Keyur D Vasava

Pharmacy+MBA

Dist.Narmada

"ACCEPT EVERYTHING ABOUT YOURSELF -- I MEAN EVERYTHING, YOU ARE YOU AND

THAT IS THE BEGINNING AND THE END -- NO APOLOGIES, NO REGRETS."

( 14/03/12)
(BE&CG)-SEM-IV (GTU)
Business Ethics & Corporate Governance

Module I…!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

1. INTRODUCTION TO BUSINESS ETHICS:

 Ethics is a set of standards or code or value system, worked out from

human reason & experience by which free human actions are determined as
ultimately right or wrong, good or evil.

 Business ethics means the application of ethics in business

 Definition of Business Ethics: Business Ethics is a specialized study of

moral right and wrong. It concentrates on moral standards as they apply
particularly to business policies, institutions, and behavior.

 Characteristics of business ethics

 Differ with persons: ethical questions do not have a unique solution but a multitude of
alternatives
 Ethical decisions are not limited to them, but affect a wide range of other situations
as well.
 Ethical decisions involve a tradeoff between cost incurred and benefits received.
 Consequences are not clear
 Every person is individually responsible for the ethical or unethical decision and action
that he or she takes
 Ethical actions are voluntary human actions

 Why is ethics important in business?

 Ethics corresponds to basic human needs

 Values create credibility with the public
 Values give mgmt credibility with employees
 Values help better decision making
 Ethics and profit
 Law cannot protect society, ethics can
  Morality and ethics:

 Morality is the std an individual or community keeps about what is right and wrong or
good and evil.
 Moral norms deal with topics that either seriously harm or benefit human beings.
 Moral standards are not dependent on or changed by the decision of authoritative
bodies.
 Moral demands enjoy a self-driven force. Expressed through the medium of special
emotions.
 Ethics helps one to address questions such as what do moral principles mean in a given
situation.
 Ethics offers certain moral standards to judge a particular human behavior or
situation.

 Law and ethics:

 Law is universally accepted, published document

 Law says, what action should be taken against a person who violates the provisions of
legal system whereas the consequences of unethical action is not clear
 Some laws have nothing to do with morality while some may even violate our moral
standards.

 Aims and Objectives

 To give a basic understanding of the major theories of ethics - including deontology,

utilitarianism and virtue theory - and their application in the relevant fields of
business and information technology.

 One of the main course objectives is to encourage independent critical thought and
develop an individual system of ethics.

IMPORTANCE OF BUSINESS ETHICS:

It is now recognized that it is good business to be ethical. An ethical image for accompany
can build goodwill and loyalty among customers and clients.

 Ethical motivation: It protects or improves reputation of the organization by creating

an efficient and productive work environment. At a time of mass corporate downsizing,
one of the most effective ways to appeal to the fragile loyalty of insecure employees
is to promote an ethical culture, which gives employees a greater sense of control and
appreciation.
 Balance the needs and wishes of stakeholders: There is pressure on business to
recognize its responsibilities to society. Business ethics requires businesses to think
about the impact of its decisions on people or stakeholders who are directly or
 indirectly affected by those decisions. Companies build their image by acting in
accordance with their values, whatever they might be. Creating a positive public image
comes from demonstrating appropriate values. Publicizing and following a company’s
values allows stakeholders to understand what the company stands for, that it takes
its conduct as an organization seriously.
 Global challenges: Business must become aware of the ethical diversity of this world
because of increasing globalization of the economy. It must learn the values of other
cultures, how to apply them to its decisions, and how to combine them with its own
values. In a world where transnational corporations and their affiliates account for
two-thirds of the world’s trade in goods, and employ 73 million people, corporations
cannot afford to ignore the reality of multicultural ethics.
 Ethical pay-off: They serve to protect the organization from significant risks, and to
some degree help grow the business. Risks such as breaches of law, regulations or
company standards, and damage to reputation were perceived to be significantly
reduced.
 Employee Retention: One of the major costs in business is inappropriate turnover. The
loss of valuable experience and development of new personnel is a cost companies can
control. Seldom is pay the primary factor in losing an employee. What would a company
give to retain valuable employees? With a successful program, the employees work with
managers and supervisors in making decisions based on the company’s values. A
successful Business Ethics program establishes a culture that rewards making the right
decision.
 Prevention and Reduction of Criminal Penalties: The United States Sentencing
Commission Guidelines state that to receive a 40% reduction in federal penalties, a
company must have "an effective program to detect and prevent violations of the law".
Executives cannot always be aware of everything done in a company’s name. Jeffrey
Kaplan in his article The Sentencing Guidelines: The First Ten Years points out those
recent cases also show that prosecutors are electing not to pursue some actions
because the companies in question have sound programs in place. This is a tremendous
asset to companies under regulatory scrutiny.
 Preventing civil lawsuits: Many times employees that experience issues in the workplace
first try to resolve these issues internally. If their complaints are ignored, employees
feel compelled to go to an outside advocate. That could be a private attorney,
government regulator or news agency. Giving employees an internal outlet can solve
problems without the event becoming public knowledge or an issue for the courts.
Having the values permeate the company culture enhances the staffs trust in senior
management. Why? Because with an effective program, the staff recognizes that
management also operates within these appropriate values.
 Market Leadership: When a company fully integrates its values into its culture, quality
rises due to the employees focus on values. Customers see that the employees care
 about the customers concerns. Employees reflect appropriate values in their attitude
and conduct. Try Ethical Business Practices points out those businesses demonstrating
the highest ethical standards are also the most profitable and successful.
 Setting the Example: By setting the example in the community and market, the entire
industry has a new standard that allows the community and the market to recognize
the company as a leader. When the word gets out, competitors will have to answer
questions about why they were not establishing similar values.

 The History of Business Ethics

 Business ethics has only existed as an academic field since the 1970s. During the
1960s, corporations found themselves increasingly under attack over unethical conduct.
As a response to this, corporations - most notably in the US - developed social
responsibility programmes which usually involved charitable donations and funding local
community projects. This practice was mostly ad hoc and unorganized varying from
industry to industry and company to company. Business schools in large universities
began to incorporate ‘social responsibility’ courses into their syllabi around this time
but it was mostly focused on the law and management strategy.

 Social responsibility has been described as being a pyramid with four types of
responsibility involved - economic (on the bottom level), then legal, ethical and finally
philanthropic. Ethical issues were dealt with in social issues courses However, and were
not considered in their own right until the 1970s when philosophers began to write on
the subject of business ethics. Previous to this development, only management
professionals, theologians and journalists had been highlighting problems of this nature
on a regular basis.

 When philosophers became involved they brought ethical theory to bear on the relevant
ethical issues and business ethics became a more institutionalized, organized and
integral part of education in business. Thereafter annual conferences, case books,
journals and text books were more regular and established.

 This new aspect of business ethics differentiated it from social issues courses in three
ways:

1) Business ethics provided an ethical framework for evaluating business

and the corporate world.

2) It allowed critical analysis of business and development of new and

different methods. (This also made business ethicists unpopular in
certain circles.)
 3) Business ethics fused personal and social responsibility together and gave
it a theoretical foundation.

In this way, business ethics had a somewhat broader remit than its
predecessor (the social issues course) and was a good deal more
systematic and constructive. Business ethics also recognized that the
world of business raised new and unprecedented moral problems not
covered by personal systems of morality. Common-sense morality is
sufficient to govern judgments about stealing from your employer,
cheating customers and tax fraud. It could not provide all the necessary
tools for evaluating moral justification of affirmative action, the right
to strike and whistle-blowing.

 The Role of Business Ethics Today

 Business and IT students spend the majority of their time at university learning about
economics, business development, software engineering and computer programming. This
is all valuable and necessary knowledge to prepare them for the demands of
employment in the business/IT sector. However, running or working in a business will
raise many difficulties that are completely unrelated to the skills or knowledge gained
in university.

 How do you evaluate such problems as hiring the more qualified candidate for a job
when she has a disability requiring costly adaptations to the work environment,
outsourcing production materials from countries where child labour and sweatshops are
prevalent etc.?

 In recent years there have been several business scandals that caused serious damage
to the credibility of the companies involved, occasionally the entire industry in which
they operate, and the numerous stakeholders of the business. One such example is the
collapse of Barings Bank - the actions of one rogue trader incurred losses of almost
US$1 billion. It has been discovered that many high profile people (at home and
abroad) are involved in tax-evasion, insider trading and fraud, Charlie Haughey and
Martha Stewart are two such examples of people with considerable wealth and public
standing who have been involved in questionable business dealings.

 At this stage in your course, you are well equipped with knowledge of your subject, and
this will be built on when you go into the workplace due to on-going training and other
such practices. But it is fair to say that some of you may have never had the chance
to think of the ethical issues entailed in business and IT. During this course on
business ethics it is hoped that you will be given such an opportunity and attain a
 working knowledge of the different theoretical frameworks that can be applied to
business.

 Basic Ethical Values for Business

 Trust
 Honesty
 Fairness
 Dignity and Respect for Humanity
 Respect for Legitimate Law
 Respect for Property
 Autonomy and Freedom
 Impartiality/Objectivity
 Compassion

 Customary vs. Normative Ethics

 Customary Ethics

The moral values, principles, norms, and methods used to evaluate individual conduct
and social arrangements.

Developed and fostered through socio-cultural practices and institutions

 Normative Ethics

An attempt to identify, clarifies, explain, and justify the moral values, principles,
norms, and methods used to evaluate individual conduct and social arrangements.

• Customary Ethics describes what social groups and individuals do value and what
principles they do accept.

• Normative Ethics evaluates and attempts to justify certain values and principles apart
from what is customarily accepted and practiced.

 “[Normative] ethics requires us to abstract ourselves from what is normally or typically

done and reflect upon whether or not what is done, should be done, and whether what
is valued, should be valued.
 The difference between what is valued and what ought to be valued is the difference
between [customary ethics] and [normative] ethics.”
 Why fostering Good Business Ethics is important

 To gain the goodwill of the community

 To create an organization that operates consistently
 To produce good business
 To protect the organization and its employees from legal action
 To avoid unfavorable publicity

2. NATURE OF ETHICS

 Ethics is a set of moral principles or values which is concerned with the

righteousness or wrongness of human behavior and which guides your
conduct in relation to others (for individuals and organizations).

 Ethics is the activity of examining the moral standards of a society, and

asking how these standards apply to our lives and whether these standards
are reasonable or unreasonable, that is, whether they are supported by
good reasons or poor ones.

 The Nature of Ethics

 When you are guided by ethics, you do not cheat on a test or lie to friends or family.

 Most businesses are guided by business ethics.

 Different cultures, businesses, and industries have different ethical standards

 Morality is the standards that an individual or a group has about what is right and
wrong, good or evil. Moral standards are norms we have about the kinds of actions we
believe are morally right and wrong as well as the values we place on the kinds of
objects we believe are morally good and morally bad (Smith, 2003). From there, we
can say that Ethics is a branch of philosophy (moral philosophy) that examines the
moral standards of an individual or society, and asking how these standards apply to
our lives and whether these are reasonable or unreasonable.
 As part of the general nature of ethics, we uphold moral rights (Smith,
2003). The three important features of moral rights are:

1. MORAL RIGHTS are tightly correlated with duties. Duties are generally the other
side of moral rights (Smith, 2003). For example, my right to work implies the
government's duty to make jobs available to the people.

2. MORAL RIGHTS provide individuals with autonomy and equality in the free pursuit
of their interests (Smith, 2003). For example, the right to worship as I choose implies
that I am free to pursue this interest as I personally choose. No one can dictate to
me how I ought to worship (Halle, 2000).

3. MORAL RIGHTS provide a basis for justifying one's actions and for invoking the
protection or aid of others. My right to something is my justification for doing it. For
example, why do I work? - Because it is my right to work! And no one can restrain me
from working group, or an exchange (Smith, 2003). The better the quality of a
person's contributed product, the more he or she should receive.

 Morality and ethics:

 Morality is the std an individual or community keeps about what is right and wrong or
good and evil.
 Moral norms deal with topics that either seriously harm or benefit human beings.
 Moral standards are not dependent on or changed by the decision of authoritative
bodies.
 Moral demands enjoy a self-driven force. Expressed through the medium of special
emotions.
 Ethics helps one to address questions such as what do moral principles mean in a given
situation.
 Ethics offers certain moral standards to judge a particular human behavior or
situation.

 Law and ethics:

 Law is universally accepted, published document

 Law says, what action should be taken against a person who violates the provisions of
legal system whereas the consequences of unethical action is not clear
 Some laws have nothing to do with morality while some may even violate our moral
standards.
 Stakeholders and Ethics

 Stakeholders –
– people and groups affected by the way a company and its managers behave
– supply a company with its productive resources and have a claim on its
resources
 When the law does not specify how companies should behave, managers must decide
what is the right or ethical way to behave toward the people and groups affected by
their actions

 The Ethical Decision-Making Process

1. Identify the ethical dilemma.

2. Discover alternative actions.
3. Decide who might be affected.
4. List the probable effects of the alternatives.
5. Select the best alternative.

 Rules for Ethical Decision Making

 3. ETHICAL CONCEPTS AND THEORIES

ETHICAL Concepts

 Definitions

 Society: Association of people organized under a system of rules Rules:

advance the good of members over time
 Morality A societies rules of conduct What people ought / ought not to do in
various situations
 Ethics
 _ Rational examination of morality
 _ Evaluation of people’s behavior

 Moral Systems

 rules for guiding conduct

 principles for evaluating rules

 Characteristics

 public
Rules are known to all members
 informal
Not like formal laws in a legal system
 rational
Based on logic accessible to all
 Impartial
Does not favor any group or person

 Derivation of Moral Systems

 Morals are derived from society’s system of values

 Intrinsic vs. Instrumental Values
 Intrinsic
_ valued for its own sake
_ happiness, health
 Instrumental
_ serves some other end or good
_ Money
 Core vs. Non-Core Values

 Core values
_ Basic to thriving and survival of society
_ life, happiness, autonomy
_ Not necessarily moral
· Self-interest vs. impartiality

 Moral vs. Non-Moral Values

 Moral values are a subset of all values

 Moral values are
_ public,
_ Informal,
_ Rational and
_ Impartial
 Basic moral values are derived from core values using impartiality

 Grounding Principles in a Moral System

 Religion
 Law
 Philosophy

 Grounding Moral Principles in a Religious System

 Murder is wrong because it offends God

 punishment is assured, if only in the next life
 hard to apply in a pluralistic society

 Grounding Moral Principles in a Legal System

 Murder is wrong because it violates the law.

