Business Ethics Governance and Risk PDF

Business: Ethics,
Governance & Risk

S. No Reference No Particulars Slide
From-To
1 Chapter 1 Concept of Business Ethics 5-28
2 Chapter 2 Values, Norms, Beliefs and Standards in 29-52

Business Ethics
3 Chapter 3 Indian Ethos 53-77
4 Chapter 4 Ethical Issues in Functional Areas of 78-101

Management
5 Chapter 5 Introduction to Corporate Governance 102-126
6 Chapter 6 Corporate Governance: Ownership 127-150

Structure
From-To
7 Chapter 7 Corporate Governance Mechanism 151-174
8 Chapter 8 Corporate Governance in India: Statutory 175-198

Perspective
9 Chapter 9 Enterprise Risk Management 199-223
10 Chapter 10 Identification and Management of Risk 224-248

Course Introduction
• When a code of conduct is followed in business, it is called business ethics. A

business has several stakeholders such as consumers, financial institutions,
government, employees and suppliers. Ethical business practices help in
delivering values to its stakeholders, which, in turn, develops loyalty quotient for
the business.
• Corporate governance deals with looking after complete governance of various

organisations with respect to financial disclosures, transparency, legal practices,
organisational structure and social welfare.
• Risk can be defined as a situation that involves exposure to some unexpected

events usually associated with danger. To work in the current competitive and
dynamic environment, organisations need effective enterprise risk management
policies that can quickly implement existing processes and tools to manage risks.
Chapter 1: Concept of
Business Ethics
Chapter Index

From-To
1 Learning Objectives 7
2 Topic 1 Introduction to Ethics 8-16
3 Topic 2 Introduction to Business Ethics 17-20
4 Topic 3 Creating Ethical Environment 21-25

in Organisations
5 Let’s Sum Up 26
• Explain the concept of ethics in detail
• Explain the concept of business ethics
• Discuss how to create ethical environment in business organisations

1. Introduction to Ethics
• Ethics is a moral philosophy that guides individuals to decide what is wrong or

right, good or bad and what comprises desirable behaviour in a particular set of
social circumstances. In other words, it is a formal study of moral standards and
conduct.
• The word ethics has been derived from the word ethos, which implies culture.
• According to Peter F. Drucker, there is only one ethics, one set of rules of
morality, one code: that of individual behaviour in which the same rules apply to
everyone alike.
Deontological ethics
Normative ethics Teleological ethics
Branches of ethics Metaethics Virtue ethics
Applied ethics
Characteristics of Ethics
Truthfulness
Accuracy
Objectivity
Accountability
Nature of Ethics
• The notion of ethics is applicable only to human beings as they possess the
freedom of choice, i.e., alternatives and resources of free will. They can only make
a decision about the degree of ends they wish to follow and the means to realise
the ends.
• Ethics is a vast study of social science wherein methodical knowledge about

moral and ethical behaviour is gained.
• Ethics is associated with human conduct, which is voluntary and not at all
obligatory by circumstances or any other human beings.
• Ethics is a normative science that involves the incoming of moral standards that
control right and wrong conduct.
Sources of Ethics
Religious beliefs
Culture
Legal system
Discussions with others
Ethical philosophers
Ethics vs. Morality

Parameters Ethics Morality
Origin Originated from a Greek word ethos, Originated from Latin word mos,
which means character. which means customs.
Definition Ethics can be defined as the code of Morality can be defined as the system
conduct that are acceptable to specific of principles that determines the right
human groups and cultures and are or wrong conduct in an individual.
applicable to certain human actions.
Source of origin Ethics develop from external sources Morality develops from internal
such as social system. sources; for example, from individual’s
own beliefs and principles.
Requirement Ethics are imposed by society. Morality is driven by inner self belief.
Flexibility Ethics have a moderate degree of Morality is firm in nature but can
flexibility as it is totally dependent on change only if there is a change in a
a social system for its applicability. person’s belief.
Ethics vs. Law

Parameters Ethics Law
Definition Ethics are the rules of conduct Law is a set of rules framed by a
acceptable to a particular group or government to maintain legal
culture. balance in society and provide
security to its citizens.
Source of Origin Ethics originate from the self- Law originates due to the law
awareness of individuals to decide enforcement by the government on
what is right and what is wrong. citizens.
Codification Ethics are the codification of morals Law is the codification of ethics that
that an individual should be adhering is developed to maintain law and
to. order.
Punishment The violation of ethics is not The violation of law is a punishable
punishable. offence.
Guiding principle Personal beliefs, values and morals of Ethics prevalent in a country are the
individuals are the guiding principles guiding principles for framing laws.
for developing ethics.
Ethical Dilemmas
• Ethical dilemmas can be defined as complex situations that involve conflict of
moral interests while choosing from available alternatives. An individual in an
ethical dilemma may have a number of questions in his/her mind. Some of them
are:
– What should I do?
– What is right and what is ethical?
– What will be the consequences of my actions and decisions?
– What kind of damage or benefit will result from the chosen way?
– Would I be individually accountable if something went wrong?
– Who will protect me in case of any legal complications?

Ethical Dilemmas
• A business professional can deal with a situation of ethical dilemma by applying:
– ‰
Principled thinking resulting into ethical reasoning
– ‰
Moral creativity to argue with stakeholders
– ‰
Negotiating skills to articulate with stakeholders claiming unethical
interests
– ‰
Self-moral values identification to set the standards of ethical and unethical
1. Introduction to Business Ethics
• In business context, ethics are all about conducting business based on a set of
principles and standards for the welfare of all associated.
• According to Andrew Crane, business ethics is the study of business situations,

activities, and decisions where issues of right and wrong are addressed.
• The implementation of ethics in business is essential so that trust can be built
between an organisation and its stakeholders.
• Moreover, ethical business practices help in preventing ethical issues, such as

insider trading, corporate governance, bribery, discrimination, corporate social
responsibility and fiduciary responsibilities.
Characteristics of Business Ethics
A discipline of moral values
Relative term
Study of objectives and means
Interest of society
Greater than law

Relevance of Business Ethics

• Creating a good image: A business firm following a code of conduct (ethics) is able
to create a good image of the business in the minds of its customers.
• Stopping business malpractices: As discussed earlier, business ethics examines

various ethical problems such as insider trading, corporate governance, bribery,
discrimination, corporate social responsibility and fiduciary responsibilities.
• Improving customers’ confidence: Once customers are aware of the ethical values
of a concerned organisation, they start building trust towards that organisation.
• Safeguarding consumers’ rights: Business ethics ensure that the concerned

business organisation is respecting all these rights of its consumers.
Relevance of Business Ethics

• Protecting other stakeholders: It is not only the consumer segment that should be
treated well by organisations, there are many other stakeholders as well that
require fair treatment by organisations.
• Competing with healthy approach: Competition is inevitable, but a healthy

approach towards competitors helps in building a cordial atmosphere.
• Developing good relations: An organisation maintaining a code of conduct is able

to earn respect in return, thereby developing good and friendly relations between
the organisation and society.
1. Creating Ethical Environment in
Organisations
• Ethics are the norms and beliefs that guide and control the actions of an
individual.
• Businesses nowadays have adopted a proactive approach towards solving ethical

problems.
• An organisation must explore its internal business environment for ensuring that
set ethical norms are being followed.
• For creating an ethical environment in an organisation, it should be ensured that

the ethics of the organisation are embedded in its culture.
Organisations
Embedding Ethics in Organisational Culture

Getting commitment from top management
Setting a code of ethics
Communicating ethics
Providing training on ethics
Designating an ethics officer
Checking response and ensuring enforcement
Performing audits, revisions and refinement

Organisations
Guidelines for Ethical Behaviour in Business Organisations
Making managers as role models
Taking disciplinary actions for unethical

behaviour
Rewarding ethical behaviour

Organisations
Ethical Leadership
• Ethical leadership is a leadership that lays emphasis on ethical beliefs and values
of individuals. These values can be integrity, honesty, fairness and so on.
• According to Brown, Trevino & Harrison, ethical leadership is defined as the

demonstration of normatively appropriate conduct through personal actions and
interpersonal relationships, and the promotion of such conduct to followers
through two way communication, reinforcement, and decision-making.
• Ethical leaders are known for their honesty, principles and impartial approach to
decision making.
• In addition, they clearly communicate the codes of ethics to their followers and
use rewards and punishments to maintain ethical standards.
Organisations
The 4-V Model of Ethical Leadership

• V
‰alues: These are the core standards of an organisation. Ethical leadership can
be developed easily by understanding core values.
• Vision: It implies planning actions to achieve organisational objectives.

‰
• Voice: Communicating the vision is necessary for its effective implementation. A

‰
strong, convincing and motivational approach is required from an ethical leader
for articulating the vision to others.
• Virtue: An ethical leader can achieve a common goal by identifying what is right
‰
and what is wrong. He/she should practice virtuous behaviour that depicts moral
excellence.
Let’s Sum Up
• Ethics is a moral philosophy that guides individuals to decide what is wrong or

right, good or bad and what comprises desirable behaviour in a particular set of
social circumstances.
• The three branches of ethics are normative ethics, meta-ethics and applied ethics.
‰
• Main characteristics of ethics are truthfulness, accuracy, objectivity and

‰
accountability.
• Ethical dilemmas are defined as complex situations that involve conflict of moral
interests while choosing from available alternatives.
• In the business context, ethics are all about conducting business based on a set of
principles and standards for the welfare of the society.
Chapter 2: Values, Norms,
Beliefs and Standards in
Business Ethics
Chapter Index
From-To
2 Topic 1 Values, Norms, Beliefs and 32-37

Standards in Ethical Context
3 Topic 2 Types of Values 38-42
4 Topic 3 Business Ethics and Values 43-47
5 Topic 4 Value-Based Management 48

(VBM)
6 Topic 5 Factors Responsible for the 49

Enhancement and Dilution of
Human Values
7 Let’s Sum Up 50
• Explain the concept of values, norms, beliefs and standards in an ethical context
• Discuss the types of values
• Relate business ethics and values
• Explain the concept of value-based management
• List the factors responsible for the enhancement and dilution of human values
1. Values, Norms, Beliefs and Standards in Ethical
Context
• Every organisation operates in a particular business network comprising various

parties, such as customers, employees, suppliers, distributors, investors and
government agencies.
• With increased competition and awareness, these business parties always want to
deal with organisations that are based on some empirical values, a set of pre-
established norms, a sound belief system and established standards.
• Thus, to be successful, organisations need to imbibe positive values, norms,

beliefs and standards.
Context
Values
• Values basically mean moral ideas, universal conceptions or points of reference
towards others. These are key factors that drive the behaviour of an individual or
an organisation.
• In other words, values can be defined as the interests, attitudes, inclinations,

requirements, emotions and character of individuals.
• According to M. Haralambos (2000), a value is a belief that something is good and

desirable.
• It can be said that values are deep-seated beliefs of a person or social group or a
set of rules that people adopt to take right decisions.
Context
Norms
• Norms are informal guidelines regarding what is righteous and what is erroneous
in a particular social group.
• These norms form a control system as they are used as a means to influence the
members of a social group.
• Norms can be formal or informal. Formal norms are explicitly written down and
people who violate these norms face a strict action. All legal, social and religious
norms are formal in nature.
• Informal norms are not written or mentioned anywhere.

