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Van Print
Business Environment and Ethics (P-1 middle)- The state of competition in an (P-1-LAST )-The obligation can be divided into
Q1. Business Environment industry is a composite of 5 competitive forces. four responsibilities:
The environment of any organization is the 1. Threat of New Entrant: A new entrant in an 1. Discretionary Obligation – These refer to
aggregate of all conditions, events and influences industry represents a competitive threat to the voluntary contributions made by a business for
that surround and affect it. established firms. There are various entry barriers the benefit of the society without any
which hinders the entry of new entry. The barriers government intervention.
Types of Environment are:
2. Ethical Obligation – These obligations make a
Environment can be divided into the following three Economies of Scale: Existing large firms enjoy low business responsible to follow and respect the social
broad categories: cost per unit. and cultural norms laid down by the society.
They have enough room to reduce price as they
a. Internal Environment: Internal environment may be selling product at such a low price that new 3. Legal Obligation – It is the responsibility of every
is internal to the organization and it is controllable. player could not produce it at that cost as it might be business to abide with the laws of the county and
Important internal factors are: producing small quantity. follow the legal rules and regulations laid down by the
government.
1. Culture and Value System: Organizational culture Cost disadvantage independent of scale:
and values system not only influences the operations Besides economies of scale existing firm have 4. Economic Obligation – Since every business aims
and behaviour, it also influences the choice of other many cost advantages as proprietary to earn profit, it is the responsibility of every business
business. product knowledge such as patent, favourable access to generate surplus cash and use it towards further
to raw material, favourable location, etc. development or welfare of the society.
2. Mission and Objectives: The mission and
objectives of the company guide priorities, Learning and Experience Curve: Established Responsibility towards Different Interest Groups i.
direction, of development, business philosophy and companies have an advantage of learning curve. Responsibility towards owners
business policy. Owners contribute capital and bear the business
Product Differentiation: A new entrant must risks. The primary responsibilities of business
3. Management Structure and Nature: Structure is overcome the brand loyalty of the existing brands. towards its owners are to:
about the hierarchical relationship, span of
management relationship between different Capital requirement: New entrants 1. Run the business efficiently
functional areas. required capital not only to establish new business 2. Proper utilization of capital and other resources.
but also to compete from established firms 3. Growth and appreciation of capital.
4. Human Resource: It deals with factors like Switching Cost: The costs incurred in switching from 4. Regular and fair return on capital invested.
manpower planning, recruitment and selection one supplier to another supplier also resists the
and development, compensation, communication customer to go for new vendor ii. Responsibility towards investors
and appraisal.
Access to Distribution: The middleman is Investors are those who provide finance by way of
Besides this, internal environment also includes: reluctant to deal with the product which is new to investment in debentures, bonds, deposits etc. The
market and they usually prefer only established responsibilities of business towards its investors
Corporate resources products. are:
Production/ operation of goods and services
Finance and accounting system and methods 2. Bargain Power of Supplier: Suppliers have no 1. Ensuring safety of their investment,
Marketing and distribution. bargain power when there are many suppliers and 2. Regular payment of interest,
supply exceeds demand and supplier competes with 3. Timely repayment of principal amount.
b. Macro Environment: Macro Environment consist of each other to grab the order. On the other hand,
factors external to the industry that may have bargain power is very high when suppliers have iii. Responsibility towards employees Business
significant impact on the firm’s strategies. The broad expertise or supplier is working at economies of scale needs employees to work for it. These employees
dimensions are: or supplier augment the product in interest of put their best effort for the benefit of the business.
consumer or supplier also finance the buyer. The responsibilities of business towards its employees
1. Political Environment: It is the political include
environment of the country which decides the fortune 3. Bargain Power of Buyer: Buyer enjoys a 1. Fair treatment.
of the business in a country. significant bargain power when sellers are many 2. Timely and regular payment of wages and salaries.
and buyers are few or when production capacity 3. No discrimination on the basis of sex, cast or
2. Regulatory and Legal Environment: exceeds the demand. Buyer can bargain for creed.
Regulatory and legal environments play vital role reduction of prices, quantity discount, better quality 4. Fair Appraisal system.
by telling dos and don’ts to business. at same price, better after sale service and they can 5. Healthy and safe working environment.
even ask for credit or finance facility. 6. Establishment of fair work standards and norms.
3. Demographic: It is Demographic environment 7. The provision of labour welfare facilities.
which decides the 4. Threat of Substitute: Strong competitive 8. Opportunity for better career prospects.
marketing mix for the organization. pressure from substitute product depends upon 9. Recognition, appreciation and
three factors encouragement of skills and capabilities of the
4. Socio Culture: Socio culture variable like the workers.
beliefs, value system, attitudes of people, their (a) Whether attractively priced substitutes are 10. Installation of an efficient grievances handling
demographic composition have a major impact on available. system.
their personality and behaviour style. 11. An opportunity for participating in managerial
(b) Whether the buyers view the substitutes as decision
5. Technological: Technological forces present being satisfactory in terms of quality, performance and 12. Timely training and development.
wide range of opportunities and threats which have other relevant attributes, 13. Family welfare schemes.
to be accounted for. 14. Proper working conditions and welfare amenities.
