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COURSE CODE: MBA 4.

INDIAN ETHOS AND BUSINESS ETHICS


LECTURE NOTE -2009

SYLLABUS

SYLLABUS

Course objectives:
To understand the importance of ethics in business, and ,
To acquire knowledge and capability to develop ethical practices for effective
management.

Module I
Ethics, culture and values: Importance of culture in organisations; Indian ethos and
value systems; concepts of Dharma; Nishkama karma and Purusharthas; Model of
management in the Indian socio political environment; Work ethos; Indian heritage in
production and consumption.
Module II
Business ethics: Relevance of values in Management; Holistic approach for
managers in decision-making; Secular vs spiritual values in Management; Ethical
relativism; whistle blowing; Stress in corporate management;
Module III
Ethics management: Role of organisational culture in ethics; structure of ethics
management; Ethics Committee; Ethics Officers and the CFO; Communicating ethics;
Ethical Audit; Corporate Governance; Transparency International and other Ethical
bodies.

Books:
1. Chakraborty, S.K.: Foundations of Managerial Work Contributions from Indian Thought,
Himalaya Publishing Hose, Delhi 1998.
2. Chakraborty, S.K.: Ethics in Management: Vedantic Perspectives, Oxford University Press,
Delhi 1995.
3. Boatright, John R: Ethics and the Conduct of Business, Pearson Education, New Delhi 2005.
4. Kumar, S. and N.K.Uberoi: Managing Secularism in the New Millenium, Excel Books 2000.
5. Griffiths, B: The Marriage of East and West, Colling , London 1985.
6. Trevion and Nelson: Managing Business Ethics, John Wiley and Sons, 1995.

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M O D U L E

MODULE I

The terms 'values', 'ethics', 'integrity' and 'conduct' are often used interchangeably
and uncertain language is one of the barriers to establishing a widely understood
framework for ethics. For the purposes of this paper, the following definitions will
apply:

Ethics - what ought to be; the ideals of what is just, good and proper;
Values - the commonly held beliefs that guide judgment about what is good
and proper, and from which ethical principles derive;
Integrity - normally one of the key ethical values; but also used in the current
Departmental Performance Assessment as synonymous with a departmental
framework for ethics (see Part Five);
Codes of conduct
conduct - the rules that translate ideals and values into everyday
practice; and
Conduct - the actual behaviour and actions of public servants.

Normative ethics is largely about values and the accepted norms for 'right' conduct.
Applied ethics is the practical application of values and standards, which sometimes
involves choosing between values in a particular context. This paper is concerned
with applied ethics, where values are translated into conduct.

CULTURE
The word "culture" is most commonly used in three basic senses:

The set of shared attitudes, values, goals, and practices that


characterizes an institution, organization or group.
an integrated pattern of human knowledge, belief, and behavior that
depends upon the capacity for symbolic thought and social learning
excellence of taste in the fine arts and humanities, also known as high
culture

When the concept first emerged in eighteenth- and nineteenth-century Europe, it


connoted a process of cultivation or improvement, as in agriculture or horticulture. In
the nineteenth century, it came to refer first to the betterment or refinement of the
individual, especially through education, and then to the fulfillment of national

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aspirations or ideals. In the mid-nineteenth century, some scientists used the term
"culture" to refer to a universal human capacity.
In the twentieth century, "culture" emerged as a concept central to anthropology,
encompassing all human phenomena that are not purely results of human genetics.
Specifically, the term "culture" in American anthropology had two meanings: (1) the
evolved human capacity to classify and represent experiences with symbols, and to
act imaginatively and creatively; and (2) the distinct ways that people living in
different parts of the world classified and represented their experiences, and acted
creatively. Following World War II, the term became important, albeit with different
meanings, in other such as sociology, cultural studies, organizational psychology and
management studies.
Organizational Culture
One of the most important building blocks for a highly successful organization and an
extraordinary workplace is "organizational culture." We define organizational culture
as the set of shared beliefs, truths, assumptions, and values that operate in
organizations. Organizational culture has been described as "...how people behave
when no one is looking."
"...We believe that organizations will ultimately get only as far as their organizational
cultures take them."
Why should you think about this in your organization? Because "behind the scenes"
of what happens in the day-to-day life of organizations and employees... is culture.
Culture is everywhere. It directly impacts what happens...or does not happen in
organizations. At Dynamic Foundations, we place so much stock in organizational
culture that we believe organizations will ultimately get only as far as their
organizational cultures take them.
Furthermore, something is driving the development of your culture and sustaining it.
Organizational culture is a result of that which precedes it. Why this is so important to
understand and what does this mean for you in your organization? It means that if
you want to address issues related to your culture, you must focus on the key
elements that come together to create and sustain it.
Organizations are more than they appear to be on the surface. Behind products,
policies, services, and rewards are the ingredients which determine the results in
organization. We believe that organizational culture is a primary, if not the primary
determinant of that which separates "champion" from "also-ran" organizations. We
believe an organization can go only as far as its culture takes it. We help
organizations get their "cultural bearings," get a clear sense of how far they are from
where they wish to be, and what it will take to get "there." Then we help organizations
move themselves forward.

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Organizational Cultural Transformation


Organizational cultural transformation is not for the faint of heart. In fact, many
attempts at transforming an organization fail, for a variety of reasons:

"Playing at it" or "dabbling" with it until it's no longer fun


Not applying the kind of leadership that would best meet the needs of the
situation
Intervening in the wrong places or at the wrong time
Not taking this work seriously enough
Not giving it enough time or attention
Senior leaders "delegating" this work (rather than committing and investing
their own time and energies)
Knowing what needs to be done but being unwilling to do it...to go all the way
Not having the people and tools available internally to get the job done
Inability to engage all the right people in the process

Elements of organizational culture may include:

Stated and unstated values.


Overt and implicit expectations for member behavior.
Customs and rituals.
Stories and myths about the history of the group.
Shop talktypical language used in and about the group.
Climatethe feelings evoked by the way members interact with each other,
with outsiders, and with their environment, including the physical space they
occupy.
Metaphors and symbolsmay be unconscious but can be found embodied in
other cultural elements.

IMPORTANCE OF CULTURE IN ORGANISATIONS


(a) Culture is an evolutionary concept. It is developed by individuals (managers) in an
organization. A good organization is represented by its culture. Hence, culture is alive.
(b) Culture is certain set of `practices followed by individuals. Such practices are
evolved through proper experimentations. A live organization has got values. Such
values are inseparable and are a product of labour.
(c) Since an organization is represented by its practiced culture, it is `alive and has
`values. Image is nothing but an expression of `culture as is patronized by the
`society. It has a form and the same is imprinted in the minds and hearts of
individuals.
(d) Culture is represented by each and every organisation in one way or the other and
such practices forms part of organizational culture. It is through steady efforts and

practices that such a culture is represented to the outside world, in the form of
organizational culture.
(e) Culture is the backbone of each and every organization. It is based on this image
that an organization is built and hence culture acts as a foundation based on which it
is formed.
(f) The essential quality of culture is that it is unique for each and every organization.
It is built based on steady and steadfast efforts as nourished by the individuals
through hard core labour.
(g) When an organization absorbs another organization then a `wedding of different
culture takes place. This is the principle of polygamy.

INDIAN ETHOS AND VALUE SYSTEMS


Every country has its own culture and character based on the social, political and
economic environment in which it operates. From that culture springs forth the
national ethos, which prescribes a code of conduct for its citizens and creates the
context for business ethics and values in that society. Indian ethos and wisdom a
legacy and heritage from its hoary past envisaged a socialistic pattern of society,
with an accent on redistributionism. It has always been a champion of renunciation
and rectitude, rather than accumulation and aggrandisement.
Mahatma Gandhiji once said that it was difficult, but not impossible, to be an honest
businessman; but it was impossible to be honest, and also, amass wealth. He
advocated a simple and self-sustaining lifestyle based on the dictum that while there
was always adequate means to meet the needs of everyone, it was not enough to
meet the greed of a few.
When one looks at the current commercial scenario, following questions arise for
introspection. When financial scams and scandals are being reported by the media
almost as a weekly feature, when even the world of sports is tainted with treachery
and painted with perversion and political skulduggery, where does one look for relief
and redemption?
Is it not a fact that a substantial portion of the GDP in this country is being
systematically blocked and funnelled away into the black market and laundered back
with guile and impunity towards moral uprightness? When will this nation be able to
cultivate a critical mass of managers, who will measure up to their full height and call
a halt to this caricature of character and corporate misdemeanour, where the ends
always seem to vindicate the means?

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It is in this setting that the importance of instilling basic ethical norms in the process
and progress of a professional career in commerce takes the driving seat. Perhaps,
the curriculum of management education in India must be reoriented to reflect its
national culture and character.
Ethics and values must find a place in the art and science of management. The
ability to do the right thing and, what is more important, doing it every time (even
when no one is watching) is the noblesse oblige in the managerial milieu. It must
become the done thing, the insignia and talisman of a professional manager.
A word of caution, however, is necessary. In our zeal and zest to realise and
rehabilitate the quintessence of Indian wisdom in the practice of modern
management, there must be no room for anyone to take a tendentious advantage of
the situation. Let there not be any let up triggered by some vested interests to make
a political mileage out of this campaign.
Like, for instance, how the doctrine of hindutva is being brandished as the monopoly
of a particular segment of the population. The secular character of this tenet has
been tarnished to suit an ideolog; to create obscurantism as against enlightenment;
and to develop an intolerance of dissent, instead of coexistence with plurality.

Business ethos principles practiced by Indian Companies:Companies:Indian companies are guided by certain rules of conduct in the form of ethical and
moral standards. Some of the business ethos principles, practiced by Indian
companies are listed below:
1. Principle of `sacrifice
An individual is trained by the principle of `sacrifice through the process of `give and
take policy. A person, who is willing to sacrifice part of his bread or effort, commands
a superior place in the organization.
2. Principle of `harmony
An individual is trained in such a way that to avoid conflicts and friction one should
be guided by certain set of moral conducts and principles.
3. Principle of `non`non-violence
This principle protects an organization from strikes and lockouts and unnecessary
avoidable conflicts.
4. Principle of `reward
The one who performs well are encouraged to do so. This implies that the activities of
individuals need to be monitored and encouragement in the form of `rewards may
cultivate the spirit of higher productivity among groups.

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5. Principle of `justice
The one who works hard is `rewarded and the one who fails to do so is `punished.
This is essence the principle of Justice.
6. Principle of `taxation
The one who is taxed more is encouraged to stay fit for a longer period by proper
appreciation and encouragement. This principle applies to individuals who are
hardworking and productive.
7. Principle of `Integrity
An integrated mind is more productive. Groups are encouraged to stay united in order
to reap the benefits of division of labour.
8. Principle of `Polygamy
This is nothing but the wedding of two different cultures by absorption or takeover.
How values are formed
Values are formed through the process of efforts. Such efforts never go invain. The
following point throws valuable insights on formation of values, from an
organizational perspective.
1) Efforts and values.
Efforts undertaken in order to enrich productivity among labourers by the process of
experimentation, never go in vain. Efforts are milestones and the frequency with
which one labours the more, the value in an organization grows, in the same
proportion.
2) Vision and values
The vision of the entrepreneur generally tallies with the organizational goals. Vision
acts as a foundation stone and pillar for enriching values in each and every
organization.
3) Dedication and values
A dedicated mind is Gods workshop. Values are formed through dedicated efforts.
4) Morality and values
The more an organization concentrates on morality or ethics, the more it brings
fertility to the tree called values.
5) Culture and values
A well developed culture evolves positive values.
6) Ethics and values
Ethics are guided by certain moral principles. An ethical organization has got values
and hence it thrives for a longer period. Such organizations generally have an infinite
existence.

