ethics, is considered to be the
application of ethical values to business behavior and is applied to any aspects
of business conduct. It is about how a company does its business, about how it
behaves intrinsically. If we have a look at the sites of different companies, we
can easily notice that more and more companies are formulating their own
ethical and social responsibility policies. Companies have come to realize that
they have to publicize ethical actions and their politics. The general rule is that
they work only with partners that follow workplace standards and business
practices and are consistent with the company values.

Dangers of unethical behavior

With the development of the international collaboration, multicultural

corporations have to face new challenges due to dissimilar cultural
assumptions, social norms and societal values. Differences in culture can
create conflicts that pose moral issues and can raise serious ethical dilemmas.
Besides this, there are cases when there is a discrepancy between the
company’s code of ethics and the company’s actual practices which can lead to
a lack of commitment. Both employers and employees have to be aware that
inappropriate conduct may have serious consequences both socially and
legally. Both have to be trained adequately in applied ethics, but it is up to the
employers to consider ways of scientifically study organizational ethics.

Factors Influencing Ethical Behavior

Religious Beliefs:

 Our religious beliefs are the main foundation of our morals, value
systems and ethical behavior.
 We believe in life after death and the day of judgment.
 Good deeds will be rewarded and bad will be punished.
 How devoutly a person adheres to these moral codes is a factor defining
overall ethical behavior.

Ethical Decision Making and Behavior

Understanding how we make and follow through on ethical decisions is the

first step to making better choices; taking a systematic approach is the second.
We’ll explore both of these steps in this chapter. After examining the ethical
decision-making process, we’ll see how guidelines or formats can guide our
ethical deliberations.

Components of Moral Action

There are a number of models of ethical decision making and action. For
example, business ethics educators Charles Powers and David Vogel identify
six
factors or elements that underlie moral reasoning and behavior and that are
particularly relevant in organizational settings.

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1. The first is moral imagination, the recognition that even routine choices
and relationships have an ethical dimension.
2. The second is moral identification and ordering, which, as the name
suggests, refers to the ability to identify important issues, determine
priorities, and sort out competing values.
3. The third factor is moral evaluation, or using analytical skills to evaluate
options.
4. The fourth element is tolerating moral disagreement and ambiguity, which
arises when managers disagree about values and courses of action.
5. The fifth is the ability to integrate managerial competence with moral
competence. This integration involves anticipating possible ethical
dilemmas, leading others in ethical decision making, and making sure any
decision becomes part of an organization’s systems and procedures.
6. The sixth and final element is a sense of moral obligation, which serves as a
motivating force to engage in moral judgment and to implement decisions.

Individual and situation factors on individual decision making

Typically, individual and situational factors work jointly to influence ethical

decision in a business. In order to understand how these two factors influences
ethical individual decision making in business and how it affects
whistleblowing in case of problem arise in the workplace, it is important to
comprehend how rational entrepreneurial decision making are made
throughout corporation (Deresky, 2017). Generally, individual factors are
described as ethical decisions that workers decide to stick to after deliberating
on own concepts that he/she considers to be right or wrong. These individual
factors are sometimes very complex and can negative affects the workers in
their place work especially in the working environment where employees are
drawn from diverse cultural background, since an ethical decision can right to
some group of workers and wrong to another group of workers based on their
personal and cultural background.

Individual characteristics

There are two characteristics that determine whistle-blowing behavior in

any organization: these are mission valence and work motives. Research
studies have shown that employees that tend to raise alarm when a problem
occurs in an organization are committed to the organizational values and loyal
to the organization (Jones, 1991). The concept of mission valence was
advanced by Rainey (2009) to mean that “affective orientation towards
particular outcome” (Rainey, 2009). Other studies have referred mission
valence to mean workers perceptions of the salience or attractiveness of a
company’s social or purpose contribution which is derived from individual
experiences and satisfaction from advancing that purpose.

Organizational characteristics

These characteristics encourages employees to report any problem that

arises in the work place and is likely to negatively affect the operations and the
perception of the organization. Structure, culture and environment are among
the first characteristics that determines whether the employees are willing to
speak out when they noticed a problem in an organization.

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 End of Discussion

FINAL EXAMINATION

Congratulations!!!

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