Ethico-Legal Frameworks for Managerial Ethics

1. Vision, Values and Organisational Culture

The vision, mission, and values statements form the foundation for all activities in an
organization. The vision\mission statements describe what the organization is and
what they want to achieve in the future. ... The values statement defines how people in
the organization should behave. It provides a guideline for decision making.

A. Vision and Mission Statements of Famous MNCs

 “To connect the world’s professionals to make them more productive and
successful.”-LinkedIn. Their Values-“being members first, relationships
matter, be open-honest and constructive, demand excellence, take intelligent
risks, and act like an owner.”
 “To be Earth’s most customer-centric company, where customers can find and
discover anything they might want to buy online, and endeavors to offer its
customers the lowest possible prices.”—Amazon. Their Values-Customer
Obsession, Ownership, Invent and Simplify, Learn and Be Curious, Hire the
Best, The Highest Standards, Think Big, Bias for Action, Earn Trust, Deliver
Results
 “To give people the power to share and make the world more open and
connected.”—Facebook. Their Values-be bold; focus on impact; move fast; be
open; and build social value
 “To give everyone the power to create and share ideas and information
instantly, without barriers.”—Twitter. Their Values- Grow our business in a
way that makes us proud. Recognize that passion and personality matter.
Communicate fearlessly to build trust. Defend and respect the user's voice.
Reach every person on the planet. Innovate through experimentation. Seek
diverse perspectives. Be rigorous. Get it right.
 “To build the Web’s most convenient, secure, cost-effective payment
solution.”—PayPal. Their values- “collaboration, demonstrating integrity,
trust, respect, empathy, innovation, wellness, and inclusion.
 “To enrich people’s lives with programmes and services that inform, educate
and entertain.”—BBC. Their values-Trust is the foundation of the BBC. We're
independent, impartial and honest. We put audiences at the heart of everything
we do. We respect each other and celebrate our diversity.
 “To organize the world’s information and make it universally accessible and
useful.”—Google. Their values--“Focus on the user and all else will follow,
Fast is better than slow, Democracy on the web works, You can make money
without doing evil, There's always more information out there, and great just
isn't good enough.
 “We will provide branded products and services of superior quality and value
that improve the lives of the world’s consumers.”—P&G. Their values-
Integrity, Leadership, Ownership, Trust and Passion for Winning.
  “To be the most reliable global network for customers and suppliers, that
delivers value through products and services. To be a responsible value creator
for all our stakeholders.”—Tata Sons Vision Statement.. Their values:--
Integrity--We will be fair, honest, transparent and ethical in our conduct;
everything we do must stand the test of public scrutiny. Responsibility--We
will integrate environmental and social principles in our businesses, ensuring
that what comes from the people goes back to the people many times over.
Excellence--We will be passionate about achieving the highest standards of
quality, always promoting meritocracy. Pioneering--We will be bold and agile,
courageously taking on challenges, using deep customer insight to develop
innovative solutions. Unity--We will invest in our people and partners, enable
continuous learning, and build caring and collaborative relationships based on
trust and mutual respect.
 “To build a global enterprise for all our stakeholders, and great future for our
country; to give millions of young Indians the power to shape their destiny;
the means to realize their full potential…” Vision Statement of the Reliance
Group—their values-Customer Value, Ownership Mindset, Respect, Integrity,
One Team, Excellence.

B. Study the Organisational Culture and Climate

 What is the difference between organisational culture and climate and work ethos? Is
there an Ethical Infrastructure?
 Are there Formal\Informal Systems? Enumerate them.
 Is there an agreed-upon set of values?
 Is there a Code of Ethics? If both a Code of Ethics and a Set of Values are missing,
then there cannot be an Ethical Infrastructure. You have to start from scratch then.
And bide your time.
 If there is no formal\informal ethical infrastructure, then your job is to nudge your
seniors in the HR division to push for one, over time and at the right time.
 If there is a weak one ethical infrastructure, then you have to be alert to potential
scams and scandals. If Top management is open to strengthening the practice of ethics
in the org, then introduce the concept of Ethics Audits.

C. What are Ethics Audits?

 Ethical audit determines the internal and external consistency of a company's values
base. ... The results provide important management information, and can (and ideally
should) be used to report on the company's social and ethical performance, either as
part of the annual report or as a supplementary report.
 An ethics audit is a process used to evaluate several dimensions of the ethical conduct
of an organisation. It assesses how well (or poorly) an organisation conforms to
agreed benchmarks of ethical standards. It addresses the ultimate responsibility and
corresponding accountability of the organisation’s leadership to promote and ensure
 that its management at all levels and its staff behave in an ethical way and, by doing
so, refrain from acts of fraud and corruption. It may include assessment of ‘soft’
elements (like tone at the top and tone at the middle) as well as ‘hard’ elements (the
codes and procedures established to stimulate monitor and reinforce ethical conduct
throughout the organisation).
 An audit of ethics does not assess the ethical behaviour of individuals. Neither is it
aimed at detecting or investigating (suspicions of) wrongdoings, such as fraud or
corruption. This is the field of special or forensic audits.
 One of the main challenges the audit of ethics faces is the need of measuring cultural
dimensions and impacts. Auditing ethics and culture struggles with the difficulty of
assessing soft controls and considering subjective information while still needing to
identify observable measures and sufficient evidence. Although perception
information needs to be used, this information can be inaccurate and must be
combined with objective data and criteria to maximise the reliability of assessment
findings. Collecting meaningful information for this purpose will be complex and it
can also be costly.
 EXAMPLES of processes or areas inherently vulnerable to ethical breaches
 -Public procurement
 -Payment of subsidies, grants, benefits and allowances
 -Granting/issuing licenses, permits, passports, identity cards, etc.
 -Regulating and setting standards
 -Inspection/audit
 -Enforcing laws and regulations
 -Sensitive information about security threats, defence, taxes, health care,
 companies, etc.
 -Handling or custody of money
 -Managing valuable goods
 -Buying, selling and managing real estate
 HR professionals play a crucial role in shaping corporate ethical codes, policies and
procedures and then communicating and teaching that information to the workforce.
In many companies, the top HR manager either serves as the de facto chief ethics and
compliance officer or works with the person in that role to manage ethics and
compliance programs. Apart from the chief executive officer, there may be no more
important ethical role model in the organization than an HR manager.
 An ethics audit resembles a financial or operational audit. It involves interviews with
employees and managers, reviews of records and other information, and, sometimes,
observations of processes and practices.
 Does the firm have an agreed upon, jointly formulated Code of Conduct? If not, then
seminars need to be organised, involving as many executive level employees to arrive
at a jointly agreed upon Code of Conduct and Ethical principles in different areas of
operations. Once this code and principles are in place, then one can use this code and
principles as the lodestone to whet the actual practices in the firm. And that becomes
the Ethics Audit.
 "What are you auditing against?" The answer requires a distinction between two
disciplines frequently lumped together in corporate America: ethics and compliance.
Ethics refers to the amorphous area of behavior. Compliance refers to adherence to
legal regulations. A company may be fully compliant yet still engage in unethical
practices. There are many countries around the world that don’t have antitrust laws. A
company could in theory engage in price fixing in those countries. Compliance audits
compare internal behaviors to external regulations. Ethics audits compare internal
behavior to internal guidelines on behavior—guidelines that exist in corporate codes
of conduct and ethics-related policies and procedures. Of course, some compliance
problems may stem from ethical lapses; others may arise from process or operational
bugs. That’s why many business leaders conduct ethical audits in tandem with
financial or operational audits. For example, what does an ethical violation related to
bribery or conflict of interest look like? "Be very descriptive in your policies and
procedures about what these things mean," she recommends. Also, have managers
and employees establish performance goals related to ethics and compliance so
employees can be evaluated against those objectives. The greater specificity in ethics-
related policies and procedures paves the way for ethics-related performance
objectives and metrics. These metrics help enable more-tangible ethics audits. "One of
the most difficult challenges is making this highfalutin-sounding concept of ethics
actually become very granular," she adds.
 (The hotline system is managed by a third-party provider, an arrangement that Woods
says strengthens objectivity and independence. The committee conducts ethics audits
as part of an annual internal audit process. In addition, a divisional controller, an HR
employee and Woods conduct spot ethics audits on the recommendation of the
committee. Whether or not corporate leaders seek outside help on ethics audits
depends on the nature and magnitude of the issues. "If the issue involves something
very important to the company, it helps to get an outside perspective and the impartial
judgment that a third party provides," Crane says. "If the company conducts the audit
internally and outside stakeholders are paying close attention to the issue, it can be
more difficult to say, ‘Yes, we audited our ethics internally and everything is just
fine.’ That may be received as a matter of the fox guarding the henhouse.)
 The most common ethics audits examine conflicts of interest, access to company
information, bidding and award practices, giving and receiving gifts, and employee
discrimination issues.
 The actual audits are time-consuming and based on checklists. They involve a team
that typically consists of an HR professional, an internal auditor, legal managers, and
an ethics and compliance manager. The team visits an area of the organization to
conduct research in response to a specific incident or as part of an ongoing auditing
cycle.
D. How does one conduct an EA?

