Chapter 3 Law, ethics and

Business

Prof. Dipak S Gaywala 1

Ethics in Business and Corporate Governance
Satyam Scandal case( pg 107)
This is the story about Satyam Computer
Services Limited (SCSL) that no more exists as
original entity as it was taken over by the
Mahindra Group during the worst phase in its
life, the SCSL was renamed as Mahindra
Satyam Limited. The story narrates what led
Satyam Computer to a miserable end, which
otherwise could have been a big story in the
Indian Corporate world. (Reference Page 107 of
the text book)
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Summary:
The business fraud was planned and
systematically executed by a few individuals at
the top.
Laws and regulations in the country not only
failed to prevent a crime of such high magnitude,
but the company could also carry on such
unethical and illegal business practices with
impunity and award for so long.

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Summary:
People both internal and external auditors who
are supposed to check and verify good practices
ignored their role and chose to propagate the
fraud in exchange of personal gains.

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Ethics in Business and Corporate Governance
Satyam scandal took place in spite of laws,
regulatory bodies, strict audit by PWC and under
the watchful eyes of company administrators.
A company of more than 50k employees did this
scam.
This was the same company who receive
Golden Peacock Award the same year scam
was unearthed from the Institute of Director for
excellence in governance.

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Reason of Satyam Scam
Greed of few individuals at the top ( who made
money using unethical corrupt means)
Lack of moral responsibility
Trusteeship
Lack of ethical governance.

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Conclusion
To add a lot of interest to your principal, you
need to stick to your principles.
To sustain your competitive advantage in an
increasingly competitive corporate world, you
need character.
Morals are more important than money,
materials, marketing and management.

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LAW AND ETHICS IN BUSINESS
Laws are important regulators in business, but have
their own procedural limitations.
Ethics are a self-regulating mechanism based on one’s
moral values, moral principles, moral standards and a
sense of moral responsibility towards others involved
with the business.
For ‘good effect’ on business and its clients, there is the
need for both law and ethics.

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Law enforcing authorities and regulators steeped
in and acted soon thereafter, but it was too late
to prevent the loss to SCSLs investing public
and to the image of Indian Business.

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Supporting Case
A person goes to a store to buy a refrigerator.
The dealer of that store was in hurry to clear this
stock ,sold him the refrigerator knowing that it
was defective. Later when the buyer came to
know he complained to the store, the dealer
expressed his ignorance and offered to rectify
the product under warranty.
The buyer was upset with the dealers attitude
and decided to take legal action against him.

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Ethics in Business and Corporate Governance
But when the lawyer asked for proof that the
dealer had sold the product knowing it was
defective, the dealer stated that he was unaware
of the defect in the product when he had sold it.
And offered to repair it under warranty.
Here the law may appear helpless. Under
consumer protection laws, can offer
compensation an damage, but cannot cover loss
or suffering.

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Conclusion
Here only ethics could have prevented it.
The dealer sense of responsibility and ethical
standards could have stopped him from
harassing the customer.

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Supporting case 2
Same such cases have been found out in India's
Real estate sector.
Law here is unable to stop crime and fraud,
harassment of customers.

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case
India's HRD Ministry drew severe criticism of the
bill as it effectively allowed more than 5- per cent
reservation of seats in colleges and other
academic institutes, when considered along with
other such policies, there by severely limiting the
scope for meritorious students from other
classes of society. While many felt that it was not
morally justified, the government , in a bid to
encourage and uplift the weaker sections of
society, went ahead with the reservation bill.
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Ethics in Business and Corporate Governance
Law treats modern business organizations as
immoral fictitious person who have the right to
sue an be sued, own and sell assets and
properties.
Every country has laws to govern and control the
conduct of business.
Generally the chief executive of a company or a
key managerial authority is held responsible for
any violation of law.

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Brainchild of satyam promoter chairman and his
brother ( MD) despite the reservations of other
directors. On investigating, when strong
evidence for scam and fraud emerged against
these two individual.

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Should the employees be loyal to the employer
and do as they are asked without any
considerations to legality or morality of an issue.

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Employer-Employee Obligations for
Ethics and Law
Employers cannot take advantage of their employees to
further any immoral act in the company;
They have the responsibility of clearly guiding their
employees about expected conduct and behavior; and,
In case of any dispute, the employee’s action should be
judged as per (a) the principle of constraint of morality;
and (b) factors of uncertainty, difficulty and minimal
involvement.
In business practices, professionals should not allow
their self-interest to override the moral issues of their
actions.

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Morally right or wrong can be instituted in the
thinking and working of employees- this is the
process of self examining.. And it will minimize
risk associated with immoral and unethical
activity.
This is very much needed in financial sector (
banking etc)

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Numerous schemes are offered in the market
daily, and very less than little credibility.
The to protect society ethics should be combine
with law.
Many institution make there own code of ethics
Idea is to make members followers aware and
responsible for ethical behavior in profession.