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CONCEPTS OF DHARMA
The term dharma' (Sanskrit: dhrma, Pi dhamma), is an Indian spiritual and
religious term, that means one's righteous duty or any virtuous path in the common
sense of the term.
In the text of the Rigveda, the word appears as an n-stem, dhrman-, with a range of
meanings encompassing "something established or firm" (in the literal sense of prods
or poles), figuratively "sustainer, supporter" (of deities), and semantically similar to
the Greek ethos ("fixed decree, statute, law").
It is used in most or all philosophies and religions of Indian originsometimes
summarized under the umbrella term of Dharmic faithsincluding Hinduism,
Buddhism, Jainism, and Sikhism. It is difficult to provide a single concise definition
for dharma, as the word has a long and varied history and straddles a complex set of
meanings and interpretations.
The concept of dharma often found in many Hindu works such as Sibi, The Yoga of
Knowledge, and Numskull and the Rabbit; is the duties and obligations of each
caste in the Hindu religion. If a persons dharma is not achieved, when the person
dies they are reborn into the same caste they were in their previous life or they are
born into a lower one. On the other hand, if a person does achieve his or her
dharma, when they die they may be reborn into a higher caste and eventually achieve
nirvana; nirvana is when the Atman, the soul, is finally set free from the cycle of
rebirth and can finally become one with God.
In the story Sibi there is a King who has just enjoyed a feast with his people and
soon after he sits down under a tree, an injured dove falls into his lap seeking asylum
from its pursuer, a hawk. The hawk insists that King Sibi give him his rightful meal of
the dove but Sibi, being the thinker that he is tries to persuade the hawk towards a
different meal but it does not work. So Sibi, knowing that it was his dharma to
protect this dove since it took asylum in his lap, offers to give his own flesh and blood
for the same weight of the dove instead of the dove itself. The hawk agrees and so
Sibi cuts his flesh from his lower legs and finds it still is not enough to equal the
weight of the dove, so Sibi sits on the scale, since he now is almost dead from loss of
blood, to equal the weight. Then with a flash of light the dove and the hawk reveal
themselves as the God of Fire, the dove, and Indra, the hawk. They revealed to Sibi
that they were testing his dharma and give back to him his life. The concept of
dharma in Sibi was that Sibi, being a King, was to protect his people, his family, and
any other who sought asylum from him. Therefore, the dove, which sought asylum
with Sibi, was therefore protected by the dharma of the King. In conclusion, Sibi
achieved his dharma, though it was not easy to do, and once he dies he may be able
to break the chains that keeps him locked into the cycle of rebirth.
Unlike Sibi whose dharma was clear to him, Arjuna in The Yoga of Knowledge
unfortunately had a dilemma between following the dharma of what he thought was
right or following the dharma of a soldier. In the story, Arjuna is a soldier in a war
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where the opposite army includes his brothers and uncle; which means he would
have to kill them which goes against his dharma of doing the right thing, but not
killing them is going against his dharma as a soldier. Sri Krishna, a God disguised as
Arjunas charioteer, tries to tell him to fight but Arjuna still will not fight so Sri Krishna
has to bluntly tell him that he must fight for the shame he will receive if he were to go
against his dharma as a soldier would be far worse than killing a few of his relatives
in war. In the end of the story the reader does not truly find out whether Arjuna
fought or not so whether he fulfilled his dharma is unknown but either way, Arjuna
had to choose between what he thought was right and what was right.
Sibis decision to save the dove was part of his dharma; this was easily seen to him.
Arjuna had a conflict within himself about which dharma he must choose. In
Numskull and the Rabbit the rabbit knows that his dharma is to get to the lion,
Numskull, on time or the entire forest will be eaten but instead he decides to go
slowly and be late. Once he arrives there he tells Numskull that another lion was
claiming to be the king and had eaten the other five rabbits that had come with him.
Numskull, thinking that he was the only lion allowed to call himself king, instantly
jumped at the opportunity to kill this so called king and then get back to his meal of
the day. So the rabbit leads Numskull to this hole, a well, where this other lion is said
to live. The lion roars into the darkness of the hole and when he hears the roar
echoed back at him jumps into the well thinking that the other lion was challenging
him and dies being fooled by a mere rabbit. The rabbits dharma in the story was to
go to the lion and be eaten so the rest of the forest could live, but the rabbit decided
to go against that dharma and go with the dharma that told him that saving his own
family and friends as well as the other animals of the forest was right so he took it
upon himself to get rid of the problem of the forest. One way to see it, is that he
achieved his dharma but also lessened his chances of moving up in the cycle of
rebirth because he went against part of his other dharma. Over all, the rabbits
dharma is unknown but what he did was the right thing to do to save his family and
friends.
When the dharma of a person or animal, as illustrated many times in stories, is not
achieved the person or animal takes the chance of moving down or not moving at all
in the caste system after rebirth. On the other hand, if the dharma is achieved then
the person or animal has a greater chance to move up in the caste system after
rebirth. The concept of dharma is easily found in the Hindu stories Sibi, The Yoga
of Knowledge, and Numskull and the Rabbit. In all three stories dharma is clearly
marked though the right choice is not always easily seen. The concept of dharma is
more of a belief of what each individual believes is right, rather than was is right.

The Purpose of Dharma


The purpose of dharma is not only to attain a union of the soul with the supreme
reality, it also suggests a code of conduct that is intended to secure both worldly joys
and supreme happiness. Rishi Kanda has defined dharma in Vaisesika as "that
confers worldly joys and leads to supreme happiness". Hinduism is the religion that
suggests methods for the attainment of the highest ideal and eternal bliss here and
now on earth and not somewhere in heaven. For example, it endorses the idea that it

is one's dharma to marry, raise a family and provide for that family in whatever way is
necessary. The practice of dharma gives an experience of peace, joy, strength and
tranquillity within one's self and makes life disciplined.

PURUSHARTHAS
Purusharthas are the canonical four ends or aims of human life. These goals are,
from lowest to highest: Purusha means human being and Artha means object or
objective. Purusharthas means objectives of man. According to Hindu way of life, a
man should strive to achieve four chief objectives (Purusharthas) in his life. They are:
1.

dharma (righteousness),

2.

artha (material wealth),

3.

kama (desire) and

4.

moksha (salvation).

Every individual in a society is expected to achieve these four objectives and seek
fulfillment in his life before departing from here. The concept of Purusharthas clearly
establishes the fact that Hinduism does not advocate a life of self negation and
hardship, but a life of balance, achievement and fulfillment.

Dharma (righteousness)
Dharma describes as the natural universal laws whose observance enables humans
to be contented and happy, and to save himself from degradation and suffering.
Dharma is the moral law combined with spiritual discipline that guides one's life. It
means "that which holds" the people of this world and the whole creation. Dharma is
the "law of being" without which things cannot exist.
Anything that helps human being to reach god is dharma and anything that hinders
human being from reaching god is adharma. According to the Bhagavat Purana,
righteous living or life on a dharmic path has four aspects: austerity (tap), purity
(shauch), compassion (daya) and truthfulness (satya); and adharmic or unrighteous
life has three vices: pride (ahankar), contact (sangh), and intoxication (madya). The
essence of dharma lies in possessing a certain ability, power and spiritual strength.
The strength of being dharmic also lies in the unique combination of spiritual
brilliance and physical prowess.

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Manusmriti written by the ancient sage Manu prescribes 10 essential rules for the
observance of dharma:
1. Patience (dhriti),
2. forgiveness (kshama),
3. piety or self control (dama),
4. honesty (asteya),
5. sanctity (shauch),
6. control of senses (indraiya-nigrah),
7. reason (dhi),
8. knowledge or learning (vidya),
9. truthfulness (satya) and
10. absence of anger (krodha).
Manu further writes, "Non-violence, truth, non-coveting, purity of body and mind,
control of senses are the essence of dharma". Therefore dharmic laws govern not
only the individual but all in society.

Artha (material wealth)


Artha means material wealth. Hinduism recognizes the importance of material wealth
for the overall happiness and well being of an individual. A house holder requires
wealth, because he has to perform many duties to uphold dharma and ensure the
welfare and progress of his family and society. A person may have the intention to
uphold the dharma, but if he has no money he would not be able to perform his
duties and fulfill his dharma. Hinduism therefore rightly places material wealth as the
second most important objective in human life. Lord Vishnu is the best example for
any householder who wants to lead a life of luxury and still be on the side of God
doing his duties. As the preserver of the universe, Lord Vishnu lives in Vaikunth amid
pomp and glory, with the goddess of wealth herself by his side and yet helps the poor
and the needy, protects the weak, upholds the dharma and sometimes leaving
everything aside rushes to the earth as an incarnation to uphold dharma.
Hinduism advocates austerity, simplicity and detachment, but does not glorify
poverty. Hinduism also emphasizes the need to observe dharma while amassing the
wealth. Poverty has become a grotesque reality in present day Hindu society. Hindus
have become so poverty conscious that if a saint or a sage leads a comfortable life,
they scoff at him, saying that he is not a true yogi. They have to remind themselves of
the simple fact that none of the Hindu gods and goddesses are really poor.
Hinduism believes that both spiritualism and materialism are important for the
salvation of human beings. It is unfortunate that Hinduism came to be associated
more with spiritualism, probably because of the influence of Buddhism, where as in
truth Hinduism does not exclude either of them. As Swami Vivekananda rightly said
religion is not for the empty stomachs. Religion is not for those whose main concern

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from morning till evening is how to make both ends meet. Poverty crushes the spirit
of man and renders him an easy prey to wicked forces.
In ancient India Artha shastras (scriptures on wealth) provided necessary guidance to
people on the finer aspects of managing their wealth. Kautilya's Artha Shastra, which
is probably a compilation of many independent works, gives us a glimpse of how
money matters were handled in ancient India.
Kama (desire)
Kama in a wider sense means desire and in a narrow sense, sexual desire. Hinduism
prescribes fulfillment of sexual passions for the householders and abstinence from it
for the students and ascetics who are engaged in the study of the scriptures and in
the pursuit of Brahman.
The Bhagavad-Gita informs us that desire is an aspect of delusion and one has to
be wary of its various movements and manifestations. The best way to deal with
desires is to develop detachment and perform desireless actions without seeking the
fruit of ones actions and making an offering of all the actions to God. This way our
actions would not bind us to the cycle of births and deaths.
Hinduism permits sexual freedom so long as it is not in conflict with the first aim, i.e.
dharma. Hindu scriptures emphasize that the purpose of sex is procreation and
perpetuation of family and society, while the purpose of dharma is to ensure order in
the institution of family and society. A householder has the permission to indulge in
sex, but also has the responsibility to pursue it in accordance with the laws of
dharma. Marriage is a recognized social institution and marriage with wife for the
purpose of producing children is legitimate and in line with the aims of dharma. Sex
in any other form, including sex with wife for pleasure is adharma. (Here we are
explaining the logic of the Purusharthas. We are not advocating an opinion.) One of
the important sects of Hinduism is Tantricism. It recognizes the importance of sexual
freedom in the liberation of soul. The Tantrics accept sex as an important means to
experience the blissful nature of God and the best way to experience God in physical
form. They also refer to the concept of Purusharthas to justify their doctrines. They
believe that sexual energy is divine energy and it can be transformed into spiritual
energy through controlled expression of sex.Just as the dharmashastras were written
for the sake of dharma, and artha shastras for artha, Kama shastras were composed
in ancient India for providing guidance in matters of sex. We have lost many of them
because of the extreme secrecy and social disapproval associated with the subject.
What we have today is Vatsayana's Kamasutra, which like the Arthashastra seems to
be a compilation of various independent works rather the work of a single individual.

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Moksha (salvation)
If dharma guides the life of a human being from below acting as the earth, showing
him the way from above like a star studded mysterious sky is Moksha. Dharma
constitutes the legs of a Purusha that walk upon the earth; both artha and Kama
constitute his two limbs active in the middle region; while Moksha constitutes the
head that rests in the heaven.
Human life is very precious because of all the beings in all the worlds, only human
beings have the best opportunity to realize the higher self. It is also precious because
it is attained after many hundreds and thousands of lives. Rightly, salvation should
be its ultimate aim.
Moksha actually means absence of moha or delusion. Delusion is caused by the inter
play of the triple gunas. When a person overcomes these gunas, he attains liberation.
The gunas can be overcome by detachment, self control, surrender to god and
offering ones actions to God
If dharma is the center of the wheel of human life, artha and Kama are the two
spokes and Moksha is its circumference. If dharma is at the center of human life,
beyond Moksha there is no human life, but only a life divine.
The four Purusharthas are also like the four wheels of a chariot called human life.
They collectively uphold it and lead it. Each influences the movement of the other
three, and in the absence of any one of them, the chariot comes to a halt.

