MODULE 1

Values

• Values represent basic convictions that “a specific mode of conduct or end-state of

existence is personally or socially preferable to an opposite or converse mode of
conduct or end-state of existence.

• They contain a judgmental element in that they carry an individual’s ideas as to what is
right, good or desirable.

• A value is a general belief which helps differentiate good from bad.

• Values influence a person’s intentions

• Intentions leads to actions

• Actions lead to results or consequences

Important sources of value

• Family

• Peer Groups

• Role Models

• Institutions

Types of Values

1. Terminal Values

2. Instrumental Values

Terminal Values refers to the desirable end states. These are the goals a person would like to
achieve during his or her lifetime.
They include happiness, self-respect, recognition, inner harmony, leading a prosperous life,
and professional excellence.

Instrumental values refers to preferable modes of behavior, or means of achieving the terminal
values.

These include being honest, sincere, ethical, and being ambitious. These values are more
focused on personality traits and character.

Terminal Values Instrumental Values

A comfortable life (a prosperous life) Ambitious (hardworking)

An exciting life (a stimulating, active life) Broadminded (open-minded)

A sense of accomplishment (lasting

Capable (competent, efficient)
contribution)

A world of peace (free of war and

Cheerful ( lighthearted, joyful)
conflict)

A world of beauty (the beauty of nature

Clean (neat, tidy)
and the arts)

Equality (brotherhood, equal opportunity

Courageous (standing up for your beliefs)
for all)

Family security (taking care of loved

Forgiving (willing to pardon)
ones)

Freedom (independence, free choice) Helpful (working for the welfare of others)

Happiness ( contentedness) Honest (sincere, truthful)

Inner harmony (freedom from inner

Imaginative (daring, creative)
conflict)
Schwartz’s Inventory of Values

1. “Power: Defining goal: social status and prestige, control or dominance over people
and resources.”

2. “Achievement – Defining goal: personal success through demonstrating competence

according to social standards.”

3. “Hedonism – Defining goal: pleasure or sensuous gratification for oneself.”

4. “Stimulation – Defining goal: excitement, novelty, and challenge in life.”

5. “Self-Direction – Defining goal: independent thought and action–choosing, creating,

exploring.”

6. “Universalism – Defining goal: understanding, appreciation, tolerance, and protection

for the welfare of all people and for nature.”

7. “Benevolence – Defining goal: preserving and enhancing the welfare of those with
whom one is in frequent personal contact (the ‘in-group’).”

8. “Tradition – Defining goal: respect, commitment, and acceptance of the customs and
ideas that one’s culture or religion provides.”
 9. “Conformity – Defining goal: restraint of actions, inclinations, and impulses likely to
upset or harm others and violate social expectations or norms.”

10. “Security – Defining goal: safety, harmony, and stability of society, of relationships,
and of self.”

• In addition to identifying ten basic values, the theory explicates the structure of
dynamic relations among them.

• One basis of the value structure is the fact that actions in pursuit of any value have
consequences that conflict with some values but are congruent with others.

• For example, pursuing achievement values typically conflicts with pursuing

benevolence values. Seeking success for self tends to obstruct actions aimed at
enhancing the welfare of others who need one's help.

• But pursuing both achievement and power values is usually compatible. Seeking
personal success for oneself tends to strengthen and to be strengthened by actions
aimed at enhancing one's own social position and authority over others.

• Pursuing novelty and change (stimulation values) is likely to undermine preserving

time-honored customs (tradition values).

• In contrast, pursuing tradition values is congruent with pursuing conformity values.

Both motivate actions of submission to external expectations.

Ethics

• Ethics also called as moral philosophy is concerned with what is morally good and
bad or morally right and wrong.

• The subject of ethics consists of the fundamental issues of practical decision making,
and its major concerns include the nature of ultimate value and the standards by which
human actions can be judged right or wrong.

