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Ethics

Ethics is a branch of social science. It deals with moral principles and social values. It
helps us to classifying, what is good and what is bad? It tells us to do good things and
avoid doing bad things.
So, ethics separate, good and bad, right and wrong, fair and unfair, moral and immoral
and proper and improper human action. In short, ethics means a code of conduct.
In short, business ethics means to conduct business with a human touch in order to give
welfare to the society.
So, the businessmen must give a regular supply of good quality goods and services at
reasonable prices to their consumers. They must avoid indulging in unfair trade practices
like adulteration, promoting misleading advertisements, cheating in weights and
measures, black marketing, etc. They must give fair wages and provide good working
conditions to their workers.

Definition of Business Ethics

According to Andrew Crane,

Business ethics is the study of business situations, activities, and decisions where issues
of right and wrong are addressed.

According to Raymond C. Baumhart,

The ethics of business is the ethics of responsibility. The business man must promise
that he will not harm knowinfly.

Nature of Business Ethics


The characteristics or features of business ethics are:-

Code of conduct : Business ethics is a code of conduct. It


tells what to do and what not to do for the welfare of the society.
All businessmen must follow this code of conduct.

Based on moral and social values : Business ethics is based

on moral and social values. It contains moral and social principles


(rules) for doing business. This includes self-control, consumer
protection and welfare, service to society, fair treatment to social
groups, not to exploit others, etc.

Gives protection to social groups : Business ethics give


protection to different social groups such as consumers,
employees, small businessmen, government, shareholders,
creditors, etc.

Provides basic framework : Business ethics provide a basic


framework for doing business. It gives the social cultural,
economic, legal and other limits of business. Business must be
conducted within these limits.

Voluntary : Business ethics must be voluntary. The


businessmen must accept business ethics on their own. Business
ethics must be like self-discipline.

New concept : Business ethics is a newer concept. It is strictly


followed only in developed countries. It is not followed properly in
poor and developing countries.

Theories Of Business Ethic

Ethics is a branch of social science. It deals with moral principles and social values. It
helps us to classifying, what is good and what is bad? It tells us to do good things and
avoid doing bad things.
So, ethics separate, good and bad, right and wrong, fair and unfair, moral and immoral
and proper and improper human action. In short, ethics means a code of conduct.
In short, business ethics means to conduct business with a human touch in order to give
welfare to the society.
So, the businessmen must give a regular supply of good quality goods and services at
reasonable prices to their consumers. They must avoid indulging in unfair trade practices
like adulteration, promoting misleading advertisements, cheating in weights and
measures, black marketing, etc. They must give fair wages and provide good working
conditions to their workers.

Moral Theories (Normative Theories of Ethics)

Normative theories of ethics or moral theories are meant to help us figure out what
actions are right and wrong. Popular normative theories include utilitarianism, the
categorical imperative, Aristotelian virtue ethics, Stoic virtue ethics, and W. D. Rosss
intuitionism. I will discuss each of these theories and explain how to apply them in
various situations.

Normative Theories of Business ethics


This theory is divided in two parts
1. Consequentialist Theories
2. Nonconsequentialist Theories

1. Consequentialist Theories:Those theories that determine the moral rightness or wrongness of an action based on the
actions consequences or results.
2. Nonconsequentialist Theories:Those that determine the moral rightness or wrongness of an action based on the actions
intrinsic features or character.
Consequentiality Theories is also further divided in to two types1.

Egoism:

The view that morality coincides with the self-interest of an individual or an organization.
Egoists: Those who determine the moral value of an action based on the principle of personal
advantage.

An action is morally right if it promotes ones long-term interest.

An action is morally wrong if it undermines it.

Personal egoists: Pursue their own self-interest but do not make the universal claim that all
individuals should do the same.

Impersonal egoists: Claim that the pursuit of ones self-interest


everyones behavior.

should motivate

Egoists do not necessarily care only about pursuing pleasure (hedonism) or behave dishonestly
and maliciously toward others.
Egoists can assist others if doing so promotes their own advantage.
Psychological egoism: The theory of ethical egoism is often justified on the ground that human
beings are essentially selfish.
Even acts of self-sacrifice are inherently self-regarding insofar as they are motivated by a
conscious or unconscious concern with ones own advantage.
Objections to egoism

(1)

The theory is not sound: The doctrine of psychological egoism is false not all human
acts are selfish by nature, and some are truly altruistic.

(2)

Egoism is not a moral theory at all: Egoism misses the whole point of morality, which
is to restrain our selfish desires for the sake of peaceful coexistence with others.

(3)

Egoism ignores blatant wrongs: All patently wrong actions are morally neutral unless
they conflict with ones advantage.