NISHKAM KARMA
Nishkam Karma, or self-less or desireless action is an action performed without any
expectation of fruits or results, and the central tenet of Karma Yoga path to
Liberation, which has now found place not just in business management,
management studies but also in promoting better Business ethics as well. Its modern
advocates press upon achieving success following the principles of Yoga, and
stepping beyond personal goals and agendas while pursuing any action over greater
good, which is also the key message of the Bhagavad Gita.
In Indian philosophy, action or Karma has been divided into three categories,
according to their intrinsic qualities or gunas. Here Nishkam Karma belongs to the
first category, the Satvik (pure) or actions which add to calmness; the Sakam Karma
(Self-centred action) comes in the second rjasika (aggression) and Akarma (inaction) comes under the third, tmasika which correlates to darkness or inertia.
The opposite of Sakam Karma (Attached Involvement) or actions done with results in
mind, Nishkam Karma has been variously explained as 'Duty for duty's sake' and as
'Detached Involvement', which is neither negative attitude or indifference; and has
today found many advocates in the modern business area where the emphasis has

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shifted to ethical business practices adhering to intrinsic human values and reducing
stress at the workplace.
Another aspect that differentiates it from Sakam or selfish action, is that while the
former is guided by inspiration, the latter is all about motivation, and that makes the
central difference in its results, for example Sakam Karma might lead to excessive
work pressure and workaholism as it aims at success, and hence creates more
chances of physical and psychological burn outs. On the other hand Nishkam Karma,
means more balanced approach to work, and as work has been turned into a pursuit
of personal excellence, which results in greater personal satisfaction, which one
would have otherwise sought in job satisfaction coming from external rewards. One
important fallout of the entire shift is that where one is essentially an ethical practice
inside-out leading to the adage, Work is worship show itself literally at workplace,
leading to greater work commitment, the other since it is so much result oriented can
lead to unethical business and professional ethics, as seen so often at modern work
place
Since the central tenet of practicing Nishkam Karma is Mindfulness in the present
moment. Over time, this practice leads to not only equanimity of mind as it allows the
practitioner to stay detached from results, and hence from ups and downs of
business that are inevitable in any business arena, while maintaining constant work
commitment since work as now been turned into a personal act of worship.. Further
in the long run it leads to cleansing of the heart but also spiritual growth and holistic
development.
Nishkam Karma in Bhagavad Gita
Nishkam Karma, gets an important place in the Bhagavad Gita, the central text of
Mahabharata, where Krishna advocates 'Nishkam Karma Yoga' (the Yoga of Selfless
Action) as the ideal path to realize the Truth. Allocated work done without
expectations, motives, or thinking about its outcomes tends to purify one's mind and
gradually makes an individual fit to see the value of reason and the benefits of
renouncing the work itself. These concepts are vividly described in the following
verses:
karmany evdhikras te
m phalesu kadcana
m karma-phala-hetur bhr
m te sago 'stv akarmani.
You have a right to perform your prescribed duty, but you are
not entitled to the fruits of action. Never consider yourself the
cause of the results of your activities, and never be attached
to not doing your duty.
- Chapter 2, Verse 47.

XV

WORK ETHICS
Work Ethic is a set of values based on the moral qualities of hard work and
attentiveness. It is also a belief in moral benefit of work and its ability to enhance
character. An example would be the Protestant work ethic or Chinese work ethic. A
work ethic may include being reliable, having initiative or maintaining social skills.
Workers exhibiting a good work ethic in theory (and ideally in practice) should be
selected for better positions, more responsibility and ultimately promotion. Workers
who fail to exhibit a good work ethic may be regarded as failing to provide fair value
for the wage the employer is paying them and should not be promoted or placed in
positions of greater responsibility.
The so-called work ethic is generally construed to be a good and impressive thing. It
fancies itself a high quality, but like most double-edged swords, it must be handled
with care.
An ethic, by definition, is a set of moral principles. The word derives from the Greek
ethos -- which in turn is the characteristic spirit or attitudes of a community, people,
or system. Applying work as a modifier, suggests that the work ethic is a
characteristic attitude of a group toward what constitutes the morality of work. This
can, unfortunately, be taken to boundaries.

XVI

M O D U L E

MODULE II

I I

BUSINESS ETHICS
Definitions of Business ethics
Business ethics is the branch of ethics that examines ethical rules and
principles within a commercial context; the various moral or ethical problems
that can arise in a business setting; and any special duties or obligations that
apply to persons who are engaged in commerce. Those who are interested in
business ethics examine various kinds of business activities and ask, "Is the
conduct ethically right or wrong?"
Business ethics is a form of the art of applied ethics that examines ethical
rules and principles within a commercial context, the various moral or ethical
problems that can arise in a business setting and any special duties or
obligations that apply to persons who are engaged in commerce.
In the increasingly conscience-focused marketplaces of the 21st century, the
demand for more ethical business processes and actions (known as ethicism)
is increasing. Simultaneously, pressure is applied on industry to improve
business ethics through new public initiatives and laws (e.g. higher UK road
tax for higher-emission vehicles).
Business ethics can be both a normative and a descriptive discipline. As a
corporate practice and a career specialization, the field is primarily
normative. In academia descriptive approaches are also taken. The range and
quantity of business ethical issues reflects the degree to which business is
perceived to be at odds with non-economic social values. Historically,
interest in business ethics accelerated dramatically during the 1980s and
1990s, both within major corporations and within academia. For example,
today most major corporate websites lay emphasis on commitment to
promoting non-economic social values under a variety of headings (e.g. ethics
codes, social responsibility charters). In some cases, corporations have
redefined their core values in the light of business ethical considerations (e.g.
BP's "beyond petroleum" environmental tilt).

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Overview of issues in business ethics


General business ethics

This part of business ethics overlaps with the philosophy of business, one of
the aims of which is to determine the fundamental purposes of a company.
If a company's main purpose is to maximize the returns to its shareholders,
then it could be seen as unethical for a company to consider the interests
and rights of anyone else.
Corporate social responsibility or CSR: an umbrella term under which the
ethical rights and duties existing between companies and society is
debated.
Issues regarding the moral rights and duties between a company and its
shareholders: fiduciary responsibility, stakeholder concept v. shareholder
concept.
Ethical issues concerning relations between different companies: e.g.
hostile take-over, industrial espionage.
Leadership issues: corporate governance.
Political contributions made by corporations.
Law reform, such as the ethical debate over introducing a crime of
corporate manslaughter.
The misuse of corporate ethics policies as marketing instruments.

Professional ethics
Professional ethics covers the myriad of practical ethical problems and phenomena
which arise out of specific functional areas of companies or in relation to
recognized business professions.
Ethics of accounting information

Creative accounting, earnings management, misleading financial analysis.


Insider trading, securities fraud, bucket shop, forex scams: concerns
(criminal) manipulation of the financial markets.
Executive compensation: concerns excessive payments made to corporate
CEO's.
Bribery, kickbacks, and facilitation payments: while these may be in the
(short-term) interests of the company and its shareholders, these practices
may be anti-competitive or offend against the values of society.

Ethics of human resource management


The ethics of human resource management (HRM) covers those ethical issues
arising around the employer-employee relationship, such as the rights and duties
owed between employer and employee.

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Discrimination issues include discrimination on the bases of age (ageism),


gender, race, religion, disabilities, weight and attractiveness. See also:
affirmative action, sexual harassment.
Issues surrounding the representation of employees and the democratization
of the workplace: union busting, strike breaking.
Issues affecting the privacy of the employee: workplace surveillance, drug
testing. See also: privacy.
Issues affecting the privacy of the employer: whistle-blowing.
Issues relating to the fairness of the employment contract and the balance
of power between employer and employee: slavery, indentured servitude,
employment law.
Occupational safety and health.

Ethics of sales and marketing


Marketing which goes beyond the mere provision of information about (and access to) a
product may seek to manipulate our values and behavior. To some extent society regards
this as acceptable, but where is the ethical line to be drawn? Marketing ethics overlaps
strongly with media ethics, because marketing makes heavy use of media. However,
media ethics is a much larger topic and extends outside business ethics.
Pricing: price fixing, price discrimination, price skimming.
Anti-competitive practices: these include but go beyond pricing tactics to cover issues such
as manipulation of loyalty and supply chains. See: anti-competitive practices, antitrust law.
Specific marketing strategies: green wash, bait and switch, shill, viral marketing, spam
(electronic), pyramid scheme, planned obsolescence.
Content of advertisements: attack ads, subliminal messages, sex in advertising, products
regarded as immoral or harmful
Children and marketing: marketing in schools.
Black markets, grey markets.

Ethics of production
This area of business ethics deals with the duties of a company to ensure that
products and production processes do not cause harm. Some of the more acute
dilemmas in this area arise out of the fact that there is usually a degree of danger
in any product or production process and it is difficult to define a degree of
permissibility, or the degree of permissibility may depend on the changing state of
preventative technologies or changing social perceptions of acceptable risk.

XIX

Defective, addictive and inherently dangerous products and services (e.g.


tobacco, alcohol, weapons, motor vehicles, chemical manufacturing,
bungee jumping).
Ethical relations between the company and the environment: pollution,
environmental ethics, carbon emissions trading
Ethical problems arising out of new technologies: genetically modified food,
mobile phone radiation and health.
Product testing ethics: animal rights and animal testing, use of
economically disadvantaged groups (such as students) as test objects.
The permissibility of international commerce with pariah states.

HOLISTIC MANAGEMENT
The idea of Holistic Management began in the 1960s when Allan Savory, then a
young wildlife biologist in his native Southern Rhodesia, wished to solve the
riddle of desertification. After successive careers as a farmer, game rancher,
management consultant, a member of Parliament and leader of the opposition
party in the midst of a civil war, Savory concluded that the spread of deserts,
the loss of wildlife, and the human impoverishment that always resulted were
related to the way people made decisions, whether or not those people lived or
worked on the land.
Exiled as a result of his opposition to the ruling Rhodesian party, Savory
immigrated to the United States where he co-founded Holistic Management
International with his wife, Jody Butterfield, in 1984. HMI, a 501(c)3 nonprofit
organization headquartered in Albuquerque, New Mexico, works with people
around the world to heal damaged land and increase the productivity of
working lands by applying the Holistic Management principles.

Holisticgoal concept for guide decision making


At its core, the Holistic Management Framework uses a concept known as a
holisticgoal to guide decision making. The holisticgoal ties people's desired way of
life, based on what they value most deeply (materially and spiritually), to the
ecosystems and resources that that support their vision. All actions and decisions are
tested to determine whether or not they will help reach the established holisticgoal.
Testing and management guidelines, planning procedures and a feedback loop
assure constant monitoring of the success of decisions.
The Holistic Management Framework also considers the key role that animals play in
renewing the land, and recognizes the nature and importance of four basic

XX

ecosystem processes: the water cycle, the mineral cycle, energy flow, and community
dynamics (the relationship between organisms in an ecosystem). The Framework
identifies eight tools for managing these ecosystem processes: human creativity,
technology, rest, fire, grazing, animal impact, living organisms, and money and labor.