Context
Beliefs
• Beliefs refer to basic assumptions and feelings of individuals towards other
individuals, events or various other aspects.
• These beliefs help individuals to carry out their actions in a specific way.
• The belief system of an individual starts developing early in their life; however,
there is only a little understanding regarding beliefs.
Context
Standards
• Standards refer to a level or degree of a specific parameter.
• Standards may be measurable or immeasurable or may or may not be

documented.
• In an organisation, standards should be based on ethics.
• Ethical standards promote values such as trust, fairness and honesty.
• Generally, organisations follow a set of globally accepted standards throughout

the world.
• Ethical standards are usually stated or defined in a way that may be debatable
and open for discussion. The degree of specification may also vary.
Context
Relationship among Values, Norms, Beliefs and Behaviour

• Values possessed by an individual can be determined by behaviour they
demonstrate. It means that there exists a direct relation between the values and
behaviour of an individual.
• The views and beliefs of individuals are very difficult to change or modify.
• Norms are generally much more specific than values but values can be
implemented only if norms are observed. Manifestation of the norms can be seen
in an individual’s behaviour.
1. Types of Values
Spiritual Values
Spiritual Managerial Values
Professional Managerial Values

2. Types of Values
Spiritual Values
• Spiritual values relate to the non-material aspects in individuals’ lives.
• To become a better human being and satisfy the urge for a better life, it is
important to enhance spiritual awareness.
• Spiritual values provide a basis for development, improvement, achievement and

advancement to individuals.
• The values that can be associated with spirituality and help an individual to
work better and positively.
3. Types of Values
Spiritual Values
• Some of the spiritual values are:
Harmony
Truthfulness
Self-giving
Faith
4. Types of Values
Spiritual Managerial Values

• Each and every individual is a source of immense talent and potential that needs
to be developed constantly
• Work is worship
• Excellence at work
• Cooperation and teamwork
• Business is sacred
• Self-introspection
• Decision making in silence

5. Types of Values
Professional Managerial Values
Encourage others
Creativity
Intuitiveness
Knowledge
Commitment
Kindness and versatility

1. Business Ethics and Values
• Business ethics deals with ethical principles and problems that may occur in a
business environment.
• Unethical behaviour can damage the reputation of an organisation in the market.

Thus, strict adherence to ethics is important for an organisation to maintain long-
term business prospects.
• Such ethical behaviour can be maintained in an organisation if its employees

abide by the code of conduct set by the organisation.
• For this, it is important that the organisation must imbibe positive values in its
work environment.
• Values are the premise for the conduct and behaviour of employees and members.
Thus, business ethics and values are closely linked to each other.
Honesty and Integrity

• Honesty and integrity are two related concepts. However, there is a subtle
difference between these two.
• Honesty can be described as a quality owing to which an individual does not lie,
cheat or steal in any manner. On other hand, integrity is an internal quality of
being honest.
• A person of high integrity would always be honest having strong morals.
• Integrity means that an individual does what is right irrespective of the

consequences.
• Integrity is not only a value in itself; it is a value that guarantees other values.
There can be honesty without integrity but no integrity without honesty.
Trust
• A business does not run in isolation and there has to be coordination between
various stakeholders, such as employees, customers, suppliers and government
agencies.
• Therefore, success in business depends on maintaining mutual trust among these

entities.
• Without trust, a business cannot sustain. Moreover, mutual trust between

stakeholders improves the image of an organisation.
Fairness
• In the context of business, being fair means that employees must be treated
without any biasness and decisions should be made based on facts and without
prejudices.
• Fairness can be imbibed in an organisation if all the processes performed in the

organisation are free from external influences and stakeholders are treated with
respect.
• The degree to which fairness exists in an organisation can be estimated from

parameters such as employee performance and rate of absenteeism and attrition.
Respect
• In a business, there needs to be coordination between various stakeholders, such
as employees, suppliers and customers.
• This can be possible if differences between the viewpoints of stakeholders are

respected and conflicts are resolved amicably.
• Ethical businesses treat their employees, customers and other stakeholders with
respect, value autonomy and protect the interests of individuals irrespective of
their gender, caste, creed, race or origin.
Value-based Management (VBM)
• VBM is an approach to ensure that organisations run their business on values. It

ensures that performance targets of organisations are aligned with:
– ‰
Corporate mission
– ‰
Corporate strategy
– ‰
Corporate governance practices
– ‰
Corporate culture
• There are three elements of a VBM system, which are:
– ‰
Creating value
– ‰
Managing value
– M
‰easuring value
Factors Responsible for the Enhancement and Dilution
of Human Values
• The primary cause of these diminishing values is that individuals nowadays seek
for materialistic pleasures at the same time forsaking their values.
• Dilution of human values leads to various social problems, such as communalism,

separatism, biasedness, dishonesty, lack of trust, cruelty, sadism, barbarity and
self-centredness.
• Another reason for the dilution of such human values is that individuals
nowadays have become self-centred and are concerned about their own benefit.
• The enhancement of human values is not a job of a single individual rather the
government, citizens and various institutions should also contribute towards
bringing such change.
Let’s Sum Up
• Values basically mean moral ideas, universal conceptions or points of reference

towards others.
• Values are deep-seated beliefs of a person or social group or a set of rules that
‰
people adopt to take right decisions.
• Norms are informal guidelines regarding what is righteous and what is erroneous
‰
in a particular social group. Norms can be formal or informal.
• Beliefs refer to basic assumptions and feelings of individuals towards other

‰
individuals, events or various other aspects.
• Spiritual values relate to the non-material aspects in individuals’ lives.
• Some ethical business values include honesty and integrity, trust, fairness and
respect.
Chapter 3: Indian Ethos
Chapter Index

From-To
2 Topic 1 Relevance of Indian Ethos— 57-60

Spirituality at Work
3 Topic 2 Indian Work Ethos and 61-66

Principles of Indian
Management
Chapter Index

From-To
4 Topic 3 Teachings from Scriptures and 67-72

Traditions
5 Topic 4 Eroding Values and Emerging 73-74

Ethical Issues in
Contemporary Indian
Management
6 Let’s Sum Up 75
• Describe the relevance of Indian ethos in the modern workplace
• Explain the Indian work ethos and principles of Indian management
• Define important teachings in Indian scriptures and traditions
• Discuss the eroding values and emerging ethical issues in the contemporary
Indian management
1. Relevance of Indian Ethos—
• Indian ethos can be defined as a set of ideas and principles that are rooted in the
ancient philosophical tradition of the Indian subcontinent. The applicability of
the general themes of Indian ethos in the modern business environment are:
– ‰
Every human being is divine in nature and, therefore, possesses infinite
potential to achieve excellence.
– ‰
A holistic approach to life includes the unity of the divine, the individual self
and the universe.
– ‰
The intangible is as important as the tangible because there is unity and
divinity in everything.
– ‰
Inner resources, i.e., wisdom, vision, insight, foresight and divine virtues, are
more powerful than outer resources, i.e., material possessions, fame, etc.
• The relationship between religious views and work is not something new. For
ages, individuals have strived to define their work in religious terms. Spirituality
behaves as a regulative model.
• It creates an installed system of good values that speaks to an ‘internalised

character’ to act and be persuaded in specific ways.
• The regulative model will give a standard to judge and administer ethical
decisions made and activities conducted in the workplace.
• Spirituality provides a constitution for life under which inspirations, choices and
activities that fit within an individual’s regulative model are apt and
implemented, while those that go against it are abandoned.
Spirituality in Indian Organisations

• In the context of India, Shrimad Bhagavad Gita and the teachings of Lord
Krishna are becoming the new guru of corporate companies and B-schools across
the country to provide management strategies.
• The teachings of Shrimad Bhagavad Gita include selfless work (Nishkam

Karma), self-awareness, duty, wisdom, purity of soul and oneness of all beings,
among others.
• The Gita seems to be appropriate in various corporate strategies starting from

stress control to value-based management, motivation and leadership.
Spirituality in Indian Organisations

• According to Debasish Chatterjee, Gita is old in chronology but contemporary in
essence. When basic business principles cease to work and when the rate of
change outside is faster than change within, even businesses need deeper anchor
points for decision-making not available in contemporary literature.
• In today’s economic environment, the teachings of the Gita have become even
more pertinent as businesses are burdened with several financial risks and
employment uncertainties.
• Although the nature of practising the teachings of Gita may differ from one
company to another, their impact is wide enough to go beyond the professional to
the personal level.
1. Indian Work Ethos and Principles
of Indian Management
• The principles of Indian management are value-oriented and take a holistic

approach to life.
• In other words, the Indian work ethos consider work a medium of fulfilling the
spiritual as well as material goals of life.
• It takes into consideration questions such as the following:
– ‰
What is work?
– ‰
Why does one need to work?
– ‰
What is the right way of work?
– ‰
What is the right work attitude?
• Some of the important management principles that have been derived from or
influenced by Indian management practices are:
– Holistic management
– Attaining material as well as spiritual goals
– Conscious management
– Cooperation rather than competition
– Humansiation of organisations
– Meditativeness in decision making
– ‰
Intuitive decision making
– Focus on duty
Principles of Ethical Power for Organisations

• Purpose: Organisational purpose illustrates the meaning and direction of the
operations of an organisation.
• Pride: A healthy self-esteem is a foundation for all organisational achievements

and a key component in driving a moral business.
• Patience: Patience can be a great source of ethical power in an organisation.

However, patience is not very common in the age of the Internet where people are
hyper-connected and instantaneous results are always expected. According to
Blanchard and Peale, patience reflects the conviction of an organisation on its
values and principles.
Principles of Ethical Power for Organisations

• Persistence: Persistence and willpower are useful for the attainment of
organisational goals and ethical power. Persistence involves maintaining
consistency in the principles, values, objectives, activities and behaviour of an
organisation.
• Perspective: Perspective is about being aware of the bigger picture and deciding
on what is truly important. Perspective motivates an organisation to focus on its
long-term objectives rather than on being myopic.
Nishkam Karma and the Business World

• Nishkam Karma, or selfless or aspiration-less action, is an action performed with
no desire of the results as it is not performed for selfish reasons.
• Nishkam Karma is the central theme of Karma Yoga, the path of selfless action.
It is opposite to the concept of Sakam Karma — actions carried out with selfish,
self-centered motives.
• The concept of Nishkam Karma is a subject of immense interest to the

researchers of management practices who find it very useful in the productivity-
driven work environment.
Nishkam Karma and the Business World

• Nishkam Karma suggests that work should not be binding; rather, it should act
as a liberating force.
• It also suggests that when work is done with complete devotion and without
being attached to the results, it liberates an individual from unnecessary stress
and burden.
• The expectation of results and the bid to outperform others is a constant source of
stress to the workers of an organisation.
• If the concept of Nishkam Karma is understood in the right perspective and work
is performed in the right spirit, the work can be a source of immense enjoyment.
1. Teachings from Scriptures and
Traditions
• In India, there are various scriptures that reflect the wide philosophical
traditions of Ancient India. These scriptures serve as a guide to effective ethical
management and business practices.
• In the present world, where making profit seems to be the main motive of life,
these teachings from the holy books and other scriptures are a good source to
guide people on how both ethics and management can be used together to lead an
enriching life.
• Indian scriptures are one of the most ancient and comprehensive religious
writings in the world. They have many sacred writings, such as the Vedas,
Upanishads and Puranas, and epics like the Ramayana, Mahabharata and
Bhagavad Gita.
Traditions
• The sacred literature in Hindu religion is clearly divided into the following two
categories:
– ‰
Sruti: Heard literature
– S
‰mrti: Remembered or traditional literature
• The Mahabharata is classified as smrti, and since the Bhagavad Gita comes
under the Mahabharata, many scholars conclude that it is also smrti. However,
other scholars argue that the Bhagavad Gita should be regarded as sruti.
Traditions
Teachings from Mahabharata