Business Ethics

• Business Ethics is the study of appropriate business policies and practices regarding
potentially controversial subjects including corporate governance, insider trading,
bribery, discrimination, corporate social responsibility and fiduciary responsibilities.
 • Business ethics provide a basic guideline that businesses can choose to follow to gain
public approval.

Stakeholder Model of Business Ethics

• 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.

• Stakeholder theory is a “ A conceptual framework of business ethics and

organizational management which addresses moral and ethical values in the
management of a business or other organization. ”

• Corporations are not simply managed in the interests of their shareholders alone, but
that there are a whole range of stakeholders.

• It identifies and models the groups, which are stakeholders of a corporation and both
describes and recommends various methods to satisfy them.

• Ethical organization recognizes its responsibilities towards all stakeholders.

Freeman outlined six principles that should govern the relationship between the stakeholders
and the corporation:

1. The principle of entry and exit: According to this principle, there must be clear rules
that delineate, for example, the rules when it comes to hiring employees and
terminating their employment should be clear-cut and transparent.

2. The principle of governance: This principle is concerned with how the rules
governing the relationship between the stakeholders and the firm can be amended.
With unanimous consent, any changes are possible.

3. The principle of externalities: This is concerned with how a group that does not
benefit from the actions of the corporation has to suffer certain difficulties because of
the actions of the corporation. The principle of externalities suggests that anyone who
has to bear the costs of other stakeholders has the right to become a stakeholder as
well. Anyone who is affected by a business becomes a stakeholder.
 4. The principle of contract costs: Each party to a contract should either bear equal
amounts when it comes to cost, or the cost they bear should be proportional to the
advantage they have in the firm. Not all of these costs are financial in nature, so they
may be difficult to quantify.

5. Agency principle: This principle states that the manager of a firm is an agent of the
firm and therefore has responsibilities to the stakeholders as well as the shareholders.

6. The principle of limited immortality: This principle deals with the longevity of a firm.
To ensure the success of the organization and its owners alike, it is necessary for the
organization to exist for a prolonged period of time. If the firm only exists for a very
limited period of time, it would be advantageous for some of the stakeholders and
disadvantageous for others. This violates the concept of a stakeholder. Thus the firm
must remain in existence for a length of time, and it should be managed in a way that
ensures its survival. “Limited” immortality refers to the fact that the firm can be long-
lasting but it is impossible for it to actually be immortal.

There are two types of stakeholders :

• INTERNAL STAKEHOLDERS.

• EXTERNAL STAKEHOLDERS.