SECULAR Vs SPIRITUAL VALUES IN MANAGEMENT


1) By secular view on values in management, it refers to the worldly thoughts and
philosophies as reproduced by management Gurus or experts. By spiritual values
in management, it refers to the insights thrown on management by Vedas and
Upanishads (or) by spiritual Gurus.
2) Secularists thoughts and views on management finds its way from Maslows
need hierarchy and culminate till the most modern thoughts on management.
Spiritual values in management find its base from the age old Vedas and
Upanishads with special reference to Bhagavat Gita.
3) Secularists treat management values, as a science rather than ordaining it as
a philosophy. Spiritualists treat management values as a philosophy rather than
by ordaining it as a science.
4) Secularists treat management values as an evolutionary concept. Spiritualists
believe sources like Bhagavat Gita, as a ready reckoner on value based
management.
5) Secularists views on values in management are not generally ethical by nature.
Spiritualists find their reference one value based management as ethical or
moral, in its true sense.
6) The contribution of Indian thoughts towards secular values on management as
reproduced by management science is comparatively poor, with reference to
spiritual values on management. The contribution of Indian thoughts towards
spiritual values on management has magnificent theories, when compared to
secular values on management.
7) The secular views on management as propounded by management experts
lack any ideals. The Indian spiritual values in management have divinity as the
ideal to be portrayed.

XXI

ETHICAL RELATIVISM
Ethical relativism is the position that there are no moral absolutes, no moral right and
wrongs. Instead, right and wrong are based on social norms. Some have heard of the
term situational ethics which is a category of ethical relativism. At any rate, ethical
relativism would mean that our morals have evolved, that they have changed over
time, and that they are not absolute.
Ethical relativism is the theory that holds that morality is relative to the norms of
one's culture. That is, whether an action is right or wrong depends on the moral
norms of the society in which it is practiced. The same action may be morally right in
one society but be morally wrong in another. For the ethical relativist, there are no
universal moral standards -- standards that can be universally applied to all peoples
at all times. The only moral standards against which a society's practices can be
judged are its own. If ethical relativism is correct, there can be no common
framework for resolving moral disputes or for reaching agreement on ethical matters
among members of different societies.
Advantage of ethical relativism is that it allows for a wide variety of cultures and
practices. It also allows people to adapt ethically as the culture, knowledge, and
technology change in society. This is good and a valid form of relativism.
The disadvantage of ethical relativism is that truth, right and wrong, and justice is all
relative. Just because the group of people thinks that something is right does not
make so. Slavery is a good example of this. Two hundred years ago in America,
slavery was the norm and morally acceptable. Now it is not.
Within ethical relativism, right and wrong are not absolute and must be determined in
society by a combination of observation, logic, social preferences and patterns,
experience, emotions, and "rules" that seem to bring the most benefit. Of course, it
goes without saying that a society involved in constant moral conflict would not be
able to survive for very long. Morality is the glue that holds a society together. There
must be a consensus of right and wrong for a society to function well. Ethical
relativism undermines that glue.

XXII

WHISTLE BLOWING
A whistleblower is a person who alleges misconduct. More complex definitions may
be used, but the issue is that the whistleblower usually faces reprisal. The
misconduct may be classified in many ways; for example, a violation of a law, rule,
regulation and/or a direct threat to public interest, such as fraud, health/safety
violations, and corruption.
One famous whistleblower is Jeffrey Wigand, who exposed the Big Tobacco scandal,
revealing that executives of the companies knew that cigarettes were addictive and
approved the addition of carcinogenic ingredients to the cigarettes. Wigand's story
was the basis for the 1999 movie The Insider. Another example is Dr. Frederic
Whitehurst, who exposed irregularities at the USA's Federal Bureau of Investigation's
Crime Lab. In Europe, Paul van Buitenen exposed irregularities in the European
Commission.

Origins of term "whistleblower"


The term whistleblower derives from the practice of English Bobbies, who would blow
their whistles when they noticed the commission of a crime. The whistle would alert
both law enforcement officers and the general public of danger.
Definition
Definition of a whistleblower
Most whistleblowers are internal whistleblowers, who report misconduct to a fellow
employee or superior within their company. One of the most interesting questions
with respect to internal whistleblowers is why and under what circumstances people
will either act on the spot to stop illegal and otherwise unacceptable behavior or
report it. There is some reason to believe that people are more likely to take action
with respect to unacceptable behavior, within an organization, if there are complaint
systems that offer not just options dictated by the organization, but a choice of
options for individuals, including an option that offers near absolute confidentiality.
External whistleblowers, however, report misconduct to outside persons or entities.
In these cases, depending on the information's severity and nature, whistleblowers
may report the misconduct to lawyers, the media, law enforcement or watchdog
agencies, or other local, state, or federal agencies.
Under most U.S. federal whistleblower statutes, in order to be considered a
whistleblower, the federal employee must have reason to believe his or her employer
has violated some law, rule or regulation; testify or commence a legal proceeding on
the legally protected matter; or refuse to violate the law. If disclosure is specifically
prohibited by law or executive order, disclosure may be considered treason. However,
no whistleblowers have been tried for treason in the United States, and it is not
officially treasonous to report illegal conduct by government officials there.

XXIII

Some try to limit the impact of whistle blowing by arguing that "role-prescribed"
whistleblowers (e.g. quality control personnel or internal auditors) are not
whistleblowers in the traditional sense because they are employed in order to blow
whistles. In cases where whistle blowing on a specified topic is protected by statute,
U.S. courts have generally held that such whistleblowers are protected from
retaliation. However, a closely divided U.S. Supreme Court decision, Garcetti v.
Ceballos (2006). held that the First Amendment free speech guarantees for
government employees do not protect disclosures made within the scope of the
employees' duties.
Many U.S. federal courts do not distinguish between internal and external whistle
blowing. For example, in the field of federal environmental whistle blowing, federal
courts have protected only internal whistle blowing as a matter of public policy,
holding that whistleblower statutes encourage the free flow of information, and that
internal whistle blowing helps resolve problems as soon as possible.

Common reactions to whistle blowing


Ideas about whistle blowing vary widely. Whistleblowers are commonly seen as
selfless martyrs for public interest and organizational accountability; others view
them as a 'tattle tale' or "snitches" (slang), solely pursuing personal glory and fame.
It is probable that many people do not even consider blowing the whistle, not only
because of fear of retaliation, but also because of fear of losing their relationships at
work and outside work.
Because the majority of cases are very low-profile and receive little or no media
attention and because whistleblowers who do report significant misconduct are
usually put in some form of danger or persecution, the idea of seeking fame and
glory may be less commonly believed.
Persecution of whistleblowers has become a serious issue in many parts of the
world. Although whistleblowers are often protected under law from employer
retaliation, there have been many cases where punishment for whistle blowing has
occurred, such as termination, suspension, demotion, wage garnishment, and/or
harsh mistreatment by other employees. For example, in the United States, most
whistleblower protection laws provide for limited "make whole" remedies or damages
for employment losses if whistleblower retaliation is proven. However, many
whistleblowers report there exists a widespread "shoot the messenger" mentality by
corporations or government agencies accused of misconduct and in some cases
whistleblowers have been subjected to criminal prosecution in reprisal for reporting
wrongdoing.
As a reaction to this many private organizations have formed whistleblower legal
defense funds or support groups to assist whistleblowers; one such example in the

XXIV

UK is Public Concern at Work. Depending on the circumstances, it is not uncommon


for whistleblowers to be ostracized by their co-workers, discriminated against by
future potential employers, or even fired from their organization. This campaign
directed at whistleblowers with the goal of eliminating them from the organization is
referred to as mobbing. It is an extreme form of workplace bullying wherein the group
is set against the targeted individual. The fiction novel Year of The Rhinoceros by
Michael B. Neff, recently published, accurately and dramatically depicts these types
of retaliatory behaviors.
Legal protection for whistleblowers
Legal protection for whistle blowing varies from country to country. In the United
Kingdom, the Public Interest Disclosure Act 1998 provides a framework of legal
protection for individuals who disclose information so as to expose malpractice and
matters of similar concern. In the vernacular, it protects whistleblowers from
victimization and dismissal.
In the United States, legal protections vary according to the subject matter of the
whistle blowing, and sometimes the state in which the case arises. In passing the
2002 Sarbanes-Oxley Act, the Senate Judiciary Committee found that whistleblower
protections were dependent on the "patchwork and vagaries" of varying state
statutes. Still, a wide variety of federal and state laws protect employees who call
attention to violations, help with enforcement proceedings, or refuse to obey unlawful
directions.
The first U.S. law adopted specifically to protect whistleblowers was the Lloyd-La
Follette Act of 1912. It guaranteed the right of federal employees to furnish
information to the United States Congress. The first U.S. environmental law to include
an employee protection was the Water Pollution Control Act of 1972, also called the
Clean Water Act. Similar protections were included in subsequent federal
environmental laws including the Safe Drinking Water Act (1974), Resource
Conservation and Recovery Act (also called the Solid Waste Disposal Act) (1976),
Toxic Substances Control Act (1976), Energy Reorganization Act of 1974 (through
1978 amendment to protect nuclear whistleblowers), Comprehensive Environmental
Response, Compensation, and Liability Act (CERCLA, or the Superfund Law) (1980),
and the Clean Air Act (1990). Similar employee protections enforced through OSHA
are included in the Surface Transportation Assistance Act (1982) to protect truck
drivers, the Pipeline Safety Improvement Act (PSIA) of 2002, the Wendell H. Ford
Aviation Investment and Reform Act for the 21st Century ("AIR 21"), and the
Sarbanes-Oxley Act, enacted on July 30, 2002 (for corporate fraud whistleblowers).
The patchwork of laws means that victims of retaliation need to be alert to the laws
at issue to determine the deadlines and means for making proper complaints. Some
deadlines are as short as 10 days (for Arizona State Employees to file a "Prohibited
Personnel Practice" Complaint before the Arizona State Personnel Board; and Ohio
public employees to file appeals with the State Personnel Board of Review). It is 30
days for environmental whistleblowers to make a written complaint to the

XXV

Occupational Safety and Health Administration [OSHA]. Federal employees


complaining of discrimination, retaliation or other violations of the civil rights laws
have 45 days to make a written complaint to their agency's equal employment
opportunity (EEO) officer. Airline workers and corporate fraud whistleblowers have 90
days to make their complaint to OSHA. Nuclear whistleblowers and truck drivers have
180 days to make complaints to OSHA. Victims of retaliation against union organizing
and other concerted activities to improve working conditions have 180 days to make
complaints to the National Labor Relations Board (NLRB). Private sector employees
have either 180 or 300 days to make complaints to the federal Equal Employment
Opportunity Commission (EEOC) (depending on whether their state has a "deferral"
agency) for discrimination claims on the basis of race, gender, age, national origin or
religion (but here an example of retaliation can be seen, as these anti-discrimination
agencies change their areas of discrimination to suit their needs. An area of
discrimination in California was if a complaining party had a civil servant relative. The
state Department of Fair Employment and Housing quickly called an end to this
practice. The state's RALPH Act has also proven to be non-functional.) Those who
face retaliation for seeking minimum wages or overtime have either two or three
years to file a civil lawsuit, depending on whether the court finds the violation was
"willful."
Those who report a false claim against the federal government, and suffer adverse
employment actions as a result, may have up to six years (depending on state law) to
file a civil suit for remedies under the U.S. False Claims Act (FCA). Under a qui tam
provision, the "original source" for the report may be entitled to a percentage of what
the government recovers from the offenders. However, the "original source" must
also be the first to file a federal civil complaint for recovery of the federal funds
fraudulently obtained, and must avoid publicizing the claim of fraud until the U.S.
Justice Department decides whether to prosecute the claim itself. Such qui tam
lawsuits must be filed under seal, using special procedures to keep the claim from
becoming public until the federal government makes its decision on direct
prosecution.
Federal employees could benefit from the Whistleblower Protection Act, and the No
FEAR Act (which made individual agencies directly responsible for the economic
sanctions of unlawful retaliation). Federal protections are enhanced in those few
cases were the Office of Special Counsel will uphold the whistleblower's case.
The Military Whistleblower Protection Act protects the right of members of the armed
services to communicate with any member of Congress (even if copies of the
communication are sent to others).
The HOPE Scholarship in Georgia is the only incentive to report corporate,
government, or religious crimes. This scholarship provides four years of free tuition to
a tech school or University in Georgia for children of whistleblowers or those
researching corporate crime.