(c) Whether buyers can switch to substitutes easily. 15. Job and social security.
6. Global Environment: It consists of all those factors 16. Better living conditions like housing, transport,
that operates at the transnational, cross cultural and The presence of readily available and attractively canteen, crèches etc.
across the border level which have an impact on the priced substitutes creates competitive pressure.
business of an organization. iv. Responsibility towards suppliers
5. Rivalry among Competing Sellers: The intensity
7. Economic Environment: It consists of macro level of rivalry among competing sellers is a function of Suppliers are businessmen who supply raw
factors related to the means of production and how vigorously they employ such tactics as lower materials and other items required by
distribution of wealth, which have an impact on the prices, colourful features, expanded customer service, manufacturers. The responsibilities of business
business of an organization longer warranties, special promotions and new towards suppliers are:
product introductions. All this leads to adverse impact
8. National Competitive Advantage: Despite on the********************************************** 1. Giving regular orders for purchase of goods.
globalization number of industries is clustered in 2. Dealing on fair terms and conditions.
specific and small number of countries. Q.2. SOCIAL RESPONSIBILITY OF BUSINESS 3. Availing reasonable credit period.
4. Timely payment of dues.
c. Micro Environment: Microenvironment refers The social responsibility of business means
to the environment which an organization faces in its various obligations or responsibilities or duties v. Responsibility towards customers
specific arena. All the business decision like new that a business-organization has towards the
business, pricing, distribution channel, promotion society within which it exists and operates from. The business should provide the following facilities:
strategy, product portfolio, etc., depends upon the
competitive position of the firm.
1. Providing products and services of proven quality. PAGE2-MIDDLE Sometimes private sector is unable to establish its
2. Products and services must be able to take care To regulate monopoly in the market venture in some area due to constraints like lack of
of the needs of the customers. To provide balanced regional growth capital, lack of know how or restrictions by
3. There must be regularity in supply of goods and To encourage small and new enterprises government. For this, the government has to perform
services To regularize or standardize the functions of the entrepreneurial role by entering the market with
4. Price of the goods and services should be private and public sector its ownership through public sector.
reasonable and affordable.
5. Regular R&D to augment the product and to The process of regulating business activities is mainly In the entrepreneurial role, the government acts as an
innovate the product. done by two ways: entrepreneur in form of public sector ventures like
6. To ensure that product is reached to customer.
7. To supply goods at reasonable price. Discretionary Measures Transportation: IRCT Ltd, DMRC Ltd;
8. To provide required after sale service. Non-Discretionary Measures Communication MTNL, BSNL;
9. To fulfil its commitments impartially and Electricity and Power BSES, NDPL;
courteously. Discretionary measures involve the direct measures Companies like BHEL, PGCIL, IRCON ltd
10. To provide sufficient information about the by the discretion of administrative authority. These
product. include 3. Promotional Role
11. To ensure that product supplied doesn’t have any
adverse effect fixation of prices of commodities, In promotion role, government does not regulate or
12. To hear and redress the genuine grievances of quantitative restrictions on export or import, control the activities of business
customer rationing on supplies of goods, The following are major functions performed in
13. To avoid any type of union formation and to reap distribution of scare recourses for optimum promotional role:-
monopoly profits utilization of resources,
14. Unfair means like under weighing the product, licensing the goods like hazardous chemicals, etc. To provide basic infrastructure for
adulteration, etc. must be avoided. smooth functioning of business activities
These discretionary measures are performed at the To have coordination among public,
vi. Responsibility towards competitors firm level or industry level. While regulating, private, joint and cooperative sectors
government makes sure that interest of all sections To have balanced growth among all section
Competitors are the other organizations involved should be maintained.
in a similar type of business. The responsibilities of 4. Planning Role
business towards its competitors are Non-Discretionary Measures include the control
without any administrative discretion of an Government of India acts as a planner to secure
1. Not to offer exceptionally high sales authority. These measures are exercised at macro optimum utilization of resources. In 1950, Planning
commission to distributers, agents etc. level through fiscal and monetary policies. For Commission was set up by Government of India
2. Not to offer to customers heavy discounts and example: with an objective for mobilization of resources and
/or free products in every sale. to formulate the plans for the development of the
3. Not to defame competitors through false imposing different taxes on different products at nation.
or ambiguous advertisements. different places,
amending customs tariffs, Basically, there are two types of planning i.e.