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ETHICS vis-à-vis LAW
Ethics and law are not mutually exclusive; one
complements the other when it comes to ensuring best
practices in industries, business and professions.
Law and ethics have a close relationship and it is agreed
by all concerned that citizens and corporate entities have
a moral obligation to obey the law as long as the law
does not require the person to undertake any unjust or
immoral action in violation of ethical practice.
Most laws are subject to correct interpretations, and,
when rightly interpreted by taking in view the moral
aspects and purpose, there is hardly any conflict
between the law and ethics.
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Crimes, bribes, gambling, smoking, obscene
behavior etc all are violation of moral standards
or can affect the moral standards or can affect
the morals of the society are covered by laws.

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Service rule of obeying the superior or the law if
he or she has to do anything immoral in keeping
with that rule
Case ( g 118)

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Cont…
The law of the land may prevail as a deterrent
for wrongdoing, but ethics stand as the moral
guard against what is unjust or unfair.
Often, ethics work in creating a balance between
legality and morality.

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Public interest litigation (PIL)
If the government fails in the tests of morality
and ethics, people may disobey the order and
approach the court of law challenging the
government order and seeking justice,
Here justice can be sought under the scope of a
public interest litigation (PIL) which examines the
social and moral sides of the dispute.

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example
Environment pollution in India.
Medical healthcare system of India.
Consumer protection law
Food and nutrition department of India
Education department of India.
Corrupt political system of India.

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Case
A company recruits a female engineer through
an open advertisement, and appoints her at a
salary that is much lesser than other male
engineers with similar experience and working
with similar type of job responsibility. (Reference
Page 119 of the text book)

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Summary:

In countries, where there is no legal protection

against gender discrimination, the ethical
standards of the company can helping ensuring
balance between fairness, justice and equity.

Many developed countries has EEO and most of

the countries are adopting Ethico- legal system
( EXCEPT INDIA)

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CASE
The law in many countries allows clinical trials of
new drugs on human patients, there are
regulation to control this.
Thus the role of ethics along with the law is
critical in such business operations in order to
minimize the risk and harm to people.

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Special reservation
Special reservation seats in places of higher
education for students from the backward
classless.
The supreme court of India cleared 27 percent
reservation of the OBC in professional degree
colleges like the Indian Institute of Technology
and Indian institute of management, etc.

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Many academicians and social workers have
argued that this may also lead to dilution of
academic content and bring mediocrity into the
output.

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summary
This can be implemented if :-
1. If no harm is caused in the society to others
2. Greater good for a greater number ?
3. Decision is fair?

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BUSINESS PHILOSOPHY,
SYSTEMS AND ETHICS
A business ideology reflects the company’s perspectives
about its ethical responsibility and conduct.
Ethics in business operations can be examined from
different perspectives, including: enterprise perspective,
employee perspective, perspective of its customers and
the market it serves, and the social perspective.
Ethics help to harmonize and reconcile the
conflicting interests of various stakeholders of a
business, and help in arriving at a satisfactory solution to
the problems.

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Today’s business process is described as the
process of strategically and ethically
managing and influencing the market and
non-market environments in order to
accomplish the stated vision and mission of the
company.

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The approach of moral duties and
responsibilities towards all the stakeholders in
ingrained in the modern concept of TQM.

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Case
In addition to legal issues, ethical issues are also
to be appropriately addressed in global context.

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Case – MC Donald
The media reported that MC D the US fast food
chain in India was using some animal fat product
to create the special flavor in their food products.
People of certain religious faith found his highly
objectionable and it was successfully dominated
by that religion, then they would refrain from any
such practice.

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Ethics in Business and Corporate Governance
Case – MC Donald
Mc D displayed prominent notices at all its
outlets informing customers regarding the said
animal fat, and by placing advertisement in
domestic newspapers and committing to be
vegetarian food.
If MC D would not have taken serious step than
it would have suffered a serious social issue and
market repercussion, affecting business in India.

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Case Pg 127

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SCOPE AND ROLE OF
BUSINESS ETHICS
Business ethics is concerned with the morality of
actions in business operations, and deals with:
■ Rightful expectations of consumers, society, employees and
other stakeholders
■ Fairness in competition and advertising of goods and services
■ Social responsibility and care
■ Overall corporate behavior in governance

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Case pg 129

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Summary
In this case, there are elements of three types of
issues
1. Systemic
2. Corporate
3. Individual

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1. The officer did not manipulate the travel bill for personal
gain
2. The company assigned a task to the employee without
providing the resources it called for
3. The officer acted a per the demands of the situation.
4. The system did not allow for any relaxation in travel
rules for uniformity of application
5. The finance department scrutinized the officer travel
bills focusing more on what rules state rather than on
exigencies for the organization need or utility.

