What Happened to These

Companies?
 Business Ethics

The word 'Ethics' has originated from the

word 'ethos', meaning character or manners.
Business Ethics means conducting all aspects
of business and dealing with all stakeholders
in an ethical manner…
 Are ethics and business compatible?

• In an extreme, altruistic sense, business and ethics may

seem incompatible:
– Earning profits may also be a unethical
– In Islamic finance, earning interest is unethical
– All possessions stem from insecurity; insecurity comes from
mistrust:
• Therefore, possession itself may be unethical in extreme sense
• Lots of businesses may need violence of some degree:
– E.g., Medical research
• Where do we draw the line between business and
morality:
– If the approach is subjective, then ethics lose their meaning as
everyone defines ethics to suit one’s convenience
– Is there a universal, perennial definition of “ethics”?
Ethics are no more in religious texts; they are
a part of business law

• If you think business and ethics are aliens, you are

mistaken
• Not only are ethics respected in business, they are a part of
the law
• In India also, this has been implemented: all directors
annually sign Code of Corporate Ethics
– This is part of Corporate Governance Code
– Clause 49 of the Listing Agreement
 Sources of Business Ethics

Religion Culture Legal System

Ethics
 Morality and religion

• Morality and ethics have their roots in religion

– Religion and business are mutually incompatible

• Religion deals with the inner self; business deals

with the outer world

• Religion deals with contentment; business is a

play of ambition

• They are opposites, not merely incompatible

 When did ethics begin?

• In most cultures, ethics are connected with

divine origins:
– Babylonian civilization received laws of
Hammurabi from sun god
– God gave 10 commandments to Moses
– In Greek civilization, Plato says that god Zeus gave
morality to help mankind
– Manusmriti Samhita incorporates earliest code of
social and legal ethics in India
 Ethics and society

• In fact both religion and ethics serve a common

need: society
• Societies are built on the plank of co-existence and
mutuality
• All societies, whether those of humans or non-
humans, need mutual support, forbearance and care:
– Observed in societies of wolves, baboons, dolphins, etc.
• Thus, two important pillars of all societies are:
– Reciprocity
– kinship
 Ethics – Indian view

• Indian religion has always been associated with philosophy

• The vedas (about 4000 years old) talked about 4 basic goals of existence:
– Prosperity
– Satisfaction of desires
– Moral duty
– Salvation
• Upnisads distinguished between law and ethics – ethics come from inner
desire
• Charavac philosophy was basically materialistic and was a voice of dissent
– In a way, Charvak was reactionary; he was opposing the Brahmanical dogmas
in a sharp way
– Jain scriptures deal with “akriyavad” at length
• Jain philosophy was based on the quintessential principle of non-violence
• Buddha dwelt on compassion and brotherhood
 Ethics – ancient Chinese view

• Two great ancient Chinese philosophers, Lao-tzu,

and Confucius, existed in 6th century BC.
• Lao-tzu, proponent of the rule of Tao, emphasized
simplicity and humility; said rank, social status are
meaningless.
• Confucius’ dealt with ‘superior’ man – one who
aims at good, has ethical values
– One word he gave was reciprocity; do not do unto
others what you do not want to be done to you
 Ethics in ancient Greece

• Early Greek philosophers: Pythagoras, Socrates, Plato and

Aristotle,, have all emphasized ethics
– Pythagoras was contemporary of Buddha and Lao Tzu, and it is contended by
many that he was influenced by Jain philosophy
• Socrates is regarded as one of the major contributors to
Western ethics:
– Socrates did not prescribe ethics but propounded method of enquiry
• Plato, a disciple of Socrates, took forward ethics
– Ethics results from balance of 3 forces: intellect, emotion and desire
• Plato for the first time dealt with long term good and short
term good:
– He said, ethics survive in the long run
• Aristotle propounded the theory known as “Golden Mean” –
somewhat similar to Buddha’s middle path
 Ethics in Christianity
• Jesus was admitted a reformer of Hebrew ethics and did not
innovate a system of his own.
• St Augustine is regarded as one of the first ones to codify Christian
views on ethics:
– He held spiritual bliss on the top of worldly pleasures
– Also rejected the idea that love of God is for fear of punishment in
afterlife
• Long time after St Augustine, French philosopher Peter Abelard
(11-12th century) dealt with ethics:
– Stressed on intentions or the inner consent to a crime
• St Thomas Aquinas (13th century) gave the idea of the “natural law”
– Ethics which are so basic that they require no legislator
• In 17th century England, there came scholars who were called
“intuitionalists” who believed in intuition
• Coming to 17th century England, the idea of enlightened self-
interest came in – that morality does not clash with self- interest
 Can it be ethical, if it is not legal?

