CG Class-1-S PDF

Corporate Governance
Dr.S.Subramanian, IIMK
Morality
Morality – standards that an individual or a

group has about what is right and wrong,
or good and evil
Moral Standard
When will you call a standard as moral standard ?
• Deals with matters which has serious
implications for the human beings
• Cannot be established or changed by any
authoritative bodies
• Preferred over other values including self-
interest
• Based on impartial considerations
• Associated with emotions
Ethics
Ethics – a discipline that examines how
moral standards apply to our lives
It answers the question of whether the moral
standards are reasonable and supported
by good reasons – right or wrong
Where did these ethical standards
come from?
Religion
All religions talk more or less in similar tone

about ethical standards
Golden Rule of Ethics
"Treat others only as you consent to being
treated in the same situation."
GR forbids this combination:

• I do something to another person.
• I'm unwilling that this be done to me in the
same situation.
Ethical relativism
Societal requirements also determine what
ethics is. (Ethical relativism)
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Foundation of Ethical Theory

• Types of Ethical Examinations
– Descriptive Ethics
– Analytical Ethics (Metaethics)
– Normative Ethics
Understanding Business Ethics 2nd Edition © 2014 SAGE Publications, Inc.
8
Descriptive Ethics
• Defined as the presentation of facts
related to the specific ethical actions of an
individual or organization
• Explain ‘How it is?’
• Used when an observer wants to
understand the course of events that
generated the ethical issue
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Analytical Ethics
• Described as understanding the reasons
a course of action that may have an
ethical impact took place
• Moves from the how and when inquiry,
which is the basis of the descriptive ethics
viewpoint, to asking why
• Explains ‘Why it is?’
10
Normative Ethics
• Defined as a prescribed course of action
that attempts to ensure ethical behavior
• ‘How it should be’
• Moves the evaluation of ethical behavior
from the past to future tense
• Presents information on what should be
done in the future rather than what was
done in the past
Modern theories of ethics
I - Teleological Theories
• Ethical Egoism
• Utilitarianism
• Sidgwick’s dualism
II - Deontological Theories
▪ Kant’s ethics-Universalism
▪ Principle of Rights
III - Virtue ethics
Principle of Justice
Principle of Care
Teleological Theories
Moral Worth of Actions determined by its
Consequences
• Ethical Egoism -
• Utilitarianism - Jeremy Bentham & John Stuart
Mill – early 19th century
• Sidgwick’s Dualism
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Ethical Egoism
• Based on the belief that every individual
should act in a way to promote
himself/herself if the net result will
generate, on balance, positive rather than
negative results
Utilitarianism
• Greatest happiness for greatest number of
people
• Maximization of good and minimization of evil
• Only the ends are important and not the means
• An action is morally right if the net benefits
(utility) over costs are greatest compared with
the net benefits of all other possible choices
• Cost- Benefit Analysis
14
Sidgwick’s Dualism
• Attempts to resolve the difference of
whether the actions for one’s self-benefit
impact just the individual or others
• Argued that utilitarianism is a foundation
component of any ethical framework
Deontological Theories
• Moral Worth of an action determined by right
duties (actions), not consequences
• Focus on the duty or obligation in
determining whether the actions are right
or wrong
• Kant’s ethics (Universalism)
• Theory of Rights
Universalism
Immanuel Kant (1724-1804)
A person should choose to act if and only if
he/she would be willing to have every
person on earth in that same situation
exactly that same way
‘
Principle of Rights
Everybody have certain rights
Actions should respect the rights
Means are important than ends
Rights cannot be overridden by Utility
Ethics of Care
Obligation to exercise special care toward

those particular persons with whom we
have valuable close relationships
Virtue Ethics
Ethical behavior is not enough
• It is an alternative to theories of Ethics – given by Aristotle
• Both Kantian and utilitarian systems try to provide guiding

principles for actions that allow a person to decide how to
behave in any given situation.
• Virtue ethics, by contrast, focuses on what makes a good