vii. Responsibility towards government regulating the bank interest by changing centralized and decentralized planning. In Centralized
repo rates or reverse repo rates, planning, plans come from central level and passed to
The various responsibilities of business towards regulating money supply and credit creation and state level. In Decentralized planning, the plans are
government are: granting subsidies to different industries. initiated from the bottom i.e. from individual unit say
panchayat level, sectoral level, regional level and
1. Setting up units as per guidelines of government In India, the regulatory role is exercised in following national level
2. Payment of fees, duties and taxes regularly as well manner:- -------------------------------------
as honestly. (a) The Companies Act, 2013: It is an act to
3. Not to indulge in monopolistic and restrictive consolidate and amend the law relating to companies Q4- Q.4. POLITICAL SYSTEM AND ITS INFLUENCE
trade practices. various acts that was in force for better functioning of ON BUSINESS
4. Conforming to pollution control norms set up by banking sector to help businesses and other economic
government. activities. There are many external environmental factors
5. Not to indulge in corruption through bribing that affect business negatively and positively.
and other unlawful activities. (c) The Securities and Exchange Board of India Business managers must address these factors and
(Amendment) Act, make decisions that minimize the impact of
viii. Responsibility towards society 2013: This is an Act which further amends the external environment. These factors include political
Securities and Exchange factors, economic, social, technological, legal and
The various responsibilities of business towards Board of India Act, 1992 for directing the functioning environmental.
society are: of SEBI.
Political factors and environment of a country
1. to help the weaker and backward sections of the (d) The National Food Security Act, 2013: This impacts any business organization and can also
society act provides for food and nutritional security in introduce a risk factor that can cause the business
2. to preserve and promote social and cultural values human life cycle, by ensuring access to adequate to suffer losses or compromise over its profit stream.
3. to generate employment quantity and quality of food at affordable prices.
4. to protect the environment Political environment can change because of the
5. to conserve natural resources and wildlife (e) Consumer Protection Act, 1986: This is an act to policies and actions of the prevailing government at
6. to promote sports and culture protect the interest of consumers in India. every level, federal to local level. It is very
7. to provide assistance in the field of important that a business should plan for the
developmental research on education, medical (f) Industrial Policy: Industrial Policies aim at variability in the policies and regulations of the
science, technology etc. development of government to maintain a stable business
8. Promotion of small scale industry Industrial Structure by Liberalization, Privation and environment.
9. Development of region in which they are operating Globalization.
10Social development of region in which organization Definition
is working******************************************** (g) MRTP Act: The Monopolistic and Restrictive
Trade Practices Act, Political factors are government regulations that
1969, make sure that the operation of the influence business operation positively and
Q.3. ROLE OF GOVERNMENT IN BUSINESS economic system does not result in monopolies negatively. Managers must keep a bird’s eye view over
political factors. These factors may be current
Government performs many different roles in (h) Foreign Exchange Regulation Act: It is an Act to and impending legislation, political stability and
business and economy. These roles are essential to consolidate and amend laws related to foreign changes, freedom of speech, protection and
provide the platform to excel the competiveness of exchange for the conservation of the foreign discrimination laws are factors affecting business
businesses domestically, to ensure the exchange resources of the country. operation and activities
balanced regional growth, constitutional
framework, infrastructural improvement and public (i) Commercial Law: This act has been made with List of political factors that affect businesses
utilities. a view to order operational aspects of trade and
business. It includes acts like India Contract Act, Corruption level
The following roles are played by the government in Sales of Goods Act, Negotiable Instruments Act, Trade control
business. Arbitration Act, etc. Bureaucracy
Tariffs
1. Regulatory Role: Listed below are the major 2. Entrepreneurial Role Freedom of the press
objectives of regulating the business functioning:
(P-3 middle )Government view business as a three categories: (PAGE-3-LAST)
Competition regulation (P3) crucial vehicle for social improvement.
Regulation and deregulation 1. Socialistic Principles
Education law The government is responsible for protecting the
Discrimination law public interest. These principles reflect the ideology of socialism.
Antitrust law Following Articles state the guidelines of Socialistic
Data protection law A stable political system can affect the Principles of state policy:
Employment law petition of a particular local market.
Health and safety law Article 38: To promote the welfare of
Environmental law Governments pass legislations that the people by securing a social order and to
Tax policy can also influence the relationship between the minimise inequalities in income, status, facilities
Government stability and changes firm and the suppliers, customers and other and opportunities.
Government participation in trade unions companies.
Import limitations on quantity and quality of the Article 39: To secure
product The government is the primary consumer of
Legislation that manages environment pollution products and services. (a) the right to adequate means of livelihood for all
Consumer e-commerce and protection citizens; (b) the equitable distribution of material
Intellectual property law Government actions impact the economic resources;
environment (c) prevention of concentration of wealth and means
How Political Factors Affecting Business ------------------------- of production; (d) equal pay for equal work for men
Environment Q.5. CONSTITUTION & BUSINES s and women;
(e) preservation of the health and strength of
Political factors can impact a business by making the The Constitution of India is not only a document workers; and
market environment more or less friendly for that which tell about the formation and running of
business. Typically, governments have a great deal Govt. Rather it influences the life of every (f) Opportunities for healthy development of
of power over businesses and many times, there is individual. children.
not much that businesses can do about it.