To start, choose a random sample of employees and/or managers from selected

work sites (about 20 employees at each location). Interview employees without
the presence of their supervisors. Provide a standard questionnaire to each Ethics
Auditor to be used in these interviews to ensure consistency.
Best practice is to communicate to the employee before the interview begins that
they are being questioned to assess how well the company has communicated the
appropriate guidelines. However, they respond, they are not at fault and are not
being judged.
Code of Conduct Audit:
Employee Interview Questions

Self-auditing your ethics program will help to ensure that it is functioning as

intended, and that all business units and staff functions are complying with its
requirements. Interviews with employees and managers can be used to assess
understanding of important areas of an ethics and compliance program. Use the
sample questions below in your interviews for a code of conduct audit, hotline
reporting mechanism audit, or leadership commitment audit.
1. Does the employee understand their role in complying with the standards
established by the code of conduct?

2. Does the employee believe the company is

serious about ethics and compliance? If
not, why not?

3. What does the employee think are the

company’s risks regarding ethics and
compliance?

4. Does the employee know the name and

contact information of their Ethics
Officer/Advisor, or the person they can
contact to report wrongdoing?
The answers to the above questions should be
summarized to form an opinion regarding the
effectiveness of the Code of Conduct training
program.

Hotline Reporting Mechanism Audit:

Employee Interview Questions
1. Does the employee know that there is a
hotline number they can use to report
concerns?
2. Does the employee know where to find
the hotline number?
3. Does the employee know that there will
be no retaliation for reporting a concern
even if it turns out to be unsubstantiated?
If the employee answers that they fear
retaliation, ask why. Is there any evidence
of retaliation?
4. Does the employee know the name and
contact information of their Ethics
Officer/Advisor, or the person they can
contact to report wrongdoing?
The answers to the above questions should
be summarized to form an opinion
regarding the effectiveness of the hotline
reporting mechanism.

Leadership Commitment Audit: Manager Interview Questions

1. What do you think is your role in establishing an ethical culture?

2. What specific things do you do to promote an ethical culture within your

organization?

3. What do you do to ensure that employees know how to voice their concerns
without
fear of retaliation?
Assess the effectiveness of leadership commitment to ethics and compliance
asking the following questions during interviews with managers.
Manager answers should include all or most of the following:
If manager responses do not cover the above, this could indicate the message of
ethical behavior has not flowed from the top leadership down to the supervisors
who directly manage the company’s day-to-day business. Therefore, internal audit
should recommend corrective actions such as additional training, communication,
and coaching.
1. Lead by example
2. Ensure that employees receive a copy of the code of conduct
3. Ensure that employees understand the company’s ethics standards
4. Create a culture that encourages employees to comply with company policies
and voice questions and concerns
5. Respond immediately to concerns that are raised
6. Ensure that employees complete required ethics and compliance training
7. Be cognizant of ethics exposures and take appropriate mitigating actions
8. Reiterate on a regular basis that there will be no retaliation for reporting a
concern

Step 1. Company Values

An organization should have clearly stated values to establish its culture of ethics
and compliance. Values that shape a company’s ethical culture through daily work
practice could include: integrity, respect, diversity, safety, conscientiousness,
creativity, and more. For instance, safety is our company’s number one value — it
might not seem an obvious choice, but our people work in nuclear plants,
manufacturing, and construction worksites that may contain dangerous hazards.
Thus, we’ve made safety a top value that is fundamental to our ethics programs
and prioritized in our peoples’ everyday work practices.
Step 2. Code of Ethics and Code of Conduct
The values chosen in Step 1 should be incorporated into the organization’s code of
ethics — our guidelines about behavior and principles to govern decision-making
— and the code of conduct, which applies the code of ethics to a range of
situations and actions. Both documents should also include high-level guidelines
regarding ethics and compliance risk areas. For the code of conduct to be effective
at guiding everyday work practices, it should give direction to employees on
applying the code of ethics to specific issues that are important to the company.
For example, if an employee is working in a foreign country, the code of conduct
should provide guidance on complying with the Foreign Corrupt Practices Act
rules regarding gifts, gratuities, and entertainment.

Of course, having a formal code of conduct doesn’t guarantee real-world

compliance. A code of conduct audit will assess whether the code of ethics and
code of conduct that exists in paper form is understood and internalized by
employees in their lived experience. Internal audit should:

Ensure the code of conduct is provided to all employees, directors, and agents
Assess what is done to ensure that employees understand the code of conduct and
are familiar with its requirements.
Internal audit should also assess whether the employee code of conduct training is
effective in ensuring employees understand its requirements.

Step 3. Risk Assessment

Once your company has a code of ethics that employees understand and believe
in, the next step is to understand compliance risks as well as risks in the code of
conduct guidelines that you provided. To accomplish this, perform a risk
assessment to ascertain whether your company is focusing on current business
risks as a result of changes in organizations, business practices, and laws and
regulations. When preparing each business unit risk assessment for compliance
with applicable laws and regulations, be sure to include issues that stem from the
code of conduct guidelines such as anti-kickback, anti-bribery, protection of
company assets, or harassment issues.

Step 4. Ethics and Business Conduct Policies

An effective ethics and compliance program should include policies and
procedures addressing the particular risks facing a company. For example, policies
and procedures relevant to international trade should address risks related to
import and export controls, anti-boycott measures, and money laundering, among
others.

An ethics and business conduct policies audit will assess whether employees are
aware of, understand, and are following these policies. Internal audit should
examine the list of policies to see if high risk areas from the risk assessment and
the code of conduct are addressed. For current policies, conduct employee
interviews to assess awareness of relevant policies. Ask employees how well they
understand their responsibilities in connection with ethics and business conduct
policies, naming each policy individually.

If an employee says they are not aware of the company’s guidelines on a listed
policy, refer them to the relevant section of the code of conduct and the applicable
policy.
Identify policies with which the majority of the employees were not familiar so
that additional training can be provided in these areas.
Step 5. Awareness Training Audit
It is not sufficient for a company simply to have policies in place — there must be
a program that trains employees to be aware of relevant ethics and compliance
issues. When developing or evaluating a training program, you will want to
consider:

How is this training delivered to employees? Is it an online program or live

sessions? Is the delivery method adequate to reach all employees who must take
the ethics and compliance courses?
How is one considered to have completed a course? Is there a quiz after a training
course with a minimum score requirement?
If a tracking mechanism is used to see the completion status of required courses,
what percent of the employees have completed their required courses? What
recourse is taken to follow up with employees who have not completed or passed
training?
Step 6. Inquiry and Reporting Mechanisms
It’s important that your ethics and compliance program includes a process for
employees, suppliers, customers and others who do business with your company
to ask questions or report concerns about ethics or violations of laws, regulations,
and company policies. To assess the process for investigating concerns reported
through mechanisms, such as the company hotline, internal audit should consider
the following:

Is there a prioritization of concerns received based on the severity of the issues

raised?
Is there a formal protocol for deciding who investigates what?
Is there a formal protocol to ensure that all investigations are done using certain
guidelines and consistent standards for thoroughness?
Were investigations documented in formal reports?
Were investigations completed in accordance within the established timeline?
Were the investigations thorough enough to reach a conclusion regarding the
validity of the concerns?
Was there any explanation for actions taken, or not taken, as a result of the
concerns received and investigations done?
Was ensuing actions taken with appropriate management approvals and
consultation with functional experts (e.g. Law, HR)?
Were the callers made aware of the results of the investigations?
Step 7. Communication Program
Develop a communication plan to increase ethics awareness and remind
employees that ethics and compliance are important to the company. The most
effective communication programs should engage all audiences with specific
messages about ethics using a variety of media. Effective communication
program components include:

Separate pages on ethics and compliance in the company’s internal and external
websites.
Internal ethics blogs from senior executives to help set the tone from the top.
Incorporate a variety of messages, short videos, and Q&A about ethics issues in
the company’s newsletter.
Ethics posters with the toll-free hotline number and ethics officer contact
information should be displayed prominently at locations where employees gather
frequently. Posters should clearly state that concerns can be reported
anonymously, and that there will be no retaliation for reporting a concern even if
it turns out to be unsubstantiated.
Ensure that the code of ethics, code of conduct, and ethics messages are
distributed in all native languages of employees.
A strong communication program will keep ethics and compliance top of mind for
all employees!

Step 8. Ethics and Compliance Program Assessment and Evaluation

At all points in the process of implementing an ethics and compliance culture, it is
important to maintain continuous program evaluation. There should be regular
internal and external audits of your ethics program, and an assessment of how
often internal controls are tested. Conduct employee surveys and focus groups to
assess employee impressions of the ethics and compliance culture. A constant
vigilance and program evaluation is necessary to maintain a strong culture of
ethics.