XXVI

Whistleblower Protection Act of 2007


The U.S. Supreme Court dealt a major blow to government whistleblowers when, in
the case of Garcetti v. Ceballos, 04-5, it ruled that government employees did not
have protection from retaliation by their employers under the First Amendment of the
Constitution.
The free speech protections of the First Amendment have long been used to shield
whistleblowers from retaliation by whistleblower attorneys. In response to the
Supreme Court decision, the House of Representatives passed H.R. 985, the
Whistleblower Protection Act of 2007. President George W. Bush, citing national
security concerns, promised to veto the bill should it be enacted into law by
Congress. The Senate's version of the Whistleblower Protection Act (S. 274), which
has significant bipartisan support, was approved by the Senate Committee on
Homeland Security and Governmental Affairs on June 13, 2007. However, it has yet
to reach a vote by Senate as a hold has been placed on the bill by Senator Tom
Coburn (R-OK). According to the National Whistleblower Center, Coburn's hold on S.
274 has been done to further President Bush's agenda.
California False Claims Act
The California False Claims Act protects whistleblowers from retaliation from their
employer under a section entitled: "Section 12653. Employer interference with
employee disclosures." Under this section, employers may not make rules that
prevent an employee from disclosing information to the government in furtherance of
a false claims action, an employer may not discharge, demote, suspend, threaten,
harass, deny promotion to, or in any other manner discriminate against, an employee
in the terms and conditions of employment because he or she has disclosed
information to the government.
Conscientious Employee Protection Act (CEPA)
CEPA, New Jersey's whistleblower law, prohibits an employer from taking any
retaliatory action against an employee because the employee does any of the
following:

Discloses, or threatens to disclose, to a supervisor or to a public body an


activity, policy, or practice of the employer or another employer, with whom
there is a business relationship, that the employee reasonably believes is in
violation of a law, or a rule or regulation issued under the law, or, in the case
of an employee who is a licensed or certified health care professional,
reasonably believes constitutes improper quality of patient care;

Provides information to, or testifies before, any public body conducting an


investigation, hearing or inquiry into any violation of law, or a rule or regulation
issued under the law by the employer or another employer, with whom there is
a business relationship, or, in the case of an employee who is a licensed or

XXVII

certified health care professional, provides information to, or testifies before,


any public body conducting an investigation, hearing or inquiry into quality of
patient care; or

Objects to, or refuses to participate in, any activity, policy or practice which the
employee reasonably believes: is in violation of a law, or a rule or regulation
issued under the law, or, if the employee is a licensed or certified health care
professional, constitutes improper quality of patient care; is fraudulent or
criminal; or is incompatible with a clear mandate of public policy concerning
the public health, safety or welfare or protection of the environment.

Whistleblower Week in Washington (WWW)


The week of May 13-19 2007, whistleblowers from all over the country gathered in
Washington, D.C., to convince the United States Congress to pass stronger
whistleblower protections for both government and private sector workers. Dr.
Marsha Coleman-Adebayo, founder of the No FEAR Coalition and No FEAR Institute,
served as Chair of the first-ever Whistleblower Week in Washington. The event was
coordinated around the fifth anniversary of the May 15, 2002 enactment of the
Notification and Federal Employee Antidiscrimination and Retaliation Act of 2002,
which is now known as the No FEAR Act. One purpose of the Act is to "require that
Federal agencies be accountable for violations of antidiscrimination and
whistleblower protection laws." Public Law 107-174. The law came to fruition after
Dr. Coleman-Adebayo provided congressional testimony about American companies
exposing African miners and their families to vanadium, a deadly substance.
During WWW dozens of nonprofit organizations, whistleblower groups and individual
whistleblowers participated in a broad range of activities that included discussion
panels, testimony, award ceremonies, a film night and book signing, and workshops
in advocacy, stress management, whistleblower law, and mentoring. Doctors from
the "Semmelweis Society International" played a leading role in organizing the event,
along with the Civil rights whistleblower advocates, the No FEAR Institute. Prominent
organizations included the Government Accountability Project (GAP), the National
Whistleblower Center, the VA Whistleblower Coalition, the National Security
Whistleblowers Coalition, the ACLU, Public Citizen, the Liberty Coalition, and the
Association of American Physicians and Surgeons (AAPS). Betsy Combier represented
the E-Accountability Foundation. Linda Lewis, chair of Whistleblowers USA, played a
special role and noted that "too many very brave whistleblowers were present to
adequately honor their accomplishments and their contributions to the conference."
Senator Charles Grassley saluted the group, and called on the White House to hold a
rose garden ceremony to honor whistleblowers. The group plans to make this an
annual event.

XXVIII

M O D U L E

MODULE III

I I I

ETHICS MANAGEMENT
Ethics management is a new science in the field of management. With the rapid
evolution in the field of management, the role of ethics has been recognized, by and
large, by the management experts. By ethics, it refers to the principles of conduct
governing an individual or group in a society is known as ethics management.

ROLE OF ORGANIZATIONAL CULTURE IN ETHICS


By culture, it refers to the ideas, customs, skills, arts etc. of a people or group, which
are transferred, communicated or passed along, as in or to succeeding generations.
The organization that manages such ideas, customs etc. of a particular people or
group in a particular period evolves a distinct culture as drastically different from that
of other similar organizations in the field. This is known as organizational culture.
With the involvement of management in ethical related issues in an undertaking, the
roles of organizational culture in ethics need to be recognized.
The rapid involvement of the organization towards upbringing an emerging culture or
nourishing a new culture enforces rigid constraints on the working style on group or
individuals by emphasising on a set of code of conduct, in terms of morality.

ETHICS COMMITTEE
Definitions of Ethics Committee:

An independent group of medical and non-medical people who verify the


integrity of a study and ensure the safety, integrity, and human rights of the
study participants.
A mandated committee of an institution (hence institutional ethics committee,
or IEC, or human research ethics committee, or HREC) that conducts medical
research.
A consultative committee in a hospital or other institution whose role is to
analyze ethical dilemmas and to advise and educate health care providers,
patients, and families regarding difficult treatment decisions.
This is an independent group of people that includes doctors, nurses, medical
staff, members of the public and sometimes lawyers. This committee
XXIX

considers and decides if proposed clinical trials are ethical. The details of the
proposed trial are considered and that it is looking at an important question
that cannot be answered through existing information.
A committee appointed to consider ethical issues

Main functions of the Committee:


The Committee on Ethics was first constituted on March 4, 1997 to oversee the
moral and ethical conduct of Members and to examine the cases referred to it
with reference to ethical and other misconduct of Members. In respect of
procedure and other matters, the rules applicable to Committee on Privileges
were to apply to the Committee with such variations and modifications as the
Chairman.

ETHICS OFFICERS
Ethics officers (sometimes called "compliance" or "business conduct officers") have been
appointed formally by organizations since the mid-1980s. One of the catalysts for the
creation of this new role was a series of fraud, corruption and abuse scandals that
afflicted the U.S. defense industry at that time. This led to the creation of the Defense
Industry Initiative (DII), a pan-industry initiative to promote and ensure ethical business
practices.
Another critical factor in the decisions of companies to appoint ethics/compliance
officers was the passing of the Federal Sentencing Guidelines for Organizations in 1991,
which set standards that organizations (large or small, commercial and non-commercial)
had to follow to obtain a reduction in sentence if they should be convicted of a federal
offense. Although intended to assist judges with sentencing, the influence in helping to
establish best practices has been far-reaching.
In the wake of numerous corporate scandals between 2001-04 (affecting large
corporations like Enron, WorldCom and Tyco), even small and medium-sized companies
have begun to appoint ethics officers. They often report to the Chief Executive Officer
and are responsible for assessing the ethical implications of the company's activities,
making recommendations regarding the company's ethical policies, and disseminating
information to employees. They are particularly interested in uncovering or preventing
unethical and illegal actions.
The effectiveness of ethics officers in the marketplace is not clear. If the appointment is
made primarily as a reaction to legislative requirements, one might expect the efficacy to
be minimal, at least, over the short term. In part, this is because ethical business
practices result from a corporate culture that consistently places value on ethical
behavior, a culture and climate that usually emanates from the top of the organization.
The mere establishment of a position to oversee ethics will most likely be insufficient to
inculcate ethical behavior: a more systemic programme with consistent support from
general management will be necessary.

XXX

CHIEF FINANCIAL OFFICER


The Chief Financial Officer (CFO
CFO)
CFO of a company or public agency is the corporate
officer primarily responsible for managing the financial risks of the business or
agency. This officer is also responsible for financial planning and record-keeping, as
well as financial reporting to higher management. (In recent years, however, the role
has expanded to encompass communicating financial performance and forecasts to
the analyst community.) The title is equivalent to finance director,
director commonly seen in
the United Kingdom. The CFO typically reports to the Chief Executive Officer, and is
frequently a member of the board of directors.

COMMUNICATING ETHICS
Meaning and significance of communicating ethics:
A company is communicating all the time - with insiders to instruct or guide them,
and shape their values; with outsiders to let them know what the company is thinking
and doing. Ethics in communication involves the application of ethical principles in
communicating with stakeholders of all categories - clients, employees, investors,
government departments, etc. Honesty, accuracy and transparency in
communication are very important to companies.
Significance of communication ethics

Truth and fairness in communication are necessary for individuals liberty and
proper transactions. Exaggeration, untrue statements, rough language and
remarks which spread hatred are to be avoided.

In all communication, courtesy begets courtesy. The golden rule of ethics is,
do unto others as you would like others to do unto you.

A company with a reputation for ethical communication enjoys high value for
its shares. High calibre people work for it; it also enjoys a better market for its
products and services, and public support in times of controversy.

In all communication, ethical consideration is inescapable. It is the result of


responsible thinking, decision-making and developing healthy relations with
all with whom the company deals.

Ethical communication adds to your dignity by promoting truthfulness,


responsibility, and respect for yourself and others. Unethical communication
threatens and poisons a company's name and reputation.

XXXI

Characteristics of ethical communication


An ethical communication is Complete in all respects
Is truthful and not deceptive
Avoids jugglery of language
Does not hide unhappy news under sweet coating
Does not state opinions as facts
Ethical communicators, in other words, have a well-developed sense of all-round
responsibility. One plays one's part duly and faithfully in all transactions with all kind
of stakeholders. One is not biased or tilted towards any party.
The demand for ethical communication is high, and yet it is sometimes very difficult
to be entirely ethical. All the same, it is a goal which must be kept before one's eyes
in all business transactions. Ethical organizations are created by persons of high
integrity, a Culture of truth, and by following one conscience - that small voice within
which tells us what is right.
Factors influencing ethical
ethical communication
Every act of communication has three possibilities - to speak, to listen, or to be silent.
Whatever you do, you send across a signal to the other party. And then there are
other factors like body language, tone etc. You cannot escape the responsibility to
communicate by remaining silent; a proverb says that silence is half consent.
The propriety of your speech or writing depends on these: are you telling the plain
truth but being too blunt at the same time? A Sanskrit saying says, speak the truth
and make it pleasant to hear.
A proper, ethical communication must satisfy following criterias
To whom are you talking. It should be to the right audience. And it should be
to nobody else.
The communication must be where it is due. What you say must dutifully
belong to the audience. Your trade secrets have to be guarded while
communicating.
The timing of the message is all important. Time is of essence in business
decisions and honouring the time commitment can make the big difference.
Where you speck should be the right environment for your message. You may
not scold an employee in the presence of others. You may not discuss
important trade matters where they may be overheads.