Directive Principles of State Policy Article 39 A: To promote equal justice and
Political factors can impact businesses in various to provide free legal aid to the poor.
ways. These external environmental factors can add Directive Principles, in its most simple form, are
in a risk factor which can lead to a major loss in the Guidelines in the Indian Constitution to the Article 41: To secure the right to work,
business. These factors can change the entire results State. These guiding principles are meant for to education and to public assistance in cases of
and hence, companies should be able to deal with both promoting the ideal of social and economic unemployment, old age, sickness and disablement.
local as well as international political outcomes. democracy.
Article 42: To make provision for just and
What Political Factors Affect Business The directive principles are non-justifiable in humane conditions for work and maternity relief.
Environment nature. They cannot be enforced by the court of law
for their violation. Part IV, Articles 36-51 of the Indian Article 43: To secure a living wage, a
Tax and economic policies: Increasing or constitution constitutes the Directive Principles of decent standard of life and social and cultural
decreasing rate of taxes is a good example of a political State Policy which contain the broad directives or opportunities for all workers.
component. Government regulations may raise the tax guidelines to be followed by the State while
rate for some businesses and can lower the same for establishing policies and laws. Article 47: To raise the level of nutrition
others due to specific reasons. This decision will and the standard of living of people and to improve
directly impact businesses. Features of Directive Principles public health.
Political stability: Lack of political stability The Directive Principles consist of the following 2. Gandhian Principles
within a country can significantly impact the guidelines for the States:
operations of a business. This can especially be true These principles are based on Gandhian ideology.
for businesses that are operating on the global scale. The State should strive to promote the welfare of Following Articles state the
the people. guidelines of Gandhian Principles of state policy:
Foreign Trade Regulations: Every Maintain social order through social, economic and Article 40: To organise village
business has a need to expand business operation political justice. panchayats and give them with necessary powers
to other countries. However, political The State should strive towards removing and authority to enable them to function as units of
background of a country can influence the desire for a economic inequality. self-government.
business to expand its operations. Tax policies that are Removal of inequality in status and opportunities.
particularly controlled by the government can To secure adequate means of livelihood for the Article 43: To promote cottage
induce a particular business to expand operations citizens. industries on an individual or co- operation basis in
in different regions, whereas, other tax policies can Equal work opportunity for both men and women. rural areas.
hinder the process of business expansion for some Prevent concentration of wealth in specific pockets
industries. of the society. Article 46: To promote the educational and
Prevention of child abuse and exploitation of economic interests of SCs, STs and other weaker
Employment Laws: Employment laws workers. sections of the society and to protect them from social
are made to protect the rights of Protection of children against moral and material injustice and exploitation.
employees and include every aspect of employer- abandonment.
employee relationship Free legal advice to avail of justice by the Article 47: To prohibit the consumption
Effects of political factors on businesses economically weaker section. of intoxicating drinks and drugs which are injurious
Assistance to the needy including the to health.
1. Government changes in their rules and regulations unemployed, sick, disabled and old people.
could have an impact on business. Ensure proper working conditions and a living Article 48: To prohibit the slaughter of
wage. cows, calves and other milk and draught cattle and to
2. The political condition of a country affects its Promotion of cottage industries in rural areas. improve their breeds.
commercial setting. Free and compulsory education for children below
The economic environment affects the business the age of 14years. 3. Liberal–Intellectual Principles
presentation. Economic and educational uplift of the
SC and ST and other weaker sections of the society. The principles counted in this category signify the
3. The absence of political stability affects business Prohibition of alcoholic drinks, recreational drugs ideology of liberalism. Following articles state the
operations, most especially for those companies who and cow slaughter. guidelines of Liberal–Intellectual Principles of state
operate internationally. Preservation of the environment by policy:
safeguarding the forests and the wildlife
4. Obtaining political risk insurance is a method to Protection of monuments, places and Article 44: To secure for all citizens a
manage political risk. Firms that have international objects of historic and artistic interest and national uniform civil code throughout the country.
operations uses this kind of protection to decrease importance against destruction and damage.
exposure to risk. Promotion and maintenance of Article 45: To provide early childhood
international peace and security, just and care and education for all children until they
Importance of judicious political environment honourable relations between nations. complete the age of six years.
