Business Ethics & Corporate Governance

End Term Paper Solution: 2010-2012

1A.
Ethics as a moral and normative science refers to principles that define human
behaviour as right, good and proper.

Ethics is a system of moral principles and attitude that guides our actions to
be morally correct, fair and just.

Ethics is about enforceable morality, justice and fairness of conduct, actions

and governance by individuals, institutions, companies, organisations,
societies and governments.

However, ethics are not the law itself nor are they instruments parallel to the
laws of the land.

Ethics is seen as an individual's own personal attitude and a belief concerning what
is right or wrong, good or bad. It is important to note that ethics reside within
individuals and that organization doesn't have ethics. People have ethics
Nature of Ethics
1. The concept of ethics deals with human beings only. Only human beings are
endorsed with the freedom of choice.
2. The study of ethics has become a set of systematic knowledge about moral
behavior & conduct;- field of social science.
3. The science of ethics is a normative science.
4. It deals with human conduct which is voluntary & not coerced by persons. It is
basically an area dealing with moral judgment regarding voluntary human
conduct
1B.
The Organization for Economic Cooperation & Development was one of the
earliest non-governmental organizations to work on & spell out principles &
practices that should govern corporate in their goal to attain long tern
shareholder value
The OECD principles have won universal acclaim on the subject of CG
OECD Principles
They include the following aspects:

1. Rights of Shareholders
2. Equitable Treatment of Shareholders
3. Role of Stakeholders in Corporate Governance
4. Disclosure and Transparency
5. Responsibilities of the Board
2A.
Social Contract Theory
It stresses that all businesses are ethically duty bound to increase the welfare
of the society by catering to the needs of the consumers & employees
based on the principles of social contract, wherein it is assumed that there
is an implicit agreement between the society and any created entity such as
a business unit, in which the society recognises the existence of a condition
that it will serve the interest of the society in certain specified ways.
What conditions would have to be met for the members of a society to agree
to allow a corporation to be formed? (Assumed Contract)
Therefore, the social contract theory is based on an assumed contract
between businesses & members of the society who grant them the right to
exist in return for certain specified benefits.
Corporations are expected to create more value to society that it consumes.
Social contract:
1. Social welfare corporations must produce greater benefits for the society
2. Justice corporations must pursue profits legally, without fraud or
deception, and avoid actions that harm society.
It implies that members of the society are interested to authorize the
establishment of a business firm only if they gain some advantage by doing
so. Such gains occurs to them in two ways; as consumers and employees
As consumers increased economic activity; stable level of production and
channels of distribution
As Employees income potential, social identity, income allocation scheme
Thus to produce social welfare element of social contract, the business firms
should act in such a manner so as to:

 Benefit consumers to enable them reach maximization of their wants

Benefit employees to enable them secure high incomes & other benefits that
accrue by means of employment
Ensure that pollution is avoided, natural resources are not fast depleted &
workers interests are protected
Criticisms of social contract theory
So called social contract is no contract at all and therefore fictitious
Social contract is neither explicit or implicit. Only law of land is followed.
Based on the should and must do approach.
2B
The Cadbury Committee on Corporate Governance, 1992
Stated Objective was to help raise the standards of corporate governance
and the level of confidence in financial reporting and auditing by setting out
clearly what it sees as the respective responsibilities of those involved and
what it believes is expected of them.
The Cadbury committee investigated the accountability of the board of
directors to shareholders and to the society.
The Cadbury Code of best Practices had 19 recommendations in the nature of
guidelines to the board of directors, non-executive directors, executive
directors and such other officials.
Relating to the board of directors, the recommendations
Relating to the non-executive directors the recommendations
Relating to reporting & controls, the recommendations
2A
Ethics and religion
The worlds great religionsChristianity, Hinduism, Islam & many other
religions have all left their permanent marks on morality and the conduct of
people in every aspect of Human Endeavour, including business. Every
religion has provided its followers its own set of moral instructions, beliefs,
values and virtues, traditions and commitments.
Teachings of the Church