Step 9. Leadership Commitment

To achieve and maintain an ethical company culture, there must be strong
commitment from the top to create the perception that ethics and compliance is
important to the company. Leadership commitment may be the final step in this
list, but it is fundamental throughout the previous eight steps that management
take responsibility for demonstrating through their actions the importance of
ethics and compliance. There are many ways that organizational structure and
activities can demonstrate leadership commitment:

Have the CEO make a statement to formalize your company’s commitment to the
highest ethical conduct in all aspects of your business.
The leader of the Ethics organization can report directly to the Board of Directors
or Chief Executive Officer.
An Ethics and Compliance Committee with a senior executive as Committee
Chairman can provide leadership and oversight to the ethics program and review
the status of ethics program-related activities. The committee itself might consist
of senior leaders from Legal, Human Resources, Internal Audit, Operations,
Communications, Security, IT and other departments.
A culture of ethics and compliance starts at the top, but most employees at a
company will never meet the CEO — for them, ethical culture is what they see up
front every day. The message of ethical behavior should flow from the top
leadership down to the lower-level supervisors who directly manage the
company’s business on a day-to-day basis, and from them to all employees.

To be effective, ethics can’t just be a program administered by the Ethics and

Compliance function — an ethical culture must be a process and a responsibility
shared by all employees. Developing a strong culture of ethics that employees
believe in will help to ensure that internal controls are not being circumvented due
to lax ethical standards on the ground. Following these nine steps will help enable
internal audit to implement, audit, and monitor an ethical culture where the
organization’s values are embodied in its people’s everyday work practices.

Rate the following using a through e, where:

a = Does not describe at all
b = Does not describe well
c = Describes somewhat
d = Describes well
e = Describes exactly
1. ______ Managers in my company often engage in behaviors that I consider
unethical.
2. ______ In order to succeed in my company, it is often necessary to compromise
one’s ethics.
3. ______ Top management in my company has let it be known in no uncertain
terms that unethical behaviors will
not be tolerated.
4. ______ If a manager in my company is discovered to have engaged in unethical
behavior that results primarily in
personal gain (rather than corporate gain), he or she will be promptly
reprimanded.
5. ______ If a manager in my company is discovered to have engaged in unethical
behavior that results primarily in
corporate gain (rather than personal gain), he or she will be promptly
reprimanded.
SCORING—POINTS PER ITEM
Item 1 + Item 2 + Item 3 + Item 4 + Item 5 = Total/5 = CEV
a=5 a=5 a=1 a=1 a=1
b=4 b=4 b=2 b=2 b=2
c=3 c=3 c=3 c=3 c=3
d=2 d=2 d=4 d=4 d=4
e=1 e=1 e=5 e=5 e=5
Add the scores from all items and divide by 5 to get your CEV score.
 E. Corporate Governance
CG is all about safeguarding the interests of all the stakeholders, both internal and external of
the company. This responsibility lies with the Board of Governors and they will be held
legally liable if this function is not being followed. So who constitutes the Board and how can
you stipulate an ideal mix of talent in the Board and stipulating their rights and duties become
very important to ensure good corporate governance. In addition, they also need to ensure the
long-term growth of the company and to give back to the society from which they have
earned their profits. Therefore, the relevance of CSR.
And if there are any obvious and visible weaknesses in this area, the company can be in
danger of indulging in unethical practices. Hence the relevance of CG for ethics.
So running a kingdom justly and wisely was already thought of by Kautilya\Chanakya
centuries ago in India in the form of the Arthshastra Treatise. This treatise also included tips
on geopolitics. In the Corporate world, this treatise was formulated as CG.
Fairness, transparency, accountability and legal compliance are the four fundamental tenets
of CG. The Principles of CG are:
1. Growth of shareholder wealth—The BP disaster story’’loss of wealth of $100 billion
for the shareholders\ Moratorium on all drilling in the Gulf of Mexico—so loss for BP\Exxon
and others\ bad for the tourism industry in the Gulf\ for the real estate industry\ fishing
industry. The cause of the disaster—to save1 $ 4m a day, by cutting down on safety standard,
they end of losing 100 b dollars of shareholder value. Short term shareholder value thinking
is the cause.
2. Full Disclosure of actions
3. Best mmgt practices---Shareholders vs Stakeholders
4. Compliance
5. Following Ethical standards.
• SEBI had constituted a Committee on Corporate Governance under the Chairmanship
of Shri Kumar Mangalam Birla, Member, SEBI Board to promote and raise the standard of
Corporate Governance in respect of listed companies. The SEBI Board in its meeting held on
January 25, 2000 considered the recommendation of the Committee and decided to make the
amendments to the listing agreement in pursuance of the decision of the Board, it is advised
that a new clause, namely clause 49, be incorporate in the listing agreement as under :
• Clause 49: Corporate Governance
• I. Board of Directors
The company agrees that the board of directors of the company shall have an optimum
combination of executive and non-executive directors with not less than fifty percent of the
board of directors comprising of non-executive directors. The number of independent
directors would depend whether the Chairman is executive or non-executive. In case of a
non-executive chairman, at least one-third of board should comprise of independent directors
and in case of an executive chairman, at least half of board should comprise of independent
directors.
• II Audit Committee.
• The company agrees that a qualified and independent audit committee shall be set up
and that :
• The audit committee shall have minimum three members, all being non-executive
directors, with the majority of them being independent, and with at least one director having
financial and accounting knowledge;
• The chairman of the committee shall be an independent director;
• The chairman shall be present at Annual General Meeting to answer shareholder
queries;
• The audit committee should invite such of the executives, as it considers appropriate
(and particularly the head of the finance function) to be present at the meetings of the
committee, but on occasions it may also meet without the presence of any executives of the
company. The finance director, head of internal audit and when required, a representative of
the external auditor shall be present as invitees for the meetings of the audit committee;
• The Company Secretary shall act as the secretary to the committee.
• The audit committee shall meet at least thrice a year. One meeting shall be held before
finalisation of annual accounts and one every six months. The quorum shall be either two
members or one third of the members of the audit committee, whichever is higher and
minimum of two independent directors.
• The audit committee shall have powers which should include the following:
• to investigate any activity within its terms of reference.
• to seek information from any employee.
• to obtain outside legal or other professional advice.
• to secure attendance of outsiders with relevant expertise, if it considers necessary.
• The company agrees that the role of the audit committee shall include the following.
• Oversight of the company’s financial reporting process and the disclosure of its
financial information to ensure that the financial statement is correct, sufficient and credible.
• Recommending the appointment and removal of external auditor, fixation of audit fee
and also approval for payment for any other services.
• Reviewing with management the annual financial statements before submission to the
board, focusing primarily on;
The Penn Central Transportation Company was created in 1968 via a merger between the
Pennsylvania and New York Central railroads. The Pennsylvania Railroad dated back to
1846, and the New York Central railroad dated back to 1853.

The year prior to the massive merger, both companies were profitable, but Penn Central
immediately ran into problems. The first year following the merger, the combined company
generated a net loss of $2.8 million. The following year, losses ballooned to $83 million. By
1970, net losses had growth to $325.8 million.
When the U.S. government refused to guarantee $200 million in emergency loans, Penn
Central was forced to declare bankruptcy in June of 1970. At the time, Penn Central was the
sixth largest corporation in the U.S., and its bankruptcy was the largest in American history.
Penn Central’s infamous failure remained the largest U.S. bankruptcy for more than 30 years
until Enron eclipsed it in 2001.
• SEC Speech post-Enron Goldschmid

Before I tell you where I think we are heading, let me spend some time on what went wrong
during the 1990s and early 2000s. Put bluntly, at least in my view, we witnessed systemic
failure. The checks and balances that we thought would be provided by independent
directors, independent auditors, securities analysts, investment bankers, and — even before
this audience I must add — lawyers, too often failed. The regulatory checks represented by
the SEC and federal and state legal constraints also proved inadequate, in meaningful part, I
think, because of scarce resources and overly protective case law and legislation.