Classification of the Directive Principles
Businesses should check their political Article 48: To organise agriculture and
environment. The changes in political factors can The Directive Principles are divided into the following animal husbandry on modern and scientific lines.
impact company strategies because of these reasons:
a. Harm test: Does this option do less harm than the
.( PAGE-4) must be honestly and regularly paid.( PAGE-4-MIDDLE) alternatives? PAGE-4-LAST)
Article 49: To protect monuments, b. Defensibility test: Could I defend this choice of
places and objects of artistic or historic interest. (f) Get the Accounts Audited − Proper business option before a committee of peers, or a
records, accounts Congressional committee
Article 50: To separate the judiciary from audited by authorized persons and authorities should c. Reversibility test: Would I still think this choice of
the executive in the public services of the State. be maintained. option was good?
d. Colleague test: What might my profession’s
Article 51: To promote international peace (g) Fair Treatment to Employees − Fair wages or governing board or
and security and maintain just and honourable salaries, facilities and ethics committee say about this option?
relations between nations incentives must be provided to the employees. e. Organization test: What does my organization’s
------------- ethics officer or
UNIT II (h) Keep the Investors Informed − The shareholders legal counsel say about this?
and investors must know about the financial and other f. Virtue test: Would a virtuous person do this
Q.6. ETHICS important decisions of the company.
6. Make a choice based on steps 1-5.
Ethics is a branch of social science. It deals with moral (i) Avoid Injustice and Discrimination − Avoid all
principles and social values. It helps us to classify, types of injustice and partiality to employees. 7. Review steps 1-6. What could you do to make it
what is good and what is bad. Discrimination based on gender, race, religion, less likely that you would have to make such a
language, nationality, etc. should be avoided. decision again?
Business ethics are not different from ethics in
normal sense. It is ethics applied in conduct of (j) No Bribe and Corruption − Do not give expensive a. Are there any precautions you can take as an
business activity. gifts, commissions individual?
and payoffs to people having influence. b. Is there any way to have more support next time?
Business ethics generally deals with what is right or C Is there any way to change your organization?
wrong in the business. Ethics is not only desirable (k) Discourage Secret Agreement − Making secret --------------------
but is essential for the smooth functioning of agreements with other business people to influence Q.7. CORPORATE GOVERNANCE
business. production, distribution, pricing etc. are unethical.
Corporate governance – Definition and Meaning
Features of Business Ethics: There are eight major (l) Service before Profit − Accept the principle of
features of business "service first and profit Corporate governance is the system of rules,
ethics − next." practices and processes by which a company is
directed and controlled. Corporate governance
(a) Code of Conduct − Business ethics lets us know (m) Practice Fair Business − Businesses should be essentially involves balancing the interests of
what to do and what not to do. Businesses must follow fair, humane, efficient a company's many stakeholders, such as
this code of conduct. and dynamic to offer certain benefits to consumers. shareholders, management, customers, suppliers,
financiers, government and the community.
(b) Based on Moral and Social Values − Business (n) Avoid Monopoly − No private monopolies
ethics offers some and concentration of Since corporate governance also provides the
moral and social principles for conducting a business. economic power should be practiced. framework for attaining a company's objectives, it
encompasses practically every sphere of
(c) Protection to Social Groups − Business ethics (o) Fulfil Customers’ Expectations − Adjust your management, from action plans and internal
protect various social groups including consumers, business activities as per the demands, needs and controls to performance measurement and
employees, small businesspersons, government, expectations of the customers. corporate disclosure.
shareholders, creditors, etc.
(p) Respect Consumers Rights − Honour the Scope of Corporate Governance
(d) Offers a Basic Framework − Business ethics is basic rights of the consumers.
the basic framework for doing business properly. It Corporate Governance covers the following functional
constructs the social, cultural, legal, economic and (q) Accept Social Responsibilities − Honour area of governance:
other limits in which a business must operate. responsibilities towards the society.
1. Preparation of the company’s financial statements
(e) Voluntary − Business ethics is meant to be (r) Satisfy Consumers’ Wants − Satisfy the wants of 2. Internal controls
voluntary. It should be self- practiced and must not be the consumers as the main objective of the business is 3. Review of the compensation arrangements for
enforced by law. to satisfy the consumer’s wants. All business senior executives
operations must have this aim. 4. The way in which individuals are nominated for
(f) Requires Education & Guidance − Businessmen (s) Service Motive − Service and consumer's positions on the board
should get proper satisfaction should get more 5. The resources made available to directors in
education and guidance about business ethics. attention than profit-maximization. carrying out their duties
6. Oversight and management of risk.
(g) Relative Term − Business ethics is a relative term. (t) Optimum Utilization of Resources − Ensure
It changes from one optimum utilization of resources to remove poverty Principles of Corporate Governance
business to another and from one country to another. and to increase the standard of living of people.
Commonly accepted principles of corporate
(h) New Concept − Business ethics is a relatively (u) Intentions of Business − Use permitted legal and governance include:
newer concept. sacred means to do
business. Avoid Illegal, unscrupulous and evil means. 1. Rights and equitable treatment of shareholders:
Principles of Business Ethics: The important Organizations should respect the rights of
principles of business Ethical Decision Making shareholders and help shareholders to exercise
ethics are as follows − those rights.