• Is law the embodiment of ethics?

• The essence of ethics is long-termism
• Laws are contemporary
– Not all laws are based on foundations of ethics
• Laws change every quarter; surely every year
– The way present-day laws are made, they are full of
errors and aberrations
– Hence, it is possible to draw lines of distinction between
law and ethics
.

Descriptive and Normative Ethics

Descriptive ethics is what is already being accepted as right or desirable or
customary and the present working of an organization is judged in terms of
such prevailing ethical standards. Normative ethics disregards what at
present is considered ethical and prescribe independently what the values or
practices of an organization should be

Traditional and Extended Views

Traditional view of business ethics is basically individualistic. In the
expanded or expansive view, ethical aspects of the proposed or planned
actions at the firm level influence managerial decision-making.
Three Basic Principles of Business Ethics
There are three basic principles of ethics derived from the discipline of
philosophy.
Utilitarianism
Preaches maximum good for the maximum number of people as a result of
an action.

Principle of Rights
Rights can be natural or legal. Natural rights come almost automatically. Legal
rights are provided by law, executive orders or court decisions and are
enforceable by the government.

Principle of Justice
This principle seeks to provide fair or just treatment to individuals and
organizations.
The Corporate Crimes
 Brief history of corporate governance in India

• Unlike South-East and East Asia, the corporate governance initiative in

India was not triggered by any serious nationwide financial, banking and
economic collapse
• Also, unlike most OECD countries, the initiative in India was initially
driven by an industry association, the Confederation of Indian Industry
– In December 1995, CII set up a task force to design a voluntary code
of corporate governance
– The final draft of this code was widely circulated in 1997
– In April 1998, the code was released. It was called Desirable
Corporate Governance: A Code
– Between 1998 and 2000, over 25 leading companies voluntarily
followed the code: Bajaj Auto, Hindalco, Infosys, Dr. Reddy’s
Laboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC, ICICI
and many others
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 Brief history of corporate governance in India

• Following CII’s initiative, the Securities and Exchange Board of India

(SEBI) set up a committee under Kumar Mangalam Birla to design a
mandatory-cum-recommendatory code for listed companies
• The Birla Committee Report was approved by SEBI in December 2000
• Became mandatory for listed companies through the listing agreement,
and implemented according to a rollout plan:
– 2000-01: All Group A companies of the BSE or those in the S&P
CNX Nifty index… 80% of market cap
– 2001-02: All companies with paid-up capital of Rs.100 million or
more or net worth of Rs.250 million or more
– 2002-03: All companies with paid-up capital of Rs.30 million or more

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 Brief history of corporate governance in India

• Following CII and SEBI, the Department of Company Affairs (DCA)

modified the Companies Act, 1956 to incorporate specific corporate
governance provisions regarding independent directors and audit committees
• In 2001-02, certain accounting standards were modified to further improve
financial disclosures. These were:
– Disclosure of related party transactions
– Disclosure of segment income: revenues, profits and capital employed
– Deferred tax liabilities or assets
– Consolidation of accounts
• Initiatives are being taken to (i) account for ESOPs, (ii) further increase
disclosures, and (iii) put in place systems that can further strengthen
auditors’ independence

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 What are the mandated CG guidelines and disclosures

Board of Directors: frequency of meetings and composition

• Board must meet at least at least four times a year, with a maximum
time gap of four months between two successive meetings
• If the chairman of the Company is a non-executive then one-third of
the board should consist of independent directors, and 50% otherwise
• ‘Independent’ defined as those directors who, apart from receiving
director’s remuneration do not have any other material pecuniary
relationship or transactions with the company, its promoters,
management or subsidiaries, which in the view of the board may
affect independence of judgement
– This definition may be soon strengthened

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 What are the mandated CG guidelines and disclosures