Arthur Levitt, SEC Chairman in 1998-The centerpiece of his speech was the importance of
corporate governance, and particularly, corporate audit committees. What do you get from an
active audit committee? Some who champion the idea of an active audit committee say it will
stop venal, hard-core fraud. That I do not consider realistic. An active audit committee will
not, when acting alone, be able to catch thieves in most circumstances. Even the most active
and effective auditors will have some trouble when hard-core fraud is involved. There are
techniques being developed today to try to reach hard-core misconduct, including forensic
auditing and other techniques. But when no red flags are flying, even when an audit
committee acts reasonably, it will be difficult to spot fraud that is concealed and hard-core.
The dangers of hard-core fraud, in short, will only be somewhat deterred or mitigated by an
active audit committee.
(The reasons for the failure of Penn Central and the origin of Corporate Governance laws: It
appears, however, based on the information in this and other sections that the Penn Central
board failed in its obligations. In particular, it failed to see to the integrity of management and
it failed to see to the compliance by management with the laws governing the company,
including the provisions of the Federal securities laws.
The failure of the Penn Central board to effectively monitor management arose from several
circumstances. One circumstance was the change in the complexity of corporate matters as a
result of the merger and the diversification efforts. The directors of the Pennsylvania Railroad
in particular had served on a company with a long and conservative financial and operating
history. The railroad performed basic functions in a largely unchanging way.
In such a situation, a board seat was more a matter of business honor than an active business
responsibility. On the New York Central, generally a more dynamic railroad, the majority of
directors were overshadowed by the active ownership interest of Robert Young and Allen and
Fred Kirby and the active management of Alfred Perlman. Under these conditions, the boards
tended to miss the management and financial complexity of the proposed merger. Even after
the merger, the directors only slowly awakened to what was happening.
Another circumstance limiting the effectiveness of the board was the limited amount of
information it sought or received. In the merged company, directors were furnished only with
(1) a voluminous docket of routine capital expenditure authorizations for numerous
individual transactions, (2) a treasurer's report giving the current cash balances, and (3) a
sheet listing revenues and expenses for the railroad for the period between the board
meetings.The directors had no cash or income forecasts or budgets; they had no guidelines to
measure performance; they had no capital budgets; they had no information describing the
earnings or cash performance of the subsidiaries. For all this vital information, they were
forced to rely on oral presentations by management.
The board meetings were largely formal affairs which were not conducive to discussion or
interrogation of management. Some of the directors had little opportunity to consult with
other directors outside of the environment of the board meetings.
In extreme cases, directors were isolated from the company or other directors. Otto Frenzel,
located in Indianapolis, spoke with other directors only at board meetings, which, as
indicated, allowed only limited communication. Seymour Knox, who was in Latin America
and in North Carolina much of the time from September 1969 to May 1970, attended only
one board meeting during this extremely critical period.
The board failed in two principal ways. It failed to establish procedures, including a flow of
adequate financial information, to permit the board to understand what was happening and to
enable it to exercise some control over the conduct of the senior officers. Secondly, the board
failed to respond to specific warnings about the true condition of the company and about the
questionable conduct of the most important officers. As a result, the investors were deprived
of adequate and accurate information about the condition of the company.)

If you think about Enron and WorldCom and others, at least generically, what went wrong?
Start with independent directors. "Yet too often, . . . boards were disinterested and
disengaged. . . . They are dominated by associates and friends of senior management. . . .
Many outside directors have lacked expertise in the relevant industry, and in accounting and
financial reporting issues. Thus, boards were too rarely equipped to uncover and derail the
determined efforts of management to cook the company's books.
Turning to accountants and auditors, during the 1980s and 1990s, increasingly complex
businesses turned more and more often to their auditors for help with non-audit services, such
as asset valuations, merger advice, and computer system design and implementation. But
when an accounting firm provides both audit and extensive consulting services to an audit
client, the auditor's independence may well suffer, particularly when the consulting services
are significantly more lucrative and more voluminous than the audit services. An auditor who
wants to retain an audit client's non-audit business may be less likely to question
management, and that is a serious problem. Recent data reported to the SEC indicate that, on
average, non-audit fees of large public accounting firms comprise 73 percent of total fees; in
other words, $2.69 in non-audit fees for every dollar of audit fees.
Furthermore, the scandals in the 1990s and early 2000s occurred against a backdrop of
diminished exposure to liability under both state and federal laws. In 1994 the Supreme
Court, as Jill indicated, eliminated aiding and abetting liability. Even before that, the
Supreme Court had shortened the statute of limitations for securities fraud. And state
legislatures enacted so-called shield statutes to limit or eliminate director monetary liability
for failures of duties of care.
Corporate directors and other gatekeepers act properly for many reasons: pride,
professionalism, reputation, et cetera. But the cumulative effect of these regulatory, case law,
and legislative developments "made the legal risks" — and here I am quoting from Steve
Cutler again — "associated with abdicating their gatekeeping role appear tolerable." Now, let
me underscore those words: ". . . made the legal risks associated with abdicating their
gatekeeping role appear tolerable.”

SEBI and CG: A concern that many markets around the world share in relation to poor
corporate governance is the abuse of related party transactions (RPTs). This
is particularly true in markets where controlling ownership is predominant.
Judging by the frequent reporting of RPTs, this calls for the relevant
authorities and companies to be vigilant and have in place an effective
oversight framework through which abusive RPTs can be identified,
prevented or stopped. As many high profile cases have shown, abusive
RPTs damage shareholders value, tarnish the company’s reputation with
investors, both domestic and foreign, and undermine investor confidence in
the integrity of the financial market as a whole.
Concentrated ownership and widespread use of company groups is a
common feature of listed companies in India; most companies are closely
held by families or the state. This provides more scope for RPTs involving
controlling shareholders, and increases the probability of abuse if not
conducted at arms-length. Hence, there is a need to determine and assess
the effectiveness of minority shareholder protection and the monitoring and
prevention of abusive RPTs.
The International Accounting Standards Board (IASB) defines related
party transactions as a transfer of resources, services, or obligations between
related parties regardless for which a price is charged. The Financial
Accounting Standards Board (FASB) in the United States defines them as a
transaction between related parties even though it might not be given
accounting recognition; for example, one entity may receive services from a
second, related entity without charge and without recording a receipt of
services.
Not all RPTs are detrimental to the interest of the company or its
shareholders. Some transactions can be legitimate and serve practical,
commercial purposes. If companies are prohibited from entering into such
transactions, their ability to maximise shareholder value can suffer.
The various types of RPTs that are commonly observed are:
• Financial assistance through provisions of loans, guarantees and
collateral
• Asset sales and purchases between related parties
• The sale, purchase or supply of any goods, materials or services in
the ordinary course of business
• Bailouts
Some products or services do not have comparable benchmarks in the
marketplace, however, as they are available only within a closed group. For
example, a pharmaceutical conglomerate holds all of its patents with one
company. If other companies have to manufacture those products, they
might have no choice but to transact with the related party for using such
rights. In that case, there might not be any transaction available in the
marketplace that can serve as a useful benchmark to assess whether the
transactions was conducted at arm’s length.
In India, most companies are family-owned and/or closely held (OECD
2012). Hence, the corporate governance framework in India should
emphasise monitoring/regulating connected transactions involving
controlling shareholders (so called “promoters”) and related entities.
Several factors are relevant to any discussion of related party
transactions in India and underpin the reason for a large number of such
transactions. Given that the number of family-owned businesses is very
high, it follows that they will have closer ties with other businesses owned
by the same family or its relatives. The desire and opportunity to deal with a
known party will be greater.
Also, a large number of listed companies in India are subsidiaries of
multinational corporations. Owing to regulations (such as Foreign Exchange
Management Act and Regulations) that regulate the flow of capital between
the overseas parent and an Indian subsidiary, the companies may engage in
certain RPTs to facilitate transfers between the parent company and the
subsidiary, without compromising statutory requirements.
In its commitment to converge Indian
Generally Accepted Accounting Principles (GAAP) with International
Financial Reporting Standards (IFRS), ICAI has published Indian
Accounting Standards 24 on Related Party Disclosures, which substantially
reflects the standards set forth in International Accounting Standard
(IAS) 24.
Currently, the appointment and removal of independent directors is done
through election by a majority. Thus, independent directors occupy their
position at the request of the controlling shareholders and therefore must act
in accordance with the will of the majority. This, in effect, hinders these
directors from expressing their opinions independently and honestly and
thereby limits their efficacy and defeats the purpose of appointing
independent directors.
A lack of specialized courts to try commercial cases is a major obstacle
to effective enforcement. The Companies Act 2013 provides for the
establishment of Special Courts for the speedy trial of offences under the
Companies Act. Section 436 provides that all offences under the Companies
Act shall be subject to trial only by the Special Court established for the area
where the offence is committed. The Act also empowers the Special Courts
to try “in fast track” any offence under the Companies Act that is punishable
with imprisonment for a term not exceeding three years. The India-OECD
Policy Dialogue also highlighted the need for these courts to try corporate
offences and noted that the provisions in the Companies Act 2013 are
expected to speed up the enforcement machinery dealing with abusive
RPTs.
• Sarbannes-Oxley Act
The Sarbanes-Oxley Act of 2002 is a law the U.S. Congress passed on July 30 of that year to
help protect investors from fraudulent financial reporting by corporations. Also known as the
SOX Act of 2002 and the Corporate Responsibility Act of 2002, it mandated strict reforms to
existing securities regulations and imposed tough new penalties on lawbreakers. The act took
its name from its two sponsors—Sen. Paul S. Sarbanes (D-Md.) and Rep. Michael G. Oxley
(R-Ohio).
The new law set out reforms and additions in four principal areas:
Corporate responsibility
Increased criminal punishment
Accounting regulation
New protections
Three of its key provisions are commonly referred to by their section numbers: Section 302,
Section 404, and Section 802. Section 302 of the SOX Act of 2002 mandates that senior
corporate officers personally certify in writing that the company's financial statements
"comply with SEC disclosure requirements and fairly present in all material aspects the
operations and financial condition of the issuer." Officers who sign off on financial
statements that they know to be inaccurate are subject to criminal penalties, including prison
terms.