 Laws apply to all in a society
 Punishment can be applied in this life
 Laws are not uniform across political boundaries
 Some laws are morally wrong

 Grounding Moral Principles in a Philosophical System of Ethics

 Murder is wrong because it is wrong.

 Based on reason and criteria
 An act is wrong inherently or because of social consequences
 Punishment has the form of social disapproval or ostracism
 Criteria found in ethical theories

 The Goal of Ethical Theory

 Generally: to provide a systematic answer to the question of how we should behave

 Our project: to survey a variety of theories as to what matters morally

 Theory 1. Moral Objectivism

 Moral Objectivism: What is morally right or wrong doesn’t depend on what anyone
thinks is right or wrong. 'Moral facts' are like 'physical' facts in that what the facts
are does not depend on what anyone thinks they are. They simply have to be
discovered.
– E.g., Divine Command Theory – what’s right is what God commands; what’s
wrong is what God forbids

 Theory 2. Moral Relativism

 Moral Relativism: What is morally right or wrong depends on the prevailing view in
the society or culture we happen to be dealing with.
 Often presented as a tolerant view: ‘if moral relativism is true, no one has a right to
force his moral views on others.’
 Increasingly popular in recent years
– Did this change with Sept. 11?

 A Bad Argument for Moral Relativism

The 'Cultural Differences' Argument

– Claim: There are huge differences in moral beliefs from culture to culture and
era to era.
 E.g., some cultures endorse the killing of elderly members of the tribe,
we condemn such actions.
– Conclusion: There is no objective fact as to which of these beliefs is correct,
morality is relative.
 Why are the Cultural Differences Argument Weak?

 I. Controversy regarding how much fundamental disagreement about morality there

really is
 II. Differing opinions regarding an issue don’t prove there is no fact of the matter
about that issue
– Imagine relativism about the shape of the earth (e.g., in the 1400s)

 Objectivist Theories

 Suppose for the moments that objectivism is true. What are the objective facts of
morality?
 Main Candidates:
– Consequentialism
– Deontological Theories
– Principilism

 Theory 3: Consequentialism

 Consequentialists maintain that whether an action is morally right or wrong depends on

the action's consequences.
 In any situation, the morally right thing to do is whatever will have the best
consequences.
 Consequentialist theories are sometimes called teleological theories.
 Note: not ‘theological’ – this is a misprint in the notes (6-5)

 What Kind of Consequences?

 Consequentialism isn't very informative unless it's combined with a theory about what
the best consequences are.
 Utilitarianism is such a theory.
– Utilitarianism is the most influential variety of consequentialism

 Utilitarianism

 The Basis of Utilitarianism: ask what has intrinsic value and assess the
consequences of an action in terms of intrinsically valuable things.
– Instrumental Value - a thing has only instrumental value if it is only valuable
for what it may get you
  e.g., money
– Intrinsic Value - a thing has intrinsic value if you value it for itself
 i.e., you’d value it even if it brought you nothing else
 What, if anything, has intrinsic value?

Only Happiness has Intrinsic Value

 What Utilitarians Think is intrinsically valuable: happiness (or pleasure or

satisfaction…)
 "Actions are right in proportion as they tend to promote happiness, wrong as they tend
to produce the reverse of happiness." (John Stuart Mill's Greatest Happiness Principle)
 In other words, judge an action by the total amount of happiness and unhappiness it
creates

 Theory 4: Deontology

 'Duty Based' Ethics

 Deontologists deny that what ultimately matters is an action's consequences.
 They claim that what matters is the kind of action it is. What matters is doing our
duty.
 There are many kinds of deontological theory
– e.g., The 'Golden Rule' - "Do unto others as you'd have them do unto you."

 Kantian Deontology

 Immanuel Kant (1724-1804) is the most influential deontologist.

 Rejecting Consequentialism: "A good will is good not because of what it effects or
accomplishes." Even if by bad luck a good person never accomplishes anything much,
the good will would "like a jewel, still shine by its own light as something which has its
full value in itself."

 Theory 5: Principilism

 Principilism attempts to have it both ways

 Popularized by Beauchamp and Childress
– Principles of Biomedical Ethics
– The ‘Georgetown Mantra’
 Now the dominant theory in medical ethics
  Four Principles

 1. Autonomy
 2. Beneficence
 3. Non-maleficence
 4. Justice
– 1 & 4 are deontological
– 2 & 3 are consequentialist
 It is really possible to have it both ways?

 Alternative Approaches

 Virtue Ethics
 Ethics of Care

OR

1 The extremes of ethical theories: relativism and absolutism

 There are several ethical theories around. But, before we are going to discuss them,
we first look at two extremes of the normative ethical theories. On one hand is
normative relativism. It states that all moral points of view are relative. The morals of
one person are not necessarily equal to the morals of another person. Next to this, it
is also impossible to say that certain norms and values are better than other norms
and values. The problem with this theory is that it is now impossible to discuss
normative ethics: all norms and values are allowed.

 On the other hand is absolutism, also known as universalism. It states that there is a
system of norms and values that is universally applicable to everyone, everywhere at
every time. Absolutism makes no exceptions: a rule is a rule. However, there is no set
of norms and values that never contradicts itself. So, absolutism in general doesn’t
work either.

 We know that both relativism and absolutism don’t work. Any choice/judgment based on
one of these theories is ethically suspected. But we do know something important now:
more useful ethical theories need to be somewhere between relativism and absolutism.

2 Duty ethics and the Kantian theory

 Ethics is all about choosing the right actions. An action is carried out by a certain
actor with a certain intention. This action then leads to certain consequences. In
ethical theories, we can focus on the action, the actor, the intention or the
 consequences. If we mainly focus on the action itself, then we use deontological ethics
(also known as deontology or duty ethics).

 In duty ethics, the point of departure is the norms. An action is morally right if it is
in agreement with moral rules/norms. Some theories within duty ethics depart from one
main principle/rule from which all moral norms are derived. This is the so-called
monistic duty ethics. On the other hand, pluralistic theories are based on several
principles that apply as norms.

 Immanuel Kant has developed the most well known system of duty ethics: the Kantian
theory. A core notion here is autonomy. A man should place a moral norm upon him and
obey it. This is his duty. He should then, on his own, be able to determine through
reasoning what is morally correct.

 The Kantian theory is part of monistic duty ethics: there is one universal principle.
This principle is called the categorical imperative. It is formulated in different ways.
The first formulation is the universality principle: ‘Act only on that maxim which you
can at the same time will that it should become a universal law.’ The second
formulation is the reciprocity principle: ‘Act as to treat humanity, whether in your own
person or in that of any other, in every case as an end, never as means only.’

 There are several downsides to the Kantian theory. In Kant’s theory, rules cannot be
bent. This reminds us of absolutism. So, the question arises whether all the moral laws
form a consistent system of norms. Another downside is that Kantian theory prescribes
to rigidly adhere to the rules, irrespective of the consequences. But in real life,
following a rule can of course have very negative consequences. Kant’s theory does not
deal with these exceptions.

3 Utilitarianism

 We don’t always have to focus on actions. We can also focus on consequences. If we

do this, we wind up with consequentialism. One type of consequentialism is
utilitarianism, founded by Jeremy Bentham.

 The name of utilitarianism is derived from the Latin ‘utilis’, meaning ‘useful’. In
utilitarianism,
 The consequences of actions are measured against one value. This ‘useful’ value can be
something like happiness, welfare or pleasure. It should be maximized.

 Utilitarianism is based on the utility principle: we simply need to give the greatest
happiness to the greatest number of people. (Do note that we have silently made the
assumption that ‘pleasure’ is the only goal in life, and that everything else is just a
means to get pleasure. This idea/assumption is called hedonism.) An action is morally
right if it results in pleasure, whereas it is wrong if it gives rise to pain. The freedom
principle is also based on this. This principle states that you can do whatever you
want, as long as you don’t cause anyone any pain/harm.
  There are several downsides to utilitarianism. Of course it is very hard to determine
how much pleasure an action will actually give. Also, to find the total amount of
pleasure, we need to consider all individuals that are involved and add up their
pleasures. But how do we quantify pleasure? And has the pleasure of one person the
same value as the pleasure of another? Also, how do we decide whether one action
gives more pleasure than another? Answering these questions is difficult. Even the
clever John Stuart Mill did not have an answer, although he did have an opinion. He
stated that certain pleasures (like intellectual fulfillment) are by nature more valuable
than other pleasures (like physical desires).

 Another downside is that utilitarianism doesn’t always divide happiness in a fair way.
For example, a Very talented entertainer can make a lot of people happy. But does
this mean that he needs to spend every waking moment entertaining people, until he
burns out? However, most utilitarian argue that this isn’t a downside of the theory. In
fact, they state that after a while, a small moment of spare time will give the
entertainer more happiness than all the people he could have entertained in that time.
Thus, utilitarianism automatically compensates for this ‘flaw’.

 In utilitarianism, an engineer could also be asked to bend or break a fundamental rule,

because this will result in the greatest happiness for the greatest number of people.
For example, the engineer has the opportunity to save 10 million Euros on a design. But
he knows that this will later cause an accident killing 5 people. He argues that 10
million Euros can cause more happiness than 5 lives. To compensate for this, rule
utilitarianism has been created. This kind of utilitarianism recognizes and uses moral
rules. It is thus also similar to duty ethics.

4 Virtue ethics and care ethics

 Virtue ethics focuses on the nature of the acting person. This actor should base his
actions on the right virtues. So, the central theme in virtue ethics is shaping people
into morally good and responsible creatures. Virtue ethics is rather similar to duty
ethics. But, whereas duty ethics is based on certain rules/norms, virtue ethics is
based on certain virtues.

 Virtue ethics is strongly influenced by Aristotle. He stated that every moral virtue is
positioned somewhere between two extremes. In fact, the correct moral virtue equals
the optimal balance between these two extremes. For example, to be courageous, you
need to find an optimal balance between the two extremes of cowardice and
recklessness. Sadly, there are downsides to this idea. The optimal balance often
depends on the situation which a person is in. Also, moral virtues are subjective: you
cannot generally say that the courageousness of one person is better than the
courageousness of the other.

 Care ethics is a rather new ethical theory. It emphasizes that the development of
morals is not caused by learning moral principles. Instead, people should learn norms
 and values in specific contexts. Other people are of fundamental importance here. By
contacting other people, and by placing yourself in their homes, you learn what is good
or bad at a particular time. The solution of moral problems must always be focused on
maintaining the relationships between people. So, the connectedness of people is the
key.

5 Caveats of ethical theories

 Some people believe that applying ethics is just a matter of applying ethical principles
to situations. But this is not true. One reason for this is the fact that there is no
generally accepted ethical theory. And, different ethical theories might very well
result in different judgments. So what should we do if we run into a new case? Well,
we can apply our ethical theories to it. But we should be open to the possibility that
the new case might reveal a flaw in our theory. Therefore, you should never blindly
apply an ethical theory and rely on the outcome.

 Now you may wonder what ethical theories are good for anyway. Ethical theories may
function as instruments in discovering the ethical aspects of a problem/situation. (For
example, applying consequentalism is a good way to explore the consequences of
actions.) Similarly, ethical theories may suggest certain arguments/reasons that can
play a role in moral judgments.

6. Divine Command Theory

 Good actions: those aligned with Gods will

 Bad actions: those contrary to Gods will
 Holy books reveal God’s will.
 Use holy books as moral decision-making guides.

• Pros:
o We owe obedience to our Creator.
o God is all-good and all-knowing.
o God is the ultimate authority.
• Cons:
o Different holy books disagree
o Society is multicultural, secular
o Some moral problems not addressed in scripture
o ”The good” 6= ”God” (equivalence fallacy)
o Based on obedience, not reason

7. Cultural Relativism

 What is right and wrong depends upon a society’s actual Moral guidelines
 Guidelines vary in space and time
  An action may be right in one society and wrong in another society or time

Pros:
o Different contexts demand different guidelines
o It is arrogant for one society to judge another
o Morality is reflected in actual behavior
Cons:
o Because two societies do have different moral views doesn’t mean they ought to
o Doesn’t explain how moral guidelines are determined
o Doesn’t explain how guidelines evolve
o Provides no way out for cultures in conflict
o Because many practices are acceptable does not mean any cultural practice is
(many/any fallacy)
o Societies do, in fact, share certain core values
o Only indirectly based on reason

4. MORALS AND VALUE

 Morals

 Morals are a set of guiding principles or rules that help differentiate our behavioral
choices between right and wrong or good and bad and are exhibited through our
intentions, decisions, practices and actions.

 Morals have a greater social element to values and tend to have a very broad
acceptance. Morals are far more about good and bad than other values. We thus judge
others more strongly on morals than values. A person can be described as immoral, yet
there is no word for them not following values.

 Values

 Values are ideals that we believe are important as individuals. They are subjective, and
vary as a result of our culture, beliefs, and experiences.

 Values are the rules by which we make decisions about right and wrong, should and
shouldn't, good and bad. They also tell us which are more or less important, which is
useful when we have to trade off meeting one value over another.

 Values and morals are different from one person to the next because they
are the essential building blocks that shape who we are, what we choose to
 stand for and believe in, and influence the decisions we make. They not
only give meaning to who we are but also who we want to be.

 Morals and values are a part of the behavioral aspect of a person. There is not much
difference between morals and values but both are correlated to each other. Morals
are formed from the inborn values. Moral is a system of beliefs that is taught for
deciding good or bad whereas values are personal beliefs or something that comes from
within. These are emotionally related for deciding right or wrong. Morals have more
social value and acceptance than values, therefore a person is judged more for his
moral character than the values. One is said to be immoral for a person without morals
but no such term is there for the person without values.

 Another difference between the morals and values is that moral is a motivation or a
key for leading a good life in right direction whereas value is imbibed within a person,
it can be bad or good depending on the person’s choice. It can also be called as
intuition or the call of the heart. Morals do not determine the values but are formed
because of the values. Morals contribute to the system of beliefs and are the values
which we get from the society.

