Book 11

NMIMS GLOBAL ACCESS
SCHOOL FOR
NMIMS CONTINUING EDUCATION
DHmNtt11>tUNIVEI\SITY
BUSINESS: ETHICS, GOVERNANCE & RISK
NMIMS GLOBAL ACCESS

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u,,,, ....... i MUNJVERSITY
CONTINUING EDUCATION
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Ms. Paramita Dhar Ms. Paramita Dhar
Visiting Faculty, NMIMS Global Access - Visiting Faculty, NMIMS Global Access -
School for Continuing Education School for Continuing Education
Specialization: Organizational Behaviour, Specialization: Organizational Behaviour,
HRM, General Management and Business HRM, General Management and Business
Ethics & Corporate Governance Ethics & Corporate Governance
Chief Academic Officer

Dr. Sanjeev Chaturvedi
NMIMS Global Access - School for Continuing Education
Author: Dr. Arunachal Khosla

Reviewed By: Ms. Paramita Dhar
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C O N T E N T S
CHAPTER NO. CHAPTER NAME PAGE NO.
1 Concept of Business Ethics 1
2 Values, Norms, Beliefs and Standards in Business Ethics 21
3 Indian Ethos 47
-
4 Ethical Issues in Functional Areas of Management 81
,
'
5 Introduction to Corporate Governance 111
-' -
6 Corporate Governance: Ownership Structure 137
·- .,
7 Corporate Governance Mechanism 159
/\.. - .... ,
'
8 Corporate Governance in India: Statutory Perspective 181
9
'0 Enterprise Risk Management 209
10 Identification and Management of Risk 233
11 Case Studies 261

BUSINESS: ETHICS,
GOVERNANCE & RISK
CURRICULUM
Concept of Business Ethics: Introduction to Ethics-Objectives, nature and source of Ethics, Eth-
ics Vs Morality, Ethics Vs Law, Ethical dilemmas, Introduction to Business Ethics, Features and
Relevance of Business Ethics in the era of globalisation, Creating Ethical Environment in Busi-
ness Organisation, Embedding Ethics in Organisation Culture, Guidelines for Ethical Behaviour in
Business Organization, Ethical Leadership
Values, Norms, Beliefs, and Standards in Business Ethics: Concept of Values, Norms, Beliefs and
Standards in Ethical Context, Characteristics of Values, Types of Values-Spiritual values, Spiritu-
al Managerial Values and Professional Managerial Values, Business Ethics and Values: Honesty,
Trust, Fairness and Respect, Objective of Value Based Management, Factors Responsible for the
Enhancement and Dilution of Human Values
Indian Ethos: The Relevance of Indian thos-Spiritualty at Work, Indian Work ◄ thos and Prin-
ciples of Indian Management: Principles of Ethical Power for organizations, Nishkam Karma and
Business World, Teachings from Scriptures and Traditions: Mahabharata, Gita and Work Ethos,
Eroding Values and Emerging Ethical Issues in Contemporary Indian Management
Ethical Issues in Functional Area of Management: Ethical Issues in Marketing, Ethical Issues in
HRM, Ethical Issues in IT, Ethics in Production and Operation Management, Ethics in Finance and
Accounting
Introduction to Corporate Governance: Corporate Governance: Objectives and Goals of Corporate

Governance, Dimensions of Corporate Governance (Internal and External), History of Corporate
Governance: Origin and Development of Corporate Governance, Emerging Trends in Corporate
Governance, Corporate Governance Forms and Models, OECD Principles of Corporate governance,
Theories Underlying Corporate Governance: The Stakeholder's Theory, The Stewardship Theory
and the Agency Theory, Corporate Governance as a Systemic Process (Transparency, Accountabil-
ity and Empowerment), Ethics and Corporate Governance, Corporate Social Responsibility and
Corporate Governance
Corporate Governance: Ownership Structure Ownership Concentration, Ownership Composi-

tion: Shareholder Control and Protection, Board of Directors and their Fiduciary Responsibilities,
Executive Compensation, Minority Shareholder rights Transparency and Information Disclosure,
Ownership Pattern of Companies in India, Issues in Managing Public Limited Firms - Agency
Problems, Separation of Positions of Chairman and CEO, Separation of Ownership and Manage-
ment

Corporate Governance Mechanisms: nternal Corporate Governance: Board of Directors-Functional
Committees of Board Role of Board of Directors, Directors' Remuneration, Code of conduct, Whistle
Blowing and Whistle Blowers, Non-executive Directors and their Roles, Audit Committees and Role
of Auditors, External Corporate Governance: Debt Covenants, Role of Government, Role of SEBI and
other egulators, romoters
Corporate Governance in India: The Statutory Perspective: Evolution of Corporate Governance in

India, The Legal Statutes and Committees - The Companies Act, 1956, The Companies Act, 2013 (the
new Act), The SEBI guidelines, The Accounting Standards issued by the ICAI, The listing agreements
with the stock exchanges in which they are listed, The Kumaramangalam Birla Committee, The Cad-
bury Committee, The Corporate Governance and Ethics Committee(NASSCOM), Reports on Corpo-
rate Governance: The CII Report, The RBI Report on International Financial Standards and Code
(March 2001), Reports of Naresh Chandra Committee I (2002) and II (2003), The Murthy Report
Enterprise Risk Management-Risk Assessment: Concept of Risk in Organisational Context, What is

◄ nterprise Risk Management? Drivers of◄nterprise isk Management, Assessment of isk Exposures,
Assessment of Internal and External Risk: External Business Ecosystem, Internal Environment
Identification and Management of Risk: Enterprise Risk Management with 360 Degree Approach,
isk Registrar: Finance, Operational, uman Resource, Strategy, Information Technology and Security
Risk, Government Policy, Enterprise Risk Management Framework: Casualty Actuarial Society Frame-
work, COSO ERM Framework and RIMS Risk Maturity Model, Risk Management Committees, Audit
Committee in Risk Management, Council in Risk Management, Risk Champions

CONTENTS
1.1 Introduction
1.2 Introduction to Ethics
1.2.1 Characteristics of Ethics
1.2.2 Nature of Ethics
1.2.3 Sources of Ethics
1.2.4 Ethics vs. Morality
1.2.5 Ethics vs. Law
1.2.6 Ethical Dilemmas
Self Assessment Questions
Activity
1.3 Introduction to Business Ethics
1.3.1 Characteristics of Business Ethics
1.3.2 Relevance of Business Ethics
Activity
1.4 Creating Ethical Environment in Org,anisations
1.4.1 Embedding Ethics in Organisational Culture
1.4.2 Guidelines for Ethical Behaviour in Business Organisations
1.4.3 Ethical Leadership
1.4.4 The 4-V Model of Ethical Leadership
Activity
1.5 Summary
1.6 Descriptive Questions
1.7 Answers and Hints
1.8 Suggested Readings for Reference

2 BUSINESS: ETHICS, GOVERNANCE & RISK
INTRODUCTORY CASELET
N O T E S
THE RAJAT GUPTA INSIDER TRADING CASE
Virtue ethics guide the conscious and subconscious mind of a

professional in deciding what is right and what is wrong. Being
virtuous requires consistently practising right acts and develop-
ing it as a habit. The infamous case of Rajat Gupta and insider
trading validates the theory of virtue ethics. Rajat Gupta is an
Indian-origin businessman based in the US. He had been asso-
ciated with many big names during his professional career in-
cluding Goldman Sachs, American Airlines, Procter & Gamble,
The Global Fund, International Chambers of Commerce and The
Gates Foundation. He served these firms as their board of direc-
tor, corporate chairman and strategic advisor.
When this case came in light in 2012, Rajat Gupta was working as
the Managing Director of the most famous business and manage-
ment consultancy firm McKinsey & Company with presence in
India and the US.
This whole case started in September 2008, when Warren Buffet

made an agreem nt with Goldman Sachs of worth $5 billion in re-
turn for preferred shares in the company. The motive behind this
deal was to lift up the share price of Goldman Sachs, and hence
this news was considered topmost confidential. Every involved
party was strictly asked not to disclose the news in public.
However, the moment the Board of Directors of Goldman Sachs

gave approval to Warren Buffet's proposal, Rajat Gupta gave a
call to Raj Rajaratnam, his old friend. Raj Rajaratnam is a billion-
aire and founder of Galleon Group. On receiving this valuable in-
formation and gauging the opportunity, Raj Rajaratnam instantly
bought Goldman Sachs's share. Next morning, with the opening
of the stock market and rise in the share price of Goldman Sachs,
Raj Rajaratnam received $1.2 million approximately as a profit.
The estimation done by the U.S. Securities and Exchange Com-

mission determined that this inside trading done by Rajat Gupta
resulted into the generation of illicit profits or loss avoidance of
more than $23million.
The US court started the hearing of Rajat Gupta case on 22 May

2012, and he was found guilty of insider trading charges. n June
2012, he was convicted for the same. In October 2012, the court
gave a verdict on this case and announced an imprisonment of 2
years to him with supervised release for one additional year and a
fine of worth $5 million.

N O T E S
This case directly and indirectly affected the lives of many, of

which the majorly affected were:
□ Goldman Sachs
□ McKinsey & Company
□ Raj Rajaratnam
□ Galleon Group
□ Warren Buffet
□ U.S. equity markets, and
□ Raj at Gupta himself
Besides the abovementioned parties, people who were indirectly
affected were the kith and kin of Rajat Gupta, Goldman Sachs's
creditors and investors, employees of Galleon Group and McK-
insey & Company, among many others.
Rajat failed to maintain his integrity to Goldman Sachs by leaking

confidential information to an outsider for his personal benefits.
Also, he could not be honest towards his duty for which he was
employed and towards his fellow board members by sharing in-
formation entrusted only to him. His actions resulted into a bene-
fit to him and his friend Raj Rajaratnam, which somewhere com-
promised upon fairness towards the interests of Goldman Sachs's
other investors. Moreover, Rajat's relationship with his business
associates, colleagues, clients and McKinsey & Company also
broke that he had developed over the years.
The study ofRajat Gupta's life shows that he came from a humble
background and had always been actively offering medical and
humanitarian help to various sections of developing countries. He
was respected and considered ideal in an advisory and consulting
community for the trust he had earned through his work. Few un-
ethical incidents due to lack of virtue ethics on part of Raj at Gupta
washed away all this respect and trust of lifetime earned by him in
the society and industry.

N O T E S
@) LEARNING OBJECTIVES
After studying this chapter, you will be able to:

-- Explain the concept of ethics in detail
-- Explain the concept of business ethics
Discuss how to create ethical environment in business or-
ganisations
Ill INTRODUCTION
Ethics can be defined as a set of principles that helps in segregating
fair from unfair. In other words, it is a branch of philosophy that deals
with standards for right and wrong behaviour of individuals.
When a code of conduct is followed in business, it is called business

ethics. A business has several stakeholders such as consumers, finan-
cial institutions, government, employees and suppliers. Ethical busi-
ness practices help in delivering values to its stakeholders, which, in
turn, develops loyalty quotient for the business.
In today's competitive scenario, it is mandatory for an organisation to

deliver values by adopting ethical practices in order to lead the mar-
ket. Ethical behaviour plays a significant role in an organisation and
can bring various benefits to an organisation in terms of customer
loyalty, satisfaction of employees, congenial work environment, large
number of investors, etc.
This chapter covers the concept of ethics. In addition, it discusses the

significance of business ethics. Lastly, guidelines for ethical behaviour
■ fj
in business organisations are explained in detail.
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 for-
mal study of moral standards and conduct. The word ethics has been
derived from the word ethos, which implies culture. The following are
some popular definitions of ethics given by management experts:
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 sarne
rules apply to everyone alike.
According to Philip Wheel Wright, ethics is the branch of philosophy

which is the systematic study of selective choice, of the standards of right
and wrong and by which it rnay ultirnately be directed.

N O T E S
There are three branches of ethics, which are explained as follows:

□ Normative ethics: It is the main branch of ethics that deals with
how individuals decide upon the right and appropriate moral ac-
tion or deed that they should take. Eminent philosophers such as
Socrates and John Stuart Mill contributed largely to this branch
of ethics. Normative ethics can further be divided into three cate-
gories:
♦ Deontological ethics: As per this ethical theory, certain ac-

tions are right or wrong in their own and involve absolute eth-
ical standards that are required to be maintained. Therefore,
to make correct moral choices, an individual requires under-
standing of his/her moral duties and about the rules that exist
to regulate those duties. It can be simply understood as when
an individual follows his/her duty, he/she is behaving morally.
On the other hand, in case of failing to follow the duty, he/she
is behaving immorally. However, some philosophers argue that
though, certain underlying notion of right or wrong constrain
our actions; in particular circumstances they might be over-
ridden. For example, there could be a strong moral constraint
against killing someone, however in the time of war, this con-
straint could be overridden.
♦ Teleological ethics: This theory defines that consequences of

an action play an important role in determining what to do and
what not to do. Therefore, this theory determines the rightness
of an action in terms of goals or purposes. In other words, it is
the outcome or result that determines what is right, instead
of the input or actions. n order to make correct moral deci-
sions, an individual needs to evaluate which action may result
into what outcome. If someone makes choices which result in
the correct consequences, then he/she is acting morally. On the
other hand, if the made choices result in the incorrect conse-
quences, then he/she is acting immorally.
♦ Virtue ethics: This theory does not give any rule that people
should follow. Instead, this ethic-based theory focuses more on
developing good character traits, such as kindness and gen-
erosity among people. According to this theory, if people have
good and strong character traits, they will make correct de-
cisions in their lives. Virtue theory also emphasises over the
need of learning how to break bad character habits, such as
greed and anger. It is important to get rid of these bad charac-
ter traits as they stand in the wayof becoming a good person.
□ Metaethics: This branch of ethics explores the scope of moral val-
ues in the life of individuals. It answers fundamental philosophical
questions about the ethical theory.
□ Applied ethics: This branch deals with the study of applying the-
ories in everyday life. For example, applied ethics asks questions
such as "Is it right to have gender inequality at the workplace?"

N O T E S
EXHIBIT
Ethical Relativism
Ethical relativism denies the existence of any fixed universal truths

on ethical theories. It rejects the concept that there are any valid
moral principles, theories, standards, or values. Thus, it believes
that everything is subjective. Ethical relativism is further classified
into:
D Conventionalism: A particular set of ethics or moral principles
are valid only within a given culture and for a certain period of
time.
D Subjectivism: Every individual decision determines the validi-
ty of moral principles.
The ethical relativism says that the standards of a society define

what morally correct behaviour is. Ethics are set according to the
directives of that society for a particular period of time. Thus, if
an individual follows the standards of that society then he/she is
behaving ethically. However, here it is not necessary that the same
ethical standards would apply on other societies too. Therefore, a
behaviour that is considered ethical in one society might be consid-
ered unethical in another. Similarly, ethical standards change over
time. For example, certain practices of the 18th century that were
considered as ethical at that time might not be the part of the ethi-
cal standards of the 20th century.
1.2.1 CHARACTERISTICS OF ETHICS

Ethics are concerned with setting the moral standards and norms of
human behaviour. In an organisation, employees are expected to pos-
sess highly defined ethics. This is a strong ethical base of employees
that ensures high productivity of both the employees and the organi-
sation. Thus, it is important for an organisation and its employees to
have a deep insight into the characteristics of ethics:
□ Truthfulness: Ethics are said to be related to the true thoughts
and actions of an individual or organisation. Maintaining authen-
tic practices is of utmost importance for any organisation. On the
contrary, fraudulent acts done in the present may bring huge loss-
es to an organisation in the future. Satyam Scandal is an example
of fraudulent practices of a company that misled the market by
misrepresenting its accounts. The profits and cash balances were
inflated wrongly to show the company's good health.
D Accuracy: It implies that organisational information should be
correct on ethical grounds and without any mistake. In addition,
there should be transparency in every part of the information.

N O T E S
This in turn leads to consistent and quality processes, increased

operational efficiency and high accountability.
□ Objectivity: Ethics should be clear and objective in nature. For
example, ethically, an individual's action should always be seen as
right or wrong regardless of the situation or consequences. If an
organisation has objective ethics in place, it would help employees
to easily adopt the organisation's ethical values without any hin-
drance.
D Accountability: The ethical values of an organisation prompt em-
ployees to become accountable for their actions. This in turn helps
the organisation to carry out its practices ethically.
1.2.2 NATURE OF ETHICS
Ethics lay emphasis on doing the right things. It is an enquiry into the
truth and notinto what people believe is not true. The nature of ethics
is explained in the following points:
D 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 knowl-
edge 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.
It can be implied that at the basic level, ethics deal with moral ver-
dict regarding the directed human behaviour.
□ Ethics is a normative science that involves the incoming of moral
standards that control right and wrong conduct.
1.2.3 SOURCES OF ETHICS
Ethics of an individual are formed from almost arbitrary variety of

sources, such as memories related to childhood upbringing; funda-
mental life experiences; religious beliefs; discussions with family, col-
leagues and friends; and ethical teachings of philosophers. The follow-
ing are some sources from which an individual draws ethics:
D Religious beliefs: There are diverse religions across the world. All
these religions are in accordance with certain ethical principles.
Practically, all the world's religions teach and guide an essentially
analogous code of ethics that highlight or stress on values like re-
spect for others and their rights, selflessness, etc. So, in all phases
of life, be it business or personal situations, a highly religious per-
son is expected to act in ethical ways.
D Culture: It is the culture that sets guidelines and acts as a deciding
factor to certain behaviour as acceptable and others as undesir-

N O T E S
able or obj ctionable. Culture r fers to a set of values, guidelines

and standards transferred across generations and acted upon to
produce a behaviour that falls under acceptable limits. These rules
and codes of conduct play an imperative role in formulating val-
ues as individuals identify their behaviour with the culture of the
group they belong to.
□ Legal system: Laws are framed by the legal system of a state or
country. They act as a regulator to guide human behaviour within
a social framework. These laws act as ethics for they incorporate
ethical standards.
□ Discussions with others: Individuals engage in various discus-
sions during the day, such as telephonic conversations, food time
conversations, gossiping, etc. Usually, these discussions make indi-
viduals draw a conclusion and set it as a source of ethics.
□ Ethical philosophers: Philosophers such as Plato, Aristotle, Kant
and Bentham have given various ethical theories that influence
the ethics of individuals to a large extent.
1.2.4 ETHICS VS. MORALITY

Ethics and morality are used interchangeably in day-to-day business
practices, but their inherent meanings are different. Both ethics and
morality help an individual to distinguish between right and wrong.
The morals of an individual refer to his/her personal feelings and prin-
ciples, while ethics define rules and regulations imposed by the ex-
ternal environment, such as code of conduct defined by employers,
religious groups, government, etc. For example, a defence lawyer is
responsible for defending his/her clients as per professional ethical
codes, even if the lawyer does not find the client innocent.
The ethics and morality can be distinguished on various parameters

such as their origin, definition, source of origin, requirement, flexibili-
ty, accessibility and so on. Table 1.1 presents this difference.
Parameters Ethics Morality

Origin Originated frorn a Originated from Latin
Greek word ethos, word mos, which means
which means character. customs.
Definition Ethics can be defined Morality can be defined as
as the codes of conduct a system of principles that
that are acceptable to determines the right or
civilised human groups wrong conduct by an indi-
and cultures and are vidual.
applicable to certain
human actions.

N O T E S
Parameters Ethics Morality

Source of origin Ethics develop from ex- Morality develops from in-
ternal sources such as ternal sources; for exam-
social system. ple, from individual's own
beliefs and principles.
Requirement Ethics are imposed by Morality is driven by inner
the society. self-belief.
Flexibility Ethics have a moderate Morality is firm in nature
degree of flexibility as but can change only if
they are totally depen- there is a change in the in-
dent on a social system dividual's belief.
for applicability.
1.2.5 ETHICS VS. LAW

Usually, anything defined legal is considered to be ethical, but it is
not true. For example, breaking promises and lying are considered in
most of the societies to be unethical but would be considered legal if
terms and conditions were documented beforehand.
n management context, there exists a relationship between ethics

and law, in fact, in some situations, they even overlap each other. For
instance, in some situations, something perceived as illegal is also
considered unethical, or something assumed as unethical is consid-
ered legal; or something considered ethical may be illegal otherwise.
Law is defined as a perpetual set of rules that are published, accept-

ed, enforced and universally applied. It frames mandatory rules for
citizens to behave in a particular manner in the society. The legal and
legislative system of a country frames laws that are established and
enforced by the ruling government. On the other hand, ethics are de-
fined as the rules of conduct acceptable to specific human groups and
culture and applicable to certain human actions. Ethics determine
ethical codes for how an individual must interact and behave with
others in a society.
Ethics and laws can be differentiated on different parameters such

as their definition, source of origin, guiding principles, etc. Table 1.2
differentiates between ethics and law:
TABLE 1.2: DISTINCTION BETWEEN ETHICS AND LAW

Parameters Ethics Law
Definition Ethics are the rules of La,v is a set of rules framed

conduct acceptable to a by a government to main-
particular group or cul- tain legal balance in a soci-
ture. ety and provide security to
its citizens.

N O T E S
Parameters Ethics Law

Source of origin Ethics originate from the Law originates due to law
self-awareness of indi- enforcement by a govern-
viduals to decide what is ment on citizens.
right and what is wrong.
Codification Ethics are the codifica- Law is the codification of

tion of morals that an ethics that are developed to
individual should be ad- maintain law and order.
hering to.
Punishment The violation of ethics is The violation of law 1s a
not punishable. punishable offence.
Guiding principles Personal beliefs, v lues Ethics prevalent in a coun-
and morals of individuals try are the guiding princi-
are the guiding principles pies for framing laws there.
for developing ethics.
A classic example to explain the difference between ethics and law

is of driving. An individual driving under the permissible speed limit
and in adherence to traffic rules reflects his/her ethical values. On the
other hand, an individual wearing his/her seat belt and lowering his/
her car speed on noticing traffic police represents his/her fear of legal
action that could be taken for the violation of traffic rules.
1.2.6 ETHICAL DILEMMAS

In the discussion so far, you must have understood that ethics are de-
fined as the rules of conduct that determine the behaviour of an indi-
vidual or a group within a society. An organisation, in spite of operat-
ing ethically, may face a number of complex situations called ethical
dilemmas. A business professional often comes across ethical dilem-
mas that arise out of conflicting interests while making tough choices.
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?
In the case of an ethical dilemma, various alternatives are developed

for taking a particular decision. In such a case, there may be confusion
regarding assigning at the best decision. To overcome this confusion,

N O T E S
suggestions are taken from the stakeholders. The alternative that is

accepted by the majority is finally selected.
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 unethi-
cal interests
□ Self-moral values identification to set the standards of ethical and
unethical
g SELF ASSESSMENT QUESTIONS

1. A moral philosophy that guides individuals to decide what is
wrong or right, good or bad is called _
a. Responsibility b. Ethics
c. Truthfulness d. Attitude
2. Ethics are a vast study of wherein methodical
knowledge about moral and ethical behaviour is gained.
3. refers to a set of values, guidelines and
standards transferred across generations and acted upon to
produce a behaviour that falls under acceptable limits.
4. Ethics are the rules of conduct acceptable to a particular
group or culture. (True/False)
5. Ethical dilemmas are defined as complex situations that
involve the conflict of moral interests while choosing from
available
ACTIVITY
With the help of the Internet, collect data on the cultural forces of
various countries and evaluate their importance in forming ethics
in those countries.
Iii INTRODUCTION TO BUSINESS ETHICS

As discussed earlier, ethics deal with moral principles and a code of
conduct for people. In business context, ethics are all about conduct-
ing business based on a set of principles and standards for the welfare
of all associated. The following are some definitions of business ethics:
According to Andrew Crane, business ethics is the study of business

situations, activities, and decisions where issues of right and wrong are
addressed.

N O T E S
According to Raymond C. Baumhart, the ethics of business is the eth-

ics of responsibility. The business man must promise that he will not
harm knowingly.
The implementation of ethics in business is essential so that trust can

be built between an organisation and its stakeholders. Moreover, ethi-
cal business practices help in preventing ethical issues, such as insider
trading, corporate governance, bribery, discrimination, corporate so-
cial responsibility and fiduciary responsibilities. An organisation with-
out ethics can earn a profit in the short run, but it can be harder for the
organisation to sustain in the market in the long run.
On the other hand, an organisation following ethics may face losses in the
short run, but in the long run it can lead the market by delivering values.
1.3.1 CHARACTERISTICS OF BUSINESS ETHICS
Business ethics deal with ethical principles or problems that can arise
in a business environment. The following are the characteristics of
business ethics:
□ A discipline of moral values: Business ethics are the guiding values
related to the functioning of a business. It is the information through
which human behaviour is assessed in a business situation. A busi-
ness affects the society to a large extent, thus having a number of
responsibilities to fulfil for the society. Businesses must ensure a reg-
ular supply of quality goods and services at reasonable prices to their
conswners. Unfair trade practices, such as adulteration, promoting
misleading advertisements and black marketing, must be avoided by
businesses. They must ensure the payment of fair wages and provide
good working conditions for workers. In addition, business firms
must pay all their taxes and duties regularly to the government.
□ Relative term: Ethics is a relative term for morality and immoral-
ity. It deviates from one person to another or from one society to
another. For example, something that is considered moral in one
society may be immoral in another society. Thus, ethics is a broad-
er concept and is not universally applicable in the same sense or
in the same situation.
□ Study of objectives and means: As stated earlier, business ethics
segregates between fair and unfair. Business ethics ensures that
the means opted for satisfying objectives are rational and justified.
It is essential that goals and means be based on moral principles.
□ Interest of society: Business ethics explain the importance of busi-
ness in the society. They lay emphasis on the fact that a business
should first do well to the society and then to itself. A business has
a social responsibility to guard the interests of all its stakeholders.
□ Greater than law: Business ethics cannot be obligatory by law or
by force. It must be acknowledged as self-discipline by business

N O T E S
organisations. Businessmen should opt for ethical trade practices

by themselves and not by the pressure of law. Though the law im-
parts many social decisions, it cannot be considered greater than
ethics. Law is generally related to the bare minimum control of
communal customs, whereas ethics impart greater significance to
individual and social welfare deeds.
1.3.2 RELEVANCE OF BUSINESS ETHICS
As already discussed, a business that adopts ethical practices is able

to sustain in the market by delivering value to various stakeholders.
The importance of business ethics is explained in the following points:

□ Creating a good image: A business firm following a code of con-
duct (ethics) is able to create a good image of the business in the
minds of its customers. A good public image helps business firms
to lead the market.
□ Stopping business malpractices: As discussed earlier, business
ethics examines various ethical problems such as insider trading,
corporate governance, bribery, discrimination, corporate social re-
sponsibility 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. Moreover, an organisation with
customer loyalty is always able to emerge as a brand.
□ Safeguarding consumers' rights: As per the Consumer Act,
1986, a consumer has a right to safety, right to be informed, right
to choose, right to be heard and right to redress. Business ethics
ensure that the concerned business organisation is respecting all
these rights of its consumers.
□ Protecting other stakeholders: It is not only the consumer seg-
ment that should be treated well by organisations, there are many
other stakeholders as well that require fair treatment by organisa-
tions. For example, an organisation that treats its employees fairly
is able to get loyalty quotient from employees in return.
□ Competing with healthy approach: Competition is inevitable, but
a healthy approach towards competitors helps in building a cor-
dial atmosphere. Business firms should try to provide equal op-
portunities to small-scale businesses such as taking raw materials
from small-scale suppliers. They must ignore the formation of mo-
nopolies as it degrades consumer sovereignty.
□ 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. This
would help businesses in earning profits, which would lead to the
growth of economy.

N O T E S
6. Business ethics are the guiding values related to the

functioning of a business. (True/False)
7. A good image helps business firms to lead the
market.
8. What ethical problems can be examined by business ethics?
9. Business ethics cannot be obligatory by law or by force. (True/False)
ACTIVITY
With the help of the Internet, find and present information on how
business ethics helped TCS in boosting its market image.
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 ap-
proach towards solving ethical problems. An organisation must ex-
plore 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. Let us nowdiscuss how ethics can be em-
bedded in organisational culture in the next section.
1.4.1 EMBEDDING ETHICS IN ORGANISATIONAL CULTURE
Embedding ethics in the culture is an essential requirement to build

an ethical organisation. An organisation that has ethics embedded in
its culture can ensure the ethical behaviour of its employees. There
are certain steps and procedures that an organisation must follow to
make the organisation an ethical one. These steps are:
l. Getting commitment from top management: The top
management of an organisation includes all individuals that have
power to make strategic decisions. Anyaction taken at the toplevel
trickles down to the bottom. Therefore, an ethical environment
can be created in the organisation if the top management takes
an initiative towards adopting ethical practices.
2. Setting a code of ethics: To build and ensure an ethical and moral
behaviour in an organisation, formal codes must be developed.
These codes can be altered from time to time as per business and
human resource requirements. Such codes of conduct state the
norms and behaviour expected by the organisation in an explicit
manner. However, implicit norms also exist in the organisation

N O T E S
that are not stated anywhere but are followed throughout the
organisation.
3. Communicating ethics: After the codes of ethics are created,
it is important that they are communicated across in detail.
Successful implementation of any code depends on how well it
is communicated to people. In this regard, it is advisable that
the top management should hold meetings with employees on a
regular basis to inform them about existing or upcoming codes
of ethics.
4. Providing training on ethics: As stated earlier, communicating
the codes of ethics is important for an organisation. However,
assuming that employees will be able to fully practise these codes
is an overstatement. Employees may think that they are well-
informed about the code of ethics, but in reality, it may not be
so. Therefore, it is in the interest of the employees to attend and
imbibe ethical training sessions conducted by the organisation.
5. Designating an ethics officer: An ethics officer guides employees
in imparting ethical conduct and the right decision making. He/she
is the permanent employee of an organisation and a part of the top
management. If employees get to know about any wrong practices
being carried out in their organisation, they can inform the ethics
officer about it. The ethics officer guid s about what constitutes
moral behaviour and moral choice making. In some cases, there
is a whole panel that is dedicated to ethics. The activities that are
performed by the ethics panel includ the following:
♦ Organising regular meetings to discuss ethical issues
♦ Detecting areas where ethical codes are violated
♦ Communicating the codes of conduct to all members of the
organisation
♦ Recognising employees who show ethical behaviour and
punishing those who violate the stated codes.
6. Checking response and ensuring enforcement: For an
organisation, enforcing the codes of ethics throughout the
organisation is a major issue, which is also a difficult move. The
positive response of employees must be rewarded, while the
unethical and violating behaviour of employees must be curbed.
7. Performing audits, revisions and refinement: To ensure that
the code of ethics is being implemented and administered
successfully, reviews and audits are conducted. Such audits
include itemised examination of any potential infringement of
laws/regulations.
1.4.2 GUIDELINES FOR ETHICAL BEHAVIOUR IN

BUSINESS ORGANISATIONS
Business ethics is a term that is relevant to all organisations. A dis-

honest and unethical worker is not beneficial for an organisation in

N O T E S
any manner. Organisations must make provisions so that employees

indulge in an ethical behaviour. To encourage and enforce ethical be-
haviour in an organisation, various guidelines can be followed. These
guidelines are as follows:
□ Making managers as role models: Employees learn best by see-
ing what their superiors are practising. Therefore, managers must
demonstrate utmost ethical behaviour and emerge as role models.
To enforce moral conduct, managers must set examples. If super-
visors stick to ethics, employees will feel less hesitant to contradict
the rules laid out for ethical conduct.
□ Taking disciplinary actions for unethical behaviour: The man-
agement and all the individuals, who are entrusted with the re-
sponsibility of maintaining ethical behaviour, must lay down a
foundation for ethical behaviour in the organisation. It is the duty
of management to condemn misbehaviour or deceptive conduct
on the part of employees. It is also important that the management
takes steps to punish and/or penalise those who indulge in uneth-
ical practices so that other employees can have a clear idea of the
consequences of improper conduct.
□ Rewarding ethical behaviour: When an employee is rewarded for
positive conduct, it serves as a motivation tool for other employees.
Thus, it is essential that managers should recognise employees
whose actions and behaviour are in line with the ethical standards
in either supportive or hostile circumstances.
1.4.3 ETHICAL LEADERSHIP

In an organisation, leadership is a practice of motivating others to work
with confidence and develop zeal to attain the pre-determined goals
of an organisation. This can be possible if a leader behaves ethical-
ly and make ethical decisions. Ethical leadership is a leadership that
lays emphasis on ethical beliefs and values of individuals. These val-
ues can be integrity, honesty, fairness and so on. According to Brown,
Trevino & Harrison, ethical leadership is defined as thedemonstration
of normatively appropriate conduct through personal actions and inter-
personal relationships, and the promotion of s-u,ch 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. The following are the characteristics of
ethical leaders:
□ Promoting development of leadership skills in others
□ Taking accountability for the accepted roles and responsibilities
□ Taking into account the interests of the organisation, people and
society
□ Encouraging and inviting feedback, opinions and suggestions
from followers

N O T E S
□ Guiding people towards the right direction
1.4.4 THE 4-V MODEL OF ETHICAL LEADERSHIP
Dr. Bill Grace developed the 4-V Model of Ethical Leadership based on
his leadership research and personal passion for ethics. The model is a
framework that aligns the beliefs and values of individuals with their
behaviours and actions for the purpose of ethical leadership. Four Vs
in the 4-V Model of Ethical Leadership represent Values, Vision, Virtue
and Voice. The presence of these characteristics in a leader ensures eth-
ical leadership. Figure 1.1 shows the 4-V Model of Ethical Leadership:
Values
Figure 1.1: 4-V Model of Ethical Leadership

(Source: The Center for Ethical Leadership, 2014)
The four Vs are discussed as follows:

D Values: 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 objec-
tives. Ethical leaders outline their actions towards the successful
accomplishment of organisational objectives.
□ Voice: Communicating the vision is necessary for its effective im-
plementation. 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 identify-
ing what is right and what is wrong. He/she should practice virtu-
ous behaviour that depicts moral excellence.
SELF ASSESSMENT QUESTIONS
10. ar ek n o wn for their honesty, principles and

impartial approach to decision making.
11. Who developed the 4-V Model of Ethical Leadership?
12. An ethical environment can be created in an organisation if its
top management takes an initiative towards adopting ethical
practices. (True/False)
13. For creating an ethical environment in an organisation,
it should be ensured that the ethics of the organisation are
embedded in its

N O T E S
a. Attitude b. Lower management

c. Culture d. Memorandum
14. Successful of any code depends on how
well it is communicated to people.
ACTIVITY
Find the present information on any large Indian organisation in

the manufacturing sector that has embedded ethics in its culture.
IIJsuMMARY
□ Ethics is a moral philosophy that guides individuals to decide what
is wrong or right, good or bad and what comprises desirable be-
haviour 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, objectiv-
ity and accountability.
□ Religious beliefs, culture, legal system, ethical philosophers, etc.
are the main sources of ethics.
□ Ethical dilemmas are defined as complex situations that involve con-
flict 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.
□ Business ethics create a good image of an organisation, stop mal-
practices, protect stakeholders, develop good relations and im-
prove customer confidence.
□ Embedding ethics in the culture is an essential requirement to build
an ethical organisation. An organisation that has ethics embedded
in its culture can ensure the ethical behaviour of its employees.
□ Ethical leadership is a leadership that lays emphasis on ethical be-
liefs and values of individuals. These values can be integrity, hon-
es ty, fairness and so on.
a KEYWORDS
□ Audit: Inspection of an organisation's accounts.

□ Corporate governance: A mechanism of controlling and direct-
ing an organisation and protecting the interests of stakeholders.
□ Corporate social responsibility: A business practice of partic-
ipating in social initiatives that benefit both the society and or-
ganisation.

N O T E S
□ Insider trading: An illegal act of stock trading where the indi-

viduals involved utilise non-public information.
D Normative science: Information that guides what is the correct
way of doing things.
Ill DESCRIPTIVE QUESTIONS

1. Explain the concept of ethics.
2. Describe the sources of ethics.

3. Elaborate on the characteristics of business ethics.
4. Howcan ethical environment becreated inbusiness organisations?
5. Explain ethical leadership. Also discuss the 4-V model of ethical
leadership.
6. Describe ethical dilemmas.
Iii ANSWERS AND HINTS
ANSWERS TO SELF ASSESSMENT QUESTIONS
Topic Q. No. Answer

Introduction to Ethics 1. b. Ethics
2. Social science
3. Culture
4. True
5. Alternatives
Introduction to 6. True
Business Ethics
7. Public
8. Insider trading, corporate governance,
bribery, discrimination, corporate so-
cial responsibility and fiduciary re-
sponsibilities.
9. True
Creating Ethical 10. Ethical leaders
Environment in
Business Organisations
11. Dr. Bill Grace
12. True
13. c. Culture
14. Implementation

N O T E S
HINTS FOR DESCRIPTIVE QUESTIONS

1. Ethics is a formal study of moral standards and conduct. Refer to
Section 1.2 Introduction to Ethics.
2. Ethics of an individual are formed from an almost arbitrary
variety of sources. Refer to Section 1.2 Introduction to Ethics.
3. The implementation of ethics in business is essential so that trust
can be built between an organisation and its stakeholders. Refer
to Section 1.3 Introduction to Business Ethics.
4. An organisation must explore its internal business environment
for ensuring that ethical norms are being followed. Refer to
Section 1.4 Creating Ethical Environment in Organisations.
5. Ethical leadership is leadership that lays emphasis on ethical
beliefs and values of individuals. Refer to Section 1.4 Creating
Ethical Environment in Organisations.
6. An organisation, in spite of operating ethically, may face a
number of complex situations called ethical dilemmas. Refer to
Section 1.2 Introduction to Ethics.
II SUGGESTED READINGS FOR

• REFERENCE
SUGGESTED READINGS
□ De George, R. (1982). Business ethics. New York: Macmillan Pub. Co.
□ Grace, D. & Cohen, S. (1995). B·usiness ethics. Australia: Oxford
University Press.
□ Moon, C. (2001). Business ethics. London: Economist.
E-REFERENCES
□ Au.af.mil,. (2015). Values and Ethics. Retrieved 27 July 2015, from
http://www.au.af.mil/au/awc/awcgate/ndu/strat-ldr-dm/pt4ch15.
html
□ Heskett, J. (2015). How Ethical Can We Be?-HBS Working Knowl-
edge. Hbswk.hbs.edu. Retrieved 27 July 2015, from http://hbswk.
hbs.edu/itern/6711.html
□ Small Business - Chron.com,. (2015). List of Ethical Issues in Busi-
ness. Retrieved 27 July 2015, from http://smallbusiness.chron.com/
list-ethical-issues-business-55223.html

CONTENTS
2.1 Introduction
2.2 Values, Norms, Beliefs and Standards in Ethical Context
2.2.1 Values
2.2.2 Norms
2.2.3 Beliefs
2.2.4 Standards
2.2.5 Relationship among Values, Norms, Beliefs and Behaviour
Activity
2.3 Types of Values
2.3.1 Spiritual Values
2.3.2 Spiritual Managerial Values
2.3.3 Professional Managerial Values
Activity
2.4 Business Ethics and Values
2.4.1 Honesty and Integrity
2.4.2 Trust
2.4.3 Fairness
2.4.4 Respect
Activity
2.5 Value-Based Management (VBM)
Activity
2.6 Factors Responsible for the Enhancement and Dilution of Human Values
Activity

CONTENTS
Summary
Descriptive Questions
Answers and Hints
Suggested Readings for Reference
NMIMS Global Access - School for Conhnmng Education

VALUES, NORMS, BELIEFS AND STANDARDS IN BUSINESS ETHICS 23
N O T E S
THE DEARTH OF ETHICS AND THE DEATH OF

LEHMAN BROTHERS
This case relates to the dearth of ethics and the death of Lehman
Brothers. In an unprecedented move that rocked the financial in-
dustry to its core, on September 15, 2008, Lehman Brothers filed
for Chapter 11bankruptcy protection. It was the largest bankrupt-
cy case in the US history. It came even after repeated assurance
from the company's chief executives that finances were healthy,
liquidity levels were high and leverage was manageable. The im-
plosion of this Wall Street institution shattered consumer confi-
dence during fragility. Moreover, in the aftermath of its collapse, a
number of questionable decisions came to light. This analysis will
proceed in two parts. First, a recap of the series of events lead-
ing to Lehman Brothers' failure, followed by the identification of
several dubious choices made by its executive management team
and how the consequences led to the bank's ultimate demise.
HISTORY AND FACTS
Many believe the beginning of Lehman Brothers' fall started

when Washington repealed the Glass-Steagall Act. This landmark
legislation from the Great Depression separated the interests of
commercial and investment banks and prevented them from com-
peting against each other and protecting their balance sheets by
allowing each sector to focus on business transactions that it did
best. For investment banks, it typically meant high liquidity, as-
set-light portfolios, leaving commercial banks to handle capital-in-
tensive portfolios, including real estate or corporate investments.
In addition, the Act insulat cl the economy from mass collapse
in the event of one sector's failure by preventing the other from
being dragged down in tow. owever in 1999, President Clinton
signed the Gramm-Leach-Bliley Act. This allowed commercial
and investment banks to compete head-to-head for the first time
in 60 years. This would prove disastrous for Lehman Brothers,
the financial community, and the global economy at large.
With the repeal of Glass-Steagall, Lehman Brothers became a

key player in the US housing boom. From 2004 to 2006, Lehman
Brothers experienced 56 per cent surge in revenues from the real
estate business alone. The firm earned profits from 2005 to 2006,
and in 2007, it reported a net income of $4.2 billion on revenues of
$19.3 billion. In the same year, Lehman Brothers' stock reached
an all-time high of $86.18 per share. This gave the company mar-
ket capitalisation close to $60 billion. This proved exceptional to
the existing scenario; however, the housing market began to show
the signs of a pending bubble burst.

N O T E S
In March 2007, the stock market experienced its biggest sin-

gle-day plunge in five years. The number of mortgage defaults
simultaneously rose to the highest percentage in almost a decade.
Bear Stearns, Lehman Brothers' most comparable Wall Street ri-
val, experienced the total failure of two hedge funds in August.
Despite the rapidly deteriorating market, Lehman Brothers con-
tinued writing mortgage-backed securities and touting its finan-
cial strength to the press and shareholders. However, they kept
decrying the notion that domestic and global economies were in
danger. Meanwhile, its operations were reckless, as illustrated by
its $11.9 billion in tangible equity and $308.5 billion in tangible
assets on balance sheets in 2003. It yielded a leverage ratio of 26
to 1. After four years, its $20 billion in tangible equity and $782
billion in tangible assets sent its leverage ratio skyrocketing to 39
to 1. Even with storms brewing in every direction, Lehman Broth-
ers failed to trim its portfolio of high-risk, illiquid assets. Final-
ly, when crisis erupted in 2007, Lehman Brothers had missed its
chance. Instead of acknowledging this misstep, executives took
an internal action to preserve a rosy facade.
Through deliberate accounting sleight-of-hand, concealment and

communication of misleading information, until 2008 Lehman
Brothers maintained the appearance of underdog success to the
investment community. The primary means by which Lehman
Brothers disguised its distress was through the implementation
of what was known to insiders as "Repo 105". This legal but shady
accounting device helped to er ate favourable net leverage and
liquidity measures on the balance sheet. This was a key for credit
rating agencies and consumer confidence. By utilising Repo 105,
Lehman Brothers raised cash by selling assets to Hudson Cas-
tle, which appeared to be an independently run organisation but
was actually controlled by Lehman Brothers executives. In accor-
dance with Repo 105 terms, assets were sold to Hudson Castle and
repurchased between one and three days. Owing to the fact that
the assets were valued at 105 per cent of the cash received, GAAP
accounting rules allowed transactions to be treated as sales. Thus,
this removed the assets from the Lehman Brothers' balance sheet
altogether.
Under the direction of CFO Erin Callan and the certification of

CEO Richard S. Fuld, Jr., Lehman Brothers applied a technique
at the end of the first and second fiscal quarters of 2008. It in-
volved transferring a combined total of $100 billion, amending its
leverage ratio from 13.9 to a far more favourable 12.1. Thanks to
creative accounting and clever public relations, Lehman Brothers
was able to report a positive view of its net leverage. This includ-
ed a $60 billion reduction in net assets on the balance sheet and
a deep liquidity pool. Each of these quarterly balance sheet spins

N O T E S
was intended to offset the effect of announcing-for the first time

in years-a loss of $2.8 billion from write-downs on assets, de-
creased revenues and losses on hedges. Application of Repo 105
allowed Lehman Brothers to avoid having to report selling assets
at a loss.
During the bankruptcy investigation, the company's global fi-

nance controller admitted that, "there was no substance to [Repo
105] transactions". Fuld, Callan and their respective teams con-
cealed the use of this tactic from rating agencies, investors and
the board of directors. Ernst & Young, Leh.man Brothers' audit
firm, failed to alert either internal or external parties to the ma-
nipulation that was taking place, even when explicitly questioned.
They could not maintain illusion for long. However, in September
2008, Lehman Brothers' situation finally came to a head.
On September 10, 2008, just three months after reporting sec-

ond-quarter successes, Lehman Brothers announced that its sup-
posedly robust liquidity amounted to approximately $40 billion.
However, only $2 billion constituted assets that could be readily
monetised. The remainder was tied up on so-called "comfort de-
posits" with various clearing banks, and though the firm techni-
cally had the right to recall said deposits, the validity of Lehman
Brothers' work with these institutions was questionable at best.
By August, the deposits had been converted into actual pledges.
A few months prior, Fuld began coming to terms with Lehman

Brothers' negative outlook. In a last-ditch effort, he made a public
offering that yielded $6 billion in new capital for the firm. How-
ever, by the time the third fiscal quarter financial statements
were due, Lehman Brothers was projecting additional losses of
$3.9 billion. Its stock price had plummeted to $3.65 per share, a 94
per cent decrease from January 2008. Fuld announced a plan to
spin off the majority of the company's real estate holdings into a
new public company. However, there were no prospective buyers
(Holdings, Inc.). On September 13, the US Treasury made it clear
that Lehman Brothers would not be the recipient of any bailout
money. Instead, a number of financial institutions, including Bar-
clays and the Bank of America, were being encouraged to acquire
the faltering company, invigorate it with much-needed capital and
bring it back from the edge of collapse. Each potential acquirer
declined. On September 15, 2008, Fuld admitted defeat and finally
heeded private advice from Treasury Secretary Henry Paulson,
Jr. At 1:45 a.m., he filed for Chapter 11 bankruptcy protection,just
before the opening of Asian markets.
In the days following the largest bankruptcy filing in the US histo-

ry, the American market experienced such a shock that it had not

N O T E S
felt since the Great Depression. When the domestic stock market
opened on September 15, the Dow Jones dropped 504 points. The
following day, Barclays agreed to buy Lehman Brothers' United
States capital markets division for the bargain price of $1.75 bil-
lion. Meanwhile, the insurance giant, AIG was on the verge of total
collapse, forcing the federal government to step in with a financial
bailout package that ultimately cost $182 billion. On September
16, the Primary Fund announced that due to Lehman Brothers'
exposure, its price had plummeted to less than $1 per share. The
ripple effect of Lehman Brothers' failure was widespread. It led
to the rise of confidence crisis in global banks and hedge funds.
Credit markets froze, forcing international governments to step in
and attempt to ease concerns. On the domestic front, this resulted
in a controversial passage of the Trouble Asset Relief Program, a
$700 billion federal rescue aid package, on October 3, 2008.
ETHICAL ISSUES EXAMINED

So what went wrong? The collapse of Lehman Brothers was not
the result of a single lapse in ethical judgement committed by one
misguided employee. It would have been nearly impossible for an
isolated incident to bring the Wall Street giant to its knees, espe-
cially after it successfully withstood so many historical trials.
Instead, its demise was the cumulative effect of a number of mis-

steps perpetrated by several individuals and parties. These offens-
es can be categorised into three acts-lies told by CEO Richard
Fuld; concealment endorsed by CFO Erin Callan and negligence
on the behalf of Ernst & Young.
THREE WRONGS
1. When the housing market began faltering in 2007, Fuld was
entrenched in a highly aggressive and leveraged business
model, not unlike many other Wall Street players at the
time. Unlike competitors, a few of whom had the foresight
to identify the pending collapse and evaluate possible
consequences of mortgage defaults, Fuld did not rethink
his strategy. Instead he preceded into mortgage-backed
security investments, continuously increasing Lehman
Brothers' asset portfolio to one of the unreasonably high
risk given market conditions. n short, he was obstinate,
but when the time came to recognise his error, he did not
assume the responsibility or admit wrongdoing. Fuld had
an opportunity in 2007 to voice concerns about his bank's
short-term financial health and its heavy involvement in
risky loans. He squandered it in favour of communicating
to investors and Wall Street that no foreseeable concerns

N O T E S
existed. Had he been truthful, more competitive solutions-

along with the benefit of time-would have been available.
This could have likely helped in preventing or minimising
financial haemorrhage that loomed on the horizon. For
example, commercial banks, such as Barclays and the Bank
of America, which were approached for a snap acquisition
decision, would have had more time to evaluate whether
the move would complement their long-term strategies.
They also would have had more time and opportunity to
resuscitate Lehman Brothers than they did a few quarters
down the road.
In addition, while the immediate effects of admitting a shaky
outlook would have been negative, two repercussions must
be considered. First, large capital investors would have been
appreciative of transparency. Moreover, after getting past the
initial shock, they would have taken action to get the bank
back on track. Second, had the general public-including
the federal government-been aware of the situation and
the actionable measures being taken to rectify it, more
intellectual and financial aid would have been available to
minimise losses and potentially avoid total collapse. However,
this was not the case. By choosing to paint an unrealistically
optimistic picture of Lehman Brothers' financial situation,
Fu.Id forfeited the opportunity to take advantage of various
solutions that would have cut the company's losses. Had he
acted more prudently, Lehman Brothers' story may have
ended differently.
2. The second ethical lapse was perhaps the most premeditated
and fundamentally wrong decision. This was Callan's
approval of siphoning assets away from Lehman Brothers
accounts and into Hudson Castle. It was the phantom
subsidiary created for the benefit of its parent company's
balance sheet. This blatant misrepresentation of financial
health, perpetrated through the employment of Repo 105,
was an attempt togrossly manipulate the bank's stakeholders
and also clearly indicative of a much bigger problem. Even
more severe is the fact that this technique was used in
two consecutive quarters. Various documents examining
the collapse of Lehman Brothers, including congressional
testimonies and investigative reports, confirm that the
purpose of Repo 105 was not to diminish earnings for tax
benefits or similar effects. Instead, moving assets away from
the balance sheet was intended to create the illusion of a
company that was stable and secure. Had Lehman Brothers'
executive team been capable of managing the issue, this tactic
would have been a temporary stay until reorganisational

N O T E S
measures were taken and accurate statement releases could

be resumed. Instead, for six consecutive months, the bank's
leverage was so dangerously high that it had no choice but to
intentionally mislead its shareholders if it hoped to maintain
any semblance of confidence in its operation. As with
Fuld's decision to lie about the company's state of affairs,
Lehman Brothers would have been better served by fully
and accurately disclosing the details of its finances. With the
benefit of credibility and time to strategise, the likelihood of
receiving much-needed aid would have been far greater.
3. Finally, Ernst & Young, the only third-party privy to the
happenings at Lehman Brothers, failed to reveal the
extensive steps taken by executive leadership to conceal
financial problems. As a firm of certified public accountants
expected to honour and uphold an industry-wide code of
ethics, Ernst & Young may be accused of being responsible
for gross negligence and lack of corporate responsibility.
Why would such a highly respected organisation risk its own
reputation and turn a blind eye on behaviour that is clearly
unethical? Obviously, Lehman Brothers was a sizeable
(and presumably lucrative) client of the firm. However, past
scandals involving questionable accounting observances,
such as Enron, have demonstrated first-hand that inaction
is as qually reprehensible as direct involvement in the
scheme itself. More than just a paycheck was at risk, and
failure to act successfully discredited Ernst & Young on the
basis of ethical and industry standards.
As an accounting firm, Ernst & Young is charged with certify-

ing that companies deliver accurate and reliable information to
shareholders. In this regard, Ernst & Young failed completely, as
executives were aware of behind-the-scenes bookkeeping and
the extent to which it was occurring. In this situation, concern for
ethical behaviour was of minimal or non-existent concern. There-
fore, the company's shareholders were deliberately deceived for
the purpose of preserving a pay check. In that regard, the team
of accountants who chose not to act disappointed more than just
their company; they let down the entire industry and each of the
right-minded professionals within it.
The story of Lehman Brothers' demise is unfortunate, and not

just because its collapse meant the end of a Wall Street institution.
The real tragedy lies in the lack of ethical behaviour of its exec-
utives and professional advisors. They made conscious decisions
to deceive and manipulate. The consequences proved too dire to
preserve the historic investment bank's existence. The perennial
lesson of the Lehman Brothers case is that no matter how dire
the circumstances may appear, transparency and accountability

N O T E S
are paramount. Right action up-front might sting initially, but as

history has repeatedly shown, gross unethical business practices
rarely endure in the long term. A global financial crisis such as
that of 2008 may not be prevented from happening again. What
can be improved, in large measure through ethics education, is
how corporations behave. Wall Street should take note of the case
of Lehman Brothers to ensure history does not find a way to re-
peat itself.
(Source: http://sevenpillarsinstitute.org/case-studies/the-dearth-of-ethics-
and-the-death-of-lehman-brothers)

N O T E S

-- 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 dilu-
tion of human values
IJI INTRODUCTION
In the previous chapter, you have studied the basic concepts of ethics
and how these ethics are relevant to business. In this chapter, you will
study about ethics with broader concepts of values, norms, standards
and beliefs. Ethics is a branch of philosophy that deals with the code
of conduct followed by individuals in their personal and professional
lives. This code of conduct governs values, norms and beliefs of individ-
uals to a large extent and helps them to decide what is right or wrong.
Value refers to aspects that people consider good or bad and desir-
able or undesirable. n other words, these are collective assumptions
of what constitutes a good society. Examples of values are self-respect,
tolerance, freedom, etc. Values influence the behaviour and attitudes
of individuals to a large extent. Norms serve as general guidelines that
can be interpreted byindividuals in a manner things are actually done
and implemented. Beliefs are certain assumptions on which individu-
als and businesses take their decisions.
In this chapter, you will study the concept of values, beliefs, norms
and standards in an ethical context. You will also study the types of
values in detail. The chapter will also discuss the relation between val-
ues and business ethics. Towards the end, the chapter will also cover
value-based management and the factors that are responsible for the
enhancement and dilution of human values.
VALUES, NORMS, BELIEFS AND

STANDARDS IN ETHICAL CONTEXT
Every organisation operates in a particular business network com-
prising various parties, such as customers, employees, suppliers, dis-
tributors, investors and government agencies. With increased com-
petition 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 stan-
dards. Thus, to be successful, organisations need to imbibe positive

N O T E S
values, norms, beliefs and standards. Let us discuss them in detail in

the next sections.
2.2.1 VALUES
Values basically mean moral ideas, universal conceptions or points

of reference towards others. These are key factors that drive the be-
haviour of an individual or an organisation. In other words, values
can be defined as the interests, attitudes, inclinations, requirements,
emotions and character of individuals. The following are some popu-
lar definitions of values:
According to M. Haralambos (2000), a value is a belief that sornething

is good and desirable.
According to R.K. Mukherjee (1949), who was a pioneer Indian so-

ciologist who initiated the study of social values, values are socially
approved desires and goals that are internalised through the process of
conditioning, learning or socialisation and that become subjective pref-
erences, norms and aspirations.
Values influence the actions of individuals and determine their rela-

tionship with others in society. It can be said that values are deep-seat-
ed beliefs of a person or social group or a set of rules that people adopt
to take right decisions. Examples of values include patience, faithful-
ness, self-determination, fairness, justice, respect, tolerance, compas-
sion, etc. Individuals learn values from various sources, such as fam-
ily, parents, school, peer groups, teachers, and so on. Values enable
individuals to differentiate between superior/inferior, attractive/unat-
tractive, proper/improper, good/bad, wanted/unwanted and appropri-
ate/inappropriate in society.
ere, it should be remembered that values are not only important in
individuals' life but also are equally significant for businesses. In any
organisation, there is a set of business or corporate values. These val-
ues guide and inspire the organisation's employees to achieve busi-
ness goals and objectives successfully. ◄ xamples of organisational
values include trust, teamwork, stewardship, safety, responsiveness,
quality of life, innovation, cordial relationships, fairness, integrity,
commitment to customers, transparency, accountability, etc.
2.2.2 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 ex-
plicitly written down and people who violate these norms face a strict
action. All legal, social and religious norms are formal in nature. For
example, government officers are not allowed to take bribe is a norm.

