Ch 4 Ethics in Business and

Corporate Governance

Prof. Dipak S Gaywala 1

Enron Case
This is your second assignment.

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Satyam case

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 Cases # 2

• The daily news and analysis (DNA) described the year

2010 as the year of financial scam, involving government
ministries, the companies, the societies and the others.
• Queen of all scam – The Satyam Scandal.
• It has been claimed that satyam is the biggest fraud in
India’s corporate history and will extremely impact India’s
business scene for years by raising many question about
corporate governance.

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Cases # 2
• B. Ramalinga Raju, founder and CEO of satyam computers,
India’s fourth largest IT services firm, admitted on January
7, 2009 that this company has been falsifying its accounts
for years, overstating the revenue and inflated profit by $ 1
billion.

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Cases # 2
• Raju acknowledged that,
• Rs. 7,136 crores – non-existence cash and bank
balances and interest.
• Inflated revenue in 2008 – (Rs. 588 crore to Rs. 1700
crore)
• Actual operating margin was less than a tenth of
stated Rs. 649 crore.

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Cases # 2
• Satyam means truth in Sanskrit.
• But was feeding its client, share holders, employees and
investors – Asatyam – untruth
• Raju was compelled to admit to the fraud following to an
aborted attempt to have satyam invest $ 1.6 billion in
Maytas properties and Maytas Infrastructure (spelled
backward of Satyam) – two firms promoted and controlled
by his family member.

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Cases # 2
• Satyam auditor pricewaterhouseCoopers- (PwC) issued a
careless statement, claiming: “the audits were conducted
by pricewaterhouse in accordance of applicable auditing
standard and were supported by applicable auditing
evidence.”
• But the PwC claim was not justified by the investigating
regulators, such as Institute of chartered accountants of
India (ICAI) and central bureau of investigation (CBI),
India.

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Cases # 2
• ICAI found PwC negligent in their audit responsibility.
• The ICAI branded PwC as “auditors as having been
negligent in their roles”
• When 6,000 crore out of 8000 crore were missing.
• Further the issue that PwC have received a bribes from
satyam computer to manipulate its reports.
• Both – Pwc Partner Subramani Gopalkrishnan and
satyam computer internal auditor V S Prabhakar Gupata
should be held accountable and charged for the fraud.

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Cases # 2
• The satyam scandal also reveled the absence of
whistle-blowers in India.
• There were no whistle-blowers, the truth came out only
when the nation and shareholder questioned Raju for the
Maytas deal and he himself confessed the crime.
• Enron case – CEO was questioned by the actions of
whistle-blowers.

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Johnson and Johnson Case
Second assignment.

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Individual in Business
Failures and collapses that occurred more due to
unethical business practices than because of
human errors or policy failures.
Most infamous cases of industrial collapses in
recent times are due to lack of morality and
individual ethics, bend upon making money for
themselves at any cost.

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Organization and the Individuals
There are 3 types of Organization
1. Rational organizations
2. Political organization
3. Caring organization

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ORGANISATION AND THE
INDIVIDUALS
Rational organizations are those wherein the
activities of a number of people are coordinated
for the accomplishment of some common explicit
purpose or goal, through the division of labour
and function along with a hierarchy of authority
and responsibility.

In a rational model, ethics focus on the

contractual obligations of the employer and
employees.
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Cont…
Political organisations, seldom look merely at the
formal lines of authority and communication within
the organisation.
They do not behave in a purely rational way and do
not accept that rationality is sacrosanct in achieving
the business goals and objectives.
These organisations view business as a system of
competing power and formal and informal lines of
communication for coalitions.
In a political model, the central ethical issues are
guided by the constraints of morals or laws of the
land.

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Co-existence of Political and Rational
Organisation

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Cont…
Caring organisations are not engaged in the
pursuit of profits and personal gains, but are
involved in caring for those for whom the
organisation has been designed, with whom it
interacts, and the people in the organisation
itself..
In a caring organisation, the employers may
grow closer to their employees and seek the
ways to serve and care for whom they exist, e.g.
employees, customers, society, stakeholders,
etc.
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Present situation
In fact, in today's knowledge driven business,
human capital is becoming the most critical
resource for survival and growth.
Hence in knowledge based industries like IR ,
R&D, financial management etc companies are
adopting more and more hybrid organizational
structures and work cultures.

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 Moral and ethical issues of individuals in an
organisation are influenced by, and dependent on,
the nature of the organisation and its work culture.

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RIGHTS AND OBLIGATIONS OF
INDIVIDUALS IN THE ORGANISATION
Rights devolve from the top in the organization
where power rests.
In an organization 1. top management constitute the
centralized decision making body
2. managers assume enforce managerial decisions
to hire,fire,promote,demote,reward,punish etc.
3. managers determine benefits, status, freedom to
communicate.
4. these managers distribute economic benefits and
rewards.

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The rights of individuals are also intricately
joined with the duties.
Any deviation from the contracted or mutually
understood duties would be wrong and judged
as unfair( unethical)
However, if the individual were to lose some
regular benefits bonus,increment,wage,hike,etc)
due to wrongdoing, then the organization cannot
be called unfair.

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Rights and duties
If individuals in an organization enjoy certain
rights, they are also bound by certain duties..
Thus they are reciprocal.

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LAW OF AGENCY

Employees at all levels are obliged (duty-bound) to

the company to behave ethically as a part of their
contracts and the relationships outlined by what is
commonly called the ‘law of agency’.

Law of agency specifies the legal duties of employees

(agent) towards their employers (principals) and
prohibits the agent (employees) to act in conflicts of
interests with those of the principal (employer).

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Organization and responsibility
for ethics
It is the organization responsibility to draw the
individuals into a culture of ethical behavior.
In this view company forms codes of conduct.
they believe that ethics is a top down process,
and commitment to ethics must start at the top.
Eg Enron, saytam.

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Whistle blowing
One of the propose of establishing the ethics
policy and ethics management mechanism in the
organization is to bring transparency but still
many indulge in immoral or unethical acts. For
this reason, organization provide people with
more power – known as whistle blowing

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Profession ethics
Chemist, doctor, salesperson, software
professional etc are morally duty bound to
prevent a wrongdoing.

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Ethical issues in HRM
1. Contact offered to employees
2. Nature of work conditions and environment
3. Discrimination in jobs
4. Lack of equal opportunity
5. Remuneration criteria and discrimination
6. Ethics of hiring- temporary and permanent hands
7. Ethics of retrenchment and layoff
8. Performance appraisal and performance measurement

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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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Thank You ………………

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