• Internal Stakeholders

• Shareholders

• Employees

• Management

• External Stakeholders

• Suppliers

• Customers

• Creditors

• Competitors

• Government
 • Society

RESPONSIBILITY TOWARDS OWNERS/SHAREHOLDERS

• Proper use of capital

• To manage business effectively

• To provide accurate and timely information

• Ensure growth and appreciation of owner’s capital

• Provide regular and fair return on owners capital

RESPONSIBILITY TOWARDS EMPLOYEES

• Fair compensation for service provided

• Timely and regular payments

• Provision of proper working and welfare conditions

• Job security

• Provision of security benefits and better living conditions

• Training and development opportunities

• To recognize and honor individual worker’s right

• Fair and unbiased treatment to all

RESPONSIBILITY TOWARDS MANAGEMENT

• Management decisions have impact

• Management has a fine balance

• Ultimately should help in achieving profit maximisation

RESPONSIBILITY TOWARDS CUSTOMERS

• Ensuring consistent quality

• Providing easy-to-use products

• Increasing customer satisfaction

 • Responding to product-related issues

RESPONSIBILITIES TOWARDS SUPPLIERS

• Giving regular orders

• Dealing with suppliers on fair terms and conditions

• Availing reasonable terms of credit

• Timely payment of dues

• Helping suppliers in improving or upgrading the quality

RESPONSIBILITIES TOWARDS CREDITORS

• To supply complete and accurate information

• To ensure that the value of investment doesn’t fall in the long term

• To raise public image of the company

• To improve prestige of the company

RESPONSIBILITIES TOWARDS COMPETITORS

• Not to claim exceptionally high commissions to agents and distributors

• Not to offer too high discounts to the consumers

• Not to defame competitors directly or indirectly

RESPONSIBILITIES TOWARDS SOCIETY

• Business morality

• Development of backward areas

• Efficient use of resources

• Financial assistance

• Environment Protection

RESPONSIBILITIES TOWARDS GOVERNMENT

• Payment of taxes
 • Obeying rules and regulations

• Giving suggestions

• Financial help during emergency

• Earn foreign exchange

Ethics and Religion

• Both are concerned with moral education

• Ethics is a science and relies on reason for its conclusion.

• Religion is a system of beliefs based on faith and revelation or truth.

• Ethics teaches the value of religion, as a duty towards the supreme being.

• It is possible to have ethics without religion, but religion without ethics is not worth
its name.

• One can be very ethical without being religious, but cannot be religious without being
ethical.

• In spite of this, a combination of ethics with religion can be useful. Religion lends a
fervour, a resoluteness of purpose, and a sense of compulsion, which makes following
ethics easier for common people.

• Gandhi saw no conflict between the two, as his religion was pure and genuine, shorn
of narrowness, and truth was his God.

• When religion is taken in its essence and is deeply spiritual, difference between
religion and ethics is significantly reduced because spirituality without ethics is just
not possible.

Morality and Ethics

• Morals are the internal (emphasis on internal) guidelines and principles that a person
uses to justify doing or not doing an act.

• Ethics are the external (emphasis on external) guidelines and principles that a person
uses to justify their actions. Ethics are imposed on a member of society in a number
of different ways.
Sources of Morality

• Human Nature

• Religion

• Reasoning and Observation

• Emotional Empathy

• Social and Political System

• Family

• Values

• Educational System

Work Ethics

• Positive work ethic is the collection of all the values and actions that people feel are
appropriate in the work place.

• To be successful in a career you must possess both strong occupational skills and
good work ethics.

Following are the areas of work ethic traits and performance standards you will be
expected to exhibit in the workplace:

• Attendance

• Character

• Teamwork

• Appearance

• Attitude

• Productivity

• Organisational skills

• Respect

• Cooperation
1.Attendance

• GOOD ATTENDANCE IS EXPECTED

• IT IS THE CORNER-STONE OF ADVANCEMENT

• DEPENDABILITY = RELIABILITY = MARKETABILITY

2.Character

• Display a high level of effort and commitment to performance and completion of

work

• Be honest in all situations

• Demonstrate trustworthiness and responsible behavior

• Displays loyalty, dependability, reliability, initiative, and self-discipline

3.Teamwork

• Encourage and facilitate cooperation, pride, trust, and group identity

• Foster commitment and team spirit

• Facilitate cooperation

• Respects the rights of others

• Respects confidentiality

• Is a team worker

• Is cooperative

• Is assertive

• Displays a customer service attitude

• Seeks opportunities for continuous

4. Appearance

• Present a neat, clean appearance

• Practice personal hygiene

• Wear clothing suitable to the job, task and environment

 • Use appropriate verbal and written etiquette

5. Attitude

• Demonstrates a positive attitude

• Appears self-confident

• Display a willingness to cooperate and accept constructive criticism

• Set realistic expectations

6. Productivity

• Follows directions and procedures

• Observe established policies on safety

• Notify proper authorities of circumstances or situations presenting potential safety

hazards

• Maintain equipment and supplies

• Keeps work area neat and clean

• Conserves materials

• Do not use or knowingly permit others to use tools and equipment improperly

• Make up missed assignments in a timely manner

• Stay on task and utilize time constructively

7. Organizational skills

• Prioritize and manage time and stress effectively

• Demonstrate flexibility in adapting to changes

8.Respect

• Treat fellow workers with respect, courtesy, and tact.