 Morals can be related to ones religion, political system or a business society. Business
morals include prompt service, excellence, quality and safety. One practices all the
morals while running a business, but the values may not coincide with them. Therefore
these morals do not come from within a person but are taught by the social group and
has to be followed. On the other hand values are the standards to judge the right or
wrong, good or bad, just or unjust. They are the fundamental principles that give
guidance to a person to evaluate the merits and demerits of a thing. Values include
courage, respect, patriotism, honesty, honor, compassion etc. All these are not
mandatory by society but depend on individual’s choice.

 Lastly the difference between the morals and values is that morals are like
commandments set by the elders and to be followed by the descendants. They can be
set by ones elders or religious teachers or leaders of society who want to lead people
away from immoral thoughts. One always treasures the morals throughout his life and
they never change with time or conditions. While on the other hand values are not set
by the society or teachers, but are governed by an individual. Values do not mean that
it is always right to do so. Whatever is valuable for one person may not be the same
for the other. Hence it is personal aspect and changes according to different
situations with time and needs.
 Module II…!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

MANAGERIAL ETHICS:

1. MANAGERIAL & ETHICAL DILEMMAS AT WORK

 What is an ethical dilemma?

It is a Conflict between...

 one’s personal and professional values

 two values/ethical principles

 two possible actions each with reasons strongly favorable and unfavorable

 two unsatisfactory alternatives

 one’s values/principles and one’s perceived role

 the need to act and the need to reflect

Can ethical dilemma be avoided?

 You can avoid ethical dilemmas! But...

 You cannot completely avoid ethical dilemmas!

You can avoid ethical dilemmas! An Example

 Your placement is in a school, you should give prior thought to how you would respond
when a child reveals abuse or neglect.

 Find out how your field instructor wants you to handle these situations.

 What information does the school expect you will share with concerned teachers? The
principal?
 You cannot completely avoid ethical dilemmas!

 It is best to prepare yourself for them

 by examining your own values from time to time

 and learning all you can about:

 How past ethical problems in your placement settings were resolved.

The priority ranking of ethical principles

An approach for ordering social work values that might help you get off the
“horns of a dilemma.”

 Protection of life

 Equality

 Autonomy and freedom

 Least harm

 Quality of life

 Privacy and confidentiality

 Truthfulness and full disclosure

 Criteria for Ethical Decision Making

 Utilitarian Approach

Moral behaviors produce the greatest good for the greatest number.

 Individualism Approach

Acts are moral when they promote the individual's best long-term interests.

 Moral-Rights Approach

Human beings have fundamental rights that cannot be taken away by an individual's
decision.
 1. Free consent

 2. Privacy

 3. Conscience

 4. Free speech

 5. Due process

 6. Life and safety.

 Justice Approach

Standards of equity, fairness, and impartiality.

 Distributive Justice

 Procedural Justice

 Compensatory Justice

 How do MANAGERIAL & ethical dilemmas complicate the workplace?

 An ethical dilemma occurs when choices, although having potential for personal and/or
organizational benefit, may be considered unethical.

 Ethical dilemmas include:

– Discrimination

– Sexual harassment

– Conflicts of interest

– Customer confidence

– Organizational resources

 Ethical behavior can be rationalized by convincing yourself that:

– Behavior is not really illegal.

– Behavior is really in everyone’s best interests.

– Nobody will ever find out.

– The organization will “protect” you.

  Factors influencing ethical behavior include:

– The person

• Family influences, religious values, personal standards, and personal

needs.

– The organization

• Supervisory behavior, peer group norms and behavior, and policy

statements and written rules.

– The environment

• Government laws and regulations, societal norms and values, and

competitive climate in an industry.

2. MANAGING ETHICAL PROBLEMS

3. MANAGERIAL ETHICS AND INDIVIDUAL DECISIONS

 Ethics Defined

– The rules and principles that define right and wrong conduct

 Four Views of Ethics

1. Utilitarian view of ethics says that ethical decisions are made solely on the basis of
their outcomes or consequences.
 Greatest good is provided for the greatest number
-Encourages efficiency and productivity and is consistent with the goal of profit
maximization

2. Rights view of ethics is concerned with respecting and protecting individual liberties
and privileges such as the rights to privacy, free speech, and due process.

 Respecting and protecting individual liberties and privileges

• Seeks to protect individual rights of conscience, free speech, life and

safety, and due process

3. Theory of justice view of ethics is where managers impose and enforce rules fairly
and impartially and do so by following all legal rules and regulations.

 Organizational rules are enforced fairly and impartially and follow all legal rules
and regulations
• Protects the interests of underrepresented stakeholders and the rights
of employees
4. Integrative social contracts theory proposes that ethical decisions be based on
existing ethical norms in industries and communities in determining what constitutes
right and wrong.

– Ethical decisions should be based on existing ethical norms in industries and

communities
• Based on integration of the general social contract and the specific
contract between community members

 Factors That Affect Ethical and Unethical Behavior

 Factors That Affect Employee Ethics

1. Stages of moral development

Stages of Moral Development

Lev el Description of Stage

Principled 6. Following self -chosen ethical principles ev en if

they v iolate the law
5. Valuing rights of others and upholding absolute
v alues and rights regardless of the majority ’s
opinion
Conv entional 4. Maintaining conv entional order by f ulf illing obligations
to which y ou hav e agreed
3. Liv ing up to what is expected by people close to y ou
Preconv entional 2. Following rules only when doing so is in y our immediate interest
1. Sticking to rules to av oid phy sical punishment
 Stage of moral development interacts with:

o Individual characteristics
o The organization’s structural design
o The organization’s culture
o The intensity of the ethical issue

2. Individual characteristics

 Values
Basic convictions about what is right or wrong on a broad range of issues

 Ego strength
A personality measure of the strength of a person’s convictions

 Locus of Control
A personality attribute that measures the degree to which people believe they
control their own life
-Internal locus: the belief that you control your destiny
-External locus: the belief that what happens to you is due to luck or
Chance

3. Structural variables

Organizational characteristics and mechanisms that guide and influence individual ethics:
– Performance appraisal systems
– Reward allocation systems
– Behaviors (ethical) of managers
– An organization’s culture
– Intensity of the ethical issue

Good structural design minimizes ambiguity and uncertainty and fosters ethical
behavior

4. Organizational culture

The organization’s culture is another factor that influences ethical behaviour.

a. An organizational culture most likely to encourage high ethical standards is one
that’s high in risk tolerance, control, and conflict tolerance.

b. In addition, a strong culture will exert more influence on managers than a weak
one.
 c. However, in organizations with weak cultures, work groups and departmental
standards will strongly influence ethical behavior.

5. Issue intensity

. Finally, the intensity of an issue can affect ethical decisions. There are six
characteristics that determine issue intensity (see Below Figure).

a. Greatness of harm
b. Consensus of wrong
c. Probability of harm
d. Immediacy of consequences
e. Proximity to victim
f. Concentration of effect

How Managers Can Improve Ethical Behavior in an Organization

• Hire individuals with high ethical standards.

• Establish codes of ethics and decision rules.
• Lead by example.
• Delineate job goals and performance appraisal mechanisms.
• Provide ethics training.
• Conduct independent social audits.
• Provide support for individuals facing ethical dilemmas.
  Code of Ethics

• A formal statement of an organization’s primary values and the ethical rules it expects
its employees to follow
– Be a dependable organizational citizen
– Don’t do anything unlawful or improper that will harm the organization
- Be good to customers

 Effective Use of a Code of Ethics

• Develop a code of ethics to guide decision making

• Communicate the code regularly
• Have all levels of management show commitment to the code
• Publicly reprimand and consistently discipline those who break the code

 Ethical Leadership

– Being ethical and honest at all times

– Telling the truth
– Admitting failure and not trying to cover it up
– Communicating shared ethical values to employees through symbols, stories, and
slogans
– Rewarding employees who behave ethically and punishing those who do not
– Protecting employees (whistleblowers) who bring to light unethical behaviours or
raise ethical issues

4. CREATIVE ACCOUNTING-ITS ROLE IN BUSINESS SCANDALS

 Creative accounting and earnings management are euphemisms referring to

accounting practices that may follow the letter of the rules of standard
accounting practices, but certainly deviate from the spirit of those rules. They
are characterized by excessive complication and the use of novel ways of
characterizing income, assets, or liabilities and the intent to influence readers
towards the interpretations desired by the authors. The terms "innovative" or
"aggressive" are also sometimes used.

 The term as generally understood refers to systematic misrepresentation of the true

income and assets of corporations or other organizations. "Creative accounting" is at
the root of a number of accounting scandals, and many proposals for accounting reform
- usually centering on an updated analysis of capital and factors of production that
would correctly reflect how value is added.
  Newspaper and television journalists have hypothesized that the stock market downturn
of 2002 was precipitated by reports of accounting irregularities at Enron, WorldCom,
and other firms in the United States.
 One commonly accepted incentive for the systemic over-reporting of corporate income
which came to light in 2002 was the granting of stock options as part of executive
compensation packages. Since stock prices reflect earning reports, stock options could
be most profitably exercised when income is exaggerated, and the stock can be sold at
an inflated profit.

 The motivations of creative accounting

 Personal incentives
 Bonus-related pay
 Benefits from shares and share options
 Job security
 Personal satisfaction
 Cover-up Fraud

 Earnings management usually involves the artificial increase (or decrease) of revenues,
profits, or earnings per share figures through aggressive accounting tactics. Aggressive
earnings management is a form of fraud and differs from reporting error.
 Management wishing to show earnings at certain level or following a certain pattern
seek loopholes in financial reporting standards that allow them to adjust the numbers
as far as is practicable to achieve their desired aim or to satisfy projections by
financial analysts. These adjustments amount to fraudulent financial reporting when
they fall 'outside the bounds of acceptable accounting practice'. Drivers for such
behavior include market expectations, personal realization of a bonus, and maintenance
of position within a market sector. In most cases conformance to acceptable accounting
practices is a matter of personal integrity. Aggressive earnings management becomes
more probable when a company is affected by a downturn in business.
 Earnings management is seen as a pressing issue in current accounting practice. Part of
the difficulty lies in the accepted recognition that there is no such thing as a single
'right' earnings figure and that it is possible for legitimate business practices to
develop into unacceptable financial reporting.
 It is relatively easy for an auditor to detect error, but earnings management can
involve sophisticated fraud that is covert. The requirement for management to assert
that the accounts have been prepared properly offers no protection where those
managers have already entered into conscious deceit and fraud. Auditors need to
distinguish fraud from error by identifying the presence of intention.

The main forms of earnings management are as follows:

 Unsuitable revenue recognition

 Inappropriate accruals and estimates of liabilities
 Excessive provisions and generous reserve accounting
  Intentional minor breaches of financial reporting requirements that aggregate to a
material breach.

5. CORPORATE ETHICAL LEADERSHIP

 Ethical Leadership

– Being ethical and honest at all times

– Telling the truth
– Admitting failure and not trying to cover it up
– Communicating shared ethical values to employees through symbols, stories, and
slogans
– Rewarding employees who behave ethically and punishing those who do not
– Protecting employees (whistleblowers) who bring to light unethical behaviours or
raise ethical issues

 Trust Model

A Step-by-step process that enables you to break down situations to smaller & simpler
segments. This enables you to analyze a situation more objectively.

T = Think about the situation objectively

* Clearly understand the situation.
* Know the facts.
*Identify the real issues.
R = Recognize and analyze motivations.
* If the situation troubles you, ask yourself why.
* Consider the other party’s motivations.
U = Understand applicable laws, rules, and policies
* Consider all options
* Research the Standards of Business Conduct & other policies
* Know whom and when to ask for help
S = Satisfy the headline test
* Ask yourself if you feel comfortable seeing your actions reported in the news
* Consider the consequences of your decision: on APICS, customer, yourself
T = Take responsibility for your actions
* Make an appropriate choice & act accordingly
* Remember, you are accountable for the outcome of your decisions.

 Avoiding conflicts of interest

You are an active APICS member.

You serve on the chapter board, attend PDM’s, and teach certification courses. You are
approached by a member company that has a need for on-site courses that you teach & ask if
these could be available. You’ve been thinking about starting a consulting business on the side.
This seems like it might be a good way to get started. You are considering making an offer.

 Business amenities

A business partner suggests a business meeting with the chapter board this Friday at his
family’s vacation home, which happens to be on the ocean. Afterward, he has invited you &
your family to spend the weekend there enjoying the house and the beach.

 Values-based Decisions

Let’s take another look at the trust model to see if we are using that process to make the
best decisions….
Remember there could be more than one correct answer depending on the situation…
We are looking for the best decision!

6. CORPORATE SOCIAL RESPONSIBILITY

Corporate Social Responsibility is a concept whereby companies integrate social and

environmental concerns into their business operations and in their interaction with their
stakeholders (employees, customers, shareholders, investors, local communities, government),
on a voluntary basis.

