ETHICS AND VALUES IN MANAGEMENT

PGDM BATCH : 2013-2015
SECTION 135 – COMPANIES ACT, 2013: ETHICAL OR UNETHICAL?!
STATUS : INTERIM REPORT

SUBMITTED TO PROF. GOVINDA SHARMA

BY GROUP NO C7 DATE: 10-02-2014

2013: ETHICAL OR UNETHICAL?! Comment [NRGS1]: Pl see me .COMPANIES ACT.SECTION 135 .

..................................................................... 87 ..................................................................................................... 65 CONCLUSION ..............................................................................................................Contents INTRODUCTION .................................................. 43 CSR AS AN ETHICAL DILEMMA .......... 54 THEORIETICAL APPROACH .................................................................................... COMPANIES ACT 2013 ...................................................................... 32 ETHICAL ISSUES WITH SECTION 135......................................................................... 65 BIBLIOGRAPHY ................................

5 crore. The fundamentals of CSR rest on a thesis that not only public policy but even corporates should be responsible enough to address social issues. The government has not set up any audit mechanism as to keep a check on how the mandated 2% of the profits are being spent. Companies having net worth of at least Rs. Social business projects. Government. discussion and consultation between Corporates. They have to give written explanation as to why the company should be exempted from this regulation. Combating HIV. (cuts-international. Reducing child mortality and improving maternal health. 6. The Companies Act. along with a customary line – “such other matters as may be prescribed”.1.: 1. Schedule VII of the draft rules specifically mention a list of eight activities which may be included by companies in their CSR policies.INTRODUCTION The concept of corporate social responsibility (CSR) has a long history associated with how it impacts on organizations' behavior. Gender equality and women empowerment. Eradicating extreme hunger and poverty. NGOs etc. The term CSR was coined by Howard Bohen in 1953 through his famous article „Social responsibilities of Business‟. with CSR referring to way that businesses are managed to bring about an overall positive impact on the communities. (Bohen. 9. Formatted: Highlight Comment [NRGS2]: Citation This Schedule can be amended by the government and need not go back to Parliament for any change.500 crore or having minimum turnover of Rs.org. 8. Parliamentarians. cultures. societies and environments in which they operate. (Townsend. 2013 has evolved over a period of time through debate.000 crore or those with at least net profit of Rs. 5. 7. have to spend at least 2% of their three-year average annual net profit towards CSR activities. One of the interesting things about Section 135 is that it does not lay out any penalties for non-compliance. Environmental sustainability. Contribution to PM‟s National Relief Fund and such other funds set up by Government. The corporates have the liberty to maintain to do internal auditing or third party auditing. 2013 also has provision through which companies can exempt themselves from exercising section 135. Civil Society. 2. The objective of Section 135 of the Companies Act. 2014) First reports on the lines of Corporate Social Responsibility are attributed to Ben & Jerry‟s as well as Shell. Provision of vocational skills. 2013) Formatted: Highlight Comment [NRGS3]: ! . 2011) The evolution of corporate social responsibility in India refers to changes over time in India of the cultural norms of corporations' engagement of corporate social responsibility (CSR). malaria and other diseases. Education. 3. 4.

be utilized for CSR activities. In their normal course of business they are doing socially responsible activities which should be taken into account as part of CSR. Highlight Comment [NRGS4]: This is central question. in the process they provide technical and financial support to farmers. even if it is spending for CSR. The next issue to delve on is that if it is right that shareholders money is used by the company to perform CSR activities. Companies almost always tend to look for their benefits. 2011) On the other hand.ETHICAL ISSUES WITH SECTION 135. the question over here seems to be that whether it is really right on part of the government to impose such a restriction of 2% on companies towards CSR. (The Economic Times. At times what they mention in public about their projects and what they actually say to the NGOs are very different behind closed doors when it is lobbying government or through industry mouthpieces. Formatted: Highlight . they portray themselves as an organization that cares for society and does well for them. Under this collaborative farming model they procure around 45 per cent of its current total requirement of 2. it creates a wrong incentive for the company to act upon as they very often try various means to look ethical by performing unethical activities and camouflaging them as CSR activities. Many companies tie up with NGOs and gain access to target markets that they could not reach out to easily. It should be left to the free will of a company to help society and if they want they shall help the societies is something that cannot be imposed on someone just to prove that good is being done for society. instead companies know that by educating the village children they may not gain as much as they would. Since many a companies like PepsiCo are already looking to enhance potato procurement through its tie up with farmers by around 20 per cent to 65 per cent in India in the next five years. Comment [NRGS5]: This is contestable. Formatted: Font: 12 pt. COMPANIES ACT 2013 Since the law enforces that 2% of the average net profits made by the company during every block of three years. 2013) Competitive aspirations of a company are itself acting as a boon for the potato farmers in case of PepsiCo. (Vijayaraghavan.40 lakh tones of potato per annum by working with farmers. thus creating a very strong image for themselves in the mind of the people. So they decide to set up system through which they create an infrastructure to help farmers in their produce and indirectly create a proper source of supply for themselves and call it CSR. it could be that the actual need in the village is to educate the children of the village. It is equivalent to saying that you want to do good for someone but at the expense of someone else‟s money. With the help of their efforts in the NGO. for example if they do a project for a particular village.