• Do not engage in harassment of any kind

• Know the legal definitions of sexual harassment

• Deal appropriately with cultural/racial diversity

Ethical Dilemma

• A situation in which a difficult choice has to be made between two courses of action,
either of which entails transgressing a moral principle.

• An ethical dilemma is a problem where a person has to choose between a moral and
an immoral act

Influences to Ethical Responses

1. Consequences

While making ethical responses the consequences of the response should be given its due
importance. It has to be evaluated how the decision is going to affect oneself and the
organisation.

2. Rules and Obligations

Ethical response should be based on rules of the organisation and obligations from one’s part
to the organisation. If violated, he/she should be ready to face disciplinary actions.

3. Values

A person’s response in a situation of ethical dilemma will be influenced a lot by the value
system he follows. The decision which he/she takes must be in congruence with his value
system.

Law and Ethics

• Law is a system of rules and guidelines which are enforced through social institutions
to govern behavior.

• Law is an expression of the ethical beliefs of our society.

• Ethics, also described as moral philosophy, is a system of moral principles which is

concerned with what is good for individuals and society.

Similarities between Ethics and Laws

• In general, laws are made based on moral values of a particular society. They describe
the basic behavior of human beings.
 • In other words, laws represent the minimum standards of human behaviors, that is,
ethical behavior.

• Both law and ethics are systems which maintain a set of moral values and prevent
people from violating them.

• They both provide people guidelines of what may do or what may not do in certain
situations

Differences between ethics and laws:

• Ethics comes from people’s awareness of what is right and what is wrong while laws
are written and approved by governments.

• It means that ethics may vary from people to people because different people may
have different opinions on a certain issue, but laws describe clearly what is illegal no
matter how people argue.

• To some extent, ethics is not well defined but laws are defined and precise.

• Nobody will be punished when they violate ethics; but whoever violates laws is going
to receive punishment carried out by relevant authorities.

• An action can be illegal, but morally right

• An action that is legal can be morally wrong.

• Some laws have nothing to do with ethics, like cars should go on the left side of
roads.

• Ethics emphasizes more on positive aspects while laws are more concerned with
negative actions.

• Ethics and law are closely related since law represent minimum ethical behaviors of
human beings; but they are distinct in many aspects.

• Ethics provides people guidelines on how to behave in order to create a peaceful

society

• Whereas laws carry out restrictions through punishment.

• Sometimes ethics and laws do not necessarily have any overlap, but these two
combined define how people should behave in the society.
Corporate Social Responsibility

• Corporate Social Responsibility is a management concept whereby companies

integrate social and environmental concerns in their business operations and
interactions with their stakeholders.

• CSR is generally understood as being the way through which a company achieves a
balance of economic, environmental and social imperatives (“Triple-Bottom-
Line- Approach”), while at the same time addressing the expectations
of shareholders and stakeholders.

• CSR is an evolving business practice that incorporates sustainable development into a

company's business model. It has a positive impact on social, economic and
environmental factors.

• According to EU Commission (2002) “ … CSR is a concept whereby companies

integrate social and environmental concerns in their business operations and in their
interaction with their stakeholders on a voluntary basis”

The Principles of CSR

• Sustainability

• Accountability

• Transparency

Sustainability

• It is concerned with the effect which action taken in the present has upon the options
available in the future.

• If resources are utilised in the present then they are no longer available for use in the
future, and this is of particular concern if the resources are finite in quantity.

Accountability

• It is concerned with organisation recognising that its actions affect the external
environment, and therefore assuming responsibility for the effects of its actions.

• This concept implies a quantification of the effects of actions taken, both internal to
the organisation and externally.
Transparency

• It means that the external impact of the actions of the organisation can be ascertained
from that organisation’s reporting and pertinent facts are not disguised within that
reporting.