• Maha means ‘great’ and bharata means ‘India’. Thus, the Mahabharata is the
story of the great India. It is the longest epic of the world written in verse with
over 100,000 stanzas.
• The characters and situations in the epic are so diverse and many in number that
almost every situation that a human being faces in his/her life can be explained
within the storyline.
• For managers, it is a great source of information for understanding human action

and psychology.
Traditions
Teachings from Mahabharata
Build strategy
Form allies
Show leadership quality
Maintain team spirit
Forget individual motives
Show commitment
‰
Encourage women empowerment

Traditions
Teachings of Gita and Work Ethos

• The Bhagavad Gita narrates the dialogue that takes place between Krishna and
Arjuna in the battlefield of Kurukshetra.
• The Bhagavad Gita symbolises a general ideal of spiritual warriorship. It teaches

that freedom does not lie in rejection but in self-controlled action, which is
performed with knowledge and detachment.
• Before the final battle of Kurukshetra, Arjuna could not decide whether it is right
to fight and kill those who are his relatives and old friends. He was also doubtful
about the reasonability of the war.
• To remove his doubts, Lord Krishna answered his questions on the nature of the
universe, the method to attain God and the meaning of duty.
Traditions
Teachings of Gita and Work Ethos

• The teachings of the Bhagavad Gita are as relevant in today’s world as they were
when they were first revealed.
• The present-day management paradigms like vision, initiative, inspiration,

brilliance in work, accomplishment of objectives, significance of work, state of
mind towards work, nature of individual, decision making, etc., are all mentioned
in the Bhagavad Gita along with explanations that can be universally applied.
• Management denotes a body of knowledge that enables an organisation to deal in

different situations consisting of people, process and environment in the most
efficient manner. The Gita teaches us that the dominant concern of our existence
revolves around doing work (karma yoga) in the most efficient manner.
1. Eroding Values and Emerging
Ethical Issues in Contemporary
Indian Management
• The ethical standards of the society are not immune to evolutionary changes.
• As a society matures, the underlying social norms change, and this in turn raises
various ethical questions.
• In addition, as human societies grow increasingly complex and the business

environment changes rapidly, new ethical issues emerge. Some of these
challenges are as follows:
– Eroding traditional values
– Gender issues
– Regulatory challenges
– Artificial Intelligence (AI) and robotics

2. Eroding Values and Emerging
Ethical Issues in Contemporary
Indian Management
• Business ethics seems to be eroding in many Indian organisations. This is mainly
due to the following reasons:
– •Poor treatment of customers
– •Lack of compliance with safety and other regulatory norms
– •Breakdown of trust between customers and businesses
– •Increasing cases of financial frauds and scams
– •Ignorance of ethical values and culturally best practices
– •Failure to enforce contracts
• The emerging ethical challenges coupled with eroding values call for a more
efficient system in India to regulate unethical business practices and effectively
handle the emerging regulatory challenges.
Let’s Sum Up
• Indian ethos can be defined as a set of ideas and principles that are rooted in the
ancient philosophical tradition of the Indian sub-continent.
• Indian ethos lists out six human shortcomings — lust (kama), anger (krodha),
greed (lobh), attachment (moha), pride (ahankar) and jealousy (Matsarya).
• The principles of Indian management are value-oriented and take a holistic

approach to life.
• Nishkam Karma, or selfless or aspiration-less action, is an action performed with

‰
no desire of results as it is not performed for selfish reasons.
• Some of the emerging ethical challenges faced by organisations include eroding

traditional values, gender issues, regulatory challenges, artificial intelligence and
robotics.
Chapter 4: Ethical Issues
in Functional Areas of
Management
Chapter Index

From-To
2 Topic 1 Ethical Issues in Marketing 81-87
3 Topic 2 Ethical Issues in HRM 88-89
4 Topic 3 Ethical Issues in IT 90-93
5 Topic 4 Ethics in Production and 94-95

Operations Management (POM)
6 Topic 5 Ethics in Finance and 96-98

Accounting
7 Let’s Sum Up 99
• Discuss ethical issues in marketing
• Explain ethical issues in human resource management
• Describe ethical issues in information technology
• Discuss the role of ethics in production and operations management
• Explain the significance of ethics in finance and accounting

1. Ethical Issues in Marketing
• The term ‘marketing’ refers to a process carried out by a seller to communicate

the value of products and services to a customer with an aim to sell those
products and services.
• Carrying out ethical marketing practices is of utmost importance for an

organisation.
• Ethical issues in marketing include moral and ethical principles and problems
arising in the marketing environment (which involves various factors and forces
affecting an organisation’s capability to develop successful relationships with
customers).
• These issues are usually concerned with negative aspects such as false claiming
of product features (puffery) and unfair competitive strategies.
• Today, it has become important for marketing organisations to perform ethical

marketing practices.
• With increasing awareness and easy access to correct information, customers can
easily differentiate between honest and deceptive marketing practices.
• This kind of unethical behaviour can quickly lead organisations to failure.
• An organisation that wants to improve the brand image of its products and
develop long-term relationship with customers should try to avoid such unethical
practices.
• Organisations that follow an ethical code of conduct in marketing practices win

the trust of customers.
• To apply ethics, an organisation needs to carry out a systematic process, which

involves the following steps.
– Clarify
• Define the basis for taking any marketing decision.
• Formulate and bring various alternatives for making decisions.
• Determine ethical principles and values involved in each alternative.
• Eliminate undesirable and impracticable alternatives.
– Evaluate
• •
Assess the options if they do not stand on ethical principles.
• •
Determine the credibility of the option.
• •
Consider benefits, problems and risks associated with stakeholders.
– Decide
• •
Determine the most possible consequences based on facts.
• •
Give ranking to values to determine their priority.
– Implement
• •
Develop a plan for the implementation of a decision.
• •
Maximise benefits and minimise costs and risks associated.
– Observe and modify
• •
Detect the effect of decisions and modify them if required.
• •
Adjust according to new changes.
Major Marketing Decisions and Related Ethical Issues

• Product-related ethical issues: These issues occur when marketers fail to provide
its customers with information related to products, such as features, value, usage
and associated risks. Product related ethical issues may also relate to:
– •
Packaging and labelling practices
– Maintaining quality standards for products
– Product safety
• Promotion-related ethical issues: It is important not to overlook social, ethical

and legal aspects of promoting a product or service through mass media.

• The major unethical practices followed at product/service promotional level are:
– •
Deceptive advertising
– Sales promotion gimmick
• Price-related ethical issues: Every customer wants to pay a fair price for the
product purchased by him/her. There are various unethical pricing policies
followed by various organisations. Some of them are as follows:
– •
Price fixing
– Bid rigging
– Price war
– Deceptive pricing

• Distribution-related ethical issues: Ethical issues in distribution can occur
between suppliers, producers and distributers on account of manipulating
product’s availability, selling surplus inventory to wholesalers and retailers at
higher rates, forcing other intermediaries to behave in a specific manner, etc.
• These issues may result into increased prices, misled investors and fluctuations
in demand.
• Distribution-related ethical issues often appear in the following forms:
– •
Creating artificial scarcity
– Creating monopoly market

1. Ethical Issues in HRM
• In an organisation, Human Resource Management (HRM) plays a crucial role in

maximising employee performance with an aim to accomplish organisational
goals and objectives.
• It involves a number of activities such as recruitment, selection, training and

development, compensation, rewards, induction and orientation.
• The HRM function is related to the management of people in an organisation.
• Any unethical issue in HRM may negatively affect employee motivation and
organisational performance.
• Major ethical issues in HRM include inequitable performance appraisal and

discrimination of employees on the basis of age, gender, religion or disability.
2. Ethical Issues in HRM
Unfair
Performance
Appraisal
Discriminati
Sexual
on in
Harassment
Employment
Ethical Issues in HRM
Unjustified
and
Privacy
Discriminati
Issues
ve Work
Conditions
Safety and
Health
Issues
1. Ethical Issues in IT
• With advancement in technology, many advanced computer and information

technologies have emerged.
• This has enabled individuals to have easy access to any type of information from
all over the world. However, such tremendous growth of technology has also come
up with various new challenges and issues.
• Rights and responsibilities regarding the ethical use of information have given
rise to various ethical dilemmas that significantly affect a business organisation.
• Some major ethical issues involved in IT are:
Plagiarism
Piracy and hacking
Invading others’ privacy
Cybercrimes
• Plagiarism: The word ‘plagiarism’ has evolved from a Latin word ‘plagiarius’,
which means ‘kidnapper’. Plagiarism implies stealing ideas, thoughts,
expressions or writings of other persons. It is a type of intellectual theft where
the work of others is duplicated.
• Piracy and hacking: Piracy and hacking have emerged as two major threats to
the security of software applications and information sources. Piracy is related to
the unlawful replication of software without the owner’s permission.
• Invading others’ privacy: IT, with its massive power to store, communicate,
analyse and retrieve information, can be used as an easy medium to invade
others’ privacy. As the role of information in decision making is increasing
gradually, the risk of invading others’ privacy is becoming more serious.
• Cybercrimes: These include illegal activities, such as theft, financial fraud,

embezzlement, online harassment, virus infection and sabotage, which are
performed by using a computer.
1. Ethics in Production and Operations Management
(POM)
• The POM function of an organisation aims at producing in the right quantity at

the right time and cost, thereby fulfilling the needs of customers and increasing
organisational efficiency and effectiveness.
• Ethics in POM is a subset of business ethics that aims to ensure that the
production function follows ethical norms and values, which are set by the
society.
• Ethics in production is intended to guarantee that the production capacity or

exercises is not harming the buyer or the general public.
• There needs to be a certain code of conduct or standards followed in the POM

practices of an organisation.
2. Ethics in Production and Operations Management
(POM)
Measures against Unethical POM Practices
Create a code of conduct
Create safe and hygienic working conditions
Focus on environmental sustainability
Follow specifications
Follow total quality practices
Crosscheck supplier background

1. Ethics in Finance and Accounting
• Ethics in finance deals with various ethical dilemmas and violations in day-to-
day financial transactions. The following are some ethical practices in finance:
– Following truthfulness and authenticity in business transactions
– Seeking the fulfilment of mutual interests
– Getting economies and financial units freed from greed-based methodologies
• Finance and accounting are one of the most important business functions
accountable to act in the public interest instead of satisfying the needs of an
individual or an organisation.
• Ethics in finance and accounting determine how to make moral decisions

regarding the preparation, presentation and revelation of financial information.
• Some of the most common unethical issues in finance and accounting are:
Fraudulent financial reporting
Misuse of assets
Disclosure
Insider trading
Budgetary slack
• It is better for organisations to have safeguards that may reduce the chances for
the occurrence of unethical behaviour. Such safeguards may fall into two
categories, which are:
– Safeguards created by law: They may include corporate governance

regulations, professional standards, regulatory monitoring and disciplinary
procedures.
– Safeguards created by organisations: They include employing competent

staff, ethical programs, strong disciplinary processes, solid leadership and
robust internal control, and monitoring the quality of employee performance
and encouraging employee communication with senior levels.
Let’s Sum Up
• Ethical issues in marketing are usually concerned with negative aspects, such as
false claiming of product features (puffery) and unfair competitive strategies.
• Major ethical issues in HRM include inequitable performance appraisal and

discrimination of employees on the basis of age, gender, religion or disability.
• Rights and responsibilities regarding the ethical use of information have given
rise to various ethical dilemmas that significantly affect a business organisation.
• Ethics in POM is a subset of business ethics that aims to ensure that the
production function follows ethical norms and values, which are set by the
society.
• Ethics in finance deals with various ethical dilemmas and violations in day–-to-
day financial transactions.
Chapter 5: Introduction to
Corporate Governance
Chapter Index