N O T E S
In case, any official is found taking bribe, he/she can be punished. On

the other hand, informal norms are not written or mentioned any-
where. For example, it is expected that all people who go to a movie
theatre to see a movie should remain calm and do not make noise that
causes inconvenience to other viewers. This is a norm that is generally
accepted but nowhere in the theatre is it explicitly mentioned to do so.
2.2.3 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 sys-
tem of an individual starts developing early in their life; however, there
is only a little understanding regarding beliefs. There is a link between
psychology (present day school of thought) and the belief system.
2.2.4 STANDARDS
Standards refer to a level or degree of a specific parameter. Standards

may be measurable or immeasurable or may or may not be document-
ed. For example, in a test, scoring 50% to clear the test is a standard.
In an organisation, standards should be based on ethics. Ethical stan-
dards promote values such as trust, fairness and honesty. Generally,
organisations follow a set of globally accepted standards throughout
the world. Apart from this, every organisation also establishes a set of
standards that are specific to it.
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. For example, an organisation may have a standard that em-
ployees must treat customers with respect. Now, here the term respect
is quite debatable as it means different to different individuals.
2.2.5 RELATIONSHIP AMONG VALUES, NORMS, BELIEFS

AND BEHAVIOUR
The interrelationship between values, morals, ethics, principles and

behaviour is shown in Figure 2.1:
Principles Why Codes ofBeha, our

[ethics, morals, laws,
etc]
Values What
! How
--+- Behaviour
(Fill.er)
t Consequence
Figure 2.1: Relationship between Values, Morals, Ethics, Principles

and Behaviour

N O T E S
As per Figur 2.1, values possessed by an individual can be deter-

mined by behaviour they demonstrate. For example, an individual
works extremely hard to achieve goals. In this case, it can be said that
the individual values achievement/success. It means that there exists
a direct relation between the values and behaviour of an individual.
However, only the knowledge of values cannot help in predicting his/
her degree and nature of behaviour exhibited. In the example stated
above, the individual values achievement/success. However, it cannot
be said whether he/she would follow the right path to achieve or suc-
ceed in a particular aspect.
The views and beliefs of individuals are very difficult to change or

modify. This is because when individuals behave in a manner dictated
by their values, they do not see the real outcome of their activities.
What they see is the result filtered through the values. Thus, it can be
said they see what matches their values and they do not see what does
not match their values.
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. Let us understand
this with the help of an example. Assume that an organisation empha-
sises maintaining privacy. Now, norms corresponding to the value of
privacy may be not checking e-mails and letters of a person without
his/her prior permission. Norms should be followed by all the mem-
bers of the organisation. The values and norms would be reflected in
the behaviour of individuals.
1. According to R.K. Mukherjee's definition of values, values

are socially approved desires and goals that are internalised
through the process of
2. Informal norms are explicitly written down and people who
violate these norms face a strict action. (True/False)
3. Values possessed by individuals can be determined by
they demonstrate.
ACTIVITY
As a student, you might have closely observed your school or col-

lege and all its members. Make a list of values, behaviours, beliefs
and standards possessed there.
Ill TYPES OF VALUES

Since time immemorial, humans live together in a community and de-
velop values shared by other members of the community on what is

N O T E S
good or bad and right or wrong. These values largely influence the be-
haviour and attitude of individuals in a community as well as at their
place of work. Figure 2.2 shows three major values in business:
r Spiritual Values
]
r Spiritual Manageria.l Values )

r Professional Managerial Values ]
Figure 2.2: Types of Business Values
Let us discuss these three values in detail.
2.3.1 SPIRITUALVALUES
These 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. Some of these values
are explained as follows:
□ Harmony: In an organisation, every individual faces conflicts,
clashes, competition and disagreements with his/her colleagues. If
these issues take place more often, there can be an adverse effect
on the performance of the individual. Thus, it is important that
there should be coordination and good relationships among indi-
viduals. The degree of harmony depends on the level of spiritual
consciousness of individuals.
□ Truthfulness: It is often said that truth is an expression of divinity
and spirituality. Truth refers to something that is real. An individu-
al must be true in thoughts, words and his/her actions. An individ-
ual who remains truthful in every circumstance gets elevated to a
higher level of spiritual consciousness. Being truthful and honest
is also a part of code of conduct set by organisations.
□ Self-giving: Generally, people help each other with an assumption
that if they provide a helping hand to somebody, they will also get
help in return whenever needed. In case the same is not recipro-
cated from the other person, people feel disheartened and start
developing a grudge against each other. In contrast, people with
high spiritual values generally have a self-giving attitude and do
not expect much from others.

N O T E S
□ Faith: aith is a strong belief or confidence that is embedded in the

psychology of individuals. Our minds perceive faith as a value and
can make it a basis for living. According to Sri Aurobindo, faith is
the knowledge of the soul which the rnind does not possess. Faith is
required in every aspect of individuals. For example, if an individ-
ual wants to achieve something, he/she needs to have faith in his/
her abilities. However, the level of faith depends on the past ex-
periences and willingness of people to trust others. A person who
trusts others is able to develop cordial relations at the workplace.
2.3.2 SPIRITUAL MANAGERIAL VALUES
As discussed in the previous section, individuals at work place need

to possess some spiritual values to perform efficiently. Similarly, there
are some spiritual values that must exist at the workplace in order to
get the work done. These values are as follows:
□ Each and every individual is a source of immense talent and po-
tential that needs to be developed constantly
□ Work is worship
□ Excellence at work
□ Cooperation and teamwork
□ Business is sacred
□ Self-introspection
□ Decision making in silence
2.3.3 PROFESSIONAL MANAGERIAL VALUES
In an organisation, professional managerial values are possessed by

managers and they use these values to support their team members
towards the accomplishment of organisational goals and objectives.
However, as the nature of work is dynamic, managers need to adjust
their values and behaviour according to the changing nature of work.
Professional managerial values and qualities of a manager are dis-
cussed as follows:
□ Encourage others: A good manager always uses the abilities and
assets of his/her team members to get maximum work done by
them. While doing so, he/she strives to achieve two goals. First,
organisational work is done and secondly, the skills and abilities of
employees are enhanced.
□ Creativity: An ideal manager must be creative and drive creativity
in others too. Being creative means that a manager is able to gen-
erate innovative ideas and inspires his/her team to become more
creative. This helps the team to generate out-of-the-box ideas and
drive innovation in an organisation.

N O T E S
□ Intuitiveness: ntu1t10n means knowing in advance that some-

thing is going to happen. Every individual has some kind of in-
tuitive powers owing to which sometimes he/she can foresee the
occurrence of certain events. Individuals get this intuition after
having professional experience of many years. This may also be
called a gut feeling. Due to this foresight, managers may be able
to recognise what kind of events may take place in the near future
with a great degree of certainty.
□ Knowledge: A good manager has a strong knowledge base that
he/she uses to take various decisions. Decisions that are based on
knowledge are called informed decisions and there are very less
chances of informed decisions of being wrong.
□ Commitment: A good manager always remains focused and com-
mitted towards achieving his/her goals. Such a manager holds a vi-
sion as to how he/she wants to see his/her team and work towards
making his/her team's efforts a success.
□ Kindness and versatility: A good manager is one who is compas-
sionate and is always ready to listen to subordinates. Such a man-
ager is never scared to act and take bold actions. In addition, good
managers are flexible, versatile and adaptable.
EXHIBIT
Few Other Types of Values

Personal values: These are values that guide the entire life of
individuals. Personal values also determine the behaviour and
conduct of individuals in the society and ascertain how they
relate to other individuals. These values are family values, so-
cio-cultural values and individual values.
□ Family values: Every individual belongs to a family and every
family has a set of values that can be good or bad. Family values
are basically derived from parents and are passed on to chil-
dren in the family.
□ Social-cultural values: These values are ingrained in society
and change with time. Social-cultural values may or may not
resemble family or personal values. They constitute a very com-
plex mix of various values. These values, at times, may even be
contradictory.
□ Material values: These values are related to the basic needs
of human beings, such as food, shelter and clothing. Material
values constitute a part of the complex set of personal values,
family values and socio-cultural values. Material values refer to
a person's inclination towards gathering and valuing material
things. Such individuals view material things as a measure of
their and other people's success.

N O T E S
□ Moral values: These are the values that a society deems fit and
essential for the co-existence of individuals and their well-being.
Moral values lead to justified decisions, intentions and actions
of individuals. These values include integrity, courage, respect,
fairness, honesty, compassion, etc.

4. The values of individuals largely influence their behaviour
and attitude in as we ll as at their _
5. The three types of business values include spiritual values,
spiritual managerial values and
6. An individual must be true in thoughts, words and his/her
actions. This statement corresponds to which value?
7. Good managers always work based on suspicion and intuition.
(True/False)
ACTIVITY
Make a list of five values for each of the following:
a. Spiritual values
b. Spiritual managerial values
c. Professional managerial values
Please do not include values that have already been mentioned in

the text.
Ill BUSINESS ETHICS AND VALUES

As discussed in the previous chapter, business ethics deals with ethical
principles and problems that may occur in a business environment.
Showing ethical behaviour in business can bring a number of benefits
for an organisation. For example, an organisation with ethical practic-
es would be able to win the trust of customers; retain employees and
attract investors. This would ultimately boost the organisation's sales
and profits; reduce labour turnover; increase productivity; maintain a
pool of efficient employees, etc. On the contrary, 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.
However, such ethical behaviour can be maintained in an organisation

if its employees abide by the code of conduct set by the organisation.

N O T E S
For this, it is important that the organisation must imbibe positive val-
ues 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. Let us now study some ethical
business values that are universally accepted for conducting business
in the next sub-sections.
2.4.1 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 hon-
est. A person of high integrity would always be honest having strong
morals. Integrity means that an individual does what is right irrespec-
tive 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.
2.4.2 TRUST
Any society or business runs on trust that draws from ethical founda-
tions and social norms. A business does not run in isolation and there
has to be coordination between various stakeholders, such as employ-
ees, customers, suppliers and government agencies. Therefore, suc-
cess 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.
Studies conducted in the past have revealed that trust is a major fac-
tor in influencing the competitive position of an organisation in the
market. This is because stakeholders (like customers, investors and
employees) always prefer to deal with an organisation that fulfils
promises made by it; thereby winning the trust of these stakeholders.
2.4.3 FAIRNESS
Fairness and ethics are closely associated and sometimes used inter-
changeably. However, being fair in one's dealing requires being just
and equitable. In the context of business, being fair means that em-
ployees 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.

N O T E S
2.4.4 RESPECT
As discussed earlier, in a business, there needs to be coordination
between various stakeholders, such as employees, suppliers and cus-
tomers. This can be possible if differences between the viewpoints of
stakeholders are respected and conflicts are resolved amicably. Ethi-
cal businesses treat their employees, customers and other stakehold-
ers with respect, value autonomy and protect the interests of individ-
uals irrespective of their gender, caste, creed, race or origin.
8. ----- is an internal quality of being honest.

9Sta.
te any one benefit that organisations experience as a result
of ethical practices.
10. Values are the premise for the conduct and behaviour of
employees and members. (True/False)
11. treat their employees, customers nd other
stakeholders with respect
ACTIVITY
Make a list of 20 organisations from all over the world. Now, study
the business models of all these organisations and select one or-
ganisation which according to you applies value of respect, honesty
and fairness in its business.
Ill VALUE-BASED MANAGEMENT (VBM)

In the recent years, many new management approaches have emerged
with an aim to improve organisational performance. Some of these
approaches are Total Quality Management (TQM), continuous im-
provement, Business Process Reengineering (BPR), kaizen, etc. Most
approaches are successful in improving the business performance of
organisations except a few. The main reason for the failure of some ap-
proaches was unclear performance targets that were not aligned with
organisational values. VBM is an approach to ensure that organisa-
tions run their business on values. It ensures that performance targets
of organisations are aligned with:
D Corporate mission
□ Corporate strategy
□ Corporate governance practices
D Corporate culture

N O T E S
□ Corporate communication
□ Decision processes
□ Performance management and reward processes
There are three elements of a VBM system, which are:
□ Creating value: An organisation must aim to create value for its
customers and shareholders.
□ Managing value: An organisation must manage its business based
on corporate governance, change management, com1nunication
and leadership.
□ Measuring value: An organisation must establish as to what kind
of value addition has been done.
VBM is a system that gives importance to its customers and share-

holders. The system focuses on maintaining an ownership culture in
an organisation. Here, ownership culture refers to a culture where-
in employees perform activities and tasks that are usually not a part
of their assigned work responsibilities. In addition, VBM focuses on
maximising the value of a business organisation and empowering em-
ployees by providing them an opportunity to participate in the growth
of the organisation. Employees in a VBM environment are able to
make better decisions, become more disciplined and get involved in
team work.
The following are various benefits of VBM:

□ Helps in maximising value creation in an organisation
□ Helps in meeting the interests of management and shareholders
□ Mitigates risk and uncertainty and avoids unwanted corporate re-
structuring
□ Helps in increasing investments
□ Prioritises organisational activities and tasks
[I' SELF ASSESSMENT QUESTIONS
12. The performance targets of organisations must be aligned

with corporate governance practices and corporate culture.
(True/False)
13. Which of the following is not a feature of VBM?
a. Employees make better decisions
b. Employees are more disciplined
c. Employees do not follow an ownership culture
cl. Employees are involved in teamwork

N O T E S
ACTIVITY
Find at least two examples of organisations that follow the princi-

ples of VBM and study how VBMhelped them in achieving success.
FACTORS RESPONSIBLE FOR THE

ENHANCEMENT AND DILUTION OF
HUMAN VALUES
During the last few decades, the world has witnessed diminishing hu-
man values. The primary cause of these diminishing values is that in-
dividuals nowadays seek for materialistic pleasures at the same time
forsaking their values. This scenario of diminishing human valu sis
prevalent all over the world especially in developing countries like In-
dia. This is because in these countries, there is a large disparity be-
tween haves and have-nots. The haves represent the section of a soci-
ety that has sufficient resources for their survival, while the have-nots
include those sections of the society that are barely able to earn for
their survival (people living under or just above the poverty line). The
disparity between haves and have-nots often leads to a feeling of dis-
contentment and dissatisfaction among the have-nots. At various oc-
casions, dissatisfied individuals in order to gain a particular standard
of life indulge themselves in malpractices such as burglaries, theft,
murders, etc. This is a direct consequence of diminishing human val-
ues in the society.
Basic human values include trust, respect, care, compassion, coop-

eration, honesty, benevolence, etc. Dilution of human values leads to
various social problems, such as communalism, separatism, biased-
ness, dishonesty, lack of trust, cruelty, sadism, barbarity and self-cen-
tredness. Apart from this, many individuals and institutions create
disharmony among two or more groups of people based on religion,
gender, caste, social and financial status, etc. Another reason for the
dilution of such human values is that individuals nowadays have be-
come self-centred and are concerned about their own benefit.
If the same trend of diminishing values continues, there would be time

when people would not be able to socialise with others. Therefore,
it is important for individuals to take measures to enhance human
values. However, the enhancement of human values is not a job of a
single individual rather the government, citizens and various institu-
tions should also contribute towards bringing such change. For this, a
number of measures can be adopted. Some of them are explained as
follows:
□ In India, the practice of living in a joint family has been almost
eliminated. Individuals who live in a joint family are usually more
caring and they learn to adjust and cooperate with other members.

N O T E S
A joint family is considered as a miniature society wher members

need to share limited resources. In a joint family, young members
of the family also live under the guidance and protection of elders
who play a key role in imparting good values to them.
□ In countries like India, children remain with their parents un-
til they get settled in their lives. Thus, children require constant
support of their parents in every aspect of their lives. However, in
some cases, parents are unable to spend adequate time with their
parents due to their busy work schedules. In such a case, children
do not learn human values. Therefore, it is important that parents
should spend time with children so that values can be inculcated
in the children.
□ Values such as caring for others and for one's nation should be
taught to children early in their lives. Negative values such as
self-centredness must be discouraged. Children should always be
motivated to become responsible citizens of the nation.
14. The primary cause of diminishing human values 1s that

individuals nowadays seek for
ACTIVITY
Prepare a short report on the title 'The Evolution of the Indian Val-
ue System'.
IDsuMMARY
□ 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.
□ 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. These norms form a
control system as they are used as a means to influence the mem-
bers of a social group. Norms can be formal or informal.
□ Beliefs refer to basic assumptions and feelings of individuals to-
wards other individuals, events or various other aspects.
□ Standards refer to a level or degree of a specific parameter. Stan-
dards may be measurable or immeasurable or may or may not be
documented. Ethical standards are usually stated or defined in a
way that may be debatable and open for discussion.
□ There are three types of business values, namely spiritual values,
spiritual managerial values and professional managerial values.

N O T E S
□ Spiritual values relate to the non-material aspects in individuals'

lives.
□ There are some spiritual values that must exist at the workplace
in order to get th work done. These values include values such as
work is worship, excellence at work, etc.
□ Professional managerial values are possessed by managers and
they use these values to support their team members towards the
accomplishment of organisational goals and objectives.
□ Showing ethical behaviour in business can bring a number of ben-
efits for an organisation. For example, employee retention.
□ Strict adherence to ethics is important for an organisation to main-
tain long-term business prospects.
□ Some ethical business values include honesty and integrity, trust,
fairness and respect.
□ VBM is an approach to ensure that organisations run their busi-
ness on values. It ensures that performance targets of organisa-
tions are in alignment with corporate mission, corporate strategy,
corporate governance practices, corporate culture, corporate com-
munication, decision processes and performance management
and reward processes.
□ The three elements of a VBM system include: creating value, man-
aging value and measuring value.
□ During the last few decades, the world has witnessed diminishing
human values because individuals nowadays seek for materialistic
pleasures at the same time forsaking their values.
□ Basic human values include trust, respect, care, compassion, co-
operation, honesty, benevolence, etc. Dilution of human values
leads to various social problems, such as communalism, separat-
ism, biasedness, dishonesty, etc.
□ The enhancement of human values is not a job of a single individu-
al rather the government, citizens and various institutions should
also contribute towards bringing such change.
• KEYWORDS
□ Corporate restructuring: It refers to a reorganisation of an or-

ganisation in terms of ownership or operations.
□ Ethics: A system of moral principles and code of behaviour of
individuals in a group.
□ Labour turnover: It refers to the number of employees who
leave the organisation during a specified period of time, usually
a year.

N O T E S
□ Values: The beliefs of a group or individual on which behaviour

and decisions are based.
D Value-based management: It is a management system that
gives importance to customers and is built on some set of prin-
ciples and core values.
IJ:■DESCRIPTIVE QUESTIONS
1. Briefly discuss the relation between values, norms, beliefs and
standards.
2. Describe values, norms, beliefs and standards.
3. Discuss three types of business values in detail.
4. Explain the importance of ethics and values in a business.
5. What is value-based management? Explain.
6. What are the factors responsible for the dilution of human
values'? What steps can be taken to enhance human values'?
Ill ANSWERS AND HINTS
Topic Q. No. Answer

Values, Norms, Beliefs and 1. Conditioning, learning on
Standards in Ethical Context socialisation
2. False
3. Behaviour
Types of Values 4. Community, workplace
5. Professional managerial
values
6. Truthfulness
7. False
Business Ethics and Values 8. Integrity
9. Customers' trust
10. True
11. Ethical businesses
Value-Based Management (VBM) 12. True
13. c. Employees do not follow
an ownership culture
Factors Responsible for the 14. Materialistic pleasures
Enhancement and Dilution of
Human Values

N O T E S

1. Values basically mean moral ideas, universal conceptions
or points of reference towards others; norms are informal
guidelines regarding what is righteous and what is erroneous
in a particular social group; beliefs refer to basic assumptions
and feelings of individuals towards other individuals, events or
various other aspects and standards refer to a level or degree of
a specific parameter. Refer to Section 2.2 Values, Norms, Belief's
and Standards in Ethical Context.
2. Values possessed by individuals can be determined by behaviour
they demonstrate. Norms are generally much more specific than
values but values can be implemented only if norms are observed.
Manifestation of norms can be seen in an individual's behaviour.
Refer to Section 2.2 Values, Norms, Beliefs and Standards in
Ethical Context.
3. The three types of business values include spiritual values,
spiritual managerial values and professional managerial values.
Refer to Section 2.3 Types of Values.
4. Showing ethical behaviour in business can bring a number of
benefits for an organisation. For example, an organisation with
ethical practices would be able to win the trust of customers,
retain employees and attract investors. Refer to Section
2.4 Business Ethics and Values.
5. VBM is a system that gives importance to its customers and
shareholders. The system focuses on maintaining an ownership
culture in an organisation. Refer to Section 2.5 Value-Based
Management (VBM).
6. The primary cause diminishing values is that individuals
nowadays seek for materialistic pleasures at the same time
forsaking their values. Measures that can be adopted for
enhancing human values include promoting joint family systems
among others. Refer to Section 2.6 Factors Responsible for
Enhancement and Dilution of Human Values.

REFERENCE
SUGGESTED READINGS
□ Gaur, R. (2010). A foundation course in human values and profes-
sional ethics. New Delhi.
□ Srivastva, S. (1988). Executive integrity. San Francisco: Jossey-
Bass.
D Moon, C. (2001). Business ethics. London: Economist.

N O T E S
E-REFERENCES
□ (2015). Retrieved 21 July 2015, from http://www.cesj.org/wp-con-
ten t-uploads/2014/01/j bm-cwp.pdf
□ How Values Influence Behavior. (2015). Boundless. Retrieved
from https://www.boundless.com/management/textbooks/bound-
less-management-textbook/organizational-behavior-5/driv-
ers-of-behavior-44/how-values-influence-behavior-230-7046/
□ Human Science,. (2015). Spiritual values. Retrieved 28 September
2015, from http://humanscience.wikia.com/wiki/Spiritual_values
□ Iaa.govt.nz,. (2015). Personal beliefs, values, attitudes and be-
haviour I Immigration Advisers Authority. Retrieved 28 Septem-
ber 2015, from http://www.iaa.govt.nz/adviser/ethics-toolkit/per-
sonal.asp
□ Washburn.edu,. (2015). Business Ethics and Values. Retrieved 28
September 2015, from http://www.washburn.edu/academics/col-
lege-schools/business/ethics.html

CONTENTS
3.1 Introduction
3.2 Relevance ofindian Ethos-Spirituality at Work
3.2.1 Spirituality in Indian Organisations
Activity
3.3 Indian Work Ethos and Principles ofindian Management
3.3.1 Principles of Ethical Power for Organisations
3.3.2 Nishkam Karma and the Business World
Activity
3.4 Teachings from Scriptures and Traditions
3.4.1 Teachings from Mahabharata
3.4.2 Teachings of Gita and Work Ethos
Activity
3.5 Eroding Values and Emerging Ethical Issues in Contemporary Indian
Management
Activity
3.6 Summary

N O T E S
DR. APJ ABDUL KALAM'S STELLAR ROLE IN THE

SUCCESS OF THE AGNI MISSION
"Do not look at Agni

as an entity directed upward
to deter the ominous
or exhibit your might.
It is fire
in the heart of an Indian.
Do not even give it
the form of a missile
as it clings to the
burning pride of this nation
and thus is bright."
- Dr. A.P.J. Abdul Kalam

Research and development conducted by some leading Indian
educational institutes and defence research organisations over
the years has enabled India to develop state-of-the-art defence
technology. These indigenously developed defence technologies
provide evidence of not only the technological capacities of the
country but also its work ethos that is based on selfless work.
Let us take the example of the Agni missile development pro-

gramme. India proved its mettle by developing an advanced de-
fence technology with the success of this missile. The develop-
ment of the Agni missile, a family of medium to intercontinental
ballistic missiles developed by Defence Research and Develop-
ment Organisation (DRDO), is a part of the Integrated Guided
Missile Development Programme (IGMDP) of India. IGMDP was
started in 1982-83 under the leadership of Dr. A. P. J. Abdul Kalam.
(Source: econom1ctimes.indiatimes.com and easyhomelulor.com (in the same order))
The Agni missile project was declared a success after the missile
was successfully test-fired on three consecutive occasions. The
first test took place in 1989. An experimental testing of Agni took
place in 1992; however, the objective of this mission was not fully

N O T E S
met. After analysing the reasons for the failure and making the
required modifications, the second successful test was conducted
in February 1994 by using a target 1,200 km away in the Bay of
Bengal. The final test was conducted in 1994, and the missile as
able to achieve a distance of 1450 km (Fas.org,. 2015).
More than 500 scientists and technical specialists from multiple

research organisations were brought together to work as a team
to develop the Agni missile. Dr. Kalam, the then Director of De-
fence Research and Development Laboratory (DRDL), was ap-
pointed the Chief Executive of the IGMDP. Strong commitment,
deep involvement and active participation were required from ev-
ery member of the team associated with the Agni project.
It was essential for this team to be productive and achieve its goals
even if it meant making a few sacrifices. For instance, the head of
the electrical integration team, V. R. Nagaraj, was so dedicated to
his work that he regularly skipped his meals and deprived himself
of sleep. Seeing his dedication, Nagaraj's family did not inform
him about the death of his brother-in-law.
The preparation for the test of Agni involved setting up of the

following:
□ A tele-command station
□ Two radars
□ Three telemetry stations
□ Four electro-optical tracking instruments (to control the mis-
sile course)
A close watch was kept on system pressure and the electrical pow-
er flowing from the missile batteries. If any deviation was noticed
in system pressure or electricity voltage, a specially designed au-
tomatic checkout system would send a HOLD signal so that the
error could be rectified.
Villagers living close to the launch site were shifted to safe places
well before the launch. The relocation drew the attention of na-
tional and international media. Media coverage of the Agni test
launch raised the eyebrows of powerful western nations, and they
exerted pressure to cancel the mission. The Indian government
simply ignored all this and went ahead as planned.
The first Agni launch was scheduled for 20 April 1989. This was
something new and difficult for India because of the high risk in-
volved in the launch. The countdown was to start at T-36 hours,
and from T-7.5 minutes onwards, the operation was to be automat-
ically controlled by a computer. The launch was initiated at the

N O T E S
scheduled time, but at T-14 seconds, the computer started flash-

ing the HOLD signal, indicating an error had occurred in one of
the systems. The error was rectified within minutes, but suddenly
a sequence of OLD signals started popping up from different in-
struments, which resulted in heavy internal power consumption.
Consequently, the launch had to be aborted.
This cancellation of the launch at the very first attempt disappoint-

ed all the team members who had worked very hard to see the
Agni missile soaring in the sky. However, Dr. Kalam did not allow
this failure to affect his team He encouraged the team members
with these words, You have lost nothing, your missile is in front of
you and we only need to rework for Jew more weeks to make it work.
These words gave new hope to the team members, and they felt
positive with fresh energy once again. The team members started
working again with a renewed zeal.
The team worked hard for 10 days, and the Agni launch was re-
scheduled for 1 May 1989. But this time, too, the launch had to be
aborted as an error was discovered in the system at T-10 seconds.
The repeated cancellation of the launch gave rise to all kinds of

speculations, and in some quarters, there was criticism of the peo-
ple involved in the launch. It was in these circumstances that on 8
May 1989, Dr. Kalam requested the Research Centre Imarat (RCI)
community of DRDL to assemble its members for his address.
That day, over 2000 people gathered to listen to Dr. Kalam. To lift
the morale of those gathered, Dr. Kalam said that they, as scien-
tists, had a rare opportunity to serve the nation. All big opportu-
nities come with bigger challenges, so they should not give up and
should aim for nothing less than success. e ended his address
with the assurance that his team would definitely launch the Agni
missile before the end of the month.
Dr. Kalam went back to the Integrated Test Range (ITR) and
reviewed the detailed analysis of the cancellation of the second
launch. Following the review, he concluded that the control sys-
tem needed to be overhauled. He gave this job to a team of special-
ists from DRDO-ISRO. The team completed the work in a record
time of 10 days in Thiruvananthapuram. Now, the control system
was working perfectly within the acceptable limits of all essential
parameters connected with the missile launch. On the eleventh
day, the DRDO- SRO team sent the rectified control system from
Thiruvananthapuram to ITR. After making all required prepa-
rations, with the help of hundreds of scientists, the Agni launch
was finally scheduled for 22 May 1989. All things were going on
as planned, but suddenly, the weather conditions worsened and
became a critical factor with the launch day fast approaching. The
meteorological department issued a warning of a severe cyclone

N O T E S
in the area. It seemed that Mother Earth wanted to test them with
all her might. However, an undeterred Dr. Kalam asked his team
to connect all work centres with the satellite and HF links. The
meteorological department was asked to feed its data at every
ten-minute interval.
The night before the final launch, many eminent scientists, of-
ficials, ministers and leaders gathered at the ITR to witness the
Agni launch. The then Defence Minister, K. C. Pant, along with
General K. N. Singh and Dr Arunachalam, the then Scientific
Advisor to the Defence Minister, came to meet Dr. Kalam. This
acted as a great morale-booster for the team. During their inter-
action, Mr. Pant asked Dr. Kalam whether they would we be able
to launch the Agni missile successfully the next day. Mr. Pant also
asked Dr. Kalam what he would like him to celebrate the success-
ful launch of the missile.
Mr. Pant's question surprised Dr. Kalam and the team. He thought
for a while and then, taking a deep breath, replied to Mr. Pant that
he would like 100,000 saplings to be planted at the RCI. Everyone
present there was amused at Dr. Kalam's answer. However; Mr.
Pant said that since Dr. Kalam had sought Mother Earth's bless-
ings by planting saplings, they would definitely taste success.
Agni was finally launched successfully in the third attempt. It
soared into the sky on 22 May 1989 at 0710 hours without any er-
ror or system failure. The missile followed the expected trajectory
and adhered to all important parameters. It was a historic day for
India and for Dr. Kalam's team. The team had worked hard with
dedication and commitment, even under the pressure of the mis-
sion being scrapped. However, it was Dr. Kalam's persistence and
Conviction about the project's success that made the impossible
possible.

N O T E S

-- Describe the relevance of Indian ethos in the modern work-
place
-- Explain the Indian work ethos and principles oflndian man-
agement
Define important teachings in Indian scriptures and tradi-
tions
-- Discuss the eroding values and emerging ethical issues in
the contemporary Indian management
Ill INTRODUCTION
It is already becoming clear that a chapter which had a western begin-
ning in business management will have to have an Indian ending, when
the world adopts rich thoughts of Indian ethos and wisdom, if it is not to
end in the self-destruction of the human race.
- Arnold Toynbee, Nobel Laureate
In the previous chapter, you studied about the concept of values,

norms, beliefs and standards in the context of business ethics. You also
studied about business ethics and values, objectives of value-based
management, and factors responsible for the enhancement and dilu-
tion of human values. This chapter focusses on the relevance oflndian
ethos in today's organisational environment.
Human societies have been contemplating and debating on what ex-

actly constitutes a just behaviour and conduct for thousands of years.
This historical enquiry has resulted in different branches of ethos,
which evolved in different directions on the basis of different prem-
ises. The Indian ethos is a branch of such beliefs and ideas that sheds
light on the issues of ethical and moral conduct of humans in social
interactions as well as at personal level. The Indian ethos is a huge
body of knowledge derived from the rich historical tradition of Indian
philosophy. Though the Indian ethos cannot be strictly termed as the
Hindu views of management, it certainly is influenced by the philoso-
phies of 'Sanata Dharma' or 'eternal religion'. However, ethics, being
related to human behaviour, always have a cultural perspective. In
this context, the enquiry of the relevance of Indian ethos in the mod-
ern business environment is worthwhile.
This chapter discusses the relevance of Indian ethos. It next explains

Indian work ethics and the principles of Indian management. In ad-
dition, if explains some important Indian scriptures and traditions in
order to study their relevance in business ethics. Towards the end, the

N O T E S
chapter describes the eroding values and emerging ethical issues in

the contemporary Indian business environment.
RELEVANCE OF INDIAN ETHOS-

SPIRITUALITY AT WORK
According to Cambridge Advanced Learner's Dictionary, ethos can
be defined as a set of beliefs, ideas, etc., about social behaviour and rela-
tionship of a person or group. Oxford Advanced Learner's Dictionary,
on the other hand, defines ethos as ethical ideas and attitudes that be-
long to a particular group or society.
n light of these definitions, Indian ethos can be defined as a set of

ideas and principles that are rooted in the ancient philosophical tradi-
tion of the Indian subcontinent. The scope of Indian ethos is wide as
it has been enriched over thousands of years by numerous philosoph-
ical traditions. In this chapter, we will keep our discussion limited to
the applicability of the general themes of Indian ethos in the modern
business environment. These general themes 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 indi-
vidual self and the universe.
□ The intangible is as important as the tangible because there is uni-
ty and divinity in everything.
□ Inner resources, i.e., wisdom, vision, insight, foresight and divine
virtues, are more powerful than outer resources, i.e., material pos-
sessions, fame, etc.
□ Selfless work leads to the benefit of the world and purification of
the individual self.
□ Excellence in work can be achieved through self-motivation and
devotion without attachment.
In addition to these general themes, the following are some of the prin-
ciples of ndian ethos that have practical significance in business ethics:
□ Paraspar devo bhava: Every individual has the divine inside him/
her. We are all same in essence.
□ Atmano mokshartham jagat hitaya cha: All actions should be
conducted to fulfil the dual objectives of the welfare of the larger
society and the individuals themselves. Here, the term 'welfare'
denotes both material and spiritual welfare.
□ Archet dana manabhyam: People should be worshipped not only
by material things but also because of their inherent divinity.
□ Atmana vindate viryam: The divine within each individual is the
main source of all strength and inspiration for excellence.

N O T E S
□ Yogah karmasu kaushalam, samatvam yoga uchyate: An achiev-

er works with a calm and even mind.
□ Yadishi bhavana yasya siddhi bhavati tadrishi: What we think is
what we achieve and become. The end can be achieved by giving
attention to the means.
□ Parasparam bhavayantah sreyah param avapsyatha: The high-
est good of both the material and spiritual worlds can be enjoyed
only through mutual cooperation and respect for fellow beings.
□ Tesham sukhm tesham shanti shaswati: The ability to see the di-
vine in all beings and enjoy infinite happiness and peace.
In Indian ethos, there are six human shortcomings, which if not con-
trolled, can lead men away to the wrong path. These shortcomings are
as follows:
l. Lust (Kama)
2. Anger (Krodha)
3. Greed (Lobh)
4. Attachment (Moha)
5. Pride (Ahankar)
6. Jealousy (Matsarya)
In addition, Indian ethos focusses on a balanced and ethical life. The

Vedanta, generally regarded as one of the most important author-
ities of ndian philosophy, obliges us to regard human nobility and
acknowledge divinity in every individual. Therefore, no human is an
outsider and none is separate from eternal essence.
Nowthat you have a general idea about the Indian ethos, let us study
its applicability in ethical business practices. In other words, let us
explore Indian spirituality in work. The relationship between reli-
gious 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 reg-
ulative model are apt and implemented, while those that go against it
are abandoned.
Workplace spirituality is present in several organisations. For exam-

ple, companies like Coca Cola, Boeing and Sears have incorporated
spirituality in their workplaces, strategies and cultures. Other organ-
isations like The Body Shop and Tom's of Maine have incorporated
spirituality in their strategies within the framework of Corporate So-

N O T E S
cial Responsibility (CSR). However, some organisations a.re unsure

about what constitutes workplace spirituality and how it influences
organisational culture. It is imperative that an organisation not miss
the essence of spirituality that it wants to implement. Spirituality is
neither a business opportunity nor a management tool. It should not
be used to develop corporate reputation.
3.2.1 SPIRITUALITY IN INDIAN ORGANISATIONS
n 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 (Nishkarn
Karma), self-awareness, duty, wisdom, purity of soul and oneness of all
beings, among others.
In October 2013, the Tata Group Chairman, Cyrus Mistry, and other
CEOs had their annual meeting on ethics in Mumbai, where the Di-
rector of IIM Kozhikode, Debasish Chatterjee, made a presentation on
the significance of Bhagavad Gita in management. The author of 18
Leadership S1Ltras frorn the Bhagavad Gita, Debasish motivated Tata
Group to move beyond compliance to commitment and ethics.
Another instance includes India's largest automaker Maruti Suzuki,

which provided training to its leaders on self-management and time
management. Held in New Delhi, the two-day training module was
based on the teachings of the Bhagavad Gita with an aim to improve
efficiency, effectiveness and ease among leaders.
Engineering conglomerate Escorts, too, has engaged a motivation

trainer and Bhagavad Gita-sp cialist to motivate its 20 union lead-
ers. The union leaders usually have a tough role to play of managing
both the management and workers and aligning priorities with both.
Therefore, the teachings of the Gita were provided to the leaders of
the company to ease their tasks.
Apart from these examples, there are State ank of India, NT C,

NHPC and MMTC that are using the Gita teachings to resolve man-
agement issues. The Gita seems to be appropriate in various corporate
strategies starting from stress control to value-based management,
motivation and leadership. Its relevance to contemporary corporate
issues should not be underestimated.
Today, Lord Krishna seems to have become the new management guru
of the corporate world. Just as Krishna conveyed the enduring knowl-
edge to his disciple Arjuna in his moment of indecision in the decisive
battle of Mahabharata, corporate companies are also trying to find
answers to similar dilemmas, which they face in the corporate world,
through the Gita.

N O T E S
What makes the 5,200-year-old scripture so relevant in today's cor-

porate context? According to Debasish Chatteijee, Gita is old in
chronology but contemporary in essence. When basic business principles
cease to work and when the rate of change outside is Jaster than change
within, even businesses need deeper anchor points for decision-making
not available in contemporary literature.
According to Vivek Bindra, Corporate Trainer and Director; Global

ACT, Gita is beyond time, place and circumstances. The temporary solu-
tions we are seeking from the West are often inadequate. And that is
turning corporates to the Gita.
The Vice-Chairman at Piramal Enterprises, Swati Piramal, says, I

think the importance of value is being recognised worldwide now. Ier
enterprise is following the values espoused in the Gita, including
knowledge (gyan), action (karma) and care (bhakti). Piramal further
adds, Our partners tell us that one of the reasons they want towork with
us is because we walk the talk when it comes to our values.
It was the result of these values of Piramal Enterprises that in the year
2011, when Vodafone was searching for a partner for its Indian oper-
ations, it sold a 5.5 per cent stake to Piramal Healthcare. Vodafone
wanted a partner that could meet its shareholding norms in India. The
outside world called it a 'strange deal' at that time as the engagement
of telecom with pharma wassurprising to say the least. However, both
the parties were confident about the deal. Vodafone wanted an Indian
partner that not only had the financial capability but also believed in
the values that could help Vodafone to operate in India without both-
ering about the stability of its shareholdings.
The Piramal group does not only follow the values that are based on
spirituality its group logo also depicts these values. The logo of the
Piramal group (shown in Figure 3.1) is the Gyan Mudra, a symbol of
knowledge in Indian tradition.
\ Piramal
knowledge action care
Figure 3.1: Logo of Piramal Group
Thelogo shows a hand in which the tips of the index finger and the
thumb join to make a circle. This is the position of hands when one
tries to gain knowledge. Piramal adds, We have left the circle open as a
symbol of humility. We believe that the circle of excellence is incomplete
and that we want to learn more and keep an open mind.
According to SY Siddiqui, COO, HR, IT & Finance, Maruti Suzuki,

spiritual texts often contain sound management principles that can pro-

N O T E S
vide vital lessons in a corporate set-up. In addition to our regular pro-

grarnrnes, we thought we could turn to the Bhagavad Gita for manage-
ment insights.
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. According to Chatterjee, You need
internal cohesion, external resilience, ability to deal with stress and ability
to operate beyond the ego. And the Gita helps in all of this.
The scene is not very different at Public Sector Undertakings (PSUs).

owever, the crises that these units are facing today are somewhat
different from those faced by private companies. PSUs usually per-
form under immense pressure from ministries as well as regulators.
This makes it difficult for them to make bold decisions. To overcome
this problem, different PS s are taking help of the Gita and its teach-
ing. Metals and Minerals Trading Corporation of India (MMTC) has
used motivational soft skill programmes to help the company expand
its decision-making ability. According to Bindra, when employees be-
corne push-start managers, learnings frorn the Gita help them become
self-start leaders. This is precisely what Krishna did - he giiided A1ju-
na to decide why fighting the battle was necessary.
Although the nature of practising the teachings of Gita may differ

from one company to another, their impact is wide enough to go be-
yond the professional to the personal level. According to an employee
at Maruti who had participated in a motivational course, the teachings
help in associating the meaning of the shloka "Karmanye vadhikaraste
ma phaleshii kadachana" with the corporate world as well as person-
al lives. He says, Often we lose our cool over petty issues at work or
at horne. Practicing the mool mantra eases oiit things everywhere, gets
things done fast and reduces stress.
Similarly, an employee at SBI, who has also participated in the course,

says, We are seeking return from every action. The Gita helps us iin-
derstand the spirit of Karma and focus on doing rather than expecting
immediate retiirns. It taiight me to listen to others and take their per-
spective into account - something I had forgotten to do.
Bindra adds that today we live in a world where every day is like a
battle. e says, Krishna trained Arjun to overcome depression and in-
decision in 48 rninutes. Those similar qiiestions are visible in today's life
and can be answered through the Gita.
Apart from corporate companies, B-schools are also emphasising in-

creasing the portion of spirituality in their courses. This is done to
make the students understand the significance of spirituality in busi-
ness. For example, IIM Kozhikode has initiated a course on 'Timeless
eadership and Selfincorporated', which is based on visions from the
Gita. According to Chatterjee, it is an open-ended course, which rims
through the year.

N O T E S
Similarly, Mumbai's SP Jain nstitute is also running a course on 'The

Science of Spirituality' under its executive MBA programme. IIM
Indore, too, has started taking sessions on the Gita under its course
module on 'Ancient Oriental Philosophy and Spirituality'.
Bhagavad Gita offers a fresh perspective while making management

decisions, and it is not related to any religion. According to Siddiqui, I
dearly believe that this has nothing to do with religion orfaith per se. We all
recognise that the programme is management focused and not on religious
dimensions. It is about identifying the universal principles contained in
the Gita and applying them to a corporate setting.

1. Define Indian ethos.
2. Describe at least two general themes of Indian ethos.
3. Discuss the six human shortcomings as mentioned in Indian
ethos.
ACTIVITY
With the help of the Internet, conduct a research to find out the
extent of practice of Indian ethos in global organisations. Make a
note of your findings.
INDIAN WORK ETHOS AND PRINCIPLES

OF INDIAN MANAGEMENT
The impact of Indian ethos on the workplace has been a subject of in-
terest of management experts for long. An academic discipline by the
name of Indian Ethics in Management (IEM) has emerged as a result
of this interest. ◄ M brings all management practices that have their
roots in Indian philosophy under one umbrella.
The principles of Indian management are value-oriented and take a

holistic approach to life. In other words, the Indian work ethos consid-
er 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?
Now, let us discuss some of the important management principles that

have been derived from or influenced by Indian management practic-
es. These management principles are listed below:

N O T E S
□ Holistic management: Indian ethos suggests that the ultimate

goal of all actions is purification of the soul and achievement of
the ultimate stage of eternal truth, conscience, and bliss (Sat-Chit-
Ananda). Therefore, all work in an organisational environment
must be done keeping this ultimate goal in mind.
□ Attaining material as well as spiritual goals: Indian work ethos
considers work a means of achieving material as well as spiritual
goals. This is contrary to Western management practices, where
though the importance of work satisfaction is well recognised,
there is not much recognition of spiritual goals.
□ Conscious management: ndian ethos emphasises expanding the
sphere of human consciousness to gain wisdom. Conscious man-
agement means being completely aware of all actions taken and
their probable repercussions.
□ Cooperation rather than competition: Indian ethos focusses more
on achieving goals through cooperation rather than competition.
Cooperation involves recognition of common goals. Cooperation is
also a very important conflict-resolution technique in Indian ethos.
□ Humansiation of organisations: ndian ethos focusses on creating
an organisational environment that promotes the holistic growth
of an individual. Holistic growth includes material well-being, at-
tainment of wisdom through self-analysis, expansion of conscious-
ness, ability to assume personal responsibility, etc.
□ Meditativeness in decision making: In order to make rational and
enduring decisions, it is essential to achieve a state of stillness of
mind. This state of mind can be reached through meditation. Med-
itation helps a person to understand problems from a holistic point
of view and find the best solution for them.
□ Intuitive decision making: Intuitive decision making is the pro-
cess of making decisions with the help of instincts rather than log-
ical process. Intuition refers to 'direct knowledge' - knowledge
that is not the result of reasoning or inference. According to Indi-
an ethos, intuition, if properly developed through meditation, can
be very efficient in making prompt and enduring decisions. Many
modern studies also corroborate this claim. •or example, research
psychologist Glary Klein suggests that 90% of our decisions are
made by intuition.
□ Focus on duty: Indian ethos emphasises execution of the respec-
tive duties by individuals. Bhagavad Gita Chapter 2, Verse 47 says:
Karmanye vadhikaraste Ma Phaleshu Kadachana,

Ma Karmaphalaheturbhurma Te Sangostvakarmani
The literal meaning of it is: You have the right to work only but
never to its fruits. Let not the fruits of action be your motive, nor
let your attachment be to inaction.

N O T E S
In other words, the duties assigned to an individual must be per-

formed with complete dedication without any attachment to re-
sults or any desperation to control them. The idea is also known as
Nishkam Karrna, a concept that wewill discuss later in the chapter.
3.3.1 PRINCIPLES OF ETHICAL POWER FOR

ORGANISATIONS
Ethical utilisation of power is an important aspect of spirituality in the

context of an organisation. Blanchard and Peale stated five principles
of ethical power for organisations, which are as follows
1. Purpose: Organisational purpose illustrates the meaning and
direction of the operations of an organisation. It is the driving
force behind what an organisation does.
2. Pride: A healthy self-esteem is a foundation for all organisational
achievements and a key component in driving a moral business.
High self-esteem can help an organisation to do what it
understands to be correct, notwithstanding the external factors
that might force it to do otherwise.
3. 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-connectedand instantaneous
results are always expected. According to Blanchard and Peale,
patience reflects the conviction of an organisation on its values
and principles.
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. It is about
being committed to certain objectives and values. It gives ethical
power to an organisation and creates trust among stakeholders.
5. 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. Therefore, setting the perspective
requires holistic awareness, which is quite similar to the Indian
ethos of meditativeness.
3.3.2 NISHKAM KARMA AND THE BUSINESS WORLD
Nishkam Karma, or selfless or aspiration-less action, is an action per-

formed 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 - ac-
tions carried out with selfish, self-centered motives.

N O T E S
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 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 work-
ers of an organisation. owever, 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. This can also
boost productivity and excellence in work.
4. The principles of Indian management are value-oriented and

take a holistic approach to life. (True/False)
5. Indian work ethos considers work a means of achieving
material as well as goals.
6. management means being completely aware of
all actions taken as well as their probable repercussions.
7. refers to the knowledge that is not the result of
reasoning or inference.
8. List the five principles of ethical power for organisations as
mentioned by Blanchard and Peale.
9. is an action performed with no desire of results as it is
not performed for selfish reasons.
ACTIVITY
With the help of the Internet, conduct research on the applications

of Nishkam Karma in organisations. Make a note of your findings.
TEACHINGS FROM SCRIPTURES AND

TRADITIONS
India is a country of high values and ethics. It is a land where people
of various religions and cultures, with difference in languages, beliefs
and social backgrounds, live together. We find that various scriptures
reflect the wide philosophical traditions of Ancient India. These scrip-
tures 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.

N O T E S
According to Professor Klaus K. Klostermaier, a prominent research-

er on Hinduism, since ancient times, India has been famous for its wis-
domand thoughts. The ancient Persians, Greeks and Romans were eager
to learn from its sages and philosophers. When, in the eighteenth cen-
tury, the first translations of some Upanishads and the Bhagavad Gita
became available to the West, European philosophers rhapsodized about
the profundity and beauty of these writings. Here they encountered a
fusion of philosophy and religion, a deep wisdom and a concern with the
ultimate that had no paraHel in either contemporary Western philosophy
or Western religion. Indian philosophy is highly sophisticated and very
technical and surpasses both in volume and subtlety.
Sir William Jones, a prominent Anglo-Welsh philologist, wrote, When-

ever we direct our attention to Hindu literature, the notion of infinity
presents itself.
Indian scriptures are one of the most ancient and comprehensive re-
ligious 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.
The sacred literature in Hindu religion is clearly divided into the fol-
lowing two categories:
□ Sriiti: Heard literature
□ Smrti: 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. Despite these contrary beliefs, one cannot ig-
nore the high esteem with which the Bhagavad Gita is regarded. In
the pre-modern era, it was considered a part of Prasthana-traya (tri-
ple foundation) along with the Upanishads and the VedantaSutra. In
addition to the Bhagavad Gita, there are many other Gitas, such as
Anu-Gita, which is also depicted in the Mahabharata; Uddhava-Gita,
which is in the Bhagavada Purana; Siva-Gita, which is depicted in the
Padma Purana; Devi-Gita, which is depicted in the Devi Bhagavad
Purana; etc.
Let us discuss more about the teachings from the Mahabharata and
the Bhagavad Gita and their relevance in today's business world.
3.4.1 TEACHINGS FROM MAHABHARATA

Maha means 'great' and bharata means 'India'. Thus, the Mahabhara-
ta is the story of the great India. It is the longest epic of the world
written in verse with over 100,000 stanzas. The complete version of the
Mahabharata has 64 volumes and gives a comprehensive picture ofln-
dia's cultural heritage. However, the Mahabharata is not just an amus-

N O T E S
ing story, it offers great lessons from life that can be implemented in
the real world also. 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 hu-
man action and psychology. Today, the business world is not unaware
of the significance and teachings of the Mahabharata. Therefore, let
us discuss the major management lessons that can be derived from
this great epic and their relevance in today's corporate world. These
can be listed as follows:
□ Build strategy: The Mahabharata gives us an important lesson
that victory in a war can be achieved with an effective strategy. In
business, a manager strives to achieve business goals by making
strategies, considering the limitations, managing t ams efficiently
and managing projects. In the Mahabharata, Karna subdued other
kings to get their wealth. On the other hand, Arjuna, heema, and
Yudhisthira focussed on acquiring Divyastras (divine strength)
and strategic wisdom. Like the Pandavas, a successful manager
should also focus on achieving the most important goals in order
to strengthen the organisation and make it grow.
□ Form allies: In the Mahabharata, the Kauravas had few allies. On
the other hand, the Pandavas focussed on gaining allies to gain
more support. In business, managers may be under pressure to
grow the business, but at the same time, they should also focus
on reaching out to more people and making allies. This is because
allies can lend support and push you forward in your bad times. In
addition to this, while working on a big project, allies can contrib-
ute in achieving targets more efficiently.
□ Show leadership quality: In the Mahabharata, the Kauravas had
only one leader, Duryodhana. Therefore, the Kaurav sena was guid-
ed by a one-man leadership hierarchy, and the whole army was un-
der the command of one man. Unlike the Kauravas, the andavas
had different generals directing different operations in the war. It is
a good leadership quality to share your responsibilities when target-
ing a huge audience. It is very effective to have different managers
looking after and managing different departments. It helps to keep
things clear as each person is answerable for his/her own tasks.
Therefore, the Mahabharata is one of the best sources to teach us
the lessons of decision making and delegating responsibilities. The
Pandavas were very good at leadership. They knew how to motivate
their soldiers, benefit from the weaknesses of the enemy, and seek
guidance and assistance from others. All these are essential leader-
ship qualities. Putting the right resource at the right place is very
important as only then can you utilise those resources optimally. If
the leader is not able to motivate and provide direction, the team
can not function efficiently. The Pandavas, in spite of being small in
number, knew this art very well.