2. Utilitarianism
Definition: The moral theory that we should act in in ways that produce the most pleasure or
happiness for the greatest number of people affected by our actions.
Main representatives: The British philosophers Jeremy Bentham (17481832) and John Stuart
Mill (18061873).
The principle of utility: Actions are morally praiseworthy if they promote the greatest
human welfare, and blameworthy if they do not.

Six points concerning utilitarianism:


(1)In choosing between alternative courses of action, we should consider the net worth of
happiness vs. unhappiness produced by each course of action.
(2)We should give equal consideration to all individual preferences, then calculate the net worth
of the various kinds of pleasures and pains.
(3) Anything can be morally praiseworthy in some circumstances if it promotes the greatest
balance of pleasure vs. pain for the greatest number of people.
(4) We should seek to maximize happiness, not only immediately, but in the long run.
(5) We should avoid choosing actions if their consequences are uncertain.
(6) We must guard against bias in our utilitarian calculations when our own interests are at stake.
So it is advisable to rely on rules of thumb.

Utilitarianism in an organizational context:

Provides a clear and straightforward standard for formulating and testing policies.
Offers an objective way for resolving conflicts of self-interest.
Suggests a flexible, result-oriented approach to moral decision making.
Criticisms of utilitarianism:
(1)

The practical application of the principle of utility involves considerable difficulties.

(2)

Some actions seem to be intrinsically immoral, though performing them can maximize
happiness.

(3)

Utilitarianism is concerned with the amount of happiness produced, not how the amount
is distributed, so the theory can run counter to principles of justice.
Nonconsequentialist Theories
Nonconsequentialist Theories it is also called Kantian theory.
Kants Ethics
Immanuel Kant (17241804): A German philosopher with a nonconsequentialist approach to
ethics.

Said the moral worth of an action is determined on the basis of its intrinsic features or character,
not results or consequences.
Believed in good will, that good actions proceed from right intentions, those inspired by a sense
of duty.

The categorical imperative: Morality as a system of laws analogous to the laws of


physics in terms of their universal applicability.

The morality of an action depends on whether the maxim (or subjective principle) behind
it can be willed as a universal law without committing a logical contradiction.

An example of the categorical imperative:

A building contractor promises to install a sprinkler system in a project.

But he is willing to break that promise to suit his purposes.

His maxim can be expressed as: Ill make promises that Ill break whenever
keeping them no longer suits my purposes.

By willing the maxim to become a universal law, the contractor undermines


promises in general.

Formulations of the categorical imperative:


(1)

Universal acceptability: To determine whether a principle is a moral law, we need to ask


whether the command expressed through it is acceptable to all rational agents.

(2)

Humanity as an end, never as a means: We must always act in a way that respects
human rationality in others and in ourselves.
Kant in an organizational context:

(1)

The categorical imperative provides a solid standard for the formulation of rules
applicable to any business circumstances.

(2)

Kant emphasizes the absolute value and dignity of individuals.

(3)

Kant stresses the importance of acting on the basis of right intentions.


Criticisms of Kants ethics:

(1)

Kants ethics is too extreme insofar as it excludes emotion from moral decision making and
makes duty paramount.

(2)

Kant fails to distinguish between excepting oneself from a rule and qualifying a rule on the
basis of exceptions.

(3)

It is not always clear when people are treated as ends and merely as means.

CSR As a business strategy for sustainable development


CSR basically means is that a business does more for the wellbeing of others than required in an
economical (make a profit) and legal (obey the law) sense.
Different types of CSR

Environmental CSR: focuses on eco-issues such as climate change.

Community based CSR: businesses work with other organizations to improve the
quality of life of the people in the local community.

HR based CSR: projects that improve the wellbeing of the staff.

Advantages of Corporate Social Responsibility


1. Satisfied employees.
Employees want to feel proud of the organization they work for. An employee with a positive
attitude towards the company, is less likely to look for a job elsewhere. It is also likely that you
will receive more job applications because people want to work for you.
2. Satisfied customers
Research shows that a strong record of CSR improves customers attitude towards the company.
If a customer likes the company, he or she will buy more products or services and will be less
willing to change to another brand.
3. Positive PR
CSR provides the opportunity to share positive stories online and through traditional media.
Companies no longer have to waste money on expensive advertising campaigns. Instead they
generate free publicity and benefit from worth of mouth marketing.
4. Costs reductions
Yes, you read this correctly. A CSR program doesnt have to cost money. On the contrary. If
conducted properly a company can reduce costs through CSR.
Companies reduce costs by:

More efficient staff hire and retention

Implementing energy savings programs

Managing potential risks and liabilities more effectively

Less investment in traditional advertising

6. Long term future for your business


CSR is not something for the short term. Its all about achieving long term results and business
continuity. Large businesses refer to: shaping a more sustainable society (Vodafone 2010
report):
Deliver a sustainable society in which business and its stakeholders can prosper in the long
term

A popular explanation of the term CSR is the continuing commitment by businesses to


behave ethically and contribute to economic development, while improving the quality of
life of the workforce and their families as well as of the local community and society at
large
. Over the last years an increasing number of companies worldwide started promoting
their business through Corporate Social Responsibility strategies because the customers,
the public and the investors expect them to act sustainable as well as responsible
In some cases, CSR as many large corporations, it is primarily a strategy to divert
attention away from the negative social and environmental impacts of their lives. It
enables the company to leverage its products, employee strength, networks and profits
and up to some extent to create a sustainable change

Despite certain criticisms on the CSR activities, more and more companies in the world
are inclined towards corporate social responsibility

CSR can not only refer to the compliance of human right standards, labor and social
security arrangements, but also to the fight against climate change, sustainable
management of natural resources and consumer protection.

In the Developed nations, the basic needs of the population do not need so much support
as in the under-developed nations. The demographies, literacy rate, poverty ratio and

GDP of the country have significant role in determining the directions of CSR initiatives
of an organization

In the Asian context, CSR mostly involves activities like adopting villages for holistic
development, in which they provide medical and sanitation facilities, build school and
houses, and helping villages become self-reliant by teaching them vocational and
business skills.

So it is necessary for each businessman the impacts of CSR on the working population,
society and environment and therefore to elaborate the various frameworks for it with a
view towards developing its practice in an evolutionary way

Corporate Governance and its Models

CORPORATE GOVERNANCE SYSTEMS

The board of directors seldom appears on the management organization chart yet it is the
ultimate decision making body in a company. The role of management is to run the
enterprise while the role of the board is to see that it is being run well and in the right
direction

Management always operates as a hierarchy. There is an ordering of responsibility, with


authority delegated downwards through the organization and accountability By contrast,
the board members need to work together as equals and each director bears the same
duties and responsibilities under the law. A useful way of interaction between
management and the board is to present the board as a circle superimposed on the
hierarchical triangle of management.

This model can be applied to the governance of any corporate entity, private or public,
profit oriented or service-based organization. The circle and triangle model mentioned
earlier is a powerful analytical tool.

Corporate governance systems vary around the world. Scholars tend to suggest three
broad versions: (i) the Anglo-American Model; (ii) the German Model; and (iii) the
Japanese Model.
THE ANGLO-AMERICAN MODEL

This is also known as unitary board model, as illustrated in Figure 14.1 in which all directors
participate in a single board comprising both executive and non-executive directors in varying
proportions. This approach to governance tends to be shareholder-oriented. It is also called the
AngloSaxon approach to corporate governance, being the basis of corporate governance in
America, Britain, Canada, Australia and other commonwealth countries including India.
The major features of the AngloSaxon or Anglo-American model of corporate governance are
as follows:
1. The ownership of companies is more or less equally divided between individual
shareholders and institutional shareholders.
2. Directors are rarely independent of management.
3. Companies are typically run by professional managers who have neligible ownership
stakes. There is a fairly clear separation of ownership and management.
4. Most institutional investors are reluctant activists. They view themselves as portfolio
investors interested in investing in a broadly diversified portfolio of liquid securities. If
they are not satisfied with a companys performance, they simply sell the securities in
the market and quit.
5 The disclosure norms are comprehensive.

GERMAN MODEL

In this model, also known as the two-tier board model, corporate governance is exercised
through two boards, in which the upper board supervises the executive board on behalf of
stakeholders. This approach to governance is typically more societal-oriented and is sometimes
called the Continental European approach, being the basis of corporate governance adopted in
Germany, Holland, and to an extent, France.

In this model although the shareholders own the company, they do not entirely dictate the
governance mechanism.
As shown in Figure 14.2, shareholders elect 50 per cent of members of supervisory board
and the other half is appointed by labour unions. This ensures that employees and
labourers also enjoy a share in the governance.

The supervisory board appoints and monitors the management board. There is a reporting
relationship between them, although the management board independently conducts the
day-to-day operations of the company.

