SYMBIOSIS LAW SCHOOL, PUNE

Constituent of Symbiosis International (Deemed) University,

Pune

(Accredited by NAAC (UGC) with `A’ Grade)

CORPORATE GOVERNANCE – RESEARCH PAPER

INTERNAL ASSESSMENT – 1

ROLE OF ETHICS IN CORPORATE GOVERNANCE

Submitted by: -

Name- Aaryan Dhar

PRN – 18010126105

3rd Year – Division B

WORD COUNT- 3100 (including annexure and other details formalities)

 ABSTRACT

The pillar of a strong corporate governance is essential for a stable and vibrant business
environment, as well as an effective tool for protecting investors. The core of corporate
governance can be stated as the establishment of a constructive partnership between various
constituents of a private organization founded on the values of justice, openness, and
responsibility Corporate governance is the process of creating a structure in which the board
of directors is tasked with roles and duties related to the management of a company's affairs.
Corporate governance aids in the improvement of corporate performance. It must be noted
that business ethics is one of the most essential factors for the smooth operation of corporate
governance.

The introduction of ethical principles to business behaviour is known as business ethics. It's
more about how an organisation conducts itself and how it acts internally. To compete in the
marketplace due to modern economic strategies such as globalization and liberalization, as
well as to increase profits, ethical principles in industry must be adopted.

Business ethics in corporate governance is evolving, and controversies, scams, and corruption
are becoming more common and rampant in the business world. As a result, corporate
governance is having difficulty functioning properly. Corporate failure has a detrimental
effect on culture and the world. The loss of a corporation is solely due to a lack of economic
integrity in corporate governance. As a result, the current research concentrates on the
importance and necessity of business ethics in corporate governance.

Issue at Hand-

The present research article concentrates on how business ethics is relevant and essential for
good governance and for the smooth functioning of organizations around the world.

LITERATURE REVIEW

Mehta G.S. (2003) in his article titled with “Dharma in Corporate Governance”
He discusses the definition and relevance of corporate governance in this article. He also
discusses how ethical considerations play a significant role in effective corporate governance
in the face of increased competition brought on by the globalization and liberalization
processes. Finally, he stated that a strategy of clear and open organizational conduct,
including public explanation of significant strategic decisions, should be implemented. The
central principles of the rich Indian philosophical tradition are dharma, lok sangrah, kausalm,
vividhta, and jigyasa, and these are the primary drivers for good governance.

In his article on Governance and Business Ethics in India, Bose discusses important topics
like good governance, business ethics, and the role of business ethics in good governance.

The author has chosen India as the case study for this research. The global view of corporate
ethics shifted radically after the disclosure of unethical decision-making at WorldCom and
Enron, according to the author of this report. Public trust and portfolios were harmed as a
result of the scandals, which also shattered their trust in the accounting profession. More
accurate financial statements and evidence of improved ethical practices have been requested
by corporate customers.

More accurate financial statements and evidence of improved ethical practices have been
requested by corporate customers.

Shahnawaz Mahmood (2008) article on “Corporate Governance and Business Ethics for
SMEs in Developing Countries” Challenges and Way Forward

The essay "Corporate Governance and Business Ethics for SMEs in Developing Countries"
Challenges and Way Forward by Shahnawaz Mahmood (2008) emphasizes the value of
business ethics not just for big corporations but also for small and medium businesses. By
adhering to these ethics, SEM firms have already established a positive reputation.
Customers, staff, vendors, and the society are all becoming more aware of the value of
healthy, trustworthy relationships among SMEs around the world. Furthermore, because of
their supply chain connections to larger companies, SMEs are constantly being questioned
about their social and environmental practices when forming joint ventures with larger
companies. One of the most intriguing signs is that SMEs account for a large portion of
industrial workers, indicating the opportunity for industrialization.

This paper examines the challenges that SMEs in developing countries (particularly in South
Asia) face, as well as the importance of corporate governance and ethical conduct. An
incentive-based framework for motivating SMEs to follow principles of good governance is
more likely to work, according to this article. It also offers a market-based approach by
establishing venture resources for businesses to engage in close collaboration with SMEs.
SMEs Chambers of Commerce may also be useful in this respect. This paper examines the
system from the lens of a SME Code and proposes ways to improve it.
 RESEARCH QUESTION

The present research article concentrates on how business ethics is relevant and essential for
good governance and for the smooth functioning of organizations around the world?