Comment [NRGS6]: With a government mandate. When a company is asked to part with its net profit all it would be instigated to do is to fill in this gap in the profit that the company had to give up by asking the consumers to shell more than what they used to spend on the same commodity or services. or be an ethical person and devote yourself to self-improvement and self-fulfillment. 2009) You can be an ethical person and pursue a life of service to the community. 2013) If a company chooses not to spend on CSR. See comment 7 Formatted: Highlight Formatted: Highlight Comment [NRGS7]: See comment 6 Formatted: Highlight . An organization which idealistically prioritizes on promoting social benefits is no better or worse. and pursuing your own personal goals and projects. apart from the goodwill ones loses from not being a part of CSR. They would not only lose the edge over their competitors just because they would be seen as “socially irresponsible” but also would fail in building a strong PR subsequently. And when it comes to the case of Corporate Social Responsibility (CSR) the ethical dilemma it hold is “to spend or not to spend”. This is the dilemma that every company is finding itself in. all it desires to do is to reinvests its entire profit in the business itself and ensure its stakeholders are benefited which also includes its customers and indirectly benefiting the society with the goods and services its providing. Whether to give up 2% of company‟s net profit into CSR activiti es with an expectation of attaining good will of the society. 2014) An argument that revolves around the effect of you cannot do “so-and-so” and yet you must do “so-and-so” is a perfect case of an ethical dilemma. A company that decides to be a part of the CSR activity as mentioned in Section 135 of the Companies Act. When a company decides to stay from this. (Klempner. this is no more a dilemma but a statutory requirement. expects itself to be not only seen as an “ideal corporate” in the eyes of the common public but also desires to acquire an edge over other companies in the same business line in being socially concerned and responsible. boost up their PR front or to reinvest this 2 % net profit and establish a self-sustaining business. Does abiding by Section135 of Companies Act give a clean chit to companies like Monsanto? Can they expect not to be referred to as “the most hated company in the World” if they take up CSR activities? (Planes. The dilemma is to be a part of this or stay away from it. than a company which benefits society by concentrating its entire focus on creating wealth and providing employment through the pursuit of profitable activities. in itself.CSR AS AN ETHICAL DILEMMA “The road to hell is paved with good intentions” – St Bernard of Clairvaux (Wikipedia. they also would have government on their back and this would give a great chance for the media to paint them black.

There is a whole lot of difference between spending your own money voluntarily and spending shareholders money. Indicate page number CONCLUSION “To be or not to be is not a question of compromise. Edward Freeman that says manager should give all stakeholders a fair share of the benefits a business produces. The current stipulation from the government through Section 135 of the Companies Act. Prices are only a mechanism to guide resources to where it has the most optimum use and profits are an incentive for people to work. (Velasquez.THEORIETICAL APPROACH Principle of Fairness: This theory was developed by Robert Philip which formed a normative argument for various other theories that claim for ethical obligation in corporate social responsibilities. Comment [NRGS8]: Fill in all relevant fields. 2014) Stakeholder Theory: This view was put forwarded by R. The primary objective of a business entity is to maximize value for both its shareholders and customers and CSR hinders the same. 2013 runs contrary to dreams and desires of millions of shareholders who put their hard earned money in various companies through stock markets. Either you be or you don’t be”-Golda Meir (Golda Meir. Spending 2% of profits in activities other than in the natural course of business is required to term it as a CSR activity. Shareholder Theory: The shareholder view of Friedman says a manager‟s only responsibility is to legally and ethically make as much money as possible for shareholders. because the money does not belong to the manager but to shareholders. as well as behaving ethically and legally towards its stakeholders. According to this theory. as every other company helps its fellow Formatted: Highlight . (Velasquez. (Shareholder Theory)This theory claims that a company‟s stakeholder work together to secure the conditions the company needs to operate successfully and they do this at some cost to themselves. 2014) Companies should be responsive to all its stakeholders and that would include making the economic and discretionary contributions society expects. 2013) Every single business stays in the market and sustains itself only because it is providing its fellow beings something that is of utility. The Principle of fairness says that if a group of people works together to provide some benefits at some cost of them. a manager has no right to give company money to social causes when doing so will reduce shareholder‟s profit. In real life it is not the same. then anyone who takes the advantage of those benefits has an obligations to contribute his or her share to the groups. This act of providing something of utility in itself is a social work.