N O T E S
□ Maintain team spirit: In the Mahabharata, the Kauravas were

greater in number than the Pandavas. However, the number was
worthless as they were not motivated. It is important to motivate a
team to work towards achieving a common goal instead of a person-
al one. War cannot be fought with one warrior. It needs an armed
force that can put its every bit to win the battle. Similar to a war,
in businesses too, a manager may find several situations when the
involvement of the entire team is required to achieve the set goals.
Every team member needs to be having equal time and importance.
A manager needs to hear everyone out and train them how to work
in coordination. Without team spirit and coordination, one cannot
think of succeeding. The Kauravas were not working as a team. All
their leaders including Bheeshma, Drona, Kama, Shalya, etc., were
fighting their individual battles. On the other hand, the Pandavas
had only one team with one goal. They used to participate in the de-
cision-making process and were a big strength for each other. In the
business world too, it is important to have a team that can get things
done.
□ Forget individual motives: In the Mahabharata, the Kauravas
had individual motives. It was only Duryodhana who wanted the
war. On the other hand, all the Pandavas had the same motive and
that helped them to achieve the common goal. The Mahabharata
presents an excellent example of how to align individual goals and
skills to achieve group goals. The practice of aligning individual
goals and skills with the group can help a manager in generating
maximum output. By fulfilling the goals of the group, individual
goals would be achieved inevitably. Therefore, it is important to
make an effort in achieving the common goal, especially in the
context of an organisation.
□ Show commitment: The Kauravas lacked commitment. They had
personal prejudices and were doubtful about the results of the war.
This affected their level of commitment to win the battle. On the
other hand, the Pandavas were passionately committed in achiev-
ing the common goal even if it meant laying aside their personal
goals. Similarly, in the real world, if the employees of an organisa-
tion are not committed to achieving common organisational goals,
it would become difficult for the managers to achieve their targets.
□ Encourage women empowerment: In the Mahabharata, the Kau-
ravas followed a male-dominant hierarchy. Even though Gand-
hari was an important character in the Mahabhrata, her husband
(Dhritrashtra) or sons did not listen to her. The Kauravas did not
approve of the participation of women in decision making. On the
other hand, the Pandavas trusted their women and often took their
advice. There were several important female characters such as
Kunti, Draupadi, Hidimba and Subhadra on the side of Pandavas
who played an important role in the storyline of the Mahabharata.
In today's business world also, women are capable of achieving

N O T E S
economic independence, managing resources and bringing inno-

vation through their creativity. Women are not only generating
employment for themselves but are also providing employment to
others. With the spread of education and awareness, women have
proved that no field is inaccessible to them. Therefore, for an over-
all growth of an organisation, it is important to understand and
utilise the capabilities of women as well.
3.4.2 TEACHINGS OF GITA AND WORK ETHOS
The Bhagavad Gita (Song of the Lord) is attributed to Maharishi Vya-

sa, the composer of the Mahabharata. The Gita comprises 700 vers-
es arranged in 18 chapters. The Bhismaparvan (the sixth of the 18
sub-divisions) of the Mahabharata describes the battle between the
Pandavas and Kauravas for the throne of the Kurus. The Bhagavad
Gita narrates the dialogue that takes place between Krishna and Ar-
juna 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 reason.ability of the war. To remove his doubts, Lord
Krishna answered his questions on the nature of the universe, the meth-
od to attain God and the meaning of duty. The Bhagavad Gita contains
a magnificent dialogue between man (Arjuna) and creator (Krishna).
I I
NOTE
Krishna was born at midnight on Friday July 27, 3112 BCE. This
date and time have been calculated by astronomers on the basis
of the planetary positions on that day as recorded by Sage Vyasa.
Krishna died in 3102 BC, starting the Ka] Yuga. The Bhagavad Gita
was compiled around 500 BCE.
In Chapter 13, it talks about the qualities of mind required to know the
truth. These qualities are explained as follows:
amanitvam adambhitvam ahimsa ksantir arjavam
Acaryopasanam shaucam sthairyam atma-vinigrhah
These lines mean absence of conceit and pretence, refusal to hurt,

glad acceptance, rectitude, service to th teacher, inner and outer pu-
rity, perseverance, 1nastery over mind.
indriyarthesu vairagyam anahankara eva ca
Janma-mrityu-jara-vyadhi-dukha-dosanudarshanam

N O T E S
These lines mean being dispassionate towards sense objects; absence

of self-importance; knowledge of limitations of birth, death, old age,
illness and pain.
ashaitir anabhisvangah putra-dara-grhadisu
Nityam ca sama-cittatvam istanistopapattisu
These lines mean absence of the sense of ownership; absence of ob-

session towards son, wife, house and the others; persistence equanim-
ity towards all pleasant and unpleasant events.
mayi cananya-yogena bhaktir avyabhicarini
vivikta-desa-sevitvam aratir jana-samsadi
These lines mean constant devotion to Me (Krishna-the eternal ex-

istence, characterised by non-separation from Me; preferences for a
solitary place; and absence of an inclination towards socialisation.
adhyatma-jnana-nityatvam tattva-jnanartha-darsanam
etaj jnanam iti proktam ajnanam yad ato 'nyatha'
These lines mean accepting the importance of self-realisation and

philosophical search for the absolute truth; whatever there may be
besides that is ignorance.
The teachings of the Bhagavad Gita are as relevant in today's world

as they were when they were first revealed. The present-day manage-
ment paradigms like vision, initiative, inspiration, brilliance in work,
accomplishment of objectives, significance of work, state of mind to-
wards work, nature of individual, decision making, etc., are all men-
tioned in the Bhagavad Gita along with explanations that can be uni-
versally applied.
Management denotes a body of knowledge that enables an organisa-

tion 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.
The Gita offers a framework for stimulating supreme motivation. A

careful study of the Gita and its perspectives can lead today's manag-
ers to create progressive and highly stable organisations. Let us now
discuss the major teachings of the Gita that are relevant in today's
business world. These can be listed as follows:
□ Notion of time: One of the major problems that modern organi-
sations face arises out of their notion of time. For example, many
software companies in India provide quarter-on-quarter guidance.
This means that they inform their stakeholders about what is ex-
pected of them in the next quarter. Although such schedules aim to
gain positive outcomes, they also tend to increase stress and force
managers to take the short-term approach to manage business. In

N O T E S
the Bhagavad Gita, the first lesson taught by Krishna to Arjuna is

about training the mind to the eternal and cyclic notion of time.
(Chapter 2, Shlokas 11-13). A good understanding of the notion
of time helps managers feel less pressured to meet performance
targets and develop conviction to engage in activities that aim to
create a balance between short-term and long-term goals.
□ Performance metrics and assessment: A major problem in mod-
ern management is the attitude towards performance assessment.
Most managers use duality in performance metrics and assess-
ment. For example, all results are classified by using the frame-
work of duality, i.e., good vs. bad, right vs. wrong, desirable vs. un-
desirable, performer vs. non-performer, positive vs. negative, and
so on. Based on these parameters, managers form only positive ex-
pectations from this world of duality. Therefore, they start forming
wrong notions that only good things are going to happen. They do
not expect negative outcomes and fail to understand why negativ
instances occur. By living in such an unrealistic world, managers
usually develop stress, which affects their professional as well as
personal lives.
One of the major contributions of the Bhagavad Gita is to develop
a real understanding of the risks of living in this world of duality.
In Chapter 2 Verse 14, Krishna teaches Arjuna how to cope up with
the ups and downs of this world of duality. Later on, in the same
Chapter, Verse 48, he says 'samatvam yog uchyate,, which means
developing a sense of equanimity to produce a calm and complete
personality. If managers learn to develop a sense of equanimity as
mentioned in the Gita, the quality of a manager as a leader will im-
prove manifold. This will ultimately help in increasing the overall
quality of the management.
□ Work and efficiency: It is one of the most important insights of-
fered by the Gita to modern-day managers. There are four aspects
that Krishna articulates to define work. They are:
♦ 'karmanyevadhikarah', which means the doer has the right to

work.
♦ 'mafaleshu kadachan', which means the doer has no control on

the results (fruits of action).
♦ 'ma karmfalheturbhuh', which means the doer has no control on

the root causes of the fruits of action.
♦ 'ma te sangostvakarmani', which means one should not be at-

tached to inaction.
There could be instances where one would say that doing work
without desire is not possible. However, there are times when
we do this consciously or unconsciously. Sometimes, when we
do something with complete focus and concentration, we often
get lost in the work. Here, getting lost in work merely means

N O T E S
that we stopped to see the results or fruits of the action for a

while. This is the whole logic behind the lines said by Krishna:
forget yourself in the work forever and enjoy doing it. Today,
managers need to understand that too much of result orienta-
tion can lead to sense of fear and discomfort, which may ulti-
mately lead to failure. The shlok says that results are the matter
of the future, but work is a matter of the present. If a person is
behaving under the influence of something (desirable result),
he/she cannot own the work, and when he/she cannot own the
work, he/she cannot enjoy it.
Based on these guidelines from the Gita, managers can take away
some important lessons, such as the following:
□ Developing a sense of neutrality is an important requisite for being
successful in today's business scenario as it may help a manager to
work more efficiently.
□ Following the principles of 'karma-yoga' can help the contemporary
managers to bring a paradigm shift in the overall quality of work
fttl EXHIBIT
The Miracle of the Bhagavad Gita:

Interview with G. Narayana
At the time of the interview, The Miracle of the Bhagavad Gita, G.

Narayana was the Executive Chairman of Excel Industries, Pvt.
Ltd., India.
Excel is a highly respected manufacturer of agrochemicals, indus-

trial chemicals and pesticides. In recent years, the company has re-
ceived special recognition for its focus on developing environmen-
tal-friendly bio-pesticides and solid waste management system as
well as for its spiritual-based leadership.
"My concept of business is the harmony of ethics, energy, excel-

lence, economy and ecology with effectiveness and efficiency that
leads to enlightenment."
- G. Narayana
G. Narayana told how, as a young man, after successfully leading a

number of companies, he had also established a computer services
company called Prism, which specialised in information systems.
"In Prism, we purchased a hard disk computer. I invested all of my

savings in Prism and my friends invested 50% of the capital. With-
in six months of our purchasing the hard disk computer, Personal
Computers (PCs) came into the market. PCs were much less ex-
pensive and had much more capability. Our then outdated system
could not compete with PCs, and the people whom we trained had

N O T E S
many opportunities outside because of the IT boom. As a result,

people started leaving Prism. Prism had yet to pay a considerable
amount ofloans, and at this point, my ego started melting. I realised
that it was not my greatness that made things successful at Valtas
and New India (companies he had led earlier), it was the greatness
of those organisations."
Experiencing fear, doubts and confusion, he went to his native vil-

lage. "The situation at Prism was so critical that suicide became one
of the alternatives," he said. "But that altemative was not correct as
our children were very young. While at my native place, we went to
the Godavari River, and there was an old temple nearby. While my
wife and I, my cousin, and his wife were in the waters of the Goda-
vari, I asked my cousin if we could go to the temple and get a me-
mento from the ruins of the old temple. He said, 'Wait! Something
is touching me in the river!' e reached down and brought out two
Shivalingams (elliptical stones representing the cosmos and that
are worshipped a.s the 'form' of Lord Shiva in the Hindu religion)
attached to a common base. He gave them to me.
The two lingams represented Kaleshwar (death) and Mukteshwar

(liberation). The message was clear: Liberation from my death-like
situation was in the offing! I thought it was a fantastic day." "In the
afternoon, my wife Sujana and I reached her parents' home where
my brother-in-law was reading a book. I asked him 'What is that
book?' He showed it to me and it was the Gita Makarandam, which
is a commentary on the Bhagavad Gita. Till that time, I had not read
even the first three verses of the Gita and I did not know Sanskrit.
I always thought, 'What is the need for Gita, when one is working
14 hours a day? In 18 chapters Gita is teaching about karma yoga
(the spiritual practice of selfless work) and that's what I am already
doing!' I was about to return the book to my brother-in-law; then I
remembered the good omen of the Shivalingams in the morning. I
thought this book, the Gita, was another blessing and I should not
lose the opportunity. I opened the book at random and the follow-
ing verse was present." Narayana quotes from memory: "'Whoever
works with full dedication and offers everything to me, who works
relentlessly, him, I will take out of the river of death and put him
on the bank.' This was the best guarantee I had ever heard," he
exclaimed. Narayana then took the book to his home and studied
the Gita for 18 days.
"Now, I had the Gita. Since the Guru (teacher) did not come, but
only the book, with its commentaries on the Gita came, I took it to
Baroda where lived.
The author was a well-respected swami, so I thought of him as my

Guru and I did an 18-day Yoga (spiritual exercise) of studying the
Gita. What I did then, I now call 'Gita yoga'. I read one chapter

N O T E S
every day, eating only one time a day, and completely avoiding alco-
hol, non-vegetarian food (which I was not taking anyway), tobacco
... I observed silence while studying the Gita and I underlined what-
ever appeared wonderful, although everything looked wonderful in
the Gita! I practised celibacy during all those 18 days." "It was a
fantastic experience. At the end of 18 days, I stood up and the world
stood up along with me. I went back to the bank and assured them
that I would pay back every rupee of the loan. I told my partners
that I would pay back their investment. During those 18 days, new
understandings flowed in my thought and consciousness. My fear
was gone. My mind frames changed. Then I did Vipassana yoga (a
special type of prolonged meditation) and it helped me to further
develop my qualities."
"When I took responsibility with this new spirit, things started oc-
curring that turned around my situation. With the new confidence
and consciousness, solutions were shining and problems were dis-
solving. Then companies approached me and I became a manage-
ment and turn-around advisor." "In 1985 I got the Gita yoga and the
rest all flowed from that. Before 1985, my wife and I were enemies.
My children would not give me a birthday card; they would give to
my wife, but not me. After 1985, everything changed with my fam-
ily, it was the change in me, not in them. We now have a fantastic
r lationship."
Today spirituality permeates G. Narayana's entire being. He says:

"Spirituality is experiencing divinity in others and self. Spirituality
is inspired responsibility towards people, other living beings, and
the world... seeing and relating with divinity in every aspect. Being
responsible is being divine. Self-improvement plus world service
equals spirituality." "Being aware of all, inside and outside, reach-
ing the hearts of others through love, and becoming a model... this
is what Divinity is - reaching the hearts of others. Jesus is this kind
of model, so is Buddha; and now, Sai Baba. They never hurt; they
have done so much for society. They have reached our hearts. This
is what I strive for in my own life and leadership." Life has taught
Narayana that man can be what he chooses to be. According to him,
this freedom to choose opens the door of immense potential with-
in each of us. "The first measure of success is the happiness of all
stakeholders. The customers must be happy, the suppliers must be
happy, employees must be happy, all must be happy.
The Gita says, 'If you do good work, you will get the returns, so do
not worry about them.' If you go for the returns, the work will not
get done. You must do excellent work and not worry about your
individual return." In this connection, Narayana says that his spir-
itual purpose is: "to return added value to the world; to be a being
of love; to contribute, endeavour, excel, and assist others to excel."

N O T E S
"Whenever any person comes to me, in each transaction I evaluate:

'When he leaves from my office, has he become small or has he be-
come tall?' I measure. If he has become small, I will not let him go;
I make him sit. Only when he becomes tall he can go. Only when he
becomes happy he can go. I may fight with him for eight hours, but
I keep at it until he is happy. Only a happy man can escape from me.
And everyone can judge whether the man is happy or not." While
G. Narayana is a vivacious, outgoing spiritual-based leader always
on the go, the next person you will meet is on all these counts the
opposite; he is quiet, introverted, and contemplative; he even refers
to himself as 'a man of silence'. Yet, in spite of the fact that he never
wanted to become a leader, he is today a modern karma yogi.
(Source: http://www.indiadivine.org/content/topic/1599167-the-miracle-of-the-bhagavad-
gita-mterv1ew-,1Tith-gnarayana/)
10. The Mahabharata is classified as smrti. (True/False)

11. The complete version of the Mahabharata has volumes.
12. Mention at least five management lessons that can be derived
from the Mahabharata.
ACTIVITY
Make a group of your friends and discuss how the lessons of the
Bhagavad Gita can help you choosing a career.
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 energe. These issues, if not dealt
with the maturity they demand, have various potential repercussions
on the society as a whole. The emerging ethical challenges become
clearer when we try to answer questions such as the following:
□ Should men and women be treated equally while recruiting them
for jobs such as construction engineering, firefighting, law enforce-
ment, which are traditionally dominated by men?
□ How can we address remuneration parity between male and fe-
male employees?

N O T E S
□ How can we ensure privacy and confidentiality of information in

the digital age?
□ Do businesses have social responsibility?
As we can see, new social norms have blurred gender disparities; the
Internet has provided a lot of opportunities as well as information se-
curity nightmare; businesses are increasingly going 'flatter' and less
authoritative. This all has resulted in organisations facing new ethical
challenges. Some of these challenges are as follows:
□ Eroding traditional values: As the workplace is getting increas-
ingly global and diverse, traditional social values are being re-
placed by global values. Therefore, organisations or individuals
who cannot adapt to these changing values may face the threat of
extinction.
□ Gender issues: With females increasingly showing interest in jobs
traditionally dominated by men, the gender divide does not seem
to have much relevance anymore in the modern workplace. Gen-
der equality is a blow for organisations or individuals accustomed
to a patriarchal setup.
□ Regulatory challenges: The Internet has increased connectivity
dramatically and empowered people. However, in the process, it
poses significant regulatory challenges as it is impossible to keep
track of all digital activities of all the users. In addition, keeping
track of the activities of the users (also called 'digital footprint') can
be a threat to individual privacy and freedom.
□ Artificial Intelligence (Al) and robotics: The development of in-
telligent machines has been possible because of these technolo-
gies. As robots are becoming increasingly intelligent, these tech-
nologies are raising many ethical questions that were previously
inconceivable.
In addition to these emerging challenges, 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. In addi-

N O T E S
tion, attitudinal changes of customers and business organisations are

also required to address ethical issues.
13. Mention some of the emerging ethical challenges in the

business sector.
14. Give your own reasons why business ethics seem to be eroding
from many Indian organisations.
ACTIVITY
Using the Internet, find out some of the regulatory measures being
taken by the Government of India to deal with ethical challenges in
Indian businesses.
lllsuMMARY
□ Indian ethos can be defined as a set of ideas and principles that are
rooted in the ancient philosophical tradition of the Indian sub-con-
tinent. The scope of Indian ethos is wide as it has been enriched
over thousands of years by numerous philosophical traditions.
□ Some of the principles of Indian ethos that have practical signifi-
cance in business ethics are:
♦ Para.spar Deva Bhav
♦ Atmano Mokshartham, Jagat hitaya cha
♦ Archet dana manabhyam
♦ Atmana Vindyate Viryam
♦ Yogah karmashu Kaushalam, Samatvam yoga uchyate
♦ Yadishi bhavana ya.sya siddhi bhavati tadrishi
♦ Para.sparam bhavayantah shreyah param bhavapsyathah
♦ Tesham sukhm tesham shanti sha.swati

□ Indian ethos lists out six human shortcomings - lust (kama), an-
ger (krodha), greed (lobh), attachment (moha), pride (ahankar)
and jealousy (Matsarya).
□ In India, Bhagavad Gita and the teachings of Lord Krishna are be-
coming the new guru of corporate companies and B-schools across
the country to provide management strategies. The teachings of
Bhagavad Gita include selfless work (Nishkam Karma), self-aware-
ness, duty, wisdom, purity of soul and oneness of all beings, among
others.

N O T E S
□ Tata group, Maruti Suzuki, Escorts, NT C, NHPC, MMTC, Pira-

mal Enterprises and SBI are some of the prominent Indian organ-
isations that have implemented the teachings of Bhagavad Gita in
their operations.
□ The impact of Indian ethos on the workplace has been a subject
of interest to management experts for long. An academic disci-
pline by the Indian Ethics in Management (IEM) has emerged as
a result of this interest. I M brings all management practices that
have their roots in Indian philosophy under one umbrella.
□ The principles of Indian management are value-oriented and take
a holistic approach to life. In other words, the ndian work ethos
considers work as a medium of fulfilling the spiritual as well as
material goals of life.
□ Some of the important managem nt principles that have been de-
rived from or influenced by Indian ethos are as follows:
♦ Holistic management
♦ Attainment of material as well as spiritual goals
♦ Conscious manage1nent
♦ Cooperation rather than competition
♦ Humansiation of organisations
Meditativeness in decision making
Intuitive decision making
Focus on duty
□ According to Blanchard and Peale, there are five principles of eth-
ical power for organisations:
• Purpose
• Pride
• Patience
• Persistence
□
•Nishkam Karma,
Perspective
or selfless or aspiration-less action, is an action
performed with no desire of results as it is not performed for self-
ish reasons. Nishkam Karma is the central theme of Karma Yoga,
the path of selfless action.
□ India is a country of high values and ethics. It is a land where people
of various religions and cultures, with difference in languages, be-
liefs and social backgrounds, live together. We find that the various
scriptures reflect the wide philosophical traditions of Ancient India.

N O T E S
□ Maha means 'great' and bharata means ' ndia'. Thus, the Ma-
habharata is the story of the great India. It is the longest epic of
the world written in verse with over 100,000 stanzas.
□ Some of the major management lessons that can be d rived from
the Mahabharata and their relevance in today's corporate world
are:
♦ Building strategy
♦ Forming allies
♦ Showing leadership quality
♦ Maintaining team spirit
♦ Forgetting individual motives
♦ Showing commitment
♦ Encouraging women empowerment
□ The ethical standards of the society are not immune to evolution-
ary changes. As a society matures, the underlying social norms
change, and this in turn raises various ethical questions. In addi-
tion, as human societies grow increasingly complex and the busi-
ness environment changes rapidly, new ethical issues emerge.
□ Some of the emerging ethical challenges faced by organisations
include eroding traditional values, gender issues, regulatory chal-
lenges, artificial intelligence and robotics.
Business ethics seem to be eroding from many Indian organisa-
tions, mainly clue 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
mKEYWORDS
□ Artificial intelligence: The theory and development of comput-

er systems that are able to perform tasks requiring human intelli-
gence.
□ Corporate Social Responsibility (CSR): An emerging manage-
ment concept that advocates inclusion of social and environ-
mental concerns within the business model.

N O T E S
D DRDO (Defence Research and Development Organisation):

The apex government agency in India entrusted with the re-
sponsibility of carrying out research and development activities
in the field of defence.
□ Public Sector Undertakings (PSUs): The corporations in
which at least 51% of the paid-up share capital is held by the
government.
□ Robotics: A branch of engineering that deals with designing,
constructing, operating and applying robots.
□ Sanatan Dharrna: The historical name of the religion that came
to be known as Hinduism.
ID DESCRIPTIVE QUESTIONS
1. What do you understand by Indian ethos? How is it helpful in
the context of management?
2. Enumerate the principles of ethical power for organisations as
given by Blanchard and Peale.
3. Write a detailed note on Nishkam Karma.
4. How do the teachings from the Mahabharata help in management?
5. Write a note on the teachings of the Gita.
6. In what way do the eroding values and emerging ethical issues
if:■ANSWERS AND HINTS

impact the contemporary Indian management?
ANSWERS FOR SELF ASSESSMENT QUESTIONS
Topic Q. No. Answers

Relevance of Indian Ethos 1. A set of ideas and principles that are
- Spirituality at Work rooted in the ancient philosophical
tradition of the Indian subcontinent.
2. (i) Every human being is divine in
nature; therefore, possesses in-
finite potential to achieve excel-
lence.
(ii) An holistic approach is in the
unity of the divine, the individu-
al self and the universe.
3. Lust (kama), anger (krodha), greed
(lobha), attachment (moha), pride
(ahankar) and jealousy (matsarya)

N O T E S
Topic Q. No. Answers

Indian Work Ethos and 4. True
Principles of Indian
Management
5. Spiritual
6. Conscious
7. Direct knowledge
8. Purpose, pride, patience, persistence
and perspective
9. Nishkam Karma
Teachings from Scriptures 10. True
and Traditions
11. 64
12. Building strategy, forming allies,
maintaining team spirit, showing
commitment and encouraging wom-
en empowerment.
Eroding Values and 13. Eroding traditional values, gender
Emerging Ethical Issues issues, regulatory challenges, and
in Contemporary Indian artificial intelligence and robotics.
Management
14. Poor treatment of customers, lack
of compliance with safety and oth-
er regulatory norms, breakdown of
trust between customers and busi-
nesses, increasing cases of financial
frauds and scams, and ignorance of
ethical values and culturally best
practices.

1. 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. Refer to Section 3.2 Relevance of Indian Ethos-
Spirituality at Work.
2. According to Blanchard and Peale, there are five principles
of ethical power for organisations. These are purpose, pride,
patience, persistence and perspective. Refer to Section 3.3
Indian Work Ethos and Principles of Indian Management.
3. Nishkarn Karma, or selfless or aspiration-less action, is an action
performed with no desire of results as it is not performed for
selfish reasons. Nishkarn Karrna is the central theme of Karma
Yoga, the path of selfless action. Refer to Section 3.3 Indian
Work Ethos and Principles of Management.
4. Some of the major management lessons that can be derived from
the Mahabharata and their relevance in today's corporate world

N O T E S
are building strategy, forming allies, showing leadership quality,

maintaining team spirit, forgetting individual motives, showing
commitment and encouraging women empowerment. Refer to
Section 3.4 Teachings from Scriptures and Traditions.
5. 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. Refer to Section 3.4 Teachings from Scriptures and
Traditions.
6. Some of the emerging ethical challenges faced by organisations
include eroding traditional values, gender issues, regulatory
■
challenges, artificial intelligence and robotics. Refer to Section 3.5
Eroding Values and Emerging Ethical Issues in Contemporary
Indian Management.
SUGGESTED READINGS FOR

REFERENCE
SUGGESTED READINGS
□ Das Gupta, A.(2010). Ethics, business and society. Los Angeles: Re-
sponse Books.
□ Marques, J., & Dhiman, S. (2014). Leading spiritually. Basingstoke:
Palgrave Macmillan.
□ Nandagopal, R. (2010). Indian ethos & values in management. Tata
McGraw Hill Education Private Limited.
□ Blanchard, K., & Peale, N. (1988). The power of ethical manage-
ment. New York: W Morrow.
E-REFERENCES
□ Exotic India. (2015). Indian Ethos for Management. Retrieved 21
July 2015, from http://www.exoticindiaart.com/book/details/indi-
an-ethos-for-management-IDJ861/
□ Fisher, C., Shirole, R., and Bhupatkar, A. (2001). Ethical Stances
in Indian Management Culture.Personnel Review, 30(6), 694-711.
doi:10.1108/eum000000000598l
□ The Hindu Business Line. (2005). Indian Ethos in Management.
Retrieved 21 July 2015, from http://www.thehindubusinessline.
com/todays-paper/tp-opinion/indian-ethos-in-management/arti-
cle2197464.ece

N O T E S
□ Fas.org,. (2015). Agni - India Missile Special Weapons Delivery

Systems. Retrieved 25 September 2015, from http://fas.org/nuke/
guide/india/missile/agni.htm
□ Bhagavad Gita Chapter 2, V (2014). Bhagavad Gita Chapter 2,
Verse 47; Karmanye Vadhikaraste Ma Phaleshu Kadachana ~
Swami Vivekananda Quotes. Swamivivekanandaquotes.org. Re-
trieved 26 September 2015, from http://www.swamivivekananda-
quotes.org/2014/05/bhagavad-gita-chapter-2-verse-47.html

CONTENTS
4.1 Introduction
4.2 Ethical Issues in Marketing
4.2.1 Major Marketing Decisions and Related Ethical Issues
Activity
4.3 Ethical Issues in HRM
Activity
4.4 Ethical Issues in IT
Activity
4.5 Ethics in Production and Operations Management (POM)
4.5.1 Measures against Unethical POMPractices
Activity
4.6 Ethics in Finance and Accounting
Activity
4.7 Sum1nary

N O T E S
MAGGI IN THE SOUP: UNETHICAL BUSINESS PRACTICES

OF NESTLE
Nestle's Maggi noodles, with 80% share of India's total instant

noodle market, remained one of the top brands in India for nearly
three decades, until recently when it ran into a serious controver-
sy drawing a nationwide furore.
AE per the report issued by the World Instant Noodles Association

in 2014, the consumption of Maggi noodles in India was record-
ed to be 5,340 million cups or bag through the year. It has been
estimated that Maggi's contribution to Nestle's total annual turn-
over of 9000 crores is nearly 30 per cent. Initially, Maggi was
introduced as a snack food for kids, but gradually, it started to be
widely eaten by all age groups and soon become popular among
students and young professionals who lived on their own. Besides
an instant recipe, it is popular in India for its availability even in
the most remote locations such as in Rishikesh camping areas;
Leh-Kargil highway; highest peaks such as Manali, Badrinath;
etc.
After the controversy blew up in 2015, Maggi's sale dropped by 70

per cent. The Maggi crisis started when a food inspector of UP's
Food Safety and Drug Administration, V K Pandey, during the
sample checking of Maggi in Barabanki area, found the presence
of MSG (monosodium glutamate) and lead higher than the permis-
sible limit. Nestle in a move to defend itself challenged the report
submitted by V K Pandey and demanded for retesting at a govern-
ment recognised lab. The results of the re-test were even more det-
rimental as the test not only confirmed the presence of MSG and
lead but it was also found that the lead traces were 7 times more
than the permitted level. The Lucknow authorities on 30th April
2015, issued a notice to Nestle for recall of that particular batch of
Maggi noodles.
Following the recall in UP, on notice of Food Safety and Standards

Authority of India (FSSAI), food safety authorities of health de-
partments of other states also sent their Maggi noodle samples for
testing where the results in some states were negative but con-
firmed positive in most. More and more tests were confirming the
presence of unacceptable substances in Maggi, making it "unsafe
and hazardous" to be consumed. Food safety authorities, public
health and safety officials, social activists and many NGOs blamed
Nestle for not adhering to the food safety laws. Viewing nation-
wide protest against Nestle Maggi, the state governments of Del-
hi, Uttarakhand, Tamil Nadu, Kerala and Jammu & Kashmir put
temporary ban on it. Major retailers such as Walmart, Reliance,
Big Bazaar, etc. were asked to discontinue the sale of Maggi.

ETHICAL ISSUES IN FUNCTIONAL AREAS OF MANAGEMENT 83
N O T E S
The Delhi government fil d a case against Nestle ndia based on

the test results confirming the presence of MSG and accruing
Nestle of misbranding by using MSG without appropriate label
declaration, which is an offence. Within weeks, this Maggi con-
troversy spread like fire nationwide through social media such
as Facebook, Twitter, WhatsApp, etc. In this time of difficulty and
crisis, instead of coming out publicly and addressing consumers,
Nestle adopted the silent strategy and posted some comments on
social media thinking that this controversy will die down soon if
they wouldn't respond or do anything.
Their silence and delay in communication in this critical time was

construed as an admission of guilt by its loyal consumers. A lack
or delay of clarification from a big brand like Nestle could result
in the damage of the brand credibility. Nestle ceased its social me-
dia activities immediately after its ban in UP on 21st May 2015
and became active only on 1st June 2015. The first official expla-
nation of Nestle came out on social media websites denying all
kinds of allegations against its product. No company representa-
tive came forward to apologise or communicate with consumers;
instead, what they issued was just a press release and few auto-
mated tweets, which were not expected from a brand like Nestle.
In the present dynamic world of digital media, delay of one day is

equivalent to delay of month, which is not good for any brand. At
this time, what was expected from Nestle to keep the consumers'
confidence and trust was transparency and responsibility, which
was missing. On June 2nd and 3rd, 2015, Nestle using its social
media accounts, Twitter and Facebook, stated and reassured its
consumers that Maggi was safe for public consumption; it even
launched a FAQ page on its official website for clarification. But
the impact of nationwide protest and more and more confirmed
negative lab reports was such that Nestle withdrew Maggi from
the Indian market. On 16th June 2015, it destroyed Maggi noodles
of worth US $ 50 million.
Though it came bit late, understanding the severity of the crisis,

the Global CEO of Nestle, Paul Bulcke, came to India all the way
from Switzerland to address a press conference of the Indian Me-
dia. Following the press conference, a press release was issued by
Nestle quoting In spite of MAGGI Noodles being safe, Nestle India
decides to take the products off the shelves. (Nestle India, 2015)
The Maggi Controversy in ndia led to the testing of Maggi sam-

ples during the month of July 2015 all over the world including
US, UK and Canada, even though, fortunately, these tests per-
formed abroad cleared Maggi as a safe food. August 2015 brought
some good news to Nestle when one of the Indian government-ap-

N O T E S
proved laboratories came up with the result that Maggi noodles

are adhering to the national food safety standards.
This positive turn may recover the business of Nestle, but it may
not recover the damage done to the brand image in terms of lost
consumer trust for health and safety. In India, Maggi was intro-
duced as a quick snack that mothers used to trust for their kids.
Would this too little, too late response from Nestle be able to build
this implicit trust again? Would it reassure mothers of their kids'
safety? Nestle may or may not be guilty, but its denials, deception
and doublespeak to cover up or defend its practices are surely
unethical.

N O T E S

- 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 man-
agement
- Explain the significance of ethics in finance and accounting
Ill INTRODUCTION
In the previous chapter, you studied the concept of Indian work ethos
in management. However, application of such ethos in the business en-
vironment requires addressing the moral and ethical issues at various
functional levels of an organisation. In this chapter, let us discuss how
business ethics play a crucial role in different management functions.
An organisation usually performs a number of functions such as mar-

keting, production, human resource management, etc. Each function
has a different role in ensuring the smooth functioning of the organi-
sation. Providing high-end results often depends on the efficient coor-
dination between these different functional areas of an organisation.
If one area faces some kind of unethical issue, it may affect the func-
tioning of other areas as well.
Consider an example of Holiday Inn's "No Surprises" advertising

campaign. Market research indicated that the hotel's customers want-
ed much more comfortable accommodation facilities. So, oliday
Inn's ad agency developed a campaign promising 'great lodgings with
no unpleasant surprises'. Even though the hotel managers felt that
they could not meet the claims promised in the ads, the senior man-
agement accepted the campaign. The ad campaign raised customer
expectations to an unrealistic level and caused customers, who did
confront an unpleasant surprise, an additional reason to be annoyed.
The campaign was discontinued soon after it started.
Similarly, most organisations, in order to depict the customer service

offered, display advertisements that often feature actual employees
doing their jobs or explaining the service they provide. This communi-
cation approach is effective with both the primary audience (custom-
ers) and the secondary audience (employees). However, any discrep-
ancy between services shown in advertisements and services provided
by employees may create a difficulty for the organisation on account
of practising unethical activities. Apart from this, practices, such as
making long-distance calls from office, duplicating the organisation's
system software to use at home, projecting a false report on the num-
ber of working hours, falsifying business records, etc., are also consid-
ered unethical in an organisation.

N O T E S
This chapter covers ethical issues in marketing, HRM and IT. t also
explains the role of ethics in production and operations management.
Lastly, it discusses the significance of ethics in finance and accounting.
ifj ETHICAL ISSUES IN MARKETING

The term 'marketing' refers to a process carried out by a seller to com-
municate 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. This is because
any unethical action on an organisation's part may damage the image
of the organisation in the market.
Ethical issues in marketing include moral and ethical principles and

problems arising in the marketing environment (which involves var-
ious factors and forces affecting an organisation's capability to devel-
op successful relationships with customers). These issues are usually
concerned with negative aspects such as false claiming of product fea-
tures (puffery) and unfair competitive strategies. For example, in 2000,
Pizza Hut filed a case against Papa John's on the subject of its adver-
tising that stated "Better ingredients. Better Pizza." The court con-
cluded that the statement did not deliver a verifiable fact that could be
trusted upon by consumers, thus being a case of puffery. Here, better
pizza is not a quantitative measure that can be compared with other
brands.
Today, it has become important for marketing organisations to per-

form ethical marketing practices. This is because with increasing
awareness and easy access to correct information, customers can eas-
ily differentiate between honest and deceptive marketing practices.
For example, an advertisement showing that a knife of a particular
brand can cut through a stone would be false advertising. Everybody
knows that no knife could be too sharp to cut a stone. Even if a mar-
keting organisation uses such statements to promote its product, the
advertisement would be considered deceptive and factually inaccu-
rate. This kind of unethical behaviour can quickly lead organisations
to failure. Therefore, an organisation that wants to improve the brand
image of its products and develop long-term relationship with custom-
ers should try to avoid such unethical practices.
Organisations that follow an ethical code of conduct in marketing

practices win the trust of customers. If a product lives up to the claims
made by an organisation, it creates a positive image of the organisa-
tion in consumers' minds. Apart from applying an ethical code of con-
duct in marketing communication practices, an organisation needs to
make several decisions related to marketing a product. To apply ethics
in such decisions, an organisation needs to carry out a systematic pro-
cess, which involves a number of steps.

N O T E S
These steps are:

1. Clarify
♦ Define the basis for taking any marketing decision.

♦ ormulate and bring various alternatives for making deci-
sions.
♦ Determine ethical principles and values involved in each al-
ternative.
♦ Eliminate undesirable and impracticable alternatives.
♦ Select the alternative that appears as ethically justifiable.

2. Evaluate
♦ Assess the options if they do not stand on ethical principles.

♦ Differentiate reliable facts from assumptions, beliefs, desires,
superstitions and opinions.
♦ Determine the credibility of the option.
♦ Consider benefits, problems and risks associated with stake-
holders.
3. Decide
♦ Determine the most possible consequences based on facts.
♦ Give ranking to values to determine their priority.
♦ Ensure ethical aspects have been followed by answering the

following questions:
Are you comfortable with the way you are treating others
if you are treated in the same manner?
Would you feel relaxed if your decisions go public?
Would you feel easy if your family is observing you'?
4. Implement
♦ Develop a plan for the implementation of a decision.
♦ Maximise benefits and minimise costs and risks associated.

5. Observe and modify
♦ Detect the effect of decisions and modify them if required.
♦ Adjust according to new changes.

N O T E S
EXHIBIT
Competition Practices as per Different Acts in India
The Competition Act, 2002
The Parliament of India passed The Competition Act in 2002. The

Act is aimed at governing Indian competition law that prevents
activities having an adverse effect on competition in India. The
Competition Act forbids anti-competitive agreements and misuse
of leading positions by companies. In addition, it controls various
business practices, such as acquisition, acquiring of control and
merger and acquisition, which may affect competition within In-
dia. Thus, the Act focuses on preventing such activities that might
cause adverse effect on competition in India.
The Competition Act basically aims at achieving the following ob-

jectives:
□ To prepare the market for the benefit and welfare of consumers
□ To ensure fair and healthy competition in the market
□ To sustain economic development in the country for faster and
inclusive growth
□ To implement competition policies that could help in efficient
utilisation of economic resources
□ To ensure alignment of sectoral regulatory laws with the com-
petition law
The Consumer Protection Act, 1986
To protect the interests of consumers in India, the Parliament of

India enacted The Consumer Protection Act in 1986. The Act has
been amended in the year 2002. The Act provides provisions for
establishing consumer councils and other authorities to settle con-
sumers' disputes and related matters. Twosuch councils are:
D The Central Consumer Protection Council: This council is es-
tablished by the Central Government with the Minister of Con-
sumer affairs as chairman.
D State Consumer Protection Council: This council is estab-
lished by the State Government with the Minister of Consumer
affairs in State Government as chairman.
The Consumer Protection Act basically aims at promoting and pro-

tecting the rights of the consumers. In addition, it aims at achieving
the following objectives:
□ To protected consumers against the unfair trade practices, un-
safe to life and property.

N O T E S
□ To make consumers aware of their rights to know the quality,

quantity, potency, purity, standard and price of product/services.
□ To make consumers aware of their rights to access to a variety
of product/services at competitive prices.
□ To assure consumers that their interests will receive due con-
sideration at appropriate forums.
D To make consumers aware of their rights to fight against unfair
trade practices.
□ To make consumers aware of their rights against consumer ex-
ploitation.
4.2.1 MAJOR MARKETING DECISIONS AND RELATED

ETHICAL ISSUES
If marketing decisions are taken after considering all the aspects of

ethical practices, organisations can generate higher revenues, im-
prove brand recognition, boost employee motivation and attract in-
vestors. Let us now discuss major marketing decisions and related
ethical issues as follows:
□ Product-related ethical issues: These issues occur when market-
ers fail to provide its customers with information related to prod-
ucts, such as features, value, usage and associated risks. Such a
failure on part of an organisation is regarded as a dishonest prac-
tice. For example, organisations selling weight management prod-
ucts can claim that the product can make them slim within a spe-
cific period of time. Such organisations may make exaggerated
and manipulative claims to trick customers to purchase products.
Product related ethical issues may also relate to:
♦ Packaging and labelling practices: Packaging is an important
element in the marketing of any product. When a customer
goes to a store to buy a product, packaging is the first thing
that they observe about the product. Therefore, the packaging
should be appropriate to not only attract the customers, but
also protect the product from being destroyed. owever, ethics
play a major role in packaging and labelling practices. There
are several ethical issues that relate to sustainable practices,
labels, graphics, and safety. In addition, depending on the type
of product, packaging needs to provide certain information to
the customers. For example, all edible items require providing
information to customers about the nutritional content in the
product. Thus, lack of information or misleading information
may result into unethical packaging practices. Selling different
product from what is shown in the packaging and using un-
safe packaging materials also comes under unethical packag-
ing practices. Similarly, marketers sometimes use ambiguous

N O T E S
label information to mislead the customers. For example, '100

per cent pure neem soap', 'low fat cooking oil', etc. are some
examples of labels that may display misleading information.
♦ Maintaining quality standards for products: Many a times or-

ganisations neglect adhering to quality standards while manu-
facturing a product. They use inferior materials or components
to reduce cost. This is a highly unethical practice that leads to
sell poor quality of products to customers. In addition, ethical
issues arise when marketers hide any quality related informa-
tion, such as existing conditions of the product or changing
product quality, from customers. Failing to explain the nature
of product is a form of dishonesty and comes under unethical
practices.
♦ Product safety: It is important for organisations to ensure that
the products do not put any harm or hazards to consumers. Us-
ing harmful elements or components while manufacturing the
products may impose health risks to the buyers. Therefore, it is
very important to follow product safety standards irrespective
of product type, industry or sector.
□ Promotion-related ethical issues: Due to the fast growth of com-
munication mediums, mass media has power to effectively pro-
mote the image of a brand or an organisation if properly used. It
helps in promoting products and other offerings, which are pro-
duced and distributed to a large audience. It is therefore import-
ant not to overlook social, ethical and legal aspects of promoting a
product or service through mass media.
An extensive body of laws has been developed by governments to
govern unethical practices used in promotional techniques. For in-
stance, the Indian law prohibits the advertisements that promote
the usage of cigarettes and alcoholic drinks. Any advertisement
that shows magical or supernatural ways to cure any illness or dis-
ease is not permitted either. In addition, all advertisements that
hurt morality, decency or religion in a direct or indirect way are
strictly prohibited as per the Indian law. Wrong and misleading
information on any product or service that can cause loss or injury
to consumers are considered to be unfair trade practices. Let us
discuss the major unethical practices followed at product/service
promotional level:
♦ Deceptive advertising: Advertising creates a bond between

the seller and the buyer. This connection is strengthened if the
buyer finds that the product is of same slandered as, promised
by the seller. However, if the buyer finds that the product is not
as advertised, he/she might feel cheated.
♦ Sales promotion gimmick: Sales promotion is used as a tool to

increase the product sales. However, some organisations use
promotion tools in various unethical ways. For example, in or-

N O T E S
der to sell a large number of products, marketers make several

false and misleading promises and commitments to custom-
ers. Similarly, in order to close deal with prospective customer,
the sales personnel often misrepresent the product's features.
Sometimes the sales personnel enforce the customer to buy a
product, before the customer had ample time to try-out a prod-
uct. All these are sales promotion gimmicks that come under
unethical practices and must not be followed.
There are a number of consumer protection organisations, such as
All India Consumer Protection Organisation, Consumer Guidance
Society of India and Consumers Eye India, which play an import-
ant role in ensuring that advertisements do not claim any false or
misleading concepts.
□ Price-related ethical issues: Every customer wants to pay a fair
price for the product purchased by him/her. If marketers indulge
in unethical marketing practices, they may lose customers forever.
There are various unethical pricing policies followed by various
organisations. Some of them are as follows:
♦ Price fixing: It is an unethical way of fixing the price of a prod-

uct or manipulating the economic market conditions. Usually,
price fixing can be of two types:
Vertical price-fixing: It is an illegal arrangement where
parties at different levels of a production and distribution
system act to fix the market price of a product.
Horizontal price-fixing: It is also an illegal arrangement
where several competitors pre-decide to sell a product at
the same price.
♦ Bid rigging: It is a kind of fraud where competitors decide in

advance about one party that will submit the winning bid on
a commercial contract. Iere, other parties present their bids
just for the sake of making presence. This practice raises the
price of goods and services in cases where product procure-
ment is done through bidding.
♦ Price war: It benefits customers, but not marketers. As one

competitor lowers the price, the other follows the same strate-
gy. It is followed by a series of price reductions.
♦ Deceptive pricing: It is an act of pricing products/services to
intentionally mislead the customers while price promotion.
It is counted as illegal pricing practice under Federal Trade
Commission Act, 1914 and Wheeler-Lea Act, 1938. Superficial
discounting is one form of deceptive pricing, where an organ-
isation advertises discounted price however, the product is
always sold at the same price. Similarly, some organisations

N O T E S
set pricing in a manner that it psychologically seems a lesser

amount to customers. For example, if a customer needs to se-
lect between two products where one product costs Rs. 30 and
the other costs Rs. 29.99; the customer may prefer product that
prices Rs. 29.99 as it appears less expensive. However, there is
only a difference of 1 paisa.
♦ Unfair pricing: It is an unethical pricing strategy which is usu-

ally followed by the monopolist sellers. If the number of buyers
is more than the number of sellers, the sellers usually follow
this pricing strategy for their product/services. They charge
high prices for their products/services even if it comes with ba-
sic features. In unfair pricing condition a buyer usually stops
purchasing products/services from the monopolistic vendor as
they feel the price is too high. In other words, unfair prices may
lead a customer to not to make purchases.
♦ Price discrimination: It is another unethical pricing strategy,

where organisations charge different prices from different cus-
tomers. It is a common pricing practice in consumer market,
such as cable companies usually offer lower prices to new cus-
tomers, or fast food restaurants offer low priced meals to chil-
dren. However, in general, price discrimination is an unethical
and illegal practice. Following are the two major types of price
discrimination strategies:
Price skimming: It is an unethical discrimination pricing
strategy, where the organisations charge the maximum
price for a product at first, and then lower the price over
time. Under this practice, the marketers first try to capture
the market segment of customers who could pay premium
price for the product. After a period of time, as the demand
of the first customers starts declining, the marketers lower
the prices to attract the next, more price-sensitive segment
of customers. This type of pricing helps the marketer to
know what the customer is willing to pay for a product and
generate the profit for both the short and long terms. Sony
and Apple are some examples of companies that have been
using this pricing strategy for years.
Dumping: It is an international price discrimination strat-
egy that is generally used in the context of international
trade. In dumping, an exporter organisation sells its prod-
ucts in a foreign market at a low price, however, sells the
same product at a high price in the home market. According
to Haberler, dumping is the sale of goods abroad at a price
which is lower than the selling price of the same goods at
the same time and in the same circumstances at home, tak-
ing account of differences in transport costs. Thus, dump-
ing is a price discrimination practice between two markets.
Most organisations employ a wide range of pricing tactics to de-
ceive customers deliberately. These pricing tactics are mentioned
as follows:

N O T E S
♦ romoting a simple product as a luxury product

♦ Discounting prices to eliminate competitors from the industry
and then hiking prices when competitors exit the industry
♦ Increasing prices when there is a shortage of a product
♦ Increasing the price of a product and introducing 'buy one, get
one free' schemes where the second product is free or offered
at discount
♦ mporting products from other countries at a lower price and
selling them at a higher price
D Distribution-related ethical issues: Ethical issues in distribu-
tion can occur between suppliers, producers and distributers on
account of manipulating product's availability, selling surplus in-
ventory 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: It is a form of scarcity that is not
natural, but human made and often results from greed and
human selfishness. Distributers create artificial scarcity by
amassing resources or products to get abnormal profit in the
market. They do not release products in the market till the de-
mand reaches to the peak. In this way, cl mand goes higher
than supply, and the distributers get the chance to charge pre-
mium prices for their stored products. For example, in India
many traders get involved in the practice of hoarding onions to
create artificial scarcity and raise the price to earn exorbitant
profit.
♦ Creating monopoly market: Marketers can use their distri-
bution channel to establish complete dominance in a market,
which forces competitors out of the business. For example, a
large manufacturer with significant economy of scale can de-
ploy the strategy of aggressive distribution, even by selling
products at a very low price to capture the market, weed out
the competitors, and thereafter raise price once the compet-
itors are out of business. Such practices may be against the
spirit of the free market and lead to market failure.
EXHIBIT
Principles of Ethical Marketing

Some of the ba sic principles of ethical marketing are as follows:
□ All marketin g communications should exhibit truth.

N O T E S
□ Marketing professionals should focus on following the highest

standard of personal ethics.
□ Even though the focus should be on non-representation of
false information, the advertising should be done in a manner
that could clearly distinguish it from news and entertainment
content.
□ Advertisements should exhibit the real nature of the product.
□ Marketing practices should not compromise on the privacy of
the consumer at any cost.
D Marketers must comply with regulations and standards.
□ During all marketing decisions, ethics should be discoursed
openly and honestly.

1. 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.
2. isanagreement between competitors to sell a
product at the same price.
3. isakind of fraud where competitors d cide in
advance about one party who will submit the winning bid on
a commercial contract.
4. When a marketer presents false information related to
products, such as features, value, usage and associated risks,
it comes under -----
aPro.
duct-related ethical issues
b. Promotion-related ethical issues
c. Price-related ethical issues
d. Distribution-related ethical issues
ACTIVITY
Using the Internet, find information on 'Nestle's Maggi Controver-

sy - An Ethical Issue'. Prepare a report based on your findings.
Iii ETHICAL ISSUES IN HRM

In an organisation, Human Resource Management (BRM) plays a
crucial role in maximising employee performance with an aim to ac-
complish organisational goals and objectives. It involves a number of

N O T E S
activities such as recruitment, selection, training and development,

compensation, rewards, induction and orientation. Thus, it can be
said that 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 ap-

praisal and discrimination of employees on the basis of age, gender,
religion or disability. Apart from this, unfair compensation practice
is another area of concern, which leads to employee dissatisfaction.
There are a number of multinational organisations that run their busi-
nesses in both developed and developing countries. However, these
organisations barely compensate people fairly. For example, an Amer-
ican transferred to India might get more salary than his/her Indian
colleague for the same job.
Figure 4.1shows major ethical issues in HRM:
Ethical Issues
inHRM
Figure 4.1: Major Ethical Issues in HRM
Let us discuss these ethical issues in detail.

□ Unfair performance appraisal: The performance appraisal sys-
tem is the most significant factor of an employee's work life. It
is directly related to the increment in compensation, promotion
and recognition of an employee. On the other hand, it is indirectly
related to job satisfaction, employee morale, motivation, produc-
tivity and industrial relations. Unfair performance appraisal may
adversely affect the level of job satisfaction and motivation of em-
ployees.

N O T E S
□ Discrimination in employment: It is unethical to make distinction

among individuals on the basis of caste, colour, sex and creed while
selecting them for jobs. Such discrimination is generally based on
personal perceptions of the recruiter. For example, a recruiter may
be more inclined to select a candidate who belongs to the same
community as that of the recruiter. It is a serious unethical prac-
tice related to IRM as the selection should rather be done on the
basis of skills, performance, education or knowledge. Such uneth-
ical practices affect the productivity and quality of tasks within an
organisation.
□ Privacy issues: It is important for an HR professional to secure the
confidentiality of individuals and the organisation. As per the reg-
ulations supporting privacy, every individual has the right to pro-
tect his/her personal life. For example, scanning the personal mails
of an employee is an unethical practice as it breaches the privacy
rights of an employee. Similarly, an organisation also has its privacy
rights. It is not compulsory for an organisation to share or disclose
all crucial details to stakeholders. If an employee, without the con-
sent of the organisation, discloses any official record or information
to any other person/organisation, he/she can be found guilty of the
breach of confidentiality and privacy rights of the organisation.
□ Safety and health issues: Employees are the assets of any organi-
sation; therefore, it is the responsibility of organisations to provide
them with a safe and healthy work environment. Any type of in-
tentional harm to the health and safety of employees or any per-
son at the workplace is unethical. For example, Nike Shoe Plant
in Vietnam was in focus for a long time for the poor safety and
health conditions, and the employees were forced to work under
such conditions. As per an inspection report given by Ernst &
Young, workers at the factory near Ho Chi Minh City were exposed
to carcinogens that exceeded local legal standards by 177 times in
parts of the plant and that 77 per cent of the employees siif.feredfrorn
respiratory problems. Organisations take various measures for the
health and safety of employees, such as prevention of accidents,
arrangement of clean drinking water, hygienic toilet facilities, etc.
□ Unjustified and discriminative work conditions: Poor employ-
ment conditions cause various ethical concerns in organisations.
These conditions may lead to stress, work pressure and adverse
work practices. Some working conditions causing ethical issues
are discussed as follows:
♦ Cultural diversity: It refers to the difference in culture among
employees at a workplace. This restricts support and coopera-
tion among employees.
♦ Unjustified dismissal: It refers to the termination of employ-
ment without any valid reason. This can be a forced discharge
or dismissal of an employee from his/her job.

N O T E S
♦ Violation of privacy rights: It involves disclosure of an employ-

ee's confidential or sensitive information, illicit access into his/her
personal accounts or property, etc.
♦ Unfair compensation: It involves the payment of basic salary,
bonus, incentives or any other form of due compensation in an
unfair and unjustified way.
♦ Layoff discrimination: It refers to a partial and unfair ap-
proach during layoff. For example, people drawing higher sal-
aries are generally the first ones to be laid off.
♦ Glass ceiling practices: The term 'glass ceiling' was coined

in 1986 by Hymowitz and Schellhardt in a Wall Street Jour-
nal report on corporate women. The term is used to denote a
concept, according to which, women who aim to attain senior
positions in various fields, such as corporate, government, edu-
cation etc. face multiple barriers as compared to men. In other
words, according to this concept, 'glass ceiling' acts as an invis-
ible ceiling beyond which women employees cannot rise in an
organisation.
□ Sexual harassment: It is one of the major unethical issues that
typically affects female employees in an organisation. Such type of
harassment can force employees to work under hostile conditions
that may include the use of abusive behaviour or language. Con-
sidering the severity of such harassment cases, the Government of
India has announced a 'zero tolerance' policy for violence against
women.
5. The function 1s related to the management of

people in an organisation.
6. refers to the difference m culture among
employees at the workplace.
ACTIVITY
Using the Internet, find information on the ethical aspects of the

case that came up in October 2008 when Jet Airways (India) decided
to lay off more than 1,000 employees to streamline its operations.
Ill ETHICAL ISSUES IN IT

With advancement in technology, many advanced computer and in-
formation 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

N O T E S
regarding the ethical use of information have given rise to various

ethical dilemmas that significantly affect a business organisation. For
example, ideally, information created by a person is his/her intellec-
tual property. If this information is used by anybody without the per-
mission of that person, it is considered to be unethical. Let us discuss
some major ethical issues involved in IT as follows:
□ 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.
This is an immoral practice. Due to IT revolution, data and infor-
mation are easily accessible on the Internet.
□ Piracy and hacking: Piracy and hacking have emerged as two ma-
jor threats to the security of software applications and digital in-
formation sources. Piracy is r lated to an unlawful replication of
software without the owner's permission. For example, in the US
in 2002, 39 per cent of business application software were pirated
that caused a loss of around $13 billion to the country. Hacking, on
the other hand, is gaining unauthorised access to another's com-
puter for stealing or destroying information.
□ Invasion of 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 d cision making is increasing considerably, the risk of invading
others' privacy is becoming more serious.
□ Cybercrimes: These include illegal activities such as theft, finan-
cial fraud, embezzlement, on.line harassment, virus infection and
sabotage, which are performed through a computer. Organisa-
tions, specifically small businesses, suffer the most in computer
crimes as, unlike big companies, they cannot afford to implement
security measures to prevent such crimes.
7. implies stealing ideas, thoughts, expressions or

writings of other persons.
8. isrelated to an unlawful replication of software
without the owner's permission.
9. Hacking is gaining unauthorised access to another's computer
for stealing or destroying information. (True/False)
ACTIVITY
Using the Internet, find information on the Intellectual Proper-

ty Law in India. Based on your findings, prepare a report on its
strengths and weaknesses.

N O T E S
ETHICS IN PRODUCTION AND

OPERATIONS MANAGEMENT (POM)
An organisation has four main functional areas, namely, marketing,
production, finance and human resource. Among all these functional
areas, production is the basic activity to generate revenue and achieve
various other goals and objectives. Production refers to an activity of
converting input into output. However, the entire process of combin-
ing and transforming the available resources of an organisation, such
as men, machines and materials, into value-added products and ser-
vices, and making them available to end consumers is known as Pro-
duction 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 cus-
tomers and increasing organisational efficiency and effectiveness. It
encompasses a number of activities such as selection of plant location,
plant layout and material handling, product design, production plan-
ning and control, quality control and materials management.
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. In other words, ethics in production is intended to guar-
antee that the production capacity or exercises are not harming the
buyer or the general public. Thus, there needs to be a certain code of
conduct or standards followed in the POM practices of an organisation.
Let us discuss the case of unethical practices followed by Coca-Cola

in its production processes. Coca-Cola, in the year 2000, started its
bottling operations in a village called Kala Dera, located near Jaipur.
The village primarily depends on agriculture for the livelihood of peo-
ple. However, within a year, the local people started noticing a rapid
decline in groundwater levels. As agriculture was the major source of
livelihood, loss of groundwater was definitely a big problem for the
farmers. The people of Kala Dera blamed Coca-Cola Company for the
declining level of groundwater. They accused the company for wors-
ening the water situation through extraction and pollution and de-
manded the closure of the bottling plant.
The University of Michigan with the help of the Energy and Resources
Institute (TERI) conducted an independent assessment and made Co-
ca-Cola Company to be part of this assessment, which focussed on the
ethical aspects of the company's operations in ndia. As per the TERI
assessment report, the plant's operations in Kala Dera would contin-
ue to be one of the contributors to a worsening water situation and a
source of stress to the commimities around. It was found that Coca-Cola
Company runs its operations in India from a perspective of "business
continuity" rather than worrying about the impact on the community.
This was a big example of employing unethical production and op-

N O T E S
erational practices by a multinational giant that affected the general

public at large.
4.5.1 MEASURES AGAINST UNETHICAL POM PRACTICES
In today's competitive era, organisations try to reduce the overall cost

involved in the production process. This is sometimes done at the cost
of quality and encourages unethical practices. In order to bring down
the cost, organisations incorporate poor processes and technologies.
This is unethical and ultimately affects the overall quality of the prod-
uct. Let us now discuss some measures against unethical POM prac-
tices as follows:
D Create a code of conduct: The production department of an or-
ganisation should follow a written code of conduct to provide its
employees and managers an overview of the type of conduct ex-
pected from them. For example, an ethical code of conduct may
include measures against child labour, forced labour and discrim-
ination practices within the organisation.
□ Create safe and hygienic working conditions: Providing clean
and safe working conditions is one of the most important ethical
aspects in any production department. POM activities should be
designed in a manner that they provide a safe and healthy work-
place to employees. The production department should ensure
proper conditions of light, ventilation, hygiene, fire prevention,
safety measures and access to clean drinking water within the pro-
duction facility.
D Focus on environmental sustainability: Production activities
must comply with the standards and requirements of the local and
international environmental laws and regulations. There should
be well-written measures to reduce and compensate any ill effects
of production activities over environmental sustainability.
D Follow specifications: It is the responsibility of a production de-
partment of any organisation to follow all specifications and guide-
lines regarding the production process. Specifications are im-
portant specifically in industries such as food and beverages and
electronic appliances. Any deviation from the specification may
result into poor quality output. Therefore, ignoring specifications
is not only unethical but may also affect the overall image of the
organisation.
□ Follow total quality practices: Quality can be an ethical issue as
customers expect quality products and services from organisa-
tions. Any deviation in offering products from what was promised
can be a serious ethical issue. A slight en·or during the production
process can damage the quality severely. Therefore, it is important
to follow quality guidelines to produce what is promised.
□ Crosscheck supplier's background: Suppliers are the major el-
ements in the overall POM process. They provide organisations

N O T E S
with raw materials to be used for producing the final output.