ANALYSIS

To analyse why ethics is considered as one of the major factors influencing corporate
governance one needs to look into the meaning of corporate governance and what ethics
refers to in the sense of corporate governance.

What is Corporate Governance?

When we apply the principle of governance to the business world, we get the word
"Corporate Governance." ‘Corporate Governance is a term recently invented, as yet ill
described, and hence blurred at edges.

The allocation of rights and obligations among various members in the company, such as the
Board, Managers, Shareholders, and other Stakeholders, is known as corporate governance,
which sets out rules and regulations for making corporate decisions. Corporate governance is
the process of creating a structure in which the Board of Directors is tasked with roles and
duties related to the management of a company's affairs. 1

It is based on a mechanism of transparency that is mainly aimed at the shareholders, as well

as optimizing shareholder welfare. A successful corporate governance scheme includes
mechanisms for controlling the director's responsibilities in order to prevent them from
leveraging their positions of authority and to ensure that they behave in the company's best
interests overall. Corporate Governance also addresses the executives' greater transparency
and responsibilities to the corporation's other stakeholders.2

Importance of Business Ethics in Corporate Governance

Corporate governance is said to be based around business ethics. Business ethics is a method
of incorporating principles like integrity, trust, openness, and justice into a company's policy,
procedures, and decision-making. It is an important and necessary part of corporate
governance. Company ethics is the engine that propels strong corporate governance forward.
It’s when ethical principles are applied to a company's conduct. 3

1
Zimmerli, Richter & Holzinger, 2007, p.1
2
Mehta., G. S, “Dharma in Corporate Governance”, Journal of Chartered Account, 2003.
3
Bose It, “Corporate Governance and Business Ethics in India”, Indian Institute of Technology, Mumbai, India.
It covers everything from boardroom plans to how businesses handle their vendors and
pricing tactics and accounting procedures. Individuals' actions and the actions of the company
as a whole are covered by business ethics. Company ethics is primarily concerned with how a
corporation performs its operations in order to maximize profits. 4There are certain factors
which state the significance business ethics has on the entire world of business and
commerce. These factors are stated below-

Factors Stating the Importance of Business Ethics

• Fall of the Corporate Governance Structure like the 2008 Crisis

The Corporate Governance system has failed to keep unethical behaviour in check. For
example, the 2008 crisis, which began in the USA and devastated the global economy,
may have been avoided if the Federal Reserve, the nation's central bank, had done its job
properly in managing any threats that arose in the capital markets. In fact, the Federal
Reserve was said to have been taken over by the very bankers it was supposed to regulate.
At least 18 current and former Federal board members have ties to banks and businesses
who secured emergency funding from the Fed during the financial crisis since 2008.

So much of the Fed's operation was done in secrecy, with only the bankers on different
Boards and Committees knowing what was going on. Every year, the Government
Accountability Office should be allowed to perform a complete and impartial audit of the
Federal reserve for this situation to be avoided.5

• Unethical behaviour will eventually tarnish the company’s Image

If companies continue to engage in dishonest behaviour, it will eventually come to

light. The corporation will be destroyed as a result of the backlash, unwanted media
coverage, and lawsuits that will ensue. One of the best examples of the
aforementioned argument is the Volkswagen scandal. In the United States, one of the
world's most well-known and well-liked production firms was discovered to be
cheating on the pollution tests. It's been dubbed the diesel clone.
The Environmental Protection Agency (EPA), a government body in the United
States, discovered in September 2015 that many Volkswagen diesel vehicles sold in
the country have a "defeat system," which is software designed to cheat during the

4
Chowdary, Nagendra V(ed.) “Corporate Governance in Emerging Markets”, Vol. II ICFAI Press, Hyderabad,
2002
5
www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf
 pollution test by altering the vehicle's output to improve the results. Volkswagen has
admitted to using this app to cheat during pollution checks.6
Volkswagen claimed to maintain the amount of carbon emissions, but they cheated by
using defeat software. This is immoral conduct. Customers lost faith in the firm as a
result, and the stock price fell by 25%. The corporation was forced to assume the
financial responsibility of compensating the shareholders. In order to correct their
error, the company recalled 8.5 million vehicles in Europe, including almost 2.4
million in Germany and almost 1.2 million in the United Kingdom, as well as 500,000
in the United States. Martin Winterkorn, the company's Chief Executive, resigned as a
result of the controversy (BBC, 2015).
As a result, dishonest behaviour cannot be concealed for long. Since any of a
company's dealings are scrutinized these days, any ethics breach will ruin and tarnish
the company's credibility. The rise in media and social media has ensured that word
spreads quickly, making it almost difficult to keep this matter hidden. Nobody would
trust a shady company. This is so regardless of the organisation's size, country of
origin, or level of fame or acknowledgment.