XXXII

Attributes of ethical communication


It is true and fair.
It honours the freedom of expression of all parties concerned.
You must have tolerance for difference of opinion.
The human rights should be upheld in the act of communication. :
All information should be presented without the gloss of falsehood or
pretensions.
The language should be courteous.
You should accept -the consequences of what you say and do.
At the same time, you must oppose unethical communication with all your
might.
The advantages of ethical communication
Who is there who does not want ethical communications directed to him/her?
Obviously no one. It means ethics in communication is a trick to being popular. If a
company realizes that it has erred in actions or speech, it looks heroic when it comes
forward with as a correction. Here are the advantages of ethical communication:
1. It helps in longlong-term business interests:
As a company acquires a reputation for honest and upright actions and statements,
its stocks goes up. The company is liked by all the stakeholders. It is a truism that
honesty is the best policy.
2. It attracts high calibre people. People who are honest have a moral right and a
tendency to look for honesty in others. If your company runs on ethical lines, you will
get people who also do the same. Chances are that you will enjoy it better working
with them.
law: If you have been speaking
3. It gives you a good image face to face with the law
truth then your image unconsciously gets built for honesty. It does not matter
whether your turnover is small as long as you give your customers the right kind of
deal.
4. It helps in effective strategic management: Corporate communication is at the
heart of corporate management. Your company's identity depends on its public
communication and dialogue with the people. Your company's planning and control
depend on its communications, in good times and bad. If your company's name is
involved in unhappy news, mass communication becomes all important. For
instance, suppose your brand ambassador is involved in a legal tangle or if he
performs poorly in the game which earned him brand ambassadorship. You have to
issue-a delicate, discreet communiqu.
5. It helps to earn the trust of government bodies: Ethical communication gives the
company a wholesome image. In cases of doubt, its statements are believed. The
dealing with government bodies becomes hassle-free. Unethical communication may
be helpful in the short run, but in the long run, ethical communication alone helps.

XXXIII

ETHICAL AUDIT
Ethical audit is a new technology which is being developed at the European Institute
for Business Ethics (EIBE). There is nothing new about ethical behaviour in business,
nor about programmes designed to improve and perhaps formalise an ethical
approach to decision making within companies. In recent years many companies
have appointed a senior manager with dedicated responsibility for promoting ethical
behaviour throughout the company.
Ethical auditing is a process which measures the internal and external consistency of
an organizations values base. The key points are that it is value-linked, and that it
incorporates a stakeholder approach.
Its objectives are two-fold: It is intended for accountability and transparency towards
stakeholders and it is intended for internal control, to meet the ethical objectives of
the organization.
The value of the ethical audit is that it enables the company to see itself through a
variety of lenses: it captures the company's ethical profile. Companies recognize the
importance of their financial profile for their investors, of their service profile for their
customers, and of their profile as an employer for their current and potential
employees. An ethical profile brings together all of the factors which affect a
company's reputation, by examining the way in which it does business. By taking a
picture of the value system at a given point in time, it can:


Clarify the actual values to which the company operates

Provide a baseline by which to measure future improvement

Learn how to meet any societal expectations which are not currently
being met

Give stakeholders the opportunity to clarify their expectations of the


company's behavior

Identify specific problem areas within the company

Learn about the issues which motivate employees

Identify general areas of vulnerability, particularly related to lack of


openness

XXXIV

CORPORATE GOVERNANCE
Corporate governance is the set of processes, customs, policies, laws, and
institutions affecting the way a corporation (or company) is directed, administered or
controlled. Corporate governance also includes the relationships among the many
stakeholders involved and the goals for which the corporation is governed. The
principal stakeholders are the shareholders/members, management, and the board
of directors. Other stakeholders include labor (employees), customers, creditors (e.g.,
banks, bond holders), suppliers, regulators, and the community at large. For Not-ForProfit Corporations or other membership Organizations the "shareholders" means
"members" in the text below (if applicable).
Corporate governance is a multi-faceted subject. An important theme of corporate
governance is to ensure the accountability of certain individuals in an organization
through mechanisms that try to reduce or eliminate the principal-agent problem. A
related but separate thread of discussions focuses on the impact of a corporate
governance system in economic efficiency, with a strong emphasis shareholders'
welfare. There are yet other aspects to the corporate governance subject, such as the
stakeholder view and the corporate governance models around the world (see
section 9 below).
There has been renewed interest in the corporate governance practices of modern
corporations since 2001, particularly due to the high-profile collapses of a number of
large U.S. firms such as Enron Corporation and MCI Inc. (formerly WorldCom). In
2002, the U.S. federal government passed the Sarbanes-Oxley Act, intending to
restore public confidence in corporate governance.
Definition
In A Board Culture of Corporate Governance,
Governance business author Gabrielle O'Donovan
defines corporate governance as 'an internal system encompassing policies,
processes and people, which serves the needs of shareholders and other
stakeholders, by directing and controlling management activities with good business
savvy, objectivity, accountability and integrity. Sound corporate governance is reliant
on external marketplace commitment and legislation, plus a healthy board culture
which safeguards policies and processes'.
O'Donovan goes on to say that 'the perceived quality of a company's corporate
governance can influence its share price as well as the cost of raising capital. Quality
is determined by the financial markets, legislation and other external market forces
plus how policies and processes are implemented and how people are led. External
forces are, to a large extent, outside the circle of control of any board. The internal
environment is quite a different matter, and offers companies the opportunity to
differentiate from competitors through their board culture. To date, too much of
corporate governance debate has centered on legislative policy, to deter fraudulent
XXXV

activities and transparency policy which misleads executives to treat the symptoms
and not the cause.
It is a system of structuring, operating and controlling a company with a view to
achieve long term strategic goals to satisfy shareholders, creditors, employees,
customers and suppliers, and complying with the legal and regulatory requirements,
apart from meeting environmental and local community needs.
Report of SEBI committee (India) on Corporate Governance defines corporate
governance as the acceptance by management of the inalienable rights of
shareholders as the true owners of the corporation and of their own role as trustees
on behalf of the shareholders. It is about commitment to values, about ethical
business conduct and about making a distinction between personal & corporate
funds in the management of a company. The definition is drawn from the Gandhian
principle of trusteeship and the Directive Principles of the Indian Constitution.
Corporate Governance is viewed as ethics and a moral duty.
History
In the 19th century, state corporation laws enhanced the rights of corporate boards
to govern without unanimous consent of shareholders in exchange for statutory
benefits like appraisal rights, to make corporate governance more efficient. Since
that time, and because most large publicly traded corporations in the US are
incorporated under corporate administration friendly Delaware law, and because the
US's wealth has been increasingly securitized into various corporate entities and
institutions, the rights of individual owners and shareholders have become
increasingly derivative and dissipated. The concerns of shareholders over
administration pay and stock losses periodically has led to more frequent calls for
corporate governance reforms.
In the 20th century in the immediate aftermath of the Wall Street Crash of 1929
legal scholars such as Adolf Augustus Berle, Edwin Dodd, and Gardiner C. Means
pondered on the changing role of the modern corporation in society. Berle and
Means' monograph "The Modern Corporation and Private Property" (1932,
Macmillan) continues to have a profound influence on the conception of corporate
governance in scholarly debates today.
From the Chicago school of economics, Ronald Coase's "The Nature of the Firm"
(1937) introduced the notion of transaction costs into the understanding of why firms
are founded and how they continue to behave. Fifty years later, Eugene Fama and
Michael Jensen's "The Separation of Ownership and Control" (1983, Journal of Law
and Economics) firmly established agency theory as a way of understanding
corporate governance: the firm is seen as a series of contracts. Agency theory's
dominance was highlighted in a 1989 article by Kathleen Eisenhardt ("Agency theory:
an assessement and review", Academy of Management Review).

XXXVI

US expansion after World War II through the emergence of multinational corporations


saw the establishment of the managerial class. Accordingly, the following Harvard
Business School management professors published influential monographs studying
their prominence: Myles Mace (entrepreneurship), Alfred D. Chandler, Jr. (business
history), Jay Lorsch (organizational behavior) and Elizabeth MacIver (organizational
behavior). According to Lorsch and MacIver "many large corporations have dominant
control over business affairs without sufficient accountability or monitoring by their
board of directors."
Since the late 1970s, corporate governance has been the subject of significant
debate in the U.S. and around the globe. Bold, broad efforts to reform corporate
governance have been driven, in part, by the needs and desires of shareowners to
exercise their rights of corporate ownership and to increase the value of their shares
and, therefore, wealth. Over the past three decades, corporate directors duties have
expanded greatly beyond their traditional legal responsibility of duty of loyalty to the
corporation and its shareowners.
In the first half of the 1990s, the issue of corporate governance in the U.S. received
considerable press attention due to the wave of CEO dismissals (e.g.: IBM, Kodak,
Honeywell) by their boards. The California Public Employees' Retirement System
(CalPERS) led a wave of institutional shareholder activism (something only very rarely
seen before), as a way of ensuring that corporate value would not be destroyed by
the now traditionally cozy relationships between the CEO and the board of directors
(e.g., by the unrestrained issuance of stock options, not infrequently back dated).
In 1997, the East Asian Financial Crisis saw the economies of Thailand, Indonesia,
South Korea, Malaysia and The Philippines severely affected by the exit of foreign
capital after property assets collapsed. The lack of corporate governance
mechanisms in these countries highlighted the weaknesses of the institutions in their
economies.
In the early 2000s, the massive bankruptcies (and criminal malfeasance) of Enron
and Worldcom, as well as lesser corporate debacles, such as Adelphia
Communications, AOL, Arthur Andersen, Global Crossing, Tyco, led to increased
shareholder and governmental interest in corporate governance. This is reflected in
the passage of the Sarbanes-Oxley Act of 2002.
Impact of Corporate Governance
The positive effect of corporate governance on different stakeholders ultimately is a
strengthened economy, and hence good corporate governance is a tool for socioeconomic development.
Role of Institutional Investors
Many years ago, worldwide, buyers and sellers of corporation stocks were individual
investors, such as wealthy businessmen or families, who often had a vested,

XXXVII

personal and emotional interest in the corporations whose shares they owned. Over
time, markets have become largely institutionalized: buyers and sellers are largely
institutions (e.g., pension funds, mutual funds, hedge funds, exchange-traded funds,
other investor groups; insurance companies, banks, brokers, and other financial
institutions).
The rise of the institutional investor has brought with it some increase of professional
diligence which has tended to improve regulation of the stock market (but not
necessarily in the interest of the small investor or even of the nave institutions, of
which there are many). Note that this process occurred simultaneously with the direct
growth of individuals investing indirectly in the market (for example individuals have
twice as much money in mutual funds as they do in bank accounts). However this
growth occurred primarily by way of individuals turning over their funds to
'professionals' to manage, such as in mutual funds. In this way, the majority of
investment now is described as "institutional investment" even though the vast
majority of the funds are for the benefit of individual investors.
Program trading, the hallmark of institutional trading, averaged over 80% of NYSE
trades in some months of 2007. (Moreover, these statistics do not reveal the full
extent of the practice, because of so-called 'iceberg' orders. See Quantity and display
instructions under last reference.)
Unfortunately, there has been a concurrent lapse in the oversight of large
corporations, which are now almost all owned by large institutions. The Board of
Directors of large corporations used to be chosen by the principal shareholders, who
usually had an emotional as well as monetary investment in the company (think
Ford), and the Board diligently kept an eye on the company and its principal
executives (they usually hired and fired the President, or Chief Executive Officer
CEO).
A recent study by Credit Suisse found that companies in which "founding families
retain a stake of more than 10% of the company's capital enjoyed a superior
performance over their respective sectorial peers." Since 1996, this superior
performance amounts to 8% per year. Forget the celebrity CEO. "Look beyond Six
Sigma and the latest technology fad. One of the biggest strategic advantages a
company can have, [BusinessWeek has found], is blood lines." In that last study, "BW
identified five key ingredients that contribute to superior performance. Not all are
qualities unique to enterprises with retained family interests. But they do go far to
explain why it helps to have someone at the helm or active behind the scenes
who has more than a mere paycheck and the prospect of a cozy retirement at stake."
See also, "Revolt in the Boardroom," by Alan Murray.
Nowadays, if the owning institutions don't like what the President/CEO is doing and
they feel that firing them will likely be costly (think "golden handshake") and/or time
consuming, they will simply sell out their interest. The Board is now mostly chosen by
the President/CEO, and may be made up primarily of their friends and associates,
such as officers of the corporation or business colleagues. Since the (institutional)