 Corporate social responsibility (CSR) is:

 An obligation, beyond that required by the law and economics, for a firm to pursue
long term goals that are good for society
 The continuing commitment by business to behave ethically and contribute to economic
development while improving the quality of life of the workforce and their families as
well as that of the local community and society at large
 About how a company manages its business process to produce an overall positive
impact on society

 Corporate social responsibility means:

 Conducting business in an ethical way and in the interests of the wider community
 Responding positively to emerging societal priorities and expectations
 A willingness to act ahead of regulatory confrontation
 Balancing shareholder interests against the interests of the wider community
 Being a good citizen in the community

 CSR is about the organization’s obligations to all stakeholders – and not just
shareholders.
There are four dimensions of corporate responsibility

 Economic - responsibility to earn profit for owners

 Legal - responsibility to comply with the law (society’s codification of right and wrong)
 Ethical - not acting just for profit but doing what is right, just and fair
 Voluntary and philanthropic - promoting human welfare and goodwill
 Being a good corporate citizen contributing to the community and the quality of life

 Consumers concerned about the ethical implications of their purchases;

 Shareholders seeking to integrate social and environmental risks into their investment
decisions;
 Communities and civil society organizations demanding to know the value that companies
contribute to society;
 Employees who want assurance that the company they work for is a good corporate
citizen.
 Arguments for socially-responsible behavior

 It is the ethical thing to do

 It improves the firm’ public image
 It is necessary in order to avoid excessive regulation
 Socially responsible actions can be profitable
 Improved social environment will be beneficial to the firm
 It will be attractive to some investors
 It can increase employee motivation
 It helps to corrects social problems caused by busines
CSR behavior can benefit the firm in several ways

 It aids the attraction and retention of staff

 It attracts green and ethical investment
 It attracts ethically conscious customers
 It can lead to a reduction in costs through re-cycling
 It differentiates the firm from its competitor and can be a source of competitive
advantage
 It can lead to increased profitability in the long run

How companies benefit from the CSR concept

No matter the size of an organization or the level of its involvement with CSR, every
contribution is important and provides a number of benefits to both the community and
business. Contributing to and supporting CSR does not have to be costly or time consuming and
more and more businesses active in their local communities are seeing significant benefits from
their involvement:

 Reduced costs
 Increased business leads
 Increased reputation
 Increased staff morale and skills development
 Improved relationships with the local community, partners and clients
 Innovation in processes, products and services
 Managing the risks a company faces

Approaches to Social Responsibility

Obstructionist approach – Companies choose not to behave in a social responsible way and
behave unethically and illegality

Defensive approach – companies and managers stay within the law and abide strictly with
legal requirements but make no attempt to exercise social responsibility
Accommodative approach – Companies behave legally and ethically and try to balance the
interests of different stakeholders against one another so that the claims of stockholders are
seen in relation to the claims of other stakeholders

Proactive approach – Companies actively embrace socially responsible behavior, going out of
their way to learn about the needs of different stakeholder groups and utilizing organizational
resources to promote the interests of all stakeholders

Arguments Supporting Businesses Being Socially Responsible

 Public expectations
 Long-run profits
 Ethical obligation
 Public image
 Better environment
 Discouragement of further government regulation
 Balance of responsibility and power
 Shareholder interests
 Possession of resources
 Superiority of prevention over cures

Arguments Against Businesses Being Socially Responsible

 Violation of profit maximization

 Dilution of purpose
 Costs
 Too much power
 Lack of skills
 Lack of accountability
 Lack of broad public support
Challenges

 Lack of corporate strategic philosophy and vision

 Lack of understanding about Community Engagement Frameworks
 Not enough sharing of best practices
 Insufficient database of good NGO partners
 Branding issues

Poor Corporate social responsibility

• No employment
• No concern for indirect effect (land, water, air)
• Destruction of agricultural land
• Not willing to listen to other stakeholders
• Appropriate of land not being compensated
• Non compliance of rule of land
 Good Corporate social responsibility

• Taking care of workers

• Low dependence on non renewable resources
• High awareness about CSR initiatives
• Land compensation
• Increased monitoring system
• Environment responsibility

7. SOCIAL REPORTING

Social Reporting

As a contribution to facilitating and documenting events (of communities)

•Social reporting describes performance:

Where you are, where you have been and where you are going

• Social reporting involves measurement:

To describe progress, the report must indicate where you are, where you have been and
where you hope to go

• Social reporting is a recurring process:

Over time, the story emerges by reporting regularly against consistent indicators

 What is Social Reporting

Social reporting is the use of social media to report collectively and live from events, like
workshops, and conferences. It allows sharing in real time photos, videos, power point
presentations, and summaries / comments. You can for example set up a blog for an event,
feed in your photo stream from Flicker as well as your bookmarks from delicious, videos on
Blip TV, Video or YouTube, or twitter feeds. You can blog about the different session, and
include short interviews in video, podcast or written format. You can invite participants to be
part of the social reporting team by contributing with blog posts, photos, and videos. SR adds
to the "official" documentation a rich mix of stories and conversations. It means a
contribution to both facilitation and documenting. And it has human voice and a philosophy of
inclusion and empowerment.

Social reporting from events varies from traditional "post event" reporting in two
ways.

1. Interactive: It happens both during and after the event to allow people who cannot be
at the F2F to have at the minimum a "line of sight" to the event and possibly even a
way to interact with people at the event by commenting on material produce from the
event.
2. Collaborative: It is done not by one person, but by a team that can either be a
dedicated reporting team, or if your event participants have some social media
experience, ANYONE can contribute by uploading and tagging photos, taking notes and
blogging them from sessions, or participating in a podcast.

A benefit of social reporting is that you get the results of an event out to constituents
faster. And after all, who really reads the long report?

The term “social reporter” was launched recently by David Wilcox and Bev Trayner. A few of
the phrases they use to define social reporter:

 “...someone (...) to find external resources, spot stories of interest to participants,

look for common interests in profiles and make introductions, post items an help others
to so, shoot video ... and so on. I think it's a mix of facilitation and journalism.”
 “(Someone) to develop conversations for collaboration.”
 “Focused on challenging disempowering cultures, rather than re-enforcing them.”
 “My starting point is the stories, or snippets of stories, that some people on the inside
of the community want to catch about themselves - and then looking for ways to
support and extend the ways they represent and talk about those stories. (....) it's
the little incremental steps and modeling that changes a community's practice.”

 Preparing the report

Some of the common challenges seen in the preparation process were:

 Building cross-functional support for the report and reporting process

 Collecting data efficiently while ensuring accuracy and consistency

 Balancing time spent on reporting with time spent on project management

  Where is the value in reporting?

The key elements of a report are that it:

 Describes performance
 Requires measurement
 Tracks the evolution of corporate citizenship over time

Purposes of Social Reporting

 Keeping a shared memory of “what happened” through more than one people doing it,
often in quite random ways, and brought together by tags;
 Using different types of media for reporting, each media type being accessible to
different types of people with different purposes for “reading” the (social) report;
 Extending the conversation beyond any one mode (such as face-to-face mode,
telephone conference mode, lecture mode) making sure you include people who were not
“there”.
 Putting reporting in the hands of more and different types of people with access to
different tools, technologies and approaches.
 Modeling different ways of helping people to make sense of an occasion.
 Shining a spotlight on periphery voices by looking out for and recording what they say.
 Advocacy - raising awareness, highlighting good practice, having an impact in ways that
incorporate a wider type of audience than just those who will plow their way through
traditional written text.

8. ETHICS OF WHISTLE BLOWING.

 Introduction

Definition: “disclosure of illegal, immoral, or illegitimate practices that are under employer
control by either former or current organization members to persons or organizations that be
able to effect action” (Near & Micelle, 1995).
 Whistle blowing happens in all types of professions, including nursing.
 Internal vs. external whistle-blowing

 Whistle blowing is a term used to describe the disclosure of information that one
reasonably believes to be evidence of contravention of any laws or regulation or
information that involves mismanagement, corruption or abuse of authority.
 ‘raising a concern about wrongdoing within an organisation or through an independent
structure associated with it.

- The UK Committee on Standards in Public Life

Code of Corporate Governance

 Issues given rise to the need for whistle blowing provisions in the law were identified
and addressed in the context of auditors in the Report by the Finance Committee on
Corporate Governance.

Considerations for Whistle-blowing

 Grave injustice or wrongdoing that has not been resolved despite using appropriate
channels
 Morally justifies course of action by appeals to ethical theories, principles, or other
components of ethics as well as relevant facts of the incident
 Should have thoroughly investigated the incident and is confident the facts are well
understood
 Should understand that loyalty is to the client, unless compelling moral reasons
override this loyalty
 Should ascertain that doing this will cause more good than harm to clients, and clients
will not be retaliated against
 Should understand the seriousness of actions and assume responsibility for them

Duty to Blow the Whistle

Whistle-blowing should not be considered the first avenue, but the last, after all else
has failed.

When to blow:

 Knowledge of inappropriateness
 Making proprietary software available to public
 Back door/booby-trap in code
 Embezzlement or redirection of funds
 Bad claims
 Unrealistic date projection
 Advertising hype
 Knowledge of impending doom
 Serious and considerable harm to the public is involved
 Have reported to immediate supervisor already
 Have exhausted all channels available for correcting the issue within the organization
 There is documented evidence with the ability to convince an impartial party
 There is good reason to think going public will result in changes

How to Blow the Whistle

 Do it anonymously
 let the evidence speak for itself and protect yourself if possible
  Do it in a group
 Charges have more weight and won’t seem like a personal vendetta.
 Present just the evidence
 Leave interpretation of facts to others.
 Work through internal channels
 start with your immediate supervisor or follow the standard reporting
procedure
 Work through external channels
 go public (biggest risk)

Statistics on Whistle-blowing

2002 in the America

 90% of whistleblowers lost their jobs or were demoted, regardless of the industry
 27% faced lawsuits
 26% had psychiatric or medical referrals
 17% lost their homes
 8% went bankrupt
ALL as a result of whistle-blowing!

Improving Whistle-blowing Outcomes

 Create an organizational culture that embraces change in a non-punitive manner

 Value and protect anonymity
 Creation of a collegial ethics committee to provide checks and balances to the
organizational ethics committees already established
 A no-tolerance policy related to passivity
 Have specific language from the ANA and laws in place to protect nurses who come
forward
 Encourage education and open discussion that supports and rewards the people who
speak up

Module III…!!!
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1. CORPORATE GOVERNANCE-GLOBAL PRACTICE

 Corporate Governance

Corporate governance is the function of a company’s compliance with regulatory requirements

and, to the extent that it is not required by law, its adherence to standards that
 define relationships between a company’s management, its board, shareholders and
other stakeholders
 provide a structure through which the company’s objectives are set, and how they are
achieved and monitored
 recognize the value of business ethics and corporate awareness of society interests to
reputation and long-term success

 Contemporary corporate governance started in 1992 with the Cadbury report in the UK
 Cadbury was the result of several high profile company collapses
 is concerned primarily with protecting weak and widely dispersed shareholders against
self-interested Directors and managers

Corporate Governance Parties

 Shareholders – those that own the company

 Directors – Guardians of the Company’s assets for the Shareholders
 Managers who use the Company’s assets
 Four Pillars of Corporate Governance

 Accountability
 Fairness
 Transparency
 Independence

Accountability
 Ensure that management is accountable to the Board
 Ensure that the Board is accountable to shareholders

Fairness
 Protect Shareholders rights
 Treat all shareholders including minorities, equitably
 Provide effective redress for violations

Transparency
 Ensure timely, accurate disclosure on all material matters, including the financial
situation, performance, ownership and corporate governance

Independence
 Procedures and structures are in place so as to minimize, or avoid completely conflicts
of interest
 Independent Directors and Advisers i.e. free from the influence of others

 Elements of Corporate Governance

1. Good Board practices

 Clearly defined roles and authorities

 Duties and responsibilities of Directors understood
 Board is well structured
 Appropriate composition and mix of skills

2. Control Environment
 Internal control procedures

 Risk management framework present

 Disaster recovery systems in place

 Media management techniques in use

 Business continuity procedures in place

 Independent external auditor conducts audits

 Independent audit committee established

 Internal Audit Function

 Management Information systems established

 Compliance Function established

3. TRANSPARENT disclosure

 Financial Information disclosed

 Non-Financial Information disclosed

 Financials prepared according to International Financial Reporting Standards (IFRS)

 Companies Registry filings up to date

 High-Quality annual report published

 Web-based disclosure

4. WELL-defined shareholder rights

 Minority shareholder rights formalized

 Well-organized shareholder meetings conducted

 Policy on related party transactions

 Policy on extraordinary transactions

 Clearly defined and explicit dividend policy

 5. BOARD commitment

 The Board discusses corporate governance issues and has created a corporate
governance committee
 The company has a corporate governance champion
 A corporate governance improvement plan has been created
 Appropriate resources are committed to corporate governance initiatives
 Policies and procedures have been formalized and distributed to relevant staff
 A corporate governance code has been developed
 A code of ethics has been developed
 The company is recognized as a corporate governance leader

 Why Corporate Governance?

 Better access to external finance

 Lower costs of capital – interest rates on loans
 Improved company performance – sustainability
 Higher firm valuation and share performance
 Reduced risk of corporate crisis and scandals

 Global Landmarks in the Emergence of Corporate Governance

There were several frauds and scams in the corporate history of the world. It was felt that
the system for regulation is not satisfactory and it was felt that it needed substantial
external regulations. These regulations should penalize the wrong doers while those who abide
by rules and regulations, should be rewarded by the market forces. There were several
changes brought out by governments, shareholder activism, insistence of mutual funds and
large institutional investors, that corporate they invested in adopt better governance practices
and in formation of several committees to study the issues in depth and make
recommendations, codes and guidelines on Corporate Governance that are to be put in
practice. All these measures have brought about a metamorphosis in corporate that realized
that investors and society are serious about corporate governance.

• Developments in USA

Corporate Governance gained importance with the occurrence of the Watergate scandal in
United States. Thereafter, as a result of subsequent investigations, US regulatory and
legislative bodies were able to highlight control failures that had allowed several major
corporations to make illegal political contributions and to bribe government officials. This led
to the development of the Foreign and Corrupt Practices Act of 1977 that contained specific
provisions regarding the establishment, maintenance and review of systems of internal control.
This was followed in 1979 by Securities and Exchange Commission’s proposals for mandatory
reporting on internal financial controls. In 1985, following a series of high profile business
failures in the US, the most notable one of which being the savings and loan collapse, the
Tradway Commission was formed to identify the main cause of misrepresentation in financial
reports and to recommend ways of reducing incidence thereof. The tradway Report published
in 1987 highlighted the need for a proper control environment, independent audit committees
and an objective internal audit function and called for published reports on the effectiveness
of internal control The commission also requested the sponsoring organizations to develop an
integrated set of internal control criteria to enable companies to improve their control.

• Developments in UK

In England, the seeds of modern corporate governance were sown by the Bank of Credit and
Commerce International (BCCI) Scandal. The Barings Bank was another landmark. It
heightened people’s awareness and sensitivity on the issue and resolve that something ought to
be done to stem the rot of corporate misdeeds. These couple of examples of corporate
failures indicated absence of proper structure and objectives of top management. Corporate
Governance assumed more importance in light of these corporate failures, which was affecting
the shareholders and other interested parties.