• Important for the Business to function within society

The role of business in society is defined by business ethics. Since a corporation operates
within a society, it must make a contribution to the society. If a company is to succeed
commercially, it needs customers and staff, which means it must win the confidence of
society's members, including both internal and external stakeholders. According to a
study conducted by McKinsey and Company (2002), investors base their opinions on a
company's strong Corporate Governance structure as well as the existing stock values and
returns. Investors can stop investing in a corporation if they lose confidence in the
Corporate Governance structure. Companies are seeing it in their hearts to support the
world and to be interested in social reform or charitable works, which has pushed
Business Ethics into the spotlight. It also lets organizations boost their image by
demonstrating that they care for the environment in which they operate.7

Even if the organization is not engaged in any actions that are harmful to society,
maintaining a well-defined Code of Conduct/ Ethics would gain the society's respect and
trust. Simply because an organization does not engage in questionable activities or use
6
https://www.bbc.com/news/business-34324772
7
McKinsey&Company. (2002). Global investor opinion survey: Key findings. McKinsey&Company. Retrieved
 slave labour does not mean it has made a sufficient contribution to society. Companies
are supposed to uphold the law of the country, and any business that goes the extra mile
to support humanity by maintaining a positive work atmosphere, through Corporate
Social Responsibility, and an ethical work climate will still be praised. As a result,
Business Ethics must be taken seriously.

This figure shows the views of different Indian companies on how important business ethics
are in the functioning of an organisation.8

Advantages of adopting business ethics in Corporate Governance

Everyone is talking about corporate governance, but the parameters and consequences are
also up for discussion. It's not just about the process; it's about everyone's attitude and beliefs.
Adopting ethics can aid in the development of a company's image. Customer satisfaction and
sales will also be improved by promoting prestige.

Customers are becoming more mindful of their interests, and they place a priority on business
ethics. In such situations, having an ethical atmosphere in the workplace will assist in
regaining consumers' confidence.

 Rising productivity by attracting a skilled workforce and staff, as well as improving

the efficiency of current employees.
 Adherence to rules, such as labour standards and environmental legislation.
8
McKinsey&Company. (2002). Global investor opinion survey: Key findings. McKinsey&Company. Retrieved
March 17, 2018, from http://www.eiod.org/uploads/Publications/Pdf/II-Rp-4-1.pdf
  Foreign and domestic collaboration with other businesses.
 Corporate governance is important for emerging countries aiming to align with the
developed economy, since it is a core metric used for assessment by global investors
or strategic partners, as well as a major factor in improving economic performance
and development.
 Businesses will be able to project themselves abroad while keeping consumers and
vendors satisfied closer to home as a result of this.
 Ethics is a more critical consideration in the decision-making process and it helps to
reduce the financial and business challenges that a firm faces as a result of unethical
business negotiations and activities.9

For many businesses, a comprehensive approach to policy and ethics is also a work in
progress.

It is a mechanism for preventing fraud, coercion, mitigating or eliminating conflicts of

interest, and ensuring that shareholders are treated fairly. Ethical behaviour contributes to the
company's good image and prestige.

Ethics, legal questions, and corporate ethics have also been debated by many people. No one
may precisely define corporate ethics or the business ethics code model that is practiced by
company executives, managers, clients, owners, bankers, and suppliers. The method of
incorporating principles such as honesty, trust, accountability, and justice into a company's
policy is known as business ethics. Worth is a more critical and variable in this operation.

Value is characterized as the normative standards of conduct that society expects from its
members. Values are shifting as a result of processes such as transformation, urbanization,
and westernization. Values related to material life, such as benefit, living a luxury lifestyle,
and so on, are significant in this postmodern culture.

Then there's the question of how certain ethical principles or concerns should be brought into
the company. As a result, we must focus on shifting societal ideals. We have formed a close
bond between society's members.10

9
Corporate social responsibility and marketing: An integrative framework- J Ferrell · 2004

10
Chowdary, Nagendra V(ed.) “Corporate Governance in Emerging Markets”, Vol. II ICFAI Press, Hyderabad,
2002
Business ethics is not only a mechanism for combining principles, but it is also a criterion for
evaluating a company's effect on the world and society. Environmental sustainability is a
must for businesses. Whether and until there are no environmental conservation policies in
place. We would both be devoid of life and corporate governance.11

Author’s View

Business ethics has been considered as one of the most important factors of corporate
governance and its improvement in the modern business world. Till now the research paper
talks about the significance/importance of business ethics in corporate governance. This
section talks about the one important element that makes sure that business ethics are
followed by all the organisations all over the world. Now the question arises about what can
make all the employees, stakeholders and other intermediaries in an organisation follow its
ethical standards?