Section 404 of the SOX Act of 2002 requires that management and auditors establish internal
controls and reporting methods to ensure the adequacy of those controls. Some critics of the
law have complained that the requirements in Section 404 can have a negative impact on
publicly traded companies because it's often expensive to establish and maintain the
necessary internal controls.
Section 802 of the SOX Act of 2002 contains the three rules that affect recordkeeping. The
first deals with destruction and falsification of records. The second strictly defines the
retention period for storing records. The third rule outlines the specific business records that
companies need to store, which includes electronic communications.
Sarbanes–Oxley or SOX, is a United States federal law that set new or expanded
requirements for all U.S. public company boards, management and public accounting firms.
A number of provisions of the Act also apply to privately held companies, such as the willful
destruction of evidence to impede a federal investigation.

The bill, which contains eleven sections, was enacted as a reaction to a number of major
corporate and accounting scandals, including Enron and WorldCom. The sections of the bill
cover responsibilities of a public corporation's board of directors, add criminal penalties for
certain misconduct, and require the Securities and Exchange Commission to create
regulations to define how public corporations are to comply with the law.

The Sarbanes-Oxley Act of 2002 came in response to financial scandals in the early 2000s
involving publicly traded companies such as Enron Corporation, Tyco International plc, and
WorldCom. The high-profile frauds shook investor confidence in the trustworthiness of
corporate financial statements and led many to demand an overhaul of decades-old regulatory
standards.

Sarbanes-Oxley now requires that the audit committee take "direct responsibility" for
appointing, evaluating, and firing, if necessary, the outside auditor. This establishes a
relationship that ought to encourage more candid communications by auditors and much
more effective oversight by the independent directors.

Identity Theft: *Someone steals your personal financial information, such as credit card
number or bank account number, to make fraudulent withdrawals from your account.
Sometimes people will use the information to open credit or bank accounts and leave the
victim liable for all the charges. Identity theft may lead to damaged credit rating, bounced
checks/denied payments, and being pursued by collection agencies.
Investment Fraud: This type includes selling investments or securities with false, misleading
information. It could be false promises, hiding facts, and insider trading tips.
Securities Fraud: Securities fraud is illegal or unethical activity carried out involving
securities or asset markets in order to profit at the expense of others. ... Securities fraud can
also include false information, pump-and-dump schemes, or trading on insider information. It
is a felony that can attract prison sentences and fines.
Mortgage and Lending Fraud: *A third-party may open a mortgage or loan using your
information or using false information. In another case, lenders may sell mortgage or loans
with inaccurate information, deceptive practices, and other high pressure sales tactics. 4.
Mass Marketing Fraud:* The fraud is committed through mass mailings, telephone calls, or
spam emails. It also includes fake checks, charities, lotteries, honor society invitations, and
more. These modes are used to steal personal financial information or to raise contributions
to fraudulent organisations.
Chicanery: The definition of chicanery is using trickery or dishonest means to deceive or
achieve some purpose.
Larceny: Felonious stealing using tricks, chicanery, fraud etc
Misdemeanour: A minor wrongdoing, attracting less than Ione year in prison and a fine.
Felony: A crime regarded in the US and many other judicial systems as more serious than a
misdemeanour and that can involve more than one year in prison, like murder, rape, serious
assault that causes serious bodily harm, promoting prostitution, kidnapping, theft arson drug
crimes.
Securities Fraud: the illegal activity of providing false information to someone so that they
will invest in something, it includes insider trading.
Investment Scam: Ponzi schemes, Time-sharing schemes
Insider Trading: the illegal buying and selling of company shares by people who have special
information because they are involved with the company. Insider trading is a white-collar
crime that is often prosecuted as a felony and often includes jail time and steep fines.

F. Corporate Social Responsibility and Stakeholder Theory

Proper distribution of the Wealth—Milton Friedman and the concept of

maximising shareholder value will ensure proper distribution of wealth. False, if
this maximising is done by unethical processes. Shareholders do not own
corporations, they own shares, legally speaking. The idea of Friedman was that as
long as you maximise the shareholder’s wealth, we maximise the return to society,
because the shareholders are residual beneficiaries of dividends. This thinking is
flawed according to corporate lawyers. Because this concept does not describe the
reality in the corporate world. In dead firms or firms that are being liquidated,
shareholders get the residual wealth, but in live firms, shareholders do not get a
penny, unless the firms declare a dividend. But one might argue, that they get
more thru capital appreciation than dividends—but other stakeholders, like the
employees, the directors and creditors get increased benefits much before the
shareholders do. And the Board of Directors is nominated by themselves and not
by the shareholders, when the cooperation is incorporated. So in reality,
shareholders have very little real power. It’s the Board that has all the power!
Fishing with dynamite will get you more fish in the short term than fishing with
worms, but in the long term, there won’t be any fish! This is what is happening in
the corporate world, where everybody is focussing on short-term shareholder
value, by all kinds of unethical creative accounting practices—the last decade in
the US is called the Lost Decade because the shareholders got nothing, in fact,
they lost money!! That is why CG has taken on a very important position in
corporate affairs.
The triple bottom line (TBL) is a framework or theory that recommends that
companies commit to focus on social and environmental concerns just as they do
on profits. The TBL posits that instead of one bottom line, there should be three:
profit, people, and the planet. A TBL seeks to gauge a corporation's level of
commitment to corporate social responsibility and its impact on the environment
over time. The idea was that a company can be managed in a way that not only
earns financial profits but which also improves people's lives and the planet. TBL
theory holds that if a firm looks at profits only, ignoring people and the planet, it
cannot account for the full cost of doing business. By focusing on these three
interrelated elements, triple-bottom-line reporting can be an important tool to
support a firm's sustainability goals.
Measuring the TBL: A key challenge of the TBL, according to Elkington, is the
difficulty of measuring the social and environmental bottom lines. Profitability is
inherently quantitative, so it is easy to measure. What constitutes social and
environmental responsibility, however, is somewhat subjective. How do you put a
dollar value on an oil spill—or on preventing one, for example? There can be dire
repercussions of ignoring the TBL in the name of profits; three well-known cases
are the destruction of the rainforest, exploitation of labor, and damage to the
ozone layer.
The Social bottom line measures your business’ profits in human capital,
including your position within your local society. Your social bottom line is
increased by having fair and beneficial labour practices and through corporate
community involvement, and can also be measured in the impact of your business
activities on the local economy. After all, if your business is not nurturing positive
relationships with your community, your client base and employee pool shrinks
accordingly. The social bottom line questions the belief that the less a business
pays its work force the longer it can afford to operate. Instead, the social bottom
line measures the long-term sustainability of business human capital, with the
understanding that a business that is also a desirable workplace will always be
able to operate into the future, since there will be a work force striving to be part
of the business. Essentially, corporate interests and labour interests are seen as
interdependent.
The Triple Bottom Line approach to sustainability takes the view that the smaller
impact your business has on the environment and the fewer natural resources you
consume, the longer and more successful your business will be.
Controlling your Environmental bottom line means managing, monitoring, and
reporting your consumption and waste and emissions. This is typically the work of
your EHS department, though most sustainable business models also make waste
reduction and green policies corporate-wide values across all levels of
management. A sustainability committee is often required to communicate your
sustainability solution and sustainability goals across all departments.
Measuring and reporting your environmental bottom line is certainly possible,
though depending on the size of your business, it can be a time-consuming and
difficult process. However, EHS or corporate sustainability software can make the
process much quicker and cost effective. Your business needs a healthy workforce
with diverse skills, different perspectives, and the workforce must be content
enough to deliver growth.
Your business can only operate in an economic situation that sees your supply
chain and local businesses thrive. If your city or region becomes a dead zone
economically, your own business won't have access to people or resources in the
long term.
Your business needs good stewardship of natural resources to ensure they are
available 5 - 10 years down the road and beyond.
Unlike the traditional method, the Triple Bottom Line allows you to see your
business as a social and environmental entity and measure it along these
parameters.Over the last 50 years, environmentalists and social justice advocates
have struggled to bring a broader definition of bottom line into public
consciousness by introducing full cost accounting. For example, if a corporation
shows a monetary profit, but their asbestos mine causes thousands of deaths from
asbestosis, and their copper mine pollutes a river, and the government ends up
spending taxpayer money on health care and river clean-up, how do we perform a
full societal cost benefit analysis?
An example of an organization seeking a triple bottom line would be a social
enterprise run as a non-profit, but earning income by offering opportunities for
handicapped people who have been labelled "unemployable", to earn a living by
recycling. The organization earns a profit, which is ploughed back into the
community. The social benefit is the meaningful employment of disadvantaged
citizens, and the reduction in the society's welfare or disability costs. The
environmental benefit comes from the recycling accomplished.
In 1981, Freer Spreckley first articulated the triple bottom line in a publication
called 'Social Audit - A Management Tool for Co-operative Working'. In this
work, he argued that enterprises should measure and report on financial
performance, social wealth creation, and environmental responsibility. The phrase
"triple bottom line" was articulated more fully by John Elkington in his 1997 book
Cannibals with Forks: the Triple Bottom Line of 21st Century Business'.
The concept of TBL demands that a company's responsibility lies with
stakeholders rather than shareholders. In this case, "stakeholders" refers to anyone
who is influenced, either directly or indirectly, by the actions of the firm.
Examples of stakeholders include employees, customers, suppliers, local
residents, government agencies, and creditors. According to the stakeholder
theory, the business entity should be used as a vehicle for coordinating
stakeholder interests, instead of maximizing shareholder (owner) profit.