Therefore, the quality of the final output depends largely on the
quality of input provided by suppliers. It is therefore a responsi-
bility of an organisation to ensure that raw materials received are
of good quality, and suppliers are abiding by the defined quality
standards. For this, it is important for the organisation to cross-
check the background of suppliers to ensure that they have a good
market image.
[E] EXlilBIT
The Tata Code of Conduct (TCOC)
The values and principles, that govern Tata Steel's business come
under the Tata Code of Conduct (TCOC), established in 1998. This
code of conduct serves as a guideline to each employee and de-
scribes values, ethics and business principles that are expected
from them to show in personal and professional conduct. TCOC is
designed to deal with diverse cultural and business-related issues
across the group. It is deployed through a well-formulated struc-
ture called the Management of Business Ethics (MEE). This struc-
ture is based on four pillars, which are:
□ Leadership: The Managing Director is also Tata Steel's chief
ethics office1: A designated Ethics Counsellor supported by De-
partmental Ethics Coordinators, reports directly to the Managing
Director and has access to the Board of Directors.
□ Communication and awareness: Compliance to the Code is a
condition of service for aH employees and is also a pre-requisite
for service for suppliers, contractors and vendors, who must agree
to respect it. Employee seminars, compliance training and ethics
awareness workshops are conducted at frequent intervals.
□ Evaluation of effectiveness: The MBE Programme is evaluated
and reviewed and new initiatives as required are introduced un-
der the MEE Annual Business Plan.
□ Compliance structure: A number of systems and processes based
on zero tolerance have been put into place to ensure that gover-
nance standards are met. These include Gift Policy, Whistle Blow-
er Policy, Vendors Whistle Blower Policy, Sexual Harassment
Prevention and Redressal Guidelines.
(Source: http://v,r..,vw.tatasteel.com/corporate/e!hics.asp)
Cf SELF ASSESSMENT QUESTIONS

10. ------- refers to an activity of converting input into
output.

N O T E S
11. Plant layout and material handling, product design, production

planning and control, and quality control and materials
management are some of the activities that come under the
function.
ACTIVITY
Using the Internet, find and present information on the role of op-
erations managers in implementing ethical decisions.
Ill ETHICS IN FINANCE AND ACCOUNTING

Ethics in finance deals with various ethical dilemmas and violations
in day-to-day financial transactions. An example of ethical violations
is data fudging in which enterprises present a fabricated statement
of accounts and other records, which are open to investigation. 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
In this way, ethics in finance and accounting determine how to make

moral decisions regarding the preparation, presentation and revela-
tion of financial information. Finance and accounting are two of the
most important business functions accountable to act in the public
interest instead of satisfying the needs of an individual or an organ-
isation. Therefore, it becomes imperative for finance and accounting
professionals to adhere to certain ethics to achieve individual, organi-
sational and societal objectives all at the same time.
However, during the past few years, several accounting scandals have
occurred that put a serious question mark on the accountability of
finance and accounting professionals. Several organisations such as
Enron, Tyco, Global Crossing, Quest, Xerox, Adelphia, etc., were in-
volved in unethical practices by using wrong and manipulative ac-
counting information.
Let us discuss some of the most common unethical issues in finance

and accounting:
□ Fraudulent financial reporting: It refers to representing false
statements regarding the financial status of an organisation. It
is usually done by the management of an organisation. It aims to
mislead investors and uphold the organisation's share price. Such
financial reporting may increase the organisation's stock price for
a short period. However, in the long run, it proves to be very harm-

N O T E S
ful to the organisation's brand equity. Apart from this, it is unethi-

cal to mislead stakeholders by providing wrong information about
the organisation's financial status.
Enron Corporation, an American energy company based in Hous-
ton, Texas, went through a huge scandal revealed in October 2001.
The scandal was cited as the biggest audit failure and led the
company to bankruptcy. Enron was using an accounting method
known as 'mark to market', a technique mostly used by broker-
age and trading companies. This technique records the value of
a security on daily basis for calculating profits and losses. Enron
used this technique to show projected earnings from long-term
contracts as current revenue. Though in reality, this money could
not be claimed for many years. The company used this technique
to expand revenue by manipulating future revenue projections. It
made it difficult for the auditors to see the exact sum of money the
company was making in reality. The numbers were high in the re-
cord books as well as in the stock market. It encouraged more and
more investors to invest in the company. However, by April 2001,
a number of market analysts started questioning about the lack
of transparency in Enron's disclosures. Around October 2001, the
company announced its first quarterly loss. Slowly, all the fraud-
ulent activities of Enron started emerging on the ground. By No-
vember 30, the stock of the company closed at 26 cent per share,
leading the company to file for bankruptcy protection by Decem-
ber 2001.
□ Misuse of assets: It denotes one of the most common ethical issues
in finance and accounting. It involves using an organisation's as-
sets for any other purpose apart from its interests. Assets can be
misused at any level of an organisation and to any extent. For ex-
ample, a senior-level executive may show family dinner expenses
as a business expense and may charge for it from the organisation.
This is an example of serious unethical issue that involves misus-
ing the organisation's assets.
□ Disclosure: Violation of disclosure is one of the most common un-
ethical issues that organisations usually face. It involves recording
transactions in a manner that is not in accord with usually accept-
ed accounting norms. Therefore, it is considered fraudulent finan-
cial reporting that aims to mislead investors by hiding information
that could change their decisions about investing in the organisa-
tion. It is unethical for management to hide necessary information
from investors.
□ Insider trading: It is a malpractice where the trade of an organisa-
tion's securities is undertaken by people with access to non-public
information about the organisation. The people involved in insid-
er trading are generally key employees or executives who have
access and control over the strategic information of the organi-
sation. For example, suppose a member from th board of direc-

N O T E S
tors knows that within the succeeding day, the company is going
to announce a merger that may help the company's stock to go
up. In such a case, he buys 500 shares of the company's stock in
his brother's name to make a profit after the share's prices go up.
Here, the member from the board of directors took advantage of
his/her insider knowledge to make profit. This is a case of illegal
insider trading.
This type of malpractice is highly unethical as it promotes unfair
trading practices. It is highly discouraged by the Securities and Ex-
change Board of India (SEBI) for the benefit of the common investor.
□ Budgetary slack: It is another malpractice in finance and account-
ing, which deliberately under-estimates the budgeted revenue or
over-estimates the budgeted exp nses. Budgetary slack may occur
at times when there is no certainty regarding possible results to
be expected in future. Managers usually follow this practice when
they do not have historical records to rely upon. However, this
strategy prevents budgets from working accurately. This is uneth-
ical in cases, when managers deliberately distort budget figures to
achieve certain accounting objectives.
Today, penalties for violating ethics have increased manifold with in-
crease in unethical practices. There are harsh penalties for manip-
ulating financial records and information, providing protection to
wrongdoers and misleading the investigation. However, it is better for
organisations to have safeguards that may reduce the chances of the
occurrence of unethical behaviour. Such safeguards may fall into two
categories, which are:
□ Safeguards created by law: They may include corporate gover-
nance regulations, professional standards, regulatory monitoring
and disciplinary procedures.
□ Safeguards created by organisations: They include employing
competent staff, ethical programmes, strong disciplinary process-
es, solid leadership and robust internal control, and monitoring
the quality of employee performance and encouraging employee
communication with senior levels. All these practices can help an
organisation to imbibe ethical practices with much ease. An eth-
ical audit is one such practice that follows a thorough formal ex-
amination of the labour practices of a specific organisation. The
audit works as a verifiable process that helps an organisation to
comprehend, measure, and improve its social and environmental
performance.
EXHIBIT
Scam of Satyam Computer Services
Satyam Computer Services, the fourth largest IT outsourcing or-

ganisation in India, was incorporated on 24 June 1987. Mr. Rama

N O T E S
Raju and Mr. Ramalinga Raju were the promoters of the organi-
sation. Satyam achieved a tremendous amount of success within
a very short period of its inception. The organisation established
two technology parks in Secunderabad and Qutuballapur in its
initial years of operation. Satyam's Initial Public Offer (IPO) was
over-subscribed by 17 times in 1991. When Satyam announced its
offshore software project with John Deere and Co., Satyam's reve-
nue reached $2 billion mark in 2008. In the same year, Satyam had
its operations in 65 countries around the world. The organisation
had been offering consulting, outsourcing and system integration
services to more than 20 industries.
However, the true picture of Satyam came to light in 2008. It was

when Mr. Ramalinga aju, one of the promoters of the organisa-
tion, disclosed all the fraudulent practices and fabrication of the
accounting books to the board of directors. On 30 September 2008,
Mr. aju admitted that the balance sheet of the organisation con-
tained inflated cash and bank balances. He also admitted that the
organisation had been showing inflated profit figures for the last
several years. According to the confession made by Mr. Raju, the
extent of the fraud was 7,800 crores. The Satyam scam is the big-
gest accounting fraud in India.
The scam attracted the attention of the international business com-
munity to the corporate governance practices in India. In addition,
the suspicious role of the independent directors and dubious audit-
ing practices was also exposed.

12. isanexample of ethical violations in which
enterprises present a fabricated statement of accounts and
other records, which are open to investigation.
13. refers torepresenting false statements regarding
the financial status of an organisation.
14. isa malpractice where the trade of an
organisation's securities is undertaken by people with access
to non-public information about the organisation.
ACTIVITY
Using the Internet, find at least five organisations that come under
the purview of legislation for being unethical in the area of finance
and accounting. Prepare a report on the same.
IQsuMMARY
□ 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.

N O T E S
□ Ethical issues in marketing include moral and ethical principles

and problems arising in the marketing environment.
□ Ethical issues in marketing are usually concerned with negative
aspects such as false claiming of product features (puffery) and
unfair competitive strategies.
□ With increasing awareness and easy access to correct information,
customers can easily differentiate between honest and deceptive
marketing practices.
□ Organisations that use an ethical code of conduct in marketing
practices win the trust of customers.
□ The four major marketing decisions and related ethical issues con-
sist of product-related ethical issues, promotion-related ethical is-
sues, price-related ethical issues and distribution-related ethical
issues.
□ In an organisation, the HRM function plays a crucial role in max-
imising employe performance with an aim to accomplish organi-
sational goals and objectives.
□ Major ethical issues in HRM include inequitable performance ap-
praisal and discrimination of employees on the basis of age, gen-
der, religion or disability.
□ The major ethical issues in HRM include unfair performance ap-
praisal, discrimination in employment, privacy issues, safety and
health issues, unjustified and discriminative work conditions, and
sexual harassment.
□ With advancement in technology, many advanced computer and
information technologies have emerged.
□ Rights and responsibilities regarding the ethical use of informa-
tion have giv n rise to various ethical dilemmas that significantly
affect a business organisation.
□ Some major ethical issues involved in IT are:
♦ Plagiarism
♦ Piracy and hacking
♦ Invasion of others' privacy
♦ Cybercrimes
□ Production refers to an activity of converting input into output.
□ The entire process of combining and transforming the available
resources of an organisation, such as men, machines and mate-
rials, into value-added products and services, and making them
available to end consumers is known as Production and Opera-
tions Management (POM).

N O T E S
□ Ethics in POMare a subset of business ethics which aims to ensure

that the production function follows ethical norms and values, set
by the society.
□ Some measures against unethical POM practices include creating a
code of conduct, creating safe and hygienic working conditions, fo-
cusssing on environmental sustainability, following specifications, fol-
lowing total quality practices, and crosschecking supplier background.
□ Ethics in finance deals with various ethical dilemmas and viola-
tions in day-to-day financial transactions.
□ Some of the most common unethical issues in finance and ac-
counting are
♦ Fraudulent financial reporting

♦ Misuse of assets
♦ Disclosure
♦ Insider trading
□ It is better for organisations to have safeguards that may reduce
the chances for of the occurrence of unethical behaviour. Such
safeguards may fall into two categories, which are:
♦ Safeguards created by law
♦ Safeguards created by organisations
11
- -
KEYWORDS
D Layoff: Temporary suspension or permanent termination of an

employee from employment due to business reasons, such as
reduction in production or corporate reorganisation.
D Manipulative advertising claims: Misguided promises made to
customers to convince them for buying a product/service.
□ Puffery: An unethical advertising practice that counts on sub-
jective claims rather than objective ones to puffing up the ad-
vertised products.
□ Quality control: A process that reviews the quality of a particu-
lar product or service.
□ Value: The benefits and costs associated with the product of-
fered to the customer.
ii: ■ DESCRIPTIVE QUESTIONS

1. Why is it important to carry out ethical marketing practices?
2. Delineate major marketing decisions and related ethical issues.
3. Discuss major ethical issues in HRM.

N O T E S
4. Explain some major ethical issues involved in IT.

5. Elaborate on some measures against unethical POM practices.
6. Discuss the most common unethicalissues in finance and accounting.
Iii• ANSWERS AND HINTS
Topic Q. No. Answer

Ethical Issues in Marketing 1. Marketing
2. Price fixing
3. Bid rigging
4. a. Product-related ethical issues
Ethical Issues in HRM 5. HRM
6. Cultural diversity
Ethical Issues in IT 7. Plagiarism
8. Piracy
9. True
Ethics in Production and 10. Production
Operations Management
(POM)
11. Production and Operations Man-
agement (POM)
Ethics in Finance and Ac- 12. Data fudging
counting
13. Fraudulent financial reporting
14. Insider trading

1. It is important to carry out ethical marketing practices because
any unethical action on an organisation's part may damage
the image of the organisation in the market. Refer to Section
4.2 Ethical Issues in Marketing.
2. The four major marketing decisions and related ethical issues
are product-related ethical issues, promotion-related ethical
issues, price-related ethical issues and distribution-related
ethical issues. Refer to Section 4.2 Ethical Issues in Marketing.
3. Major ethical issues in HRM include unfair performance
appraisal, discrimination in employment, privacy issues, safety
and health issues, unjustified and discriminative work conditions
and sexual harassment. Refer to Section 4.3 Ethical Issues in
HRM.

N O T E S
4. Major ethical issues in IT include plagiarism, piracy and hacking,

invasion of others' privacy and cybercrimes. Refer to Section
4.4 Ethical Issues in IT.
5. Some measures against unethical OM practices include
creating a code of conduct and safe and hygienic working
conditions, focussing on environmental sustainability, following
specifications and total quality practices, and crosschecking
supplier background. efer to Section 4.5 Ethics in Production
and Operations Management (POM).
6. Some of the most common unethical issues in finance and
accounting include fraudulent financial reporting, misuse of
assets, disclosure and insider trading. Refer to Section 4.6 Ethics
in Finance and Accounting.
Ill SUGGESTED READINGS FOR

REFERENCE
SUGGESTED READINGS
□ De George, R.(1982). Business ethics. New York: Macmillan Pub. Co.
□ Grace, D. & Cohen, S. (1995). Business ethics. Australia: Oxford
University Press.
E-REFERENCES
□ 123helpme.com (2015). Operations Management and Ethical Is-
sue:: Business Ethics. Retrieved 21 July 2015, from http://ww-
w.123 he] p me. com/op era tions -manage ment-and-e t hi cal-is-
sue-view.asp ?id=166675
□ Managementstudyguide.com (2015). Ethics and Production. Re-
trieved 21 July 2015, from http://www.managementstudyguide.
com/ethics-in-production.htm
□ Small Business - Chron.com (2015). What Is an "Ethical Issue" in
Financial Accounting?. Retrieved 21 July 2015, from http://small-
business.chron.com/ethical-issue-financial-accounting-57889.html

CONTENTS
5.1 Introduction
5.2 Corporate Governance
5.2.1 Objectives and Goals of Corporate Governance
5.2.2 Dimensions of Corporate Governance
Activity
5.3 History of Corporate Governance
5.3.1 Origin and Development of Corporate Governance
5.3.2 Emerging Trends in Corporate Governance
Activity
5.4 Models of Corporate Governance
Activity
5.5 OECD Principles of Corporate Governance
Activity
5.6 Theories Underlying Corporate Governance
5.6.1 Stakeholder Theory
5.6.2 Stewardship Theory
5.6.3 Agency Theory
Activity
5.7 Corporate Governance as a Systemic Process
Activity
5.8 Ethics and Corporate Governance
Activity

N O T E S
CONTENTS
5.9 Corporate Social Responsibility and Corporate Governance

Activity
5.10 Summary

INTRODUCTION TO CORPORATE GOVERNANCE 113
N O T E S
CORPORATE FRAUD IN INDIA - CASE STUDY OF

SAHARA GROUP
Sahara scandal is one of the biggest corporate frauds in India.

This case came into notice when in January, 2010, Mr. Roshan
Lal, Indore-based chartered accountant, wrote a letter to Nation-
al Housing Bank to investigate the housing bonds issued by two
Lucknow-based companies - Sahara India Real Estate Corpora-
tion Limited and Sahara Housing Investment Corporation Limit-
ed. He pointed out the negligence of Indian rules and law while
issuing bonds by these companies to a large number of investors.
The National Housing Bank forwarded the letter to market reg-

ulator, Securities and Exchange Board of India (SEBI). On in-
vestigation, SEEi concluded that the aforesaid two companies of
Sahara Group violated the Companies Act by collecting money
)
through optionally fully convertible unsecured debentures (OF-
CDs). So, SEBI summoned these companies to provide informa-
tion and facts on OFCDs issued by them to protect the interest of
the investors. In response to SEBI's notice, Sahara did not pro-
vide any information to it. Non-cooperation from Sahara forced
SEBI to issue a show cause notice demanding information and
supporting documents.
The denial on the part of Sahara aggravated the case. So, SEEi
ordered Sahara to refund the full amount to its investors. ow-
ever, Sahara challenged SEBl's order and registered its applica-
tion to Securities Appellate Tribunal (SAT). The SAT underwent
further investigation and found the same findings as submitted
by SEBI and upheld the order issued by S Bl. n August 2012,
Sahara submitted its appeal to the Supreme Court against the
charges levied by the SEBI.
The Supreme Court in its judgement ordered the Sahara to re-

fund the full amount to its investors together with 15 per cent
interest annually. In its another petition filed with the Supreme
Court, Sahara stated that it had already paid $ 3.9 billion to its
investors, only $ 840 million is pending, which it is ready to de-
posit with SEBI. SEBI questioned this declaration of Sahara and
told that the details of investors to whom money was repaid had
never been disclosed to it. The Supreme Court ordered Sahara to
provide investors' complete information to SEBI, deposit the rest
of the money with SEBI and asked the Sahara Chairman Subrata
Royto appear before court.
In February, 2014, aggrieved by the continual rejection and fail-

ure of Sahara Group to obey the court's judgement, the Supreme
Court of India issued a non-bailable arrest warrant against Sub-
rata Roy.
-
N O T E S
Sahara Group kept on denying all charges of black money laun-

dering by misusing political connections and questioned SEBI's
authority. But in 2014, with the Supreme Court's directions, Sub-
rata Roy was arrested under non-bailable warrant and sent to jail.
This victory brought in attention the need of greater autonomy
and jurisdiction power to regulating bodies like SEEL In addition,
the most surprising element in this victory was the persistence of
SEBI to bring Sahara to justice after a tough and long 5-year bat-
tle, in spite of being immensely pressurised by Indian political au-
thorities and restricted by its own limited powers and authority.

N O T E S

- 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
I) ■ INTRODUCTION
The previous chapter discussed ethical issues in marketing, HRM and
IT, ethics in production and operations management and ethics in
finance and accounting. This chapter will focus on corporate gover-
nance.
The term 'corporate governance' is a relatively new discipline of man-

agement that focuses on regulation and control of an organisation.
Corporate governance deals with looking after complete governance
of various organisations with respect to financial disclosures, trans-
parency, legal practices, organisational structure and social welfare.
It includes theories, practices, principles, mechanisms and processes
that help to direct, manage and govern the organisations effectively.
The discipline of corporate governance is worth exploring because it
includes various organisational aspects, such as executive compensa-
tion, financial scandals and shareholder activism.
Corporate governance helps an organisation in dealing with legal is-

sues, creating healthy competitive environment, preventing fraudu-
lent practices, developing key competitive advantage, distinguishing
the role of board of directors and management and protecting the
shareholders' rights. The fundamental issue of corporate governance
is to make sure that the directors and managers consider the interest
of the organisation and its stakeholders. The successful implementa-
tion of corporate governance practices is of paramount importance for
the long-term growth and development of the organisation.
The present chapter discusses the history and different models of cor-
porate governance. It also explains the OECD principles of corporate
governance, theories underlying corporate governance, and corpo-
rate governance as a systemic process. Finally, it discusses ethics and
corporate governance.

N O T E S
ifj CORPORATE GOVERNANCE

Corporate governance refers to a set of techniques that are used to
direct, supervise and operate the corporate machinery. Different au-
thors and institutions have provided different definitions of corporate
governance.
According to Gabrielle O'Donovan, corporate governance is an inter-

nal system encompassing policies, processes and people, which serve
the needs of shareholders and other stakeholders, by directing and con-
trolling management activities with good business savvy, objectivity,
accountability and integrity. Sound corporate governance is reliant on
external marketplace commitment and legislation, plus a healthy board
culture which safeguards policies and processes.
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 corporatefimds in the management of a company.
According to Sir Adrian Cadbury, corporate governance is concerned

with holding the balance between economic and social goals and between
individual and communal goals. The corporate governance framework
is there to encourage the efficient use of resources and equally to require
accountability for the stewardship of those resources. The aim is to align
as nearly as possible the interests of individuals, corporations and soci-
ety.
According to the International Chamber of Commerce, corporate

governance is the relationship between corporate managers, directors
and the providers of equity, people and institutions who save and invest
their capital to earn a return. It ensures that the board of directors is ac-
countable for the pursuit of corporate objectives and that the corporation
itself conforms to the law and regulations.
In simple words, we can conclude that corporate governance refers to

a system of rules, regulations and processes that helps a company in
directing and controlling the functioning of a company.
5.2.1 OBJECTIVES AND GOALS OF CORPORATE

GOVERNANCE
Corporate governance is essential because it focuses on building a

long-term shareholders' value. In addition, it is needed to gain the
trust and confidence of domestic and foreign investors. Corporate
governance also assumes that proper functioning of the financial mar-
kets helps in various corporate and societal concerns, including la-
bour welfare and environmental protection.

N O T E S
An effective corporate governance system is need cl to curb or mi-

nimise corporate failure, corporate malice and unethical behaviour
present in organisations. The incidents of corporate scandals, such as
misuse of organisation's financial resources for personal benefits or
not following the code of conduct, damage its goodwill.
Good corporate governance is responsible for the growth and devel-

opment of organisations. Amidst increasing competition, liberalisa-
tion and globalisation, an organisation is required to retain the trust
of stakeholders as well as attract new ones. The objectives and goals
of corporate governance are as follows:
□ Creating competitive advantage: It refers to building a core com-
petency that works as an edge over the rivals of a particular organ-
isation. Competitive advantage comes into being only when the or-
ganisation supports value creation. An example of value creation
would be Sony, which has the competitive advantage of creating
small-sized products that are more effective and of better quality.
□ Preventing fraud and malpractices: It refers to precluding mis-
conducts and fraudulent practices so as to ensure sound and
trustworthy corporate environment. Small frauds can lead to big
financial crisis; therefore, such frauds should be prevented at the
nascent stage only.
□ To bring in transparency: It refers to meeting the investor's ex-
pectations by creating an open system that aims at providing ac-
countability and transparency in all organisational operations.
This further leads to value enhancement and provides scope for
effective implementation of corporate standards.
□ Adhering to legal compliance: It refers to adhering to the laws and
regulations as per the legal framework of a country. Compliance to
laws enables an organisation to survive in the long term and builds
a good code of conduct. Moreover, jurisdiction also helps in pro-
tecting the rights of investors.
5.2.2 DIMENSIONS OF CORPORATE GOVERNANCE

Corporate governance is a set of rules that directs, regulates, governs
and controls business organisations. These rules are basically the
guidelines to run organisations and operate businesses. Corporate
governance enables organisations to achieve their objectives with-
in the government and industrial frameworks. Moreov r, corporate
governance aims at adding value to the business which results into
numerous benefits retrieved by an organisation and its various stake-
holders such as suppliers, employees and customers.
There are mainly two dimensions of corporate governance, namely,

internal corporate governance and external corporate governance.
These are explained as follows:

N O T E S
□ Internal corporate governance: t involves the controlling mech-

anism among various players within an organisation, such as
Board of Directors, top management like CEO and MD, and share-
holders. It aims at ensuring methodical strategy implementation,
optimum management of risks, efficient processes and regulatory
compliance within the organisation.
□ External corporate governance: This comprises the forces that
impact an organisation from outside, such as legal entities, govern-
ment, industry norms, regulatory authorities, market, service pro-
viders (auditors, consultants and financial institutions) and media.
It plays a key role in ensuring appropriate corporate governance
practices and mechanism in an organisation.
L There are mainly two dimensions of corporate governance,

namely, internal corporate governance and external corporate
governance. (True/False)
2. Internal corporate governance involves the
among various players within an organisation, such as
Board of Directors, top management like CEO and MD and
shareholders.
ACTIVITY
Visit the website of an Indian organisation and evaluate how it is

influenced by the external corporate governance.
Ill 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 corpo-
rate 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 cor-
porate governance. The broader perspective of corporate governance
includes a huge spectrum of issues, such as business ethics, corpo-
rate social responsibility, corporate strategy and sustainable economic
development. These issues necessitate the implementation of proper
practices of corporate governance to be in place. Corporate gover-
nance ensures the balancing of interest between the insider and out-
sider stakeholder. Here, insider stakeholders include employees and
management; whereas outsider stakeholders include customers, in-
vestors and government.

N O T E S
The broader perspective brought about radical changes in th way or-

ganisations perceived corporate governance. Now, organisations not
only focus on their stakeholders' interest, but also they take care of
overall welfare of the society. Thus, corporate governance has evolved
as an all-encompassing system of desirable corporate behaviour that
facilitates the sustainable development of an organisation and its sur-
roundings.
5.3.1 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. Many people who had invested in the cor-
porate funds had to suffer irreparable damages and losses because of
financial scams and fraudulent management practices.
The effective implementation of corporate governance started in India

in 1997. t started with a voluntary code that was designed by the Con-
federation oflndian Industry (CII). In addition, SEBI set up a commit-
tee headed by Kumar Mangalam Birla to enforce intern tional 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.
A few renowned organisations, such as Infosys and Wipro, developed

sound governance policies and took up Corporate Social Responsibil-
ity (CSR) to set a benchmark of corporate governance practices for
other competitors.
5.3.2 EMERGING TRENDS IN CORPOUATE 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. The legal environment in India has a lot of
loopholes, which have in turn, created various opportunities for the
growth of unethical practices and corruption in many organisations.
Therefore, there is a lot of scope for the implementation of corporate
governance practices.
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 gover-
nance practices in the Indian scenario.

N O T E S
Corporate governance principles follow the 'one size does not fit all'
approach worldwide because different nations have different levels of
development and cultures. However, the principles of corporate gov-
ernance are more or less becoming similar for all nations because of
the uniformity of core objective of corporate governance that is creat-
ing a balanced approach between internal and external stakeholders.
International Corporate Governance Network (ICGN), established in

1995, aims at creating a supportive organisational environment for in-
vestors, organisations and other parties that are in favour of corpo-
rate governance practices. ICGN also encourages the efforts of OECD
in spreading the awareness and importance of corporate governance
practices. It also applauds the initiatives taken by OECD to bring the
corporate governance practices in various countries to a common
platform. ICGN has recommended that the main objective of corpo-
rate 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. In ad-
dition, ICGN has recommended that the strategic decisions cannot be
taken without the approval of shareholders in an organisation. It has
also highlighted that the organisation must strictly adhere to the laws
of the national judiciary.
3. The effective implementation of corporate governance started

in India in 1997. (True/False)
4. What is the full form of C I?
ACTIVITY
Using the Internet, find out the latest corporate governance trends
with regard to the World Bank.
Ill MODELS OF CORPORATE GOVERNANCE

An organisation always follows a hierarchy where authority flows up-
wards and accountability is delegated downwards. For example, in a
marketing department, the marketing manager holds the authority
to give directions; whereas, the marketing executive is accountable
to abide by those directions. The Board of Directors forms the man-
agement of the organisation, which works as a team for reaching con-
sensus on matters related to corporate governance. The practices of
corporate governance, as followed across various organisational hi-
erarchies, can be explained with the help of various models. These
models are shown in Figure 5.1:

N O T E S
Models of Corporate
Governance
I
The Anglo
The German The Japanese The Indian
American
Model Model Model
Model
Figure 5.1: Corporate Governance Models
et us explain these models of corporate governance in the following

sub-sections.
THE ANGLO-AMERICAN MODEL
The Anglo-American model, 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 major features of the Anglo-American model are as follows:

□ Providing equal ownership of the organisation to both institution-
al and individual shareholders
□ Making directors and managers int rdependent
□ Separating the ownership and management functions
□ Making disclosure norms concise and comprehensive
□ Penalising insider trading and framing strict rules against the ma-
nipulations of organisational code of conduct
□ Protecting the interest of small shareholders
Figure 5.2 shows the Anglo-American model of corporate governance:
Shareholders Creditor
Board of
Di.rectors
I_M_a_n_a_g_e_rs_ I S).
1D
Organisation
Other
Stakeholders
Own
Figure 5.2: The Anglo-American Model of Corporate Governance

N O T E S
As shown in Figure 5.2, in the Anglo-American model, shareholders

elect the Board of Directors. The Board of Directors appoints the
managers to manage the organisation. In addition, this model shows
a legal system that regulates the organisation, which is owned by the
shareholders. The organisation has an obligation towards the credi-
tors and other stakeholders who have contributed it financially and/
or non-financially.
THE GERMAN MODEL
The German 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 mod-
el 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. Figure 5.3 illus-
trates the German model of corporate governance:
Supervisory
Employees and
Board
Labour Union Elect
50%
Management
Board
Shareholders
Organisation
Figure 5.3: The German Model of Corporate Governance
As per Figure 5.3, half of the supervisory board is elected by employ-

ees and labour union of the organisation; while the other half is elect-
ed by the shareholders. The supervisory board thereafter supervises
the management board that comprises executive managers. The man-
agement board is responsible for managing the overall organisational
affairs.
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 features of the Japanese model are
as follows:

N O T E S
□ Including the president in the model and assigning him the func-
tion of consulting both supervisory and executive boards
□ Outlining the importance of lending banks
Figure 5.4 represents the Japanese model of corporate governance:
Shareholders Supervisory
Board
Executive
Figure 5.4: The Japanese Model of Corporate Governance
As shown in Figure 5.4, in the Japanese model of corporate gover-

nance, shareholders appoint the advisory board, which ratifies the de-
cisions taken from the board. The executive management works as a
consultant for the organisation's president. The banks are required to
finance the organisation that is owned by shareholders.
[!!] EXHIBIT
Similarities between German and .Japanese Models of
Corporate Governance
The similarities between the German and Japanese corporate gov-

ernance models are as follows:
□ Integrated financial system
□ Maintain long-term investor relations
□ Follow flexible norms and do not have a stringent regulatory
force that can minimise insider trading
□ Lack a proper control system regarding mergers and acquisi-
tions

N O T E S
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 sys-
tem of India is based on the recommendations of three committees:
Kumar Mangalam Birla Committee, Narayana Murthy Committee
and Naresh Chandra Committee. Some experts have also pointed out
that the Indian model of corporate governance takes most of the fea-
tures of the Anglo-American model. Therefore, it can be said that the
Indian corporate governance model is influenced by corporate gover-
nance practices prevailing worldwide. Figure 5.5 illustrates the Indian
model of corporate governance:
External Business Environment
Government Culture Guidelines Regulators Depositors and Borrowers
Internal Environment
(Auditors, Internal Stakeholders, Board of Directors)
Vision Corporate Mission

Governance
Transparency Accountability Customer Care
Investor Protection
Long-term shareholder Value
Corporate Governance Outcomes
Figure 5.5: The Indian Model of Corporate Governance
As shown in Figure 5.5, the Indian model of corporate governance

depicts the external and internal organisational environments, which
influences the organisational functioning. The model also depicts the
output of corporate governance in the form of investor protection, eth-
ics, long-term shareholder value and transparency as well as account-
ability.

N O T E S
5. Which of the following models of corporate governance 1s

called the business network model?
a. Anglo-American model
b. German model
c. Japanese model
cl. Indian model
6. The German model of corporate governance comprises two
boards. Name these boards.
ACTIVITY
Compare and contrast all the four models (Anglo-American, Ger-

man, Japanese and Indian) of corporate governance. List the simi-
larities and differences amongst all the four models.
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 re-
fers to a forum of countries coming together and describing their com-
mitment 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 promotes policies designed:

□ to achieve the highest sustainable economic growth and employment
and a rising standard of living in member countries, while maintain-
ing financial stability, and thus to contribute to the development of
the world economy;
□ to contribute to sound economic expansion in member as well as
non-member countries in the process of economic development; and
□ to contribute to the expansion of world trade on a multilateral,
non-discriminatory basis in accordance with international obliga-
tions
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 gover-

N O T E S
nance and are applicable universally. These principles are given as

follows:
□ Protecting the shareholders' rights
□ Bringing transparency in the standards of corporate governance
□ Balancing the conflict of interest and discouraging insider trading
through discussions
□ Including independent directors on audit committees
□ Conducting the internal audit of the organisation separately from
the external audit
□ Creating and protecting property rights
As per the notification made by the OECD:
□ The corporate governance framework should be developed with a
view to its impact on overall economic performance, market integri-
ty and the incentives it creates for market participants and the pro-
motion of transparent and efficient markets.
□ The legal and regulatory requirements that affect corporate gover-
nance practices in a jurisdiction should be consistent with the rnle of
law, transparent and enforceable.
□ The division of responsibilities among different anthorities in a jn-
risdiction should be dearly articnlated and ensure that the public
interest is served.
□ Snpervisory, regnlatory and enforcement authorities shoitld have the
anthority, integrity and resources to fulfil their ditties in a profes-
sional and objective manner. Moreover, their rulings should be time-
ly, transparent and fully explained.
7. OECD is a non-governmental organisation that has a goal to

achieve long-term value for shareholders. (True/False)
ACTIVITY
Discuss the ways in which OECD principles of corporate gover-

nance are applied universally.
THEORIES UNDERLYING CORPORATE

GOVERNANCE
The organisation can act as a separate entity distinct from its mem-
bers. owever, the members of the organisation give it a form or struc-
ture on the basis of their strategic thinking and business plans. There
are some basic theories, such as stakeholder theory, stewardship the-

N O T E S
ory and agency theory, which influence the corporate governance

practices in an organisation. These theories are explained in the next
sub-sections.
5.6.1 STAKEHOLDER THEORY
The stakeholder theory was developed in 1930s. It supports the view

that an organisation should maximise stakeholders' benefits and fol-
low an ethical code of conduct. t has been drawn on the basis of var-
ious 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 share-
holders' benefits. An organisation has many stakeholders. Therefore,
some management experts have suggested dividing stakeholders into
primary and secondary shareholders. Primary shareholders refer
to those shareholders who directly purchase shares from the organ-
isation; whereas, secondary shareholders purchase shares from the
stock exchange.
The stakeholder theory of corporate governance has been accused of

creating chaos in the organisation as it diverts the managers from the
goal of profit maximisation.
5.6.2 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. There is a high de-
mand for managers who have a strong sense of dignity for their per-
sonal reputation. Consequently, managers with high ethical and moral
values are being offered higher remuneration in their respective in-
dustries as compared to others.
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 per-
sonal goals, but also align these personal goals with the organisa-
tional objectives
□ Controlling managers with excessive modes can actually demoti-
vate them. So, it is important to ensure that the control measures
do not hamper the productivity of the managers.
5.6.3 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.

N O T E S
The shareholders select the managers, who are called agents, for the
long-term wealth maximisation and smooth functioning of the organ-
isation. owever, the managers focus on their personal benefits and
short-term profit maximisation rather than long-term wealth maximi-
sation of the organisation. This conflict of interest between managers
and shareholders gives rise to a problem, known as the agency prob-
lem. The role of corporate governance comes into picture for address-
ing the agency problem by bringing transparency and aligning the
objectives of the organisation with its associated parties.
The agency problem can be solved by providing incentives, personal

recognition and monetary and non-monetary rewards to managers to
motivate them to achieve wealth maximisation. In addition, the organ-
isation tries to establish a link between executive remuneration and
shareholder benefits to address the agency problem.
It is not possible for an organisation to completely eradicate the con-

flict of interest between shar holders and managers. However, this
conflict of interest can be minimised by implementing the following
effective corporate governance practices:
□ Correct full disclosures: It implies that all documents pertaining
to the financial and operational framework of a company should
represent its true and fair picture to its shareholders and investors.
□ Effective board of directors: It refers to an efficient board of di-
rectors that should be independent and neutral enough to deal
with managers as well as shareholders. The board should also en-
sure proper implementation of legal regulations. The directors are
responsible for the rights of shareholders. Therefore, they should
aim towards long-term value maximisation.
[ii] EXHIBIT
Differences between the Agency Theory and

Stewardship Theory
The differences between agency theory and stewardship the-

ory are as follows:
□ Behavioural differences: It refers to the difference in the at-
titude and behaviour of managers. The agency theory follows
the materialistic approach, whereas the stewardship theory
supports the socialistic approach. Besides, the agency theory
prompts managers to take the role of agents where they have to
control and supervise the managerial functioning. On the other
hand, the stewardship theory aims at empowering the manag-
ers.

N O T E S
□ Need hierarchy differences: It refers to the needs (as per the

Maslow's Hierarchy of Needs Theory) of managers fulfilled by
these two theories. The two theories satisfy different levels of
needs of the managers. The agency theory satisfies the lower
level needs of the managers that are also known as extrinsic
needs. On the other hand, the stewardship theory aims at fulfill-
ing the intrinsic or higher level needs of the managers.
□ Orientation differences: It refers to the differences in approach
followed by these two theories. The agency theory aims at build-
ing a control and authority-oriented management, whereas the
stewardship theory focuses on participative management.
8. Which of the following theories is built upon the presumption

that the interests of managers often clash or are divergent
from that of the shareholders?
a. Agency theory
b. Stewardship theory
c. Stakeholder theory
d. All of the above
9. Secondary shareholders refer to those shareholders who
directly purchase shares from the organisation. (True/False)
ACTIVITY
List the possible reasons whystakeholder theory is not widely prac-

ticed in India. Cite hypothetical or real examples to support the rea-
sons.
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. Thus, there
is a need of structured corporate governance, based on strong ethics
and principles. Corporate governance structure is primarily based on
two core principles, which are as follows:

N O T E S
□ The administrative and decision-making freedom to the manage-

ment to take the organisation forward without any unnecessary
limitations.
□ The fre dom must have the effective accountability of performing
individual duties.
The systemic process of corporate governance must have the struc-

tured and well-defined roles of the organisation, which also includes
the role of every individual associated with the organisation, espe-
cially at middle, senior and higher level of management. Well-defined
roles based on core principles further elucidate the philosophy of an
organisation. The governance philosophy includes transparency, em-
powerment and accountability, which are explained as follows:
□ Transparency: This means the clarity of policies and procedures
of an organisation to the associated stakeholders to whom it owns
the responsibility, such as customer (or client), supplier (or service
provider), regulatory authorities, government and society. Thus,
transparency must ensure the proper disclosure of the policies
and procedures without jeopardising the key strategies of the or-
ganisation.
□ Empowerment: It can be defined as a process to unleash creativity
and innovation throughout an organisation by encouraging deci-
sion making at various levels of hierarchy in order to realise the
actual potential of its employees. In turn, empowerment helps the
organisation to grow and succeed.
□ Accountability: Accountability refers to the responsibility. There
is a direct relationship between the power and accountability. The
high level of power comes with the high level of accountability.
Thus, it is of paramount importance for an organisation to allow
the access of relevant information, policies and procedures to all
the employees. Appropriate transparency and empowerment en-
hances the accountability.
10. As large organisations use a substantial number of

corporate governance must ensure the proper utilisation
of these resources in order to meet the requirements and
expectations of their stakeholders.
11. Transparency means the clarity of policies and procedures
of an organisation to the associated stakeholders to whom it
owns the responsibility, such as customer (or client), supplier
(or service provider), regulatory authorities, government and
society. (True/False)

N O T E S
ACTIVITY
Using the Internet, evaluate the corporate governance philosophy

of any Indian organisation.
IJ:j ETHICS AND CORPORATE GOVERNANCE

Nowadays, many Indian organisations have acknowledged the signif-
icance of incorporating ethical values, such as integrity, transparency
and healthy communication in their corporate governance system.
They believe that the goodwill generated by implementing business
ethics helps to gain their monetary and non-monetary benefits in the
long run.
Every organisation deals with many stakeholders that include

shareholders, employees, customers, vendors and communities.
For attaining a healthy growth rate, an organisation needs to build
healthy relations with all these stakeholders. For example, an or-
ganisation ensures the payment of decent dividend to its share-
holders, good working conditions to employees, reliable prod-
ucts for consumers and responsible relations with the community.
Business ethics is a system of moral principles applied in a business
environment. It has the following purposes:
□ Providing tools to individuals so that they can deal with moral
complexity in business
□ Ensuring that business decisions cover ethical framework
D Evaluating ethical implications before taking any decisions
Corporate governance elaborates the corporate pursuit of economic

objectives related to a number of wider ethical and societal consid-
erations. It can be understood as an application of best management
practices associated with compliance of law in true spirit and adher-
ence to ethical framework. The concept of corporate governance deals
with the following questions:
□ Who should derive benefits from corporate decisions?
The enhanced level of awareness among stakeholders and consumers

leads to the identification of the existence of unethical practices in the
organisation. Such practices include financial frauds, tax evasion, bad
quality products and services, indifference towards environmental
concerns and hazardous working conditions.
owadays, investors make sure that the organisations in which they

invest are managed properly and possess a proper corporate gover-
nance structure. The organisations consider corporate governance

N O T E S
as an important control mechanism. This mechanism makes the op-

timum use of the human, financial and physical resources of organi-
sations. Thus, organisations focus to ingrain ethics into their culture
and concentrate on implementing appropriate corporate governance
practices.
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. To survive in
the market in the long run by creating reputation and strong goodwill,
an organisation needs to develop a systematic approach towards the
corporate governance.
12. Corporate governance elaborates the corporate pursuit of

economic objectives related to a number of wider ethical and
societal considerations. (True/False)
13. represents the various frameworks that are
associated with the functioning of an organisation.
ACTIVITY
Select an organisation of your choice and write a short note on how

that organisation follows ethics and corporate governance.
CORPORATE SOCIAL RESPONSIBILITY

AND CORPORATE GOVERNANCE
Corporate governance and corporate social responsibility are quite
different business concepts. However, their association is becoming
much familiar due to increased focus of corporate houses on balanc-
ing business profits with responsible operations.
Corporate governance is traditionally defined as a mechanism used

by an organisation to ensure that organisational functioning is opti-
mised to produce the best financial results for shareholders. The top
management develops and oversees the governing systems that facil-
itate the application of the various rules and regulations pertaining
to the corporate governance mechanism. In the current and dynamic
scenario that asks for the high level of the accountability from the cor-
porate houses, it has become essential for them to treat all the stake-
holders with balanced approach. The increased public demands have
made it compulsory for the corporate houses to incorporate social and
environmental responsibilities into corporate guidelines.

N O T E S
There has been an ongoing debate on the involvement of other stake-

holders' interests within the corporate governance system. Some com-
panies still consider the maximisation of shareholders as their main
agenda, whereas others believe that a balanced approach towards the
corporate and societal issues provides them long-term viability and
proves as a competitive advantage.
Corporate Social Responsibility (CSR) has evolved from basic stan-

dards of business ethics. It comprises honesty and transparency. Ac-
cording to Hopkins (2007), CSR is defined as continuing commitment
by business to behave ethically and contribute to economic development
while improving the quality of life of the workforce and their families, as
well as of the local community and society at large.
The outcome of the common convergence of corporate governance

and corporate social responsibility is not easy to measure for a corpo-
rate house. According to Forbes Magazine, company leaders should
not expect to see tangible profits from responsible behavioitr. Instead,
companies should include responsible behaviotlr in its corporate gover-
nance to do the right thing and to experience long-term indirect benefits
of better community relations and the avoidance of pilblic backlash.
14. 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. (True/False)
ACTIVITY
Pick any one of the big corporate houses in India and evaluate its
functioning on the basis of the norms developed by it under CSR
and corporate governance.
iju1SUMMARY
□ 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-Ameri-
can model, the German Model, the Japanese model and the Indian
model.

N O T E S
□ The Organisation for Economic Cooperation and Development

(OECD) is a non-governmental organisation that has a goal to
achieve long-term value for shareholders.
□ There are some basic theories, such as stakeholder theory, stew-
ardship theory and agency theory, which influence the corporate
governance practices in an organisation.
□ The organisations believe that the goodwill generated by imple-
menting business ethics helps to gain monetary and non-monetary
benefits in the long run.
□ Nowadays, investors make sure that the organisations in which
they invest are managed properly and possess a proper corporate
governance structure.
• KEYWORDS
□ Corporate: It refers to a legal body that has a name and comprises
people who carry out duties in the interest of a concerned legal entity.
□ Globalisation: It is a process of creating a worldwide network in which
economies and societies are integrated.
□ Governance: It is a part of the management function that focuses on
administration and control of the people and processes.
□ Liberalisation: It refers to a reduction of practices that hinder the free
flow of goods and services in the economy.
□ Maslow's hierarchy of needs: It refers to the motivation theory giv-
en by Abraham Maslow in 1943. This theory classifies the basic hu-
man needs into different levels that must be satisfied in a specified
sequence starting with the lowest level.
□ Stakeholder: It refers to an individual or group of individuals who
hold a risk or stake of an organisation and get affected by its decisions.
1tfl■DESCRIPTIVE QUESTIONS
1. Discuss the origin and development of corporate governance.
2. Describe the German model of corporate governance.

3. Explain the OECD principles of corporate governance.
4. What is the stakeholder theory of corporate governance?
5. Explain ethics and corporate governance.
6. Discuss the significance of the relationship of CSR and corporate
governance.

N O T E S
iJtJ ANSWERS AND HINTS

Corporate Governance 1. True

2. Controlling mechanism
History of Corporate 3. True
Governance
4. Confederation of ] ndian In-
dustry
Models of Corporate 5. c. Japanese model
Governance
6. Supervisory board and man-
agement board
OECD Principles of Corporate 7. True
Governance
Theories Underlying 8. a. Agency theory
Corpor te Governance
9. False
Corporate Governance as a 10. Societal resources
Systemic Process
11. True
Ethics and Corporate 12. True
Governance
13. Corporate governance
Corporate Social Responsibility 14. True
and Corporate Governance
1. 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 ndustry (CII). Refer to Section
5.3 History of Corporate Governance.
2. The German model of corporate governance comprises two
boards, namely supervisory board and management board.
Refer to Section 5.4 Models of Corporate Governance.
3. The Organisation for Economic Cooperation and Development
(OECD) is a non-governmental organisation that has a goal to
achieve long-term value for shareholders. Refer to Section 5.5
OECD Principles of Corporate Governance.

N O T E S
4. 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. Refer to Section
5.6 Theories Underlying Corporate Governance.
5. Nowadays, many Indian organisations have acknowledged the
significance of incorporating ethical values, such as integrity,
transparency and healthy communication in their corporate
governance system. Refer to Section 5.8 Ethics and Corporate
Governance.
■
6. Corporate governance and corporate social responsibility are
quite different business concepts. Refer to Section 5.9 Corporate
Social Responsibility and Corporate Governance.
SUGGF.STF.O READINGS FOR

REFERENCE
SUGGESTED READINGS
□ Gaur, R. R., Sangal, R. and Bagaria, P. G. 2009. Afoundation course
in human valiws and professional ethics. 1st ed. New Delhi: Excel
Books.
□ Rao, B., A. 2006. Business ethics and professional values. 1st ed.
New Delhi: Excel Books.
E-REFERENCES
□ Exideindustries.com. (2015). Governance Philosophy. Retrieved 22
July 2015, from http://www.exideindustries.com/corporate/corpo-
rate-governance/governance-philosophy
□ Kensolar.in. (2015). Governance. Retrieved 22 July 2015, from
http://www.kensolar.in/goverence.html
□ Itcportal.com. (2015). ITC - Corporate Governance. Retrieved 22
July 2015, from http://www.itcportal.com/about-itc/values/corpo-
rate-governance.aspx

CONTENTS
6.1 Introduction
6.2 Ownership Concentration
Activity
6.3 Ownership Composition
6.3.1 Shareholder Control and Protection
6.3.2 Board of Directors and their Fiduciary Responsibilities
6.3.3 Executive Compensation
6.3.4 Minority Shareholder Rights
6.3.5 Transparency and Information Disclosure
Activity
6.4 Ownership Pattern of Companies in India
Activity
6.5 Issues in Managing Public Limited Firms - Agency Problem
6.5.1 Separation of Positions of Chairman and CEO
6.5.2 Separation of Ownership and Management
Activity
6.6 Summary

N O T E S
CORPORATE STRUCTURE AND SARADHA CHIT FUND SCAM
The Saradha Chit Fund Scheme was first launched in 2006 when
the owner of the Saradha Group of Companies, Sudipto Sen, in-
troduced it as a Ponzi scheme. In a Ponzi scheme, money is raised
by issuing redeemable bonds and secured debentures and invit-
ing investments by promising higher profits to investors. In an ag-
gressive bid to expand, the Saradha Group recruited local agents
across West Bengal by offering them huge payoffs in the form of
agent commissions to the tune of 40% from investors' deposits.
In the Saradha Chit Fund Scheme, investors were offered excep-

tional returns totheir investments. For instance, an investor mak-
ing a long-term investment off 1 lakh for a period of 14 years was
assured a sum of 10 lakhs on maturity. The same amount, if de-
posited in a bank or post office account, would yield a maximum
of 4 lakhs. In some cases, investors were promised land or a
flat on the maturity of their investment. These offers and inflated
promises resulted in an increase in the number of agents from
thousands to lakhs in a few months as people were keen on buy-
ing the scheme. Within a short span of time, the Saradha Group
was able to form a syndicate of more than 200 companies. Unfor-
tunately, this resulted in an extremely complex corporate struc-
ture. The hidden agenda behind the formation of the syndicate
was to misguide financial regulators like Securities and Exchange
Board of India (SEBI) in order to continue money laundering.
The biggest advantage for the Saradha Group was its chief ad-
visor, Rajat Majumdar, who was a CA by profession. He was for-
merly a senior administrator in the police department of the West
Bengal government and helped to cover up all illegal activities of
the company.
The first incidence that brought illegal activities of Saradha into

the notice of the SEBI was in the year 2009, when it was discov-
ered that Saradha had not been adhering to the Companies Act,
1956. According to this Act, any money-raising business involving
more than 50 investors needs to have an official record and a for-
mal consent from the financial market regulator, SEBI. As Sarad-
ha had formed an intricated network of companies, it was difficult
for SEBI to pinpoint the blame. Therefore, the focus of the inves-
tigation shifted from the parent company to the sister companies.
In 2010, the Saradha Group created further complications for

SEBI bychanging its modus operandi from direct money launder-
ing to Collective Investment Schemes (CIS), which raises money
by offering tour and travel packages, hotel booking, real-estate
finance, etc. In this way, the people, who have invested in Saradha
Chit Fund in the hope of getting good returns on their money, got

CORPORATE GOVERNANCE: OWNERSHIP STRUCTURE 139
N O T E S
deceived by the company. The whole idea behind forming a chit

fund scheme to raise money was to escape from the proceedings
of SEBI, as chit funds came under the jurisdiction of state govern-
ments. SEBI continued its investigation on Saradha, warning it of
its illegal and fake business practices.
In 2011, SEBI notified the West Bengal government of Saradha's

fraudulent chit fund but nothing happened. At the same time,
SEBI warned Saradha to comply with the law but to no avail.
Saradha changed its way of trading again and started bulk share
trading of the companies listed on the stock exchange. Finally, in
April 2013, the Saradha's Chit Fund Scheme collapsed, resulting
in a loss of$ 5 billion and bankrupting its investors.
An investigation committee was formed by the state govern-

ment to investigate the Saradha Group. The Indian government
announced a relief fund of $ 90 million to save the interests of
low-income investors. Due to the enormity of the crime coupled
with political interference, the case was handed over to the Cen-
tral Bureau of Investigation (CBI) by the Supreme Court in 2014.

N O T E S

-- 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 compa-
nies
Iii• INTRODUCTION
In the previous chapter, you have studied the concept of corporate
governance and its relationship with ethics. You also studied different
theories of corporate governance. In this chapter, you will study dif-
ferent aspects related to ownership structures in organisations. Two
important components of ownership structure are ownership concen-
tration and ownership composition.
Ownership concentration is a phenomenon wherein the power to con-

trol the operations of an organisation lies in the hands of a few big
shareholders. Two important aspects of ownership concentration are
controlling shareholders and managerial ownership. Ownership com-
position, on the other hand, consists of all shareholders having major
and minor stakes in an organisation. A shareholder can be a group, a
family, an individual, a non-financial organisation or an investment
organisation. The major factors that determine the composition of
ownership include shareholder control and protection, Board of Di-
rectors (BOD), executive compensation, minority shareholder rights
transparency and information disclosure.
In this chapter, you study the ownership structure of Indian compa-

nies. The other topics covered in the chapter include ownership con-
centration, ownership composition, ownership pattern of companies
in India and issues in managing public limited companies with special
focus on the agency problem (principal-agent problem).
Ill OWNERSHIP CONCENTRATION

To understand the concept of ownership concentration, we have to
first understand the meaning of ownership structure, of which own-
ership concentration is an important component. Ownership struc-
ture refers to the distribution of voting rights among different equity
shareholders of an organisation. t gives a clear indication about the

N O T E S
identity of the owners of the organisation. The concept of ownership

structure is important in corporate governance because the econom-
ic efficiency of the organisation depends on it. Ownership structure
comprises two main components, namely, ownership concentration
and ownership composition, as shown in Figure 6.1:
Components
of Ownership
Structure
Ownership Ownership
Concentration Composition
Figure 6.1: Components of Ownership Structure
Ownership concentration occurs when the power to control the activi-

ties of an organisation lies in the hands of a few shareholders. The de-
gree 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 im-
plies that a majority of shares are distributed among numerous small
shareholders. Generally, small shareholders do not have any interest
in monitoring the activities of the organisation because it involves
high costs and few benefits. In countries such as the US and UK, cor-
porate ownership is relatively discrete or dispersed. In case of dis-
persed ownership, the power to monitor the organisational activities
lies with managers.
As discussed earlier, if a small number of shareholders possess the

majority of shares, then the ownership is concentrated in a few hands.
In such a case, the shareholders may try to fulfil their own interests at
the expense of other investors as well as minority shareholders. The
shareholders ensure that their interests are taken care of in the fol-
lowing ways:
□ Paying special dividends to themselves
□ Influencing the organisation to enter into unethical business prac-
tices
□ Taking high-risk projects for their own benefits
An inverted U-shaped relationship exists between the degree of own-

ership concentration and profitability of an organisation, as shown in
Figure 6.2:

N O T E S
Ownership Concentration
Figure 6.2: Inverted U-Shaped Relationship between the Degree of

Ownership Concentration and Profitability
As ownership concentration increases during the initial stage, suffi-

cient funds are raised for the growth and expansion of the organisa-
tion. As a result, profitability increases and the curve goes up (Fig-
ure 6.2). However, as the number of shareholders increases, the profit
earned by the organisation has to be distributed among them in the
form of dividends. Therefore, the curve starts declining after crossing
a certain limit of ownership concentration.
There are two important concepts of ownership concentration. These

are managerial ownership and controlling shareholders. Let's discuss
these two concepts in the following sections.
MANAGERIAL OWNERSHIP
Managerial ownership refers to the extent to which managers have

certain powers and rights to take decisions for an organisation. Own-
ership and management are segregated because of the agency prob-
lem, which represents a conflict of interest between decisions taken
by managers and the owners (shareholders). The owners want to max-
imise their own profit, while managers focus on maximising organisa-
tional profit.
Managers often perform well when they have a higher share in the
organisation. In 1988, Stulz studied the relationship between manage-
rial ownership and the performance of an organisation and found out
that managers try to ownvoting rights to minimise their probability of
losing control over the organisation.
CONTROLLING SHAREHOLDERS
Controlling shareholders refer to a single or a group of shareholders

who possess a large number of shares in an organisation. Acontrolling
shareholder can influence the Board of Directors in order to gain con-
trol of an organisation. Therefore, the controlling shareholder may ex-
ert both a positive and negative influence over the organisation. The
Indian government has promulgated many laws to keep a check on

N O T E S
shareholders having major holdings. The Company Law Board also

helps in protecting the rights of shareholders with fewer holdings.