THE JAPANESE MODEL

This is the business network model, which reflects the cultural relationships seen in the Japanese
keiretsu network, in which boards tend to be large, predominantly executive and often
ritualistic.The reality of power in the enterprise lies in the relationships between top management
in the companies in the keiretsu network. The approach bears some comparison with
Korean chaebol.
In the Japanese model (Figure 14.3), the financial institution plays a crucial role in governance.
The shareholders and the main bank together appoint the board of directors and the president.
The distinctive features of the Japanese corporate governance mechanism are as follows:

The president who consults both the supervisory board and the executive management
is included.
Importance of the lending bank is highlighted.

Narayan Murthy Committee on Corporate Governance

Corporate governance is the acceptance of the inalienable rights of shareholders as the


true owners of the corporation.

The Committee on Corporate Governance was constituted by SEBI, to evaluate the


existing corporate governance practices and to improve these practices as the standards
themselves.

The committees recommendations are based on the relative importance, fairness,


accountability, transparency, ease of implementation, verifiability, audit reports,
independent directors, related parties, risk management

The key mandatory recommendations focus on

Strengthening the responsibilities of audit committees: At least one member should be


financially knowledgeable and at least one member should have accounting or related
financial management proficiency.

Improving the quality of financial disclosures, including those related to related party
transactions.

Companies raising money through an IPO should disclose to the Audit Committee the
uses / applications of funds by major category like capital expenditure, sales and
marketing, working capital, etc.

Requiring corporate executive boards to assess and disclose business risks in the
annual reports of companies.

Board of a company to lay down the code of conduct for all Board members and senior
management of a company.

Improved disclosures relating to compensation paid to non-executive directors.


Nominee of the Government on public sector companies shall be similarly elected and
shall be subject to the same responsibilities and liabilities as other directors

Whistle Blower Policy: Personnel who observe an unethical or improper practice


should be able to approach the audit committee without necessarily informing their
superiors.

Implementation issue
A primary issue that arises with implementation is whether the recommendations should
be made applicable to all companies immediately or in a phased manner, since the
costs of compliance may be large for certain companies.

Naresh Chandra Committee Report on Corporate Audit and


Governance (2002)
The Ministry of Corporate Affairs had appointed a high level committee in August
2002 to examine various corporate governance issues. The committee had been
entrusted to analyse and recommend changes, if necessary, in diverse areas such
as:

The statutory auditor-company relationship so as to further strengthen the


professional nature of this interface
The need, if any, for rotation of statutory audit firms or partners
The procedure for appointment of auditors and determination of audit fees
Restrictions, if necessary, on non-audit fees
Independence of auditing functions
Measures required to ensure that the management and companies actually
present 'true and fair' statement of the financial affairs of companies
The need to consider measures such as certification of accounts and financial
statements by the management and directors;

Role of independent directors, and how their independence and effectiveness


can be ensured.

The Committee's recommendations relate to:

Disqualifications for audit assignments;


List of prohibited non-audit services
Compulsory Audit Partner Rotation;
Auditor's disclosure of contingent liabilities
Appointment of auditors
Defining an independent director
Percentage of independent directors
Minimum board size of listed companies
Remuneration of non-executive directors
Training of independent directors

Kumar Mangalam Birla Committee Report (2000)

In early 1999, Securities and Exchange Board of India (SEBI) had set up a
committee under Shri Kumar Mangalam Birla, member SEBI Board, to
promote and raise the standards of good corporate governance. The report
submitted by the committee is the first formal and comprehensive attempt to
evolve a Code of Corporate Governance
The primary objective of the committee was to view corporate governance
from the perspective of the investors and shareholders and to prepare a
Code' to suit the Indian corporate environment.
The committee had identified the Shareholders, the Board of Directors and
the Management as the three key constituents of corporate governance and
attempted to identify , their roles and responsibilities as also their rights in
the context of good corporate governance.
Corporate governance has several claimants shareholders and other
stakeholders - which include suppliers, customers, creditors, and the bankers,
the employees of the company, the government and the society at large.
The Report had been prepared by the committee, keeping in view primarily
the interests of a particular class of stakeholders, namely, the shareholders.
Mandatory and non-mandatory recommendations
The committee divided the recommendations into two categories, namely,
mandatory and non- mandatory.

A. Mandatory Recommendations:

Applies To Listed Companies With Paid Up Capital Of Rs. 3 Crore And Above
Composition Of Board Of Directors Optimum Combination Of Executive &
NonExecutive Directors
Audit Committee With 3 Independent Directors With One Having Financial
And Accounting Knowledge.
Remuneration Committee
At least 4 Meetings of the Board in a Year with Maximum Gap of 4 Months
between 2 Meetings
Information Sharing With Shareholders
B. Non-Mandatory Recommendations:

Role Of Chairman
Remuneration Committee Of Board
Corporate Restructuring
Further Issue Of Capital
Venturing Into New Businesses

CORPORATE GOVERNANCE CHALLENGES IN DEVELOPING, EMERGING


AND TRANSITION ECONOMIES

Establishing any one of institutions is a necessary and challenging undertaking without


democratic markets and corporate governance. Success requires that the private and public
sectors work together to establish the necessary legal and regulatory framework through ethical
behaviour.
While the set of institutions is designed to be comprehensive, each region is in a different stage
of establishing a democratic, market-based framework and a corporate governance system.
Hence, each nation has its own particular set of challenges. Some of the general challenges
confronting developing, emerging and transition economies include the following:

Establishing a rule-based system of governance.