An enterprise dedicated to the triple bottom line seeks to provide benefit to many
constituencies and not to exploit or endanger any group of them. The "up
streaming" of a portion of profit from the marketing of finished goods back to the
original producer of raw materials, for example, a farmer in fair trade agricultural
practice, is a common feature. In concrete terms, a TBL business would not use
child labour and monitor all contracted companies for child labour exploitation,
would pay fair salaries to its workers, would maintain a safe work environment
and tolerable working hours, and would not otherwise exploit a community or its
labour force. A TBL business also typically seeks to "give back" by contributing
to the strength and growth of its community with such things as health care and
education. Quantifying this bottom line is relatively new, problematic and often
subjective. The Global Reporting Initiative (GRI) has developed guidelines to
enable corporations and NGOs alike to comparably report on the social impact of
a business.
The planet, environmental bottom line, or natural capital bottom line refers to
sustainable environmental practices. A TBL company endeavors to benefit the
natural order as much as possible or at the least do no harm and minimize
environmental impact. A TBL endeavour reduces its ecological footprint by,
among other things, carefully managing its consumption of energy and non-
renewables and reducing manufacturing waste as well as rendering waste less
toxic before disposing of it in a safe and legal manner. "Cradle to grave" is
uppermost in the thoughts of TBL manufacturing businesses, which typically
conduct a life cycle assessment of products to determine what the true
environmental cost is from the growth and harvesting of raw materials to
manufacture to distribution to eventual disposal by the end user.
Currently, the cost of disposing of non-degradable or toxic products is born
financially by governments and environmentally by the residents near the disposal
site and elsewhere. In TBL thinking, an enterprise which produces and markets a
product which will create a waste problem should not be given a free ride by
society. It would be more equitable for the business which manufactures and sells
a problematic product to bear part of the cost of its ultimate disposal.
Ecologically destructive practices, such as overfishing or other endangering
depletions of resources are avoided by TBL companies. Often environmental
sustainability is the more profitable course for a business in the long run.
Arguments that it costs more to be environmentally sound are often specious when
the course of the business is analyzed over a period of time. Generally,
sustainability reporting metrics are better quantified and standardized for
environmental issues than for social ones. A number of respected reporting
institutes and registries exist including the Global Reporting Initiative, CERES,
Institute 4 Sustainability and others.
The stakeholder theory is a theory of organizational management and business
ethics that accounts for multiple constituencies impacted by business entities like
employees, suppliers, local communities, creditors, and others. It addresses morals
and values in managing an organization, such as those related to corporate social
responsibility, market economy, and social contract theory. In the traditional view
of a company, the shareholder view, only the owners or shareholders of the
company are important, and the company has a binding fiduciary duty to put their
needs first, to increase value for them. Stakeholder theory instead argues that there
are other parties involved, including employees, customers, suppliers, financiers,
communities, governmental bodies, political groups, trade associations, and trade
unions. Numerous articles and books written on stakeholder theory generally
credit Edward Freeman as the "father of stakeholder theory.
=Stakeholder theory drives more than profits and productivity. There are ethical
benefits of practicing it as well. Companies find that the mental health of the
workforce is greatly improved as their job satisfaction increases. It also will
elevate the status of the company’s social-economic status in the local community.
When one company practices stakeholder theory, it creates healthy competition
among other companies, where all can thrive and help benefit their stakeholders.
Edward Freeman’s stakeholder theory holds that a company’s stakeholders
include just about anyone affected by the company and its workings. That view is
in opposition to the long-held shareholder theory proposed by economist Milton
Friedman that in capitalism, the only stakeholders a company should care about
are its shareholders - and thus, its bottom line. Friedman’s view is that companies
are compelled to make a profit, to satisfy their shareholders, and to continue
positive growth.
By contrast, Dr. Freeman suggests that a company’s stakeholders are "those
groups without whose support the organization would cease to exist." These
groups would include customers, employees, suppliers, political action groups,
environmental groups, local communities, the media, financial institutions,
governmental groups, and more. This view paints the corporate environment as an
ecosystem of related groups, all of whom need to be considered and satisfied to
keep the company healthy and successful in the longterm.
Dr. Freeman’s books describe how a healthy company never loses sight of
everyone involved in its success. Stakeholder theory says that if it treats its
employees badly, a company will eventually fail. If it forces its projects on
communities to detrimental effects, the same would likely happen. “A company
can’t ignore any of its stakeholders and truly succeed,” Dr. Freeman said in an
interview. “There might be short-term profits, but as stakeholders become
dissatisfied, and feel let down, the company cannot survive.”
Prof Craig McDonald: “In other words, corporate responsibility and business
ethics don’t need their own special focus inside the company, as long as the
company practices true stakeholder theory for all its stakeholders, from suppliers
and employees to factory workers and environmentalists. Of course, it doesn't
always work out this way, maybe because we don't know what our real values are
until we are in a position that tests them, or maybe… things went pear-shaped,
despite our good will…The bottom line is, figure out what your values are, what
your context is, what the consequences of your actions will be. Then decide what
to do in a knowledgeable and responsible manner.”
The dominant view of the modern corporation in management literature is that the
exclusive obligation of the corporation is to maximize shareholder return,
constrained only by an obligation to obey the law and (on Friedman’s
interpretation) respect conventional morality. Support for this view comes from
agency theory, firm-as-contract theory, neo-classical economic theory and so on.
And although it has been variously criticized in the literature as myopic (Blair,
1998, 47), and descriptively inaccurate and unacceptable (Donaldson and Preston,
1998, 191), it remains, as Freeman points out (1998, 125), a view that scholars
and managers alike “continue to hold sacred”. Whether the focus is practical or
theoretical, the effect of this dominant view is to set managers within a tightly
constrained moral environment quite unlike that of any of the other environments
in which moral agents are likely to find themselves. And this, of course, is the
source of the perplexity for business ethics. Seen from a moral perspective, the
dominant view is seriously truncated. Not only does it place severe limits on the
obligations of managers to people directly affected by their actions, it constrains
any attempt to propose that managers and the companies they manage should be
concerned on ethical (as opposed to instrumental or strategic) grounds for the
wider social, environmental and economic impacts of their activities and the
general conditions of the societies in which they conduct business. That is to say,
the answers the dominant view implies for our two questions seem seriously
flawed.
Applied to the activities of investor owned corporations, this principle requires
that managers acknowledge that all corporate stakeholders have equal moral status
and acknowledge that status in all their activities.
Unfortunately, it is simply not the case that ethical treatment of even primary
stakeholders is required to ensure their continued participation of primary
stakeholders. Just as gauging the reasons of management for acting as they do is
not relevant, so too, gauging the reasons of primary stakeholders for cooperating
or continuing to participate in a wealth generating relationship with a corporation
is not relevant on this view. What counts is what can be measured, namely,
performance. The difficulty is that long term primary stakeholder participation can
be and has been achieved in a variety of ways, many of them unethical. These
include deception (health implications of working with asbestos for which the
Thetford mines in Quebec, Canada is an illustration, or marketing strategies in the
tobacco industry), coercion (for example, labour conditions under military
dictatorships as is currently reported to be the case in Burma and the Sudan), brute
necessity in the face of severe deprivation (for example people working under
appalling labour conditions in factories in underdeveloped countries and South
Africa under apartheid), and so on. Indeed corporate history is filled with
examples of companies that have been successful by conventional marketing and
financial standards both by and while cutting sharp ethical corners.
Indeed unethical behaviour traditionally has centred in many cases in ensuring
that stakeholders, who, under ethical management systems, would be primary
stakeholders, do not become primary stakeholders; that is to say, do not acquire
the leverage that would give them the power to disrupt or block a corporation
from achieving its objectives. All of this is to say nothing of what Clarkson
describes as secondary stakeholders. Here examples of unarguably unethical
treatment by successful corporations of their stakeholders are legion. Clarkson’s
comments in this regard are again ironically revealing. Secondary stakeholders
are those affected by or capable of affecting corporation corporate activity.
However, they are not essential for a corporation’s survival even though they may
on occasion be able to cause significant damage (1998, 260). What success will
require is that these stakeholders be managed effectively if they must be managed
at all. What counts, remember, is performance. Stakeholders who are marginal,
politically, economically or socially speaking, can safely ignored, on this
