Deva Prasad M

Faculty, IIM Kozhikode

 Union Carbide knew the hazardous nature of the chemical being
kept on their industrial premises

 UC claimed – safety standard as required under the India law has

been followed

 Warren Anderson- followed company policy but was aware of the

possible safety issue due to hazardous nature of chemical

 Dow Chemical- takeover of UC- claimed that they have no

responsibility for UC’s corporate past
 The Parable of a Sadhu-

 The Sadhu was helped by each group of people to the extend

possible

 But did they help the Sadhu enough- as required by ‘human

morality’?
 Ethics are a set of moral principles that guide behaviour

 Operates at individual, organisational and societal level

 Difficulty in defining- as ethics could based on a different

framework
 Individual Ethics v. Group Ethics

 ‘I have done by bit’ phenomenon

 How can individuals and impersonal organisations be guided

to “do the right thing” ?
 Social Darwinism – self interest maximization, ignore moral
consequences

 Cultural and ethical relativism

 No model or prior experience of reaching a consensus

 Corporate structure- pressure leading to morally diffused

decision making
 Companies should identify and address actual or potentially
adverse human rights and societal risks that may be
encountered directly or indirectly through its activities and
business relationships
 Awareness creation among employees
 Open door policy, suggestion boxes
 Performance standards should be aimed not only at
shareholder concerns
 Audit of corporate culture
 Hence many business organisations have explicitly mentioned
ethical values and policies

 Based on the norms and standards of behaviour that their

leaders believe will best help them express their identity and
achieve their objectives.

 Certain other organisation may use it based on the implicit

organisation culture:“the way we do things around here”.
 Walk the talk becomes important- Eg. Hema Hattandagy

 Providing impetus through ethical policy – Eg. Tata sons

 “Without corporate support the individual is lost”

 Chief Belief Officer- Future group had appointed Devdutt
Patnaik to this unique position

 “Business depends on how people behave (customers,

employees, stakeholders) and how people behave depends on
what people believe in. Belief is an invisible cultural lever that
shapes all decision-making. Modern management ignores it as
it is not measurable and never objective. My job is to make
people aware of it”. (Business Line)
 Why should law be concerned? Issue with moral limits of
market
 Price Gouging Example:

 The case of free-market- price is determined by supply and

demand

 What is the moral limit of market? Should there be restrictions

on free market?
 Corporations are a separate entity in law:

 What is your idea of corporate accountability?

 Can corporate organizations follow ethics?

 How law should incorporate corporate ethics?

 Separate legal entity
 Company is a distinct person/entity from (Founder/promoter) as
per law
 Limited liability
 (Founder/promoter) liability is limited to the equity contribution

 Santa Clara County v. Southern Pacific Railroad Co- 1886 U.S

Supreme Court
 As a separate legal entity, the company was provided with all the
constitutional rights similar to that of an individual
 The corporate incentives cannot be without responsibilities

 Fiduciary Concept

 Lifting of Corporate Veil

 Stakeholder Theory
 Legal norms evolve- notions of shared value evolve eg. Death
penalty

 Legal norms remains dynamic

 Integrated approach of law and ethics

 Shareholder profit maximization model by stating that management
of a company ‘must attract customers and investors by promising
and delivering what those people value’

 Attracting investments and ensuring the value for investors

 Leads to ‘Investors v. Society’ interest conflict

 Short-term interest of the organisations

 “Autonomous vehicles will soon take over the road. This new
technology will save lives by reducing driver error, yet accidents
will still happen. The cars’ computers will have to make difficult
decisions: When a crash is unavoidable, should the car save its
single occupant or five pedestrians? Should the car prioritize
saving older people or younger people? What about a pregnant
woman—should she count as two people? Automobile
manufacturers need to reckon with such difficult questions in
advance and program their cars to respond accordingly”.
(A New Model for Ethical Leadership- HBR 2020)
 Normative theories that examine the responsibilities of
corporations:

 Shareholder/stockholder theory

 Stakeholder theory
 Milton Friedman’s statement
 ‘There is one and only one social responsibility of business—to
use its resources and engage in the activities designed to
increase its profits so long as it stays within the rules of the
game, which is to stay engaged in open and free competition
without deception or fraud.”
 Basic Principle: managers (including BoD) not to spend the
available resources on any activity without the authorization
from their owners, regardless of any societal benefits that could
be accrued by doing so

 Managers/BoD are merely authorized to maximise profits

within capital provided
 Firm is an instrument for coordinating stakeholder interests
and considers managers as having a fiduciary responsibility
not merely to the shareholders, but to all of them.

 When conflicts of interests arise, managers should aim at

optimum balance among them.

 Managers obliged to partially sacrifice the interests of

shareholders to those of other stakeholders - corporations do
have social responsibilities.
 Has COVID pandemic led to shift in the mindset of corporate
leaders?

 Does it help to have more diverse representation on the

boards?
 ‘A person is holding Property, Information or Power on behalf

of the other persons

 Have discretion to act on behalf of the other person’

 Identify who are holding fiduciary responsibility in a company?

 Candour and Disclosure

 Diligence and Care

 Loyalty and Self-restraint

 Doctrine of Public Trust

 A mediation referee agreed the opportunity belonged to the
joint venture, and awarded Meinhard a 25% interest in the new
business deal

 The court held that Salmon, as the managing partner, owed

Meinhard, as the investing partner, a fiduciary duty, and that
this included a duty to inform Meinhard of the new leasing
opportunity. Joint venture's owe each other the highest duty of
loyalty and Salmon, as managing partner has assumed a
responsibility by which Meinhard must rely on him to manage
the partnership
 The Court found that the directors were grossly negligent,
because they quickly approved the merger without substantial
inquiry or any expert advice.
 For this reason, the board of directors breached the duty of care
that it owed to the corporation's shareholders.
 As such, the protection of the business judgment rule was
unavailable.
 Ovitz did not breach his fiduciary duties when he negotiated
his employment agreement with Disney
 Ovitz did not breach his fiduciary duties by accepting the
severance payout defined in his employment agreement, when
he was terminated
 There was sufficient evidence to show the corporation's
compensation committee did not violate its fiduciary duties
when it approved Ovitz's employment agreement
 In Smith v. Van Gorkom the sale for $735m of TransUnion was
much more significant to the company than Ovitz's hiring here.

 And TransUnion had absolutely no documentation before it

when it considered the merger agreement
 Environment

 Employees

 Political System and Government

 Consumers

 Public Interest and Societal Interest

 Investors
 The findings of ‘Sustainable Company’ project study conducted by the
Department of Private Law, Oslo University, during the period 2010–14
pinpoint the need for incorporating stakeholder responsibility
towards environment protection and sustainability in the corporate
law.
 This project highlights that the shareholder primacy approach acts as
a major hurdle for the internal decision-making process in a
company to adopt sustainable and environmental friendly decisions
 What are the ethical and legal concerns relating to societal and
public interest perspective?
 Compulsory licensing is the right of the government to put to use a patent in public
interest.

 Government can allow business organizations to use the patent on a licensing fee
fixed by government

 In following cases:

 “the reasonable requirements of the public with respect to the patented invention have
not been satisfied, or

 the patented invention is not available to the public at a reasonably affordable price”
 Compulsory Licensing was granted to Natco Pharma for
producing a generic version of Bayer’s Corporation’s patented
medicine Nexavar

 This medicine is used in the treatment of liver and kidney

cancer

 Price of medicine was around Rs.2.8 lakh for a monthly course

 Natco Pharma promised to reduce it to around Rs 8800 per

month
 What is the responsibility of business towards environment?
 Duty of care towards society as well as environmental
protection