Michael Davis proposed a seven step guide to ethical
(a) Avoid Exploitation of Consumers − Do not decision making; 2. Interests of other stakeholders: Organizations
cheat and exploit should recognize that they have legal, contractual,
consumer. 1. State problem. State your possible ethical social and market driven obligations to non-
problem that makes you uncomfortable or creates a shareholder stakeholders, including employees,
(b) Avoid Profiteering − Unscrupulous business conflict of interest. investors, creditors, suppliers, local communities,
activities such as hoarding, black-marketing, selling customers and policy makers.
banned or harmful goods to earn exorbitant profits 2. Check facts. Many problems disappear upon closer
must be avoided examination of the situation, while others change 3. Role and responsibilities of the board: The
c) Encourage Healthy Competition − A radically. board needs sufficient relevant skills and
healthy competitive understanding to review and challenge management
atmosphere that offers benefits to the consumers must 3. Identify relevant factors. For example, the persons performance.
be encouraged. involved, applicable laws, professional codes or
standards, other practical constraints. 4. Integrity and ethical behaviour: Integrity should
(d) Ensure Accuracy − Accuracy in weighing, be a fundamental requirement in choosing
packaging and quality of 4. Develop a list of options. What other actions or corporate officers and board members.
supplying goods to the consumers has to be followed. decisions are available to you besides the original one Organizations should develop a code of conduct for
that started you thinking? their directors and executives that promotes ethical
(e) Pay Taxes Regularly − Taxes and other duties and responsible decision making.
to the government 5. Test the options using any one of the following:
.( PAGE-5 MIDDLE) 14. Supranational recognition of intellectual
.( PAGE-5) these stakeholders have the incentives, combined with property restrictions (e.g. patents granted by China
5. Disclosure and transparency: Organizations the right degree of control and power, to monitor the would be recognized in the US). PAGE-5-LAST)
should clarify and make publicly known the roles management
and responsibilities of board and management 15. As a consequence of the Globalisation of
(b) External corporate governance controls production and markets, world trade has grown
to provide stakeholders with a level of accountability. faster than world output, foreign direct
External corporate governance controls encompass investment has surged and imports have penetrated
Role/Importance of Corporate Governance the controls external stakeholders exercise over the more deeply into the world's industrial nations.
organization. Examples include:
The role of effective corporate governance is of 16. The developments in communication and
immense significance to society. It can be Competition information processing technology have helped
summarized as follows: Debt covenants firms link their worldwide operations into
Demand for and assessment of performance sophisticated information networks.
1. It ensures efficient use of resources information
Government regulations 17. Development of a global telecommunications
2. It makes the resources flow to those sectors Managerial labour market infrastructure and greater trans-border data flow,
where there are efficient production of goods and Media pressure using Internet communication satellites and
services. Takeovers telephones.
Proxy firms
3. It provides for choosing the best managers to ---------------------------- 18. Increases in the number of standards applied
administer the scarce resources. UNIT III globally; e.g. copyright laws and patents.
4. It helps the managers to remain focused on Q.8. GLOBALISATION Impact of Globalisation on Corporations
improving performance.
Globalisation is a modern term used to describe the Globalisation has influenced the every part of the
5. It pressurizes the organization to comply with the changes in societies and the world economy that Globe. Corporations are changing their strategies and
laws, regulations and expectations of society. result from dramatically increased international are reorganizing their function to cope up with the
trade and cultural exchange. changed scenario. In the changed scenario, they are
6. It assist the supervisor in regulating the entire reorganizing and bringing changes, including:
economic sector without partiality and nepotism. The IMF defines Globalisation as “the growing
economic interdependence of countries worldwide a.Designing in Global Environment
7. It increases the shareholders’ value which attract through increasing volume and variety of cross-border
more investors. transactions in goods and services, freer With globalization, companies adopt global design
international capital flows and more rapid and strategies. Global design has cost benefits that are very
8. It helps in increasing market share and sales. widespread diffusion of technology” attractive to today’s manufacturer, but adds new
Product Lifecycle Management challenges and
9. Employees are more satisfied in the With globalisation, people around the globe are intensifies existing problem areas such as protecting
organizations which follows corporate governance more connected to each other than ever before. intellectual property. Designing products in a
policies. Information and money flow more quickly than ever. distributed approach makes classic control,
Goods and services produced in one part of the communication and collaboration even more
10. It reduces the procurement and inventory cost. world are increasingly available in all parts of the challenging, requiring better management of
world. International travel is more frequent. product innovation, product development and
11. It helps in establishing good rapport with International communication is commonplace. engineering processes and new approaches to
distributors. sharing product designs.
Characteristics of Globalisation
Mechanism and Control b.Production Location Selection
1. Over the past two decades, there is a rapid
Corporate governance mechanisms and controls are Globalisation of markets and production. With globalisation, companies are opting for a
designed to reduce the inefficiencies that arise from production strategy which intended to reduce
moral hazard and adverse selection. There are both 2. The Globalisation of markets implies that production cost by concentrating manufacturing
internal monitoring systems and external monitoring national markets are merging into one huge operations wherever in the world they could be
systems. marketplace. carried out most cost effectively.