The major factor for governing Corporate Governance around the world is for an
organization to have a strict Code of Conduct.

• Code of Conduct

As previously said, each industry has its own set of unethical activities. So, how can you
keep such immoral behaviour from happening again? A way to set a precedent for others
is to punish the perpetrator after the offence has been committed. Preventing dishonest
behaviour is preferable than prosecuting the perpetrator, who might or might not have
a malicious intention. Like previously noted, not all crimes are done for the sake of profit
or greed. Any workers may be unaware that they are breaking the laws because the rules
are unclear, or because they are new employees who have not been adequately trained.
That is why a Code of Conduct/Ethics is needed.

What is Code of Ethics?

A Code of Ethics is a declaration of values that upholds an organization's moral principles.

The aim of the code is to clarify how to act in a way that society and organizations approve
of. Unlike a Code of Conduct, a Code of Ethics does not have a set of ethical laws that an
individual must obey. It explains how to interact with co-workers and external partners in a
professional way.

Its Importance
11
P.V. Sharma and S. Rajani: “Corporate Governance: Contemporary Issues and Chaellenges”.
In order to determine how a business works, they require a Code of Conduct/Ethics that
workers should follow. There are many good arguments to create an ethical code.

First, a Code establishes a mutually agreed-upon legal basis for an organization's commercial
and industry operations, and is shared by all stakeholders.
Second, ethics establishes guidelines with the aim of removing all ambiguity about law,
employee behaviour, and their activities by defining what constitutes good and bad conduct.
External ideals that are a part of job – society – are the subject of ethics. It is critical in
decision-making because it decides whether an employee's or the Board's decisions can result
in benefit or loss for the company.
Third, a Code of Conduct/Ethics would demonstrate that the organization is concerned with
its stakeholders' well-being. A code of ethics protects all innocent stakeholders from
unethical conduct.
Fourth, an organization with a rigid Code would not have to constantly promote its ethical
behaviour to the rest of the planet, which would be the case if it does not have one.12

CONCLUSION

Ethical culture can be seen as a type of business insurance. As a result, ethics is crucial for
good governance. As a result, it is the social responsibility of every corporation to follow the
ethical codes.

However, not only is it necessary for their company, but it is also necessary for their daily
lives. In India, corporate governance is a modern concept. Via governance norms, the
Security Exchange Board of India is attempting to enforce Corporate Governance norms. In
order to draw both international and domestic funds, a growing number of publicly traded
firms have realized the importance of openness and good governance. As a result, a 21st-
century company's ethical culture is critical for good governance. Thus, for a company's
sustenance in the highly competitive market, a good ethical practice has to be inculcated in its
corporate governance norms.

REFERENCES

 Zimmerli, Richter & Holzinger, 2007, p.1

 Mehta., G. S, “Dharma in Corporate Governance”, Journal of Chartered Account, 2003.

12
Rezae, Z., Elmor, R., & Szend, J. (2001). Ethical behaviour in higher educational institutions: The role of the
code of conduct. Journal of Business Ethics, 30(2), 171- 183.
 Bose It, “Corporate Governance and Business Ethics in India”, Indian Institute of
Technology, Mumbai, India.
 Chowdary, Nagendra V(ed.) “Corporate Governance in Emerging Markets”, Vol. II
ICFAI Press, Hyderabad, 2002
 www.govinfo.gov/content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf
 https://www.bbc.com/news/business-34324772
 McKinsey&Company. (2002). Global investor opinion survey: Key findings.
McKinsey&Company. Retrieved
 Corporate social responsibility and marketing: An integrative framework- J Ferrell · 2004
 Chowdary, Nagendra V(ed.) “Corporate Governance in Emerging Markets”, Vol. II
ICFAI Press, Hyderabad, 2002

 P.V. Sharma and S. Rajani: “Corporate Governance: Contemporary Issues and

Challenges”.
 Rezae, Z., Elmor, R., & Szend, J. (2001). Ethical behaviour in higher educational
institutions: The role of the code of conduct. Journal of Business Ethics, 30(2), 171- 183.