1. What are the two components of the ownership structure?
2. What is the reason behind the segregation of ownership and

management?
3. The Indian government has promulgated many laws to keep a
check on shareholders having major holdings. (True/False)
ACTIVITY
Find information on any Indian company that has implemented the

concentration of ownership. Write down the advantages and disad-
vantages of the same.
Ill 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. As stated earlier, a shareholder can
be a group, a family, an individual, a non-financial organisation or an
investment 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. There are various factors or determinants that decide or in-
fluence the ownership composition of an organisation. These determi-
nants are shown in Figure 6.3:
Executive
Composition
Figure 6.3: Determinants of Ownership Composition

N O T E S
Various determinants of ownership composition are discussed in the

next sections.
6.3.1 SHAREHOLDER CONTROL AND PROTECTION
Shareholder control and protection refer to a manner in which share-

holders 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 participa-
tion of shareholders during voting, compensation of executives (per-
formance based), transparency and disclosure requirements and legal
protection of shareholders' rights.
6.3.2 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 poli-
cies, 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 profitabil-
ity of the organisation. Directors are required to be loyal, cautious and
responsible individuals. They need to ensure that any action that is
taken is in the best interests of the organisation and its shareholders.
6.3.3 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. Executives have a great impact on
the strategy of the organisation, and on decision making. Their pack-
age includes a mix of salary, bonuses, call options, etc. An inappropri-
ate 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.
6.3.4 MINORITY SHAREHOLDER RIGHTS
Minority shareholders are entities that do not have the right to partic-
ipate 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:

N O T E S
1. Right to appoint a director - Small shareholders, upon notice of not

less than 1110th of the total number of such shareholders or 1000
shareholders, have a small shareholder director elected.
2. Right in decision making and such director appointed shall be
considered as independent director.
3. 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.
4. 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 ma-
jority shareholders to buy the shares of minority shareholders.
♦ The transferor company shall be the agentfor making payments
to minority shareholders.
5. Class action suit: Class action suit may be filed by the minority
shareholders as per the provisions of Companies Act, 2013
(Source: Companies Act 2013)
6.3.5 TRANSPARENCY AND INFORMATION DISCLOSURE
Transparency and information disclosure is all about maintaining an

easy access of information to ensure an effective control and protec-
tion of shareholders. Shared information includes financial outcomes,
major predicted risks, remuneration of BoD and the policies and ob-
jectives of the organisation.
Transparency and information disclosure are important in an organi-

sation 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
□ Check whether the organisation is performing according to legal
requirements
□ Allow organisations to differentiate themselves among other or-
ganisations that are not practicing good governance
f;f SELF ASSESSMENT QUESTIONS

4. Mention some entities that can be the stakeholders m a
company.

N O T E S
5. can b ed e f i n ed as holding those shares that do not

have any control in the organisation.
6. refers to a body of appointed members to take care of
the activities performed in an organisation.
7. Executive compensation is designed by the BoDs of a company
that consists of independent directors. (True/False)
ACTIVITY
Learn more about minority shareholding rights as provided in the

Companies Act, 2013. How they are different from those listed in
the Companies Act, 1956?
OWNERSHIP PATTERN OF COMPANIES

IN INDIA
The Companies Act, 1956 defines various types of companies in India.
We have often heard and read about various types of companies such
as private ltd. company, public ltd. company, unlimited company, sole
proprietorship, joint hindu family, partnership, cooperatives, imited
Liability Partnership (LLP), liaison office, branch office, project office,
subsidiary company, etc. owever, we need to understand the differ-
ence between these companies. Section 3(1) of the Companies Act,
1956 d fines two types of companies in India:
1. Companies formed and registered under the Companies Act
ii. Any existing company established under any previous Act
There are various types of companies depending on differences in

their core objectives. Various types of companies and their divisions
are shown in Figure 6.4:
Types of Companies
Incorporation Liability Control
Charted Registered Statutory Limited by Unlimited Govt./

Company Company Company Shares Company Non-Govt.
Public Holding
Company Public Public Public and
Subsidiary
Private
Private Private Foreign
Company
or
Domestic
Figure 6.4: Types of Companies

N O T E S
Various important classifications of comparues, as defined by the

Companies Act, 1956 are as follows:
D Classification of companies by mode of incorporation: As per the
mode of incorporation, there are three categories of companies:
♦ Cbartered companies: Such companies are incorporated un-
der a special charter by a monarch (for example, the Queen of
England). For instance, East India Company and Bank of En-
gland were incorporated in England. Such companies are reg-
ulated by their charter and the Companies Act does not apply
on them. The charter also defines the power and nature of the
company. Such a company can enter into any contract it wants.
owever, in case such a company deviates from its business
as stated in the charter, the monarch (Queen of England) can
declare the company to be invalid and also close it down. At
present, such companies do not exist in India.
♦ Statutory companies: Such companies are incorporated by a
special act passed by the central or state legislature. For exam-
ple, Reserve Bank of India, State Bank of India, Industrial Fi-
nance Corporation, Unit Trust oflndia, State Trading Corpora-
tion and Life Insurance Corporation are statutory companies.
In statutory companies, there are no articles of association or
memorandum. Statutory companies derive their powers from
the Companies Act and possess certain powers because they
have been constituted under the Act. To make any changes in
the powers of such statutory bodies, legislative amendments
need to be made. Such companies are non-profit enterprises
that are formed to meet social needs.
♦ Registered/incorporated companies: Companies formed un-
der the Companies Act, 1956 are said to be registered compa-
nies. Such companies come into existence only after being reg-
istered under the Companies Act, 1956 and after a certificate
of incorporation has been issued to them by the Registrar of
Companies. This method of forming a company is very com-
mon. Registered companies are of three types:
Companies limited by shares: According to Section
12[2(a)J, a company having the liability of its members lim-
ited by the memorandum to the amount (to the extent of face
value of share subscribed by a member), if any, unpaid on
the shares is a company limited by shares. A company limit-
ed by shares may be public or private.
Companies limited by guarantee: Such companies may or
may not have a share capital. According to Section [13(3)],
in the case of liquidation of the company, each member has
to pay a specified sum of money for the payment of debts
and liabilities and this is mentioned in the Memorandum
of Association. The amount promised by the member is

N O T E S
called a 'Guarantee' as stated in Section 14 of the Act. Sec-

tion 27 (2) of the Act relates to the articles of association
of the company, and it states the number of members with
which the company has to be registered. The liabilities of
the members are limited to the extent of the guarantee and
the face value of the shares subscribed by them (in case the
company has share capital). A company limited by guaran-
tee may be public or private. The amount of the guarantee
is in the form of reserve capital of the company, and this
reserve capital cannot be called upon except in the event
the company winds up. Various non-profit companies that
do not trade in stock exchanges a.re formed to promote art,
culture, sports, religion, etc. Such companies are limited by
guarantee.
Unlimited companies: According to Section 12[2(c)J, a
company not having any limit on the liability of its members
is called an unlimited company. Such companies may or
may not have a share capital. If an unlimited company has
a share capital, then it may be public or private. Accord-
ing to Section 27[1], in the case of an imlimited company,
the articles shall state the number of members with which the
company is to be registered and, if the company has a share
capital, the amount of share capital with which the company
is to be registered.
□ Classification of the companies on the basis of number of mem-
bers: On the basis of number of members, a company may be clas-
sified into two categories, which are as follows:
♦ Private company
♦ Public company
A. Private company: According to Section 3(1) (iii) of the Indi-
an Companies Act, 1956, a private company means a company
which, by its articles of association:
a. restricts the right to transfer its shares, if any;
b. limits the number of its members to fifty not including -

1. persons who are in the employment of the company, and
11. persons who having been formerly in the employment of
the company, were members of the company while in that
employment and have continued to be members after the
employment ceased; and
c. prohibits any invitation to the public to subscribe for any
shares in, or debentures of, the company;
Provided that where two or more persons hold one or more shares
in a company jointly, they shall, for the purposes of this defini-
tion, be treated as a single member.

N O T E S
Section 12 of the Act also states that the minimum number of

members to form a private company is two, and a private com-
pany should use 'Pvt.' after its name.
The shares of a private company are not freely transferable,
and whenever a shareholder wants to transfer his/her shares,
he/she must first approach the existing members of the compa-
ny. The price of the shares is determined by the directors of the
company.
B. Public company: According to Section 3 [l(iv)] oflndian Com-
panies Act, 1956, public company means a company which is not
a private company.
The main differences between public and private companies are
listed in Table 6.1:
TABLE 6.1: DIFFERENCES BETWEEN PUBLIC

AND PRIVATE COMPANIES
Basis of Difference Public Company Private
Company
1. Minimum num- Seven Two
ber of members
2. Maximum num- No limit 50
ber of members
3. Number of At least three directors At least two
directors directors
4. Restriction on Directors are required to Nosuchrequire-
theappointment file consent with the Reg- ment
of directors istrar to act as a director
or they may be required
to sign an undertaking for
their qualification shares
5. Restriction on Public companies invite Private compa-
invitation to sub- the general public to nies do not invite
scribe for shares/ purchase their shares and the general pub-
public subscrip- debentures lie to purchase
tion their shares and
debentures
6. Name of the Public companies must Private compa-
company add 'Public Ltd.' or 'Ltd.' nies must add
at the end of their names 'Private Ltd.' at
the end of their
name
7. Issue of prospec- Before allotting shares, a A private compa-
tus public company must is- ny does not need
sue a prospectus detailing to issue a pro-
the investment offered to spectus
the public or file a state-
ment with the Registrar in
place of a prospectus

N O T E S
Basis of Difference Public Company Private

Company
8. Transferability of Shares are freely Shares of a pri-
shares transferable vate company are
not freely trans-
ferable; they are
restricted by the
articles of associ-
ation
9. Special privileges No special privileges A private compa-
ny enjoys certain
special privileges
(it doesn't need
a prospectus, or
file consent with
the Registrar,
etc.)
10. Quorum (the Five persons Two persons
least nu1nber of
members that
must be present
in any meeting to
make the pro-
ceedings of the
meeting mean-
ingful)
11. Managerial Managerial remuneration No restriction
remuneration in a public company can- on managerial
not exceed 11% of the net remuneration
profits
Commencement A public company cannot A private com-
of business start its operations until pany can start
it receives the certificate its operations
of 'Commencement of without getting
Business' the 'Certificate of
'Commencement
of Business'
□ Classification of the companies on the basis of control: In terms

of control, companies are classified into the following two groups:
A. Holding Company: According to Section 4(4) of the Companies
Act, 1956, a company shall be deemed to be the holding company
of another if, but only if, that other is its subsidiary. It means that
a company will be called a holding company if it has control
over another company. A company may become the holding
company of a company in any of the following three ways:
If it holds more than 50%equity capital of another compa-
ny (subsidiary)

N O T E S
If it holds more than 50% of the voting rights of another

company (subsidiary)
If it has the right to appoint the majority of the directors of
another company (subsidiary) either directly or indirectly
It must be noted that both holding and subsidiary companies
are separate legal entities, but they are controlled by the hold-
ing company only. A holding company can have any number of
subsidiaries.
B. Subsidiary company: According to Section 4[I], a company
shall, subject to the provisions of sub-section (3), be deemed to be
a subsidiary of another if, but only if,
that other controls the compositions of its Board of Directors;
or
that other holds more than half in nominal value of its equity
share capital; or
the first-mentioned company is a subsidiary of any company
which is that other's subsidiary.
In other words, a subsidiary is a company over which control is
exercised by the holding company.
D Classification of the companies on the basis of the ownership of
companies:
A. Government companies: If the central or state government in-
dividually or in collaboration holds 51% or more of the paid-up
capital of a company, th n that company is said to be a gov-
ernment company. However, even if the government has 100%
share in a government company, the company should not act as
an agent of the government. The government appoints the au-
ditors for government companies after taking advice from the
Comptroller and Auditor General of India (CAG). For example,
National Thermal Power Corporation Ltd. (NTPC), State Trad-
ing Corporation Ltd. (STC), Hydroelectric Power Corporation
td. (HPCL), Bharat Heavy ◄ lectricals td. (B EL), etc., are
some notable government companies.
B. Non-government companies: Companies that are not owned
by the government or its agencies are called non-government
companies.
D Classification of companies on the basis of the nationality of the
company:
A. Indian companies: Such companies are registered in India un-
der the Companies Act, 1956. These companies also have a reg-
istered office in India. However, the nationality of the members
of these companies is not relevant.

N O T E S
B. Foreign companies: Section 592 to Section 602 of the Com-

panies Act, 1956 has provisions regarding the functioning of
foreign companies in India. Foreign companies are those com-
panies that have been registered outside India but have an
established place from where they conduct their business in
India. The place may be in the form of an office, a store house,
or any other premises.
8. - ------------------------------------------
are incorporated under a special charter
b
amy
onarch.
9. A company limited by shares may be public or private. (True/
False)
10. If an unlimited company has a share capital, it is a private
company. (True/False)
ACTIVITY
Make a list of 20 companies at random and identify the type of com-

pany they are. Also mention whether they belong to more than one
type of company. For example, a private company that is also limit-
ed by shares/guarantee.
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 corpo-
rate 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 of-
ten 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.
All decision-making power lies with the management of the company.

A manager acts as an agent for shareholders (investors or owners)
and is expected to make decisions for maximising the shareholders'
wealth. However, the manager's own interests lie in the maximisation
of his/her own wealth. It is this conflict that most organisations have
to face.
The agency problem cannot be eliminated completely. However, it

can be controlled to a large extent. For example, the management can
be compelled through various methods, such as performance-based

N O T E S
compensation or the threat of firing, to act m the best interests of

shareholders.
6.5.1 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 in-
ternal 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 compa-
ny. The efficiency of the board gets compromised when the power to
make decisions lies in the hands of a single individual.
However, there are many authors who support the decision of com-
panies to have the same individual as chairman and CEO. Brickley et
al. (1997) argue that separating the CEO and chairman positions may
result in higher costs, such as monitoring costs, incentive costs, etc.,
for an organisation. This increased cost may offset the benefit derived
from the separate CEO-chairman leadership structure.
There are no set rules for an organisation while taking the decision
for the separation of positions of the chairman and the CEO. However,
many studies have shown that organisations perform more effectively
when the positions are separate.
EXHIBIT
Keeping the Positions of the Chairman and
the Managing Director/CEO Separate
There are suggestions that the position of Chairman and that of the
Managing Director/CEO should be segregated to avoid one person
having unfettered powers of management. It may be noted that the
requirement to segregate the role of Chairman and CEO is common
among most of the developed jurisdiction like US, UK, France, etc.
As per voluntary guidelines issued by the Ministry of Company Af-

fairs (MCA) to prevent unfettered decision making power with a
single individual, there should be a clear demarcation of the roles
and responsibilities of the Chairman of the Board and that of the
Managing Director/Chief Executive Officer (CEO). The roles and
offices of the Chairman and the CEO should be separated, as far
as possible, to promote the balance of power. As per the Organisa-
tion for Economic Co-operation and Development (OECD) report
on "Corporate Governance and the Financial Crisis - Conclusions
and Emerging Good Practices to Enhance Implementation of the
Principles", when the roles of the CEO and the Chairman are not
separated, it is important in larger, complex companies to explain

N O T E S
the measures that have been taken to avoid conflicts of interest and
to ensure the integrity of the chairman function. As per Compa-
nies Bill, 2012, an individual shall not be appointed or reappointed
as the chairperson of the company, in pursuance of the articles of
the company, as well as the managing director or Chief Executive
Officer of the company at the same time unl ss, - (a) the articles
of such a company provide otherwise; or (b) the company does not
carry multiple businesses. As per Clause 49, where the Chairman
of the Board is a non-executive director, at least one-third of the
Board should comprise independent directors and in case he is
an executive director, at least half of the Board should comprise
independent directors. It is proposed to align the requirements of
Clause 49 with the Bill.
(Source: Consultative Paper On Review Of Corporate Governance Norrns In India - SEBI)
6.5.2 SEPARATION OF OWNERSHIP AND MANAGEMENT

All investors of an organisation are called its owners. It is not neces-
sary that the person investing in an organisation also manages the or-
ganisation. There could be several reasons for the separation of own-
ership and management, such as an investor not having either the
expertise or the time to run the business effectively.
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, share-
holders and employees. This separation of management and owner-
ship (shareholder) results in a potential conflict of interests. For in-
stance, managers may be concerned more about their salaries and
fringe benefits than about the shareholders' return on invested capital
into the organisation.
In most cases, BoDs is often made up of individuals who get nominat-

ed by the top managers of the company. Shareholders having voting
power use their right to vote and choose various members of BoDs.
However, sometimes, due to a lack of adequate information, most
shareholders vote for the nominees recommended by the current
members of the board. Shareholders can also vote by proxy, a process
by which a person votes on behalf of another person.
The following reasons usually encourage the managers of an organi-

sation to act in the interests of its shareholders:
□ Competition: In this competitive world, many organisations com-
pete for the same customer segmentation, and managers often
have to make decisions for the business to remain competitive and
profitable. In any organisation, high returns need to be ensured on
the invested capital.

N O T E S
□ Threat of being taken over: If an organisation does not make the

optimum utilisation of resources, there are chances that it would
be taken over by a more efficient organisation. The management
of an inefficient organisation may face the prospect of being re-
placed if it is taken over by another competing organisation.
The two reasons cited above compel a manager to act in the best inter-
ests of shareholders so that he/she can enjoy the security of a job and
an assured income.
11. A conflict of interest between the management of an

organisation and its stakeholders is usually called _
12. Competition in the market is one of the reasons that compel
managers to work efficiently in the interests of shareholders.
(True/False)
13. In sole proprietorships, the owners of a business are usually
the same people managing various operations of the business.
(True/False)
14. The separation of a nod w n e r s h i p (shareholder)
results in a potential conflict of interests.
ACTIVITY
Select any two big corporations of India, and with the help of the
Internet, study whether they have separate positions of the chair-
man and the CEO. Make a report of your findings.
ilisuMMARY
□ 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.
□ Two important aspects of ownership concentration are controlling
shareholders and managerial ownership.
□ Managerial ownership refers to the extent to which managers have
power to take decisions for an organisation.
□ An important component of the ownership structure is ownership
composition, which consists of all shareholders having major and
minor stakes in an organisation.
□ A shareholder can be a group, a family, an individual, a non-finan-
cial organisation or an investment organisation.

N O T E S
□ 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 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 div-
idends. The board also recruits people, provides compensation,
plans successions and nominates the prospective members.
□ Executive compensation refers to the remuneration of executives
who play a very important role in corporate governance in an or-
ganisation.
□ Minority shareholders are entities that do not have the right to
participate and influence the decisions of an organisation.
□ Transparency and information disclosure refer to maintaining
clear disclosure and access of information to ensure an effective
control and protection of shareholders.
□ A conflict of interest between the management of a company and
its stakeholders is usually defined as an agency problem in the cor-
porate world.
a□
KEYWORDS
Company: A company is an artificial entity created by law and

may be defined as a group of persons that come together to
achieve a common goal.
Holding company: A company is a holding company if it has
another company as its subsidiary.
□ Registered company: A company formed and registered under
the Indian Companies Act, 1956 or under any earlier Compa-
nies Act in India is called a registered company.
□ Takeover: When a company acquires another company, it is
called a takeover.
□ Unlimited company: According to the Companies Act, 1956 a
company not having any limit on the liability of its members is
called an unlimited company.
ID DESCRIPTIVE QUESTIONS
1. Explain the concepts of ownership structure and ownership
concentration.
2. What is the role of the Board of Directors in a company?
3. Differentiate between public and private companies.

N O T E S
4. Explain the significance of the separation of the positions of the

chairman and the CEO in an organisation.
5. Write a short note on executive compensation.
6. Explain the importance of the separation of ownership and
management in an organisation.
■II:■ ANSWERS AND HINTS
Topic Q. No. Answer

Ownership Concentration 1. Ownership concentration and
ownership composition
2. Agency problem
3. True
Ownership Composition 4. A group, a family, an individual, a
non-financial organisation or an
investment organisation
5. Minority shareholding
6. Board of Directors
7. True
Ownership Pattern of Com- 8. Chartered companies
panies in India
9. True
10. False
Issues in Managing Public 11. Agency problem
Limited Firms - Agency
Problem
12. True
13. True
14. Management

1. Ownership concentration is a phenomenon wherein the power
tocontrol the operations of an organisation use in the hands of a
few big shareholders on the other hand ownership composition
consists of all shareholders (Having minor or major showed) in
an organisation. Refer to Section 6.2 Ownership Concentration.
2. Board of Directors (BoD) 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. Refer to Section 6.3 Ownership
Composition.

N O T E S
3. The minimum number of members in the public company is

seven while that in a private company, it is two. Refer to Section
6.4 Ownership Pattern of Companies in India.
4. 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. Refer to Section 6.5 Issues in Managing Public
Limited Firms - Agency Problem.
5. Executive compensation refers to compensation or
remuneration of executives who play a very important role
in corporate governance in an organisation. Refer to Section
6.3 Ownership Composition.
6. There could be several reasons for the separation of ownership
and management, such as an investor not having either the
■
expertise or the time to run a business effectively. Refer to
Section 6.5 Issues in Managing Public Limited Firms - Agency
Problem

I REFERENCE
SUGGESTED READINGS
□ Mallin, C. (2004). Corporate governance. Oxford: Oxford University
Press.
□ Sarkar, J., & Sarkar, S. (2011).WCorporate governance in india.
New Delhi: SAGE India.
E-REFERENCES
□ Lexisnexis.com,. (2015). Retrieved 25 September 2015, from https://
www.lexisnexis.com/uk/lexispsl/disputeresolution/document/3937
47/58XG-2F5 l-Fl8B-7005-00000-00/Minority%20shareholder%20
protection% E2%80%94overview
□ Sias.org.sg,. (2015). Minority Shareholders' Rights. Retrieved
25 September 2015, from http://sias.org.sg/?option=com_con-
tent&view= article&id= 268&Itemid= 102&lang= en

CONTENTS
7.1 Introduction
7.2 Internal Corporate Governance
7.2.1 Board of Directors
7.2.2 Functional Committees of the Board
7.2.3 Concept of Whistle-blowing
7.2.4 Non-Executive Directors and their Roles
Activity
7.3 External Corporate Governance
7.3.1 Role of Government
7.3.2 Role of SEBI and Other Regulators
7.3.3 Promoters
Activity
7.4 Summary

N O T E S
DINESH THAKUR-THE WHISTLE-BLOWER BEHIND

THE RANBAXY CRISIS
Ranbaxy was considered to be one of the largest manufacturers

of medicines in the world. The company was enjoying a pioneer
position in the pharmaceutical industry until a gentleman Dinesh
Thakur blew a whistle regarding the unethical manufacturing
practices of the company.
Dinesh Thakur was an established US citizen of Indian origin.

In 2002, Dinesh Thakur joined Ranbaxy as an engineer. Initial-
ly, he was posted at the Ranbaxy's drug manufacturing plant on
the outskirts of Delhi, India. Dinesh Thakur was assigned with
the task of analysing the company's data and report, which was
submitted to the US and other potential drug markets around the
world for approval.
On examining, Dinesh discovered that the reports generated were

based on falsified test results specifically for the HIV anti-retrovi-
ral and certain other important drugs. Dinesh also observed that
the drug manufacturing process of the company was sloppy and
imprudent. Dinesh submitted his findings to his superiors in 2004,
but his notifications were not welcomed and ignored; instead al-
legations of watching pornography on his official computer were
made against him by Ranbaxy's management. After being disap-
pointed with such an unprofessional and unethical treatment, he
resigned from Ranbaxy in 2005 and moved to the US.
In 2007, Dinesh filed a complaint in the US against Ranbaxy as

per the False Claims Act (FCA), which is well-known as the Whis-
tle Blower's Law in the US. Under this Law, an individual is ca-
pable of registering a case against fraudulent claims made by an
entity (organisation). However, it is important that the individual
should have evidence regarding the complaint filed.
US federal agencies and state medical departments contract-

ed Ranbaxy for supplying drugs. On acting on the plea filed by
Dinesh Thakur, the US federal government ordered an immedi-
ate action on Dinesh's complaint and initiated the further investi-
gation of the allegations against Ranbaxy.
In 2013, the US federal agencies managed to find evidence, which

proved the allegation against Ranbaxy correct. The company was
proved guilty and charges were filed under the Criminal and Civil
Law of the US Department of Justice. During proceedings, Ran-
baxy confessed that it had:
□ Submitted fraudulent data and reports to US regulating agen-
cies purposely
□ Failed to provide requisite reports timely

N O T E S
□ Produced counterfeit statements

□ Sold adulterated drugs in the US which were not produced
in adherence to the Current Good Manufacturing Practices
(CGMP) as mentioned by the US Food and Drug Administra-
tion (US FDA).
The US Department of Justice imposed a penalty of $500 million

on the company, which was the highest penalty ever paid in the
US history by any drug manufacturer.
According to the False Claims Act, a monetary reward is given to

the whistle blower if he/she is proved right. Dinesh Thakur re-
ceived a reward worth $48.6 million, but he opted not to disclose
his location for the safety of self and his family.

N O T E S

-- Discuss the internal corporate governance mechanism
-- Explain the external corporate mechanism
Bl INTRODUCTION
In the previous chapter, you studied the concept of corporate gover-
nance, its goals and objectives. Corporate governance can be further
divided into internal and external corporate governance mechanisms.
In this chapter, you will study about internal and external corporate
governance.
Corporate governance is a process of controlling an organisation on

the basis of prescribed rules, practices and processes. It can be suc-
cessful if both internal and external stakeholders abide by corporate
governance practices of the organisation. Internal stakeholders in-
clude the employees and the management of an organisation, while
external stakeholders are customers, government and society.
The internal corporate governance mechanism supervises the actions

of senior executives on an ethical ground. The structure of the board
of directors, its style, processes, relationships and roles of directors
come under internal corporate governance. On the other hand, the
external corporate governance mechanism includes a set of practices
and norms issued by the government and statutory bodies to protect
the interests of investors.
This chapter explores the concept of internal and external mecha-

nisms for corporate governance. It also discusses important players of
internal and external corporate governance in detail.
ftjINTERNALCORPORATEGOVERNANCE
Internal corporate governance is a framework or system of rules, prac-
tices 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 en-
sure the ethical functioning of the organisation. The internal corpo-
rate governance framework differs from across organisations based
on various factors such as sociocultural environment, economic envi-
ronment, government policies and financial market systems.
Although there are many differences in the structure of internal corpo-

rate governance of organisations, 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 indi-

N O T E S
viduals 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 gener-
ally 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.
As discussed in the previous chapter, corporate governance is an ap-

proach to create a balance between internal and external stakeholders
such as management, customers, suppliers, financiers, govern1nent
and the community. An organisation would be able to coordinate with
external stakeholders if its internal stakeholders comply with the de-
fined code of conduct. For instance, an organisation needs to promise
its shareholders for paying decent dividends in the upcoming year. In
such a case, if the internal management does not act as per the rules
prescribed in the dividend policy of the organisation, it may damage
the image of the organisation in the market.
I I
NOTE
Theterm code of conduct is sometimes used synonymously with
ethics. However, these two concepts are complementary to each
other. The code of conduct is rule based and provides a solution to
every possible situation, while ethics are value based and comprise
beliefs and values of individuals. The behaviour exhibited by an in-
dividual in any difficult situation largely depends on the values and
principles of that individual. Therefore, it can be said that the code
of conduct is closely linked to ethics.
The effective implementation of the code of conduct depends a great

deal on the board of directors (BODs) of an organisation and the com-
mittees formed by them. Let us discuss the important components of
the internal corporate governance in the next sections.
7.2.1 BOARD OF DIRECTORS

BODs are vested with the responsibility of governing an organisation.
The directors are appointed by the shareholders of the organisation.
The board further appoints one or more Managing Directors (MDs) or
Executive Directors (EDs) after due approval from shareholders. Good
internal corporate governance depends largely on the level of commu-
nication and understanding among the directors and the sharehold-
ers. Therefore, there should be effective coordination among share-
holders 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

N O T E S
promoters. The size of the board is mainly determined by the size of

the organisation. In India, it has been observed that the size of the
board is usually large in industries like banking, petroleum, textiles,
iron and steel, telecommunication, while in IT and pharmaceutical or-
ganisations, there are 4-9 board members. In the board, those who
are employed in any of the management position and are full-time
employees are known as inside directors or executive directors; while
those who are not employed in any management position are referred
to as non-executive directors or outside directors.
The key roles of the board as per Section 166 of the Companies Act,
2013 oflndia 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 pro-
tection of environment
□ Exercise your duties with due and reasonable care, skill and dili-
gence
□ Not involve yourself in a situation in which you may have a direct
or indirect interest that conflicts, or possibly may conflict, with the
interest of the Company
□ Not achieve or attempt to achieve any undue gain or advantage ei-
ther to yourself or to your relatives, partners or associates
□ Not assign your office as Director and any assignments so made
shall be void
Asp r the Principles of Corporate Governance (2004) given by the Or-

ganization for Economic Cooperation and Development (OECD), 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
□ Select, compensate, monitor and replace key executives and over-
see succession planning
□ Align key executive and board remuneration (pay) with the long-
term interests of the company and its shareholders
□ Ensure a formal and transparent board member nomination and
election process
□ Ensure the integrity of accounting and financial reporting systems
□ Ensure that appropriate systems ofinternal control are established

N O T E S
□ Supervise the process of disclosure and communication

□ Define and communicate the mandate, composition and working
procedures of committees
7.2.2 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 down-
falls 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 that are
generally constituted are nomination committee, audit committee and
remuneration committee. Let us discuss the functions of these com-
mittees in detail in the next sections.
NOMINATION COMMITTEE
The nomination committee is made up of outside independent direc-

tors. 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. The following are the functions of the nomination committee:
□ Oversee and evaluate the performance of the board
□ Ensure that the company adheres to the prescribed compliance
and all the regulations, guidelines and principles pertaining to cor-
porate governance
□ Assess the performance of individuals and identify individuals
qualified to become board members
□ Make recommendations to the board for the proposed nominees
for the board membership
□ Make recommendations to the directors to serve on each standing
committee.
The nomination committee possesses the following rights:

□ The committee has unrestricted access to all information.
□ All employees are directed to cooperate as per the rules and regu-
lations made by the members of the committee.
□ The committee can obtain advice and assistance from outside or
other advisors provided their discretion is required to assist the
committee in fulfilling its responsibilities.
The responsibilities of the nomination committee towards corporate

governance are as follows:
□ The committee ensures that all the aspects of corporate gover-
nance are taken care of by the BODs.

N O T E S
□ The committee makes recommendations to the board pertaining

to corporate governance comprising various policies, practices
and procedures made by the organisation.
□ The committee monitors and ensures that the organisation com-
plies with the set corporate governance policies.
□ The committee provides advice on the issues of corporate gover-
nance to the BODs.
□ The committee reviews and approves any changes recommended
by management pertaining to the organisation's corporate disclo-
sure policies.
□ The committee can amend the organisation's corporate gover-
nance policies pertaining to various attributes such as insider
trading in the organisation's securities, code of business conduct
and ethics for directors, officers and employees.
AUDIT COMMITTEE
The members of the audit committee members are responsible for re-
porting financial proceedings of the organisation to the board. It acts
as a useful link between outside auditors and the board. The com-
mittee 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 reappoint-
ment or replacement of auditors.
Apart from this, an audit committee keeps checks against the exec-
utives on the board. The auditors in this committee are responsible
for reviewing systems and practicing internal control through a.nob-
jective review of the progress made. In Australia and Canada, it is
mandatory for all listed companies to have audit committees. On the
other hand, in countries like India, the US and the UK, it is a listing
requirement for stock exchange in order to prevent fraud, cognitive
omissions and management errors.
Under the provision of the Companies Act 1956, there must be at least
three members from the board out of which, two-third of members will be
independent directors in an audit committee. According to Clause 49 of
the Listing Agreement, such members must have financial knowledge
in terms of corporate clients and must be experts in accounting aspects.
There are many corporate houses in India that have set up audit com-
mittees in their organisation but have failed to comply with the full
requirements of Clause 49 of the Listing Agreement due to non-disclo-
sure of information about:
□ Literacy and expertise of the members in the committee in the
field of law, finance and accounts

N O T E S
□ Participation of finance, statutory and internal auditors m the

committee
□ Audit committee charter and terms of reference
□ Audit committee reports in the annual reports of companies
The following are the major roles of an audit committee:
□ To assess and evaluate the integrity of the company's financial
statements and announcements
□ To review the internal financial controls mechanism (unless there
is a separate risk committee) and ensure the effectiveness of risk
management systems
□ To monitor and review the internal audit function
□ To make recommendations pertaining to the appointment or re-
placement of external auditors and ensure the effectiveness of
their work by reviewing the same
There should be a right blend of audit committee members in order

to execute corporate governance successfully. The task of the audit
committee depends on its members and their knowledge about the
business of the organisation. Auditors would be encourag d to work
efficiently and perform fairly if the committee has power to perform
independently and raise questions to management. The responsibili-
ties of an auditor include the following:
□ To make certain inquiries
□ To create report on the accounts examined
□ To make a proclamation in terms of the provisions set
□ To detect, report and prevent a fraud
□ To maintain substantial precision in auditing
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 indepen-
dent 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 sharehold-
ers. 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.
In India, having a remuneration committee is a non-mandatory re-

quirement as per Clause 49 of the Listing Agreement. However, it is
mandatory to disclose information regarding the remuneration of di-

N O T E S
rectors in the annual report. The remuneration committee performs

the following tasks:
□ Ensures that the remuneration of executive directors is not set up
by themselves
□ Ensures that the remuneration committee is staffed by non-exec-
utive directors only
□ Takes consideration of other companies before offering monetary
benefits to directors
□ Considers the relevant attribute for setting up remuneration of-
fered to BODs
□ Decides which kind of disclosures should be made by the remu-
neration committee in the accounts section pertaining to corpo-
rate governance
7.2.3 CONCEPT OF WHISTLE-BLOWING

The word whistle-blowing was derived from the practice of English po-
licemen, who used to blow their whistles to alert people of any danger
or mishappening. There are several ways to define whistle-blowing.
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 ex-
ternal whistle-blowing happens when a whistle blower spreads the
information outside the organisation; for instance, to media. An indi-
vidual who takes the responsibility of raising voice against wrong is
called a whistle-blower.
Wh never a concern is raised by an employee, it needs to be communi-

cated 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 com-
plaints, 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. They have a high sense of responsibility towards
their organisation's ethics and goals. Such employees :f: el perturbed
whenever they are confronted with moral or ethical dilemmas.
Whistle-blowing is an act of self-sacrifice as whistle-blowers are

threatened by the authority structure within the organisation for re-
porting wrongdoing. Sometimes, whistle-blowers are either fired or
humiliated. It can be said that they put themselves at risk willingly in
order to achieve the common good of the organisation.

N O T E S
n the era of globalisation where p rsonal and economic motives sur-

pass all virtues, values and traditions, it becomes more important to
protect the public interest from great corporate scandals. An effective
whistle-blower policy has hence been recognised as an important fea-
ture of corporate governance norms adopted by most of the countries
across the globe. In India, a report given by the Murthy Committee
suggested that a whistle-blower policy is mandatory but it was made
a non-mandatory recommendation due to the lobbying of Indian cor-
porations.
The concept of whistle-blower came into existence in 2002 after the

two of the biggest known corporate scandals: Enron and WorldCom.
Sherron Watkins (Vice President of Enron) and Cynthia Cooper (Ac-
countant at WorldCom) have been recognised as the two gutsiest wom-
en of this century. Both of them uncovered fraud and misrepresenta-
tion of statements in the accounts of two well-known corporations of
the US. In India, Satyendra Dubey was murdered in 2003 as he wrote
a letter to the then Prime Minister to expose corruption in the Gold-
en Quadrilateral Highway Construction Project. In India, the idea of
protecting the interest of whistle blowers gained attention afterwards.
7.2.4 NON-EXECUTIVE DIRECTORS AND THEIR ROLES

on-executive directors a.re 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 con-
tract and paid a flat fee for their services. The main role of non-exec-
utive directors is to minimise the conflicts of interests in the organisa-
tion. However, according to the Higgs Report, published in 2003, their
role can be summarised as follows:
□ Contributing to the strategic plan
D Scrutinising the performance of EDs
□ Providing an external perspective on risk management
□ Dealing with issues, such as the future shape of the board and res-
olution of conflicts
According to various codes of corporate governance, non-executive

directors should be independent, i.e., they should not have any mate-
rial or pecuniary relationship with the organisation. As per the Cad-
bury Report, non-executive directors are in the best position to monitor
the performance of the board and the CEO. 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 inter-
ests of all stakeholders. In the eyes of law, there is no difference be-

N O T E S
tw en executive and non-executive directors, i.e., they have the same

fiduciary duties as that of other directors. Hence, these outside direc-
tors have the power to demand information from the management or
exercise their votes.
Non-executive directors must maintain high levels of integrity and

act ethically. They need to monitor the conduct of the executive team
by demonstrating a willingness to listen, question, debate and chal-
lenge while avoiding friction. Having more non-executive directors
than EDs is now recognised as a best practice in public organisations.
For example, Tesco PLC has five executive directors and eight inde-
pendent non-executive directors; Swire Pacific Limited has eight EDs
and ten non-executive directors.

1. Internal corporate governance is a framework or system of
rules, practices and processes designed in an organisation by
the internal human force. (True/ False)
2. isanapproach to create a balance between internal
and external stakeholders such as management, customers,
suppliers, financiers, government and the community.
3. BODs are accountable towards all stakeholders pertaining to
the of an organisation and resolving issues between
various stakeholders, such as shareholders, customers,
lenders and promoters.
4. The 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.
5. An audit committee comprises members who are responsible
for reporting the proceedings to the board. (True /false)
6. In India, having a remuneration committee is a non-mandatory
requirement as per Clause of the Listing Agreement.
7. isanactof self-sacrifice as whistle-blowers are
threatened by the authority structure within an organisation
for reporting wrongdoing.
8. Non-executive directors are involved in the day-to-day
running of an organisation. (True/ False)
ACTIVITY
With the help oflnternet, gather data of any three corporate houses
and analyse how the functioning of their BODs impacted their in-
ternal and external corporate governance mechanism.

N O T E S
DI EXTERNAL CORPORATE GOVERNANCE

An organisation does not work in isolation and is driven by several
macro factors such as markets, service providers, media and govern-
ment of a country. As discussed earlier, corporate governance focus-
es on the interests of both internal and external stakeholders. In the
previous section, you have studied the role of internal stakeholders in
corporate governance. Now, let us explore the role of external stake-
holders in the corporate governance practices of an organisation.
7.3.1 ROLE OF GOVERNMENT

very country has some minimum legislative requirements to be fol-
lowed by organisations operating in that country. For instance, in In-
dia, organisations need to abide by the Company Act, 1956 and other
listing requirements. However, some organisations are subject to fur-
ther external control by the government. Such control is exercised by
the government on those organisations or sectors that are strategical-
ly 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. Moreover, it is responsible for pre-
venting malpractices such as formation of monopolies or illegal sup-
plyof utilities such as power, water and energy. Regulations are levied
to protect the interests of stakeholders; thereby attracting more inves-
tors and increasing tax revenues in the country.
7.3.2 ROLE OF SEBI AND OTHER REGULATORS

For a long time, the concept of corporate governance was an alien con-
cept to Indian businesses. There were weak governance norms, which
were evident in India's huge public sector and nationalised banks. Af-
ter the fiscal crisis of 1991, the Indian government rolled down a series
ofliberalisation, privatisation and globalisation reforms. This brought
new governance models that focussed on new business opportunities
and funding avenues. n addition, a need of a mechanism to check the
capital market and keep the trust of investors intact was felt. Conse-
quently, to develop India's capital market, the Central Government
established the Securities and Exchange Board oflndia (SEBI).
SEBI is an independent statutory authority that regulates the se-

curities 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 ndia. ntroduction of Clause 49 of the Listing
Agreement is the most important step taken by S ◄ B for establishing
a new corporate governance regime. The Clause includes the follow-
1ng norms:

N O T E S
□ Independent directors are appointed in the board

□ Audit committee is appointed, composed and powers are given
□ Investors' grievances redressed committee and remuneration
committee is functioned
□ Compensation that is to be paid to non-executive directors
□ Internal control of conduct is adhered by Board of Directors and oth-
er top executives
□ Accounting policies, related party transactions, contingent liabili-
ties and IP proceed utilisation needs to be disclosed
□ Certification by CEO/CFO on adequacy of internal control system
and correctness of the reported financials
□ Whistle-blower policy
The above compliance terms contained in Clause 49 are required to
be signed by the directors and auditors of the company and need to
be annexed to the annual report. The companies that are listed in the
stock market must submit a consolidated compliance report to SEEi
within 30 days after the end of each quarter. After the enactment of
Companies Act, 2013, SEBI introduced a new set of norms on corpo-
rate governance. 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 shuld have at least one women director.
□ The role of the audit committee should be increased.
□ BoDs should engage in succession planning for the board posi-
tions and other key positions.
INDEPENDENT DIRECTORS
□ Nominee directors should not be considered as independent di-

rectors.
□ 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 serv for more than two terms of 5
years each.

N O T E S
OTHER GOVERNANCE ASPECTS

□ Getting prior approval of all material related party transactions
from an audit committee
□ Defining Companies Act and accounting standards
□ Makings whistle-blowing mechanism compulsory
□ Mandatory discloure of remuneration policy.
□ Specifying principles of corporate governance
□ Defining policy risk management
7.3.3 PROMOTERS
A promoter is a person who performs the necessary formalities of reg-
istering a company, finding directors and shareholders for the new
company, acquiring business assets and negotiating business con-
tracts 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 organisa-

tion, the role of promoters is quintessential. romoters 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. Promoter-driven organi-
sations outperform other organisations over the y ars, provided they
are governed well. Investors are likely to invest in organisations that
are proactively implementing better governance practices. The char-
acteristics of promoter-driven organisations are as follows:
□ Separate ownership and management so as to establish a profes-
sional management team
D 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 so-

cial goals along with pursuing the goal of wealth creation. Promoters
lead from the front and inculcate values and good governance practices.
EXHIBIT
Promoter's Uole in Corporate Governance
(Richard Rekhy)
These words come to my mind as I go through the new Companies Bill.
The bill has many provisions to improve the governance culture in

N O T E S
India. But I wonder if one can legislate the state of mind, because
that's the genesis of governance. Mervyn King of the King Report
fame said good corporate governance is about 'intellectual honesty'
and not just sticking to rules and regulations.
I watch, with some shock and much disappointment, when every scan-
dal emanating from governance deficit is followed by finger pointing
and blame fixing. The usual targets are independent directors, audi-
tors and everybody else, b1tt the promoter. More than 95 per cent of the
companies in India are said to be family-owned and let us not forget
that the promoter exerts considerable influence. He is the scriptwrit-
er and director, while the CEO acts under his direction. The mind-
set and role of promoters become highly important if we have to take
an honest shot at improving the governance culture in India. It's all
about tone at the top. The promoter is at the centre of all activities
around corporate governance. They need to lead by walking the talk,
otherwise the tiger they unleash would be difficult to manage.
In this day and age, I don't think we need to make a case for gov-
ernance. Robust governance has a premium and it is seen that pro-
moters who demonstrate adherence to corporate governance in spirit,
have reaped the benefits of governance premium. Rating and broker-
age firms have long tracked corporate governance and its impact.
CLSAfound that a 10-point difference in their corporate governance
score led to a 7.3 per cent additional performance for a stock over
the next nine months. Promoter-driven companies have been known
to outperform other companies over the long term, provided they are
governed well. Private equity respondents of a recent KPMG survey
also rated 'corporate governance' among the top three barriers to in-
vestment in India. Off late, we have read about several instances in
the media highlighting friction between promoters and their private
equity (PE) investors. The underlying reasons in most cases are in-
adequate transparency and communication, stemming from an in-
formal and less satisfactory governance structure. PE investors are
more likely to invest in companies that are proactively implementing
better governance practices.
As their companies grow and mature, promoters need to be more open

to external perspectives, prepare for more scrutiny and adopt a more
structured approach to day-to-day management. In the book Manag-
ing for the Long Run, the authors Danny Miller and Isabel Le Bret-
on-Millet, after analysing 24 successful promoter-driven companies,
highlight that these companies have incorporated four major pTiori-
ties into their bitsiness model. These 'four Cs' are:
Command - separating ownership and management, and estab-

lishing a professional management team; continuity - maintaining
adherence to a farsighted mission and adopting formal succession
plan; community - establishing a unifying corporate culture and

N O T E S
exhibiting social responsibility; and connection - establishing long-

term relationship with suppliers and customers.
In India, some progressive promoters have long inculcated some or

all of these Cs. For instance, in 1999, decades old Murugappa groiip
separated ownership and operational management. Leadership of
their group companies moved from family members to professional
CEOs. Later, Murugappa corporate board that oversaw the group
was re-organised with the induction of three independent directors
and a non-family CFO. The chairmanship of the board also shifted to
a non-family professional eventually. These changes appear to have
fuelled the company's strong growth in the past decade. The group
achieved a landmark turnover of $1 billion in 2003-04, which has now
grown into $4.4 billion.
Progressive promoter-driven companies have also set environmental

and social goals for themselves, in addition to wealth creation goals.
For instance, earlier this year, two of the prominent companies in the
Tata group - Tata Steel and Tata Chemicals -won theprestigious
CII-ITC 'sustainability award'. Not surprisingly, the group is one of
the most respected corporate houses in India. In fact, a UK-based val-
uationfirm's 2013 ranking of top 50 global brands saw the 'Tata' brand
ranked at 39, ahead of Nestle, Hitachi and TESCO, among others.
All these examples drive home a couple of key messages. Good gover-
nance practices pay! It is a sound investment to help to reduce risk
and maintain investor confidence. Developing a well-deserved rep-
utation for integrity and being readily able to maintain and provide
accurate information on its affairs, directors and officers may be an
excellent way for a company to secure a competitive advantage in
a marketplace that has become increasingly nervous about deficien-
cies in corporate governance. In the words of Henry Ford, '½ biwiness
absolutely devoted to service will have only one worry about profits.
They will be embarrassingly large!'
Promoters have to lead from the front in inculcating values and good
governance practices. There can be no governance without good lead-
ership. If only everyone thought like Abraham Lincoln, who said, "I
am not bound to win, but I am bound to be true. I am not bound to suc-
ceed, biit I am boiind to live by the light that I have. I must stand with
anybody that stands right, and stand with him while he is right, and
part with him when he goes wrong."
(Source: http://wv,rw.mydigitalfc.com/op-ed/promoter%E2%80%99s-role-corporate-gover-
nance-329)
9. In India, organisations need to abide by the and other

listing requirements.

N O T E S
10. After the fiscal crisis of 1991, the Indian government rolled
down a series of privatisation and globalisation reforms.
11. SEBI is an independent statutory authority that regulates the
securities market in India. (True/False)
12. Introduction of Clause 49 of the Listing Agreement is the most
important step taken by for establishing a new corporate
governance regime.
13. A is a person who performs necessary formalities of
company registration; finds directors and shareholders for
the new company; acquires business assets and negotiates
business contracts on behalf of the company.
14. Promoter-driven organisations aim to achieve environmental
and social goals along with pursuing the goal of wealth
creation. (True/False)
ACTIVITY
Using the Internet, find the latest government regulations related

to corporate governance. Make a note of the latest government reg-
ulation related to corporate governances
Q
□
■ SUMMARY
Internal corporate governance is a framework or system of rules,
practices and processes designed in an organisation by the inter-
nal human force. This framework is generally developed and man-
aged by the top management of an organisation.
□ Corporate governance is an approach to create a balance between
internal and external stakeholders such as management, custom-
ers, suppliers, financiers, government and the community.
□ BODs are vested with the responsibility of governing an organi-
sation. The directors are appointed by the shareholders of the or-
ganisation.
□ BODs are accountable towards all stakeholders pertaining to the
functional attributes of the organisation and resolving issues be-
tween various stakeholders, such as shareholders, customers,
lenders and promoters.
□ 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.
□ An audit committee comprises members who are responsible for
reporting the proceedings to the board. It acts as a useful link be-
tween outside auditors and the board.

N O T E S
□ 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 word whistle-blowing was derived from the practice of ◄ n-
glish policemen, who used to blow their whistles to alert people of
any danger or mis happening.
□ 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 organisa-
tion.
□ An organisation does not work in isolation and is driven by several
macro factors such as markets, service providers, media and gov-
ernment of a country.
□ Every country has minimum legislative requirements to be fol-
lowed by organisations operating in that country. •or instance, in
India, organisations need to abide by the Company Act, 1956 and
other listing requirements.
□ SEBI is an independent statutory authority that regulates these-
curities 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.
□ A promoter is a person who performs the n c ssary formalities
of registering the company finding directors and shareholders for
the new company acquiring business assets and negotiating busi-
ness contracts on behalf of the company.
mKEYWORDS
□ Article of association: It is a document that needs to be filed with
th registrar of a company explaining the purpose of the compa-
ny followed by its duties and responsibilities of its members.
□ Dividends: It is the sum of money paid regularly (typically an-
nually) by a company to its shareholders out of its profits.
□ Fiduciary duty: It refers to a legal duty to act solely in the in-
terest of another party. Parties owing this duty are called fidu-
ciaries.
□ Liberalisation: It refers to a relaxation of previous government
restrictions, usually in the areas of social, political and econom-
ic policy.
□ Ombudsman: It refers to an official appointed to investigate
complaints made by individuals against a company or organi-
sation.

N O T E S
BJ DESCRIPTIVE QUESTIONS
1. Explain the concept of internal corporate governance.
2. Discuss the significance of BODs m internal corporate
governance.
3. What is the importance of functional committees in internal
corporate governance?
4. Explain the concept of whistle-blowing.
5. Discuss the role played by SEBI in corporate governance.
6. What is the importance of promoters in corporate governance?
Ill ANSWERS AND HINTS
Topic Q. No. Answer

Internal Corporate Governance 1. True
2. Corporate Governance
3. Functional attributes
4. Nomination Committee
5. True
6. 49
7. whistle-blowing
8. False
External Corporate Governance 9. Companies Act 1956
10. Liberalisation
11. True
12. SEBI
13. Promoter
14. True

1. 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. Refer
to Section 7.2 Internal Corporate Governance.
2. BODs are vested with the responsibility of governing an
organisation. The directors are appointed by the shareholders
of the organisation. Refer to Section 7.2 Internal Corporate
Governance.

N O T E S
3. 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. efer to
Section 7.2 Internal Corporate Governance.
4. Non-executive directors are the members of an organisation's
board of directors. owever, they neither belong to the
executive team nor are involved in the day-to-day running
of the organisation. Refer to Section 7.2 Internal Corporate
Governance.
5. 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) toensure that their members adhere tothe regulations
and instructions of the authority. Refer to Section 7.3 External
Corporate Governance.
6. A promoter is a person who performs 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. Refer to Section 7.3
External Corporate Governance.

REFERENCE
SUGGESTED READINGS
□ Das, S. (2008). Corporate governance in India. New Delhi: Pren-
tice-Hall of India.
□ Rezaee, Z. (2009). Corporate governance and ethics. Hoboken, NJ:
John Wiley & Sons.
□ Mallin, C. (2004). Corporate governance. Oxford: Oxford Universi-
ty Press.
□ Sarkar, J., & Sarkar, S. (2011). Corporate Governance in India. New

Delhi: SAGE India.
E-REFERENCES
□ ICAI,. (2015). !CAI - The Institute of Chartered Accountants of India.
Retrieved 25 September 2015, from http://www.icai.org/
□ Rbi.org.in,. (2015). Retrieved 25 September 2015, from https://
www.rbi.org.in/
□ Se bi.gov.in,. (2015). Securities and Exchange Board of India - Home
Page. Retrieved 25 September 2015, from http://www.sebi.gov.in/
sebiweb/

CONTENTS
8.1 Introduction
8.2 Evolution of Corporate Governance in India
Activity
8.3 The Legal Statutes and Committees
8.3.1 The Companies Act, 1956
8.3.2 The Companies Act, 2013
8.3.3 The SEEi Guidelines
8.3.4 The Accounting Standards issued by the ICAI
8.3.5 The Listing Agreements with the Stock Exchange
8.3.6 The Kumar Mangalam Birla Committee
8.3.7 The Cadbury Committee
8.3.8 The Corporate Governance and Ethics Committee
Activity
8.4 The Reports on Corporate Governance
8.4.1 The CII Report
8.4.2 The RBI Report on International Financial Standards
and Code (March 2011)
8.4.3 Reports of Naresh Chandra Committee I (2002) and II (2003)
8.4.4 The Murthy Report
Activity
8.5 Summary

N O T E S
LESSONS FROM SATYAM SCANDAL
Mr. Ramalinga Raju, Chairman of Satyam, was involved in the

accounting scandal of USD 1.6 billion. The scandal was related
to fabricating accounts, overstated revenues, hypothetical profits
and falsified bank deposits. It was a particular case that brought
reforms in corporate governance and the lessons it gave to all the
organisations across the globe are as follows:
□ Investigate all inaccuracies: The frauds by Satyam were
started on a small scale and reached USD 1.6 billion. It has
been observed that mostly fraudulent activities start at small
scale and are generally unidentifiable. It is a warning sign for
companies to not to ignore any small unethical activity or im-
balance in the accounts. These activities should be identified
and proper investigations should be carried out. Moreover, it
is important to divide the task and assign accountability for
it. This division of task allows to discover any irregularity or
violation easily and in given time frame.
□ Ruined reputation: A fraud like Satyam, not only ruins the
reputation of the company, but also of the industry and coun-
try. This scandal reflected the negative image of the booming
economy, India and Left it in a bad spot. Moreover, it brought
the stock market to tumble down, where investors were not
willing to invest in the country as well the outsourcing sector.
It also brought several other companies under the scrutiny of
investors, regulators and customers.
□ Stronger corporate governance: The Satyam case enlight-
ens that there is a need for strong corporate governance in
organisations. It is important to be extra careful while hiring
top management people for the organisation. These people
are responsible for ethical business environment. Thus, it is
crucial for them to be accountable towards their role in the
organisation.