 The Church always supports and promotes the welfare of the poor. People
often think how we can relate business and ethical teachings of Church. But
now the trend has changed and organizations and institutions relate business
with religion and ethics. This transition is due to the increased importance of
ethics in business. The Church's concerns and ethical teachings are found in
several papal encyclicals, i.e, letters the pope writes to his followers.
Gitas message in an organization
When applied to an organization where one is only worried of the result, he is
likely to fall into improper activities. On the other hand, if he is ready to do his
duty to the utmost of his ability and set aside the result, he will be an ethical
person in the organization
Business and Islam
For Islam, all principles covering business originate from the Holy Quran, as
they are explained and amplified in the Hadith (collection of the Prophets
sayings)
The Prophet Mohammed ordained that businesses should promote ethical and
moral behaviour and should follow honesty, truthfulness and fulfilment of
trusts and commitments, while eliminating fraud, cheating, cut-throat
competition, lending money at interest to people in need and false
advertising.
2B
1. Recognise and identify the kind of ethical issue you need to resolve
2.Pause and Think
3. Make Sure of Your Goals
4. Get Your Facts Right
5. Evaluate choices from Different Ethical Perspectives
6. Consider the Consequences
7. Make a Decision
8. Act, then Reflect on the Decision Later
3A
Sarbanes-Oxley Act, 2002

 The Sarbanes--Oxley Act (SOX Act), 2002 is a serious attempt to address all
the issues associated with corporate failures to achieve quality governance
and to restore investor confidence.
The Act was formulated to protect investors by improving the accuracy &
reality of corporate disclosures.
Contains a number of provisions that dramatically change the reporting
structure of public companies.
Important provisions of SOX
1. Establishment of Public Company Accounting Oversight Board (PCAOB)
2. The SOX provides for a new improved audit committee
3. Conflict of interests
4. Audit partner rotation
5. Improper influence on conduct of audits
6. Prohibition of non-audit services7. CEOs and CFOs required to affirm/certify financials
8. Loans to Directors9. Attorneys
10.Securities Analysts
3B
CSR as a business strategy for sustainable development
When CSR is adopted as a business strategy for sustainable development, it
goes to improve corporate performance: It offers multiple benefits to corporations both internally & externally Externally it creates a positive image & goodwill among the public & earns a
special respect amongst different stakeholders which go a long way in
promoting long term shareholder value & sustainable development
Internally it cultivates a sense of loyalty & trust amongst employees
It provides workers a feeling of satisfaction & a meaning to their lives

 Thus because of all these positive factors that organizations involve

themselves in socially responsible investing (SRI)
Evaluation of CSR Activity
3 basic principles to measure the impact of CSR:1. Sustainability
2. Accountability
3. Transparency
3A
Agency Cost
3B

An ethical dilemma is a moral situation in which a choice has to be made

between two equally undesirable alternatives.

ASK THREE QUESTIONS

To resolve these questions that create a dilemma, ask three questions

Utility: Do the benefits exceed the cost?

Rights: Do they respect human rights (Society)?

Justice: Does it distribute benefits and burdens evenly (Employees)?

4A

The report on corporate governance set up by SEBI under the chairmanship

of N.R.NARYAN MURTHY was submitted in february 2003.
The main objective of the report was: to review the performance of corporate governance

to determine the role of companies in responding to rumour and other

price sensitive information circulating in the market in order to
enhance integrity of the market.

MAJOR POINTS IN THE REPORT

Disclosure of contingent liabilities.
Certification by CEOs and CFOS.

 Definition of independent directors.

Independence of audit committees.
The committee came up with 2 sets of recommendations namely, mandatory
recommendations & non-mandatory recommendations
4B
CG Rating
The DCA has set up an institute to rate corporate governance excellence
similar to credit rating agencies such as CRISIL
This institute will undertake research in the area of CG to be able to improve
the overall legal framework & to advise companies & directors on how to
improve CG excellence
Individual corporate ratings will be made available to investors, lenders & the
public.
The institute will be funded from the penalties paid by the companies for
violating the provisions of companies act.
ICRAs Rating Methodology

1.
2.
3.
4.
5.
6.