As a result of these corporate failures and lack of regulatory measurers from authorities as
an adequate response to check them in future, the Committee of Sponsoring Organizations
(COSO) was born. The report produced in 1992 suggested a control framework and was
endorsed a refined in four subsequent UK reports: Cadbury, Ruthman, Hampel and Turbull.

There were several other corporate failures in the companies like Polly Peck, British &
Commonwealth and Robert Maxwell’s Mirror Group News International were all victims of the
boom-to-bust decade of the 1980s. Several companies, which saw explosive growth in
earnings, ended the decade in a memorably disastrous manner. Such spectacular corporate
failures arose primarily out of poorly managed business practices.

The publication of a serious of reports consolidated into the Combined Code on Corporate
Governance (The Hampel Report) in 1998 resulted in major changes in the area of corporate
governance in United Kingdom. The corporate governance committees of last decade have
analyzed the problems and crises besetting the corporate sector and the markets and have
sought to provide guidelines for corporate management. Studying the subject matter of the
corporate codes and the reports produced by various committees highlighted the key practical
problem and concerns driving the development of corporate governance over the last decade

• World Bank on Corporate Governance

The World Bank, involved in sustainable development was one of the earliest economic
organization o study the issue of corporate governance and suggest certain guidelines. The
World Bank report on corporate governance recognizes the complexity of the concept and
focuses on the principles such as transparency, accountability, fairness and responsibility that
are universal in their applications.

Corporate governance is concerned with holding the balance between economic and social goals
and between individual and communal goals. The governance framework is there to encourage
the efficient use of resources and equally to require accountability for the stewardship of
those resources. The aim is to align as nearly as possible, the interests of individuals,
organizations and society.

The foundation of any corporate governance is disclosure. Openness is the basis of public
confidence in the corporate system and funds will flow to those centers of economic activity,
which inspire trust. This report points the way to establishment of trust and the
encouragement of enterprise. It marks an important milestone in the development of corporate
governance.

2. SARBANES OXLEY ACT OF 2002

The Sarbanes-Oxley Act (SOX) is a sincere attempt to address all the issues associated with
corporate failure to achieve quality governance and to restore investor’s confidence. The Act
was formulated to protect investors by improving the accuracy and reliability of corporate
disclosures, made precious to the securities laws and for other purposes. The act contains a
number of provisions that dramatically change the reporting and corporate director’s
governance obligations of public companies, the directors and officers. The important
provisions in the SOX Act are briefly given below.

I) Establishment of Public Company Accounting Oversight Board (PCAOB):

SOX creates a new board consisting of five members of whom two will be certified public
accountants. All accounting firms have to get registered with the board. The board will make
regular inspection of firms. The board will report to SEC. The report will be ultimately
forwarded to Congress.

ii) Audit Committee: The SOX provides for new improved audit committee. The committee is
responsible for appointment, fixing fees and oversight of the work of independent auditors.
The registered public accounting firms should report directly to audit committee on all critical
accounting policies.

iii) Conflict of Interest: The public accounting firms should not perform any audit services for
a publically traded company.

iv) Audit Partner Rotation: The act provides for mandatory rotation of lead audit or co-
coordinating partner and the partner reviewing audit once every 5 years.
v) Improper influence on conduct of Audits: According to act, it is unlawful for any executive
or director of the firm to take any action to fraudulently influence, coerce or manipulate an
audit.

vi) Prohibition of non-audit services: Under SOX act, auditors are prohibited from providing
non-audit services concurrently with audit financial review services.

vii) CEOs and CFOs are required to affirm the financials: CEOs and CFOs are required to
certify the reports filed with the Securities and Exchange Commission (SEC).

viii) Loans to Directors: The act prohibits US and foreign companies with Securities traded
within US from making or arranging from third parties any type of personal loan to directors.

ix) Attorneys : The attorneys dealing with publicly traded companies are required to report
evidence of material violation of securities law or breach of fiduciary duty or similar violations
by the company or any agent of the company to Chief Counsel or CEO and if CEO does not
Respond then to the audit committee or the Board of Directors.

x) Securities Analysts: The SOX has provision under which brokers and dealers of securities
should not retaliate or threaten to retaliate an analyst employed by broker or dealer for any
adverse, negative or unfavorable research report on a public company. The act further
provides for disclosure of conflict of interest by the securities analysts and brokers or
dealers.

xi) Penalties: The penalties are also prescribed under SOX act for any wrong doing. The
penalties are very stiff.

The Act also provides for studies to be conducted by Securities and Exchange
Commission or the Government Accounting Office in the following area:

i) Auditor’s Rotation

ii) Off balance Sheet Transactions

iii) Consolidation of Accounting firms & its impact on industry

iv) Role of Credit Rating Industry

v) Role of Investment Bank and Financial Advisers.

The most important aspect of SOX is that it makes it clear that company’s senior
Officers are accountable and responsible for the corporate culture they create and must
be faithful to the same rules they set out for other employees. The CEO for example,
Must be responsible for the company’s disclosure,controls and financial reporting.
OR

 SOX was signed into law July 30, 2002 to protect investors by improving the
reliability and accuracy of disclosures made pursuant to the securities laws.

• SOX provisions include, but are not limited to, the following issues:
– Public Company Accounting Oversight Board
– Auditor Independence
– Corporate Responsibility/Governance
– Enhanced Financial Disclosures
– Enhanced Penalty Provisions

 To Whom Does SOX Apply?

• SOX is generally applicable to all companies, regardless of size, who are required to file
reports with the SEC under the 1934 Act or that have a registration statement on file under
the 1933 Act.
• Certain SOX provisions apply only to companies listed on a national securities exchange.
• Small business issuers that file reports on Form 10-QSB and Form 10-KSB are generally
subject to SOX in the same way as larger companies.

 SOX established the creation of the PCAOB to oversee the audit of public
companies that are subject to the securities laws.

• PCAOB is charged with several duties including:

– Registering public accounting firms that prepare audit reports;
– Establishing auditing, quality control, ethics, Independence, and other standards relating to
the preparation of audit reports; and
– Conducting inspections of registered public accounting firms and conducting investigations and
disciplinary proceedings, where justified, concerning registered public accounting firms

 What Sarbanes-Oxley Brings

 Major Provisions of Sarbanes-Oxley

The Act has 11 titles can be summarized within;

• Foundation of Public Company Accounting Oversight Board
• Auditor independence provisions,
• A range of corporate governance measures,
• Expanded financial disclosure requirements,
• Analyst`s potential conflict of interest,
• Increase in SEC funding & enforcement power and direction of various
studies and reports,
 • Criminal penalties & fraud.

• Title I and II, regulates;

 Foundation of PCAOB-empowered to set auditing quality, control and

ethic standards, inspects registered accountants, take disciplinary
actions,
 Funding of FASB changed by providing full financial independence from
the accounting industry,
 Auditor independence from corporate management supported by creating
more separation between auditing and consulting function,

• Title III and IV brought enclosed provisions about responsibility of

public company officers and lawyers for the quality and accuracy of
financial reporting, and some related disclosure requirements, provided
in detail in Chapter III.

• Title IV cited provisions aiming to enhance financial disclosure;

-Off-balance sheet transactions- Sec. 401-As a direct response use of Enron SPEs
to keep liabilities off balance-sheet, SOA directs SEC to prepare regulations requiring
companies to disclose in their periodic reports all material off balance-sheet information
(including contingent obligations),

-Pro Forma Disclosure- Requires SEC to adopt rules requiring the companies to publish
Pro Forma data with reconciliation to comparable data calculated according to GAAP.

-Required SEC prepare a study on SPEs,

-Enhanced SEC Review of Disclosure- Sec. 408.-SEC must systemically review corporate
filings at least once a three year. (Selection criterias e.g. stock price volatility, large market
capitalization…)

-Rapid Disclosure of Financial Change-Sec. 409-Disclosure of additional information

concerning material changes in financial conditions or operations on a rapid and current basis.

• Title V seeks to limit and expose to public possible conflict of interest

effecting securities analysts, in that respect; Sec. 501 of the Act
obliged, SEC or on the SEC’s direction exchanges, designed regulations;
-Restricting the pre-publication clearance of research or recommendation by other
staff,

-Limiting supervision and compensation of analysts to one other than investment banking,

-Protects analysts from retaliation or threats.

 • Title VI is related to SEC’s resources and authority and Title VII
requires some studies and reports to be conducted;
•
- Increased SEC funding;

-Codified SEC’s authority to censure and deny temporarily or permanently preparing

and practicing before,

-To reduce the migration of fraud, SEC was authorized to bar securities industry
employees barred from other financial sectors,

Title VI is related to SEC’s resources and authority and Title VII requires some studies and
reports to be conducted;

-Required special studies;

-Sec. 701-Consolidation of public accounting firms (Comptroller General)

-Sec. 702-Role of credit rating agency in the operation of securities markets (SEC)
-Sec. 705-Role of investment bankers and financial advisers in assisting public companies
manipulation of their earnings (GAO)

SOA imposes new criminal penalties for fraud and other wrongful act;

-Creates a new federal criminal violation, called securities fraud, violation of this
statue will be punishable by fine and imprisonment up to 25 years,

-Strengthens the existing penalties of mail and wire fraud,

-Direct respond to Arthur Andersen`s shredding event, creates new document destruction
crime,

-Contains federal protection for whistle blowers when act lawfully to disclose
information,

-Increases statute of limitation in private lawsuits,

 Critics of Sarbanes-Oxley

 An election year is not proper to overhaul a complicated area like

securities regulation.
 Simply follows headlines from Enron and others with little appreciation
for systemic problems
 The efforts of SEC and other SROs are not taken into account by
Congress.
 Little appreciation for markets` response to the scandals.
  Many provisions are simply delegations of authority to the SEC to adopt
rules, some of them involve the SEC or the other SROs had already
undertaken rulemaking initiatives.
 May cause long-term systemic harm to the competitiveness of US
capital markets.

 Regulations of Sarbanes-Oxley
Affecting Corporate Responsibility and Its Disclosure

TITLE I – PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD

 Creation of the Public Company Oversight Board (the Board)

– Created as a non-profit organization, the Board will oversee audits of public
companies; it is under the authority of the SEC but above other professional
accounting organizations such as the AICPA

– The Board is comprised of 5 members (appointees), with a maximum of two

CPA’s

– Among its duties are registering existing public accounting firms which prepare
audits for publicly traded companies (issuers), reviewing registered public
accounting firms (auditing the auditors), establishing and amending rules and
standards (in cooperation with other standard setters), and in the event of
non-compliance by registered public accounting firms, to try such firms (and/or
any related associate(s)) and penalize

TITLE II – AUDITOR INDEPENDENCE

 Prohibits registered public accounting firms (RPAFs) who audit an issuer from
performing specific non-audit services for that issuer, including but not limited to:
bookkeeping, financial information systems design, appraisal services, actuarial
services, internal audit outsourcing services, management/human resource functions,
broker/dealer, legal/expert services outside the scope of the audit

 In addition to these limitations, audit functions and all other non-audit functions
provided to the audit client must be pre-approved by the Board (such as tax services)

 Audit Partner rotation – Lead partner on 5 years, off 5 years; other partners on 7
years, off 2

 RPAFs performing audits to issuers must report to issuer’s audit committees about: (1)
critical accounting policies to be used in the audit, (2) any written communication with
management, and (3) any deviations from GAAP in financial reporting
  A conflict of interest arises and an RPAF may not perform audit services for any
issuer employing – in the capacity of CEO, controller, CFO or any other equivalent title

– A former audit engagement team member – there is a “cooling-off period” for one
year
– i.e., an employee of an RPAF who works on an audit of an issuer may not turn
around and directly go to work for that issuer – they must wait one year

 Currently under investigation is the possibility of mandatory rotations of audit clients

among registered public accounting firms

TITLE III – CORPORATE RESPONSIBILITY

 Audit Committee (committees est. by the board of a company for the purpose of
overseeing financial reporting) Independence

– Establishes minimum independence standards for audit committees

 Independence of the audit committee crucial in that it must (1) oversee
and compensate RPAF to perform audit, and (2) establish procedures for
addressing complaints by the issuer regarding accounting, internal
control, etc. (this lays the foundation for anonymous whistle blowing)

 CEOs and CFOs must certify in any periodic report the truthfulness and accurateness
of that report – creates liability

 Under certain conditions of re-statement of financial due to material non-compliance,

CEOs and CFOs will be required to forfeit certain bonuses and profits paid to them as
a result of material mix-information

TITLE IV – ENHANCED FINANCIAL DISCLOSURES

 Issuers must disclose “off-balance sheet transactions” in periodic reports

 No issuer shall make, extend, modify or renew any personal loan to CEOs, CFOs
(limited exceptions include company credit cards)

 Annual reports will contain internal control reports which state the responsibility of
management for establishing such controls and their assessment of the effectiveness
of such controls – which must be attested to by the auditor

 In periodic reports filed, the issuer must disclose its code of ethics for senior
financial officers, and if the issuer has not adopted such a policy, must disclose why
not
  Issuer must disclose whether or not its audit committee is comprised of at least one
financial expert, and if not, why
– Member considered financial expert if they have an understanding of GAAP,
experience in preparing/auditing financials, experience with internal controls,
and an understanding of audit committee functions

 SEC must review disclosures (in financials) made by any issuer at least once every
three years (similar to Board review of registered public accounting firms)

 Issuers must disclose in real time any additional information concerning material
changes in the financial condition or operations of the issuer

TITLE V – ANALYST CONFLICTS OF INTEREST

 National Securities Exchanges and registered securities associations must adopt rules
designed to address conflicts of interest that can arise when securities analysts
recommend securities in research reports

– To improve objectivity of research and provide investors with useful and reliable
information

TITLE VI – COMMISSION RESOURCES AND AUTHORITY

 Increase 2003 appropriations for the SEC to $780 million, $98 million to be used to
hire an additional 200 employees for enhanced oversight of auditors and audit services

 SEC will establish rules setting minimum standards for profession conduct for attorneys
practicing before it

 SEC to conduct investigations of any security professional who has violated a security
law
– May censure, temporarily bar or deny right to practice

TITLE VII – STUDIES AND REPORTS

 The Comptroller General of the US shall conduct a study regarding the consolidation of
public accounting firms (e.g. Coopers & Lybrand/Price Waterhouse combine to become
PriceWaterhouseCoopers; Touché Ross/DeloitteHaskins merge to become Deloitte &
Touché) since 1989, analyze the past, present and future impact of the consolidations,
and create solutions to problems discovered caused by such consolidations