CORPORATE GOVERNANCE IN INDIA: STATUTORY PERSPECTIVE 183
N O T E S

- Explain the evolution of corporate governance in India
- Discuss legal statutes and committees
Describe the reports on corporate governance
■:j■ INTRODUCTION
In the previous chapter, we studied about the concept of internal cor-
porate governance. We discussed board of directors, code of conduct,
non-executive directors and their roles, and audit committees. In this
chapter, you will learn about the corporate governance in India.
We know that corporate governance refers to the processes and mech-

anisms in the organisation that help in governing and directing its
functioning. The main aim of corporate governance is to increase the
accountability of people associated with the organisation.
The well-implemented corporate governance provides transparency

in the functioning of an organisation that strengthens the confidence
of the stakeholders and investors. It also helps in mitigating the risk
associated with fraudulent activities or corporate scandals. It works
on the principle of self-monitoring that further helps in building the
positive image of the organisation. Various reports and committees
have been developed by the SEBI and other legal authorities to pro-
tect the interest of the company, investors and public.
This chapter explains the evolution of corporate governance in India.

It discusses legal statutes and committees and 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 com-
panies, such as Enron and WorldCom, due to unethical business be-
haviour followed brought into the significance of implementing corpo-
rate 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. For the duration of 1947 to 1991, the socialist
policies were followed and implemented by the Indian Government,

N O T E S
where all banks were nationalised and were responsible for funding
the private business organisations.
The main criterion for providing funds was the capital investment
only. Moreover, the government did not promote foreign investment
so as to restrain the competition. Private companies offering equity
and debt had to undergo many complications, while public companies
had to just comply with limited governance and disclosure standards
given in the Companies Act 1956, the Listing Agreement, and the ac-
counting standards given by the Institute of Chartered Accountants of
India (ICAI).
When in 1991, India came across the fiscal crisis, the then Finance
Minister Mr. Manmohan Singh brought many economic liberalisation
reforms. Securities and Exchange Board of India (SEBI) was founded
in 1992 with the aim of regulating the securities market.
The need for capital formed the framework for the concept of corpo-
rate governance in 1996 after economic liberalisation and deregula-
tion of businesses and industries took place. It helped in developing a
strong financial system that further helped in stimulating the growth
of economy.
According to La Porta (1997), Effective corporate governance enhances

access to external financing byfirrns, leading to greater investments as
well as higher growth and employment. The proportion of private credit
to GDP in countries in the highest quartile of creditor right enactment
and enforcement is more than double that in the countries in the lowest
quartile.
1. Corporate governance is one of the oldest concepts that date

back to
2. Corporate governance 1s a multi-level and multi-tiered
process. (True/False)
3. The full form of ICAI is --------
4. The full form of SEB 1s --------
5. The formed the framework for the concept
of corporate governance in 1996 after economic liberalisation
and deregulation of businesses and industries took place.
ACTIVITY
Using the Internet, search the history of corporate governance in

developed countries and prepare a report on it.

■
•
THE LEGAL STATUTES AND
COMMITTEES
N O T E S
Corporate governance is a process that defines the set of laws and

provides directions and guidelines to corporations for tracking the ac-
tions of the management and finding as well as mitigating the risk as-
sociated with it. Various legal laws and committees have been formed
to protect the rights of shareholders. Let us discuss these committees
in the next sub-sections.
8.3.1 THE COMPANIES ACT, 1956

The Companies Act, 1956 is an Act of the Parliament oflndia. 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 Com-
panies, 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 Govern-
ment for registering the formation of a company, its functioning and
winding up procedure. According to this Act, the Central Government
has the right to examine the books of a company, conduct special au-
dit, inspect the company's processes, and act against any violation
made by the company. This helps in knowing that if any unethical
or unfair practices are followed by the company that may affect the
interest of various parties involved such as shareholders, creditors,
customers and employees.
8.3.2 THE COMPANIES ACT, 2013

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

N O T E S
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 get-
ting the permission from the President of India. It was enforced in
September, 2013 after making few changes. Some of the changes or
new provisions made in this Act are as follows:
□ One person company: It means a company has only one person
as a member and at least one director. According to Sec 3 (1) of
2013 Act, The 2013 Act introduces a new type of entity to the existing
list, i.e. apartfromforming a public or private limited company, the
2013 Act enables the formation of a new entity 'one-person company'
(OPC). An OPC means a company with only one person as its mem-
ber. Holding annual meeting is not necessary in this company.
□ Women director: It is mandatory that every Listed Company/
Public Company with paid up capital oft 100 crore or more/Public
Company with turnover of 300 crore or more should have at least
one Woman Director.
□ Corporate socia] responsibiJity cJause: A company with net worth
of 500 crore or more or turnover of 1000 crore or more should
be a part of corporate social responsibility committee.
□ Dormant company: According to Sec 455 of 2013 Act, A company
can be classified as dormant when it is formed and registered under
2013 Act for a future project or to hold an asset or intellectual prop-
erty and has no significant accounting transaction. Such company
should register for obtaining the status of a dormant company.
□ Officer: According to Sec 2 (59) of 2013 Act, The definition of of-
ficer has been extended to include promoters and key managerial
personnel.
□ Key managerial personnel: According to Sec 2 (51) of 2013 Act,
The term 'key managerial personnel' has been defined in the 2013
Act and has been used in several sections, thus expanding the scope
of persons covered by such sections.
□ Promoter: According to Sec 2 (69) of 2013 Act, The term 'promoter'
has been defined in the following ways:
♦ A person who has been named as such in a prospectus or is iden-
tified by the company in the annual return referred to in Section
92 of 2013 Act that deals with anniwl return; or
♦ who has control over the affairs of the company, directly or indi-
rectly whether as a shareholder, director or otherwise; or
♦ in accordance with whose advice, directions or instructions, the
Board of Directors of the company is accustomed to act. The pro-
viso to this section states that sub-section (c) would not apply to a
person who is acting merely in a professional capacity.

N O T E S
□ Independent director: According to Sec 2 (47), 149 (5) of 2013 Act,

The term 'Independent Director' has now been defined in the 2013
Act, along with several new requirements relating to their appoint-
ment, role and responsibilities. Fiirther some of these requirements
are not in line with the corresponding requirements under the equity
listing agreement.
□ Subsidiary: According to Sec 2 (87) of 2013 Act, The definition of
subsidiary as included in the 2013 Act states that certain class or
classes of holding company (as may be prescribed) shall not have lay-
ers of subsidiaries beyond such numbers as may be prescribed. With
stlCh a restrictive section, it appears that a holding company will no
longer be able to hold subsidiaries beyond a specified number.
□ Financial year: According to Sec 2 (41) of 2013 Act, It has been de-
fined as the period ending on the 31st day of March every yem; and
where it has been incorporated on or after the 1st day of January, the
period ending on the 31st day of March of the following year, in re-
spect whereof financial statement of the company or body corporate
is made up.
8.3.3 THE SEBI GUIDELINES
The Securities and Exchange Board of India (SEEi) was formed in

1988. Howeve1; it was given statutory powers in 1992 with the aim of
regulating the securities market. It is headquartered in Mumbai with
its offices in New Delhi, Kolkata, Chennai and Ahmedabad. Initially,
SEBI was formed as a non-statutory; however in 1992, the Government
of India provided it statutory powers by passing a special resolution.
According to Management of the Board, SEBI (Sec 4),

1. The Board shall consist of the following members, namely:
a. A Chairman;
b. Two members from amongst the officials of the Ministry of the
Central Government dealing with Finance and administration
of the Companies Act, 1956;
c. One member from amongst the officials of the Reserve Bank;
d Five other members of whom at least three shall be the whole-
time members to be appointed by the central Government.
2. The general superintendence, direction and management of
the affairs of the Board shall vest in a Board of members, which
may exercise all powers and do all acts and things which may be
exercised or done by the Board.
3. Save as otherwise determined by regulations, the Chairman shall
also have powers of general superintendence and direction of the
affairs of the Board and may also exercise all powers and do all
acts and things which may be exercised or done by that Board.

N O T E S
4. The Chairman and members referred to in clauses (a) and (d) of

sub-section (1) shall be appointed by the Central Government and
the members referred to in clauses (b) and (c) of that sub-section
shall be nominated by the Central Government and the Reserve
Bank, respectively.
5. The Chairman and other members referred to in clauses (a) and (d)
of sub-section (1) shall be persons of ability, integrity and standing
who have shown capacity in dealing with problems relating to
securities market or have special knowledge or experience of law,
finance, economics, accountancy, administration or in any other
discipline which, in the opinion of the Central Government, shall
be useful to the Board.
The main functions of SEBI are as follows:

□ Safeguarding the vested interest of the investors m securities
market
□ Supporting the development of the securities market
□ Controlling and directing the stock exchange
□ Regulating and directing the securities market
□ Promoting awareness among investors
□ Registering and directing the functioning of Venture Capital Funds
and Mutual Funds
□ Registering and tracking the functioning of Foreign Institutional
Investors (FIIs) and Credit Rating Agencies
□ Regulating and controlling any unfair or fraudulent trade activities
8.3.4 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 regulat-
ing body that is ranked as the second largest professional accounting
body. !CAI is also known for providing license to the accounting pro-
fessionals as well as for setting auditing and assurance standards. It is
closely associated with Government of India, RBI and SEBI for fram-
ing and implementing these standards.
According to Accounting Standards Board, As of 2010, the Institute

of Chartered Accountants of India has issued 32 Accounting Standards.
These are numbered AS-1 to AS-7 and AS-9 to AS-32 (AS-8 is no longer
in force since it was merged with AS-26). Compliance with accounting
standards issued by ICAI has become a statutory requirement with the
notification of Companies (Accounting Standards) Rules, 2006 by the
Government of India.

N O T E S
The Accounting Standards that are mandatory as on 1"1 S ptember,

2014 are as follows:
□ AS 1 Disclosure of Accounting Policies
□ AS 2 Valuation of Inventories
□ AS 3 Cash Flow Statements
□ AS 4 Contingencies and Events Occurring after the Balance Sheet
Date
□ AS 5 Net Profit or Loss for the period, Prior Period Items and
Changes in Accounting Policies
□ AS 6 Depreciation Accounting
□ AS 7 Construction Contracts (Revised 2002)
□ AS 9 Revenue Recognition
□ AS 10 Accounting for Fixed Assets
□ AS 11 The Effects of Changes in Foreign Exchange Rates
(revised 2003)
□ AS 12 Accounting for Government Grants

□ AS 13 Accounting for Investments
□ AS 14 Accounting for Amalgamations
□ AS 15 Employee Benefits (revised 2005)
□ AS 16 Borrowing Costs
□ AS 17 Segment Reporting
□ AS 18 Related Party Disclosures
□ AS 19 Lease
□ AS 20 Earnings Per Share
□ AS 21 Consolidated Financial Statements
□ AS 22 Accounting for Taxes on Income
□ AS 23 Accounting for Investments in Associates in Consolidated
Financial Statements
□ AS 24 Discontinuing Operations
□ AS 25 Interim Financial Reporting
□ AS 26 Intangible Assets
□ AS 27 Financial Reporting of Interests in Joint Ventures
□ AS 28 Impairment of Assets
□ AS 29 Provisions, Contingent Liabilities and Contingent Assets

N O T E S
The non-mandatory Accounting Standards are as follows:

□ AS 30 Financial Instruments: Recognition and Measurement and
Limited Revisions to AS 2, AS 11 (revised 2003), AS 21, AS 23, AS 26,
AS 27, AS 28 and AS 29
□ AS 31, Financial Instruments: Presentation
□ Accounting Standard (AS) 32, Financial Instruments: Disclo-
sures, and iimited revision to Accounting Standard (AS) 19, Leases
8.3.5 THE LISTING AGREEMENTS WITH THE STOCK

EXCHANGE
When a company listed on the stock exchange agrees on implement-
ing the regulations of stock exchange and signs an agreement, it is
known as listing agreement. When a company is listed on the stock ex-
change, 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 xchange
(ESE), 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. The
Company must ensure that there is a gap of at least 30 days be-
tween 2 book closure and/or record date. The Company shall give
an advance notice of at least 7 working days ( ◄ xcluding the date
of the intimation and record date/book closure start date) to the
Stock Exchange for corporate actions (Book closure/Record date)
fixed for the purpose of corporate benefits like mergers, de-merg-
ers, split, bonus, dividend, rights, etc.
□ 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 recom-
mendation 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. Further, the compa-
ny will recommend or declare all dividend and/or cash bonuses at
least five days before commencement of the book closure or record
date fixed for the purpose.
□ 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. Further, the company shall inti-
mate to the Stock Exchange the date on which dividend shall be
paid/dispatched.

N O T E S
□ Clause 30: The Company has to intimate to the Stock xchange

of any change in the Issuer's directorate by death, resignation, re-
moval or otherwise; of any change of Managing Director, Manag-
ing Agents or Secretaries and Treasurers; of any change of Audi-
tors appointed to audit the books and accounts of the ssue.
□ Clause 33: The Company is required to submit to the Stock Ex-
change 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.
In case the company opts to submit unaudited financial results, they
shall be subjected to limited review by the statutory auditors of the is-
suer (or in case of public sector undertakings, by any practicing Char-
tered Accountant) and such limited reviewed results (financial results
accompanied by the limited review report) shall be submitted within
forty-five days from the end of the quarter.
8.3.6 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 Com-
mittee that had 18 members and had the aim of advancing the stan-
dards of corporate governance.
This committee was crucial in developing a Code of Corporate Gover-

nance in India with respect to the current market conditions of Indi-
an 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.
Moreover, the Committee suggested that while selecting a director for

the company, shareholders should be provided information regarding
director's educational qualification specialisation, and give the details
of the organisations where he is already working as a director.
The Committee also provided the following recommendations:

□ Quarterly reports should be made public on the company's web-
site and also provided to the stock exchange where it is listed.
□ Sharing semi-annual financial results with the shareholders' as
well as the key financial decision taken
□ Encouraging shareholders' participation and right to vote
□ Redressal of shareholders' grievances or complaints

N O T E S
8.3.7 THE CADBURY COMMITTEE
According to the Report of the Committee on the Financial Aspects of

Corporate Governance (1992), The Cadbury Committee was appoint-
ed by the Conservative Government of United Kingdom in 1991 with a
broad mandate to address the.financial aspects of corporate governance.
The Chairman of this Committee was Mr. Adrian Cadbury who was
responsible for defining the best practices followed by organisations.
The first report of the Cadbury Committee was published in Decem-

ber, 1992 that gave the regulations to be followed for implementing
best practices. It divided the roles in four different sections and pro-
vided following recommendations:
□ Board of directors: It is important to conduct regular meeting of
board of directors for controlling the organisation and monitor-
ing its functioning. Non-executive directors should be part of the
board of directors and should be equal in number such that they
can also take equal part in the board's decision-making process.
□ Non-executive directors: They should be able to provide unbiased
judgement on the matters related to organisational strategy, per-
formance, or code of conduct. They should be hired as non-execu-
tive directors for specific purpose and their reappointment should
not be direct.
□ Remunerations: Directors should not hold a financial interest in
the organisation. Moreover, the remuneration committee should
include non-executive directors for the purpose of deciding direc-
tor's remuneration. This will help in deciding upon fair remunera-
tion to the directors without any vested interest.
□ Providing details regarding any financial query: The balance
sheet of the organisation should be made available to the share-
holders. Moreover, regular audit of the organisation should be con-
ducted.
8.3.8 THE CORPORATE GOVERNANCE AND ETHICS

COMMITTEE
The National Association of Software and Services Companies (NASS-
COM) set up Corporate Governance and Ethics Committee in 2009.
The main aim of this Committee is to provide a framework where or-
ganisations 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: It discussed the responsibilities of the board of
directors as mentioned under Clause 49 as well as disclosure about
their qualifications, remuneration, evaluation and successions.

N O T E S
□ Audit committee:The Corporate Governance and Ethics Commit-

tee defined that audit plays a crucial role in an organisation; thus,
it is important to pay heed to constitution of audit committee, its
charter, review and responsibilities of auditors in identifying any
fraud or illegal activity.
□ Shareholder empowerment: The committee identified that a two-
way communication helps the organisation to grow and increase
the trust of its investors. t allows the shareholders to participate
and exercise their vote, and provides key information about the
company and its directors to them.
6. provides the power to the Central

Government for registering the formation of a company, its
functioning and winding up procedure.
7. Mention one new amendment made in Companies Act, 2013.
8. Mr. Kumar Mangalam Birla in collaboration with SEBI
founded a committee in --------
9. The Cadbury Committee was appointed by the Conservative
Government of United Kingdom in 1991 with a broad mandate
to address the financial aspects of corporate governance.
(True/False)
10. The full form of ESE is --------
11. The Companies Act, 1956 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. (True/False)
12. The full form of NASSCOM is --------
ACTIVITY
Prepare a report on the Cadbury Committee and Kumar Mangalam

Birla Committee.
THE REPORTS ON CORPORATE

GOVERNANCE
SEBI establishes various committees to bring effectiveness in corpo-
rate governance practices of organisations. These committees work
to establish corporate governance practices as per the requirement of
the industry, society, organisation and international environment. Fre-
quent changes are made in these guidelines as per the level of develop-
ment and modernisation taking place in the country. Various reports
have been published that we will discuss in the next sub-sections.

N O T E S
8.4.1 THE CII REPORT
The Confederation oflndian Industry (CII) has played a crucial role in

the industrial development of India. It helps in sustaining an environ-
ment that is conducive to the development of India. It is a non-prof-
it organisation that was established in 1895. 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 CI report are as follows:

□ A listed organisation, whose revenue is more than 100 crore
should have professionally qualified, independent and non-exec-
utive directors. They should comprise:
a. Minimum 30 per cent, when the Chairperson of the board is a
non-executive director
b. Minimum 50 per cent, when the Chairperson and Managing
Director is the same person
□ One single person should not be director in more than 10 companies.
□ It is the responsibility of the non-executive director to be more ac-
tively involved in the decision-making process of the organisation.
□ When taking the decision related to reappointment, it is important
to review the attendance record of the non-executive director.
□ Key information given to board should include annual operating
plans and budget; capital and overhead budgets; quarterly finan-
cial reports of the organisation.
8.4.2 THE RBI REPORT ON INTERNATIONAL FINANCIAL

STANDARDS AND CODE (MARCH 2011)
As capital markets become global in nature, many countries such as

Australia, France, Germany and Mexico recognise the need for har-
monising the global accounting practices and policies. Thus, the In-
ternational Accounting Standards Committee (IASC) was constitut-
ed in 1973. The standards issued by IASC were called International
Accounting Standards ( AS). In 2001, IASC was reformed as Interna-
tional 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 state-
ment. The IAS that get revised are issued as IFRS. In India, in April
2012, ICAI announced that IFRS are mandatory for financial state-
ment but this plan failed. Till now, there is no clear adoption of IFRS
and many Indian companies are following Indian Generally Accepted
Accounting Principles (GAAP).
RBI has formed a Working Group for addressing the implementa-

tion issues and guidelines related to IFRS for Indian banking system.

N O T E S
FRS would help India to have access to international capital markets.

The main benefits of IFRS are that it leads to lowering the cost of
raising funds, enable faster access in markets and reduction in ac-
counting fees. In India, IFRS will be mandatory from the Financial
Year 2016-17.
The report on IFRS by RBI is shown in the following exhibit:
EXHIBIT
The RBI Report on IFRS
The following is the RBI report on IFRS implementation in India.
Introduction ofIFRS-Issues andChallenges by K. C.Chakrabm·ty*
Dr Naresh Chandra, Principal, Birla College, Fonner Pro Vice Chan-

cellor, Mumbai University, Dr Shyam Agrawal, eminent eye surgeon,
Shri M. M. Chitale, veteran CA and Chairman NACAS, Shri U. Ven-
kataraman, CEO-Currency Derivatives Segment & Whole Time Di-
rector, MCX-SX, Principal of PDL College of Commerce and Econom-
ics and my dear student Dr N. N. Pandey, Prof D. M. Kadhi, Convenor,
other distinguished guests, ladies and gentlemen. I am delighted to be
present here amongst you all on the occasion of the National Level
Seminar on IFRS. Needless to say, it is a very topical area which has
been engaging the attention of the standard setters, government au-
thorities and regulatory bodies for quite some time. I shall share with
you a few of my thoughts on the issue.
Rea.ding Financial Statements
Let me begin by talking about the most elementary and fundamental

area of commerce and accountancy which is "How to read a Finan-
cial Statement". To a lay man, financial statements comprise the Bal-
ance Sheet and Profit and Loss Account. However, the numbers given
in these alone do not give the correct picture to the reader unless one
carefully goes through the notes to accounts, cash flow statements and
qualifications, if any, in the Auditor's Report and also appreciates
the accounting policies followed by the enterprise. In some cases, ra-
tio analysis, trend analysis and an industry peer comparison can be
done to obtain a better perspective. A thorough study of all these as-
pects is required before a user can make an informed decision.
The objective of financial statements is to provide information

about the financial position, performance and cash flows of an en-
terprise that is useful to a wide range of users in making economic
decisions. Corporate financial statements with the notes and narra-
tives surrounding them, are intended to enable investors to predict
cash flows, determine returns generated on capital invested, assess
the business liquidity, and evaluate management's performance.

N O T E S
Financial statements are prepared by drawing an artificial line of

cut-off at the year end, even though the business continues as a going
concern. In many transactions, one leg of a transaction may be com-
pleted, while the other leg may still have to take place. For instance,
questions arise on several issues such as to whether unsold goods at
the end of the accounting period can be valued at cost or realisable
value and the applicable cost formula, alternative method for evaluat-
ing depreciated/amortised value of fixed assets, how to ascertain the
value of a number of assets/liabilities, claims and counter-claims and
the correct treatment of uncertainties involved in evaluating a par-
ticular transaction. Therefore, there is an imperative needfor evolv-
ing appropriate accounting policies and accounting standards to deal
with these questions.
Importance of Accounting Standards
Accounting as a "Language of Business" communicates the .financial

results and health of an enterprise to various interested parties by
means of periodical financial statements. Like any other langiiage,
accounting should have its grammar and these sets of rules are Ac-
counting Standards. The objective of Accounting Standards is three-
fold. Firstly, they help to standardise the diverse accounting policies
and eliminate the incomparability of financial statements within an
entity and across entities. Secondly, they facilitate the presentation
of high quality, transpwrent and comparable information in.financial
statements. Thirdly, they reduce to accounting alternatives and there-
by eliminate the element of subjectivity in financial statements.
India has a long tradition of framing accounting standards in the

country. The Institute of Chartered Accountants of India (ICAI) set
up under an act of Parliament had constituted an Accounting Stan-
dards Board (ASE) in April 1977 and the ASE has been framing the
Indian Accounting Standardsfor the last three decades.
Inte1-national Financial Repm·ting Standwrds
Globalisation of financial markets has meant an increased focus on

international standards in accounting and has intensified efforts to-
wards a single set of high quality, globally acceptable set of account-
ing standards. Financial statements prepared in different countries
according to different set of rules, mean numerous national sets of
standards, each with its own set of interpretation about a similar
transaction, maldng it difficult to compare, analyse and interpret fi-
nancial statements across nations.
A financial reporting system supported by strong governance, high
quality standards, and firm regulatory framework is the key to
economic development. Indeed, sound .financial reporting stan-
dards underline the trust that investors place in financial reporting

N O T E S
inforrnation and thus play an important role in contributing to the

economic development of a country. Needless to mention, internation-
ally accepted accounting standards play a major role in this entire
process.
A financial reporting system supported by strong governance, high

quality standards, and firm regulatory framework is the key to eco-
nomic development. Indeed, sound financial reporting standards un-
derUne the trust that investors place in financial reporting informa-
tion and thus play an important role in contributing to the economic
development of a country. Needless to mention, internationally ac-
cepted accounting standards play a major role in this entire process.
It is in this context that the role of an independent, global stan-

dard-setting body such as the International Accounting Standards
Board (IASB) is of critical importance. The principal objectives of the
IASB are:
a. to develop a single set of high quality, understandable,
enforceable and globally accepted international financial
reporting standards (IFRS) through its standard-setting body,
the IASB;
b. to promote the use and rigorous application of those standards;
c. to take account of the financial reporting needs of emerging
economies and small and medium-sized entities (SMEs); and
cl. to bring about convergence of national accounting standards
and IFRS to high quality solutions.
Converging to global accounting standards, i.e. IFRS facilitates com-

parability between enterprises operating in d fferent jurisdictions.
Thus, global accounting standards would remove a frictional element
to capital flows and lead to wider and deeper investment in markets.
Convergence with IFRS is also in the interest of the industry since
compliance with them would be able to create greater confidence in
the mind of investors and reduce the cost of raising foreign capital.
It is also burdensome and costly for enterprises operating across
several countries to comply with a midtitude of national accounting
standards and convert them to a single standard for group reporting
purposes. Convergence would thus help reduce both the cost of capital
and cost of compliance for industry.
In pursuit of its objectives, the IASB works in dose cooperation with

stakeholders around the world, including investors, national stan-
dard-setters, regulators, auditors, academics and others who have an
interest in the development of high-quality global standards. Progress
towards this goal has been steady. All major economies have estab-
lished time lines to converge with or adopt IFRS in the near future
and more than hundred countries require or permit the use of IFRS.

N O T E S
Though Indian Accoimting Standards are framed based on standards

issued by the IASB, there are certain differences due to the legal and
regulatory environment prevailing in the country, conceptual issues
and the economic environment. In 2007, the ICAl decided that India
should converge towards IFRS in a definite time frame in the wake of
developments taking place in other major jurisdictions which had set
up time scheditles for migrating towards IFRS.
Lessons from the Financial Crisis - Review of Stanclards for Fi-

nancial Instruments
One of the most destabilising elements of the global financial crisis

has been the pro-cyclical amplification of financial shocks through
the banking system, financial markets and the broader economy.
The tendency of the market participants to behave in a pro-cyclical
manner has been amplified through a variety of channels, including
through accounting standards for both mark-to-market assets and
held-to-maturity loans, margining practices and through the build up
and release of leverage among the financial institutions, firms and
consumers. Failure to captitre major on-and off-balance sheet risks
as well as derivative related exposures, was also a key destabilising
factor.
The provisions of IAS 39-Financial Instri1,ments-Recognition and

Measurement issued by the International Accounting Standards
Board (IASB), establishes the principles for recognising and mea-
suring financial assets and financial liabilities. This standard is of
particular importance to the banking sector and NBFCs which deal
primarily in financial instruments. IAS .39 includes provisions about
classification of financial instruments, their ongoing measiirement
(including when impairment is required) and derecognition. The pro-
visions of IAS 39 are ciirrently applicable globally in respect of finan-
cial instruments.
Following the crisis, there was widespread criticism that the account-
ing standards, more so, fair value accounting significantly contribut-
ed to the financial crisis or at the very least exacerbated the severity
of the crisis, in view of its failure to deal with illiqiiid markets and
distressed sales.
The G 20 Working Group on "Enhancing Sound Regulation and
Strengthening Transparency" recommended that accounting stan-
dard setters should strengthen accounting recognition of loan loss
provisions by considering alternative approaches for recognising and
measuring loan losses that incorporate a broader range of available
credit information. The G 20 Working Group also recommended that
the International Accounting Standards Board (IASB) should en-
hance its efforts to facilitate the global convergence towards a sin-
gle set of high-quality accounting standards by sharing the experi-
ence of countries that have completed this process and by providing

N O T E S
technical assistance. Another significant recommendation was that

accounting standard setters should accelerate efforts to reduce the
complexity of accounting standards for financial instruments and
enhance presentation standards to allow the users of financial state-
ments to better assess the uncertainty surrounding the valuation of
financial instruments.
In April 2009, in response to the input received on its work responding

to financial crisis, and following the conclusions of the G 20 leaders
and the recommendations of international bodies such as the Finan-
cial Stability Board, the IASB announced an accelerated timetable for
replacing the principal standard for recognition and measurement
of financial instruments - IAS 39. IAS 39 is sought to be replaced by
IFRS 9 in three phases. The first phase was completed with the issue
of the portion of IFRS 9 which deals with the classification and mea-
surement of financial assets andfinancial liabilities. The second and
third phases are in the area of Hedge Accounting and Impairment,
where currently work is underway. It is expected that IFRS 9 wilt
replace IAS 39 in its entirety by June 2011.
IFRS Convergence - Implementation in the Indian Context and

Challenges
In the backdrop of the developments after the global financial crisis,

the Ministry of Corporate Affairs (MCA), GOI set up a high-powered
Core Group under the chairmanship of Secretary (MCA) to stiidy the
impact of IFRS and to understand the preparedness of the Indian
companies for converging with IFRS. The road map towards IFRS
convergence for corporates from April 1, 2011 has been finalised by
the Ministry of Corporate Affairs in January, 2010.
Convergence also entails maintaining consistency with legal and

regulatory requirements prevalent in the country. Towards this end,
amendments need to be made to existing laws and regulations, no-
tably the Companies Act, 1956 provisions and schedules that detail
the requirements of financial statements need to be harmonised with
IFRS requirements and converged Indian Accounting Standards
need to be notified under section 211 (3C) of the said Act. Additional-
ly, there are also issues relating to taxation under an IFRS converged
environment.
There is also a need to improve awareness in general and build

technical competence for the accounting and auditing profession on
IFRS. The ICAI has already included a comparative study of Indian
Accounting standards with international standards in its syllabus for
CA Final Advanced Accoimtancy and is also offering courses and
seminars for its members to update them in the field. The RBI too has
been holding periodical seminars and workshops to educate its staff
on IFRS provisions.

N O T E S
Challengesfm· Banks and Non-banking Financial Companies
In respect of banks and NBFCs, in view of the special issues involved

(finalisation of IFRS 9 expected in the middle of 2011), a separate
road map was prepared in March 2010 for convergence with IFRS
for the banking industry and NBFCs. The convergence process would
be from period beginning April 1, 2013, with a phased approach for
urban banks and NBFCs. This gives the banking system some time to
adopt to the standards in a smooth and non-disruptive manner.
It has to be noted, however, that banks will be significantly affected

by the IAS 39 replacement project and a number of other accounting
developments including those relating to financial instruments, fair
value measurement, financial statement presentation and consolida-
tion. Some of the major changes pertain to certain critical areas such
as classification and measurement of financial assets, classification
and valuation of liabilities, impairment provisions and fair value
measurement. One area of concern has been the drawback of the in-
curred loss model of IAS 39 and the need to introduce more forward
looking provisioning.
The IFRS convergence process will involve significant challenges for

the banking system in general. Banks would need to upgrade their
infrastriictitre, including IT and human resources, to face the com-
plexities and challenges of IFRS. Some major technical issues arising
for Indian banks during the convergence process would be differences
between the IFRS and current regulatory guidelines on classification
and measurement of financial assets, focus in the standard on the
business model followed by banks and the challenges for management
in this area, application of fair values for transactions where not
much guidance is available in India in terms of market practices or
benchmarks, and expected changes in impairment rules.
Key Non-accounting Issues

Let me now draw your attention towards certain key non-account-
ing issues which are equally crucial in the IFRS convergence process.
The desired results will not come if non-accounting issues are not ad-
dressed along with the accounting issues. The first challenge is integ-
rity of data and information. Most Scheduled Commercial Banks in
India have either already migrated or are in the process of migrating
to Core Banking Solutions (CBS). In this context, data integrity and
data validity would be of critical i1nportance especially dite to data
intensive requirements of IFRS converged standards. The present sys-
tem of compilation and submission of data which forms the backbone
of preparation of financial statements compromises on data quality.
The scope of erroneous data entry of even malicious wrong report-
ing cannot be ruled out. Lack of adequate data results in absence of
information on "returns" at activity level and segmental reporting
in a granitlar manne1 Incorporating suitable capability in CBS for

N O T E S
enabling atltomated data flow/generation of MIS would be a facili-

tator in accurate reporting and financial statements prepared from
such data as the basis would reflect a "true and fair)' picture of the
financial position of the entity. RBI has set up a group to work on this
area. Preparatory work in this regard would enable us to counter a
basic challenge in our effort towards IFRS convergence.
Secondly, we come to the tssue of "Ethical Standards" which are of

critical importance in the field of accountancy where users rely heav-
ily on the statements made by accounting professionals. Maintain-
ing ethical standards and values is a key part of financial reporting.
Without a strong code of ethics and adherence to those ethics, finan-
cial reporting would fail to inspire and ensure public and investor
confidence in entities. Thus, along with high levels of technical com-
petence, accounting professionals also need to have unquestionable
and impeccable professional integrity. Therefore, professional bodies
have codes of ethics for their members and disciplinary procedures
for those who infringe upon these rules. However, one of the causes
of the recent financial crisis was also the poor adherence to ethics by
some accounting professionals who exploited ''form over substance",
rather than "substance over form" to hide weaknesses in their finan-
cial position and misstate profits.
Thirdly, adaptability and compatibility of existing IT solutions used

by banks to the new requirements imposed by IFRS convergence is
also a major challenge. Software which has been written keeping in
mind Indian GAAP requirements may have to be modified substan-
tially to incorporate features of IFRS requirements. Similarly, com-
patibility between software and hardware would have to be addressed
to take care of the new requirement.
RBI has always believed in the fact that accounting standards and the
integrity of its implementation has a very important role to play in the
financial system as reflected in the Report of the Committee on Finan-
cial Sector Assessment, wherein the importance of the convergence
process of Indian accounting standards with IFRSs has been empha-
sised. RBI has set up a Working Group to address implementation
issues in IFRS for non-disruptive migration of the Indian banking
system with members from ICAI, IBA and the regulatory and supervi-
sory departments of RBI.
Conclusion
Training, education and skill development are one of the cornerstones

of a successful IFRS implementation. All the stakeholders including
investors, accountants, auditors, customers, software and hardware
vendors, rating agencies, analysts, audit committees, actuaries, valu-
ation experts and other specialists would need to develop and under-
standing of IFRS provisions to varying degrees and what they need

N O T E S
to do. Educational institutions need to play a pro-active role and stu-

dents must also strive to develop a strong conceptual understanding
of the new framework and academic institutions should include it in
their curriculum. It is not only the accounting issues but how we ad-
dress the non-accounting issues that will determine how successfully
we make a transition to IFRS. It is in this backdrop, and considering
the ongoing changes in the standards both globally and in the Indian
context as well as the amount of work involved in the convergence
process, that this National Seminar on IFRS assumes importance. I
wish the deliberations in this Seminar all success.
*Speech delivered by Dr. K. C. Chakrabarty, Deputy Governor, Re-

serve Bank of India at the inauguration of a national level seminar
on IFRS at Prahladrai Dalmia Lions College of Commerce & Eco-
nomics, Mumbai on February 11, 2011.
(Source: www.rbi.org)
8.4.3 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
Besides these issues, the Committee was responsible for taking issues
raised by Kumar Mangalam committee one step ahead. The Naresh
Chandra Committee Report is also known as 'Corporate Audit and
Governance Report'.
The Naresh Chandra Committee has given stringent guidelines re-

garding the professional relationship between the auditors and the
customers. Moreover, it believed that auditors should be regarded
with more freedom and gave following recommendations for the au-
diting firms:
□ Accurately disclose the audit findings without any biasness
□ While verifying or certifying the accounts of company, it is import-
ant for auditing committee to be assured that Chief Executive Of-
ficer (CEO) or Chief Financial Officer (CFO) is present at that time
For revisiting the laws related to private companies, Indian govern-

ment constituted a committee in 2003 called Naresh Chandra Com-

N O T E S
mittee IL It was constituted for suggesting a rational regulatory en-

vironment for the private companies. Naresh Chandra Committee II
gave the report on the regulation of private companies and partner-
ship. The recommendations given by the Committee are as follows:
□ Providing adequate flexibility to companies/firrns conducting, or in-
tending to conduct business or provide professional services;
□ Providing a structural environment conducive to growth and pros-
perity of the entities, being mindful of the impact on various stake-
holders, and effective regulation in a manner that minimises and
deters exploitation of the liberalised provisions by unscrupulous el-
ements; and
□ Simplifying and rationalising entry and exit procedures (especially
for non-functional companies)
8.4.4 THE MURTHY REPORT

The Narayana Murthy Committee was formed in February, 2003 for
encouraging corporate governance practices and evaluating the cur-
rent 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
D Advancing and promoting transparency and integrity
The Narayana Murthy Committee came forward with some mandato-

ry and non-mandatory recommendations. The mandatory recommen-
dations are as follows:
D Timely disclosure of financial and audit reports
D Discussing financial and managerial issues
D Reporting risk management
D Preparing reports on current transactions
The non-mandatory recommendations include the following:

□ Managing the performance of directors
□ Providing training to the board of directors for their roles
13. set rules for preparing and

presenting the financial statement.
14. The Naresh Chandra Committee Report 1s also known as

N O T E S
ACTIVITY
Prepare a report on corporate governance m an international
market.
■:IJ
□
SUMMARY
Corporate governance is one of the oldest concepts that date back
to the 19th century. It holds its relevance in relation to the profit-
ability, 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 (SEEi) was founded
in 1992 with the aim of regulating the securities market.
□ ICAI is a corporate body that works under the Chartered Accoun-
tants 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.
□ When a company listed on the stock exchange agrees on imple-
menting the regulations of stock exchange and signs an agree-
ment, it is known as listing agreement.
□ Mr. Kumar Mangalam Eirla in collaboration with SEEi founded
a committee in 1999. twas known as the Kumar Mangalam Birla
Committee that had 18 members and had the aim of advancing the
standards of corporate governance.
□ 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 frame-
work where organisations in the Information Technology (IT) or
Business Process Outsourcing (B 0) can follow good corporate
governance practices.
□ The Confederation of Indian Industry (CII) has played a crucial
role in the industrial development oflndia. It is a non-profit organ-
isation that was established in 1895.
□ The Naresh Chandra Committee was formed in August, 2002 with
the aim of addressing various issues related to corporate gover-
nance.

N O T E S
□ The Narayana Murthy Committee was formed in ebruary, 2003

for encouraging corporate governance practices and evaluating
the current practices followed by companies in India.
-KEYWORDS
□ Annual general meeting: A meeting where shareholders and

directors of the company discuss various issues such as legal
issues, appointment of a director, or proposed dividend.
□ Audit: A process of verifying the accounts of a company by cer-
tified professionals.
□ Fiscal crisis: It can be defined as a situation where the govern-
ment is unable to meet the gap between expenditure and tax
revenues.
□ Security: It can be defined as a financial instrument, such as
stock or debt, that when exchanged or traded provides mone-
tary benefits.
□ Winding up: A process of dissolving the business by selling as-
sets, paying creditors, dividing the rest of assets with the parent
company or partners.
■ :jj DESCRIPTIVE QUESTIONS

1. Explain the evolution of corporate governance in India.
2. Explain Companies Act, 1956.

3. Describe Companies Act, 2013.
4. What are the main functions of SEBI?
5. Explain the recommendations given by CII report.
6. Describe the objectives and recommendations of Murthy
Committee.
■:fl ANSWERS AND HINTS
Topic Q. No. Answer

Evolution of Corporate Gov- 1. 19 century
th
ernance in India
2. True
3. Institute of Chartered Accoun-
tants of India

N O T E S
Topic Q. No. Answer

4. Securities and Exchange Board
of India
5. Need for capital
The Legal Statutes and 6. The Companies Act, 1956
Committees
7. One person company
8. 1999
9. True
10. Bombay Stock Exchange
11. False
12. National Association of Software
and Services Companies
The Reports on Corporate 13. International Financial Report-
Governance ing Standards
14. Corporate Audit and Governance
Report

1. 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. Refer to Section
8.2 Evolution of Corporate Governance in India.
2. 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. Refer to Section 8.3 The Legal Statutes and Committees.
3. The Companies Act, 2013 was passed bythe Parliament oflndia on
29th August 2013. It regulates the incorporation, responsibilities
and dissolution of a company. Refer to Section 8.3 The Legal
Statutes and Committees.
4. The main functions of SEBI are safeguarding the vested interest
of the investors in securities market, supporting the development
of the securities market, etc. Refer to Section 8.3 The Legal
Statutes and Committees.
5. CII is closely associated with the Government of India on the
matters related to competence and growth of economy. Refer to
Section 8.4 The Reports on Corporate Governance.
6. Murthy Committee was formed for encouraging corporate
governance practices and evaluating the current practices
followed by companies in India. Refer to Section 8.4 The Reports
on Corporate Governance.

N O T E S

REFERENCE
SUGGESTED READINGS
□ Mallin, C. (2004). Corporate governance. Oxford: Oxford University
Press.
□ Sarkar, J., & Sarkar, S. (2011). Corporate governance in India. New
Delhi: SAGE India.
E-REFERENCES
□ ICAI,. (2015). !CAI - The Institute of Chartered Accountants of India.
Retrieved 25 September 2015, from http://www.icai.org/
□ Rbi.org.in,. (2015). Retrieved 25 September 2015, from https://
www.rbi.org.in/
□ Sebi.gov.in,. (2015). Securities and Exchange Board of India - Home
Page. Retrieved 25 September 2015, from http://www.sebi.gov.in/
sebiweb/

CONTENTS
9.1 Introduction
9.2 Concept of Risk in Organisational Context
Activity
9.3 What is Enterprise Risk Management (ERM)
Activity
9.4 Drivers of ERM
Activity
9.5 Assessment of Risk Exposures
Activity
9.6 Assessment oflnternal and External Risks
9.6.1 External Business Ecosystem
9.6.2 Internal Environment
Activity
9.7 Sum1nary

N O T E S
ENTERPRISE RISK MANAGEMENT AT DEUTSCHE

POSTDHL
The case of one of the leading logistics companies, Deutsche Post

DBL, is one of the most referenced examples of enterprise risk man-
agement that succeeded to manage its projected risk proactively.
Deutsche Post DHL (DPDHL) is the leading logistics company

offering a variety of services such as mail, express and logistics
services. Its business is conducted under two separate brand
names - Deutsche Post and DHL, wherein Deutsche Post looks
after communications services and DHL takes care of the logis-
tics business. DPDHL has its presence in more than 220 countries
and employs approximately 480,006 people.
The results of the first quarter of2014 was an eye opener for DP-
DHL as the revenue earned was not up to expectations. The man-
agement analysed that in this first quarter, the revenue had just
increased to €13.6 billion, which was just a 1.2% increase from
the previous year. On analysis, it was concluded that the foremost
reason for the lower revenue was the negative currency effect
due to the stronger Euro (which is the home currency of DPDHL)
with respect to the US dollar.
It was strange for the management of DPDHL to accept that the

reason behind the diminishing of revenue by €461 million was
currency fluctuations resulting in negative exchange-rate effects.
Here comes the role of the risk management system of DPDHL
that was put in place to save the business from any unforeseen
risks by either controlling or mitigating them. The risk manage-
ment process of DPDHL was strong enough to control currency
and other risks.
The 'Enterprise-wide Risk Management Process' of DPDHL was

well organised and efficient to identify and notify the enterprise
of the risks at the very first onset so that the remedial steps could
be taken in advance. In order to ensure continuous growth of the
enterprise, the supervisors of all the departments quarterly iden-
tified and assessed the effect of projected business situations and
their risks in their respective departments. Every remedial action
either taken in the past or proactively projected to be implement-
ed in future by the company was well documented and recorded.
The risk management system of DPDHL had a well-defined hier-
archy, used a.s a basis for reporting of all managerial levels either
to take approval or for seeking any answer.
Also, as the business of DPDHL is located across countries and

territories across the world, it is essential to have an error-proof
system to track the delivery of packages around the world. DP-

N O T E S
OHL developed technology to detect the risks in supply chain,

offering a complete supply chain risk management solution. DP-
OHL recently introduced this technology as OHL Resilience360™
with an aim of continuous assessment of potential risks and mon-
itoring of such incidences by using software.
Thus, the components comprising OHL Resilience360™ provide

the company with real-time risk assessment study and supply
chain monitoring instruments. The ultimate objective of the OHL
Resilience360™ was prevention of production from being idle and
protection from revenue loss, which required the supply chains to
be more flexible and less failure-prone.
Thus, the implementation of DHL Resilience360TM in business

entity resulted into multiple advantages such as:
□ Maintenance of business operation
□ Sustainable optimisation of customer satisfaction
□ Improvement of business operational efficiency
□ Opportunity of discovering new business models

N O T E S

-- 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
Ill INTRODUCTION
In the previous chapter, you studied about corporate governance in
India. This chapter will focus on the assessment of risks using the En-
terprise Risk Management (ERM) tool.
Risk can be defined as a situation that involves exposure to some un-

expected events usually associated with danger. Our daily lives are im-
mensely impacted by the outcome of these risks. Risks also influence
the day-to-day working of public and private sector organisations.
Many definitions of risk have been formulated showing its signifi-
cance across various industries and organisations. However, 'uncer-
tainty of outcomes' is the most common element in all the definitions.
Risk in many organisations pertains to only adverse consequences.
These organisations do not take into consideration the opportuni-
ties that are inherent in a risk. Still, effort is being made to develop a
more generic definition of risk that incorporates both consequences
as well as opportunities associated with it. One school of thought has
even conceptualised that risks, if assessed and managed properly, can
lead to innovation. The significance of this concept emphasises the
key role of Chief Financial Officer (CFO) in managing risk opportuni-
ties apart from streamlining processes, cutting programme costs and
finding best practices that can lead to more effective management of
resources. Effective capitalisation on risk opportunities by identifying
programmes that manage people's risks best can yield outstanding
results.
To work in the current competitive and dynamic environment, organ-

isations need effective enterprise risk management policies that can
quickly implement existing processes and tools to manage risks. ERM
includes the methods and processes used by organisations to identify
and manage significant risks. Risks have the potential to create prob-
lems that can cause significant interference and prevent organisations
in achieving their goals and objectives. It is an activity or event that
may lead to loss of a significant opportunity for organisation. ◄ RM
provides a methodology that involves various key steps to reduce or
mitigate risks such as identification, assessment, measurement, re-

N O T E S
sponse implementation, monitoring, reporting and application of key

learning to risks. Many organisations have gained significant bene-
fits by identifying and addressing significant risks proactively. This
approach helps to protect organisations and create value for their
stakeholders. Therefore, while an effective ERM programme can be
implemented in an organisation by using various approaches, one un-
derlying objective of all these approaches is the protection of the or-
ganisation from any kind of risk.
An approach should be adopted keeping in mind the size and com-

plexity of the organisation. It requires a deep understanding of the
ERM processes and the nature and extent of the risks facing the or-
ganisation. A critical element in the risk assessment process is identi-
fying and prioritising risks by severity in the context of their likelihood
of occurrence and their impact on an organisation. ERM provides the
necessary foundation for an organisation to manage risks across de-
partments effectively and efficiently. With the help of ERM, organisa-
tions have included risk management as a routine function in their
day-to-day business operations.
It is important for an organisation to build a healthy approach against

a risk. Here, the term healthy indicates the ethical aspect of the ap-
proach designed to face and mitigate the risk. The approach and tools
used by an organisation to identify and manage risks should be justi-
fied on ethical grounds.
This chapter discusses the concept of risk in the organisational con-

text as well as the role of ERM in risk management in organisations. It
also explores the drivers of ERM and the assessment of risk exposure
in organisations. Towards the end, the chapter discusses the factors
that are taken into account while assessing internal and external risks.
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 or-
ganisation's objectives. Due to the uncertainty of their occurrence,
risks have a great impact on the achievement of business objectives.
The identification of risks is necessary to mitigate them, and this
identification cannot take place in the absence of clear objectives and
strategies of an organisation.
External and internal factors impact the day-to-day working of an or-

ganisation to a great extent. The key objectives of an organisation are
also driven by these factors. 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.
◄ xtemal risks arise due to various environmental conditions outside

N O T E S
the control of the organisation; for example, regulatory environment

and market conditions. Internal risks, on the other hand, are the out-
come of various decisions taken or activities performed within the or-
ganisation; for example, an organisation's various interdepartmental
operations.
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 organi-
sation 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 trans-
ferring it through a third-party vendor.
□ The approach and tools adopted for risk management should be
justified on ethical grounds.
At the organisational level, risk assessment helps departments to im-

prove their functional ability by setting a common agenda and priori-
ties. The process helps employees to develop new skills and strength-
ens their ability to anticipate, assess and manage risks. Earlier, the
concept of risk assessment was mainly focussed on ad.opting precau-
tions, safety and insurance. The idea was to avoid negative events in
an organisation. Risks pertaining to one department were treated as
silos and even the risk removal process was focussed on that specific
department only. 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. Risk managers came to be known
as risk owners. Organisations started treating risk strategically and
with a broader view to understanding uncertainties in their processes
and business. The shift was to optimise risk and treat risk managers
as risk facilitators and leaders. Organisations started recognising risks
as either threats or opportunities. 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. These questions are
clubbed under the following four categories:
1. The general context
t What are the aims and objectives of the organisation?
t What are the core activities of the organisation'?

N O T E S
2. The internal context

t What is the analysis of the organisation's current method of
managing risk?
t What is the legal structure of the organisation?

3. The strategic context
t How is the relationship of the organisation with other organ-

isations?
t What are the different laws, regulations, rules or standards

applicable to the organisation?
4. The external context
t What is the level of awareness among the employees of their
legal rights related to their working environment?
t What has the organisation done or is doing to maintain ex-

pertise in dealing with different types of risks?
1. areuncertainties that affect the achievement of

business objectives.
2. At organisational level, risk assessment actually helps
departments to improve their functional ability by setting a
common agenda and priorities. (True/False)
ACTIVITY
Risk has been defined in innumerable ways and in varying con-

texts. Make a list of 5 such definitions and study the context used
to define risk.
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 con-
trolling the activities of the organisation. ERM is defined in different
ways by different authorities. The following are some popular defini-
tions of ERM:
According to the Institute of Internal Auditors, enterprise risk man-

agement is a structured, consistent, and continuous process across the
whole organisation for identifying, assessing, deciding on responses to,

N O T E S
and reporting on opportunities and threats that affect the achievement

of its objectives.
According to the Committee of Sponsoring Organisations (COSO),

ERM is a process, effected by an entity's board of directors, management
and other personnel, applied in strategy-setting and across the enter-
prise, designed to identify potential events that may affect the entity,
and manage risk to be within its risk appetite, to provide reasonable
assurance regarding the achievement of entity objectives.
From the definitions given above, we can see that ERMhas the follow-
ing advantages:
□ It serves as a tool for enhancing the management's decision-mak-
ing 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).
SCOPE OF ERM IN AN ORGANISATION
The scope of ERM in an organisation can be briefly explained through

the following points:
□ It integrates the performance of different departments of the or-
ganisation 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 rele-
vant standards across the industry. The approach ensures adop-
tion of the best practice for reporting risks.
□ It emphasises the commitment of departments to the periodic re-
view and verification of the framework and its continual improve-
ment.
□ It describes the resources available to assist those with account-
ability or responsibility for managing risks.
□ It ensures that the departments meet their risk reporting obliga-
tions.

N O T E S
isk is defined and accepted as the effect of uncertainty in an organi-

sation. It can have either a positive or a negative effect on the business
objectives of the organisation. Risks define the scope of work for risk
management in an organisation. Some of the highlights of risk man-
agement are as follows:
□ Risk management includes a set of coordinated activities within
an organisation that directs and controls departments with regard
to risks.
□ Risk management helps in the realisation of potential opportuni-
ties along with the positive and negative impacts of risks.
Risk management is defined as a set of actions performed in an organ-

isation to identify, understand and manage risks. These actions are
aimed at controlling risks in order to meet the objectives of the organ-
isation. Risk management is implemented while performing all other
daily activities and responsibilities of the organisation.
BENEFITS OF RISK MANAGEMENT
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.
ERM sets guidelines and processes for implementing a risk manage-

ment system in an organisation. This is done by analysing the risk
portfolio of the organisation. The guidelines are set by keeping in
mind the risk appetite of the organisation. The objectives of the or-
ganisation are set to meet its long-term strategies.
The main objective of ERM is to measure an organisation's achieve-

ment on the following parameters:
D Strategic: This relates to the goals that are aligned with the mis-
sion statement and regarded as highly intrinsic to the organisa-
tion's overall vision.

N O T E S
□ Functional: It includes the day-to-day work processes of the or-

ganisation.
□ Compliance: It involves the formulation of guidelines for strict ad-
herence to various regulatory laws by the organisation.
There are eight main components of ERM. These components are in-
terrelated to each other. The components can be briefly explained as
follows:
1. Environment: This is essentially the environment in which the
organisation operates and defines the organisation's culture.
2. Setting of objectives: The management sets the strategic goals
and objectives based on the risk appetite of the organisation.
3. Identification ofevents: It essentially means the activities aimed
at identifying events that influence the strategies and objectives
of the organisation. These events may affect the organisation's
ability to achieve its objectives.
4. Risk assessment: It includes activities to assess the impact and
likelihood of events and a prioritisation of related risks.
5. ltisk response: It includes the risk-taking capabilities of the
organisation and how it will respond to risks. Organisations may
use various strategies to respond to risk. For example, they may
choose to avoid the risk, share the risk or mitigate the risk.
6. Control activities: These relate to the policies and procedures of
the organisation to address risks.
7. Information and communication: Here, the focus is on
information and communication of activities in response to a
risk at th right time to the right people.
8. Monitoring: These are activities that are involved in evaluations
for effective control of risks.
ERM is an approach to risk management that has evolved significant-

ly 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, circumstanc sand stakeholders.
□ ERM works on the principle that the sum of individual risks in an
organisation is not equal to the individual risks across the organ-
isation. The exposure created by combined risks is far more than
the individual risks.

N O T E S
□ It provides a structured process for managing all types of risks.

□ It provides competitive advantage for the organisation by effec-
tively managing risks.
□ It treats a risk as an underlying truth to every critical decision tak-
en in the organisation.
Various external factors negatively affecting the performance of an or-

ganisation have resulted in increased interest in understanding the
concept of ERM. Government regulatory bodies as well as investors
are constantly scrutinising the risk factors related to the policies and
procedures followed by organisations. The boards of directors are
now required to review and report on the adequacy of risk manage-
ment processes followed in their organisations. The key is to strike a
balance between enhancing profits and managing risk through ERM.
3. ERM is a structured, consistent and continuous process

followed across an entire organisation foridentifying, assessing,
deciding on responses to and reporting on opportunities and
threats that affect the achievement of its objectives. (True/
False)
4. ERM measures the achievement of an organisation on the
following parameters:
a. Strategic b. Compliance
c. Functional d. All of the above
!!:] ACTIVITY
Visit an organisation and make a report on how it uses ERM to
manage its processes and functions.
l!I DRIVERS OF ERM

ERM provides a risk assessment framework to organisations. It pro-
vides them an ability to respond confidently to existing and emerging
challenges. ERM shifts an organisation's focus from a 'cost/benefit'
line of operations to a 'risk/reward' approach. This approach was con-
ceived by Standard & Poor's as regulatory and governance require-
ments of organisations continue to advance with a request for more
robust risk assessment practices. Based on the concept formulated
by Standard & Poor's, many organisations have implemented formal
enterprise-wide risk management programmes.

N O T E S
Th re are several drivers of enterprise risk management. We can list

them on the basis of the following categories:
□ Risk governance: This refers to the mechanism arranged to gov-
ern a risk. The following reasons und r this mechanism strives the
need for ERM:
♦ Unclear risk accountability due to risk oversight by board

members
♦ Lack of sharing information related to risk in processes and its

management by board members
♦ Poor integration of risk management into day-to-day manage-

ment decision making
♦ Too much focus on operational and process-level risks rather

than on strategic business activities
□ Risk identification and assessment: This refers to the first step
towards risk management that is identification and assessment
of the risk. The following reasons under this phase reinforce the
need for ERM:
♦ Need for long-term perspective of risk assessment
♦ Need for discouraging short-term outcomes of risk assess-

1nent
Risk identification to be done by assessing internal and exter-

nal factors affecting the organisation
Need to consider climate change in the process of risk assess-

ment
□ Risk quantification/mitigation: The ultimate objective of the pro-
cess of risk management is to mitigate risk. The following reasons
under this phase reinforce the need for ERM:
♦ Focus on adequate training of risk quantification/usage of

quantification tools
♦ Risk at individual level and process-level risks together define

the risks faced by organisations. These risks can be handled at
portfolio level and by employing a broad range of approaches
aimed at risk mitigation.
□ Risk monitoring/reporting: This refers to the last step towards
risk management that is monitoring and reporting of the risk.
The following reason under this phase reinforces the need for the
ERM:
♦ This requires adequate monitoring and reporting of risks in a

way that they are fully aligned with the strategic objectives of
the organisation.