(a) Internal corporate governance controls 3. Erosion of national sovereignty and national c.Rationalized Production
borders through international agreements leading to
Internal corporate governance controls monitor organizations like EU. Companies produce different components or
activities and then take corrective actions to different portions of their product line in different
accomplish organisational goals. 4. Development of Global Financial System. parts of the world to take advantage of low labour
costs, capital and raw materials. This is rationalized
Examples include: 5. Reduced transportation costs. production.
Monitoring by the board of directors: The 6. The Globalisation of production implies that d.Vertical Integration
board of directors, with its legal authority to hire, firms are basing individual productive activities at
fire and compensate top management, safeguards the optimal world locations for the particular Vertical Integration is a company’s control of the
invested capital. Regular board meetings allow activities. different stages in a value chain of making of
potential problems to be identified product - from raw material to production to final
Internal control procedures and 7. Two factors seem to underlie the trend toward distribution of product. As international trade
internal auditors: Internal control procedures are Globalisation: declining trade barriers and changes barriers are eliminating, organizations can combine
policies implemented by an entity's board of in communication, information and transportation resources located in more than one country.
directors, audit committee, management and other technologies.
personnel to provide reasonable assurance of the e.Product Strategy
entity achieving its objectives related to reliable 8. Since the end of World War II, there has been a
financial reporting, operating efficiency and significant lowering of barriers to the free flow of To cross borders, organization has to face a very
compliance with laws and regulations. Internal goods, services and capital. critical question of product standardization vs.
auditors are personnel within an organization product adaptation. With globalization,
who test the design and implementation of the 9. Increase in international flow of capital. standardization enabled the advantages in low cost
entity's internal control procedures and the reliability production and distribution of products and services.
of its financial reporting 10. Increase in the share of the world economy In many goods, however, product adaptation is
controlled by multinational essential to meet the local conditions or
Remuneration: Performance-based --------------- -----------
remuneration is designed to relate some proportion 11. Increased role of international organizations Q.9. MULTINATIONAL CORPORATIONS
of salary to individual performance. It may be in the such as WTO, IMF that deal with international
form of cash or non-cash payments such as shares and transactions. The word "Multinational" is a combined word of
share options, superannuation or other benefits. "Multi" and "National", which when combined refers
12. Increase of economic practices like to numerous countries.
Monitoring by large shareholders outsourcing, by multinational corporations.
and/or monitoring by banks and other large Multinational Corporations (MNCs) are defined as
creditors: Given their large investment in the firm, 13. Intellectual Property Restrictions.
every other member. That means all members must
enterprises that are headquartered in one country for the local population.( PAGE-6-MIDDLE) be treated equally when it comes to tariffs. PAGE-6-LAST)
but have operations in two or more countries.
PAGE-6) Encourages competition: MNCs 2. Second, GATT prohibited restriction on the
Sometimes it is difficult to know if a firm is a MNC encourage entrepreneurship and breeds a culture number of imports and exports. The exceptions
because multinationals often downplay the fact that of competition. Increasing competitiveness amongst were:
they are foreign held. For example most of people local companies cause them to improve their own
in India are unaware that Bata is a Canadian company, goods and services by increasing their efficiency. When a government had a surplus of agricultural
Nestle is a Swiss company and Cadbury is British products.
company. Improves Balance of Payments: An If a country needed to protect its balance
added benefit of foreign direct investment is that it of payments because its foreign exchange reserves
Benefits of Being MNCs helps the Balance of Payments of both, the capital and were low.
current accounts, of the host country. Developing countries that needed to protect new
Benefits of being a MNC include: industries.
Criticism of MNCs: In addition, countries could restrict trade
1. Survival: Business organizations in countries that for reasons of national security.
are smaller in size or with shortage of diverse Critics of MNCs state that the cons far outweigh the
resources and opportunities do their business pros that MNCs bring to host countries. 3. The third provision was added in 1965 with
outside their territory as a survival option. Even in joining of more developing countries in GATT and it
big countries, organization do business outside their Colonialism: MNC's are seen as an offshoot of wished to promote them. Developed countries agreed
territory to find new markets for their product and western colonialism. to eliminate tariffs on imports of developing countries
cheap source of resources to remain competitive to boost their economies.
and to survive. Unmatchable influence: The power,
influence and reach of MNCs have enabled them to Pros of GATT
2. Growth of Overseas Market: This is the pressurize governments into letting them become
biggest reason of going abroad. In last 20 years many more competitive via the implementation of For 47 years, GATT reduced tariffs. This
economies have opened their doors for world. This national policies that is conductive to their end goals boosted world trade 8 percent a year during the 1950s
resulted in big opportunity in terms of Market. Technological fraud: Technological and 1960s.
transfer agreements are not always kept. Even if
3. Diversification: Every organization wants to technological transfer happens, the technology By 1995, there 128 members, generating
diversify the risk and internationalization is a good passed onto the country is usually obsolete in nature at least 80 percent of world trade.
manner to diversify the risk. or is patented so it would be of little use to the host # By increasing trade, GATT promoted world peace
country on a global scale. By showing how free trade works,
4. Source of Resources: Organizations go GATT inspired other trade agreements. It set the
abroad in search of economical source of supply. Little or No accountability: MNCs stage for the European Union.