From-To
2 Topic 1 Corporate Governance 106-108
3 Topic 2 History of Corporate 109-112

Governance
4 Topic 3 Models of Corporate 113-115

Governance
5 Topic 4 OECD Principles of Corporate 116

Governance
Chapter Index

From-To
6 Topic 5 Theories Underlying Corporate 117-120

Governance
7 Topic 6 Corporate Governance as a 121

Systemic Process
8 Topic 7 Ethics and Corporate 122

Governance
9 Topic 8 Corporate Social Responsibility 123

and Corporate Governance
10 Let’s Sum Up 124

• Explain the concept of corporate governance
• Discuss the history of corporate governance
• Describe the models of corporate governance
• Explain OECD principles of corporate governance
• Describe the theories underlying corporate governance
• Discuss corporate governance as a systemic process
• Explain ethics and corporate governance

1. Corporate Governance
• Corporate governance refers to a set of techniques that are used to direct,

supervise and operate the corporate machinery.
• It refers to a system of rules, regulations and processes that helps a company in

directing and controlling the functioning of a company.
• Security and Exchange Board of India (SEBI) defines corporate governance as

the acceptance by management of the inalienable rights of shareholders as the
true owners of the corporation and of their own role as trustees on behalf of the
shareholders. It is about commitment to values, about ethical business conduct
and about making a distinction between personal and corporate funds in the
management of a company.
Objectives and Goals of Corporate Governance
Creating competitive advantage
Preventing fraud and malpractices
To bring in transparency
Adhering to legal compliance

Dimensions of Corporate Governance
Dimensions of Corporate
Governance
Internal corporate governance External corporate governance

1. History of Corporate Governance
• Corporate governance is not a new concept as it originated in the 19th century.

However, it was implemented in organisations in a narrow sense.
• The narrow perspective or the traditional approach of corporate governance

primarily paid much attention to the segregation of ownership and control.
• However, after some time with the increase in competition, the need was felt to
broaden the perspective of corporate governance.
• The broader perspective of corporate governance includes a huge spectrum of

issues, such as business ethics, corporate social responsibility, corporate strategy
and sustainable economic development.
Origin and Development of Corporate Governance

• Indian organisations became aware about corporate governance around 1983.
During this time, Indian corporate environment also witnessed various scandals.
• The effective implementation of corporate governance started in India in 1997.
• It started with a voluntary code that was designed by the Confederation of Indian
Industry (CII).
• In addition, SEBI set up a committee headed by Kumar Mangalam Birla to

enforce international codes of corporate governance for companies listed on stock
exchange.
• A tremendous amount of change was brought about in the corporate environment

due to increased competition in the Indian market in 1990s.
Emerging Trends in Corporate Governance

• Corporate governance has occupied a special place in the Indian business
scenario as it is dependent on the economic, legal and social conditions of a
country.
• Liberalisation had brought a lot of changes in corporate governance practices and

perhaps changed the outlook of people towards it.
• SEBI has worked hard in laying down various corporate governance rules and
regulations to be followed in the country.
• The opening up of global markets has raised the need of the investigation of
corporate governance practices in the Indian scenario.
Emerging Trends in Corporate Governance

• Corporate governance principles follow the ‘one size does not fit all’ approach
worldwide because different nations have different levels of development and
cultures.
• International Corporate Governance Network (ICGN), established in 1995, aims

at creating a supportive organisational environment for investors, organisations
and other parties that are in favour of corporate governance practices.
• ICGN has recommended that the main objective of corporate governance practice
should be the timely payment of returns to investors.
• It has also stated that the full disclosure should be made about matters that are
of importance to shareholders on time.
1. Models of Corporate Governance
Models of
Corporate
Governance
The Anglo- The German The Japanese

The Indian Model
American Model Model Model
• The Anglo-American model: It is also known as the Anglo-Saxon approach, of

corporate governance follows a shareholder-oriented approach. It highlights the
fundamentals of corporate governance practices in America, Britain, Canada,
Australia and other countries following the common wealth law.
• The German model: This model of corporate governance comprises two boards,
namely supervisory board and management board. This model is also known as
two-tier board model as well as Continental European model as it has been
adopted in Germany, Holland and France. It adopts a societal orientation and
states that the employees of an organisation have a voting right to elect the
Board of Directors.
• The Japanese model: The Japanese model of corporate governance is called the
business network model. It is also known as Keiretsu in Japanese, which means
system and row. It considers financial institutions as an important part of
corporate governance.
• The Indian model: The Indian corporate houses are governed by the Company’s
Act of 1956 that is influenced by the model followed by the United Kingdom. It
also uses recommendations given by the German and Japanese models of
corporate governance. The legal corporate governance system of India is based on
the recommendations of three committees: Kumar Mangalam Birla Committee,
Narayana Murthy Committee and Naresh Chandra Committee.
OECD Principles of Corporate
Governance
• For stimulating the economic progress and international trade, the Organisation
for Economic Cooperation and Development (OECD) was founded in 1961 as an
international economic organisation.
• It refers to a forum of countries coming together and describing their

commitment towards the democracy and the market economy.
• It basically got established with an objective of maintaining good practices and

coordinating among the countries across the globe.
• OECD is a non-governmental organisation that has a goal to achieve long-term

value for shareholders.
• The principles provided by OECD play a significant role in improving the

structure of corporate governance and are applicable universally.
1. Theories Underlying Corporate
Governance
• The organisation can act as a separate entity distinct from its members. However,
the members of the organisation give it a form or structure on the basis of their
strategic thinking and business plans.
• There are some basic theories, such as stakeholder theory, stewardship theory
and agency theory, which influence the corporate governance practices in an
organisation.
Governance
Stakeholder Theory
• The stakeholder theory was developed in 1930s. It supports the view that an
organisation should maximise stakeholders’ benefits and follow an ethical code of
conduct.
• It has been drawn on the basis of various theories, including the social contract
theory, communitarian ethics and ethics of care.
• There are many problems that arise while enforcing the stakeholder theory in an
organisation. These problems include identifying genuine stakeholders and
determining the shareholders’ benefits.
Governance
Stewardship Theory
• The stewardship theory nullifies the possible conflicts between the managers and
shareholders that have been presumed by the agency theory. It supports the view
that the managers are considerate about their personal reputation and value
their integrity.
• The stewardship theory focuses on the trustworthiness of managers and is based

on the following points:
– ‰
Motivating managers to ensure that they not only look after personal goals,
but also align these personal goals with the organisational objectives
– ‰
Controlling managers with excessive modes can actually demotivate them.
So, it is important to ensure that the control measures do not hamper the
productivity of the managers.
Governance
Agency Theory
• The agency theory is built upon the presumption that the interests of managers
often clash or are divergent from that of the shareholders.
• The shareholders select the managers, who are called agents, for the long-term
wealth maximisation and smooth functioning of the organisation.
• However, the managers focus on their personal benefits and short-term profit
maximisation rather than long-term wealth maximisation of the organisation.
• This conflict of interest between managers and shareholders gives rise to a

problem, known as the agency problem.
• The role of corporate governance comes into picture for addressing the agency
problem by bringing transparency and aligning the objectives of the organisation
with its associated parties.
Corporate Governance as a
Systemic Process
• Corporate governance can be defined as a systemic process that helps companies

in enhancing their wealth-generating capacity by using managerial activities like
direction and control.
• As large organisations use a substantial number of societal resources, corporate

governance must ensure the proper utilisation of these resources in order to meet
the requirements and expectations of their stakeholders.
• The systemic process of corporate governance must have the structured and well-
defined roles of the organisation, which also includes the role of every individual
associated with the organisation, especially at middle, senior and higher level of
management.
• Well-defined roles based on core principles further elucidate the philosophy of an

organisation.
Ethics and Corporate Governance
• Business ethics is a system of moral principles applied in a business

environment.
• Corporate governance elaborates the corporate pursuit of economic objectives

related to a number of wider ethical and societal considerations.
• It can be understood as an application of best management practices associated

with compliance of law in true spirit and adherence to ethical framework.
• Corporate governance represents the various frameworks that are associated

with the functioning of an organisation. It includes moral framework, ethical
framework and the value framework.
Corporate Social Responsibility
and Corporate Governance
• Corporate governance is traditionally defined as a mechanism used by an

organisation to ensure that organisational functioning is optimised to produce the
best financial results for shareholders.
• Corporate Social Responsibility (CSR) has evolved from basic standards of

business ethics. It comprises honesty and transparency.
• The association of corporate governance and corporate social responsibility is

becoming much familiar due to increased focus of corporate houses on balancing
business profits with responsible operations.
Let’s Sum Up
• Corporate governance refers to a set of techniques used to direct, supervise and

operate the corporate machinery.
• The effective implementation of corporate governance started in India in 1997. It

‰
started with a voluntary code that was designed by the Confederation of Indian
Industry (CII).
• The various models of corporate governance are the Anglo-American model, the
‰
German Model, the Japanese model and the Indian model.
• There are some basic theories, such as stakeholder theory, stewardship theory
and agency theory, which influence the corporate governance practices in an
organisation.
• The organisations believe that the goodwill generated by implementing business

‰
ethics helps to gain monetary and non-monetary benefits in the long run.
Chapter 6: Corporate
Governance: Ownership
Structure
Chapter Index

From-To
2 Topic 1 Ownership Concentration 130-132
3 Topic 2 Ownership Composition 133-141
4 Topic 3 Ownership Pattern of 142-144

Companies in India
5 Topic 4 Issues in Managing Public 145-147

Limited Firms – Agency
Problem

• Describe ownership structure in companies
• Explain ownership concentration
• Discuss the concept of ownership composition
• Examine various types of ownership patterns of companies in India
• Explain issues involved in managing public limited companies