interpretation of stakeholder theory. This is likely to be particularly true of
involuntary stakeholders, whose participation is not by choice. Here it may be
possible and indeed historically has been possible to off-load or externalize costs
without serious risk to the corporation involved or to impose terms that are
anything but fair.The point here is not that those advocating the business case
would condone unethical behaviour where success either called for or tolerated it.
Rather, while the business case for business ethics offers pragmatic reasons for
ethical treatment of stakeholders, it opens the door to pragmatic arguments for
ignoring them as well. And even where it is obvious that unethical behaviour may
create significant risks for managers, the theory cannot differentiate between
being and appearing to be ethical.
Management theory is prescriptive. Its purpose is to provide an account that will
guide management decision making in ways designed to increase the chances for
success. Descriptive stakeholder theory, too, appears to be and is implicitly
recognized to be prescriptive. Why is this so? The question, as I hope to show, is
central to moving to a clear understanding of the foundations of corporate social
responsibility.Management theories are prescriptive because they are built on
assumptions about the nature and purpose of private sector investor owned
corporations. What virtually all management theories assume is that the purpose
of a management theory is to provide the foundations for successful management.
Successful managers are managers who do well what managers are supposed to
do. The role of managers is in turn defined by the nature and purpose of the
corporation. The purpose of the corporation on conventional accounts is to
maximize profits for the benefit of the people who have invested in it and who are
by virtue of their investment the corporation’s owners. Managers, therefore, have
an obligation to maximize share value for the benefit of investors.Shareholder
theory defines managers as agents and investors as their principals (Goodpaster
1998, 115). As agents, managers have fiduciary obligations that derive from their
role as agents. Those obligations are ethical in nature. And so shareholder
theorists like Milton Friedman correctly conclude that on their account of the
matter, managers have ethical obligations, namely, the obligation to maximize
profits. With respect to other stakeholders, however, the only obligation is to
think strategically. The value of any object of strategic thinking vi David Hume,
the Scottish enlightenment philosopher, is most often identified as the source of
this insight. It is restated by many twentieth century philosophers. One of the
most direct and influential of those restatements can be found in The Language of
Morals, by R.M.Hare
is instrumental. Its value resides in its utility for the achievement of corporate
objectives. What is important here is to recognize that conventional shareholder
theories (I shall call them conventional management theories since they dominate
the thinking of the business community and business educators at this moment in
history) is that they are prescriptive. They prescribe a set of fiduciary obligations
that have ethical content. They also provide a framework for strategic decision
making whose goal is to determine the strategic (i.e. instrumental) value of
anything or anyone that might serve to either enhance or impede accomplishing
the primary purpose of the corporation which is to maximize profits for the benefit
of shareholders.
There are two ways to interpret this view. The first asserts that while agents have
obligations to principals, they remain moral agents in their own right. The second
interpretation would see agents as moral agents by proxy; that is to say, they take
on the moral personality of their principals. Both interpretations add pieces to the
business ethics puzzle. Neither, however, provides an adequate account as it
stands. The first interpretation has two strengths. First, it points to one of the
disturbing aspects of agency theory as it tends to be interpreted in management
contexts. The conventional view is that managers are agents of investors who
invest in corporations with a view to maximizing share value and therefore the
value of their financial investment. The sole moral responsibility of managers is
then to ensure the achievement of profit maximization on behalf of investors.
Frequently, this view accepts that management should act within the constraints of
law and conventional morality, though the justification for respecting these two
constraints is less than clear.viiWhat is striking about this view is the degree to
which is seems to require that agents surrender their character as moral agents.
The manager becomes an instrument at the service of investors for the pursuit of
their pecuniary interests. This of course is viewed as a clear strength of
shareholder theories. Accountability, it is argued, is clear and direct on this
account. Shareholder theories locate clearly the responsibility of managers,
identify clearly and unambiguously to whom they are accountable and provide a
standard by which performance can be measured. What is more, shareholder
theories allow for the alignment of the moral responsibilities of management, i.e.
their fiduciary obligations, with their self interest through systems of rewards and
penalties. This approach is illustrated by systems of remuneration whose obvious
goal is to align the interests of managers with those of shareholders by generating
very significant financial rewards in return for increasing the value of the shares
of the companies they manage. On this view, an ideal system would align the
interests of shareholders and senior management so tightly that the need to appeal
to the fiduciary obligations of managers would become otiose. The effect is to
turn managers into “pure” agents whose goals and objectives as managers are
solely those of their principals whose goals and objectives are assumed in turn to
be profit maximization. No publicly held corporation or management theorist
would publicly espouse the view just described, of course. The reasons are
obvious. Stripping human beings of their character as moral agents is to strip
them of their character as human beings. It is, as Kant put it, to see managers as
means only. This view of manager/agents constitutes, therefore, a fundamental
challenge to the view that moral personality is inalienable. The view that moral
personality or agency cannot be relinquished, sold or otherwise alienated by
individuals (i.e. by moral agents) is a fundamental tenant of law.viii It is also a
fundamental tenant of post renaissance morality as it has evolved in western
liberal democratic societies. It follows on both legal and moral grounds that any
theory of management must make a place for moral agency in its account of the
role and responsibilities of managers. The alternative is to accept that
corporations and their agents operate in a social and economic space that is
fundamentally amoral in character.
On the second interpretation, Goodpaster may be suggesting that managers are
moral agents by proxy; that is, as agents, they take on the moral personality or
moral character of their principals. This view is subject to severe criticism as our
discussion of the first interpretation above implies. However, it does have the
merit of pointing out that investors are also moral agents. Moral agency by its
nature constrains the pursuit of pure self interest. It follows that investors have an
obligation to evaluate all their actions in light of their impact on others. Those
others, as we have already seen, are by definition the corporation’s stakeholders.
Goodpaster’s own extension of stakeholder theory is to argue that while managers
have obligations to stakeholders, they differ in character from the obligations
managers have to shareholders. The obligations to shareholders, he suggests, are
fiduciary obligations. The obligations to stakeholders are non fiduciary
obligations. The problem with this view is that it derives the obligations that
managers have to stakeholders not from their role as managers but rather from
their status as human beings. As people or human beings, managers on this
account have a general moral obligation to take into account the impact of what
they do on those likely to be affected by their decisions, that is to say on their
stakeholders. In this respect, managers are no different from anyone else. As
managers, however, managers have a moral obligation only to maximize profits
for investors.
Some critics, such as political philosopher Charles Blattberg, say stakeholder
theory is problematic. They claim that the interests of various stakeholders cannot
be balanced against each other.
This is because stakeholders represent such a large and diverse group. You can’t
please every stakeholder. One or more stakeholders will have to take a backseat to
other, more dominant ones, which is likely to create discord. This will disrupt the
benefits associated with stakeholder theory.
Also, who will wield the most influence? Some stakeholders might find that
they’re not impacting decisions as much as another group. The different power
levels and spheres of influence can be a problem. Even those with seemingly more
influence might not feel that they’re getting what they want. Hence stakeholder
management comes into play and a stakeholder prioritising strategy needs to be
worked out and “communicated” effectively and periodically.
Shareholder theory, however, fails a crucial test, a test of internal, prescriptive
coherence. Understanding the nature of that failure lies at the root of finding a
sound normative foundation for stakeholder theory. Typically, shareholder
theories accept that managers have this as their central obligation. However, also
typically, shareholder theorists accept that managers have a responsibility to
pursue their goals and objectives within the constraints of law and conventional
morality. Setting aside the issue of conventional morality for the moment, this
assumption raises a significant question. How does shareholder theory justify the
proposition that managers should work within the constraints of law? To put this
another way, what is the answer of shareholder theory to the question: “what
policy should govern a corporation’s approach to fulfilling its legal obligations?”
 The obvious answer is that failure to work within the constraints of law generates
risks. Further, taking the risks associated with breaking the law is inconsistent
with the fiduciary responsibilities entailed by the obligation to maximize
shareholder wealth. Corporation should obey the law if breaking the law generates
risks that are incompatible with their fiduciary obligations.