N O T E S
The mentioned drivers of risk assessment serve as challenges of risk

management. These identified challenges can be overcome through
the following combined initiatives summarised below:
□ Effectiveness in separating the risk process and content
□ Integrating enterprise risk management process into decision
making processes by linking objectives, strategies and risks to key
risk indicators
□ Developing a strong risk culture for implementing an ERM initia-
tive in an organisation
□ Integration of risk, compliance and governance into a single, en-
terprise-level effort
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 follows:
□ Stable earnings: Stable earnings are the outcome of ERM. They
help in identifying and quantifying risks with greater accuracy, re-
sulting in informed and improved decision making and profit for
the organisation.
□ Capital volatility: Greater insight into risk profile results in cap-
ital volatility, resulting in greater confidence in all stakeholders-
particularly shareholders.
□ Upgraded credit ratings: Effective ERM implementation leads to
better risk assessment and mitigation, resulting in lower capital re-
quirements. All the factors like better earnings, capital position and
improved performance improve the credit ratings of the organisation.
□ Compliance to regulatory requirements: ERM helps in meeting
the regulatory requirements, and this facilitates the process of risk
measurement and management and improves organisational de-
cision making.
□ Increased sbarebolder value: The credit ratings determine the
organisation's borrowing capacity. In a way, ERM determines the
cost of capital and, consequently, the value of the shareholders.
5. According to Standard & oar's, ERM shifts a company's

focus from the "risk/reward" line of operations to a "cost/
benefit" approach. (True/False).
6. The credit ratings determine an organisation's borrowing
capacity. (True/False)
7. Drivers of ERM in an organisation include:
a. Risk governance b. Risk mitigation
c. Risk monitoring d. All the above

N O T E S
ACTIVITY
Take the examples of two Indian organisations and explain the fac-
tors that lead ERM to impact the credit ratings of the organisations.
Make a list and analyse those factors.
Iii ASSESSMENT OF RISK EXPOSURES

Risk exposure is a term 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. The as-
sessment of risk exposure requires categorisation of the risk. 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. Various precautionary and preventive measures can
be taken by the organisation to minimise the impact of such risks.
For example, planned forecasting of natural disasters like tsunamis,
earthquakes, etc., can help to offset the destruction caused by them.
□ 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. Financial investments, mergers, acquisitions, etc., carry
risks of uncertain outcome and form a part of speculative risks.
Speculative risks lead to potential losses such as property loss,
property damage, strained custmner relations and increased over-
head 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. The probability of the risk is then multiplied by the total
potential loss due to the risk. Variables are determined by estimating
the quantified potential loss to be incurred by the organisation from
the risk. The main objective for the calculation of risk exposure for an
organisation is to determine the level of tolerance of the organisation
of such risks. The assessment of risk exposure is done on the basis of
the benefits and costs involved in the given business. Risk assessment
is not an objective scientific process. Besides, various cultural factors
also affect the way people assess risks.
Risk exposure assessment helps in identifying risks in two ways, i.e.,

as events representing opportunities and as events that might be po-
tential pitfalls. An effective assessment leads to enhanced risk appe-
tite and tolerance level for an organisation. It also provides a basis
for determining responses to risks. Assessment of risk exposure helps
organisations to better identify, evaluate and exploit the right risks

N O T E S
for their business, along with appropriate controls to ensure efficient

operations and regulatory compliance.
The following are the key principles for the assessment of risk
exposure:
□ Risk assessment should have certain business objectives to pro-
vide the basis for measuring the impact and probability of risk.
□ Governance over the assessment process should be clearly estab-
lished to foster a holistic approach and a portfolio view indicating
the organisation's overall risk appetite and tolerance.
□ Leading indicators should be captured toenhance the ability of an-
ticipating possible risks and opportunities before they materialise.
8. 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. (True/False)
9. Risk exposure assessment helps in identifying risks that
represent
10R
. isks can be categorised on the basis of:
a. Impure risks and pure risks
b. Slow risks and fast risks
c. Pure risks and speculative risks
cl. None of the above
ACTIVITY
Visit the official website of an organisation of your choice. The

choice of organisation should be based on its size, years of opera-
tion, diversified business portfolio, competitors, etc. Make a list of
various potential risks being faced by the organisation and catego-
rise them as pure or speculative risks.
ASSESSMENT OF INTERNAL AND

EXTERNAL RISKS
Assessment of a risk refers to the determination of the risk followed by
quantitative and qualitative aspects that result in a recognised threat.
Risk assessment is a stage where an organisation identifies and eval-
uates each risk. It assesses its impact on the organisation and further

N O T E S
sets guidelines in terms of risk reducing recommendations. Risk as-

sessment is the first step towards managing the risk. The outcome of
risk assessment is to determine the extent of the potential threat to the
organisation due to the risk. It is the correct assessment of the poten-
tial threats of these risks that decides the disadvantage or advantage
of a particular vulnerability.
Apart from categorising risks as pure and speculative, we can also cat-
egorise them as external and internal risks as follows:
□ External risks: These are risks that originate outside the organ-
isation 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 envi-
ronmental risks. Regulatory risks pertain to laws, regulations, pol-
icies and guidance governing organisations. Organisations should
observe the rules enforced by the government for regulating their
operations. Environmental risks occur due to changes in the envi-
ronment that have a direct bearing on the working of the organi-
sation.
□ Internal risks: These risks are specific to organisations, such as
employee performance, procedural failure and faulty or insuffi-
cient infrastructure. These risks exist within the organisation and
normally due to weakness in policies, procedures, systems and
personnel. Organisations should take proper steps to ensure mini-
mal disruptions to their operations due to these risks.
IDENTIFYING RISKS
The first step in risk assessment process is to identify the risk catego-
ries. These risk categories can be listed and explained as follows:
□ Technical or IT risks: These risks may result due to the malfunc-
tioning of applications or programmes including computers or pe-
rimeter security devices (for example, a computer linked to the
Internet without antivirus software could be at risk).
□ Project management risks: These risks arise due to the in.ability
of the project manager to complete and deliver a project, causing
the organisation to delay the release of a product in the market.
□ Organisational risks: These risks relate to the infrastructure of an
organisation and how well it is able to cope with the business op-
erations as well as protect the organisational assets (for example,
risk may arise if the organisation does not have a clear distribution
of duties between its production and development environments).
□ Financial risks: These risks cover events having financial impli-
cations on the organisation (for example, investing the company's
cash reserves in a highly speculative investment scheme).

N O T E S
□ Compliance risks: These risks might occur if the organisation fails

to comply with the mandated laws and regulations of business op-
erations, resulting in fines or legal sanctions.
Business risks are omnipresent and come in all magnitudes. It is the

responsibility of the management to adopt processes and policies
that can effectively assess the risk and prepare the organisation to
be adaptable to or uniquely designed to cope with specific vulnera-
bilities. An organisation should group risks in order to adopt suitable
analytic processes. Capital allocation by the organisation should be
based on risks in conjunction with their cost/benefit analyses. Every
business, before assessing a business risk, first tries to identify the
likely occurrence of that risk. Organisations rely on reasonable ap-
proximations based on past experiences in the absence of any specific
method for identification or assessment of risk. Every risk assessment
should involve assessment of both internal and external risk factors of
the organisation.
RISK ANALYSIS
Risk analysis is the scrutiny of the impact of risks on the achievement

of an organisation's objectives. It also incorporates and determines
processes to manage risks. All risks are not equal by their occurrence
factors as well as their impact. Risks once identified need to undergo
probability and significance assessment before the management de-
cides how to deal with them. Sometimes, control decisions are made
after risk analysis. Risk analysis is an ongoing process, and new inter-
nal and external threats constantly develop presenting new hazards
to the organisation. Change itself is a risk. Management must adapt
its policies and procedures in order to manage the changing risks and
keep their threats at a comfortable level. Organisations adopt differ-
ent approaches for the analysis of internal and external risks impact-
ing 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, prob-
abilistic 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. Compliance risk ass ss-
ment is very important in tightly controlled industries like banking
or agriculture. Internal audit risks must be assessed, particularly for
publicly traded companies. Figure 9.1shows the various components
of the business environment:

N O T E S
Figure 9.1: Various Components of Business Environment
9.6.1 EXTERNAL BUSINESS ECOSYSTEM
In the early 1990s, James F. Moore conceptualised the first definition

of business ecosystem in his widely accepted book titled The Death of
Competition: Leadership and Strategy in the Age of Bitsiness Ecosys-
tems. The concept first appeared in Moore's May/June 1993 Harvard
B'tLSiness Review article, titled Predators and Prey: A New Ecology of
Competition, and won the McKinsey Award for Article of the Year. The
following is an excerpt from the same:
An economic community supported by a foimdation of interacting or-

ganisations and individuals-the organisms of the business world. The
economic community produces goods and services of value to customers,
who are themselves members of the ecosystem. The member organisms
also inclitde suppliers, lead producers, competitors, and other stakehold-
ers. Over time, they co-evolve their capabilities and roles, and tend to
align themselves with the directions set by one or more central compa-
nies. Those companies holding leadership roles may change over time,
but the function of ecosystem leader is valued by the commimity because
it enables members to move toward shared visions to align their invest-
ments and to find mutually supportive roles.
Moore used several ecological metaphors, suggesting that the firm is

embedded in a (business) environment and needs to become proac-
tive in developing mutually beneficial ('symbiotic') relationships with
customers, suppliers and even competitors.
J. Bradford DeLong, a professor of economics at the University of

California, Berkeley, defined business ecosystems as the pattern of
launching new technologies that has emerged from Silicon Valley. He

N O T E S
further defines business ecology as a more productive set of processes

for developing and commercialising new technologies characterised by
rapid prototyping, short product-development cycles, early test market-
ingJ options-based compensationJ venturefimdingJ early corporate inde-
pendence.
According to Peltoniemi and Vuori (2005), a dynamic structure which

consists of an interconnected population of organisations. Business eco-
system develops through self-organisation, emergence and co-evolution,
which help it to acquire adaptability. In a business ecosystem, there is
both competition and cooperation present simultaneo·usly.
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 commer-
cial success makes a business ecosystem. A business ecosystem has a
large number of interconnected participants and different kinds of in-
teractions. These interactions in the ecosystem are described as com-
petitive or cooperative. A business ecosystem is located in an environ-
ment that has varied political, cultural, social and legal aspects. This
complex environment has an impact on the business ecosystem, but
the business ecosystem may also have an impact on the environment.
The term business ecosystem refers to the environment containing a

business organisation but with some more provocative implications.
A business ecosystem has been used to refer to a specific type of en-

vironment where clusters of companies that locate their operations
in close geographic proximity to each other with a defined focus on a
specific type of business or technology. Within the broader focus, these
companies may be quite diverseJ but they are brought together by the
complementary nature of their activities and, in particular, by the per-
ceived value in accessing shared knowledge. A variety of specialised
infrastructure service businesses, including finance, legal, executive
recruiting, accounting, consulting, and marketing and public relations
firmsJ help to provide some of the networks that link the practitioners in
these diverse businesses. In addition, other institutions like universities
and government agencies may also serve both as magnets and as net-
work nodes within the local business ecosystem (Hagel III, 2005).
9.6.2 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. Although some el-
ements affect an organisation as a whole, others affect only managers.
These factors impact the approach and success of various operations
within the organisation. The key to the success of any business de-
pends 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. The internal environment in-

N O T E S
eludes all those factors that influence the business of the organisation
and which are present within the business itself. These factors are
usually under the control of the organisation. Some of the components
of an internal business environment include the following:
□ Objectives of business
□ Policies of business
□ Production capacity
□ Production methods
□ Management information system
□ Participation in management
□ Composition of board of directors
□ Managerial attitude
□ Organisational structure
□ Features of human resource
Organisations that focus on internal business environment do so be-
cause they feel that managing the strengths of internal operations is
the key to their success. The internal factors basically include the in-
ner strengths and weaknesses. Internal factors can affect how an or-
ganisation meets its objectives.
The following resources are essential for the success of an organisa-

tion:
□ Financial resources like funding, investment opportunities and
sources of income
□ Physical resources like the organisation's location, equipment and
facilities
□ Human resources like employees, target audiences and volunteers
□ Access to natural resources, patents, copyrights and trade1narks
□ Current processes like employee programmes, software systems
and departmental hierarchies

11. In early 1998, James F. Moore conceptualised the first
definition of the term business ecosystem. (True/False).
12. A refers to an environment containing a business
organisation.
13. An organisation's internal environment includes several
elements within the organisation, such as:
a. Current employees b. Management
c. Corporate culture d. All the above

N O T E S
14. risks arise due to the inability of the project manager

to complete and deliver a project, causing the organisation to
delay the release of a product in the market.
ACTIVITY
Analyse the business ecosystem of an organisation and write a re-

port on the various factors impacting the operations of the organi-
sation. Also, categorise these factors as internal and external.
IQsuMMARY
□ There has been a strong and growing realisation among financial
service organisations and their stakeholders that have a holistic
approach towards Enterprise Risk Management (ERM) which is
not just an added advantage but a necessity for sustained and prof-
itable performance.
□ Risks include immediate financial market exposures, regulatory
compliance issues, social and demographic changes, global warm-
ing, 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 per-
spectives 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 organ-
isation.
□ Some of the components of an internal business environment in-
clude objectives of business, policies of business, production ca-
pacity, etc.
mKEYWORDS
□ Monitoring and evaluation: It refers to a repetitive assessment

process to keep a risk management process current and rele-
vant. It includes, among other activities, external peer review,
testing and validation.

N O T E S
□ Risk: It refers to an event that has a potentially negative impact

on an organisation's assets, activities and operations.
□ Risk appetite: It refers to the amount and type of risk that an
organisation is prepared to pursue, retain or take.
□ Risk assessment: It refers to a process of qualitatively or quan-
titatively determining the probability of an adverse event (risk)
and the severity of its impact.
□ Risk identification: It relates to the process of finding, recog-
nising and describing risks.
□ Risk owner: It refers to a person or an entity with the account-
ability and authority to manage the risk.
□ Risk profile: It refers to the description of any set of risks faced
by an organisation.
□ Residual risk: It refers to the risk remaining after its treatment.
Residual risk can contain unidentified risks, also known as re-
tained risks.
IJ:■DESCRIPTIVE QUESTIONS
1. Explain the concept of risk in the context of an organisation. Briefly
discuss various types of risks generally faced by organisations.
2. Discuss the importance of ERM in an organisation. What are the
benefits of using ERM in an organisation? Also, illustrate the
scope of ERM.
3. Explain the various drivers of ERM.
4. Differentiate between internal risks and external risks. Further,
briefly explain the methods of risk assessment in both cases.
5. What are the internal factors of a business environment? How
are they different from external factors? Illustrate with some
examples.
6. Briefly explain the concept of Moore's external business
ecosystem. Give some definitions in support.
Iii ANSWERS AND HINTS
Topic Q. No. Answer

Concept of Risk in Organisa- 1. Risks
tional Context
2. True
What is Enterprise Risk Man- 3. True
agement (ERM)

N O T E S
Topic Q. No. Answer

4. d. All of the above
Drivers of ERM 5. False
6. True
Assessment of Risk Expo- 8. True
sures
9. Opportunities
10. c. Pure risks and speculative
risks
Assessment of Internal and 11. False
External Risks
12. Business ecosystem
14. Project management

1. 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. Refer to Section 9.2 Concept of Risk in
Organisational Context.
2. 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. Refer to
Section 9.3 What is Enterprise Risk Management (ERM).
3. ERM provides a risk assessment framework to organisations. It
provides them an ability to respond confidently to existing and
emerging challenges. Refer to Section 9.4 Drivers of ERM.
4. External risks are those that originate outside of the organisation
and include economic trends,government regulation,competition
in market and change in consumer taste. Internal risks are specific
to an organisation and include risks like employee performance,
procedural failure and faulty or insufficient infrastructure. Refer
to Section 9.6 Assessment of Internal and External Risks.
5. Organisations that focus on internal business environment do
so because they feel that managing the strengths of internal
operations is the key to their success. Refer to Section
9.6 Assessment of Internal and External Risks.
6. Moore used several ecological metaphors, suggesting that
the firm is embedded in a business environment and needs to
become proactive in developing mutually beneficial ('symbiotic')
relationships with customers, suppliers and even competitors.
Refer to Section 9.6 Assessment of Internal and External Risks.

N O T E S
■ SUGGESTED READINGS FOR
REFERENCE
SUGGESTED READINGS
□ Pickett, Spencer, K., H. 2006. Enterprise risk management: A man-
ager's journey. Hoboken, NJ: John Wiley & Sons.
□ Rao, B., A. 2006. Business ethics and professional values. lsted. New
Delhi: Excel Books.
E-REFERENCES
□ RIMS, 2007. Risk Manager Core Competency Model. Retrieved 25
July 2015, from http://www.rims.org/education
□ RIMS, 2009. The 2008 Financial Crisis: A Wake-up Call for Enter-
prise Risk Management. Executive Report. Retrieved 25 July 2015,
from http://www.rims.org
□ Risk and Insurance Management Society (RIMS). 2008 State of
ERM Report-Executive Summary. Retrieved 25 July 2015, from
http://www.RIMS.org

CONTENTS
10.l Introduction
10.2 Enterprise Risk Management with 360 Degree Approach
Activity
10.3 Risk Registrar
10.3.1 Finance
10.3.2 Operation
10.3.3 Human Resource
10.3.4 Strategy
10.3.5 Information Technology and Security Risk
10.3.6 Government Policy
Activity
10.4 Enterprise Risk Management Framework
10.4.1 Casualty Actuarial Society Framework
10.4.2 COSO ERM Framework
10.4.3 RIMS: Risk Maturity Model
Activity
10.5 Risk Management Committees
Activity
10.6 Audit Committee in Risk Management
Activity
10.7 Council in Risk Management
Activity

CONTENTS
10.8 Risk Champions

Activity
10.9 Summary
NMIMS Global Access - School for Conhnmng Education

IDENTIFICATION AND MANAGEMENT OF RISK 235
N O T E S
ENTERPRISE RISK MANAGEMENT AT TOYOTA
In 2009, Japan-based Toyota Motors Corporation, with the help of

its lean business practices and continuous innovation strategies,
became the most efficient car manufacturing leader in the auto
industry. Lean manufacturing processes, strong supplier base,
lean product innovation strategies and elimination of wastage
strategy were the core business practices at Toyota.
However, Toyota was not able to enjoy this success for long as
within a few months, major technical problems were reported in
Toyota cars such as unintended acceleration, defective braking
system and flawed floor mats. Meanwhile, certain deadly road
accidents were also reported, which were also supposed to be
caused due to the defective accelerators in Toyota cars. This out-
raged the public and authorities.
Thus, in response to the seriousness of the crisis, in late Janu-

ary 2010, the Toyota management decided to recall over 8 million
cars worldwide to address the technical issues. As if this was not
enough, Toyota was forced to:
□ Postpone production of eight of its most popular models
□ Stop further sales of its products
This recall crisis not only put Toyota's reputation at stake in the
global auto industry but also cost it around $5 billion and reduced
its sales by 16%.
This recall of more than 8 million vehicles by Toyota proved to be

the greatest threat to its reputation as analysts, critics and author-
ities started to doubt on Toyota's quality, and they held the com-
pany responsible for this major failure. On an in-depth analysis of
the recall crisis, it was found out that the root causes of this failure
were as follows:
□ Deterioration in Toyota's work culture and corporate values
□ Poor response to its customer needs and breach of its stated
quality principles
□ Absence of any contingency plans to deal with such high-level
crisis and to protect company's reputation
□ Ineffective communication between the management and
stakeholders at the time of recall crisis
□ Delay in communication due to centralised decision making
based at Toyota's headquarters in Japan
In April 2010, National Highway Traffic Safety Administration

(N TSA) of United States penalised the Toyota Motor Corpora-

N O T E S
tion (Toyota) with a fine of $16.4 million against the accelerator

pedal defects in its cars. This fine on Toyota is considered to be
the largest civil fine ever imposed by NHTSA on any auto man-
ufacturer in history. As per the NHTSA, the fine was imposed on
Toyota for its non-adherence to NHTSA rules, which involved no-
tification of defects or problems in vehicles to NHTSA at least
after 4 months from the identification of problem.
In order to reclaim the trust of its customers and re-establish its

reputation with reference to its legendary quality standards, Toy-
ota implemented the following crisis management strategies:
□ Announcement of fixing the accelerator defect
□ Placement of ads in print as well as television and media
□ Development of customer-focussed strategies to communicate
regularly with its customers such as organising online discus-
sions and query resolution forums at various social media
platforms
□ Engagement and involvement of company executives as their
representatives to customers and clients
□ Restructuring of crisis communication and issue management
teams to identify and manage various kinds of risks
Most importantly, the main action taken by Toyota to deal with this
crisis is to request its strategic partner, Business Systems Group
(BSG), for helping and finding a way out for the company. BSG
without any further delay, set up a crisis management team and
developed a recovery plan for Toyota by assessing various kinds
of risks such as brand risk. BSG took the following measures to
help Toyota in regaining its reputation and customer trust:
□ Organising meetings for issue awareness and impact study
□ Conducting tri-weekly tracking polls
□ Designing communication blueprints for the endorsement of
Toyota's strength
□ Communicating regularly with key audiences
□ Developing and implementing brand reputation rebuilding
strategies
□ Assessing attitude of consumers and key stakeholders towards
Toyota
On implementation of these crisis management initiatives along

with the BSG's revival plan, by the end of 2011, Toyota's sales
started rising. With its persistent efforts and enhanced quality,

N O T E S
Toyota reclaimed its status as the most-efficient auto manufactur-

ing company by producing 10 million Toyota cars within a period
of 12 months.
Toyota Annual Auto Sales

(Thousands)
10000
9000 Height of
Recall Crisis
8000 I I
7000
6000
2010 2011 2012 2013
Figure: Toyota Recall Cri is I pac

(Source: http://www.bsgco.com/work/cases/toyota-reputation-management)
A consumer-focussed approach and quality products with dura-

bility and reliability helped Toyota to r gain its corporate repu-
tation.

N O T E S

-- 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
■llj■INTRODUCTION
In the previous chapter, you studied about the concept of risk in or-
ganisational context, Enterprise Risk Management (ERM) and drivers
of ERM. You also studied about assessment of risk exposures as well
as external and internal risks.
According to Douglas Hubbard, risk management is the identification,

assessment, and prioritisation of risks (defined in ISO 31000 as the ef-
fect of uncertainty on objectives) followed by coordinated and economi-
cal appiication of resources to minimise, monitor and control the proba-
bility and/or impact of unfortunate events.
ERM can be defined as a process that includes managerial activities,

such as planning, organising, leading and controlling. The main aim of
these activities is to mitigate the impact of risk on organisation's costs
and profits. The concept of ERM is not just limited to accidental losses,
but it has expanded to financial, strategic, operational and other risks.
A risk-based approach helps in effectively managing an enterprise and

looks for opportunities that further help in accomplishing the goals
and objectives of the business. ERM creates value for shareholders
that include owners, employees, customers and society.
This chapter covers ERM with a 360-degree approach, risk registrar

and ERM framework. It also explains the concept of risk manage-
ment committees, audit committee in risk management and council
in risk management. Towards the end, the chapter discusses about
risk champions.
ENTERPRISE RISK MANAGEMENT WITH

360 DEGREE APPROACH
As per the Committee of Sponsoring Organisations (COSO) of the
Treadway Commission, ERM is an ongoing process in an entity. It has
the following features:

N O T E S
□ Affected by people at every level of organisation

□ Applied in strategy-setting
□ Applied across the enterprise, at every level and unit, and includes
taking an entity-level portfolio view of risk
□ Designed to identify potential events affecting the entity and rnanage
risk within its risk appetite
□ Abie to provide reasonable assurance to an entity's management and
board
□ Geared to the achievement of objectives in one or more separate but
overlapping categories-it is a means to an end, not an end in itself
A 360 Degree Risk Management Model helps in evaluating a model by

creating and exploiting opportunities in an organisation. It helps both
managers and organisations to:
□ Learn and look for new opportunities
□ Recognise and reduce the scope of risks as well as their consequences
on a regular basis
□ Increase the competency level of the managers by learning from the
previous experiences of dealing with risks
This model comprises people, services and governance. People in-

clude stakeholders; services include providing support related to any
project, tool or portfolio; and governance can be generalised as a Proj-
ect Management Office (PMO) that includes Subject Matter xperts
(SMEs) in risk.
At the project level, this model helps in evaluating the new risk trends
and offering suggestions related to them. Thus, at the project level,
this model helps in analysing risks and ways to mitigate or reduce
them. Therefore, to deal with these new issues, every enterprise pre-
pares its employees by training them to deal with new changes that
would serve as a basis for dealing with risks.
For an enterprise to implement new strategies, it is important to fol-

low Plan-Do-Check-Act (PDCA) cycle (Deming cycle); it is also known
as continuous risk management, which applies to business continuity
model. It is explained as follows:
□ Plan: This activity is concerned with the set of processes that helps
in defining goals, objectives, controls and procedures. These help
in delivering quality in accordance with the overall procedures
and policies of the organisation.
□ Do: In this activity, the policies and procedures related to busi-
ness continuity and risk management are implemented in the or-
ganisation. Numerous activities are planned in an organisation
for understanding and strategising the events related to business

N O T E S
continuity. The first step under this activity is to perform Business

Impact Analysis (BIA) with respect to risk evaluation. The second
step is to select as well as implement a risk mitigation and recovery
plan. The third step is to develop plan documentation. The docu-
ments must be written in such a way that they allow repeatable
response and recovery performance. The fourth and last step in-
volves imparting training to the employees so that they can initiate
programme maintenance by conforming to the set standards and
policies.
□ Check: The main goal of this activity is to track and assess the
performance against the set standards and policies of the man-
agement and report the same to the management. In this activity,
internal review is carded out that includes assessing and evaluat-
ing the performance of a given programme against the set stan-
dards of the organisation. Thus, it can be said that check activity is
concerned with the capability of usiness Continuity Programmes
(BCPs) and management's responsibility towards it.
□ Act: In this activity, corrective actions are taken that are based on
management review of business continuity policy. In this activity,
a list of Corrective and Preventive Actions (CAPA) is maintained
that helps in ensuring BCP and collaborate it with expectations
and standards of the organisation.
There are various tools and processes that help in identifying risks
and simultaneously planning the right response for the risk. These are
given below:
□ Opportunity-level processes: These processes help in judging the
scope of risk related to the projects that in turn helps in deciding
the priority (scheduling) of the projects in an organisation.
□ Portfolio/programme-level processes: There are numerous activ-
ities that help in knowing how different components of a project
help in analysing the risks associated with the portfolio. It includes
collecting information from internal sources, such as risk assess-
ment sheet, preparing a standard book that promotes assessment
of risks, finding best risk solutions depending upon the situation,
generating risk assessment report, etc.
□ Review and audit: As the names suggest, reviews and audits re-
lated to risk assessment are carried out on regular intervals by the
senior management and internal auditors. This helps in knowing
the effectiveness and responsiveness of the organisation in dealing
with the risks. Moreover, it helps in knowing whether the organ-
isation is capable of successfully implementing the lessons learnt
from risk assessment.
□ Risk reporting: It is considered to be one of the most important
processes while communicating and disseminating information.
Moreover, the usefulness of risk reporting depends upon the spec-

N O T E S
ifications and details provided. While preparing a risk report, each

risk is viewed from a time scale (short/medium/long term) and the
progress of risk is monitored on regular basis. The report also con-
tains the dependency, impact and steps taken to mitigate the risks.
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. Give the full form of PDCA.
2. What is another name of PDCA cycl
ACTIVITY
Find an Indian financial enterprise that uses the ERM 360 degree
approach and prepare a report on it. You can use the Internet for
obtaining the necessary information.
■lljj RISK REGISTRAR

Organisations use a document to maintain their risk management in-
formation, and this document is known as risk register or risk log.
Risk register helps in classifying, standardising and merging informa-
tion to be used by the management. ts primary function is to fur-
nish information to the senior management, board members and key
stakeholders on the main risks faced by the organisation. Risk register
also allows the organisation's risk management stakeholders to have a
clear picture of the current status of various risk factors, at any point
in time. 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
□ Identify risk control and mitigation measures

N O T E S
□ Report the risk status whenever needed
A risk register will enable risk registrars to record the following risk
management information:
□ Nature, type and effects of risk on the organisation
□ Probability of occurrence of the risk
□ Risk priority, on the basis of its effect on the organisation
□ Actions taken to control or mitigate the risk
□ Risk reduction measures taken in case of occurrence of the risk
The information in a risk register can be stored in various ways, in-

cluding database, spreadsheet, or a simple paragraph-style document.
However, in most organisations, a risk registrar tries to develop and
maintain a spreadsheet table layout for easy and prominent display
of information. A paragraph-style document is generally avoided be-
cause it's difficult to locate important information in a paragraph-style
document.
It is essential for risk r gistrars to record the timing of risk identifica-

tion and risk entry to the register. They should keep regular updates
on each risk entry, the timing of risk entry and historical analysis re-
cord, etc. They must also ensure that access to the risk register is lim-
ited to maintain its integrity and confidentiality. There might be some
sensitive data recorded in the register that should not be leaked in
public interest. These confidential items can be 'flagged' by inserting
additional rows and columns to the risk register. Risk registrars need
to develop and update a risk register in such a way that new risks can
be added according to change in organisational profile and external
risk environment.
Some of the common components of a risk register are as follows:

□ Date: It is essential to record the date on which risks are identified
or updated. Optional dates can also be present, such as target and
completion dates.
□ Risk number: This is a unique identification number for the risk.
□ Risk description: This is a brief description of the risk, its causes
and impact.
□ Existing controls: These are a brief description of the controls
that are currently in effect for the risk.
□ Consequence: This indicates the consequence, that is, the severity
or impact rating for the risk, with the help of scales; for example, 1
to 5, with 5 being most severe and 1 being least.
□ Likelihood: This indicates the likelihood or probability rating for
the risk with the help of scales, for example, 1 to 5, with 5 being
most likely and 1 being least.

N O T E S
□ Overall risk score: This is evaluated by multiplying likelihood

(probability) with consequence (impact) for a scale ranging from
1 to 25.
□ Risk ranking: This is a priority list that is estimated by the relative
ranking of the risks by their overall risk score.
□ Risk response: It indicates the action that needs to be taken if the
risk occurs.
D Trigger: It indicates some factors that forecast if a risk is about to
happen or has already taken place.
□ Risk owner: He/she is the person whom a project manager assigns
the task to record any triggers and manage the dsk response, if the
risk occurs.
Let us now study some examples of events in which risk information

is recorded in risk registers by risk registrars:
Suppose there is an organisation that maintains a risk register for the

accidents related to its vehicle fleet. It is estimated that the chance
of an accident is likely, resulting in a score of 4. owever, the conse-
quences of such an occurrence are evaluated to be only moderate, as
most accidents normally result in relatively small losses, resulting in a
score of 3. The risk level rating is calculated to be 4 X 3 = 12.
The risk register can also provide information on fleet safety training
as a measure for risk reduction.
In another example, let us assume that the potential risk event is a

fire occurring at one of the organisation's facilities, leading to massive
property loss. In this case, the likelihood is lower than the previous
example, but still possible, leading to a score of 3. However, the loss
could be much more severe, leading to a rating of 4. Thus, the risk lev-
el rating is 3x4=12. The risk mitigation measures taken by the organi-
sation are the installation of sprinkler systems in all facilities, training
employees to identify and minimise fire hazards,etc.
In the final example, let us assume that the potential risk is windshield
damage. This is an event that is almost certain to occur, leading to a
score of 5. However, the consequences of such an event are insignifi-
cant, leading to a score of 1. Thus, the risk level rating is 5xl=5. Such
losses are required to be managed through regular maintenance prac-
tices.
10.3.1 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 in-
struments. Financial value of a business has an impact on the market
and credit risks of the business.

N O T E S
Organisations are expected to prepare guidelines related to their fi-

nancial risk appetite. 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 man-
agement to present a written document on the risks they are willing to
accept and follow. Moreover, they should track the risks and provide
an analysis on the same for further use.
However, it is to be understood that employees working on financial

risk management are not governed by people laying the policy for fi-
nancial risk. This helps in avoiding any situation leading to conflict of
interest between the financial risk department and senior manage-
ment. Moreover, the duties of financial risk department should also
not be delegated to those working in financial investment decisions
for avoiding conflict of interest.
10.3.2 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 control..s
According to US Department of Defense, there are four principles of

ORM:
1. Accept risk when benefits outweigh the costs.
2. Accept no unnecessary risk.

3. Anticipate and manage risk by planning.
4. Make risk decisions at the right level.
There are three levels of ORM that are explained below:

1. In-depth: This method of risk management is used before project
implementation starts and the organisation has enough time to
plan and organise.
2. Deliberate: This method is used at periodic intervals during the
implementation phase of a project or process. It may include on.-
the-job training, performance reviews or quality assurance.
3. Time critical: These are exercises that are used at the time
when a project is in execution or completion phase. It is marked
by making optimal use of available resources for ensuring the
success of the project.

N O T E S
10.3.3 HUMAN RESOURCE
Human resources identify the importance of risk management in an

organisation and play two important roles. These roles include:
□ Human resources as a source of risk: Human resources are con-
sidered to be one of the various sources of risk under circumstanc-
es 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.
Previously, risks specialists gave very little importance to human
resources as a source of risk and also as an asset for the organisa-
tion. However, there has been a paradigm shift, and a lot of impor-
tance is given to risk management in human resources. There are
four implications of risk management in human resources that are
given below:
♦ Since, risk management decisions are taken by people, it is im-
portant to harmonise human resource tools with risk manage-
ment. It can be done only by placing the right people at right
positions in addition to providing training, motivation and re-
wards to them.
♦ While making appropriate risk management decisions, it is im-
portant to keep in mind human resource crises, such as divorce,
accidental death, etc. These can cause disruption in one of the
best risk management decisions; therefore, a backup plan or
a contingency plan should be properly planned and executed.
♦ Management teams are not created for an indefinite time peri-
od; thus, management succession becomes a cause of risk. Le-
gal and financial considerations affect management succession
and, thereby, affect risk management.
♦ Risk management should be considered a major factor for eval-
uating the performance of human resources.
10.3.4 STRATEGY
As per Mark Frigo and Richard Anderson, Strategic Risk Manage-

ment is a process for identifying, assessing and managing risks and un-
certainties, affected by internal and external events or scenarios, that
could inhibit an organisation's ability to achieve its strategy and stra-
tegic objectives with the ultimate goal of creating and protecting share-
holder and stakeholder value. It is a primary component and necessary
foundation of Enterprise Risk Management.

N O T E S
Strategic Risk Management (SRM) is bas d on the following six prin-

ciples:
1. 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.
2. The main objective of SRM is to build and protect the
shareholder's value.
3. The organisation's ERM forms the primary foundation for SRM.
4. As a part of ERM, strategic management is influenced by the
board of directors and management.
5. SRMprovides a strategic view regarding the impact of risks and the
organisation's capability for achieving the pre-defined objectives.
6. It is a never-ending and repetitive process that allows strategy
setting, strategy execution and strategic management.
10.3.5 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 un-
certain events. The objective of the risk management prograrn is to
reduce risk. The process facilitates the management of security risks
by each level of management throughout the system life cycle. The ap-
proval process consists of three elements: risk analysis, certification
and approval.
□ An element of managerial science concerned with theidentification,
measurement, control and minimisation of uncertain events. An ef-
fective risk management programme encompasses the following four
phases:
a. Risk assessment
b. Management decision
c. Control implementation
d. Effectiveness review
□ The total process of identifying, measuring and minimising uncer-
tain events affecting Information System resources. It includes risk
analysis, cost benefit analysis, safeguard selection, security test and
evaluation, safeguard implementation and systems review.
10.3.6 GOVERNMENT POLICY
According to Kurt F. Reding and Paul J. Sobel, Governance, Risk

Management, and Compliance (GRC) are three pillars that work togeth-
er for the purpose of assuring that an organisation meets its objectives.

N O T E S
Governance is the combination of processes that are established and

executed by the board of directors. The type of governance an organ-
isation 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 ob-
jectives. An organisation's success depends upon compliance with the
company's policies and procedures, laws and regulations. In short, we
can say that strong and efficient governance is considered as the key
to a successful organisation.
3. A risk register identifies the roles and responsibilities that

each and every department has to perform for ensuring
proper risk management within an organisation. (True/False)
4. can b ed e f i n e d as a process that focusses
on increasing the financial value of a business.
ACTIVITY
Find information on how an Indian IT firm manages its risk regis-
ter. Use the Internet to help your presentation..
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: Preventing or leaving those activities that are directly
related to risks.
□ Reduction: Taking measures that help in mitigating the impact of
risks.
D Alternative actions: ooking for other opportunities that may be
taken as steps for minimising risks.
□ Share or insure: Transferring or sharing risks to reduce there ef-
fect on business.
□ Accept: Exploiting the risk and seeking opportunity or cost-bene-
fit from it

N O T E S
10.4.1 CASUALTY ACTUARIAL SOCIETY FRAMEWORK

As adopted by the Casualty Actuarial Society (CAS) Board of Direc-
tors, a casualty actuary is a professional skilled in the analysis, evalua-
tion and management of the financial implications of future contingent
events primarily with respect to general insurance, including property,
casualty, and similar risk exposures. A casualty actuary has practical
knowledge of how these various risks interact with each other and the
environment in which these risks occur.
According to CAS Committee, ERM is the discipline in which an or-

ganisation in any industry assesses, controls, exploits, finances, and
monitors risks from all sources for the purpose of increasing the organi-
sation's short- and long-term value to its stakeholders.
CAS has conceptualised ERM as proceeding across two dimen-

sions, risk type and risk management processes.
Some risk types, conceptualised by CAS, include:

□ Hazard risks: Property damage, natural catastrophe, etc.
□ Financial risks: Pricing risk, asset risk, currency risk, liquidity
risk, etc.
□ Operational risks: Customer satisfaction, product failure, integri-
ty, reputational risk, internal poaching, knowledge drain, etc.
□ Strategic risks: Competition, social trend, capital availability, etc.
The steps in the risk management process as conceptualised by CAS

include:
1. Establish context: This step includes external, internal and risk
management contexts.
♦ The external context starts with a definition of the relationship
of the enterprise with its environment, including identification
of the enterprise's strengths, weaknesses, opportunities and
threats ("SWOT analysis"). This context setting also identifies
the various stakeholders (shareholders, employees, customers,
community), as well as the communication policies with these
stakeholders.
♦ The internal context starts with an understanding of the over-
all objectives of the enterprise, its strategies to achieve those
objectives and its key performance indicators. It also includes
the organisation's oversight and governance structure.
♦ The risk management context identifies the risk categories
of relevance to the enterprise and the degree of coordination
throughout the organisation, including the adoption of com-
mon risk metrics.

N O T E S
2. Identify risks: This step involves documenting the conditions

and events (including "extreme events") that represent material
threats to the enterprise's achievement of its objectives or repre-
sent areas to exploit for competitive advantage.
3. Analyse/quantify risks: This step involves calibrating and, wher-
ever possible, creating probability distributions of outcomes for
each material risk. This step provides necessary input for subse-
quent steps, such as integrating and prioritising risks. Analysis
techniques range along a spectrum from qualitative to quantita-
tive, with sensitivity analysis scenario analysis, and/or simulation
analysis applied where appropriate.
4. Integrate risks: This step involves aggregating all risk distribu-
tions, reflecting correlations and portfolio effects, and expressing
the results in terms of the impact on the enterprise's key perfor-
mance indicators (i.e., the "aggregate risk profile").
5. Assess/prioritise risks: This step involves determining the con-
tribution of each risk to the aggregate risk profile and prioritising
accordingly.
6. Treat/exploit risks: This step encompasses a number of different
strategies including decision to avoid, retain (and finance), reduce,
transfer or exploit risk. For hazard risks, the insurance market has
been used as a transfer mechanism. Alternative Risk Transfer
(A T) markets have developed from these with a goal of striking
a balance between risk retention and risk transfer. With respect
to financial risks, the capital markets have exploded over the last
several decades to assist companies in dealing with commodity,
interest rate and foreign xchang risk. Until recently, companies
had no mechanisms to transfer operational or strategic risks and
simply had to avoid or retain these risks.
7. Monitor and review: This st p involves continual gauging of the
risk environment and the performance of the risk management
strategies. It also provides a context for considering risk that is
scalable over a period of time (one quarter, one year, five years).
The results of the ongoing reviews are fed back into the con-
text-setting step, and the cycle repeats.
10.4.2 COSO ERM FRAMEWORK

According to COSO of the Treadway Commission, ERM is a process,
affected by an entity's board of directors, management and other per-
sonnel, applied in strategy-setting and across the enterprise, designed
to identify potential events that may affect the entity, and manage risk
to be within its risk appetite, to provide reasonable assurance regarding
the achievement of entity objectives.

N O T E S
The COSO Framework has the following eight components:

1. Internal environment: The internal environment of an
organisation sets the basis of how risk is viewed and mitigated
by the organisational members. The internal environment also
includes risk management philosophy and risk appetite, integrity
and ethical values, and the environment of the organisation in
which it operates.
2. Objective setting: Before the management can identify
potential events that affect the achievement of the objectives it
is important to set the objectives. An effective ERM system must
have a process by which the objectives can be set, and the chosen
objectives must be supported and aligned with the mission of the
organisation and its risk appetite.
3. Event identification: The organisation must identify the
internal and external events that may affect the achievement
of objectives of the organisation. There must also be a clear
distinction between the risks and opportunities.
4. Risk assessment: For carrying out the analysis of the risks, the
organisation considers its likelihood and impact for determining
how they should be managed.
5. Risk response: It is the duty of the management to select the
risk responses (avoiding, accepting, reducing or sharing risk);
the management must also develop a set of actions to align the
risks in line with the risk appetite of the organisation.
6. Control activities: To ensure that the risk responses are
implemented effectively, the policies and procedures are
established.
7. Information and communication: The organisation must
identify, capture and communicate the relevant information in a
time- bound manner and in a particular form such that it enables
the people to carry out their responsibilities.
8. Monitoring: The process of ERM is monitored. If found necessary,
modifications are made to the ERM.
10.4.3 RIMS: RISK MATURITY MODEL
According to the Risk and Insurance Management Society (RIMS),

ERM is an umbreUaframework of content and methodology that detail the
requirements for sustainable and effective enterprise risk management.
It is a free assessment tool that is available for risk management ex-

perts for developing and upgrading the ERM programmes. It also
helps in improving the effectiveness of the programme with its unique
features.

N O T E S
The RIMS Risk Maturity Model (RMM) is a framework that consists

of the following:
D ISO 31000
D OCEG Red Book
D BS 31100
□ coso
D FERMA
□ Solvency II standards
5. There are numerous important ERM frameworks that exist

internally and externally, which help in identifying, evaluating,
reacting and tracking both risks and opportunities. (True/
False)
6. Name any two risk response strategies.
ACTIVITY
Using the Internet, search for organisations that have implemented

any of the above-mentioned ERM frameworks. Make a report on
how the implementation of ERM has helped these organisations.
■ u!,j RISK MANAGEMENT COMMITTEES

A risk management committee comprises people who are responsible
for developing and supervising the risk management programme in
an organisation. This committee is mainly responsible for carrying out
the following functions:
D Knowing the level of organisation's exposure to market risks
□ Creating the risk control programme

□ Developing a strategy for funding risks
isk management committees are basically useful for non-profit or-
ganisations or for those organisations that have limited budget. A
non-profit organisation should look for the risk management commit-
tees that have people with expertise and in-depth knowledge to deal
with risks. Big non-profit organisations take the services of risk man-
agers for activities that include:
□ Mitigating the impact of loss
□ Reporting claims
D Purchasing group insurance
□ Executing safety programmes

N O T E S
Risk management committees prove to be the most cost-effective bod-

ies in supporting the risk management needs of an organisation. Risk
management committees can operate as either an organisation's de-
partment or a separate strategic partner of the organisation.
While forming the committee, creative problem-solving technique

and unique perspective towards risk should be kept in mind. The var-
ious responsibilities of risk management committees are as follows:
□ Reviewing risk management policy, strategy, implementation plan
and risk appetite
□ In-depth analysis and judgements of potential risks
□ Improvising the organisation's capability to absorb the impact of
risks
□ Enhancing the ability of the organisation to recover from the fi-
nancial and operational losses with the help of risk identification
and mitigation policies
□ Carrying out internal audit for tracking the performance of risk
management programme

7. A comprises people who
are responsible for developing and supervising the risk
management programme in an organisation.
8. Risk management committees are basically useful for non-
profit organisations or those organisations that have limited
budget. (True/False)
ACTIVITY
Using the Internet, search at least five risk management commit-
■
tees that are working for non-profit organisations. Study how these
risk management committees function and make a note of your
findings.
AUDIT COMMITTEE IN RISK

I 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.
According to the Audit Committee Charter, the Audit Committee

("Committee") shaU assist the Board of Directors (the "Board") in the
oversight of (1) the integrity of the financial statements of the Campa-

N O T E S
ny, (2) the effectiveness of the internal control over financial reporting,
(3) the independent registered piiblic accoiinting firm's qiialifications
and independence, (4) the performance of the Company's internal aiidit
Junction and independent registered piiblic accounting firms, and (5)the
Company's compliance with legal and regulatory requirements, (6) the
effectiveness of the Company's enterprise risk management program,
and (7) the performance of the Company's compliance function.
Today, ERM has become one of the most important tools of audit com-
mittees as it covers all the organisation's perspectives on risk. It offers
numerous benefits by implementing the following steps:
□ Improve internal control: For the success of an organisation, in-
ternal control plays a key role. It means that if the roles of the
employees are properly defined, it helps in increasing the process
efficiency and reduces wastage of time, money and effort.
□ Improve financial management: One of the key concern areas for
audit committee is to improve the financial management and its
reporting to the organisation. It helps in knowing the creditwor-
thiness of the competitors as well as the current market position of
the organisation.
□ Clarify roles of board of directors: Board of directors are con-
sidered responsible for carrying out audit work. However, if the
duties and responsibilities are not assigned properly, it increases
the risk of unsatisfactory and incomplete task. An audit commit-
tee helps in explaining the responsibility of each member on the
board clearly.
□ Understand the value of audit expenses: The process of audit is
often considered an expensive and unnecessary activity. However,
when an audit committee actively works with the organisation, it
helps in identification of various risks at early stages only. This
ultimately helps the organisation in maintaining its profitability in
the long run.
9. An consists of a specified number of

members who assist the board of directors of that company.
10. If the duties and responsibilities of the board of directors are
not assigned properly, it increases the risk of inefficient and
incomplete task. (True/False)
ACTIVITY
Using the Internet, search at least three audit committees that op-
erate in India in the field of risk management. List the main func-
tions of these audit committees.

N O T E S
■ua COUNCIL IN RISK MANAGEMENT

According to the mission and purpose of International Risk Gov-
ernance Council (IRGC), IRGC is an independent non-profit organ-
i.'Jation, based at Ecole Polytechnique Federale de Lausanne (EPFL)
in Lausanne, Switzerland. JRGC works to improve the understand-
ing, management and governance of emerging systemic risks that may
have significant adverse consequences on human health, environment,
economy and society.
IRGC is involved in activities such as risk governing, increasing aware-

ness about key risks and recommending shareholders about risk gov-
ernance policies.
IRGC is an international independent body that was established af-

ter xperiencing 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, deci-
sion makers and public.
As per IRGC, in June 2012, the IRGC Secretariat moved its offices from
Geneva to the Ecole Polytechnique Federale de Lausanne (EPFL) in
Lausanne, Switzerland. IRGC signed a formal collaboration agree-
ment with EPFL that came into effect on January 1, 2013, according
to which EPFL will support IRGC's mission and activities.
According to IRGC, as a non-profit organisation, IRGC receives fund-

ing from both public and private sources. IRGC's sponsors and part-
ners include:
□ Swiss State Secretariat for Education and Research (Switzerland)
□ Ecole Polytechnique Federale de Lausanne, Lausanne (Switzer-
land)
□ Swiss Re (Switzerland)
□ Oliver Wyman (USA)
□ Center for Strategic Futures (Singapore)
□ Treasury Board Secretariat (Canada)
11. IRGC isan international independent body that wasestablished

after experiencing regulatory and risk management failures
in the year 1990. (True/False)
12. As a non-profit organisation, IRGC receives funding from
both public and private sources. (True/False)

N O T E S
ACTIVITY
Find information on three similar councils like IRGC that help in

risk management. Compare the functioning of the three councils
with regard to risk management. You can use the Internet to help
your preliterates.
■uJ:1RISK CHAMPIONS
An effective risk process depends on team work, open communica-
tion, and strong and effective actions and solutions. 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 funda-
mental knowledge about risks makes them champions.
According to National Treasury (Republic of South Africa), a risk

champion can be defined as a person who by virtue of his/her expertise
or atlthority champions a particular aspect of the risk management pro-
cess, but who is not the risk owner.
Risk champions help in assisting the risk management process in var-

ious areas of management. However, the main responsibility of a risk
champion is to illustrate an organisation about how risk management
could help it in achieving its objectives and improving its position in
the market by analysing threat from competitors, market risk, etc.
According to National Treasury (Republic of South Africa), a risk

champion is a person with the skills, knowledge, leadership qualities
and power of office required to champion a particular aspect of risk
management.
t is the responsibility of the risk champion to identify the instances

where the risk management efforts are being hindered in an organi-
sation. Lack of co-operation by the management and lack of institu-
tional skills and expertise are some reasons that may hinder the pos-
sibility of risk identification in an organisation. A risk champion not
only identifies these reasons but also tries to lessen the chance for the
occurrence of such instances.
Apart from this, a risk champion also provides guidance and support to
manage potential risks that require a multiple-participant approach.
Therefore, the risk champion also adds value to the risk management
process.
Risk champions often act as change agents in a risk management pro-

cess. However, they are different from risk owners and facilitate reso-

N O T E S
lution of risk-related problems. A risk owner, on the other hand, is any

individual who manages, monitors and controls an identified risk. The
risk champions only help the risk owners in resolving problems.
In order to be effective, risk champions need to possess the following:

□ Thorough knowledge of risk management concepts and processes
□ Knowledge of activities that could support in integrated risk man-
agement
□ Good analytical skills to identify the root cause of the risk prob-
le1ns
□ Strong leadership and motivational skills
□ Effective communication skills

13. aretheones who comprise the qualities of
coordinating effectively in a team, communicating effectually
and thinking logically.
14. Risk champions only help risk owners in resolving problems.
(True/False)
ACTIVITY
Using the Internet, find information on the relevance of hiring
risk champions in the Indian corporate world. Organise a debate
in favour of and against such championships in Indian corporate
houses.
■ lljl SUMMARY
□ A 360 Degree Risk Management Model helps in evaluating a mod-
el by creating and exploiting opportunity in an organisation. This
model comprises people, services and governance, where people
include stakeholders; servic s include providing support relat-
ed to any project, tool or portfolio; and governance model can be
generalised as a Project Management Office (PMO) that includes
(SMEs) in risk.
□ 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 finan-
cial, operational, human resource, strategic, information technolo-
gy and security risk, and government policy.

N O T E S
□ There are numerous important ERM frameworks that exist inter-

nally and externally, which help in identifying, evaluating, reacting
and tracking both risks and opportunities.
□ A risk management committee comprises people who are respon-
sible for developing and supervising the risk management pro-
gramme in an organisation.
□ An audit committee consists of a specified number of members
who assist the board of director of that company. The main re-
sponsibility of the board of directors is to ensure that auditors are
independent of the management.
□ IRGC is involved in activities such as risk governance, increasing
awareness about upcoming key risk issues and recommending
shareholders about risk governance policies.
□ An effective risk process depends on team work, open communi-
cation, and strong and effective action. In risk management, risk
champions are the ones who are considered central to all these
activities.
mKEYWORDS
□ Credit risk: It refers to those risks that are posed by debtors
with regard to payment failure, where the debtor can be cus-
tomer or employer.
□ Market risk: It refers to those risks that arise due to movement
in the prices of equity, currency or commodity with respect to
the market.
□ Risk appetite: It refers to the risk bearing capacity of an enter-
prise and ils willingness to take risks for achieving the strategic
objectives.
□ Risk manager: It refers to the individuals who are responsible
for planning, managing and controlling the impacts of risk, such
as accidental loss covered by insurance, on the business.
□ Risk: It refers to the probability of losing something that is pre-
cious for an individual or organisation, such as physical or men-
tal health, status, or financial condition.
1u8r11 DESCRIPTIVE QUESTIONS

1. Explain the concept of (ERM) with 360 degree approach.
2. Describe risk management with respect to finance, human
resources and strategy.
3. Discuss in detail the concept of ERM framework.
4. What is a risk management committee?

N O T E S
5. What is the role of an audit committee in risk management?

6. Explain the concept of council in risk management.
■ ui•■ ANSWERS AND HINTS

Topic Q, No. Answer

Enterprise Risk Management 1. Plan-Do-Check-Act
with 360 Degree Approach
2. Continuous risk management
Risk Registrar 3. True
4. Financial risk management
Enterprise Risk Management 5. True
Framework
6. Avoidance and reduction
Risk Management Committee 7. Risk Management Committee
8. True
Audit Committee in Risk Man- 9. Audit Committee
agement
10. True
Council in Risk Management 11. True
12. True
Risk Champions 13. Risk champions
14. True

1. A 360 degree risk management model helps in evaluating a model
by creating and exploiting opportunities in an organisation.
It helps both managers and organisation to learn and look for
new opportunities. Th.is model comprises people, services and
governance. Refer to Section 10.2 Enterprise Risk Management
with 360 Degree Approach.
2. Organisations are expected to prepare guidelines related to their
financial risk appetite. Financial risk management includes
practices and procedures followed by organisations to exploit
the risk and gain financial interests from it. Human resources
identify the importance of risk management in an organisation
and play two important roles, namely human resources as a
source of risk and risk handling ability of human resources.
Refer to Section 10.3 Risk Registrar.
3. There are numerous important ERM frameworks that exist
internally (within an organisation) and externally (outside an
organisation), which help in identifying, evaluating, reacting and

N O T E S
tracking both risks and opportunities. For example, Casualty

Actuarial Society Framework, COSO ERM Framework. Refer to
Section 10.4 Enterprise U.isk Management Fr·amework.
4. A risk management committee compris s people who are
responsible for developing and supervising the risk management
programme in an organisation. Refer to Section 10.5 Risk
Management Committees.
5. 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. efer to Section
10.6 Audit Committee in Risk Management.
6. IRGC is a council that works to improve the understanding,
management and governance of emerging systemic risks which
may have significant adverse consequences on human health,
environment, economy and society. Refer to Section 10. 7 Council
in Risk Management.