which is not a responsibility of a responsible business entity. 5. Ensure dealers are given maximum value for the time they are investing in you. The responsibilities of a business towards its various stakeholders are: 1. 3. It would be better to see this section of Companies Act. Mobile and Airline industry are prime examples of how increased efficiency can reduce the cost and bring social change. In the nutshell. 2013 getting repealed and this basic idea of social responsibility be left to corporates to decide and voluntarily work upon. The money that could have been re-invested in the business to either expand or to become more efficient would now be squandered away in the name of CSR. Formatted: Highlight . Efficiency in business reduces the cost. Moreover it is a loosely drafted law which can be easily taken for a toss. Ensure suppliers are given commensurate to the services that they provide. CSR also hurts the consumers as the cost of being philanthropic is passed on to customers in terms of shoddy services and high prices. Ensure employees are given salaries and benefits adequate to the skill sets that they provide. mandating CSR seems to be nothing more than a despotic act of a growingly tyrannical government which asks people to spend what rightfully belongs to them on something that they voluntarily would never spend on.beings in the very course of its normal business activities. A company that should be focused on its core business activities and responsibilities stated above would now be cracking its head on how to spend 2% of its profits on philanthropy. Maximize profits for the shareholders. Give maximum value for the price paid by the customers. 2. 4. and the benefit of which is passed on to the consumers as low prices.

Retrieved from klempner. 12. March 24).com/2013/06/08/why-is-monsanto-the-most-hated-company-in-theworl/ 9. Golda Meir. A.cutsinternational. Shareholder Theory.org: http://klempner. Retrieved from colorado. The Guardian.economictimes. February 09).org: http://en.edu/~vancecd/phl306/share. (2014).org/wiki/Golda_Meir 3. Vijayaraghavan.BIBLIOGRAPHY 1. Retrieved from Wikiquote. Velasquez. August 03). (1970. (2014.html 8. Bohen. (2011. January 09).pdf 10.wikipedia.htm 6. M. Retrieved from rintintin.org: http://en.com: http://www. Planes.freeshell. Klempner. (n. (2013. Retrieved from theguradian. Wikipedia.org/pdf/Draft-CSR_Rules_2013.org: http://uiowapress.org/books/2013-fall/social-responsibilities-businessman.org: http://www.com: http://www. G.dailyfinance. CSR AN ETHICAL DILEMMA. A.colorado.). (2011. Retrieved from economictimes.pdf 2. February 08). Retrieved from wikipedia.org/wiki/The_road_to_hell_is_paved_with_good_intentions 5.org/articles/dilemma.edu: http://rintintin. University of Iowa Press.edu: http://www. (2014. September 13). H. The Social Responsibility of Business is to Increase its Profits. S. Retrieved from uiowapress.indiatimes. Retrieved from www.html 7. (2013. Retrieved from cuts-international. Townsend.indiatimes. (2013.edu/studentgroups/libertarians/issues/friedman-soc-resp-business. Friedman. july 26).com/2011/07/making-csr-mandatory-india/ . M. Sep 25). (2009.triplepundit.wikiquote. feb 10). Business Ethics Concepts and Cases.theguardian. Retrieved from dailyfinance. G.com: http://www.colarado.com/sustainable-business/blog/sustainability-csr-reporting 11.com: http://articles.colorado.freeshell.triplepundit. June 09). (2013.d. Delhi: Pearson Prentice Hall. Triple Pundit. The Economic Times.com/2013-09-25/news/42394669_1_drip-irrigationfarming-market 4. Daily Finance.

most importantly resolution of the dilemma and suggestions for avoiding such dilemma in future (recommendation of systemic changes) Max marks 3 4 3 Marks obtained 2. Adopt APA style.5 Comment [NRGS9]: This section needs improvement.Sl No 1 2 3 Criteria for evaluation Description of the ethical issues and dilemma Application of ethical theories and approaches to resolve the dilemma Quality of referencing Pl note that referencing is extremely important for an objective study. Discussions are sketchy. The quality of articles referred should be very good. I will be evaluating your report for the components mentioned under “Basis for evaluation” (see page 5 of the Course Hand out). .5 2. Comment [NRGS10]: All references are to be built into body text. 10 7.5 2. Regulatory assumptions can be questioned from the two perspectives. Total Pl note that in the final report." which is a strong critique of the assumptions of neoclassical/institutional economists. Fill in all fields of reference.5 The Friedman article could be contrasted with the 2005 article by Sumantra Ghoshal in Academy of Management Learning and Education on "Bad Management Theories Are Destroying Good Management Practices.

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