• Thus all the effects of the actions of the organisation, including external impacts,
should be apparent to all from using the information provided by the organisation’s
reporting mechanisms.
 MODULE 2

Ethical Philosophies

• Normative Ethics

• Descriptive Ethics

• Applied Ethics

• Meta Ethics

• Deontological Ethics

• Teleological Ethics

• Virtue Ethics

• Utilitarianism

Normative Ethics

• Normative Ethics deals with “norms” or set of considerations how one should act.
Thus, it’s a study of “ethical action” and sets out the rightness or wrongness of the
actions.

• It is the branch of ethics that investigates the set of questions that arise when
considering how one ought to act.

• The word normative is an adjective which comes from the word "norm.“ which means
standard, or rule, or principle.

Central concepts of Normative Ethics

• Normative ethics has two central concepts: The right and the morally good.

• The concept of the right is, roughly, the concept of duty, the concept of
which actions we ought to perform, which it would be wrong not to perform.
 • The concept of the morally good, a target of the theory of value,
or axiology (Greek: axios = worth; logos = study of), refers to morally good
properties of human beings. Virtuous character traits such as kindness, courage, and
honesty are examples of states that are generally thought to be morally good.

• It is worth noting here that the term "right" is usually reserved for actions, whereas the
"morally good" is for states of character, including motives.

Which actions are right?

• The central question of normative ethics involves asking which actions fall into the
category of the right and the category of the wrong. This is called the theory of right
action.

• The theory of right action is an investigation and an attempt to answer the question:
"What ought I to do?" The "ought" in this question is to be interpreted as a moral
ought, and may be understood as equivalent to the question: "What is the right thing
to do?

• Besides the terms, "right," "wrong," and "ought," other important normative concepts
relating to action include "obligatory," "forbidden," "permissible," and "required.“

• A normative theory usually amounts to drawing out basic principles as standards of

right action.

• These basic principles may be employed as a moral guide to human beings in their
lives, deciding whether particular courses of action—or particular types of action—
are right or wrong.

Which states of character are morally good?

• The second important focus of normative theory is the question of what states of
character are desirable, or morally good.

• Here normative ethics attempts to answer the question: "What sort of person ought I
to be?" This is called the theory of virtue, or virtue ethics.

• The focus of this aspect of normative ethics is character. A virtue is a morally

desirable state of character such as courage.
 • The theory of virtue is directed not at what actions one ought to do, but what person
one should be.

• Theory of right action aims to specify which actions are right, a theory of virtue
should specify the virtues, that is, traits of character it is good or bad to possess.

• It should say, for example, that courage is a virtue, and cowardice a vice. It should
explain why we should think of traits like these as virtues or vices. The form of this
justification might be: Courage is a virtue because it tends to bring benefits to other
people.

• Here again, the state of character is assessed against a basic normative principle,
namely, that it is right to bring benefits to other people.

Important Normative Theories

1. Utilitarianism

• Classical utilitarianism says that the right action is that which produces the greatest
balance of overall happiness. By saying that happiness is the only determinant of the
rightness of an action, classical utilitarianism endorses hedonism as a theory of value.

• Utilitarianism has undergone many revisions, but one common move has been to
deny the hedonistic element, and preserve the claim that right action depends on the
best consequences overall in view of the principle of utility, although the best
consequences are not necessarily understood in terms of happiness but more broadly
in terms of valuable states of affairs.

2. Kantianism

• Kantian ethics stems from the work of the great German philosopher Immanuel Kant.

• Kant's theory revolves around what he calls the categorical imperative (CI), a moral
principle which he regards as the fundamental principle of morality, and from which
all our duties may be derived.

• The categorical imperative is basically a principle of consistency, demanding that we

act on reasons which all rational agents could endorse, that is, universally acceptable
reasons.
 • All specific moral requirements, according to Kant are justified by this principle,
which means all immoral actions are irrational because they violate CI

3. Virtue ethics

• Virtue ethics begins with an account of virtuous character. In other words, virtue
ethics offers an account of what states of character are desirable, or virtues, and then
tends to define right actions in terms of these virtues.