 The Comptroller General and/or SEC will also explore such issues as
  (1) the role and function of credit rating agencies in the operation of the securities
market,

 (2) the number of securities professionals (public accountants, investment bankers,

attorneys) who have been found to have aided and abetted a violation of securities law
and who have not been disciplined,

 (3) all enforcement actions by the SEC regarding re-statements, violations of reporting
requirements, etc., for the five year period prior to the date the Act is passed, and

 (4) whether investment banks and financial advisers assisted public companies in
manipulating their earnings (specifically Enron and WorldCom)

TITLE VIII – CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY

 To knowingly destroy, create, manipulate documents and/or impede or obstruct federal

investigations is considered felony, and violators will be subject to fines or up to 20
years imprisonment, or both

 All audit report or related work papers must be kept by the auditor for at least 5
years

 Whistleblower protection – employees of either public companies or public accounting

firms are protected from employers taking actions against them, and are granted
certain fees and awards (such as Attorney fees)

TITLE IX – WHITE-COLLAR CRIME PENALTY ENHANCEMENTS

 Financial statements filed with the SEC by any public company must be certified by
CEOs and CFOs; all financials must fairly present the true condition of the issuer and
comply with SEC regulations

– Violations will result in fines less than or equal to $5 million and /or a maximum
of 20 years imprisonment

 Mail fraud/wire fraud convictions carry 20 year sentences (previously 5 year

sentences)

 Anyone convicted of securities fraud may be banned by SEC from holding

officer/director positions in public companies
TITLE X – CORPORATE TAX RETURNS

 Federal income tax returns must be signed by the CEO of an issuer

TITLE XI – CORPORATE FRAUD ACCOUNTABILITY

 Destroying or altering a document or record with the intent to impair the object’s
integrity for the intended use in a securities violation proceeding, or otherwise
obstructing that proceeding, will be subject to a fine and/or up to 20 years
imprisonment

 The SEC has the authority to freeze payments to any individual involved in an
investigation of a possible security violation

 Any retaliatory act against whistleblowers or other informants is subject to fine

and/or 10 year imprisonment

3. REPORTS OF VARIOUS COMMITTEES AND THEIR RECOMMENDATIONS ON

CORPORATE GOVERNANCE.

1. Narayanmurthy

 The terms of reference of the committee were to:

 review the performance of corporate governance; and

 Determine the role of companies in responding to rumour and other price sensitive
information circulating in the market, in order to enhance the transparency and
integrity of the market.

The issues discussed by the committee primarily related to audit committees, audit reports,
independent directors, related parties, risk management, directorships and director
compensation, codes of conduct and financial disclosures.

The committee's recommendations in the final report were selected based on parameters
including their relative importance, fairness, accountability, transparency, ease of
implementation, verifiability and enforceability.

 The key mandatory recommendations focused on:

 strengthening the responsibilities of audit committees;

 improving the quality of financial disclosures, including those related to related party
transactions and proceeds from initial public offerings;
 requiring corporate executive boards to assess and disclose business risks in the annual
reports of companies;
  introducing responsibilities on boards to adopt formal codes of conduct; the position of
nominee directors; and
 Stock holder approval and improved disclosures relating to compensation paid to non-
executive directors.

Non-mandatory recommendations included:

 moving to a regime where corporate financial statements are not qualified;

 instituting a system of training of board members; and
 Evaluation of performance of board members.

As per the committee, these recommendations codify certain standards of 'good governance'
into specific requirements, since certain corporate responsibilities are too important to be left
to lose concepts of fiduciary responsibility. Their implementation through SEBI's regulatory
framework will strengthen existing governance practices and also provide a strong incentive to
avoid corporate failures.

The Committee noted that the recommendations contained in their report can be implemented
by means of an amendment to the Listing Agreement, with changes made to the existing
clause 49.

2. Ganguly Committee’s Recommendations

To introduce corporate governance practices in the banking sector the recommendations of the
working group of directors of Banks Financial Institutions, known as the Ganguly Group, will be
of interest.

Composition of Boards:

Boards should be more contemporarily professional by inducting technical and specially qualified
personnel. There should be a blend of “historical skill” set and “new skill” set, i.e. skills such
as marketing, technology and systems, risk management, strategic planning, treasury
operations, credit recovery, etc.

Directors should fulfill certain “fit and proper” norms. , viz., formal qualification, experience
and track record. To ensure this, companies could call upon the candidates for directorship to
furnish necessary information by way of self- declaration, verification reports from market,
etc.
Certain criteria adopted for public sector banks such as the age of director being between 35
and 65, that he/she should not be a member of parliament! state legislatures, etc. may be
adopted for private sector banks also.

Selection of directors could be done by a nomination committee of the board. The Reserve
Bank of India (RBI) also might compile a list of eligible candidates.

The banks may enter into a “Deed of Covenant” with every non-executive director, delineating
his/her responsibilities and making him/her abides by them.

Need-based training should be imparted to the directors to equip them govern the banks
properly.

The Ganguly Committee has suggested the formation of the following committees of the board,
in addition to the Nomination Committee: Audit Committee, Shareholders: Redressal
Committee, Supervisory Committee and Risk Management Committee. The job of the first two
committees is well known in all big corporates in India.

Incidentally, the Reserve Bank has prescribed that the audit committee should be presided
over by a Chartered Accountant Director, but Ganguly Committee opined that it could be done
by any non-executive director

3. Naresh Chandra

The thrust of this report, therefore, is to suggest certain voluntary recommendations for
industry to adopt.

The report is structured according to the different elements of corporate governance:

 The Board of Directors

– Non-executive and independent directors

– Committees of the board
– Significant related party transactions

 Auditors

– Independence of Auditors
– Rotation of Audit Partners
  Regulatory Agencies

– Legal and regulatory standards

– Effective and credible enforcement

 External Institutions

– Institutional investors
– The Press

Recommendation 1: Nomination Committee

The Task Force believes that having a well functioning Nomination Committee will play a
significant role in giving investors substantial comfort about the process of Board-level
appointments. It, therefore, recommends that listed companies should have a Nomination
Committee, comprising a majority of independent directors, including its chairman. This
Committee’s task should be to:

• Search for, evaluate, shortlist and recommend appropriate independent directors and NEDs,
subject to the broad directions of the full Board; and

• Design processes for evaluating the effectiveness of individual directors as well as the
Board as a whole.

The Nomination Committee should also be the body that evaluates and recommends the
appointment of executive directors.

A separate section in the chapter on corporate governance in the annual reports of listed
companies could outline the work done by the Nomination Committee during the year under
consideration.

Recommendation 2: Letter of Appointment to Directors

• The Task Force recommends that listed companies should issue formal letters of
appointment to NEDs and independent directors - just as it does in appointing employees and
executive directors. The letter should:

• Specify the expectation of the Board from the appointed director;

• The Board-level committee(s) in which the director is expected to serve and its tasks;

• The fiduciary duties that come with such an appointment;

• The term of the appointment;

• The Code of Business Ethics that the company expects its directors and employees to
follow;

• The list of actions that a director cannot do in the company;

• The liabilities that accompany such a fiduciary position, including whether the concerned
director is covered by any Directors and Officers (D&O) insurance; and

• The remuneration, including sitting fees and stock options, if any

Recommendation 3: Fixed Contractual Remuneration

The Task Force recommends that the Companies Act, 1956, be amended so that companies
have the option of giving a fixed contractual remuneration to NEDs and independent directors,
which is not linked to the net profit or lack of it. Therefore, companies should be given the
option to choose between:

a. Paying a fixed contractual remuneration to its NEDs and IDs, subject to an appropriate
ceiling depending on the size of the company; or

b. Continuing with the existing practice of paying out upto 1% (or 3%) of the net profits of
the standalone entity as defined in the Companies Act, 1956. For any company, the choice
should be uniform for all NEDs and independent directors, i.e. some cannot be paid a
commission of profits while others are paid a fixed amount.

If the option chosen is (a) above, then the NEDs and independent directors will not be eligible
for any commission on profits.

The current limits and constraints on sitting fees and stock options or restricted stock may
remain unchanged. If stock options are granted as a form of payment to NEDs and
independent directors, then these must be held by the concerned director until one year of
his exit from the Board.

Recommendation 4: Structure of Compensation to NEDs

The Task Force recommends that listed companies use the following template in structuring
their remuneration to NEDs and independent directors

• Fixed component: This should be relatively low, so as to align NEDs and independent
directors to a greater share of variable pay. Typically, these are not more than 30% of the
total cash remuneration package.

• Variable Component: Based on attendance of Board and Committee meetings (at least 70%
of all meetings should be an eligibility pre-condition)
• Additional payment for being the chairman of the Board, especially if he/she is a non
executive chairman

• Additional payment for being the chairman of the Audit Committee

• Additional payment for being the chairman of other committees of the Board

• Additional payment for being members of Board committees: Audit, Shareholder Grievance,
Remuneration, Nomination, etc.

Recommendation 5: Remuneration Committee

The Task Force recommends that listed companies should have a Remuneration Committee of
the Board.

• The Remuneration Committee should comprise at least three members, majority of whom
should be independent directors.

• It should have delegated responsibility for setting the remuneration for all executive
directors and the executive chairman, including any compensation payments, such as retiral
benefits or stock options. It should also recommend and monitor the level and structure of
pay for senior management, i.e. one level below the Board.

• The Remuneration Committee should make available its terms of reference, its role, the
authority delegated to it by the Board, and what it has done for the year under review to the
shareholders in a separate section of the chapter on corporate governance in the annual
report.

Recommendation 6: Audit Committee Constitution

Listed companies should have at least a three-member Audit Committee comprising entirely of
non-executive directors with independent directors constituting the majority.

Recommendation 7: Separation of Offices of Chairman & Chief Executive

Officer

The Task Force recognized the ground realities of India. Keeping these in mind, it has
recommended, wherever possible, to separate the office of the Chairman from that of the
CEO.
 Recommendation 8: Board Meetings through Tele-conferencing

If a director cannot be physically present but wants to participate in the proceedings of the
board and its committees, then a minuted and signed proceeding of a teleconference or video
conference should constitute proof of his or her participation.

Accordingly, this should be treated as presence in the meeting(s). However, minutes of all
such meetings or the decisions taken thereat, recorded as circular resolutions, should be
signed and confirmed by the director/s who has/have attended the meeting through video
conferencing.

Recommendation 9: Executive Sessions

To empower independent directors to serve as a more effective check on management, the

independent directors could meet at regularly scheduled executive sessions without
management and before the Board or Committee meetings discuss the agenda.

The Task Force also recommends separate executive sessions of the Audit Committee with
both internal and external Auditors as well as the Management.

Recommendation 10: Related Party Transactions

Audit Committee, being an independent Committee, should pre-approve all related party
transactions which are not in the ordinary course of business or not on “arms length basis” or
any amendment of such related party transactions. All other related party transactions should
be placed before the Committee for its reference.

Recommendation 11: Auditors’ Revenues from the Audit Client

No more than 10% of the revenues of an audit firm singly or taken together with its
subsidiaries, associates or affiliated entities should come from a single corporate client or
group with whom there is also an audit engagement.

Recommendation 12: Certificate of Independence

Every company must obtain a certificate from the auditor certifying the firm’s independence
and arm’s length relationship with the client company. The Certificate of Independence should
certify that the firm, together with its consulting and specialized services affiliates,
subsidiaries and associated companies or network or group entities have not / has not
undertaken any prohibited non-audit assignments for the company and are independent vis-à-
vis the client company, by reason of revenues earned and the independence test are observed.

Recommendation 13: Rotation of Audit Partners

The partners handling the audit assignment of a listed company should be rotated after every
six years. The partners and at least 50% of the audit engagement team responsible for the
audit should be rotated every six years, but this should be staggered so that on any given day
there isn’t a change in partner and engagement manager.

A cooling off period of 3 years should elapse before a partner can resume the same audit
assignment.

Recommendation 14: Auditor’s Liability

The firm, as a statutory auditor or internal auditor, has to confidentially disclose its networth
to the listed company appointing it. Each member of the audit firm is liable to an unlimited
extent unless they have formed a limited liability partnership firm or company for professional
services as permitted to be incorporated by the relevant professional disciplinary body (ICAI).
Even in the case of a limited liability firm undertaking audit in the future, under the new law,
the individual auditor responsible for dereliction of duty shall have unlimited liability and the
firm and its partners shall have liability limited to the extent of their paid-in capital and free
or undistributed reserves.

Recommendation 15: Appointment of Auditors

The Audit Committee of the board of directors shall be the first point of reference regarding
the appointment of auditors. The Audit Committee should have regard to the entire profile of
the audit firm, its responsible audit partner, his or her previous experience of handling audit
for similar sized companies and the firm and the audit partner’s assurance that the audit
clerks and / or understudy chartered accountants or paralegals appointed for discharge of the
task for the listed company shall have done a minimum number of years of study of Accounting
Principles and have minimum prior experience as audit clerks.

To discharge the Audit Committee’s duty, the Audit Committee shall:

• discuss the annual work programmed and the depth and detailing of the audit plan to be
undertaken by the auditor, with the auditor;

• examine and review the documentation and the certificate for proof of independence of the
audit firm, and

• Recommend to the board, with reasons, either the appointment/re-appointment or removal

of the statutory auditor, along with the annual audit remuneration.

Recommendation 16: Qualifications in Auditor’s Report

ICAI should appoint a committee to standardise the language of disclaimers or qualifications

permissible to audit firms. Anything beyond the scope of such permitted language should
require the auditor to provide sufficient explanation.

Recommendation 17: Institution of Mechanism for Whistle Blowing

The Task Force recommends institution of a mechanism for employees to report concerns
about unethical behavior, actual or suspected fraud, or violation of the company’s code of
conduct or ethics policy. It should also provide for adequate safeguards against victimization
of employees who avail of the mechanism, and also allows direct access to the Chairperson of
the audit committee in exceptional cases.