1. Ownership Concentration
• Ownership structure refers to the distribution of voting rights among different

equity shareholders of an organisation.
• It gives a clear indication about the identity of the owners of the organisation.
• The concept of ownership structure is important in corporate governance because

the economic efficiency of the organisation depends on it. Ownership structure
comprises two main components:
– Ownership concentration
– Ownership composition
• Ownership concentration occurs when the power to control the activities of an

organisation lies in the hands of a few shareholders.
• The degree of ownership concentration determines the distribution of power

among shareholders and managers in an organisation.
• The control of shareholders becomes weak when ownership is dispersed, which

implies that a majority of shares are distributed among numerous small
shareholders.
• Between the degree of ownership concentration and profitability of an

organisation, an inverted U-shaped relationship exists.
• As ownership concentration increases during the initial stage, sufficient funds

are raised for the growth and expansion of the organisation.
• There are two important concepts of ownership concentration. These are:
– Managerial ownership: It refers to the extent to which managers have

certain powers and rights to take decisions for an organisation. Ownership
and management are segregated because of the agency problem, which
represents a conflict of interest between decisions taken by managers and the
owners (shareholders).
– Controlling shareholders: It refer to a single or a group of shareholders who

possess a large number of shares in an organisation. A controlling
shareholder can influence the Board of Directors in order to gain control of an
organisation. Therefore, the controlling shareholder may exert both a positive
and negative influence over the organisation.
1. Ownership Composition
• An important component of the ownership structure is ownership composition,

which consists of all the shareholders having major and minor stakes in an
organisation.
• If families, groups, or individuals are the shareholders of an organisation, they

would be interested in profits as well as non-monetary benefits such as goodwill
of the organisation in the market.
• However, if institutional investors are shareholders, they will be interested only

in profits and will not care about non-monetary benefits.
Executive
Composition
Shareholder Minority
Control and Shareholder
Protection Rights
Determinants of
Ownership
Composition
Board of
Directors and Transparency
their Fiduciary
Responsibilities
Shareholder Control and Protection

• Shareholder control and protection refer to a manner in which shareholders
monitor managers and the control mechanism.
• This ensures that managers always act in the interest of the shareholders. There
are a number of mechanisms to monitor and control the activities of managers.
• Such mechanisms are a part of corporate laws and various legislations. Examples
of some important mechanisms are participation of shareholders during voting,
compensation of executives (performance based), transparency and disclosure
requirements and legal protection of shareholders’ rights.
Board of Directors and their Fiduciary Responsibilities

• BoDs refers to a body of appointed members to take care of activities performed
in an organisation.
• The board formulates corporate policies, authorises major transactions and sales,
and declares dividends.
• It also recruits people, provides compensation, plans successions and nominates

prospective members.
• The efficiency of BoDs depends on how it manages the organisation on behalf of

shareholders. It protects the rights of minority shareholders and tries to increase
the profitability of the organisation.
Executive Compensation
• Executive compensation refers to the remuneration of executives who play a very
important role in corporate governance in an organisation.
• Executive compensation is designed by BoDs of the company that consists of

independent directors.
• Their package includes a mix of salary, bonuses, call options, etc. An

inappropriate compensation of executives costs shareholders a large amount of
money.
• Proper compensation is required as otherwise executives may lack incentives to

increase the profits of the organisation.
Minority Shareholder Rights

• Minority shareholders are entities that do not have the right to participate and
influence the decisions of an organisation. The Companies Act, 2013 protects the
rights of minority shareholders. The following rights are reserved for minority
shareholders in the Act:
– Right to appoint a director - Small shareholders, upon notice of not less than
1/10th of the total number of such shareholders or 1000 shareholders, have a
small shareholder director elected.
– Right in decision making and such director appointed shall be considered as
independent director.

– Oppression and mismanagement:
• Right to apply to tribunal by the minority shareholders, when

management or control of the company is being conducted in a manner
prejudicial to the interests of the class or company.
– Rights with respect to reconstruction and amalgamation:
• •
Purchase of shares of dissenting shareholders at a determined value by
the registered valuer.

• •
The minority have been given a right to make an offer to the majority
shareholders to buy the shares of minority shareholders.
• •
The transferor company shall be the agent for making payments to
minority shareholders.
– Class action suit: Class action suit may be filed by the minority shareholders
as per the provisions of Companies Act, 2013.
Transparency and Information Disclosure

• Transparency and information disclosure is all about maintaining an easy access
of information to ensure an effective control and protection of shareholders.
• Shared information includes financial outcomes, major predicted risks,

remuneration of BoD and the policies and objectives of the organisation.
• Transparency and information disclosure are important in an organisation for the

following reasons:
– Help in monitoring companies by legal authorities
– Increase shareholder ability to exercise ownership rights
– Help to attract capital
– Ensure investor confidence in markets

1. Ownership Pattern of Companies
in India
• The Companies Act, 1956 defines various types of companies in India.
• Section 3(1) of the Companies Act, 1956 defines two types of companies in India:
– Companies formed and registered under the Companies Act
– Any existing company established under any previous Act
• Various important classifications of companies, as defined by the Companies Act,

1956 are as follows:
– Classification of companies by mode of incorporation:
• Chartered companies
• Statutory companies
• Registered/incorporated companies
in India
– ‰
Classification of the companies on the basis of number of members:
• •Private company
• •Public company
– Classification of the companies on the basis of control:
• Holding Company
• Subsidiary company
in India
– Classification of the companies on the basis of the ownership of companies:
• Government companies
• Non-government companies
– Classification of companies on the basis of the nationality of the company:
• Indian companies
• Foreign companies
1. Issues in Managing Public Limited
Firms – Agency Problem
• A conflict of interest between the management of a company and its stakeholders

is usually defined as an agency problem in the corporate world.
• A relationship in a company encounters conflict of interest when one party (the

agent) does not act according to the interests of another party (the principal). The
problem is that the agent, who is into decision making, is fundamentally driven
by self-interest.
• This often leads to conflict of interest as the interests of the agent may differ from
the principal’s interests. This problem about the agency is also known as the
principal–agent problem.
Separation of Positions of Chairman and CEO

• Corporate governance codes recommend that outside directors should be included
in the management board, which implies that there should be a separation of the
position of the chairman and the CEO.
• The internal system of an organisation fails when the same individual holds both
positions. Decisions such as performance evaluation of the CEO cannot be taken
fairly if the same person is the chairman of a company.
• However, there are many authors who support the decision of companies to have
the same individual as chairman and CEO.
Separation of Ownership and Management

• All investors of an organisation are called its owners. It is not necessary that the
person investing in an organisation also manages the organisation.
• In sole proprietorships, the owners of the business are usually the same people
managing various operations of the business.
• However, in large organisations or corporations, a corporate manager manages

the corporation on behalf of shareholders (investors).
• Organisations can have numerous stakeholders, such as customers, suppliers,

shareholders and employees. This separation of management and ownership
(shareholder) results in a potential conflict of interests.
Let’s Sum Up
• Ownership structure refers to the distribution of voting rights among different

equity shareholders of an organisation.
• Ownership concentration occurs when the power to control the activities of an

‰
organisation lies in the hands of a few shareholders.
• BoDs refers to a body of appointed members to take care of the activities

‰
performed in an organisation. It formulates corporate policies, authorises major
transactions and sales, and declares dividends.
• Executive compensation refers to the remuneration of executives who play a very

important role in corporate governance in an organisation.
• Minority shareholders are entities that do not have the right to participate and
‰
influence the decisions of an organisation.
Governance Mechanism
Chapter Index

From-To
2 Topic 1 Internal Corporate Governance 154-165
3 Topic 2 External Corporate Governance 166-171

• Discuss the internal corporate governance mechanism
• Explain the external corporate mechanism

1. Internal Corporate Governance
• Internal corporate governance is a framework or system of rules, practices and

processes designed in an organisation by the internal human force.
• This framework is generally developed and managed by the top management of

the organisation.
• The internal governing framework acts as a roadmap for both internal and
external stakeholders to ensure the ethical functioning of the organisation.
• The internal corporate governance framework differs from across organisations

based on various factors such as sociocultural environment, economic
environment, government policies and financial market systems.
• Any internal corporate governance framework is incomplete without a proper

code of conduct in place.
• A code of conduct is a set of rules, responsibilities and practices of individuals in

an organisation.
• Apart from employees, the organisation is also responsible for abiding by the code
of conduct itself first in order to encourage the employees to do the same.
• A code of conduct generally focuses on promoting fairness and preventing

discrimination on the basis of sex, race or religion.
• In addition, it makes it mandatory for the top management to act in accordance

with a pre-specified set of guidelines whenever it exercises authority or control.
Board of Directors
• BoDs are vested with the responsibility of governing an organisation.
• The directors are appointed by the shareholders of the organisation.
• Good internal corporate governance depends largely on the level of

communication and understanding among the directors and the shareholders.
• Therefore, there should be effective coordination among shareholders and

directors so that any conflicts of interest can be avoided.
• BoDs are accountable towards all the stakeholders pertaining to the functional
attributes of the organisation and resolving issues between various stakeholders,
such as shareholders, customers, lenders and promoters.
• The size of the board is mainly determined by the size of the organisation.
Board of Directors
• The key roles of the board as per Section 166 of the Companies Act, 2013 of India
are explained as follows:
– Act in accordance with the Company’s Articles of Association.
– Act in good faith in order to promote the objects of the Company for the
benefit of its members as a whole, and in the best interest of the Company,
its employees, shareholders, community and for the protection of
environment
– Exercise your duties with due and reasonable care, skill and diligence
– Not involve yourself in a situation in which you may have a direct or indirect
interest that conflicts, with the interest of the Company
Board of Directors
• The responsibilities of the board are as follows:
– ‰
Act ethically and in good faith with due diligence and care, in the best
interest of the company and shareholders.
– ‰
Review and guide the corporate strategy, objective setting, major plans of
action, risk policy, capital plans and annual budgets.
– ‰
Oversee major acquisitions and divestitures S
‰elect, compensate, monitor and
replace key executives and oversee succession planning.
– ‰
Align key executive and board remuneration (pay) with the long term
interests of the company and its shareholders.
Functional Committees of the Board

• The BoDs of an organisation form various committees to divide work among
groups. This is done for avoiding corporate failures and downfalls and increasing
the efficiency of the board.
• In an organisation, there is a clearly specified set of duties for each director who
is a member of any functional committee. The three committees are:
– Nomination Committee: The nomination committee is made up of outside

independent directors. It is headed by the chairman of the company and is a
means by which new non-executive directors are brought for the selection to
the board.

– Audit Committee: The members of the audit committee members are
responsible for reporting financial proceedings of the organisation to the
board.
– It acts as a useful link between outside auditors and the board.
– The committee resolves matters, such as the scope of the audit, issues raised
by auditors with regard to management systems and control or any
disagreement or conflict of interest related to the published financial
statements.
– It also gives recommendations on audit fees or reappointment or replacement

of auditors.