• For example, virtue ethics might say that lying is wrong because it is dishonest.
(Contrast it with the utilitarian explanation: Lying is wrong because it tends to bring
about unhappiness).

• Virtue ethicists, particularly, Aristotle and those who follow him, argue that right
action cannot be understood as conformity of actions to rules.

• They tend to emphasize that the virtuous person is someone who acts rightly in the
situation upon requirements that are unique to the situation.

• The virtuous person is someone who is able to perceive what the situation requires
and act accordingly.

Issues on normative ethics

Internal tension within normative ethics

• Normative ethics has two different foci it is interested in dealing with: action and
character. The question of action is usually asked by utilitarianism, Kantianism in its
methodological sense, and they address it by setting up moral rules and principles
which determine which actions are right.

• By contrast, the question of character is handled by virtue ethics, which begins with
an account of virtuous character.

• There is some tension between both approaches, which therefore criticize each other
sometimes.

• Utilitarianism and Kantianism criticize virtue ethics for not being able to tell what the
moral rules and principles should be to give clear guidance on how to act in specific
circumstances.
 • Virtue ethics, in turn, blames utilitarianism and Kantianism for inflexibly imposing
rules and principles upon all situations without being able to appropriately
accommodate complex circumstances such as abortion, euthanasia, and cloning where
the virtue of wisdom, for example, might be needed case by case.

Metaethics

• Metaethics—sometimes known as analytic ethics—is the branch of ethics that seeks

to understand the nature of ethical properties, and ethical statements, attitudes, and
judgments.

• In other words metaethics is reasoning about the presuppositions behind or

underneath a normative ethical view or theory.

• Metaethics addresses such questions as: "What is (moral or ethical) goodness?"

"What does it mean to say that something is good?" "What are the characteristics or
qualities of an acceptable or defensible ethical theory?" "What is justice?" "How, if at
all, can an ethical theory be justified?"

Applied Ethics

• Applied ethics is a field of ethics that deals with ethical questions specific to a
professional, disciplinary, or practical field.

• Subsets of applied ethics include medical ethics, bioethics, business ethics, legal
ethics, and others .

• There are generally two approaches taken in applied ethics. The first is to apply
ethical principles such as utilitarianism and deontological ethics to each issue or
question; the second is to generate a situation-based discourse that uses multiple
ethical theories.

• Applied ethics requires knowledge of specific fields and, oftentimes, multiple fields.

For example, in order to address the ethical questions concerning global warming, a
central issue in environmental ethics, philosophers often have to consider social,
economic, and political implications.

• Furthermore, applied ethics often require not only a theoretical analysis but also
practical, feasible solutions.
Descriptive Ethics

• Descriptive ethics, also known as comparative ethics, is the study of people's beliefs
about morality.

• Descriptive Ethics, the empirical (observational) study of the moral beliefs and
practices of different peoples and cultures in various places and times.

• Of particular interest in comparative ethics are the similarities and differences

between the moral practices and beliefs of different people, as explained by physical
and economic conditions, opportunities for cross-cultural contacts, and the force of
inherited traditions facing new social or technological challenges.

Deontological Ethics

• Deontological ethics recognizes a number of distinct duties, such as those proscribing

the killing of innocent people (murder) and prohibitions on lying and promise
breaking.

• Deontology maintains that the wrongness of (some) actions is intrinsic, or resides in

the kind of action that it is, rather than the consequences it brings about.

For example, an act of killing an innocent man is wrong because it is the killing of an
innocent man, rather than because it deprives someone of future happiness and causes
grief to a family.

• Deontologists think that moral action is essentially about following a set of rules that
forbid or require certain actions.

• Since deontologists equate right or wrong action with obedience or disobedience to

moral laws, they see rightness or wrongness as intrinsic to certain types of actions.