Establishing property right systems that clearly and easily identify true owners even
if the state is the owner.
Protecting and enforcing minority shareholders rights.
Finding active owners and skilled managers amid diffuse ownership structures.

Encouraging good corporate governance practices and creating benchmarks through


cooperation

Cultivating technical and professional know-how.

Promoting good governance within family-owned and concentrated ownership


structures.

WALTONS SIX MODELS OF BUSINESS CONDUCT

To understand business conduct, Walton13 has classified it into six models.


1. The austere model: It gives almost exclusive emphasis on ownership interest and
profit objectives.
2. The household model: Following the concept of an extended family, the model
emphasizes employee jobs, benefits and paternalism.
3. The vendor model: In this model, consumer interests, tastes and rights dominate the
organization.
4. The investment model: This model focuses on the organization as an entity and thus
on long-term profits and survival. In the name of enlightened self-interest, it gives
some recognition to social investments along with economic ones.
5. The civic model: Its slogan is corporate citizenship. It goes beyond imposed
obligations, accepts social responsibility and makes a positive commitment to social
needs.
6. The creative model: This model encourages the organization to become a creative
instrument, serving the cause of an advanced civilization with a better quality of life.
Employees in such organizations behave and perform as artists, building their own
creative ideas into actions, resulting in new contributions not originally contemplated.
These six models may be thought of as points on a continuum from low to high social
responsibility. As a result, employees become proud of their companys performance, and
develop a sense of belonging and creativity.
Regardless of the model adopted by an organization, one of its most important jobs is to establish
its value together so that it becomes a effective system that is known and accepted by the
investors, employees, customers and society, including government.

The system must be strong enough and flexible enough to move with the changing society.
The primary responsibility of management is to reduce conflict areasfor sharing benefits of
business and to bring harmony of interest among diverse stakeholder groups.

SARBANESOXLEY ACT, 2002

The SarbanesOxley Act (SOX Act), 2002 is a sincere attempt to address all the issues
associated with corporate failures to achieve quality governance
The Act was formulated to protect investors by improving the accuracy and reliability of
corporate disclosures
The Act contains a number of provisions that dramatically change the obligations of
public companies, the directors and officers.
Important provisions contained in SOX Act are briefly given below:
Establishment of Public Company Accounting Oversight Board (PCAOB):
The SOX Act creates a new board consisting of five members of whom two will
be certified public accountants.
All accounting firms will have to register themselves with this Board and submit
among other details, particulars of fees received from public company clients for
audit and non-audit services, financial information about the firm, list of firms
staff who participate in audits, quality control policies, information on civil,
criminal and disciplinary proceedings against the firm or any of the staff.

The Board will conduct annual inspections of firms, which audit more than 100
public companies, and once in three years in other cases.
The board will establish rules governing audit quality control, ethics,
independence and other standards.
The Board reports to the SEC. The Board is required to send its report to the SEC
annually, which will then be forwarded by the SEC to the Congress.

Audit committee:

The SOX Act provides for a new improved audit committee. The members of
the committee are drawn from among the directors of the board of the company
but all are independent directors as defined in the Act.

The audit committee is responsible for appointment, fixing fees and oversight of
the work of independent auditors. The committee is also responsible for
establishing and reviewing the procedures for the receipt, treatment of accounts,
internal control and audit complaints received by the company from the interested
or affected parties.

The SOX Act requires that registered public accounting firms should report
directly to the audit committee on all critical accounting policies and practices and
other related matters.

Audit partner rotation: The SOX Act provides for mandatory rotation of the
lead auditor, co-ordinating partner and the partner reviewing audit once every five
years.

Improper influence on conduct of audits: It will be unlawful for any


executive or director of the firm to take any action to fraudulently influence, coerce,
manipulate or mislead any auditor engaged in the performance of an audit with the
view to rendering the financial statements materially misleading.

Prohibition of non-audit services:


Under the SOX Act prohibition of non audit services are:- financial information system, design
and implementation, internal audit outsourcing services, management functions or human
resources, legal services or expert services unrelated to the audit