Recommendation 18: Risk Management

The Board, its audit committee and its executive management must collectively identify the
risks impacting the company’s business and document their process of risk identification, risk
minimization, risk optimization as a part of a risk management policy or strategy. The Board
should also affirm that it has put in place critical risk management framework across the
company, which is overseen once every six months by the Board.

Recommendation 19: Harmonization of Corporate Governance Standards

The Task Force suggests that the Government and the SEBI as a market Regulator must
concur in the corporate governance standards deemed desirable for listed companies to ensure
good corporate governance.

Recommendation 20: Audit Oversight Mechanism

In the interest of investors, the general public and the auditors, the Task Force recommends
that the Government intervenes to strengthen the ICAI Quality Review Board and facilitate
its functioning of ensuring the quality of the audit process through an oversight mechanism on
the lines of Public Company Accounting Oversight Board (PCAOB) in the United States.

Recommendation 21: Effective & Credible Enforcement

The Task Force recommends that instances of investigations of serious corporate fraud must
be coordinated and jointly investigated. Joint investigations / interrogation by the regulators
for example, the SFIO and the CBI should be conducted in tandem.

On the lines of the recommendations of the Naresh Chandra Committee Report on Corporate
Audit and Governance, a Task Force should be constituted for each case under a designated
team leader and in the interest of adequate control and efficiency, a Committee each, headed
by the Cabinet Secretary should directly oversee the appointments to, and functioning of this
office, and coordinate the work of concerned department and agencies. Civil recovery for acts
of misfeasance, malfeasance, nonfeasance and recovery from the wrongdoers and criminal
offences and penalties and punishments should be adjudicated appropriately, without
conflicting reports and opinions, and disposed off between 6 to 12 months.
 Recommendation 22: Cancellation of Fraudulent Securities

A provision of confiscation and cancellation of securities of a person who perpetrates a

securities fraud on the company or security holders ought to be prescribed for the protection
of capital markets.

Recommendation 23: Liability of Directors & Employees

Personal penalties should be imposed on directors and employees who seek unjust enrichment
and commit offence with such intentions. Such punishments should be commensurate with the
wrongful act and be imposed in addition to disgorgement of wrongful gains. Further, non-
executive directors cannot be made to undergo the ordeal of a trial for offence of non-
compliance with a statutory provision unless it can be established prima facie that they were
liable for the failure on part of the company.

Recommendation 24: Shareholder Activism

Long term institutional investors, pension funds or infrastructure funds can help to develop a
vibrant state of shareholder activism in the country. The oversight by such investors of
corporate conduct can be facilitated through internal participation of their nominees as
directors or external proceedings for preventing mis-management. Such institutional investors
should establish model codes for proper exercise of their votes in the interest of the company
and its minority shareholders, at general meetings, analyze and review corporate actions
intended in their investee companies proactively and assume responsible roles in monitoring
corporate governance and promoting good management of companies in which they invest.

Recommendation 25: Media as a stakeholder

The Task Force recommends that media, especially in the financial analytics and reporting
business should invest more in analytical, financial and legal rigor and enhance their capacity
for analytical and investigative reporting.

OR

RECOMMENDATION OF NARESH CHANDRA COMMITTEE:

 recommended a list of disqualifications for audit assignments like direct relationship

with company, any business relationship with client, personal relationship with director

 audit firms not to provide services such as accounting, internal audit assignments etc.
to audit clients

 auditor to disclose contingent liabilities & highlight significant accounting policies

 audit committee to be first point of reference for appointment of auditors

  ceo & cfo of listed company to certify on fairness, correctness of annual audited
accounts

 redefinition of independent directors – does not have any material, pecuniary

relationship or transaction with the company

 composition of board of directors

 statutory limit on the sitting fee to non-executive directors to be reviewed

4. CIIOECD COMMITTEES

Organization for Economic Co-operation and Development (OECD) was one of the earliest non-
governmental organizations to work on and spell out principles and practices that should govern
corporate in their goal to attain long-term shareholder value.

The OECD was trend setters as the Code of Best practices are associated with Cadbury
report. The OECD principles in summary include the following elements.

I) the rights of shareholders

ii) Equitable treatment of shareholders
iii) Role of stakeholders in corporate governance
iv) Disclosure and Transparency
v) Responsibilities of the board

The OECD guidelines are somewhat general and both the Anglo-American system and
Continental European (or German) system would be quite consistent with it.

 The recommendations in brief are as under:

1. Appointment of Independent Director

a. Nomination Committee

2. Duties, liabilities and remuneration of independent directors

a. Letter of Appointment to Directors

b. Fixed Contractual Remuneration

c. Structure of Compensation to NEDs

3. Remuneration Committee of Board

4. Audit Committee of Board

5. Separation of the offices of the Chairman and the Chief Executive Officer

6. Attending Board and Committee Meetings through Tele-conferencing and video conferencing

7. Executive Sessions of Independent Director

8. Role of board in shareholders and related party transactions

9. Auditor – Company Relationship

10. Independence to Auditors

11. Certificate of Independence

12. Auditor Partner Rotation

13. Auditor Liability

14. Appointment of Auditors

15. Qualifications of Auditors Report

16. Whistle Blowing Policy

17. Risk Management Framework

18. The legal and regulatory standards

19. Capability of Regulatory Agencies - Ensuring Quality in Audit Process

20. Effective and Credible Enforcement

21. Confiscation of Shares

22. Personal Liability

23. Liability of Directors and Employees

24. Institutional Activism

25. Media as a stakeholder

 Module IV…!!!
!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

1. MODEL WORKING OF CORPORATE GOVERNANCE:

Two models of Corporate Governance

1. Outsider (shareholders) model

2. Insider (stakeholders) model

The outsider model-

 A priority to market regulation

 the owners of firms tend to have a transitory interest in the firm

 The absence of close relationships between shareholders and management

 the existence of an active `market for corporate control´ - takeovers, particularly

hostile ones

 the primacy of shareholder rights over those of other organisational groups

The insider model

 The priority to stakeholders control

 The owners of firms tend to have an enduring interest in the company

 They often hold positions on the board of directors or other senior managerial positions

 The relationships between management and shareholders are close and stable

 There is little by way of a market for corporate control

 the existence of formal rights for employees to influence key managerial decisions

Corporate governance models around the world

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 Anglo-American
"model" tends to emphasize the interests of shareholders. The coordinated or multi-
stakeholder model associated with Continental Europe and Japan also recognizes the interests
of workers, managers, suppliers, customers, and the community.
Continental Europe

Some continental European countries, including Germany and the Netherlands, require a two-
tiered Board of Directors as a means of improving corporate governance. In the two-tiered
board, the Executive Board, made up of company executives, generally runs day-to-day
operations while the supervisory board, made up entirely of non-executive directors who
represent shareholders and employees, hires and fires the members of the executive board,
determines their compensation, and reviews major business decisions.

India

India's SEBI Committee 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." It has been suggested that the
Indian approach is drawn from the Gandhi an principle of trusteeship and the Directive
Principles of the Indian Constitution, but this conceptualization of corporate objectives is also
prevalent in Anglo-American and most other jurisdictions.

The United States and the UK

The so-called "Anglo-American model" (also known as "the unitary system") emphasizes a
single-tiered Board of Directors composed of a mixture of executives from the company and
non-executive directors, all of whom are elected by shareholders. Non-executive directors
are expected to outnumber executive directors and hold key posts, including audit and
compensation committees. The United States and the United Kingdom differ in one critical
respect with regard to corporate governance: In the United Kingdom, the CEO generally does
not also serve as Chairman of the Board, whereas in the US having the dual role is the norm,
despite major misgivings regarding the impact on corporate governance.

In the United States, corporations are directly governed by state laws, while the exchange
(offering and trading) of securities in corporations (including shares) is governed by federal
legislation. Many U.S. states have adopted the Model Business Corporation Act, but the
dominant state law for publicly-traded corporations is Delaware, which continues to be the
place of incorporation for the majority of publicly-traded corporations. Individual rules for
corporations are based upon the corporate charter and, less authoritatively, the corporate
bylaws.[26] Shareholders cannot initiate changes in the corporate charter although they can
initiate changes to the corporate bylaws.
 2. BOARD STRUCTURE, ROLE AND RESPONSIBILITIES OF DIRECTORS

 Purpose, Authority and Responsibility of the Board of Directors

The primary responsibility of the board of directors is to protect the shareholders' assets
and ensure they receive a decent return on their investment. In some European countries, the
sentiment is much different; many directors there feel that it is their primary responsibility
to protect the employees of a company first, the shareholders second. In these social and
political climates, corporate profitability takes a back seat the needs of workers.

The board of directors is the highest governing authority within the management structure at
any publicly traded company. It is the board's job to select, evaluate, and approve
appropriate compensation for the company's chief executive officer (CEO), evaluate the
attractiveness of and pay dividends, recommend stock splits, oversee share repurchase
programs, approve the company's financial statements, and recommend or strongly discourage
acquisitions and mergers.

 Roles and responsibilities of boards of directors are to:

(1) Represent shareholders and create shareholder value.

(2) Align the interests of management with those of shareholders while protecting the
interests of other stakeholders (customers, creditors, suppliers).

(3) Define the company’s mission and goals.

(4) Establish or approve strategic plans and decisions to achieve these goals.

(5) Appoint senior executives to manage the company in accordance with the established
strategies, plans, policies, and procedures.

(6) Oversee the company’s performance by setting objectives, establishing short-term and
long-term strategies to achieve these objectives, and assessing the performance of senior
executives in fulfilling their responsibilities without micromanaging.

(7) Approve major business transactions and corporate plans, decisions, and actions according
to the bylaws.

(8) Develop and approve executive compensation, pension, post-retirement benefits plan, and
other long-term benefits, including stock ownership and stock options.
(9) Review financial reports, including audited annual financial statements, quarterly reviewed
financial statements, and other important financial disclosures such as management discussion
and analysis (MD&A) earnings releases and reports filed with regulators (SEC) or disseminated
to the public.

(10) Review management’s report on the effectiveness of internal control over financial
reporting.

(11) Provide counsel to the company’s senior executives, especially the CEO, on material
strategic decisions and risk management.

(12) Ensure the company’s compliance with applicable laws, rules, and regulations.

(13) Approve the company’s major operating, investing, and financial activities.

(14) Set the tone at the top by promoting legal and ethical conduct throughout the company.

(15) Evaluate the performance of the board, its committees (e.g., audit, compensation, and
nominating), and the members of each committee.

(16) Hold the board, its committees, and directors accountable for the fulfillment of the
assigned fiduciary duties and oversight functions.

(17) Approve dividends, financing, capital changes, and other extraordinary corporate matters.

(18) Oversee the sustainability of the company in creating long-term shareholder value and
protecting interests of other stakeholders.

 Board Models

One-Tier Board Model - consists of both inside (executive) directors and outside
(nonexecutive) directors. Inside directors are perceived as the decision managers and outside
directors are assumed to have the power and duty to monitor those decisions.

Two-Tier Board Model - The two-tier board system, consisting of a supervisory board and a
management board, better known as the German board model, establishes different
authorities and responsibilities for members of each board.

Modern Board Model - the structure of the modern board based on the two components of
strategic board and oversight board is the natural offshoot of the emerging corporate
governance reforms.
  Board Characteristics

Board Leadership – The effectiveness of board meetings depends largely on the leadership
ability of the chairperson to set an agenda and direct discussions. The board agenda is usually
prepared by chairperson in collaboration with the CEO.

CEO Duality – implies that the company’s CEO holds both the position of chief executive and
the chair of the board of directors. They are pros and cons of that model, but investors
usually prefer to separate the positions. If they don’t, then it is preferable that the
company’s board consists of a ‘substantial’ majority of independent directors.

Lead Director – demand for Lead Director increased because of the presence of CEO duality,
resulting from growing concern that duality places too much power in the hands of CEO, which
may impede board independence.

Board Composition – in terms of ratio of inside and outside directors, and the number of
directors influence the effectiveness of the board. A board size of nine to fifteen is
considered to be adequately tailored to the number of board standing committees.

Board Authority – is granted trough shareholder elections. SOX substantially expanded the
authority of directors, particularly audit committee members, as being directly responsible for
hiring, firing, compensating, and overseeing the work of the companies’ independent auditors.

Responsibilities – the primary responsibility of the board of directors that the companies
assets are safeguarded and that managerial decisions and actions are made in a manner of
maximizing shareholders wealth while protecting the interests of other shareholders.

Resources – board of directors should have adequate resources to effectively fulfill its
oversight functions. Resources available to the board consist of legal, financial, and
information resources.

Board Independence – implies that, to be independent director shouldn’t have any relationship
with the company other than his or her directorship that my compromise the director’s
objectivity and loyalty to the company’s shareholders.

Director compensation – best practices suggest that increases in stock ownership, reduction in
cash payments, and charges in compensation should be aligned with shareholders long-term
interest determined by board, approved by shareholders, and fully disclosed in public
reporting.
  Fiduciary Duties of Board of Directors

Fiduciary duty means that, as shareholders’ guardians, directors must be trustworthy, acting
in the best interest of shareholders, and investors in turn have confidence in the directors’
actions.

MANDATED BY LAW AND SPECIFIED IN COMPANIES CHARTERS AND BYLAWS

The corporate governance literature presents the following fiduciary duties of boards of
directors:

- Duty of due care

- Duty of loyalty
- Duty of Good Faith
- Duty to Promote Success
- Duty to Exercise Diligence, Independent Judgment, and Skill
- Duty to Avoid Conflict of Interests
- Fiduciary Duties and Business Judgment Rules.

• Duty of Due Care - determines the manner in which directors should carry out their
responsibilities. Failure to uphold the set stipulations may constitute a breach of the
fiduciary duty of care of expected directors.

• Duty of loyalty - requires directors to refrain from pursuing their own interests over
the interests of the company. Breach of loyalty can occur even in the absence of
conflicts of interest if directors consciously disregard their duties to the company and
its shareowners.

• Duty of Good Faith – It’s an important of directors fiduciary obligations, and any
irresponsible, reckless, irrational or disingenuous behaviors or conduct can breach that
fiduciary duty.