 Issue regarding whether the safety standards required as per

the US Environmental laws and Environment Protection Agency
was followed

 The oil company has spent over $26 billion on cleaning up, fines
and compensation for the disaster, which killed 11 people on the
rig and spilled millions of barrels of oil into the Gulf of Mexico for
87 days after the blast on April 20, 2010
 The ship, MV Rak, sank 20 nautical miles off the south coast of
Mumbai with a cargo of more than 60,000 metric tonnes of coal
while on its way from Indonesia to Dahej, Gujarat. It also
contained 290 tonnes of fuel oil and 50 tonnes of diesel on board

 Marine environment degradation issue.

 Can the shipping company be held accountable?

 Upholding the ‘polluter pays’ principle of environmental law, the
National Green tribunal held Panama-based shipping company and
its two Qatar-based sister concerns to pay Rs 100 crore for
damages caused due the sinking of their ship off Mumbai’s coast in
2011.

 The fine has been directed to be paid to the Ministry of Shipping,

Government of India.
 Public interest as the key ethical standard used by law and
judiciary

 Duty of care standards towards environment, society

 Transparency requirement on corporates

 Standard’s and Regulation for Internal Conduct in Corporates

 Coca cola plant in Plachimada, Kerala

 Issues of water exploitation

 Impact on livelihood of farmers as well as right to clean water

was affected

 What should be the responsibility of the company?

 Niyamagiri indigenous people’s right- land rights as well as
issue of cultural identity- Acquisition of land by mining
company

 Bhopal gas tragedy – compensation for the affected families

has not yet be completely paid. US court also refused to
determine the liability stating
 Environmental Impact Assessment

 Liability Standard- Hazardous chemicals industries

 E-Waste Regulation- Extended producer responsibility

 Rehabilitation and Resettlement Policy-The Right to Fair

Compensation and Transparency in Land Acquisition,
Rehabilitation and Resettlement Act, 2013
 Policy-The Right to Fair Compensation and Transparency in
Land Acquisition, Rehabilitation and Resettlement Act, 2013

 Forest Rights Act- Talks about the Free Prior Informed Consent
Principle

 It is reflection of the ethical principles which got translated into

legal requirements
 Reduction in the carbon footprints
 Water conservation measures by Coca Cola, Pepsi

 IKEA’s plan to shift towards making products using recycled raw

materials

 Safe e-waste disposal drive by I.T companies in India

 Green Building Code

 Issue of biotechnology in food – GM food products-GM Brinjal
controversy in India

 Should we adopt the EU Precautionary Principle model or Cost-

Benefit Approach of US?

 How corporates should be regulated and held accountable?

 What is the responsibility of organization towards employees?
 Asbestos Issue – Mining Industry –
 Occupational health hazard
 Can you hold company accountable?

 As awareness increased and doctors diagnosed more people

with mesothelioma, the number of claims escalated to 750,000
in around 20-30 years in US.
 Samsung Electronics apologised to workers who developed
cancer after working at its semiconductor factories, finally ending
a decade-long dispute at the world’s top chipmaker.

 Samsung Electronics will pay the group’s employees

compensation of up to 150 million won ( USD 133,000) per case.
 Andhra Pradesh Mineral Development Corporation (APMDC)-
Quartz mining -1970-80

 Led to the exposure to employees of Silicosis

 This occupational hazard that could have been prevented if

safety protocols had been followed

 Even after finding out company kept on denying the claim of

compensation
 Pay and salary discrimination based on gender- issue in
private sector

 Hiring and promotion discrimination based on gender,

religious criteria’s in private sector

 How to evolve law and address ethical concerns?