Board of Directors: frequency of meetings and composition

• The frequency of board meetings and board committee meetings, with their
dates, must be fully disclosed to shareholders in the annual report of the
company
• The attendance record of all directors in board meetings and board committee
meetings must be fully disclosed to shareholders in the annual report of the
company
• Full and detailed remuneration of each director (salary, sitting fees,
commissions, stock options and perquisites) must be fully disclosed to
shareholders in the annual report of the company
• Loans given to executive directors are capped (no loans permitted to non-
executives), and must be fully disclosed to shareholders in the annual report of
the company
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 What are the mandated CG guidelines and disclosures

Board of Directors: information that must be supplied

• Annual, quarter, half year operating plans, budgets and updates
• Quarterly results of company and its business segments
• Minutes of the audit committee and other board committees
• Recruitment and remuneration of senior officers
• Materially important legal notices and claims, as well as any accidents, hazards,
pollution issues and labor problems
• Any actual or expected default in financial obligations
• Details of joint ventures and collaborations
• Transactions involving payment towards goodwill, brand equity and intellectual
property
• Any materially significant sale of business and investments
• Foreign currency and other risks and risk management
• Any regulatory non-compliance
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 What are the mandated CG guidelines and disclosures

Board of Directors: Audit Committee

• Audit Committee is mandatory
• Must have minimum of three members, all non-executive directors, the
majority of whom are independent
• Chairman must be an independent director, and must be present at the annual
shareholders’ meeting to answer audit or finance related questions
• At least one member must be an expert in finance/accounts
• Must have at least three meetings per year, including one before finalisation
of annual accounts
• Must meet with statutory auditors and internal auditors; have the powers to
seek any financial, legal or operational information from the management;
obtain outside legal or professional advice
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 What are the mandated CG guidelines and disclosures

Board of Directors: Audit Committee functions

• Oversight of the company’s financial reporting process to ensure that the
financial statement is correct, sufficient and credible
• Appointment / removal of external auditor and fixing of audit fees
• Reviewing with management the annual financial statements before submission
to the board, focusing on:
– Changes in accounting policies and practices
– Major accounting entries
– Qualifications in draft audit report
– Significant adjustments arising out of audit
– The going concern assumption
– Compliance with accounting standards, with stock exchange and legal
requirements
– Any related party transactions
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 What are the mandated CG guidelines and disclosures

Board of Directors: Audit Committee functions

• Adequacy of internal audit and internal control systems, through
discussion with internal and statutory auditors as well as management
• Significant findings, follow-up and action taken reports
• Discussion with internal and statutory auditors about scope and design
of audits
• Reviewing financial and legal risks and company’s risk management
policies
• Examining reasons behind any materially significant default to
creditors, bond-holders, suppliers and shareholders

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 What are the mandated CG guidelines and disclosures

Disclosures to shareholders in addition to balance sheet, P&L and cash flow

statement
• Board composition (executive, non-exec, independent)
• Qualifications and experience of directors
• Number of outside directorships held by each director (capped at director
not being a member of more than 10 board-level committees, and
Chairman of not more than 5)
• Attendance record of directors
• Remuneration of directors
• Relationship (familial or pecuniary) with other directors
• Warning against insider trading, with procedures to prevent such acts
• Details of grievances of shareholders, and how quickly these were
addressed
• Date, time and venue of annual general meeting of shareholders
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 What are the mandated CG guidelines and disclosures

Disclosures to shareholders in addition to balance sheet, P&L and cash flow

statement
• Dates of book closure and dividend payment
• Details of shareholding pattern
• Name, address and contact details of registrars and/or share transfer agents
• Details about the share transfer system
• Stock price data over the reporting year, and how the company’s stock
measured up to the index
• Financial effects of stock options
• Financial effects of any share buyback
• Financial effects of any warrants that are to be exercised
• Chapter reporting corporate governance practices
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 What are the mandated CG guidelines and disclosures

Disclosures to shareholders in addition to balance sheet, P&L and cash

flow statement
• Detailed chapter on Management Discussion and Analysis focusing on markets,
operations, finances, accounts, risks, opportunities and threats, internal control
systems
• Consolidated financial statement, incorporating accounts of all subsidiaries
(over 50% shares held by reporting company)
• Details of all significant related party transactions
• Detailed segment reporting (revenues, costs, operating profits and capital
employed)
• Deferred tax liabilities and assets and debit/credit in the P&L for the reporting
year
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