– Remuneration Committee: There is a remuneration committee in every large
organisation. The main function of this committee is to set and check
monetary benefits offered by the company to BODs.
– The committee comprises independent directors who are well-informed about

compensation trends in similar and other industries. It is responsible for
setting a clear policy on the remuneration of directors, which is supported by
all shareholders.
– This is because shareholders have a right to sue the directors in case their
pay scale is more than the stated amount or they take a large share of profit
instead of distributing it as dividends.
Concept of Whistle-blowing
• The word whistle-blowing was derived from the practice of English policemen,
who used to blow their whistles to alert people of any danger or mishappening.
• In the organisational context, whistle-blowing is an act of reporting or raising a

concern over wrongdoing within an organisation to internal or external parties.
• Internal whistle-blowing happens when a matter is reported internally to an

authority within an organisation, while external whistle-blowing happens when a
whistle blower spreads the information outside the organisation.
• An individual who takes the responsibility of raising voice against wrong is called
a whistle-blower.
Concept of Whistle-blowing
• Whenever a concern is raised by an employee, it needs to be communicated to the
ombudsman who can either be a personal legal advisor, or a member of the audit
committee or a compliance officer.
• This would help to initiate an enquiry, which can either be accepted or dismissed
if the complaint is frivolous or insignificant.
• In case of genuine complaints, an enquiry committee needs to be appointed which

may take the investigation further and based on the results of the enquiry, an
appropriate action may be taken against the wrongdoer.
• Most whistle blowers are the productive, valued and highly committed members
of the organisation.
Non-executive Directors and their Roles

• Non-executive directors are the members of an organisation’s BoDs.
• However, they neither belong to the executive team nor are involved in the day-
to-day running of the organisation. They may even have full-time jobs elsewhere
or they may be prominent individuals from the public.
• Usually, non-executive directors are hired on a fixed contract and paid a flat fee
for their services. The main role of non-executive directors is to minimise the
conflicts of interests in the organisation.
• Non-executive directors must maintain high levels of integrity and act ethically.
Non-executive Directors and their Roles

• According to various codes of corporate governance, non-executive directors
should be independent, i.e., they should not have any material or pecuniary
relationship with the organisation.
• They are responsible for providing direction to the company and bringing in their
experience, technical expertise, independent judgement and new ideas to the
board.
• Non-executive directors must also maintain adequate control systems to

safeguard the organisation’s interests as well as the interests of all stakeholders.
• In the eyes of law, there is no difference between executive and non-executive

directors, i.e., they have the same fiduciary duties as that of other directors.
1. External Corporate Governance
Role of Government
• Every country has some minimum legislative requirements to be followed by
organisations operating in that country.
• However, some organisations are subject to further external control by the

government. Such control is exercised by the government on those organisations
or sectors that are strategically and politically important to the government, for
example, defence and medical supplies.
• The government exercises control by setting regulations related to pricing, supply

contracts and tax.
• Regulations are levied to protect the interests of stakeholders; thereby attracting

more investors and increasing tax revenues in the country.
Role of SEBI and other Regulators

• SEBI is an independent statutory authority that regulates the securities market
in India.
• It has delegated powers to two exchanges (Bombay Stock Exchange and National
Stock Exchange) to ensure that their members adhere to the regulations and
instructions of the authority.
• SEBI has set out corporate governance standards for the listed organisations in
India. Introduction of Clause 49 of the Listing Agreement is the most important
step taken by SEBI for establishing a new corporate governance regime.

• The key changes proposed by SEBI are as follows:
– Board of Directors and its Committees
• BoDs should maintain a healthy relationship with the stakeholders
• BoDs should form a nomination and remuneration committee having an

independent chairman.
• BoDs should have at least one women director.
• The role of the audit committee should be increased.
• BoDs should engage in succession planning for the board positions and
other key positions.

– Independent Directors
• ‰
Nominee directors should not be considered as independent directors.
• ‰
Stock options should be prohibited.
• ‰
Performance of the independent directors should be evaluated
compulsorily.
• ‰
Independent directors cannot serve in more than 7 companies or in 3
companies, if serving as whole-time directors.
• ‰
Independent directors cannot serve for more than two terms of 5 years
each.
Promoters
• A promoter is a person who performs the necessary formalities of registering a
company, finding directors and shareholders for the new company, acquiring
business assets and negotiating business contracts on behalf of the company.
• Promoters are usually considered to be the most important external actors in

corporate governance.
• In order to improve corporate governance practices in an organisation, the role of

promoters is quintessential.
• Promoters and directors have a principal–agent relationship where the promoters

(principals) expect the agents (directors) to act in their best economic interests
and observe a fiduciary duty towards them.
Promoters
• The characteristics of promoter-driven organisations are as follows:
– ‰
Separate ownership and management so as to establish a professional
management team
– ‰
Farsighted mission and formal succession plan
– ‰
Unifying corporate culture and social responsibility
– ‰
Long-term relationship with suppliers and customers
• Promoter-driven organisations aim to achieve environmental and social goals

along with pursuing the goal of wealth creation.
Let’s Sum Up
• Corporate governance is an approach to create a balance between internal and

external stakeholders such as management, customers, suppliers, financiers,
government and the community.
• BODs are vested with the responsibility of governing an organisation. The

‰
directors are appointed by the shareholders of the organisation.
• Non-executive directors are the members of an organisation’s board of directors.

‰
However, they neither belong to the executive team nor are involved in the day-
to-day running of the organisation.
• An organisation does not work in isolation and is driven by several macro factors
‰
such as markets, service providers, media and government of a country.
• Every country has minimum legislative requirements to be followed by

‰
organisations operating in that country.
Governance in India:
Statutory Perspective
Chapter Index

From-To
2 Topic 1 Evolution of Corporate 178

Governance in India
3 Topic 2 The Legal Statutes and 179-191

Committees
4 Topic 3 The Reports on Corporate 192-195

Governance

• Explain the evolution of corporate governance in India
• Discuss legal statutes and committees
• Describe the reports on corporate governance

Evolution of Corporate Governance in India
• Corporate governance is one of the oldest concepts that date back to the 19th
century.
• It holds its relevance in relation to the profitability, expansion and business

continuity.
• The collapse of high profile companies, such as Enron and WorldCom, due to
unethical business behaviour followed brought into the significance of
implementing corporate governance in the organisations.
• Corporate governance is a multi-level and multi-tiered process that is distilled

from an organisation’s culture, its policies, values and ethics, especially of the
people running the business and the way it deals with various stakeholders.
1. The Legal Statutes and Committees
• Corporate governance is a process that defines the set of laws and provides
directions and guidelines to corporations for tracking the actions of the
management and finding as well as mitigating the risk associated with it.
• Various legal laws and committees have been formed to protect the rights of
shareholders.
The Companies Act, 1956

• The Companies Act, 1956 is an Act of the Parliament of India. Enacted in 1956, it
enables companies to be formed by registration, and set out responsibilities of
companies, their directors and secretaries.
• The Companies Act, 1956 is governed by the Ministry of Corporate Affairs,

Government of India as well as the Office of Registrar of Companies, Official
Liquidators, Company Law Board, and so on.
• This Act contains all the provisions on following:
– ‰
Forming a company
– ‰
Fee procedure
– ‰
Registration of name

– Board members of the company
– Company’s motive
– Issue of share
– Board meetings
– Responsibilities and liabilities of the company
– Winding up process
• The Companies Act, 1956 provides the power to the Central Government for
registering the formation of a company, its functioning and winding up procedure.

• The Companies Act, 2013 was passed by the Parliament of India on 29th August
2013.
• It regulates the incorporation, responsibilities and dissolution of a company. It is

divided into 29 chapters containing 470 sections as against 658 Sections in the
Companies Act, 1956 and has 7 schedules.
• The Companies Act, 2013 replaced the Companies Act, 1956 after getting the
permission from the President of India.

• Some of the changes or new provisions made in the Companies Act, 2013 are as
follows:
– One person company
– Women director
– Corporate social responsibility clause
– Dormant company
– Officer
– Key managerial personnel
– Promoter
The SEBI Guidelines

• The Securities and Exchange Board of India (SEBI) was formed in 1988.
However, it was given statutory powers in 1992 with the aim of regulating the
securities market.
• Initially, SEBI was formed as a non-statutory; however in 1992, the Government

of India provided it statutory powers by passing a special resolution.
• The main functions of SEBI are as follows:
– ‰
Safeguarding the vested interest of the investors in securities market
– ‰
Supporting the development of the securities market
– ‰
Controlling and directing the stock exchange
– Regulating and directing the securities market

The Accounting Standards issued by the ICAI

• The Institute of Chartered Accountants of India (ICAI) is a corporate body that
works under the Chartered Accountants Act, 1949 and was constituted by the
Parliament of India.
• It is a financial audit regulating body that is ranked as the second largest

professional accounting body.
• ICAI is also known for providing license to the accounting professionals as well as
for setting auditing and assurance standards.
• It is closely associated with Government of India, RBI and SEBI for framing and
implementing these standards.
The Listing Agreements with the Stock Exchange

• When a company listed on the stock exchange agrees on implementing the
regulations of stock exchange and signs an agreement, it is known as listing
agreement.
• When a company is listed on the stock exchange, then it means that the company
has been granted permission to deal in the specific stock exchange.
• When a company agrees to get listed on the stock exchange, then it has to follow
various clauses. According to Bombay Stock Exchange (BSE), these clauses are as
follows:
– ‰
Clause 16: The Company is required to close its transfer books at least once a
year at the time of the Annual General Meeting if it has not been otherwise
closed at any time during the year.

– ‰
Clause 19: The Company shall give an advance notice of at least 2 working
days (Excluding the date of the intimation and date of the meeting) to Stock
Exchange, of board meeting fixed for recommendation or declaration of a
dividend or convertible debentures or of debentures carrying a right to
subscribe to equity shares or the passing over of the dividend or the issue of
right or proposal for buyback of securities is to be considered.
– Clause 20: The Company has to intimate the outcome of the board meeting
(as intimated under clause 19) immediately on the day of board meeting once
concluded.

– Clause 30: The Company has to intimate to the Stock Exchange of any
change in the Issuer’s directorate by death, resignation, removal or
otherwise; of any change of Managing Director, Managing Agents or
Secretaries and Treasurers; of any change of Auditors appointed to audit the
books and accounts of the Issue.
– C
‰lause 33: The Company is required to submit to the Stock Exchange
certified copy of amended Memorandum and Articles of Association of the
company.
– ‰
Clause 41: The Company shall give an advance notice of at least 7 clear
calendar days (Excluding the date of the intimation and date of the meeting)
to the Stock Exchange, of board meeting fixed to consider financial results.
The Kumar Mangalam Birla Committee

• Mr. Kumar Mangalam Birla in collaboration with SEBI founded a committee in
1999.
• It was known as the Kumar Mangalam Birla Committee that had 18 members
and had the aim of advancing the standards of corporate governance.
• This committee was crucial in developing a Code of Corporate Governance in

India with respect to the current market conditions of Indian companies and
capital market.
• It was responsible for realising the importance of Annual General Meeting (AGM)
as it maintained that it will help in knowing the concerns and issues related to
shareholders.
The Cadbury Committee

• The Cadbury Committee provided following recommendations:
– ‰
Board of directors: It is important to conduct regular meeting of board of
directors for controlling the organisation and monitoring its functioning.
– Non-executive directors: They should be able to provide unbiased judgement

on the matters related to organisational strategy, performance, or code of
conduct.
– Remunerations: Directors should not hold a financial interest in the

organisation.
– Providing details regarding any financial query: The balance sheet of the
organisation should be made available to the shareholders.
The Corporate Governance and Ethics Committee

• The National Association of Software and Services Companies (NASSCOM) set
up Corporate Governance and Ethics Committee in 2009.
• The main aim of this Committee is to provide a framework where organisations

in the Information Technology (IT) or Business Process Outsourcing (BPO) can
follow good corporate governance practices.
• The Committee discussed the role and responsibilities of the following:
– ‰
Board of directors
– Audit committee
– ‰
Shareholder empowerment
1. The Reports on Corporate
Governance
The CII Report

• The Confederation of Indian Industry (CII) has played a crucial role in the
industrial development of India.
• CII is closely associated with the Government of India on the matters related to
competence and growth of economy. Some of the recommendations given by the
CII report are as follows:
– ‰
A listed organisation, whose revenue is more than Rs. 100 crore should have
professionally qualified, independent and non-executive directors.
– ‰
One single person should not be director in more than 10 companies.
– ‰
It is the responsibility of the non-executive director to be more actively
involved in the decision-making process of the organisation.
Governance
The RBI Report on International Financial Standards and Code (March