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Officer cannot be held responsible for violation of
individual ethics
The system ( policy) should be transparent and
uniform for all and it should be respected.

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Role of ethics
Destruction of the environment
Immoral business practices ( e.g. selling
adulterated foods)
Loss to stakeholder ( e.g. Company
manipulating its accounts )

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Some school of thought classify
Business ethics into
(a) Systemic
(b) Corporate
(c) Individual

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Cont…
Broadly, ethics in business practices involve:
(a) Ethics as applicable to business
philosophy
(b) Ethics of professional management

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The Internal and External
Environments of a Business

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Ethics in Business – Internal
Environment
For ethics management in a company, the
company should,
(a) promote ethical practices;
(b) enforce mechanisms to prevent unethical
practice; and,
(c) should serve its stakeholders with fairness,
equity and moral responsibility

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Business cannot survive in the long run
without ethics; and ethical practice must
include the ethics of employees, processes
and products.

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The Internal Environments of a
Business
Business practices now a days face various
moral issues in their daily functioning like
favoritism, nepotism, bribery, dishonesty,
indiscipline, misinformation, rumors,
insubordination, sexual harassment, undue
punishment etc.
Every business has its own policies and
procedures

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If the immoral act had been carried out with the
knowledge and consent of the superior as well
as the subordinate, then who is morally
responsible?

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example
Union carbide case, the head of the works and
staff behind the negligence causing the gas leak
were held responsible and taken to court.

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Case
Similarly in the Satyam case, the chairman and
directors along with two senior auditors of its
audit firm (PWC) have been taken into legal
custody for alleged fraud and financial crime

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Ethics in Business and Corporate Governance
Other associated bodies like SEBI ( the
securities and Exchange Board of India) and
ICAI ( Institute of Chartered Accountants of
India.). Also moved in to identify personnel and
professionals involved in the scam so as to take
the necessary action against them.

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Ethics in Business and Corporate Governance
Promotion of good work culture, transparency in
business transactions, ethical corporate
behavior, and awareness of corporate social
responsibility are the focus of good corporate
governance these days.

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Ethics in Business and Corporate Governance
Case Pg 136 Discuss In class )

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Case
A product that is unsafe for consumption or use
must not be designed or marketed fro profits.
Take for instance the US ban on toys made in
China in 2006-07 and the ban imposed by India
on all imports of toys from Chain for six months
in 2009.

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Ethics in Business – External
Environment
The approach to lawfully and ethically handle the external
environment needs more cautious and careful judgment, because
the related issues can,
(a) often encumber more than one factor;
(b) involve social and political interference; and
(c) often result in serious repercussions on the company’s business
potential in the case of their failure.

All business executives, particularly those dealing with the external

environment, should be:
(a) fully aware of their moral responsibility to the market, society,
locality and environment; and
(b) fully committed to ethical business practices.

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Case
The Singur case underlines the importance of
managing the external environment in business.

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Tall standing companies such as TCS , Infosys
and Wipro know for their transparent and ethical
business practices.
Fast growing pharmaceutical industry where
many cases involving the violation of intellectual
property rights (IPR).
Long ago Ranbaxy had the same issues ( selling
adulterated drugs in USA) and thus leading to a
sharp fall in its stock price and loss of goodwill.

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RESPONSIBILITY FOR ETHICS IN
BUSINESS
The purpose of ethics in business is to provide its people with the moral
power to prevent any wrongdoing. And, people are morally bound to
exercise this privilege in both internal and external environments for
effective discharge of duties and responsibilities.
Both the management and the employees of a company have the
moral responsibility to conduct business ethically.
The management has to institute systems, procedures and methods
to ensure and monitor ethical conduct of business operations, and
the employees have to apply moral principles in carrying out their
activities and responsibilities.

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Cont…
A company can formulate an ‘Ethics Statement’
which may be in line with its ‘Quality Statement’.
Many companies also appoint an ‘Ethics
Counselor’ or an ‘Ethics Committee’ to
promote ethics in the workplace and to monitor
any violation of ethics in its business practices.

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Industry today is equipped with modern quality
management systems in order to ensure quality
in total business practices, quality systems such
as ISO –9000 and TQM practices are
especially designed and directed to institute
quality in all business operations.

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Company has to ensure protection of customer
interest
Designing, adopting and managing the system is
the responsibility of the top management in the
company.

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Ethics in Business and Corporate Governance
Disclaimer:
This material is compiled by Dipak S Gaywala,
Associate Professor, Parul Institute of
Management & Research. The praiseworthy
support in compilation of this study material by
Prof. Shirufi Purohit is acknowledged. The
students are requested to study test books/
reference books to supplement this material
through Library work.

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Ethics in Business and Corporate Governance
THANK YOU
Prof. Dipak S Gaywala 70
Ethics in Business and Corporate Governance