• Someone is considered as having done moral wrong, for example, when his or her act
intentionally deceives (i.e., a lie) or intentionally harms someone. The wrongness of
such an act does not depend on the consequences of the action

• Deontologists usually concentrate on moral rules formulated negatively as

prohibitions. Prohibitions are rules that forbid us to do certain things. "Thou shall not
murder" is a typical example of a deontological prohibition.
 • Deontologists also recognize positive duties to alleviate suffering and to tell the truth,
but do not generally hold the positive requirements to be quite as important as the
prohibitions.

Teleological Ethics

• The Greek word telos means goal, end, or purpose, and teleology is the study of goals,
ends and purposes.

• A moral theory is regarded as teleological to the extent that it defines and explains
right actions in terms of the bringing about some good state of affairs.

• A teleological moral theory defines right action in terms of the good.

• Theory of morality that derives duty or moral obligation from what is good or
desirable as an end to be achieved.

• Also known as consequentialist ethics, it is opposed to deontological ethics, which

holds that the basic standards for an action’s being morally right are independent of
the good or evil generated.

Social Contract Theory

• Social contract theory says that people live together in society in accordance with an
agreement that establishes moral and political rules of behavior.

• Thomas Hobbes (1588-1689) proposed that a society without rules and laws to govern
our actions would be a dreadful place to live.

• Hobbes described a society without rules as living in a “state of nature.” In such a

state, people would act on their own accord, without any responsibility to their
community.

• Life in a state of nature would be Darwinian, where the strongest survive and the
weak perish.

An example of a society in a state of nature can at times be observed when a society is

plunged into chaos due a catastrophic event or by cause of a natural disaster.

• In general, even without the calamities of natural disasters and war, Hobbes assumed
people would strive for more wealth and power in what could be described as a “dog
 eat dog” society, where, he believed, people will do whatever is required to survive in
a state of nature, where rules and laws are non-existent.

• This would mean that people will act in “wicked” ways to survive, including attacking
others before they are attacked themselves.

• For Hobbes, the solution is a social contract in which society comes to a collective
understanding — a social contract — that it is in everyone’s interest to enforce rules
that ensure safety and security for everyone, even the weakest.

• Thus, the social contract can deliver society from a state of nature to a flourishing
society in which even the weak can survive.

• The degree to which society protects the weak may vary; however, in our society, we
agree to the contract and need the contract to ensure security for all.

• The social contract is unwritten, and is inherited at birth.

• It dictates that we will not break laws or certain moral codes and, in exchange, we
reap the benefits of our society, namely security, survival, education and other
necessities needed to live.

Moral Relativism

• Moral relativism is the view that moral judgments are true or false only relative to
some particular standpoint (for instance, that of a culture or a historical period) and
that no standpoint is uniquely privileged over all others.

• According to this view, “slavery is unjust” is true relative to the moral framework of
most 21st century Norwegians, but it is false relative to the moral perspective of most
white Americans in South Carolina in the 18th century.

• Regarding the second clause in the definition, moral philosophers from the time of
Plato have sought to demonstrate the objective correctness (and hence the superiority)
of a given moral outlook by showing how it conforms to God’s will, or corresponds to
a metaphysical moral order, or is entailed by dictates of Reason, or accords with basic
intuitions, or best meets the needs of human nature.
 • According to the moral relativist, all such attempts fail, for they all rest on premises
that belong to the standpoint being defended and need not be accepted by people who
do not share that point of view.

• Thus, a critic of slavery could no doubt prove the truth of what she says to anyone
who accepts her basic premises—for example, that all races are equally human, and
that all human beings should enjoy the same basic rights.

• But the argument will not convince someone who denies these premises.

Divine Command Theory

• Divine Command Theory is the view that morality is somehow dependent upon God,
and that moral obligation consists in obedience to God’s commands.

• The specific content of these divine commands varies according to the particular
religion, but all versions of the theory hold in common the claim that morality and
moral obligations ultimately depend on God.

Utilitarianism

• Utilitarianism is an ethical theory that determines right from wrong by focusing on

outcomes. It is a form of consequentialism.