REFERENCE
SUGGESTED READINGS
□ Hampton, J. J. (2015). Fundamentals of enterprise risk management:
How top companies assess risk, manage exposure, and seize oppor-
tunity. 2nd ed. New York: Amacom
□ Olson, L. D. and Wu, D., D. (2008). Enterprise risk management. 1st
ed. Singapore: World Scientific Publishing Company Pvt. Ltd.
E-REFERENCES
□ Casact. (2015). Retrieved 23 July 2015, from https://www.casact.
org/area/erm/overview.pdf
□ Cosco. (2015). Retrieved 23 July 2015, from http://www.coso.org/
documents/coso_erm _executivesummary.pdf

CONTENTS
Case Study 1 Ethical Misconduct by General Motors

Case Study 2 Indifference of McDonald's towards Religious Values and Beliefs
Case Study 3 TCS: Personifying Ethos s Envisioned
by Ratan Tata
Case Study 4 The Enron Scandal
Case Study 5 Corporate Governance Failure at Ranbaxy
Case Study 6 Separation of Family Ownership and Management at Abdullatif
Alissa Group Holding Company
Case Study 7 One-Tel's Collapse: A Case of Weak Internal Corporate Governance
Case Study 8 Violation of SEBI's Takeover Guidelines
Case Study 9 Neglect of Risk Management Causes Lehman Bankruptcy
Case Study 10 Enterprise Risk Management by Grant Thornton
Case Study 11 Ban on Tobacco Ads by the Government of India
Case Study 12 Swift Resolution to the Cadbury Controversy
NMIMS Global Access - School for Contmwng Education

CASESTUDYl
N O T E S
ETHICAL MISCONDUCT BY GENERAL MOTORS
This Case Study discusses the 'ignition switch scandal' of General

Motors and its ethical issues. It is with respect to Chapter 1 of the
book.
General Motors Company (GM) is an American MNC whose head-

quarters is at Detroit, Michigan. GM designs, produces, promotes
and distributes automobiles and their parts, and also deals in au-
tomotive financial services. GMwas originally a holding company
operating for Mc aughlin Carriage Company and was established
in September 1908.
GM is currently embroiled in a major ethical issue of knowingly

selling cars with faulty ignition switches. As early as March 2005,
problems were being reported about the stalling of cars indicat-
ing a faulty ignition switch. However, GM did not take any cor-
rective action even after internal tests validated the customers'
complaints in September 2005. The fault was researched upon by
the engineering department of GM, and it was estimated that the
cost of changing the switch would be $0.90 per car and around
$400,000 would be needed to be invested in the production ma-
chinery to rectify the problem. This information was dispersed
within the company, and the decision was made to not recall or
repair any cars already sold in order to save costs.
Later on in 2006, the engineers who had designed the ignition

switch requested the parts supplier to change the switch design
without changing the part number. The records for these requests
were not discovered until 2013 by an internal investigation led by
the new GM CEO, Mary Barra. The investigation also found out
that if the driver's knee touched the ignition switch, it could cause
it to switch off, leading to failures in critical systems of car such as
braking, steering and deployment of airbags.
GM was fined US$35 million by the U.S. Department of Transpor-

tation as it did not immediately inform about the safety concerns
regarding its cars to the National Highway Traffic Safety Admin-
istration (NHTSA). Mr. David Friedman, the Acting Administra-
tor of NHTSA, stated, GM engineers knew about the defect. GM
investigators knew about the defect. GM lawyers knew about the
defect. But GM did not act to protect Americans from that defect.
Mary Barra, the current CEO of General Motors, was informed
about the scandal before she was appointed for her current posi-
tion in December 2013. GM recalled 1.6 million defective vehicles
in February 2014, which grew to 2.6 million subsequently, to re-
pair the faulty ignition switches. Attorney Kenneth Feinberg, who
is responsible for GM's compensation fund, revealed that their

CASE STUDY 1: ETHICAL MISCONDUCT BY GENERAL MOTORS 263
CASESTUDYl
N O T E S
ignition switches caused 124 deaths and 275 injuries. GM has set
aside US$625 million, out of which each family who lost a member
would receive at least US$ 1 million.
As per recent developments in this scandal, GM has reached a

deal with the federal prosecutors. Two criminal charges would be
dismissed if GM complies with the terms of the agreement over
a period of next three years. Moreover, the company has agreed
to provide compensation amounting to US$900 million to the US
government. GM has also said that it would spend another US$575
million to settle various civil lawsuits filed against the company.
This real-life scenario illuminates us about the importance of hav-

ing an open and ethical culture in a company and regularly as-
sessing the same so that problems can be solved without them es-
calating. GM has started a programme 'Speak Up for Safety' as a
solution to counter this big issue. The programme's objective is to
motivate employees to come forward and inform about problems
rather than staying silent. According to Mary Barra, GM must
embrace a culture where safety and quality come first. GM em-
ployees should raise safety concerns quickly and forcefully, and
be recognised for doing so.
1. What was the ethical issue that General Motors tried to

cover up?
(Hint: Faulty ignition switch leading to deaths and
accidents and GM still not recalling the defective cars for
rectification.)
2. What are the consequences that GM has to bear for its
negligence?
(Hint: US$ 900 million fine paid to the US government,
$US 575 million for civil lawsuits.)

CASESTUDY2
N O T E S
INDIFFERENCE OF MCDONALD'S TOWARDS RELIGIOUS

VALUES AND BELIEFS
This Case Study discusses the disregard of values and beliefs of

Hindu customers by McDonald's. It is with respect to Chapter 2 of
the book.
McDonald's is a renowned chain of fast food restaurants, which

mainly sells a variety of hamburgers to its customers. It has more
than 35,000 outlets around the world and serves more than 68
million consumers daily. It was established in 1940 in the United
States by Richard and Maurice McDonald.
In 2000, a US$100 million civil lawsuit was filed against McDon-

ald's by Harish Bharti, a Hindu lawyer in the United States, after
the company admitted to using beef fat to fry its French fries for
flavouring purpose before sending them to its restaurants. These
chips were frozen and refried using vegetable oils when serving to
customers at the restaurants.
Consuming beef is against the religious beliefs of Iindus as they

consider the cow to be a sacred animal. McDonald's had to issue
an apology to all its Hindu customers for acting in an unethical
manner and not respecting their values. McDonald's statement
was: A small amount of natural beef flavouring is added to our
French fries during potato processing. If there was confusion, we
apologise. Because it is our policy to communicate to customers, we
regret if customers felt that the information we provided was not
complete enough to meet their needs.
In July 2002, McDonald's agreed to donate US$10 million to the

petitioning Hindu groups for falsely selling French fries as vege-
tarian. Mr. Bharti commented upon the ruling proclaiming it as
a step in the right direction and urged for disclosure from all fast
food restaurants. The apology and disclosure was most important
for the clients and the class, Bharti said. My hope is when all other
fast food chains see what McDonald's has done, they will have to
follow suit. I want to start a chain reaction of disclosure.
McDonald's has strictly decided to take precautionary measures

so that such an event doesn't repeat in the future. It has formed a
Dietary Practice/Vegetarian Advisory Panel that is made up of ex-
perts in the field of dietary habits of consumers. The panel's role
will be to advise McDonald's which dietary restrictions and guide-
lines to follow according to the customs of each individual market.

CASE STUDY 2: INDIFFERENCE OF MCDONALD'S TOWARDS RELIGIOUS VALUES AND BELIEFS 265
CASESTUDY2
N O T E S
QUESTIONS
1. What was the reason due to which a lawsuit was filed

against McDonald's?
(Hint: Using essence of beef fat in frying French fries and
selling them as vegetarian food.)
2. What was the impact of the ruling against McDonald's?
(Hint: McDonald's donated US$10 million to petitioning
indu groups, set up a Dietary PracticeNegetarian
Advisory Panel to help in following customer-centric
dietary restrictions and guidelines.)

CASESTUDY3
N O T E S
TCS: PERSONIFYING ETHOS AS ENVISIONED

BY RATAN TATA
This Case Study discusses the values of humility and integrity in-
culcated by TCS and personified by Mr. Ratan Tata. It is with re-
spect to Chapter 3 of the book.
Mr. atan Tata writes: I would hope that my successors would never
compromise and turn to soft options to meet their ends.
Ethics is not just about whether you take bribes or not. Employees
expect impartiality, gratitude, appreciation and loyalty from their
leaders for their work. The best ethical leaders inspire their staff
by setting examples themselves and help the staff when they need
it. Mr. Tata is hailed as an ethical leader of the highest calibre. The
following are the reasons why he is regarded so highly by others:
□ He preserves a grand vision of possibility: Tata Group
reached revenues of US$100 billion in 2012 with more than
50 per cent of them coming from outside India, in the process
becoming the first Indian company to do so. Rather than rest
on his laurels, he set an ambitious target for the company to
achieve sales ofUS$500 billion within the next decade. He also
envisions India to be successful and unified in the future. In
his words, I am proud of my country. But we need to unite to
make a unified India, free of communalism and casteism. We
need to build India into a land of equal opportunity for all. We
can be a truly great nation if we set our sights high and deliver
to the people the fruits of continued growth, prosperity and equal
opportunity.
□ Clarity about his beliefs: The secret behind Mr. Tata's re-
markable success was an unwavering belief in his values. He
didn't believe in making compromises with his principles that
helped him to shape Tata Group into a huge company that it is
today. He has championed the highest standards of ethics, im-
partiality, integrity and social consciousness. He is one of the
few individuals in India who holds an untarnished reputation
in a country much maligned with corruption.
□ Humility: Ratan Tata is an epitome of humility. Even in his
interviews, he comes across as humble and finds it difficult to
talk about his achievements in life and management. He terms
his management style as simply being fair and being accessi-
ble to his staff. In particular, he says, I would like to believe I
am operating honestly. That is something I am proud of
Mr. Tata has tried to replicate and inculcate his philosophy and
persona.I beliefs in all his business ventures, especially when it

CASE STUDY 3: TCS: PERSONIFYING ETHOS AS ENVISIONED BY RATAN TATA 267
CASESTUDY3
N O T E S
comes to Tata Consultancy Services (TCS). TCS is an Indian MNC

that provides information technology services and consulting and
business solutions. Its headquarters is located in Mumbai, Maha-
rashtra. Based on Mr. Ratan Tata's values and beliefs personify-
ing the Indian ethos of humility, hard work and enterprise, TCS
quickly became a global brand.
TCS'S COMMUNICATION STRATEGY
TCS is the biggest software and services company in the Asian

market. It founded the Global Network Delivery model, which
became the industry norm. Moreover, TCS enjoys a global pres-
ence that no other company in India can equal. Actually, TCS is
present in more nations than most airlines. This inspired the core
innovative idea of 'TCS - Truly Global'.
Under this innovative idea, TCS created a four-ad campaign that

would highlight four vital aspects of the company - its enterpris-
ing spirit, global delivery system, preparation specialisation and
research impetus.
The four-ad campaign focussed on four key areas of interest. The

taglines of the ads were as follows:
□ 'IT' put India on the world map. But who put 'IT' on the Indian
map? (TCS spearheaded the Indian IT software and services
industry.)
□ When does the day end when you're working around the clock,
round the world? (TCS invented the global delivery system.)
□ Money makes the world go round. But who makes the money go
round? (TCS is recognised worldwide for its financial services,
IT software division, etc.)
□ Do you ever think of software saving lives ?'(TCS is financing
research in this crucial area.)
TCS's 'Truly Global' ad campaign presented the company as a

leader in the IT software industry highlighting its global stature
in terms of its operations, stature, ethos and motivation for it to
become a pioneering company. This was keeping in line with Mr.
Ratan Tata's vision for TCS.
1. What are the values that personify Ratan Tata as an

ethical leader?
(Hint: Humility, grand vision of possibility)

CASESTUDY3
N O T E S
2. TCS's global ad campaign highlighted which four key

facets of the company?
(Hint: Pioneering spirit, global delivery model, research
thrust and practice specialisation.)

CASESTUDY4
N O T E S
THE ENRON SCANDAL I

This Case Study discusses the ethical issues and accounting prac-
tice that led to the bankruptcy of Enron. It is with respect to Chapter
4 of the book.
Enron Corporation was an American energy, commodities and

services corporation with its headquarters located in Houston,
Texas. It was listed as "America's most innovative company" six
years in a row by Fortune and yet it filed for bankruptcy in late
2001 under Chapter 11 of the United States Bankruptcy Code.
Enron projected itself as a financially stable and profitable com-

pany, but this was an illusion as most of its profits were only on
paper. It was entrenched in debt and was hiding its losses from
the American public. We will discuss the rise and fall of Enron in
)
the following sections.
SWITCH FROM ENERGY TO TRADING
In the early 1990s, the sale of natural gas was deregulated along
with the sale of electricity in the free market, which was support-
ed by Kenneth Lay, the CEO of Enron. The deregulation of the en-
ergy market was instrumental in Enron earning higher revenues.
This was the turning point that paved way for Enron becoming
a trading company from an energy company. It started making
huge investments in different parts of the world to tap new mar-
kets. As Enron was one of the biggest companies in the US during
this period, it was a popular choice for many ambitious graduates
as a place of work. The employees were partially paid in stocks,
which acted as a motivating factor to increase the stock price of
the company.
MARK-TO-MARKET ACCOUNTING
Jeffrey Skilling, who was appointed the CEO of Enron Corpo-

ration in 1997, pushed to change the accounting system of the
company to mark-to-market accounting. Earlier, Enron used to
record actual revenues and costs of supplying gas. However, when
it turned to mark-to-market accounting method, the future in-
comes were being taken into account when a long-term contract
was signed. These valuations were built on future net value of the
cash flows. Due to this, it was difficult to predict the actual costs
of the contract. This led to the adverse consequence of including
estimated incomes in Enron's accounting books, even though the
money hadn't been received yet. So, any loss or additional income
would have no effect on the projected valuations of the company's

CASESTUDY4
N O T E S
income. Enron provided misleading information to its sharehold-

ers even as there were deviations in the projected and actual rev-
enues of the company.
Enron was the first non-financial company to be given permission

to use the mark-to-market method in the United States by the
U.S. Securities Exchange and Commission on 30th January 1992.
ENRON'S NEW STRATEGY
Enron became the biggest seller of natural gas in the US by 1992

with gross earnings of US$122 million. It diversified its operations
and began trading in pipelines, paper plants, electricity plants,
broadband services and water plants. This made Enron an attrac-
tive option for investors between 1990 and 1998, and its stock price
jumped up by 311 per cent. The stock price increase continued for
the next two years at 56 per cent in 1999 and 87 per cent in 2000.
Enron also manipulated energy prices to raise its stock prices and
revenues. During the California Electricity Crisis in 2000-01, the
company sold natural gas at a rate of $60 per thousand cubic feet,
which was earlier being sold for mere $3 per thousand cubic feet.
ENRON'S COLLAPSE
Mark-to-market Accounting
Enron's collapse was due to the mark-to-market accounting

method. The company had been overly optimistic about its future
profits and revenues, and wasn't left with any cash by the middle
of 2001.
The Enron Culture
In Enron, unhealthy competition rather than cooperation was

promoted amongst the employees. As the incentives were mostly
paid out in stock options, everyone was in a hurry to close deals
because bonuses were distributed on the basis of the number of
deals closed rather than following up on them. This proved to be
problematic as no follow-up action was being taken on the closed
deals.
Enron had a performance committee that conducted the perfor-

mance appraisals of the employees. It gave out ratings ranging
from 1 to 5, with 1 being the highest. As expected, employees with
higher ratings got excellent bonuses, while those with the lowest
ratings were asked to leave.

CASESTUDY4
N O T E S
Key Players at Enron

There were several people at Enron who were responsible for its
collapse. Foremost among them was Jeffrey Skilling who had in-
troduced the mark-to-marketing method of accounting in Enron.
He launched EnronOnline, an Internet-based service, to deal with
the trading of contracts of energy commodities with other compa-
nies. Ultimately, Enron could not cover the costs of capital trans-
actions.
Andrew Fastow, a top executive at Enron, was responsible for the

creation of complex financial structures at Enron that were used
for concealing the losses and debts of the company.
Rebecca Mark, the Vice-Chairman of Enron, spearheaded the

failed business operations of Azurix and Enron International
(subsidiary companies of Enron), which invested in projects such
as the US$3 billion power plant in Dabhol, India, and another
costly acquisition of Wessex Water in UK.
Kenneth Lay also played a huge part in Enron's demise as he ne-

glected his duties as the CEO of the company and preferred to
spend his time vacationing around the world using company as-
sets such as the company's jet for his personal travels. e was also
aware about the extent of debts of Enron and played a part in the
covering up of this information from the investors.
EFFECT OF ENRON'S BANKRUPTCY
Enron's bankruptcy led to the loss of jobs for almost 21000 em-
ployees. The company's shareholders lost a combined US$74 bil-
lion in the four years leading to the filing of bankruptcy by the
company. The former employees of Enron won a lawsuit against
the company in 2004 worth S$85 million, which was in lieu of
loss of nearly $US2 billion in pension funds. The employees had
the loss of a stable source of income in the form of pensions.
Due to the Enron scandal, a new US federal law, known as the

Sarbanes-Oxley Act, was passed. The main objective of the Act
was to oversee the audits of public companies.
Andrew Fastow and his wife Lea were offered a deal by the pros-
ecutors for pleading guilty and testifying against Lay, Skilling and
other top executives of Enron in January 2004. As a result, Fa-
stow's sentence was reduced from ten years to six years.
Kenneth Lay was convicted of six charges including wire and se-
curities fraud, and sentenced to 45 years in prison without parole

CASESTUDY4
N O T E S
in May 2006. He died in July 2006 due to a heart attack in As-

pen, Texas. Skilling was found guilty of 19 out of 28 charges filed
against him and in October 2006, was sentenced to 24 years and
four months in prison.
CONCLUSION
The collapse of Enron was caused by multiple factors. Among

them, the mark-to-market method of accounting, cut-throat work-
ing environment and misuse of company assets by senior exec-
utives of the company are of special significance. The story of
Enron is as much about the people who chose to mismanage com-
pany funds and deceive the US as it is about complex accounting
that contributed to the bankruptcy of the company. It is about the
decisions that affected not only 21000 Enron employees but the
US as a whole.
QUESTIONS
1. What were the main factors that contributed to the

collapse of Enron and led to its bankruptcy?
(Hint: Mark-to-market accounting, prevalent culture in
Enron.)
2. What was the effect of Enron's bankruptcy on its
employees and shareholders?
(Hint: 21000 employees lost jobs, loss of US$74 billion of
shareholders' money.)

CASESTUDY5
N O T E S
CORPORATE GOVERNANCE FAILURE AT RANBAXY I

This Case Study discusses the corporate governance failure at Ran-
baxy. It is with respect to Chapter 5 of the book.
Ranbaxy Laboratories, whose parent organisation is Sun Phar-

maceutical Industries Ltd., was recently involved in corporate
governance scams. The company's criminal guilty plea and $500
million in fines and penalties have highlighted the issue of cor-
porate governance. The scam related to sales in the US market.
However, according to global media reports, the company was in-
volved in systemic fraud in its worldwide regulatory filings. This
scam took place in the year 2004 when the Corporate Governance
Code was issued by the Securities and Exchange Board of India
(SEBI) and wa.s made compulsory. This code originated from the
Anglo-Saxon corporate governance model. Thus, it was likely that
)
several independent directors had no clarity about their respon-
sibilities and accountability due to the lack of updated knowledge
about the corporate governance code.
In the year 2004, the independent directors at the Ranbaxy Board

included Tejendra Khanna, Gurucharan Das, P. S. Joshi, Vivek
Bharat Ram, Nimesh Kampani, Vivek Mehra, Surendra-Daulet
Singh and J. W. Balani. All of them were prominent leaders in
their respective specialised fields and thus it was very unlikely
that those who were on the Ranbaxy Board had no knowledge
about the Anglo-Saxon corporate governance models.
As per Ranbaxy's shareholding data on March 31, 2004, promot-

ers' shareholding was 32.04 per cent, while foreign shareholding
and Indian institutions' shareholding were 32.98 per cent (includ-
ing Fil's shareholding of 22.68 per cent) and 15.16 per cent, re-
spectively. Therefore, it was normally expected that there would
be a high level of corporate governance at Ranbaxy along with
significant foreign and institutional shareholding; however, the
case was completely different. Ranbaxy systematically perpetrat-
ed fraud on shareholders by providing manipulated data of share-
holders to financial regulators. In addition, Ranbaxy sold adulter-
ated drugs, thereby perpetrating fraud on consumers, hospitals,
value chain partners and the general Indian public who had im-
mense faith in Ranbaxy, which was the first Indian multinational
in the pharmaceutical sector. The corporate governance failures
manifested themselves in the Ranbaxy Board's failure to control
and prevent fraud, inadequate risk management system and un-
ethical culture. The question again arises, Were the independent
directors responsible for the same?

CASESTUDY5
N O T E S
The Ranbaxy scam was similar to Satyam's as in both cases, the

senior management overrode the internal control system. On Jan-
uary 2, 2013, , Barbara Jones, the judge for the U.S. District Court
for the Southern District of New York gave the verdict that the
former independent directors of Satyam did not act recklessly.
This claim was not sustainable due to the fact that intricate and
well-concealed fraud carried out by a certain group of people in-
side the organisation only reinforced the inference that the inde-
pendent directors were themselves victims of the fraud. It may be
argued that the Ranbaxy fraud was carried out with the help of
staff at various levels and not by a certain group at the senior lev-
el. owever, the truth was that it was well-concealed and thus it
would be unfair to solely hold the independent directors respon-
sible for the fraud.
Clause 149 (11) of the Companies Bill, 2012, provides that an inde-
pendent director shall be responsible only in respect of such acts
of omission or commission by a company which had occurred with
his knowledge, attributable through board processes, and with his
consent or connivance or where he had not acted diligently. So the
question arises, Did the independent directors fail to act diligent-
ly? Further, did the independent directors not learn from the res-
ignation of Devinder Singh Brar (then CEO), Rashmi Barbhaiya
(then President, Research and Development), Rajinder Kumar
(successor to Rashmi) and Dinesh Thakur (whistle blower in this
case and subordinate to Kumar), who were established leaders of
the company, in quick succession. Their departure indicated that
something was wrong.
It may be inappropriate to infer that the independent directors

did not act diligently. According to media reports, Tejendra Khan-
na and P. S. Joshi attended the science committee meeting held
on December 21, 2004. Exclusive presentation was done on large-
scale lapses and fudging of data. Therefore, if media reports are to
be believed, they cannot claim to be innocent and should be held
responsible for the fraud and overall failure of corporate gover-
nance.
1. What role do you think an independent director of a

company can play with regard to maintaining the best
corporate governance?
(Hint: They can maintain transparency not only within
the Board but also throughout the company.)

CASE STUDY 5: CORPORATE GOVERNANCE FAILURE AT RANBAXY 275
CASESTUDY5
N O T E S
2. With regard to the above case study, what do you think

can be the effect on the employees of a company if the
senior management itself is involved in such fraud cases
and scams?
(Hint: Employees will be reluctant to join the Board or
take responsibility of any higher position in the company.)

CASESTUDY6
N O T E S
SEPARATION OF FAMILY OWNERSHIP AND MANAGEMENT

AT ABDULLATIF ALISSA GROUP HOLDING COMPANY
This Case Stildy discusses the separation of family ownership and

management at Abdullatif Alissa Group Holding Company (AAGH).
It is with respect to Chapter 6 of the book.
BACKGROUND
AAGH, headquartered at Riyadh, the Kingdom of Saudi Arabia

(KSA), was established in the 1940s. It has evolved as a diversi-
fied conglomerate from a trading business and has its operations
in automotive sales, service, financing and leasing businesses in
KSA with over 3500 employees. AAGH was founded by the late
Sheikh Abdullatif Alissa in 1940. The company initially operated
as a foodstuffs and textiles trading business, before venturing into
the automotive sector in the 1950s.
The business expanded rapidly throughout the second half of the

20th century and became one of the largest automotive businesses
in KSA. AAGH became the nationwide distributor for Nissan and
Riyadh distributor for Isuzu motors in 2013 and 1985 respective-
ly. Currently, AAGH operates multi-brand service centres across
KSA, along with rental car business. More recently, the family
business has been successful in venturing into car financing.
CHALLENGES
One of the key challenges of AAGH was decentralisation and

family complexity. In 1994, the business was managed by the
late Sheikh Abdullatif Alissa, its founder, as a sole proprietor.
His sons, Abdul Mohsen, Najeeb and Ziad were responsible for
managing independent but similar business divisions throughout
KSA. However, with time, the family noticed the existing struc-
ture was not strategically aligned and resulted in shortage of re-
sources and insufficient communication. Further, it failed to offer
value and affected future growth. Moreover, there was no clear
family succession plan that posed as a challenge to disrupt family
unity and successful business continuity. Such increasing family
complexities created an immediate requirement to manage the
expectations and aspirations of each family member.
Thus, to address such key challenges, the present chairman of

AAGH, Sheikh Abdul Mohsen Alissa and his brothers recognised
the challenges on both fronts, that is, on the corporate side and in
the family structure. They realised the need for change and thus-

CASE STUDY 6: SEPARATION OF FAMILY OWNERSHIP AND MANAGEMENT
AT ABDULLATIF ALISSA GROUP HOLDING COMPANY (AAGH) 277
CASESTUDY6
N O T E S
they began a detailed analysis to review the measures they need

to take to ensure sustainability of the business and to maintain
family unity.
SOLUTIONS
The following were the solutions to the challenges at AAGH:
Pathway to Change
After plenty of deliberations, Sheikh Abdul Mohsen Alissa and
his family decided it would be best to separate the family owner-
ship and the management of the company. Although his brothers
differed from his views and transforming from an operational-lev-
el position to board and management level-position was difficult
and needed a changed mindset, eventually, they had to agree to-
wards the impending change for the welfare of the family and the
business. Some of the key factors that helped in shaping the new
corporate structure and ownership system were:
□ To focus on growth opportunities
□ To ensure proper succession procedures were followed on
both fronts, that is, the management and ownership levels, so
as to achieve sustainability of the business
□ To prevent future family disputes
In 1994, the first step was taken towards reorganisation of the
family business whereby participating family members were re-
placed by professional managers. Thereafter, the legal structure
of the business was changed from a sole proprietorship to a hold-
ing structure with multiple business divisions, which were further
converted into independent subsidiaries. The holding company
and each subsidiary had their own boards, executive manage-
ment and reporting systems.
Leading the T·mnsfonnation

At the start of the transformation project, the family members es-
tablished the key objectives of the reorganisation. They focussed
on identifying the right talented persons for specific tasks, and
with regard to this, they consulted an international consulting
firm. The firm also helped to support the implementation of the
new strategy. The consultants of the firm worked with a panel of
executives from AAGH to design the new company structure and
develop a step-by-step implementation plan. The entire process
took around five years from planning to implementation.

CASESTUDY6
N O T E S
Pt·ofessional Management
The main initiative was to reorganise the business from a sole

proprietorship with a geography-based structure into a holding
company with distinct business segments. Once the business seg-
ments had been set up, the family appointed a professional man-
agement team for each segment. The new management was re-
cruited from both within and outside the organisation. Although
finding the right person for the right task was challenging, the
family members and the international consulting firm were both
of the opinion that future business growth and preserving the val-
ues of AAGH were only possible through the appointment of pro-
fessional managers. In addition, specialised HR and management
divisions were given the role of selecting the right candidates with
the necessary knowledge and skills.
Developing the Boards of Dfrectot·s
Family members at AAGH initially had a single board of directors

to manage all business segments simultaneously. Later, due to the
problem of'overloading', each business segment was transformed
into a subsidiary with a separate board of directors. This new
structure proved to be effective as it catered to the requirement
of the business due to the diverse nature of the units. Currently,
each of the subsidiary boards has non-executive board members
who are non-family members, and each of whom brings the nec-
essary knowledge, skills and experience to the subsidiaries.
The Alissa Group holding board was also a central point of the
transformation. Currently, the family members are elected to the
holding board or the subsidiary boards via the family assembly.
Further, in 2013, based on the positive experience with non-fam-
ily and non-executive directors on the subsidiary boards, AAGH
appointed one independent director to the board of the holding
company. The objective behind this appointment was to aid the
family members with strategic know-how and professional expe-
rience. Moreover, to ensure the ownership succession, the fami-
ly council is planning to implement a programme with a view to
preparing the young generation for future board duties, that is,
each of the boards would have an observer seat for a young family
1nember.
No Family Involvement
The new structure of AAGH ensures that no family member will

have an active management role in the group, and family input
will only be confined to the holding and subsidiary boards.

CASE STUDY 6: SEPARATION OF FAMILY OWNERSHIP AND MANAGEMENT
AT ABDULLATIF ALISSA GROUP HOLDING COMPANY (AAGH) 279
CASESTUDY6
N O T E S
IMPACT
The following were the impact of the separation of family owner-

ship and management at AAGH:
Significant Growth
Although the family members were aware that business opportu-
nities were lost due to a governance structure that was not fit for
purpose, they still managed to achieve significant growth through
AAGH as a result of the reorganisation.
Relationship with Banks and Financing

After the reorganisation of AAGH, the subsidiaries could borrow
money based on their business rather than depending on person-
al guarantees by the owner as happened earlier. AAGH has been
successful in enhancing the levels of trust with banks, and it has
also become easier to finance projects.
lnc1·eased Family Cohesion

The reorganisation needed the family members to work closely
with each other, which led to strong bonding within the family.
The new structure also enabled departing family members to
sell their shares to other family members. This has broadened
the scope for enhanced open discussion within the family and in-
creased family cohesion.
QUESTIONS
1. f AAGH had to find the right talent for the right task,
what requirements must the group have in place?
(Hint: AAGH needs to clearly define the role and profiles
in order to hire the right person for the right task.)
2. What issues do you think the future generations of family
members at AAGH might face?
(Hint: Under the new organisational structure that
restricts family involvement in business operations, the
future generation of family members at AAGH might not
get the opportunity to understand the business properly
by working there unlike previous times.)

CASESTUDY7
N O T E S
ONE.TEUS COLLAPSE: A CASE OF WEAK INTERNAL

CORPORATE GOVERNANCE
This Case Study discusses the collapse of One.Tel because of its

weak internal corporate governance. It is with respect to Chapter
7 of the book.
One.Tel, an Australia-based telecommunications company, was

established in 1995. It was Australia's fourth largest telecommu-
nications provider at the time of its collapse. As per as agreement
with Optus (the second largest telecommunications company in
Australia), One.Tel received SIM cards, customer call details and
network services from Optus. One.Tel had to pay Optus for the
call charges and a monthly access fee for each of its subscribers.
Thus, the gross profit of One.Tel was the excess of the amount
billed to its customers over the amount paid to Optus. It used to
attract customers by providing cheap mobile calling rates and
selling profitable long distance and international call service to
them. However, in July 1996, disagreements between One.Tel and
Optus increased on the issues of competition and promotion cam-
paigns. Thereafter, One.Tel signed an agreement with Global One
in July 1997. It started providing discounted national and inter-
national calls to its customers carried on Global One's network.
One.Tel was listed on the Australian Securities Exchange on 12
November 1997.
One.Tel's growth was very rapid with regards to the number of

customers and sales revenue. Stats showed that the company's
operating profit after tax was A$3.7 million in 1996-97. In 1998,
One.Tel expanded its operations to Europe and the US. In Feb-
ruary 1999, News Ltd. and PBL were One.Tel's primary share-
holders as these companies invested about one billion Australian
dollars. Soon after being ranked as the 30th largest listed compa-
ny in Australia with a market capitalisation of A$3.8 billion on
23 November 1999, One.Tel suffered a record operating loss of
A$291 million for 1999-2000 fiscal year as per August 2000 data,
despite the doubling of sales revenue from the previous year to
A$654 million. Further, in February 2001, One.Tel reported a loss
of A$132 milJion for July-December 2000, and by April 2001, its
cash balance had reduced to A$25 million. On the final trading
day of 25 May 2001, One.Tel shares closed at Australian 16 cents,
and it went into receivership on 30 May 2001. The creditors of the
company voted to close its operations on 24 July 2001.
The One.Tel collapse is a classic case of weak internal corporate

governance, failed expectations, incorrect pricing policy, un-
bridled growth and strategic mistakes. According to Hambrick
and D'Aveni (1992), corporate collapses are usually preceded
by corporate deteriorations because of strategic errors of senior

CASE STUDY 7: ONE.TEUS COLLAPSE: A CASE OF WEAK INTERNAL CORPORATE GOVERNANCE 281
CASESTUDY7
N O T E S
management. One.Tel senior management also made such stra-

tegic errors and had wrong pricing policy. It had very expensive
customer acquisition campaigns. Moreover, the customers failed
to contribute to the revenues and the cash flow the company des-
perately required to continue its operations. In addition, One.
Tel was involved in expansion into new markets through its ag-
gressive strategies without consolidating its position in the local
and existing markets. All along, the company was involved in
disagreements with its suppliers, i.e., Optus and Telstra, and its
network builder, Lucent Technologies. One.Tel also paid an ex-
cessive amount to obtain telecommunication licences to position
itself in the market.
One.Tel had poor financial reporting quality along with poor

earnings quality. It was only able to report small positive earnings
in its initial years because of non-conservative accounting policy
choices and large positive accruals. The company had weak in-
ternal controls, discrepancies in record keeping and poor audit
quality. It regularly obtained an unqualified audit opinion despite
serious breaches of the Corporations Act, principle accounting
and auditing standards in 1998. Despite the company's deterio-
rating operating cash deficits, cash collection issues and losses
concealed by non-conservative accounting policies, its auditor did
not place any 'going concern' opinion.
There were serious issues of diversity among its board members,

and the senior management failed to make full disclosure to the
board regarding the performance and solvency of the company.
Besides, the non-executive directors failed to analyse the func-
tioning of the senior management effectively. Weak internal cor-
porate governance was further evident from the fact that there
was very poor linkage between executive pay and performance at
the company. The senior management at One.Tel received hefty
performance bonuses during the times of deteriorating perfor-
mance of the company.
One-Tel had major problems with its cash balance, creditors, earn-
ings and debtors. The management communications to the board
only reflected EBITDA (Earnings before Interest, Taxes, Depre-
ciation and Amortisation) and gross margin but not net profit.
Further, the board was rarely apprised of different creditor and
debtor issues. ts cash balances reported in the board papers of-
ten neglected unpresented cheques. There were no well-defined
responsibilities between the board and the management.
One of the two joint CEOs of One.Tel was of very dominant nature
in the board who was appointed without any proper election and
chaired various board meetings. Although One-Tel had set up an
audit committee, a remuneration committee and a corporate gov-

CASESTUDY7
N O T E S
ernance committee, all these committees' duties and responsibil-

ities were performed by two non-executive directors. Thus, these
committees never had any impact on One.Tel's governance.
As per Haleblian and Finkelstein (1993), firms with dominant

CEOs tend to perform poorly in a difficult environment. As late
as 30 March 2001, One.Tel board members were notified that
'everything was fine.' Later, on 1 May 2001, the company's cash
crisis was simply termed 'timing issue'. There was also major in-
formation asymmetry between One.Tel's senior management and
shareholders during 2000 - 2001.
The dominance of the CEO and poor monitoring of the manage-

ment by the board negated chances for the company's survival.
This also hampered the functioning of the board and affected
leadership renewal. Further, excessive reliance of the company's
shareholders on the CEOs enabled them to conceal the crisis
situation of the company. All these factors led to the collapse of
One.Tel.
QUESTIONS
1. With regards to this case study, what lessons can we learn

on corporate strategies'?
(Hint: Placing high competitive pricing beyond a certain
budget and only having the view to gaining market share
can lead to the downfall of a company.)
2. One-Tel had poor internal controls and weak corporate
governance. Such factors led to its downfall. In order to
avoid such collapses, what measures can other companies
take?
(Hint: Companies must try to establish a strong link
between executive pay and company performance. It
is essential for the effective corporate governance of a
company.)

CASESTUDYS
N O T E S
VIOLATION OF SEBl'S TAKEOVER GUIDELINES I

Thi.s Case Study discusses the various takeover guidelines issued by
the SEBI. It is with respect to Chapter 8 of the book.
Nowadays, takeover of companies is a popular and easy-to-follow

strategy for the corporate growth. According to this strategy, an
'acquirer' acquires the significant amount of shares characterised
by voting rights in the 'Target Company'. It is important to note
that the process of takeover can be in either direct or indirect
manner with an objective to obtain control over the management
of the target company.
The process of takeover comes with several economic impli-

cations in an economy. Acquiring substantial shares in a target
company by the acquirer affects the existing shareholders. There-
)
fore, it is important for the acquirer to comply with shareholding/
disclosure norms under SEEI's takeover code. As per the norms,
the acquirer has to make an open offer to the public sharehold-
ers of the target company if the acquisition of shares exceeds the
threshold level. In addition, they have to disclose their holding to
the exchanges on a continual basis.
The norms stipulated by the SEEi have been made for safeguard-
ing the interest of an investor. However, there are numerous cases
revealing that Indian investors have been victimised of malprac-
tices in the context of 'takeover'. The involvements of big Indian
corporate houses are often seen in undesirable takeover practices
resulting negative outcomes over the Indian capital markets and
their investors. The untimely disclosure of shareholding and ac-
quisition of shares over the stipulated limit without making an
open offer causes loss to small investors. In order to protect the
interest of these investors, SEEi has formulated regulations for
Substantial Acquisition of Shares (SAST). Any violation of SEBI
(SAST) regulations will lead to monetary penalties or debarment
from accessing capital markets.

CASESTUDY8
N O T E S
REGULATORY SAFEGUARDS
a. Regulations to protect the interest of investors:
SEBI Takeover Regulations 2011

Regulation 3-11 Substantial acquisi- Provides threshold
tion of shares with limit for open offer
voting rights and exemptions
• Open
crossing
offer for
initial
threshold - 25%
• Open offer for

creeping acquisi-
tion limit 5%
Regulations 12-23 Open offer process Deals with concepts

related to open offer
Regulations 24--27 Other obligations Obligations of
acquirer, target
1,
company, merchant
banker
Regulations 28-31 Disclosure norms Provides limits for
making disclosures
b. A Takeover Regulations Advisory Committee (TRAC)

was set up by SEBI in September 2009. This Committee
examines the existing takeover regulations and suggests
suitable amendments to it.
Let us discuss an example of unhealthy takeover practices done

by Reliance Industries Limited (RIL) followed by the SEBl's ac-
tion.
In March 2011, the combined shareholding ofRIL, RIIHL and Re-

liance Capital Limited (Reliance Group) in L&T was 6.62% and
decreased to 3.92% in October 2011. RIL increased its stake in
L&T to over 10%. Thereafter, it sold the entire lot to Aditya Birla
Group (Grasim). According to the SEBI takeover regulations, any
company which that buys more than 5% shares of another compa-
ny (Target Company) has to inform the target company. However,
in this case, RIL did not inform L&T when its stake in the com-
pany crossed the aforesaid limit. When RIL sold over 10% of its
stake in L&T to Grasim, Investors Grievance Forum (IGM) com-
plained to SEBI saying that RIL did not disclose any information
regarding its purchase of shares in October 2011 and November
2011. Hence, RIL violated the takeover regulations of the SEEL
So, a penalty of 4.75 lakh was imposed by SEBI on R liance
Industries Ltd. for the violation of takeover code while increasing
its stake in L&T in 2011.

CASE STUDY 8: VIOLATION OF SEBI'S TAKEOVER GUIDELINES 285
CASESTUDYS
N O T E S
QUESTIONS
1. On the basis of this case study, discuss the significance of

the various regulations pertaining to takeover practices
made bySEBI.
(Hint: The untimely disclosure of shareholding and
acquisition of shares over the stipulated limit without
making an open offer causes loss to the small investors.)
2. Analysing the case of RIL, state what all precautions
could be taken for ensuring the non-violation of SEBI's
takeover code.
(Hint: The complaint was related to the grievances
made by the shareholders of L&T for not disclosing any
information regarding RIUs purchase of shares between
October 2011 and November 2011.)

CASESTUDY9
N O T E S
NEGLECT OF RISK MANAGEMENT CAUSES LEHMAN

BANKRUPTCY
This Case Study discusses how neglect of risk management led to

the bankruptcy of Lehman Brothers. It is with respect to Chapter 9
of the book.
Lehman Brothers Holdings was a global financial services firm

dealing in investment banking, private equity, trading, invest-
ment management and private banking. It was the fourth largest
investment bank in the US before it filed for bankruptcy in 2008.
Troubled Asset Relief Programme (TARP) was created to help

banks and financial institutions during the 2008 financial crisis.
The risk management practices followed by these banks were ex-
amined and in some cases were even blamed for the financial con-
dition. Lehman Brothers was generating huge profits from mort-
gage-backed securities, but it neglected the crucial aspect of risk
management. This was the view of Mark T. Williams, a lecturer at
Boston University, who wrote the book Uncontrolled Risk about
the causes that led to the 2008 financial crisis and bankruptcy of
Lehman Brothers.
Williams was present at the CFO's Corporate Performance Man-

agement Conference held in Philadelphia in February 2013. Ac-
cording to him, the key for any company is looking at the factors in
creating trust, honesty, and integrity - what are the things that can
undermine reputation?
Williams told CFO, I would argue that risk management in bank-

ing is still not at a level where it needs to be. In regard to other
industries, you have to look at yourself. If you are a nuclear energy
company with power plants, for example, then you're in the risk
management business.
Lehman Brothers decided to set up its risk management division

when it separated from American Express in 1994. It appointed
Maureen Miskovic as its first Chief Risk Officer (CRO) in 1996
who had previously held the position of treasurer at Morgan
Stanley. She held this post till 2002. Maureen had also worked
at Goldman Sachs and had not only managed risk but had traded
mortgage-backed securities, Williams noted. So she was both sides
of the coin: perfect for the job.
William added, Just in the last decade we've had a huge move-
ment towards CROs. More companies are moving risk to an enter-
prise-wide level and looking at risk across the whole company.
Lehman appointed Madelyn Antoncic in 1999 who had also

worked in mortgage trading at Goldman Sachs, to help Miskovic.

CASESTUDY9
N O T E S
Antoncic wa.s a top-notch risk professional, a highly trained q·uan-

titative analyst who had extensive experience involving the risks of
the more complicated products that Lehman had begun to structure,
trade and sell-principally mortgage-backed and asset-backed se-
curities, Williams wrote in his book. By the year 2000, Antoncic
had replaced Miskovic as the CRO of Lehman Brothers who was
seen as her logical successor.
Antoncic was highly successful in her role as the CRO and was
in fact named the Risk Manager of the Year by Risk Magazine
in 2006. Since her appointment in September 2002, [Antoncic] has
swelled Lehman's risk management ranks to 170, with 50 new staff
added over the course of 2005, Risk reported then.
Lehman Brothers had transformed into "a real estate hedge fund
disguised as an investment bank" by the year 2003. Antoncic's
warnings were not heeded by the CEO of Lehman Brothers, Dick
Fuld, when she termed the company "too risky". By the year 2007,
the risk posed by mortgage-backed security bets had become
abundantly clear. However, Antoncic' warnings continued to be
were ignored by the senior management, and she was fired from
her post.
On paper, on the company's organisational chart, the company had

a risk management function, but not in practice, Williams explains.
The biggest flaw wa.s that they listened to the risk manager in good
times-but the most important time to listen to your risk manager is
in bad times.
Risk professionals, he notes, are not there to be like a marketer, say-

ing the company is wondeeful and everything will be great, they are
there to look at alternative, the low profitability that is occurring. In
other words, their job is to give the company a reality check.
Antoncic was replaced by the CFO Chris O'Meara. The new

CRO had two important qualifications, Williams said, He was
Fuld-Friendly and he had no formal risk management training. A
dangerous combination and hardly an adequate counterbalance
against oversized risk taking. Lehman Brothers had shown that
it promoted a weak risk management culture when it replaced a
competent employee with one who did not have the suitable cre-
dentials for the job.
In March 2009, Dow Jones hit a 12-year low on the stock mar-
ket at 6500 points. As a result, trillions of dollars were lost, and
around 8 million people lost their means of livelihood, and the US
government policymakers came to the realisation that not saving
Lehman Brothers was "a disastrous mistake".

CASESTUDY9
N O T E S
QUESTIONS
1. How did the neglect of risk management lead to the

bankruptcy of Lehman Brothers?
(Hint: Lehman Brothers kept investing 111 mortgage-
backed securities.)
2. In what way did Lehman Brothers show signs of promoting
a weak risk management culture?
(Hint: Appointment of Chris O'Meara who did not have
any formal risk management training.)

CASE STUDY 10
N O T E S
ENTERPRISE RISK MANAGEMENT BY GRANT

THORNTON j
-
Thi.s Case Study discusses the enterprise risk management by Grant
Thornton. It is with respect to Chapter 10 of the book.
BACKGROUND
A leading financial management company of income-oriented

portfolios with a focus on global real estate securities, preferred
stocks, utilities, listed infrastructure and large cap value equities
was seeking to implement an internal audit and risk management
function. However, the management team was not sure about
where and how to start and required an external partner to en-
able it to set up these functions efficiently and effectively.
)
STRATEGY AND APPROACH
Grant Thornton Limited Liability Partnership (LLP) profession-

als worked with the senior management team of the company to
identify the company's different business segments and general
areas of risk. These areas of risk comprised financial risk, opera-
tional risk, technology risk and compliance risk. Enterprise risk
management experts from Grant Thornton used proprietary risk
assessment software that was mainly intended for asset man-
agers. The Grant Thornton team members collected input data
from management interviews, financial analysis and technology
research.
APPROACH
Enterprise risk management experts from Grant Thornton used

a risk matrix approach to conduct a review of all significant risks.
After interviewing the senior management, and compliance, tech-
nology and other departmental supervisors, enterprise risk man-
agement experts from Grant Thornton used interview input and
raw data from financial statements and different IT reviews to
develop a 'scorecard' of business risk areas.
RESULTS
The following were the results of the above approach:
□ An entire inventory of major risks relating to technology, oper-
ations and regulatory compliance was identified.
□ A common risk management platform was established not
only among the senior management but also throughout the
company.

CASE STUDY 10
N O T E S
□ A three-year internal audit plan was formulated, which en-

abled the company to address serious risk issues and ensure
that effective risk mitigation controls were in place.
□ The scorecard, which was shared with both the senior man-
agement of the company and the Audit Committee, facilitated
the establishing of consensus across the entire company on
major risk concerns and devising of blueprint for the new in-
ternal audit function and its audit plan.
IMPACT ON THE COMPANY'S BUSINESS
The following points depict the impact of the various approaches

taken by Grant Thornton on the company's business:
□ The senior management of the company is able to focus on
common risks.
□ The new internal audit function that was launched has clear
and well-defined objectives and priorities resulting in efficient
use of the company's time and resources.
□ The company's overall risk profile is rapidly reduced as the
enterprise risk management experts from Grant Thornton
identify and swiftly address high-risk areas.
□ The company is well-prepared to address any marketplace
variability, regulatory or compliance issues.
□ The company's risk profile can be easily and efficiently updat-
ed to highlight any changing financial condition.
Currently, the enterprise risk management experts from Grant

Thornton continue as the company's outsourced internal audit
provider and regularly update the company's enterprise risk
management policies and documents.
QUESTIONS
1. In the context of this case study, what other approaches

can enterprise risk management experts from Grant
Thornton take?
(Hint: Apply the 360-degree approach to risk and
opportunity management. This approach can help to
prepare for unforeseen risks and manage daily functional
and strategic risks, etc.)
2. Discuss some additional enterprise risk management
tools that financial companies can use.
(Hint: Total Risk Profiling (TRP) and Enterprise Risk
Management (ERM) gap analysis tools.)

CASE STUDY 11
N O T E S
BAN ON TOBACCO ADS BY THE GOVERNMENT OF INDIA
This Case Study discusses the ban on tobacco ads by the Government
of India. It is with respect to Chapter 1 of the book.
On 6 February 2001, the Government of India sparked a major

controversy across the country when it announced that it would
very soon ban tobacco companies from advertising their products
and sponsoring sports and cultural events. The intention of such a
ban was to discourage adolescents from consuming tobacco prod-
ucts. Further, through such bans, the government would be able
to launch an 'anti-tobacco programme'.
This decision was met with much angry oppositions and debates
throughout the country not only over the ethical aspects of the
government's moral policing but also over the achievability of the
intent itself. With regards to the proposed government ban, the
strong reaction of Suhel Seth, CEO, Equus Advertising, was: The
ban does not have teeth. It is a typical knee-jerk reaction by any
Government to create some kind of popularity for itself. The Leg-
islation has not been thought thorough. Further, in reaction to the
government's decision, ITC Ltd. announced: It would voluntarily
withdraw from all of the sponsorship events, irrespective of the legal
position on the subject.
ITC's statement in view of the proposed government ban was: It

believes that this action on its part will create the right climate for
a constructive dialogue that will help develop appropriate content,
rules and regulations to make the intended legislation equitable and
implementable. The issue was complex in nature as the dispute
involved ethical and commercial considerations. On one hand,
there was the harmful effect of tobacco that has proved fatal for
human life. Thus, from an ethical view, the government, being
responsible for the welfare of its citizens, needed to discourage
the habit of tobacco consumption. However, on the other hand,
the government also needed to take into consideration the com-
mercial benefits of tobacco. The tobacco industry is considered
a key contributor to the State Exchequer. This was evident from
the stats that depicted that during the year 2000-01, it contrib-
uted about 8000 crores in excise revenue. This was considered
extremely essential in view of the economic crisis that the govern-
ment faced at that time.
In light of the above statements, there were several questions that

came up, such as "What approach must the government take-
ethical or commercial?" or "ls it right for the government to inter-
fere in the matters of personal choice in the first place?" To make
the issue more complex and debatable, there were also questions

CASE STUDY 11
N O T E S
such as "Was the objective achievable at all?" or "Was it equita-

ble?" The answers to these questions lay in understanding the
opinions of both sides, that is, those in favour of and those against
such bans.
The ban was not unusual if some of the international precedents

analysed. For example, in countries like France, Finland and Nor-
way, similar bans on tobacco ads had already been imposed. Peo-
ple supporting these bans were of the view that these resulted
in breach of people's privacy and personal choice and decision
making. However, others were of the opinion that the government
had the right to intervene in the overall interest of the citizens.
They mentioned examples of drugs, like cocaine, which is banned
around the world.
In 1981, the Supreme Court (of Appeal) in Belgium gave the ver-
dict that a ban on tobacco advertising was not unconstitutional.
Further in 1991, the French Constitutional Council gave the ver-
dict that the French ban on tobacco ads was not unconstitutional
as it intended to protect public health without restricting the free-
dom of trade. There were many precedents of restrictions being
imposed on the advertising of dangerous or potentially danger-
ous products, e.g., pharmaceutical products, firearms, etc., even if
they were available in the market.
QUESTIONS
1. With regards to this case study, before proposing such bans

on tobacco ads, what approaches could the Government
of India have taken?
(Hint: The Government of India could have conducted a
public survey or collected an overall people's consensus
to avoid creating such nationwide fray.)
2. If the Government oflndia has to face any legal tussle, how
can it make its case stronger in support of its proposed
decision to ban tobacco ads?
(Hint: The Government oflndia can produce documentary
evidence of countries that have been successful in banning
tobacco ads; for example, France, Finland, Norway, etc.)

CASE STUDY 12
N O T E S
SWIFT RESOLUTION TO THE CADBURY CONTROVERSY
This Case Study discusses how worm infestation discovered in its

chocolate bars tarnished Cadbury's brand image and the measures
that the company took to restore it. It is with respect to Chapter 4 of
the book.
(Source: autonomieproject.wordpress.com)
Cadbury is a British MNC founded in the year 1824 in Birming-

ham, England, by John Cadbury. It is currently owned by Mon-
delez International and is world's second biggest confectionary
brand.
The company ran into a controversy when, in October 2003, re-

ports were made about worm infestation in two Cadbury Dairy
Milk chocolate bars in Mumbai, India. The complaints were re-
ported to the Food and Drug Administration Commissioner who
took swift action. Cadbury also showed quickness and issued a
statement wherein it denied any worm infestation case reas-
suring the public that such an occurrence was impossible. The
Maharashtrian Food and Drug Administration disagreed with
Cadbury's claims and seized its chocolate stocks from its manu-
facturing plants operating in the state.
This ethical issue was picked up by the media, and over the next
three weeks, Cadbury's reputation began to be questioned. Its
credibility came under doubts. As a result, the product sales fell
and were affected to a marked extent in the first 10 weeks of the
crisis. The sales of Cadbury dropped by more than 30 per cent due
to this controversy. Cadbury's main focus now was to win back
the trust of its customers, distributors and the sales staff.
This PR disaster was handled in an extremely professional man-

ner by Cadbury India. They took off all their advertisements from
television and newspapers and focussed on restoring the brand
image by starting a PR campaign aimed at retailers. It kept the

CASE STUDY 12
N O T E S
media updated on definitive measures that the company was tak-

ing to improve its manufacturing and storage processes used in
producing chocolates. For this, Cadbury imported new machinery
and changed the packaging of Dairy Milk chocolate bars by using
a sealed plastic wrapper with another foil acting as a cover. It also
recruited the services of Mr. Amitabh Bachchan to spearhead its
PR campaign to regain the lost trust in consumers.
Thus, Cadbury was successful in restoring its brand image. In the

subsequent two months of its new ad campaign and new packag-
ing used for the product, sales reached the pre-controversy levels.
In June 2004, eight months after the controversy first came to

light, Cadbury made an announcement that the consumer con-
fidence had become stronger than befor the emergence of the
issue. Cadbury has maintained its position of a market leader in
the Indian chocolate market ever since. It had a 55.5 per cent mar-
ket share according to a study conducted by Euromonitor in 2015.
QUESTIONS
1. What was the reason behind the controversy that impacted

Cadbury India?
(Hint: Worm infestation discovered in its chocolates.)
2. What measures did Cadbury take to restore its brand
image in the Indian market?
(Hint: It changed itsmanufacturing process with the help
of new improved machinery and intelligent ad campaign.)

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NMIMS GLOBAL ACCESS

NMIMS GLOBAL ACCESS

TOC Reviewer Content Reviewer

Chief Academic Officer

Author: Dr. Arunachal Khosla

NMIMS Global Access - School for Contmumg Education

CHAPTER NO. CHAPTER NAME PAGE NO.

1 Concept of Business Ethics 1

2 Values, Norms, Beliefs and Standards in Business Ethics 21

4 Ethical Issues in Functional Areas of Management 81

5 Introduction to Corporate Governance 111

8 Corporate Governance in India: Statutory Perspective 181

10 Identification and Management of Risk 233

11 Case Studies 261

NMIMS Global Access - School for Contmumg Education

Introduction to Corporate Governance: Corporate Governance: Objectives and Goals of Corporate

Corporate Governance: Ownership Structure Ownership Concentration, Ownership Composi-

NMIMS Global Access - School for Contmumg Education

Corporate Governance in India: The Statutory Perspective: Evolution of Corporate Governance in

Enterprise Risk Management-Risk Assessment: Concept of Risk in Organisational Context, What is

NMIMS Global Access - School for Contmumg Education

NMIMS Global Access - School for Contmumg Education

THE RAJAT GUPTA INSIDER TRADING CASE

Virtue ethics guide the conscious and subconscious mind of a

This whole case started in September 2008, when Warren Buffet

However, the moment the Board of Directors of Goldman Sachs

The estimation done by the U.S. Securities and Exchange Com-

The US court started the hearing of Rajat Gupta case on 22 May

NMIMS Global Access - School for Contmumg Education

This case directly and indirectly affected the lives of many, of

Rajat failed to maintain his integrity to Goldman Sachs by leaking

NMIMS Global Access - School for Contmumg Education

After studying this chapter, you will be able to:

When a code of conduct is followed in business, it is called business

In today's competitive scenario, it is mandatory for an organisation to

This chapter covers the concept of ethics. In addition, it discusses the

According to Philip Wheel Wright, ethics is the branch of philosophy

NMIMS Global Access - School for Contmumg Education

There are three branches of ethics, which are explained as follows:

♦ Deontological ethics: As per this ethical theory, certain ac-

♦ Teleological ethics: This theory defines that consequences of

NMIMS Global Access - School for Contmumg Education

Ethical relativism denies the existence of any fixed universal truths

The ethical relativism says that the standards of a society define

1.2.1 CHARACTERISTICS OF ETHICS

NMIMS Global Access - School for Contmumg Education

This in turn leads to consistent and quality processes, increased

1.2.2 NATURE OF ETHICS

1.2.3 SOURCES OF ETHICS

Ethics of an individual are formed from almost arbitrary variety of

NMIMS Global Access - School for Contmumg Education

able or obj ctionable. Culture r fers to a set of values, guidelines

1.2.4 ETHICS VS. MORALITY

The ethics and morality can be distinguished on various parameters

Parameters Ethics Morality

NMIMS Global Access - School for Contmumg Education

Parameters Ethics Morality

1.2.5 ETHICS VS. LAW