A truly global firm always locates its processing in comprise of international bodies which function
the best available location in the world and outsources beyond the state authorities, in terms of decision GATT also improved communication by
HR and other physical resources from the best making power and the power they hold over monetary providing incentives for smaller countries to learn
suited place in the world. assets. English.
5. To Protect Market Share: Firms also become Undermine Social and Economic Cons of
MNCs in response to increased foreign competition Rights: MNCs' can easily undermine economic and
and a desire to protect their home market share. social rights. Their interference leads to social and Low tariffs destroy some domestic
economic hazards for the public industries, contributing to high unemployment in
6. Tariff and Non-Tariff Barrier: Organizations those sectors.
establish their operation overseas to deal with tariff Strangles Competition: The
and non-tariff barriers. superiority of MNC's throttle competition by By the 1980s, the nature of world trade
local manufacturers, resulting a lot of them leaving the had changed. GATT did not address the trade of
7. Technology Expertise: A reason for becoming field, leaving the MNC's to monopolies the economy. services, for example, financial services.
an MNC is to take advantage of technological
expertise by manufacturing goods directly (by FDI) Unmatched budgets: The MNCs have a GATT reduced the rights of a nation to rule its own
rather than allowing others to do it under a license. huge advertising budget, which enables them to people.
Many MNCs feel it unwise to give another firm portray a much better image in the eyes of the local GATT destabilized small, traditional economies
access to proprietary information such as patent, populace.
trademarks, or ------------------
----------- Human Right abuses: The Q.11. WTO
8. To have an access to Economical Human Multinational Corporation allows for abuses of
Resource: Many a times Companies cross borders to human rights to take place internationally. The World Trade Organization (WTO) is an
have an access to the economical human resource. intergovernmental organization that regulates
Environmental impacts: MNCs want to international trade. The WTO officially commenced
Advantages of MNCs produce in ways that are as efficient and as cheap as on 1
possible and this may not always be the best January 1995 replacing the GATT.
Increase Investment: The primary environmental practice
argument in favour of MNCs is that they enable ----------------------- WTO is the largest international economic
investment into less developed countries which is Q.10. GATT organization in the world. The WTO deals with
essential for their growth. regulation of trade in goods, services and
General Agreement on Tariffs and Trade (GATT) intellectual property between participating countries
Technological Transfers: Any MNC was a legal agreement between many countries, by providing a framework for negotiating trade
operating in a certain country needs to have an whose overall purpose was to promote agreements and a dispute resolution process aimed
agreement to transfer of technology which would turn international trade by reducing or eliminating trade at enforcing participants' adherence to WTO
out to be very beneficial for the host country, barriers such as tariffs or quotas. agreements
since technological advancements require huge
research and development funds that the developing According to its preamble, its purpose was the Functions of WTO
countries just do not have. "substantial reduction of tariffs and other trade
barriers and the elimination of preferences, on a joint The most important functions of the WTO are:
Transfer of skills: Like transfer of and mutually advantageous basis."
technology, MNCs also bring with them a wealth of It oversees the implementation,
knowledge and experience. Their staff is amongst the GATT was signed by 23 nations in Geneva on administration and operation of the covered
best in the world and employees from the less October 30, 1947 and took effect on January 1, agreements.
developed countries learn plethora of skills from them 1948. It remained in effect until the World Trade
Organization (WTO) established on January 1, It provides a forum for negotiations and for settling
Increase in Tax revenue: An increase in tax 1995. GATT and its successor WTO, have disputes
revenue is also an added benefit. This can be used to successfully reduced tariffs.
finance projects that lead to development of It review and propagate the national trade policies
infrastructure, causing economic development. Three Provisions of GATT
It facilitate the implementation, administration
Reduces gap between capital and labour: GATT had three main provisions. and operation of this
MNCs help in reducing gap between capital and Agreement
labour by creating jobs and employment and revenue 1. The most important requirement was that each
member must confer most favored nation status to welfare of the people and also for the economic
PAGE-7 country, prepared by the Finance Minister of the state. development.( PAGE-7-LAST)
It provide the forum for negotiations among its It is through fiscal policy that the government tries to
members. correct inequalities of income and wealth.( PAGE-7-M All public expenditure classified into:
It administer the Settlement of Disputes. Fiscal policy is implemented through Budget, which is a) Non-plan expenditure b) Plan expenditure
statement of state’s a.Non-plan Expenditure: Non-plan expenditure of
It administer Trade Policy Review Mechanism. revenue and expenditure. the central govt. is divided into
Advantages of VAT