2011)
• The standards issued by IASC were called International Accounting Standards
(IAS). In 2001, IASC was reformed as International Accounting Standards Board
(IASB). The standards issued by IASB are called International Financial
Reporting Standards (IFRS).
• The IFRS set rules for preparing and presenting the financial statement. The IAS
that get revised are issued as IFRS. In India, in April 2012, ICAI announced that
IFRS are mandatory for financial statement but this plan failed.
• RBI has formed a Working Group for addressing the implementation issues and
guidelines related to IFRS for Indian banking system.
Governance
Reports of Naresh Chandra Committee I (2002) and II (2003)

• The Naresh Chandra Committee I was formed in August, 2002 with the aim of
addressing various issues related to corporate governance.
• It gave insightful recommendations on the following:
– ‰
The relationship between auditor and company
– ‰
List of services that are not allowed in audit
– ‰
Appointing an auditor
– ‰
Providing training to independent directors
– ‰
Disclosing contingent liabilities
– ‰
Disclosing professional qualifications of the director
Governance
The Murthy Report

• The Narayana Murthy Committee was formed in February, 2003 for encouraging
corporate governance practices and evaluating the current practices followed by
companies in India.
• The main aims of the Committee were following:
– ‰
Measuring the corporate governance performance
– ‰
Identifying and specifying the role of independent directors
– ‰
Observing and evaluating the role of organisations when dealing with
rumour or price-sensitive issues
– ‰
Advancing and promoting transparency and integrity
Let’s Sum Up
• Corporate governance is one of the oldest concepts that date back to the 19th
century. It holds its relevance in relation to the profitability, expansion and
business continuity.
• The Companies Act, 1956 is governed by Ministry of Corporate Affairs,

‰
Government of India as well as the Office of Registrar of Companies, Official
Liquidators, Company Law Board, and so on.
• The Companies Act, 2013 was passed by the Parliament of India on 29th August
‰
2013. It regulates the incorporation, responsibilities and dissolution of a company.
• The Securities and Exchange Board of India (SEBI) was founded in 1992 with the
‰
aim of regulating the securities market.
Chapter 9: Enterprise Risk
Management
Chapter Index

From-To
2 Topic 1 Concept of Risk in 203-207

Organisational Context
3 Topic 2 What is Enterprise Risk 208-212

Management (ERM)
4 Topic 3 Drivers of ERM 213-214

Chapter Index

From-To
5 Topic 4 Assessment of Risk Exposures 215-216
6 Topic 5 Assessment of Internal and 217-220

External Risks

• Explain the concept of risk in the context of an organisation
• Define enterprise risk management and explain its benefits
• Discuss various drivers of enterprise risk management
• Assess risk exposures
• Explain the difference between the assessment of internal and external risks
1. Concept of Risk in Organisational Context
• An important consideration while determining the scope of the risk management

process is that it should be within the context of the organisation’s objectives.
• Due to the uncertainty of their occurrence, risks have a great impact on the
achievement of business objectives.
• External and internal factors impact the day-to-day working of an organisation to

a great extent. Therefore, it is important to review these factors in the context of
the organisation’s objectives.
• This will help in identifying the processes of risk assessment, which would in
turn, in the long run, help to derive the greatest value for the organisation.
• External risks arise due to various environmental conditions outside the control
of the organisation.
• Internal risks, on the other hand, are the outcome of various decisions taken or
activities performed within the organisation.
• Risks at the organisational level are dealt with in the following ways:
– ‰
Eliminate negative risks at all costs.
– ‰
If risks cannot be eliminated, reduce them to an acceptable level.
– The acceptable level is defined as the level of risk that the organisation can
tolerate if the risk was to occur.
– ‰
If it is not possible to eliminate risks, the effort should be focussed on
reducing the risk by mitigating it through insurance or transferring it
through a third-party vendor.
• Earlier, the concept of risk assessment was mainly focussed on adopting

precautions, safety and insurance. The idea was to avoid negative events in an
organisation.
• Gradually, organisations started treating risks as a necessary expense that had to

be borne, and the focus shifted from the removal of risks to manage them.
• Historically, organisations used to be focussed on hazard risk management and

insurable financial risks.
• Today, it includes operational, strategic, financial and reputation risks based on

the fair understanding of an organisation’s aims, activities, structure and
methods of operation.
• Understanding the concept of risk in the context of an organisation requires

answers to the following questions:
– The general context
• •
What are the aims and objectives of the organisation?
• •
What are the core activities of the organisation?
– The internal context
• •
What is the analysis of the organisation’s current method of managing
risk?
• •
What is the legal structure of the organisation?
– The strategic context
• •
How is the relationship of the organisation with other organisations?
• •
What are the different laws, regulations, rules or standards applicable to
the organisation?
– The external context
• •
What is the level of awareness among the employees of their legal rights
related to their working environment?
• •
What has the organisation done or is doing to maintain expertise in
dealing with different types of risks?
1. What is Enterprise Risk Management (ERM)
• ERM can be defined as a process of mitigating the effect of a risk by following

various activities such as planning, organising and controlling the activities of
the organisation. ERM has the following advantages:
– ‰
It serves as a tool for enhancing the management’s decision-making process,
corporate governance and accountability.
– ‰
It helps the management to tackle uncertainties and associated risks in the
organisation.
It guides the organisation to get to where it wants to go, and avoid pitfalls
– ‰
and surprises along the way (COSO).
It is a systematic approach to a historically intuitive exercise (Klein, Mandl
– ‰
and Sencer).
• The scope of ERM in an organisation can be briefly explained through the

following points:
– ‰
It integrates the performance of different departments of the organisation
with risk management capabilities.
– ‰
It conveys the organisation’s policy, approach and attitude towards risk
management.
– ‰
It sets the scope and application of risk management within the organisation.
– ‰
It defines clearly the roles and responsibilities for managing risks.
– ‰
It develops an approach that is consistent and aligned with relevant
standards across the industry. The approach ensures adoption of the best
practice for reporting risks.
• Risk management provides the following benefits to an organisation:
– ‰
It is an approach to manage the events or opportunities impacting the
objectives of an organisation.
– ‰
It supports the management to tackle potential negative effects of risks. It
also enables an organisation to take advantage of potential opportunities.
– ‰
It provides opportunity for enhanced planning of processes and improved
performance with focus on service delivery.
– ‰
It leads to the development of efficiencies within an organisation so that it
can face any uncertainties in the future with confidence.
– ‰
It leads to the growth and development of a positive organisational culture
where people are aware of their role in contributing to the overall
achievement of the organisation’s objectives.
• There are eight main components of ERM:
– Environment
– Setting of objectives
– Identification of events
– Risk assessment
– Risk response
– Control activities
– Information and communication
– Monitoring
• ERM is an approach to risk management that has evolved significantly in recent

times due to the following reasons:
– ‰
It covers and protects organisations against most types of risks, be they
financial, operational, compliance, governance, strategic, etc.
– ‰
Exposure to risks is managed as an interrelated risk portfolio.
– ‰
Risk evaluation is based on internal and external environments, systems,
circumstances and stakeholders.
– ‰
ERM works on the principle that the sum of individual risks in an
organisation is not equal to the individual risks across the organisation.
– The exposure created by combined risks is far more than the individual risks.
1. Drivers of ERM
• The several drivers of enterprise risk management are:
Risk governance
Risk identification and assessment
Risk quantification/mitigation
Risk monitoring/reporting
2. Drivers of ERM
• ERM has a huge impact on the business of an organisation and brings tangible
and quantifiable benefits that serve as major driving forces towards meeting the
objectives of the organisation. Some of these benefits can be listed as:
Stable earnings
C
‰apital volatility
Upgraded credit ratings
Compliance to regulatory requirements
Increased shareholder value

1. Assessment of Risk Exposures
• Risk exposure is a term for quantified potential loss to a business. Risk is divided
into two categories to quantify the probability of loss. These are:
– Pure risks: These risks include natural disasters or untimely death and are
beyond anyone’s control. The extent of loss can also not be estimated.
– Speculative risks: These risks are termed as voluntary risks. The outcome of
these risks results in either a profit or a loss for the business. Speculative
risks lead to potential losses such as property loss, property damage, strained
customer relations and increased overhead expenses.
• Depending upon the type of potential risk, variables are determined to calculate
the probability of the risk occurring in order to calculate risk exposure.
2. Assessment of Risk Exposures
• The assessment of risk exposure is done on the basis of the benefits and costs
involved in the given business.
• The following are the key principles for the assessment of risk exposure:
– ‰
Risk assessment should have certain business objectives to provide the basis
for measuring the impact and probability of risk.
– ‰
Governance over the assessment process should be clearly established to
foster a holistic approach and a portfolio view indicating the organisation’s
overall risk appetite and tolerance.
– ‰
Leading indicators should be captured to enhance the ability of anticipating
possible risks and opportunities before they materialise.
1. Assessment of Internal and External Risks
• External risks: These are risks that originate outside the organisation and
include economic trends, government regulation, competition in market and
change in consumer taste. They can be further divided into two categories:
regulatory risks and environmental risks. Regulatory risks pertain to laws,
regulations, policies and guidance governing organisations. Environmental risks
occur due to changes in the environment that have a direct bearing on the
working of the organisation.
• Internal risks: These risks are specific to organisations, such as employee

‰
performance, procedural failure and faulty or insufficient infrastructure. These
risks exist within the organisation and normally due to weakness in policies,
procedures, systems and personnel.
• Risk analysis is an ongoing process, and new internal and external threats
constantly develop presenting new hazards to the organisation.
• Organisations adopt different approaches for the analysis of internal and

external risks impacting their organisational working.
• External risk analysis is data-heavy, and since these risks are outside the control
of the organisation, a more systemic approach for analysis is required. Various
quantitative techniques like benchmarking, probabilistic modelling, etc., can
easily be applied to assess external risks in organisations.
• Internal risk analyses are far more specific and controllable processes. The
operational risk assessment method is adopted by organisations to manage risks
due to inadequate business decisions. They include compliance risks, internal
audit risks, etc.
External Business Ecosystem

• A business ecosystem pertains to a changing environment. It sets a connection
between a market economy and an individual organisation.
• A conscious decision by an organisation to innovate and gain commercial success

makes a business ecosystem.
• A business ecosystem has a large number of interconnected participants and

different kinds of interactions.
• These interactions in the ecosystem are described as competitive or cooperative.
• A business ecosystem is located in an environment that has varied political,

cultural, social and legal aspects.
Internal Environment
• An organisation’s internal environment includes the organisation’s elements such
as current employees, management and, especially, corporate culture that defines
employee behaviour.
• These factors impact the approach and success of various operations within the
organisation.
• The key to the success of any business depends upon how well the organisation is
able to manage the strengths of its internal operations and recognise potential
opportunities and threats outside of these operations.
Let’s Sum Up
• R
‰isks include immediate financial market exposures, regulatory compliance
issues, social and demographic changes, global warming, etc.
• ERM provides organisations the required framework to assess and mitigate risks
‰
so that organisational objectives are met in the most effective manner. In other
words, it provides organisations with a holistic approach to deal with risks.
• ERM not only provides ongoing protection but also a competitive advantage as
‰
well as adding value to the short- and long-term perspectives of organisations.
• Risk exposure is a term given for quantified potential loss to a business. The
‰
estimation of risk exposure is done by multiplying the probability of an incident
occurring by its potential loss to an organisation.
• A business ecosystem pertains to a changing environment. It sets a connection