XXXVIII

shareholders rarely object, the President/CEO generally takes the Chair of the Board
position for his/herself (which makes it much more difficult for the institutional
owners to "fire" him/her). Occasionally, but rarely, institutional investors support
shareholder resolutions on such matters as executive pay and anti-takeover, aka,
"poison pill" measures.
Finally, the largest pools of invested money (such as the mutual fund 'Vanguard 500',
or the largest investment management firm for corporations, State Street Corp.) are
designed simply to invest in a very large number of different companies with
sufficient liquidity, based on the idea that this strategy will largely eliminate individual
company financial or other risk and, therefore, these investors have even less
interest in a particular company's governance.
Since the marked rise in the use of Internet transactions from the 1990s, both
individual and professional stock investors around the world have emerged as a
potential new kind of major (short term) force in the direct or indirect ownership of
corporations and in the markets: the casual participant. Even as the purchase of
individual shares in any one corporation by individual investors diminishes, the sale
of derivatives (e.g., exchange-traded funds (ETFs), Stock market index options, etc.)
has soared. So, the interests of most investors are now increasingly rarely tied to the
fortunes of individual corporations.
But, the ownership of stocks in markets around the world varies; for example, the
majority of the shares in the Japanese market are held by financial companies and
industrial corporations (there is a large and deliberate amount of cross-holding
among Japanese keiretsu corporations and within S. Korean chaebol 'groups'),
whereas stock in the USA or the UK and Europe are much more broadly owned, often
still by large individual investors.
Parties to corporate governance
Parties involved in corporate governance include the regulatory body (e.g. the Chief
Executive Officer, the board of directors, management and shareholders). Other
stakeholders who take part include suppliers, employees, creditors, customers and
the community at large.
In corporations, the shareholder delegates decision rights to the manager to act in
the principal's best interests. This separation of ownership from control implies a loss
of effective control by shareholders over managerial decisions. Partly as a result of
this separation between the two parties, a system of corporate governance controls
is implemented to assist in aligning the incentives of managers with those of
shareholders. With the significant increase in equity holdings of investors, there has
been an opportunity for a reversal of the separation of ownership and control
problems because ownership is not so diffuse.
A board of directors often plays a key role in corporate governance. It is their
responsibility to endorse the organisation's strategy, develop directional policy,

XXXIX

appoint, supervise and remunerate senior executives and to ensure accountability of


the organisation to its owners and authorities.
The Company Secretary, known as a Corporate Secretary in the US and often referred
to as a Chartered Secretary if qualified by the Institute of Chartered Secretaries and
Administrators (ICSA), is a high ranking professional who is trained to uphold the
highest standards of corporate governance, effective operations, compliance and
administration.
All parties to corporate governance have an interest, whether direct or indirect, in the
effective performance of the organisation. Directors, workers and management
receive salaries, benefits and reputation, while shareholders receive capital return.
Customers receive goods and services; suppliers receive compensation for their
goods or services. In return these individuals provide value in the form of natural,
human, social and other forms of capital.
A key factor is an individual's decision to participate in an organisation e.g. through
providing financial capital and trust that they will receive a fair share of the
organisational returns. If some parties are receiving more than their fair return then
participants may choose to not continue participating leading to organizational
collapse.
Principles
Principles
Key elements of good corporate governance principles include honesty, trust and
integrity, openness, performance orientation, responsibility and accountability,
mutual respect, and commitment to the organization.
Of importance is how directors and management develop a model of governance that
aligns the values of the corporate participants and then evaluate this model
periodically for its effectiveness. In particular, senior executives should conduct
themselves honestly and ethically, especially concerning actual or apparent conflicts
of interest, and disclosure in financial reports.
Commonly accepted principles of corporate governance include:

Rights and equitable


equitable treatment of shareholders:
shareholders Organizations should respect
the rights of shareholders and help shareholders to exercise those rights.
They can help shareholders exercise their rights by effectively communicating
information that is understandable and accessible and encouraging
shareholders to participate in general meetings.
Interests of other stakeholders:
stakeholders Organizations should recognize that they have
legal and other obligations to all legitimate stakeholders.
Role and responsibilities of the board:
board The board needs a range of skills and
understanding to be able to deal with various business issues and have the
ability to review and challenge management performance. It needs to be of
sufficient size and have an appropriate level of commitment to fulfill its

XL

responsibilities and duties. There are issues about the appropriate mix of
executive and non-executive directors.
Integrity and ethical behaviour:
behaviour Ethical and responsible decision making is not
only important for public relations, but it is also a necessary element in risk
management and avoiding lawsuits. Organizations should develop a code of
conduct for their directors and executives that promotes ethical and
responsible decision making. It is important to understand, though, that
reliance by a company on the integrity and ethics of individuals is bound to
eventual failure. Because of this, many organizations establish Compliance
and Ethics Programs to minimize the risk that the firm steps outside of ethical
and legal boundaries.
Disclosure and transparency:
transparency Organizations should clarify and make publicly
known the roles and responsibilities of board and management to provide
shareholders with a level of accountability. They should also implement
procedures to independently verify and safeguard the integrity of the
company's financial reporting. Disclosure of material matters concerning the
organization should be timely and balanced to ensure that all investors have
access to clear, factual information.

Issues involving corporate governance principles include:

internal controls and internal auditors


the independence of the entity's external auditors and the quality of their
audits
oversight and management of risk
oversight of the preparation of the entity's financial statements
review of the compensation arrangements for the chief executive officer and
other senior executives
the resources made available to directors in carrying out their duties
the way in which individuals are nominated for positions on the board

dividend policy

Nevertheless "corporate governance," despite some feeble attempts from various


quarters, remains an ambiguous and often misunderstood phrase. For quite some
time it was confined only to corporate management. That is not so. It is something
much broader, for it must include a fair, efficient and transparent administration and
strive to meet certain well defined, written objectives. Corporate governance must go
well beyond law. The quantity, quality and frequency of financial and managerial
disclosure, the degree and extent to which the board of Director (BOD) exercise their
trustee responsibilities (largely an ethical commitment), and the commitment to run
a transparent organization- these should be constantly evolving due to interplay of
many factors and the roles played by the more progressive/responsible elements
within the corporate sector. In India, a strident demand for evolving a code of good
practices by the corporation, written by each corporation management, is emerging.

XLI

Mechanisms and controls


Corporate governance mechanisms and controls are designed to reduce the
inefficiencies that arise from moral hazard and adverse selection. For example, to
monitor managers' behaviour, an independent third party (the external auditor)
attests the accuracy of information provided by management to investors. An ideal
control system should regulate both motivation and ability.
(a) Internal corporate governance controls
Internal corporate governance controls monitor activities and then take corrective
action to accomplish organisational goals. Examples include:

Monitoring by the board of directors:


directors The board of directors, with its legal
authority to hire, fire and compensate top management, safeguards invested
capital. Regular board meetings allow potential problems to be identified,
discussed and avoided. Whilst non-executive directors are thought to be more
independent, they may not always result in more effective corporate
governance and may not increase performance. Different board structures are
optimal for different firms. Moreover, the ability of the board to monitor the
firm's executives is a function of its access to information. Executive directors
possess superior knowledge of the decision-making process and therefore
evaluate top management on the basis of the quality of its decisions that lead
to financial performance outcomes, ex ante. It could be argued, therefore,
that executive directors look beyond the financial criteria.
Internal control procedures and internal auditors:
auditors Internal control procedures
are policies implemented by an entity's board of directors, audit committee,
management, and other personnel to provide reasonable assurance of the
entity achieving its objectives related to reliable financial reporting, operating
efficiency, and compliance with laws and regulations. Internal auditors are
personnel within an organization who test the design and implementation of
the entity's internal control procedures and the reliability of its financial
reporting.
Balance of power:
power The simplest balance of power is very common; require that
the President be a different person from the Treasurer. This application of
separation of power is further developed in companies where separate
divisions check and balance each other's actions. One group may propose
company-wide administrative changes, another group review and can veto the
changes, and a third group check that the interests of people (customers,
shareholders, employees) outside the three groups are being met.
Remuneration:
Remuneration Performance-based remuneration is designed to relate some
proportion of salary to individual performance. It may be in the form of cash or
non-cash payments such as shares and share options, superannuation or
other benefits. Such incentive schemes, however, are reactive in the sense
that they provide no mechanism for preventing mistakes or opportunistic
behaviour, and can elicit myopic behaviour.

XLII

External corporate governance controls


External corporate governance controls encompass the
stakeholders exercise over the organisation. Examples include:

controls

external

competition
debt covenants
demand for and assessment of performance information (especially financial
statements)
government regulations
managerial labour market
media pressure
takeovers

Systemic problems of corporate governance

Demand for information: A barrier to shareholders using good information is


the cost of processing it, especially to a small shareholder. The traditional
answer to this problem is the efficient market hypothesis (in finance, the
efficient market hypothesis (EMH) asserts that financial markets are efficient),
which suggests that the small shareholder will free ride on the judgements of
larger professional investors.
Monitoring costs: In order to influence the directors, the shareholders must
combine with others to form a significant voting group which can pose a real
threat of carrying resolutions or appointing directors at a general meeting.
Supply of accounting information: Financial accounts form a crucial link in
enabling providers of finance to monitor directors. Imperfections in the
financial reporting process will cause imperfections in the effectiveness of
corporate governance. This should, ideally, be corrected by the working of the
external auditing process.

Role of the accountant


Financial reporting is a crucial element necessary for the corporate governance
system to function effectively. Accountants and auditors are the primary providers of
information to capital market participants. The directors of the company should be
entitled to expect that management prepare the financial information in compliance
with statutory and ethical obligations, and rely on auditors' competence.
Current accounting practice allows a degree of choice of method in determining the
method of measurement, criteria for recognition, and even the definition of the
accounting entity. The exercise of this choice to improve apparent performance
(popularly known as creative accounting) imposes extra information costs on users.
In the extreme, it can involve non-disclosure of information.
One area of concern is whether the accounting firm acts as both the independent
auditor and management consultant to the firm they are auditing. This may result in

XLIII

a conflict of interest which places the integrity of financial reports in doubt due to
client pressure to appease management. The power of the corporate client to initiate
and terminate management consulting services and, more fundamentally, to select
and dismiss accounting firms contradicts the concept of an independent auditor.
Changes enacted in the United States in the form of the Sarbanes-Oxley Act (in
response to the Enron situation as noted below) prohibit accounting firms from
providing both auditing and management consulting services. Similar provisions are
in place under clause 49 of SEBI Act in India.
The Enron collapse is an example of misleading financial reporting. Enron concealed
huge losses by creating illusions that a third party was contractually obliged to pay
the amount of any losses. However, the third party was an entity in which Enron had
a substantial economic stake. In discussions of accounting practices with Arthur
Andersen, the partner in charge of auditing, views inevitably led to the client
prevailing.
However, good financial reporting is not a sufficient condition for the effectiveness of
corporate governance if users don't process it, or if the informed user is unable to
exercise a monitoring role due to high costs (see Systemic problems of corporate
governance above).
Rules versus principles
Rules are typically thought to be simpler to follow than principles, demarcating a
clear line between acceptable and unacceptable behaviour. Rules also reduce
discretion on the part of individual managers or auditors.
In practice rules can be more complex than principles. They may be ill-equipped to
deal with new types of transactions not covered by the code. Moreover, even if clear
rules are followed, one can still find a way to circumvent their underlying purpose this is harder to achieve if one is bound by a broader principle.
Principles on the other hand is a form of self regulation. It allows the sector to
determine what standards are acceptable or unacceptable. It also pre-empts over
zealous legislations that might not be practical.
Enforcement
Enforcement can affect the overall credibility of a regulatory system. They both deter
bad actors and level the competitive playing field. Nevertheless, greater enforcement
is not always better, for taken too far it can dampen valuable risk-taking. In practice,
however, this is largely a theoretical, as opposed to a real, risk.
Action Beyond Obligation
Enlightened boards regard their mission as helping management lead the company.
They are more likely to be supportive of the senior management team. Because