 The Rights of Persons with Disabilities (PWD) Act 2016, the IRBI
notes, does not seem to have had a “significant influence” on
companies to disclose their policies on PWD.
 While 81 companies disclosed the number of PWD in their
workplaces, only 19 companies have recognized creation of disabled-
friendly workspaces as part of their policy commitment
 2016 Act creates obligation upon private organizations also
 Legal giant Baker & McKenzie fired a young associate because
he had AIDS
 Court decided this as a work place discrimination that was
held to be “devastatingly cruel”
 The firm was asked to pay his estate more than $500,000.
 POSH Act, 2013 –Safe work place for women

 Low wages issues against Nike- forum shopping low wage

labour

 Rana plaza building collapse, Bangladesh- Worker’s safety

issue

 Class action suit against Uber by drivers

 Does companies have corporate political responsibility?

 Political funding by corporates in India- Is it an allowed

practice?

 Is Lobbying an allowed practice?

 What are the ethical concerns relating to transparency

measures in the corporate conduct?
 “Compared with companies’ efforts to green their operations,
corporate political actions such as lobbying or campaign funding
can have more influence on environmental protection, and
arguably represent the greatest impact a company can have on
protecting—or harming—the environment”

 CPR could be used as part of the Sustainable Investing and Social

Responsibility Investing
 In 2012, as part of a routine disclosure under U.S. law, Wal-Mart
revealed it had spent $25 million since 2008 on lobbying to
“enhance market access for investment in India”.

 This disclosure, which came weeks after the Indian government

made a controversial decision to permit FDI in the country's
multi-brand retail sector, created uproar in India.
 Controversy regarding PR firm of Nira Radia trying to ensure
that a particular politician is not appointed as the Telecom
Minister

 Link between Nira Radia and Tata Group became a major

controversy
 Lobbying Law in India-

 Lobbying is not yet recognized in a statutory or non-statutory

form in India.

 Thus there is no formal mechanism for lobbying regulation in

India.

 Operations like these are being routed through Public

Relations Firms-
 What are the responsibility of business towards consumers?
 Strengthen the compensation framework

 Product recall framework

 Stipulate manufactures responsibility for warning system

 Introduced in India through the Consumer Protection

Amendment Act, 2018

 Duty of care of business towards consumers forms the basis

for product liability
 Ranbaxy had to pay compensation to the tune of $500
medicinal drug quality issues in U.S

 Automobile industry- GM, Toyota have faced major product

liability claims

 Johson and Johson product liability case

 Duty of care- McDonald case

 Should high net worth corporate executives pay more tax?

 Should corporates pay more tax?

 Should companies working in depleting resources shift focus?

 How such companies should work on mitigating activities?

 Sustainability, labour rights concerns in contract
 Can the contractor be asked to follow environmental friendly
practices through terms in the contract?

 Can the contractor be asked to ensure labour standard are followed

?
 Fraud is defined in company law:
 “any act or abuse of position
 committed with intent to deceive, to gain undue advantage from,
 or to injure the interests of a person, company, shareholders, or
creditors,
 whether or not there is wrongful gain or loss”
 Post-Satyam scam- scenario
 Penalty for fraud

 Imprisonment- minimum 6 months to 10 years

 In cases where fraud involves public interest, term of imprisonment

not to be less than 3 years

 Fine: Not less than amount involved in the fraud and extending to

three times the amount in certain case

 Lifting of corporate veil

 Actions on shell company

 Law takes away the

 Limited liability protection

 Separate entity concept

 Generally in cases of fraud, non-compliance with law, evasion

of tax

 Liability is imposed individually on persons

 Task force on shell companies

 Dormant companies and companies defaulting compliance was

de-registered -2.17 lakh companies struck-off from ROC
register

 Director’s were disqualified- 3.2 lakh directors

 Aimed at regulating money laundering or fraudulent activities

 Serious Fraud Investigation Office

 Investigate into corporate fraud and white collar crimes

 Substantial public interest- size of scam or the number of people

affected
 Giving Voice to Value:
https://www.youtube.com/watch?v=Chyw6-UQw_c

 Mental muscle memory

 Enabling framework at the organization level