person, rather than what makes a good action
Principle of Justice
Fair treatment to each person
Distributive Justice
Retributive Justice
Compensatory Justice
Distributive Justice
Different people put forth claims on society’s
benefits and burdens and all claims cannot
be satisfied
Distributive Justice -
Egalitarianism -Justice as Equality - Every person
should be given exactly equal shares of society’s or
a group’s benefits and burdens
Capitalism - Justice based on Contribution -Benefits
should be distributed according to the contribution
the individual makes to a society, a task, a group or
an exchange
Socialism Justice based on needs and abilities- Work
burdens should be distributed according to people’s
abilities, and benefits should be distributed
according to people’s needs
Justice as fairness : John Rawls
Each person has an equal right to the most

extensive basic liberties compatible with similar
liberties for all
Social and economic inequalities are arranged so
that they are both
• To the greatest benefit of the least advantaged
persons and
• Attached to offices and positions open to all
under conditions of fair equality of opportunity
Retributive Justice
Justice of punishing persons for wrong doing
1. Person being punished actually did
wrong
2. The wrong doing must have been
committed knowingly
3. Punishment should be proportional to the
wrong
Compensatory Justice
Justice of restoring to a person what the
person lost when he or she was wronged
by someone else
Ethics and Law
Statues – laws created by the legislative
bodies
IPC, Company law, Factories Act
Regulations
Enacted by boards and agencies subjected
to the statutory power – always
subordinate to the law
Constitutional Law- Foundation of the legal
system
Law
Law- Consistent set of universal rules that
are widely published, accepted and
enforced. It also defines the requirement
that one must act or must not act in a
given situation
Law
• Consistent – Degree of firmness
• Universal – applicable to all
• Published – Available in written form
• Accepted – Everybody should accept it
• Enforced – mechanism to enforce
Law and Moral Standards
Law is based on moral code to a greater
extent
An action can be legal but morally wrong
An action can be moral but illegal
Law has other considerations – Sovereignty,

Bringing order in the society etc
Why ethics in Business
Why study ethics in business ?
Individuals need to follow ethical standards
but what about corporations?
Two views about business and ethics
Business and Ethics
Unitarian View
Business activities are part of the ethical system
Separatist view
Adam Smith – Business need not worry about
ethics- The invisible hand will ensure that
Milton Friedman – Business should concentrate on
production and distribution of goods. It’s the duty
of the government to focus on social problems
Applying Ethical theories to
Business
Unitarian View – Business entities are part of the
society hence they need to adopt ethical
practices
But how to apply ethical standards to Business
entities?
To apply to the organization as a whole – Citi bank
in 1992 Scam- Ford Pinto - who is responsible
Or to the individuals who are responsible for it –
Enron
Application of Ethical theories in
Business
• Theory of Corporate Moral Excellence
• Ethics and Stakeholders theory
• Ethics and Corporate Governance
Theory of Corporate Moral
Excellence
Corporations have two sets of values
Espoused Values
Values in Practice
Differences between the above two will

result in violation of ethical norms
Theory of Corporate Moral
Excellence
How to overcome the problems?
1. Values, attitudes and beliefs
2. Shape mission, policies, structure and
strategies based on values (Culture
should reflect the values)
3. Organizational procedures and process
should facilitate the values
Ethics and Stakeholders theory
Act in a responsible manner by paying
attention to the needs and rights of the
primary stakeholders
Stake – interest, claim, share
Stakeholder- individual or group that has
one or more of the various kinds of stakes
in the business
Who are the primary stakeholders of
Business ?
Stakeholders
Primary Stakeholders
–Shareholders and investors
–Employees and Managers
–Customers
–Suppliers and other business
partners
–Local community
–Government
–Competitors
Ethics and Corporate Governance
Managers are working for Stakeholders not
for personal gains (except the salary)

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Corporate Governance

Morality – standards that an individual or a

All religions talk more or less in similar tone

GR forbids this combination:

Foundation of Ethical Theory

Obligation to exercise special care toward

• It is an alternative to theories of Ethics – given by Aristotle

• Both Kantian and utilitarian systems try to provide guiding

• Virtue ethics, by contrast, focuses on what makes a good

Each person has an equal right to the most

Law has other considerations – Sovereignty,

Differences between the above two will

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