CG rating is done by ICRA.

In order to evaluate CG, ICRA analyze the following parameters:
Shareholding structure
Governance Structure & Management Process
Board Structure & Process
Examine Stakeholder Relations
Transparency & Disclosures
Financial Discipline
4A

There are different models of corporate governance around the world & they
differ according to the economic style, social priorities & business philosophy
of the country or state in which it operates
CG model provides a framework of effective accountability to stakeholders
It influences the process of decision making
Procedures to set companys objectives
Means to achieve the desired results
Models of CG:
The Anglo-American Model
The Coordinated Model

 The Family-Owned Company Model

4B

CLASSIFICATION OF
ETHICAL THEORIES
Egoism
The view that links morality with self interest is referred to as egoism. (the
desired is the long-term self-interest 0f the individual)
Therefore it can be said that egoism is an ethical theory that treats self
interest as the foundation of morality.
Egoism contends that an act is morally right if and only if it best promotes an
agent's (persons, group or organizations) long term interests
makes use of self interest as the measuring rod for actions performed
Decisions based on egoism mainly are intended to provide positive
consequences to the party's interest without considering the consequence to
the other parties
Two kinds of egoism: Personal & Impersonal
The Personalist theory argues that person should follow their long term
interest & do not dictate what others should do.
Impersonal egoists argue that everyone should follow their best long term
interest , but it doesnt mean that an egoist will act against the interest of the
society.
Criticism
1. Egoism as an ethical theory is not really a moral theory at all.

2. Psychological egoism is not a sound theory as it assumes that all

actions of men are motivated by self interest.
5A

Section 2 (13) of the Companies Act defines a director as follows: A director

includes any person occupying the position of director by whatever name
called.

Duties and Responsibilities of Directors

The directors have certain duties to discharge. These are:

(i) fiduciary duties

(ii) duties of care, skill and diligence;
(iii) duties to attend board meetings;
(iv) and duties not to delegate their functions except to the extent authorized by the
Act or the constitution of the company and to disclose his interest.
RESPONSIBILITIES OF DIRECTORS
1. An efficient and independent board should be conscious of protecting the
interests of all stakeholders and not be concerned too much with the
current price of the stock.
2. Another important function of the director is to set priorities and to ensure
that these are acted upon.
3. A director is also expected to have the courage of conviction to disagree.
4. Directors have great responsibility in the matter of employment and
dismissal of the CEO.
5. One of the toughest challenges confronted by boards arises while approving
acquisitions.
6. An efficient board should be able to anticipate business events that would
spell success or lead to disaster if proper measures are not adopted in time.
7. The directors have a duty to act bona fide for the benefit of the company as a
whole.
5B
Justice Principles
Associated with issues of rights, fairness & care.

A just act respects your rights. A just act treats you fairly.

Principles of justice may be divided into three types1. distributive justice

2.

retributive justice

3. compensatory justice.

5B

An executive director is one, who is an executive of the company & who is

also a member of the board of directors.

A non executive director has no separate employment relationship with the

company

Independent non executive directors are those directors on the board who are
free from any business or other relationship, which could materially interfere
with the exercise of their independent judgment in the process of decision
making as a member of the board

An affiliated director is a non executive director who has some kind of

independence, impairing relationship with the company or the companys
management

e.g: director may have links with a major supplier, or may be a partner in a
professional firm that supplies services to the company or may be a retired top
management professional of the company.

The BoD of a company must have an optimum combination of executive &

non executive directors with not less than 50% of the board comprising of
non executive directors.

In case a company has a non executive chairman, at least one third of the
board should comprise independent directors & in case a company has an
executive chairman, at least half of the board should be independent.