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enlightened directors strongly believe that it is their duty to involve themselves in an


intellectual analysis of how the company should move forward into the future, most
of the time, the enlightened board is aligned on the critically important issues facing
the company.
Unlike traditional boards, enlightened boards do not feel hampered by the rules and
regulations of the Sarbanes-Oxley Act. Unlike standard boards that aim to comply
with regulations, enlightened boards regard compliance with regulations as merely a
baseline for board performance. Enlightened directors go far beyond merely meeting
the requirements on a checklist. They do not need Sarbanes-Oxley to mandate that
they protect values and ethics or monitor CEO performance.
At the same time, enlightened directors recognize that it is not their role to be
involved in the day-to-day operations of the corporation. They lead by example.
Overall, what most distinguishes enlightened directors from traditional and standard
directors is the passionate obligation they feel to engage in the day-to-day challenges
and strategizing of the company. Enlightened boards can be found in very large,
complex companies, as well as smaller companies.
Corporate governance models around the world
Although the US model of corporate governance is the most notorious, there is a
considerable variation in corporate governance models around the world. The
intricated shareholding structures of keiretsus in Japan, the heavy presence of banks
in the equity of German firms, the chaebols in South Korea and many others are
examples of arrangements which try to respond to the same corporate governance
challenges as in the US.
AngloAnglo-American Model
There are many different models of corporate governance around the world. These
differ according to the variety of capitalism in which they are embedded. The liberal
model that is common in Anglo-American countries tends to give priority to the
interests of shareholders. The coordinated model that one finds in Continental
Europe and Japan also recognizes the interests of workers, managers, suppliers,
customers, and the community. Each model has its own distinct competitive
advantage. The liberal model of corporate governance encourages radical innovation
and cost competition, whereas the coordinated model of corporate governance
facilitates incremental innovation and quality competition. However, there are
important differences between the U.S. recent approach to governance issues and
what has happened in the UK. In the United States, a corporation is governed by a
board of directors, which has the power to choose an executive officer, usually known
as the chief executive officer. The CEO has broad power to manage the corporation
on a daily basis, but needs to get board approval for certain major actions, such as
hiring his/her immediate subordinates, raising money, acquiring another company,
major capital expansions, or other expensive projects. Other duties of the board may

XLV

include policy setting, decision making, monitoring management's performance, or


corporate control.
The board of directors is nominally selected by and responsible to the shareholders,
but the bylaws of many companies make it difficult for all but the largest
shareholders to have any influence over the makeup of the board; normally,
individual shareholders are not offered a choice of board nominees among which to
choose, but are merely asked to rubberstamp the nominees of the sitting board.
Perverse incentives have pervaded many corporate boards in the developed world,
with board members beholden to the chief executive whose actions they are
intended to oversee. Frequently, members of the boards of directors are CEOs of
other corporations, which some see as a conflict of interest. sons to deviate from the
sound rule, they should be able to convincingly explain those to their shareholders.
Codes and guidelines
Corporate governance principles and codes have been developed in different
countries and issued from stock exchanges, corporations, institutional investors, or
associations (institutes) of directors and managers with the support of governments
and international organizations. As a rule, compliance with these governance
recommendations is not mandated by law, although the codes linked to stock
exchange listing requirements may have a coercive effect.
For example, companies quoted on the London and Toronto Stock Exchanges
formally need not follow the recommendations of their respective national codes.
However, they must disclose whether they follow the recommendations in those
documents and, where not, they should provide explanations concerning divergent
practices. Such disclosure requirements exert a significant pressure on listed
companies for compliance.
In the United States, companies are primarily regulated by the state in which they
incorporate though they are also regulated by the federal government and, if they are
public, by their stock exchange. The highest number of companies are incorporated
in Delaware, including more than half of the Fortune 500. This is due to Delaware's
generally business-friendly corporate legal environment and the existence of a state
court dedicated solely to business issues (Delaware Court of Chancery).
Most states' corporate law generally follow the American Bar Association's Model
Business Corporation Act. While Delaware does not follow the Act, it still considers its
provisions and several prominent Delaware justices, including former Delaware
Supreme Court Chief Justice E. Norman Veasey, participate on ABA committees.
One issue that has been raised since the Disney decision in 2005 is the degree to
which companies manage their governance responsibilities; in other words, do they
merely try to supersede the legal threshold, or should they create governance
guidelines that ascend to the level of best practice. For example, the guidelines
issued by associations of directors (see Section 3 above), corporate managers and

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individual companies tend to be wholly voluntary. For example, The GM Board


Guidelines reflect the companys efforts to improve its own governance capacity.
Such documents, however, may have a wider multiplying effect prompting other
companies to adopt similar documents and standards of best practice.
One of the most influential guidelines has been the 1999 OECD Principles of
Corporate Governance. This was revised in 2004. The OECD remains a proponent of
corporate governance principles throughout the world.
Building on the work of the OECD, other international organisations, private sector
associations and more than 20 national corporate governance codes, the United
Nations Intergovernmental Working Group of Experts on International Standards of
Accounting and Reporting (ISAR) has produced voluntary Guidance on Good Practices
in Corporate Governance Disclosure. This internationally agreed benchmark consists
of more than fifty distinct disclosure items across five broad categories:

Auditing
Board and management structure and process
Corporate responsibility and compliance
Financial transparency and information disclosure
Ownership structure and exercise of control rights

The World Business Council for Sustainable Development WBCSD has done work on
corporate governance, particularly on accountability and reporting, and in 2004
created an Issue Management Tool: Strategic challenges for business in the use of
corporate responsibility codes, standards, and frameworks.This document aims to
provide general information, a "snap-shot" of the landscape and a perspective from a
think-tank/professional association on a few key codes, standards and frameworks
relevant to the sustainability agenda.
Ownership structures
Ownership structures refers to the various patterns in which shareholders seem to
set up with respect to a certain group of firms. It is a tool frequently employed by
policy-makers and researchers in their analyses of corporate governance within a
country or business group.
Generally, ownership structures are identified by using some observable measures of
ownership concentration (i.e. concentration ratios) and then making a sketch
showing its visual representation. The idea behind the concept of ownership
structures is to be able to understand the way in which shareholders interact with
firms and, whenever possible, to locate the ultimate owner of a particular group of
firms. Some examples of ownership structures include pyramids, cross-share
holdings, rings, and webs.

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Corporate governance and firm performance


In its 'Global Investor Opinion Survey' of over 200 institutional investors first
undertaken in 2000 and updated in 2002, McKinsey found that 80% of the
respondents would pay a premium for well-governed companies. They defined a wellgoverned company as one that had mostly out-side directors, who had no
management ties, undertook formal evaluation of its directors, and was responsive
to investors' requests for information on governance issues. The size of the premium
varied by market, from 11% for Canadian companies to around 40% for companies
where the regulatory backdrop was least certain (those in Morocco, Egypt and
Russia).
Other studies have linked broad perceptions of the quality of companies to superior
share price performance. In a study of five year cumulative returns of Fortune
Magazine's survey of 'most admired firms', Antunovich et al. found that those "most
admired" had an average return of 125%, whilst the 'least admired' firms returned
80%. In a separate study Business Week enlisted institutional investors and 'experts'
to assist in differentiating between boards with good and bad governance and found
that companies with the highest rankings had the highest financial returns.
On the other hand, research into the relationship between specific corporate
governance controls and firm performance has been mixed and often weak. The
following examples are illustrative.
Board composition
Some researchers have found support for the relationship between frequency of
meetings and profitability. Others have found a negative relationship between the
proportion of external directors and firm performance, while others found no
relationship between external board membership and performance. In a recent paper
Bhagat and Black found that companies with more independent boards do not
perform better than other companies. It is unlikely that board composition has a
direct impact on firm performance.
Remuneration/Compensation
The results of previous research on the relationship between firm performance and
executive compensation have failed to find consistent and significant relationships
between executives' remuneration and firm performance. Low average levels of payperformance alignment do not necessarily imply that this form of governance control
is inefficient. Not all firms experience the same levels of agency conflict, and external
and internal monitoring devices may be more effective for some than for others.
Some researchers have found that the largest CEO performance incentives came
from ownership of the firm's shares, while other researchers found that the
relationship between share ownership and firm performance was dependent on the
level of ownership. The results suggest that increases in ownership above 20% cause

XLVIII

management to become more entrenched, and less interested in the welfare of their
shareholders.
Some argue that firm performance is positively associated with share option plans
and that these plans direct managers' energies and extend their decision horizons
toward the long-term, rather than the short-term, performance of the company.
However, that point of view came under substantial criticism circa in the wake of
various security scandals including mutual fund timing episodes and, in particular,
the backdating of option grants as documented by University of Iowa academic Erik
Lie and reported by James Blander and Charles Forelle of the Wall Street Journal.
Even before the negative influence on public opinion caused by the 2006 backdating
scandal, use of options faced various criticisms. A particularly forceful and long
running argument concerned the interaction of executive options with corporate
stock repurchase programs. Numerous authorities (including U.S. Federal Reserve
Board economist Weisbenner) determined options may be employed in concert with
stock buybacks in a manner contrary to shareholder interests. These authors argued
that, in part, corporate stock buybacks for U.S. Standard & Poors 500 companies
surged to a $500 billion annual rate in late 2006 because of the impact of options. A
compendium of academic works on the option/buyback issue is included in the study
Scandalby author M. Gumport issued in 2006.
A combination of accounting changes and governance issues led options to become
a less popular means of remuneration as 2006 progressed, and various alternative
implementations of buybacks surfaced to challenge the dominance of "open market"
cash buybacks as the preferred means of implementing a share repurchase plan.

TRANSPARENCY INTERNATIONAL
Transparency International (TI
TI)
TI is an international non-governmental organization
addressing corruption. This includes, but is not limited to, political corruption. It is
widely known for producing its annual Corruptions Perceptions Index (see below), a
comparative listing of corruption worldwide. The international headquarters is located
in Berlin, Germany. The founder of the organisation is Peter Eigen.
Organization and role
TI is organised as a group of some 100 national chapters, with an international
secretariat in Berlin, Germany. Originally founded in Germany in May 1993 as a notfor-profit organisation, TI is now an international non-governmental organisation, and
claims to be moving towards a completely democratic organisational structure. TI
says of itself:
"Transparency International is the global civil society organisation leading the fight
against corruption. It brings people together in a powerful worldwide coalition to end

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the devastating impact of corruption on men, women and children around the world.
TI's mission is to create change towards a world free of corruption."
It rejects any idea of "northern superiority" regarding corruption and is committed to
exposing corruption worldwide.
Since 1995, TI has issued an annual Corruption Perceptions Index (CPI); it also
publishes an annual Global Corruption Report, a Global Corruption Barometer and a
Bribe Payers Index.
TI does not undertake investigations on single cases of corruption or expose
individual cases. It develops tools for fighting corruption and works with other civil
society organisations, companies and governments to implement them. The goal of TI
is to be non-partisan and to build coalitions against corruption.
TI's biggest success has been to put the topic of corruption on the world's agenda.
International Institutions such as the World Bank and the International Monetary
Fund now view corruption as one of the main obstacles for development, whereas
prior to the 1990s this topic was not broadly discussed. TI furthermore played a vital
role in the introduction of the United Nations Convention against Corruption and the
OECD Anti-Bribery Convention.
However the TI USA Chapter has never commented within its publications on any
corruption case within the USA, and has taken money from the Boeing Corporation,
whose executive Darleen A. Druyun was imprisoned for corrupt activities, leading to
the resignation of Boeing CEO Phil Condit.
Corruption Perceptions Index
The CPIbesides the World Bank corruption indexis the most commonly used
measure for corruption in countries worldwide. Based on many different studies, it is
known for its accuracy. To form this index, TI compiles surveys that ask businessmen
and analysts, both in and outside the countries they are analyzing, their perceptions
of how corrupt a country is. Relying on the number of actual corruption cases would
not work since laws and enforcement of laws differ significantly from country to
country.
The CPI is criticised for two main reasons. The first is a danger of a self-fulfilling
prophecy. Country analysts might be influenced by past corruption indices and
therefore not realise changes. Secondly, the use of the index values in time-series
statistics is problematic due to the way it is calculated.
Competitiveness and corruption
A review of the linkages between countries' competitiveness and the incidence of
corruption was initiated at a TI workshop in the International Anti-Corruption
Conference in Prague, November 1998.

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