G. Whistleblower Policy
1. Whistleblower Law in India and the US and Europe

a. Why do people blow the whistle?

i. Primarily for moral reasons---to make the world a better place to live in..public health,
safety, justice and altruism.
ii. Take the case of Eric Benarzi, former Deutsche Bank employee, who exposed the
wrongdoing of inflating the Bank’s net worth. Benarzi won USD 8.5 m from the SEC as
Whistleblower bounty, but he refused the award, because he felt that the SEC had not
punished the erring employees enough.
iii. They like to rise above the loyalty to their superiors\friends\group\tribe for the greater
good.
iv. The increasing inequality of income globally and therefore a sense of injustice has led
to perceptible increase in the number of whistle blowers. This is aided by social media, easier
access to public data, like the RTI Act in India and the increased interest in investigative
journalism globally.
v. Also, with the overall increase in absolute wealth globally (and therefore a reduction
in absolute poverty), people are more willing to look beyond their “in-group” and speak up
for justice. This is a global phenomenon.
2. Robots can be the future whistle blowers, because they don’t have loyalties.
3. Whistle blower Protection and the Truth: July 1978, the US Congress passes the US’
first Whistleblower Protection Law. And July 16th is National Whistleblower’s Day in the
US. Since 2000, in the US, the Supreme Court has backed the Whistleblower. In 1978, there
was only one country with a Whistleblower Law, now there are 30 countries. Who is a
whistleblower? They are individuals who use freedom of speech to challenge abuses of
power to betray the public trust. They also serve another important function—they warn the
public in advance of disasters coming their way. In the Holland, they are called the “bell-
ringers”, in Germany, they are called the “lighthouse keepers”, in Africa, they are called
“public sentinels”, because they are defending the people. They are the opposite of the
“mythical monkeys”—it is the duty of an ethically sensitive person to see evil, hear what the
evil-doer is saying and speak to the world of the evil being perpetrated.
4. Whistleblowing is like “committing the truth” and is treated like “committing a
crime”. So there can be a big price to pay. But you will do this only when you are the cross-
roads of your life; when the crime is unbearable for you to live with. The case of Cathy
Harris, the Customs Inspector Whistleblower—profiling African American women for drug-
trafficking. With no evidence—purely on suspicion and racial bias, or for sexual harassment
or even to earn overtime. After full luggage check, they go for full body search-then ultra
sound and questioning for 4 days in the Customs offices and govt hospitals, during which
time they ae not allowed to inform their families about their whereabouts—they just vanish
into thin air for four agonising days and then they reappear, maybe with an apology from the
Authorities. Harris blows the whistle on this practice and the truth comes out and the
Supreme Court reduces the inspection from 4 days to 2 hours!
5. In 2000, 5000 gallons of nuclear waste couldn’t be accounted for from the Hansford
Nuclear Waste dump, where all of America’s nuclear waste is dumped, including plutonium,
to which if you are exposed for a certain amount of time, you are maimed for life or even
killed. A whistleblower brought out the truth—that it was not 5000 gallons, but 440 billion
gallons and that it was dumped over the years in the Columbia River, that supplies water to
the entire northwest of the US and Canada. Divers were sent into the river to check for
radiation and sure enough the waters were radioactive!! Billions of dollars were spent to
clean up the river and now it’s safe. Whistleblowers change the course of history—that is the
point being made. Even in the corporate world.
6. They need protection from all kinds of pressures like:
• Isolation by the top management/peer group out of fear of the top management and
selfish interests.
• Retaliation: Informal investigation, Internal Inquiry, Days in court, financial
pressures, peer pressures, bribery, loss of job, death threats.
• Hostile Witnesses and an apathetic public
• From the Law
7. Whistleblower Policy in India
a. Employees who reveal fraud, corruption or mismanagement to the senior management
are called internal whistleblowers. Employees who report fraud or corruption to the media,
public or law authorities are external whistleblowers. Indian whistleblowers are protected
under the Whistleblower Protection Act India.
b. The Companies Act, 2013 lays down provisions for whistleblowing and corporate
governance in India and the elimination of fraud by establishing adequate vigil mechanism.
Draft Rule 12.5 of the Companies Act, 2013 and Section 177(9) makes it compulsory for
listed companies, companies accepting deposits from public and companies borrowing more
than Rs. 50 crore from banks or public financial institutions to have a whistleblowing policy
and establish a vigil mechanism for directors and employees to report their genuine concerns.
A vigil committee has to be set up to ensure the vigil mechanism in the company and
whistleblower policy is effectively implemented in the company.
c. Additionally, the Securities and Exchange Board of India (SEBI) amended the
Principles of Corporate Governance in 2003. Clause 49 of the Listing Agreement now
includes the formulation of a Whistleblower policy in Indian companies. A company may
establish a mechanism for employees to report concerns regarding unethical behavior, actual
or suspected fraud or violation of the company’s code of conduct or ethics policy. However,
it is currently not mandatory for companies to have a whistleblowing policy in place.
d. In India, whistleblowers are protected by the Whistle Blowers Protection Act, 2014.
The law provides for the protection of their identity and also has strict norms to prevent their
victimization. For instance, an organization cannot initiate proceedings against a
whistleblower pending a probe into allegations. The same sections have been adopted in the
Companies Act, which applies to listed companies, and are a part of the Securities and
Exchange Board of India’s governance norms. All listed and public sector firms need to have
a whistleblower policy that outlines procedures and recourses available to complainants.
e. Whistleblowing may sometimes be used to settle personal vendettas or manipulate the
stock market. To prevent this from occurring, the audit committee that investigates the
allegations will examine them for their merit. If a complaint is proven to be frivolous, the
complainant can face a jail term of up to two years.
f. India has a poor track record in dealing with insider trading. To improve success rates,
the market regulator recently introduced a tipping mechanism. Sebi will award up to ₹1 crore
for information and successful action against insider traders. It has also created a “cooperate
and confidentiality" mechanism. This means that if someone guilty of violating securities law
is willing to assist in the larger probe, the person will be given exemption from penal action
and their identity will be kept confidential.
g. A whistleblower in India is protected under Indian law, but it is not as effective as it is
in the US, where a separate entity takes care of such incidences. “It is incumbent upon the
Directors (usually the top management) of a company to investigate complaints of
wrongdoing by the erring top management, which usually defeats the purpose, primarily
because of lack of appropriate legislation.” The Companies Act, 2013 makes it mandatory for
entities listed on the stock exchanges to set up an audit committee to investigate
whistleblower complaints. It also provides safeguards against their victimisation, but it does
not provide a mechanism to protect them. The safeguards are entirely dependent on the
policies drafted by the companies themselves.
h. The Whistle-Blowers Protection Act, 2014, notified on May 12, 2014, has not been
implemented so far. In a recent clarification, the Ministry of Personnel, Public Grievances
and Pensions said the law may require further amendments before being introduced. The Act
pertains to government and public sector enterprises, to provide a mechanism to investigate
alleged corruption and misuse of power by public servants, and also protect anyone who
exposes alleged wrongdoing in government bodies, projects and offices.
8. Whistleblower Policy in the US
• The False Claims Act of 1986, which protects the whistleblower from legal action.
Spectacular success after 34 years, where 85% of the claims from corporates for tax evasion,
misappropriation, insider trading etc comes from whistleblower activity and not independent
investigatons by SEC and others.
• 42% of all fraud cases in the US are brought to light by whisltleblowers. A great
weapon against corruption.
• The office of the Whistleblower Protection Program enforces protections for
employees who suffer retaliation for engaging in protected activities under more than 20
federal laws. The investigation of complaints of retaliation against employees is conducted by
investigators in OSHA’s (Occupational Safety and Health Administration). The investigators
are neutral fact-finders; they do not work for either the complainant or respondent
(employer).
9. Whistleblower policies in Europe and OECD countries: DEFINITION OF
WHISTLEBLOWER PROTECTION
“Legal protection from discriminatory or disciplinary action for employees who disclose to
the competent authorities in good faith and on reasonable grounds wrongdoing of whatever
kind in the context of their workplace”. More OECD countries have put in place dedicated
whistleblower protection laws in the past five years than in the previous quarter century.
Among respondents to the 2014 OECD Survey, 84% have enacted a dedicated whistleblower
protection law or legal provision(s) related specifically to protected reporting or prevention of
retaliation against whistleblowers in the public sector. However, these laws have usually
been reactive and scandal-driven instead of forward looking. Ad hoc protection through
fragmented provisions continues to be the norm, which risks providing less comprehensive
protection than a dedicated whistleblower protection law that has more ability to clarify and
streamline the processes for disclosing wrongdoing and provide remedies for victims of
retaliation.
86% of companies surveyed for the 2015 OECD Survey on Business Integrity and Corporate
Governance had a mechanism to report suspected instances of serious corporate misconduct,
but over one-third of these either did not have a written policy of protecting whistleblowers
from reprisals or did not know if such a policy existed.
An effective whistleblower protection system depends on clear and effective communication.
Informing both employers and employees about their rights and responsibilities and the
resources available to them is crucial for creating an environment of trust, professionalism
and collegiality that supports the tenets of integrity in both the workplace and society.
10. LEGAL PROTECTION FOR WHISTLEBLOWERS IN OECD COUNTRIES
At the national level, protection for whistleblowers may originate either from comprehensive
and dedicated laws on whistleblower protection, or from specific provisions in different laws
and/or sectoral laws. Of the 32 OECD countries that responded to the 2014 OECD Survey on
Public Sector Whistleblower Protection, 27 reported a dedicated whistleblower protection
law or legal provision(s) that calls for
the protection of whistleblowers under certain circumstances (not always for reporting of
corruption offences), with 13 having passed a dedicated law that protects public sector
whistleblowers.
In some countries, these laws also provide protection to private sector whistleblowers. The
majority of OECD countries that provide legal protection to whistleblowers do so through
provisions found in one or more laws, such as anti-corruption laws, competition laws,
company laws, employment laws, public servants laws and criminal codes. However, the
degree of protection afforded within the provisions of these laws varies and is less
comprehensive than the protection provided for within dedicated laws, which often provide
more clarity and streamline the processes and mechanisms involved in disclosing a
wrongdoing.
11. Whistleblower Process
Most people who perceive that there is some wrongdoing often do not know the specific law
that would apply,” says Bellace. “As a result, they don’t actually have a good grasp of
whether unlawful wrongdoing or probable wrongdoing has occurred. Moreover, and this has
happened in some cases, they begin to access material that they might not have the right to
access. So, I find these three points problematic from an employee’s vantage point. And even
if you do know the law and do have proof, there will be a considerable period of time before
you can have your position validated, and you may be without your job during that period of
time. That’s a difficult proposition.”