‰
between a market economy and an individual organisation.
Chapter 10: Identification
and Management of Risk
Chapter Index
From-To
2 Topic 1 Enterprise Risk Management 228

with 360 Degree Approach
3 Topic 2 Risk Registrar 229-236
4 Topic 3 Enterprise Risk Management 237-241

Framework
5 Topic 4 Risk Management Committees 242

Chapter Index

From-To
6 Topic 5 Audit Committee in Risk 243

Management
7 Topic 6 Council in Risk Management 244
8 Topic 7 Risk Champions 245

• Explain the concept of enterprise risk management with a 360 degree approach
• Define risk registrar
• Illustrate risk management framework
• Describe risk management committee
• Identify audit committee in risk management
• Explain council in risk management
• Define risk champions

Enterprise Risk Management with 360 Degree Approach
• A 360 Degree Risk Management Model helps in evaluating a model by creating

and exploiting opportunities in an organisation.
• A 360 degree approach to ERM offers various benefits that are given below:
– ‰
Helps in achieving competitive edge and in-depth information
– ‰
Guarantees operational continuity as it helps in identifying the risks in early
stages that allows to reduce or avoid any financial loss
– ‰
Increases predictability and brand value
– ‰
Upgrades the quality of products and services
– ‰
Seeks and exploits opportunities that come with risks, however avoiding
unnecessary risks
1. Risk Registrar
• Organisations use a document to maintain their risk management information,

and this document is known as risk register or risk log.
• Risk register helps in classifying, standardising and merging information to be

used by the management. Its primary function is to furnish information to the
senior management, board members and key stakeholders on the main risks
faced by the organisation.
• The people involved in managing the risk registers are called risk registrars.
With the help of risk registers, senior management can:
– ‰
Understand the nature of the risks faced by the organisation
– ‰
Become aware of the severity of risks
– ‰
Identify the degree of risk that the organisation is ready to take
2. Risk Registrar
Finance
• Financial risk management can be defined as a process that focusses on
increasing the financial value of a business.
• This is done with the help of financial instruments, such as loans bonds, or
negotiable instruments.
• Financial value of a business has an impact on the market and credit risks of the
business.
• Financial risk management includes practices and procedures followed by

organisations to exploit the risk and gain financial interests from it.
• It is the responsibility of the senior management to present a written document

on the risks they are willing to accept and follow.
3. Risk Registrar
Operation
• Operational Risk Management (ORM) can be explained as a continual cyclic
process that includes the following:
– Risk assessment
– Risk decision making
– Implementation of risk controls
• The three levels of ORM are:
– In-depth
– Deliberate
– Time critical
4. Risk Registrar
Human Resource
• Human resources as a source of risk: Human resources are considered to be one
of the various sources of risk under circumstances such as shortage of workforce,
inefficient and ineffective work, refusal to take any additional responsibility and
key employees leaving after being trained for a particular project.
• Risk handling ability of human resources: Human resources are also considered
of key importance in handling the risk because they possess problem-solving
skills and find innovative ways to meet the challenging tasks for the betterment
of organisation.
5. Risk Registrar
Strategy
• Strategic Risk Management (SRM) is based on the following six principles:
– It can be defined as a process that is focussed on evaluating and managing

internal and external procedures as well as risks. These are responsible for
delaying the success of strategic objectives.
– The main objective of SRM is to build and protect the shareholder’s value.
– The organisation’s ERM forms the primary foundation for SRM.

6. Risk Registrar
Strategy
– As a part of ERM, strategic management is influenced by the board of
directors and management.
– SRM provides a strategic view regarding the impact of risks and the
organisation’s capability for achieving the pre-defined objectives.
– It is a never-ending and repetitive process that allows strategy setting,

strategy execution and strategic management.
7. Risk Registrar
Information Technology and Security Risk

• According to American National Information Assurance Training and Education
Center, risk in Information Technology (IT) field can be defined as:
– The total process to identify, control and minimise the impact of uncertain
events.
– An element of managerial science concerned with the identification,
measurement, control and minimisation of uncertain events.
– The total process of identifying, measuring and minimising uncertain events
affecting Information System resources.
8. Risk Registrar
Government Policy
• Governance is the combination of processes that are established and executed by
the board of directors.
• The type of governance an organisation has is reflected in the organisation’s

structure. The way the management of the organisation manages and tries to
achieve the pre-determined goals is an indication of the kind of governance that
exists in the organisation.
• Risk management involves predicting and managing risks that could probably
become an obstacle for an organisation in achieving its objectives.
• An organisation’s success depends upon compliance with the company’s policies

and procedures, laws and regulations.
1. Enterprise Risk Management Framework
• There are numerous important ERM frameworks that exist internally (within an
organisation) and externally (outside an organisation) and which help in
identifying, evaluating, reacting and tracking both risks and opportunities.
• Senior management chooses the risk response strategy for certain risks, which
may include the following:
– ‰
Avoidance
– ‰
Reduction
– ‰
Alternative actions
– ‰
Share or insure
– ‰
Accept
Casualty Actuarial Society Framework

• According to CAS Committee, ERM is the discipline in which an organisation in
any industry assesses, controls, exploits, finances, and monitors risks from all
sources for the purpose of increasing the organisation’s short- and long-term
value to its stakeholders.
• CAS has conceptualised ERM as proceeding across two dimensions, risk type and
risk management processes. Some risk types, conceptualised by CAS, include:
– ‰
Hazard risks
– ‰
Financial risks
– O
‰perational risks
– ‰
Strategic risks
Casualty Actuarial Society Framework

• The steps in the risk management process as conceptualised by CAS include:
Establish context
Identify risks
Analyse/quantify risks
Integrate risks
Assess/prioritise risks
Treat/exploit risks
Monitor and review

COSO ERM Framework

• The COSO Framework has the following eight components:
– Internal environment
– Objective setting
– Event identification
– Risk assessment
– Risk response
– Control activities
– Information and communication
– Monitoring
RIMS: Risk Maturity Model

• The RIMS Risk Maturity Model (RMM) is a framework that consists of the
following:
– ISO 31000
– OCEG Red Book
– BS 31100
– COSO
– FERMA
– Solvency II standards
Risk Management Committees
• A risk management committee comprises people who are responsible for

developing and supervising the risk management programme in an organisation.
Such committee is mainly responsible for carrying out the following functions:
– Knowing the level of organisation’s exposure to market risks
– Creating the risk control programme
– Developing a strategy for funding risks
• Risk management committees are basically useful for non-profit organisations.
• Risk management committees prove to be the most cost-effective bodies in

supporting the risk management needs of an organisation. They can operate as
either an organisation’s department or a separate strategic partner of the
organisation.
Audit Committee in Risk Management
• An audit committee consists of a specific number of members who assist an

organisation’s board of directors in managing risks.
• Though such auditors are directly related to the organisation, they perform
independently of the management.
• It offers numerous benefits by implementing the following steps:
– Improve internal control
– Improve financial management
– Clarify roles of board of directors
– Understand the value of audit expenses

Council in Risk Management
• IRGC is involved in activities such as risk governing, increasing awareness about

key risks and recommending shareholders about risk governance policies.
• IRGC is an international independent body that was established after

experiencing regulatory and risk management failures in the year 1990.
• It was established by Swiss Federal Assembly and aimed at bridging the gaps
between science, technological upgradation, decision makers and public.
Risk Champions
• Risk champions are the ones who possess the qualities of coordinating effectively
in a team, communicating effectually and thinking logically. All these qualities
enable them to deal with any risk situation with much ease and effectiveness.
• It is not necessary for them to be an expert in risk management, but their ability
to coordinate with the team and fundamental knowledge about risks makes them
champions.
• Risk champions help in assisting the risk management process in various areas of
management.
• Risk champions often act as change agents in a risk management process.

Let’s Sum Up
• A risk register the roles and responsibilities that each and every department has
to perform for ensuring proper risk management within an organisation.
• There are various roles that risk registrars perform, namely financial,
‰
operational, human resource, strategic, information technology and security risk,
and government policy.
• A risk management committee comprises people who are responsible for

developing and supervising the risk management programme in an organisation.
• An audit committee consists of a specified number of members who assist the

board of director of that company. The main responsibility of the board of
directors is to ensure that auditors are independent of the management.

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Business: Ethics,

Governance & Risk

1 Chapter 1 Concept of Business Ethics 5-28

2 Chapter 2 Values, Norms, Beliefs and Standards in 29-52

4 Chapter 4 Ethical Issues in Functional Areas of 78-101

6 Chapter 6 Corporate Governance: Ownership 127-150

7 Chapter 7 Corporate Governance Mechanism 151-174

8 Chapter 8 Corporate Governance in India: Statutory 175-198

9 Chapter 9 Enterprise Risk Management 199-223

10 Chapter 10 Identification and Management of Risk 224-248

• When a code of conduct is followed in business, it is called business ethics. A

• Corporate governance deals with looking after complete governance of various

• Risk can be defined as a situation that involves exposure to some unexpected

S. No Reference No Particulars Slide

2 Topic 1 Introduction to Ethics 8-16

3 Topic 2 Introduction to Business Ethics 17-20

4 Topic 3 Creating Ethical Environment 21-25

• Explain the concept of business ethics

• Discuss how to create ethical environment in business organisations

• Ethics is a moral philosophy that guides individuals to decide what is wrong or

Normative ethics Teleological ethics

Branches of ethics Metaethics Virtue ethics

• Ethics is a vast study of social science wherein methodical knowledge about

Discussions with others

Ethics vs. Morality

Ethics vs. Law

– What should I do?

– What is right and what is ethical?

– What will be the consequences of my actions and decisions?

– Would I be individually accountable if something went wrong?

– Who will protect me in case of any legal complications?

• According to Andrew Crane, business ethics is the study of business situations,

• Moreover, ethical business practices help in preventing ethical issues, such as

Characteristics of Business Ethics

A discipline of moral values

Study of objectives and means

Greater than law

Relevance of Business Ethics

• Stopping business malpractices: As discussed earlier, business ethics examines

• Safeguarding consumers’ rights: Business ethics ensure that the concerned

Relevance of Business Ethics

• Competing with healthy approach: Competition is inevitable, but a healthy

• Developing good relations: An organisation maintaining a code of conduct is able

• Businesses nowadays have adopted a proactive approach towards solving ethical

• For creating an ethical environment in an organisation, it should be ensured that

Embedding Ethics in Organisational Culture

Setting a code of ethics

Providing training on ethics

Designating an ethics officer

Checking response and ensuring enforcement

Performing audits, revisions and refinement

Guidelines for Ethical Behaviour in Business Organisations

Making managers as role models

Taking disciplinary actions for unethical

Rewarding ethical behaviour

• According to Brown, Trevino & Harrison, ethical leadership is defined as the

The 4-V Model of Ethical Leadership

• Vision: It implies planning actions to achieve organisational objectives.

• Voice: Communicating the vision is necessary for its effective implementation. A

• Ethics is a moral philosophy that guides individuals to decide what is wrong or

• Main characteristics of ethics are truthfulness, accuracy, objectivity and

2 Topic 1 Values, Norms, Beliefs and 32-37