• Duty to promote success – directors should act in a good faith and promote the success
of the company to benefit of its shareholders and other stakeholders. Includes:
approving the establishment of strategic goals, objectives and policies that promote
enduring shareholders value as well as protect existing value.
 • Duty to exercise due diligence, independent judgment, and skill - directors should be
knowledgeable about the companies’ business and affairs, continuously update their
understanding of the company activities and performance, and use reasonable diligence
and independent judgment in making decisions.

• Duty to avoid conflicts of interests - potential conflict of interest may occur when
director: receives a gift from a third party he is doing business with, either directly
or indirectly enters into a transaction or arrangement with that company, obtains
substantial loans from the company, or engages in backdated stock options.

• Fiduciary Duties and Business Judgment Rules - directors operate under a legal
doctrine called “business judgment rules”. Under that law directors that make decisions
in good faith, based on rational reasoning, and an informed manner can be protected
from liability to the company’s shareholders in the ground that they appropriately
fulfilled their fiduciary duty of care.

 Structure and Makeup of the Board of Directors

The board is made up of individual men and women (the "directors") who are elected by the
shareholders for multiple-year terms. Many companies operate on a rotating system so that
only a fraction of the directors are up for election each year; this makes it much more
difficult for a complete board change to take place due to a hostile takeover.

In most cases,

Directors either, 1.) Have a vested interest in the company, 2.) Work in the upper
management of the company, or 3.) Are independent from the company but are known for
their business abilities.

The number of directors can vary substantially between companies. Walt Disney, for example,
has sixteen directors, each of whom are elected at the same time for one year terms.
Tiffany & Company, on the other hand, has only eight directors on its board. In the United
States, at least fifty percent of the directors must meet the requirements of "independence",
meaning they are not associated with or employed by the company. In theory, independent
directors will not be subject to pressure, and therefore are more likely to act in the
shareholders' interests when those interests run counter to those of entrenched management.
  Committees on the Board of Directors

The board of director’s responsibilities includes the establishment of the audit and
compensation committees. The audit committee is responsible for ensuring that the company's
financial statements and reports are accurate and use fair and reasonable estimates. The
board members select, hire, and work with an outside auditing firm. The firm is the entity
that actually does the auditing.

The compensation committee sets base compensation, stock option awards, and incentive
bonuses for the company's executives, including the CEO. In recent years, many board of
directors have come under fire for allowing executives salaries to reach unjustifiably absurd
levels.

In exchange for providing their services, corporate directors are paid a yearly salary,
additional compensation for each meeting they attend, stock options, and various other
benefits. The total amount of directorship fees various from company to company. Tiffany &
Company, for example, pays directors an annual retainer of $46,500, an additional annual
retainer of $2,500 if the director is also a chairperson of a committee, a per-meeting-
attended fee of $2,000 for meetings attended in person, a $500 fee for each meeting
attended via telephone, stock options, and retirement benefits. When you consider that many
executives sit on multiple boards, it's easy to understanding how their directorship fees can
reach into the hundreds of thousands of dollars per year.

 Ownership Structure and Its Impact on the Board of Directors

The particular ownership structure of a corporation has a huge impact on the effectiveness of
the board of directors to govern. In a company where a large, single shareholder exists, that
entity or individual investor can effectively control the corporation. If the director has a
problem, he or she can appeal to the controlling shareholder. In a company where no
controlling shareholder exists, the directors should act as if one did exist and attempt to
protect this imaginary entity at all times (even if it means firing the CEO, making changes to
the structure that are unpopular with management, or turning down acquisitions because they
are too pricey). In a relatively few number of companies, the controlling shareholder also
serves as the CEO and / or Chairman of the Board. In this case, a director is completely at
the will of the owner and has no effective way to override his or her decisions.
 3. RIGHTS AND RESPONSIBILITIES OF SHAREHOLDERS

RIGHTS of shareholders

Buying & Selling Shares

Shareholders can sell the shares but only if the sale does not breach the Constitution. It is a

Replaceable Rule that directors can refuse to register a proposed share transfer if the shares

are not fully paid or if the Company has a lien over the shares. In some cases, it is necessary

to evidence the sale by a share sale agreement that takes into account the parties’ rights,

obligations and liabilities, and taxation. Behan Legal can advise, assist, and prepare the

necessary share sale agreements.

Funding Company Operations

Shareholders can fund the Company's operations by lending it money, or by taking up other

shares in the Company. Unless it is raising funds from its employees or shareholders, a

Company cannot engage in any fundraising activity that requires disclosure to investors (for

example, advertising in a newspaper inviting investment in the Company). The Company can

borrow money from banks and other financial organisations. Anyone who lends money, or
provides credit to the Company can require a mortgage or charge over the Company's assets

to secure the loan or debt. Behan Legal can advise, assist, and prepare the necessary

agreements.

Shareholder Returns

Shareholders can take money out of the Company in a number of ways, but only if the

Company complies with the Constitution, Corporations Act and all relevant laws. If the

Company pays out money to shareholders in a way that results in it being unable to pay its

debts as they fall due, the directors are liable to pay compensation and for criminal and civil

penalties.

Dividends

Dividends are payments to shareholders out of the Company's after tax profits. It is a

Replaceable Rule that the directors decide whether the Company should pay a dividend.

Share Buy-Back

A Company can buy back shares from shareholders.

Distribution of Surplus Assets

If the Company is wound up and there are assets remaining after paying all debts, the surplus

is available for distribution to shareholders according to their share rights.

 RESPONSIBILITIES OF SHAREHOLDER

 Overseeing strategy and monitoring execution

 Board leadership and composition
 Executive succession and development
 Senior executive compensation issues
  Monitoring the quality of products and services
 Performance and financial viability
 Risk management, controls, and transparency
 Tone at the top, ethics, and compliance
 Stakeholder issues, including business sustainability in light of climate, energy,
environmental, and other concerns.

Two important responsibilities:

1. Voting in corporate elections; and

2. Keeping current records with the Shareholder Relations Department.

Voting

CIRI shareholders are responsible for ensuring the long-term strength of the corporation by
electing a board of directors. In addition to providing guidance and leadership, the board
establishes policies for achieving CIRI's corporate mission and strategic goals. Shareholders
can vote in person at the annual meeting or by a proxy vote.

 Voting Information

Keeping Information Current

Shareholders cannot receive informational materials from CIRI, such as annual reports,
newsletters, proxies, or dividends, if their address is not kept current. It is the
shareholder's responsibility to maintain complete and accurate shareholder records by
promptly advising CIRI of:

 Address Changes;
 Name Changes;
 Stock Will Changes; and
 Direct Deposit Changes.

Shareholder Ability to Change the Board

Shareholders who are dissatisfied with how the directors are running the corporation
may remove the directors or refuse to re-elect them. In practice, this may be a
difficult course to take, particularly where the shares of the corporation are widely
held.

4. OWNERSHIP OF INDEPENDENT DIRECTORS – INDIAN SCENARIO

Who are Independent Directors

As per Clause 49 of the Listing Agreements an ‘independent director’ shall mean non-executive
director of the company who
a. apart from receiving director’s remuneration, does not have any material pecuniary
relationships or transactions with the company, its promoters, its senior management or
its holding company, its subsidiaries and associated companies;
b. is not related to promoters or management at the board level or at one level below the
board;
c. has not been an executive of the company in the immediately preceding three financial
years;
d. is not a partner or an executive of the statutory audit firm or the internal audit firm
that is associated with the company, and has not been a partner or an executive of
any such firm for the last three years. This will also apply to legal firm(s) and
consulting firm(s) that have a material association with the entity.
e. is not a supplier, service provider or customer of the company? This should include
lessor-lessee type relationships also; and
f. is not a substantial shareholder of the company, i.e. owning two percent or more of
the block of voting shares.

Other Definitions

 Higgs’ definition: “that a non-executive director is considered independent when the

board determines that the director is independent in character and judgement and
there are no relationships or circumstances which could affect, or appear to affect,
the director's judgment”.
• Such “relationships” are enumerated
 NYSE definition: Director or immediate family member -
– not to be an executive of the company receiving $100000
– Not to affiliated in professional capacity
– Not to be one who or whose immediate family members work on another
company where the executives of the company serve on the compensation
committee.
– A director or his immediate family member is an executive officer, of a
company that makes payments to, or receives payments from, the listed
company for property or services in an amount which, in any single fiscal year,
exceeds the greater of $1 million, or 2% of such other unit’s three years
company's consolidated gross revenues, would not be independent
– “Family” defined to include person's spouse, parents, children, siblings,
mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and
sisters-in-law, and anyone (other than domestic employees) who shares such
person's home.

 To state simply the expression ‘Independent Directors’ has been defined to mean
directors who apart from receiving director’s remuneration, do not have any other
material pecuniary relation or transactions with the company, its promoters, its
management or its subsidiaries, which in the judgment of the board may affect
independence of judgment of directors.
Selection of Independent Director

 The selection and appointment of independent directors should be transparent and on

certain valued basis.
 Therefore, the companies should have an entirely independent nomination committee
which should determine the qualifications for Board membership and should identify and
evaluate candidates for nomination to the Board.
 It would be more appropriate that the code of Corporate Governance of a company
should specifically include the qualifications and attributes that the company seeks of
an independent director.
 A critical element of a director being independent is his independence to the
management both in fact and perception by the public.
 In considering the independence, it is necessary to focus not only on whether a
director's background and current activities qualify him as independent but also
whether he can act independently of the management.
 In other words, the independent directors must not only be independent according to
the legislative and stock exchange listing standards but also independent in thought and
action i.e. qualitatively independent.
 Such qualitative independence will ensure that directors think and act independently
without regard to management's influence.

Roles & Responsibilities

 The role and responsibility of an individual director, of course, would depend upon the
nature of his directorship.
 Broadly, there are three types of directors.
 Full time, executive director who is normally a paid employee of a company having
some functional responsibility.
 Non executive but non independent director who is normally a promoter of the company
or having high stakes in the company.
 And finally independent directors who are not full time directors. There is another
class of directors known as nominee directors representing some interests like lending
institutions etc.
 An executive director, by very nature has much more responsibilities than non
executive directors. In law it is their responsibility to ensure compliance with provisions
of law failing with they could be held liable as officers in default. As far as
independent directors are concerned, the position of law is nebulous.

Role of Independent Directors

 Independent directors broadly fit into the overall structure of corporate governance,
and are necessary to ensure effective, balanced boards
 The board is the most significant instrument of corporate governance
  Role Of Independent Directors
The non-executive directors should:

* Contribute to and constructively challenge development of company strategy.

* Scrutinize management performance.

* Satisfy them that financial information is accurate and ensure that robust risk management
is in place.

* Meet at least once a year without the chairman or executive directors - and there should
be a statement in the annual report saying whether such meetings have taken place.

* Be prepared to attend AGMs and discuss issues relating to their roles (especially chairmen
of committees).

* Have a greater exposure to major shareholders (particularly the senior independent

director).

 Effectiveness of the board as the oversight body to oversee what the management
does

 Is there a better way to do it, in view of

– Recent scandals of disclosures and audits
– Size and scope of present day enterprise
– Complexity of operations

Responsibilities of Independent Directors

 Independent Director shall however periodically review legal compliance reports

prepared by the company as well as steps taken by the company to cure any taint. In
the event of any proceedings against an independent director in connection with the
affairs of the company, defense shall not be permitted on the ground that the
independent director was unaware of this responsibility.
 To function to properly according to the spirit of corporate governance as o director
on the board and as Member/Chairman across various committees viz. the Audit
Committee, the Shareholders’ Grievance Committee and the Remuneration Committee of
the company.
 A director shall not be a member in more than 10 committees or act as Chairman of
more than five committees across all companies in which he is a director. Furthermore
it should be a mandatory annual requirement for every director to inform the company
about the committee positions he occupies in other companies and notify changes as and
when they take place.
 At least one independent director on the Board of Directors of the holding company
shall be a director on the Board of Directors of the subsidiary company.
Independent Directors under Listing Agreement in India

 Composition of the Board:

– Not less than 50% of the board to be non-executive directors

– Independent Directors:

• If the chairman executive:

– At least half of the board should comprise of independent
directors
• If Chairman non-executive:
– At least one- third of the board should comprise of independent
directors

 Non-executive directors’ remuneration to be approved by shareholders

 Board meetings – to meet at least 4 times, with gap not exceeding 3 months. Minimum
information for board meetings laid down

 Committees of Directors –

– Audit Committee: requirements other than those u/s 292A

• shall have minimum 3 members all of them being non-executive and

majority of them being independent

• Chairman of the committee shall be an independent director

• To meet at least thrice a year

• Company Secretary to act as secretary to the committee

– Remuneration Committee

– Shareholders/Investors Grievance Committee

Limits on committee memberships and chairmanships

5. CORPORATE GOVERNANCE RATING

Corporate Governance involves all structures, systems and processes that will lead to the
optimum performance of the corporation
Corporate Governance Rating is an objective and independent measure of a company’s
level of Corporate Governance Practices

 Mission: Provide a measure of a company’s Corporate Governance Practices

for the benefit of shareholders & other stakeholders Improve practical
aspects of corporate governance Enhance the attractiveness of the
Malaysian Capital Markets

 Vision: Build world-class companies Build world-class capital market

 Current Situation:

 Compliance Mentality -
• Ad-hoc application
• Form over substance attitude
• Box-ticking practice

 Haphazard standards actually practiced –

• Statement of Corporate Governance
• Statement of Internal Control
• Audit Committee Report

 Superficial Understanding

 Need:

To shift mindset: Compliance Issue  Business Strategy Issue

To shift approach: Cost-Based Application  Competitive Advantage Tool

To shift implementation: Vague Theoretical Concept  Practical Tools:

 Structures

 Systems

 Processes
  E.G. OF WORLDWIDE CG RATING REFERENCES

 Standard & Poors

 McKinsey
 ICRA
 PriceWaterHouseCoopers
 Credit Lyonnais Securities (CLSA)
 Institutional Shareholders Services (ISS)
 Oxfam
 Governance Metrics International (GMI)
 Corporate Governance Authority (CGA)
 DWS Investment and Deminor Rating
 Fortune
 CRISIL (India) Governance & Value Creation Rating
 Thai Rating & Information Services (TRIS)
 Pillsbury Winthrop
 OECD
 ASX Corporate Governance
 Horvath (Australia)
 Sarbanes Oxley

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!The end!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!
Keyur D vasava……….