• Utilitarianism holds that the most ethical choice is the one that will produce the
greatest good for the greatest number.

• It is the only moral framework that can be used to justify military force or war.

• However, because we cannot predict the future, it’s difficult to know with certainty
whether the consequences of our actions will be good or bad. This is one of the
limitations of utilitarianism.

• Utilitarianism also has trouble accounting for values such as justice and individual
rights. For example, assume a hospital has four people whose lives depend upon
receiving organ transplants: a heart, lungs, a kidney, and a liver. If a healthy person
wanders into the hospital, his organs could be harvested to save four lives at the
expense of one life. This would arguably produce the greatest good for the greatest
number. But few would consider it an acceptable course of action, let alone the most
ethical one.
Immanuel Kant’s Theory

• Kant’s theory is an example of a deontological moral theory–according to these

theories, the rightness or wrongness of actions does not depend on their
consequences but on whether they fulfill our duty.

• Kant believed that there was a supreme principle of morality, and he referred to it
as The Categorical Imperative. The CI determines what our moral duties are.

• An imperative is a command. So, "Pay your taxes!" is an imperative, as are "Stop

kicking me!" and "Don't kill animals!“

• Hypothetical Imperatives: these imperatives command conditionally on your having a

relevant desire. E.g. “If you want to go to medical school, study biology in
college.” If you don’t want to go to medical school, this command doesn’t apply to
you.

• Categorical Imperatives: These command unconditionally. E.g. “Don’t cheat on your

taxes.” Even if you want to cheat and doing so would serve your interests, you may
not cheat.

• Morality must be based on the categorical imperative because morality is such that
you are commanded by it, and is such that you cannot opt out of it or claim that it
does not apply to you.

Egoism

• Egoism is the theory that one’s self is, or should be, the motivation and the goal of
one’s own action.

• Egoism has two variants, descriptive or normative.

• The descriptive (or positive) variant conceives egoism as a factual description of

human affairs. That is, people are motivated by their own interests and desires, and
they cannot be described otherwise.

• The normative variant proposes that people should be so motivated, regardless of

what presently motivates their behavior.

• The term “egoism” is derived from “ego,” the Latin term for “I” in English.
 MODULE 3

Ethics in Finance

1. Window Dressing

2. Insider trading

3. Churning

Window Dressing

• Window dressing is a technique used by companies and financial managers to

manipulate financial statements and reports to show more favorable results for a
period.

• Window dressing refers to actions taken or not taken prior to issuing financial
statements in order to improve the appearance of the financial statements.

• Window dressing is a strategy used by mutual fund and other portfolio managers near
the year or quarter end to improve the appearance of a fund’s performance before
presenting it to clients or shareholders.

• To window dress, the fund manager sells stocks with large losses and purchases high-
flying stocks near the end of the quarter. These securities are then reported as part of
the fund's holdings.

How Window Dressing Works?

 • Performance reports and a list of the holdings in a mutual fund are usually sent to
clients every quarter, and clients use these reports to monitor the fund's investment
returns.

• When performance has been lagging, mutual fund managers may use window
dressing to sell stocks that have reported substantial losses, replacing them with
stocks expected to produce short-term gains to improve the overall performance of the
fund for the reporting period.

• Another variation of window dressing is investing in stocks that do not meet the style
of the mutual fund.

• For example, a oil and gas fund might invest in stocks in a hot sector at the time,
disguising the fund's holdings and investing outside the scope of the fund’s
investment strategy.

Insider Trading

• Insider trading is the buying or selling of a publicly traded company's stock by

someone who has non-public, material information about that stock.

• Insider trading can be illegal or legal depending on when the insider makes the trade.
It is illegal when the material information is still non-public.

• Insider trading is defined as a malpractice wherein trade of a company's securities is

undertaken by people who by virtue of their work have access to the otherwise non
public information which can be crucial for making investment decisions.

• When insiders, e.g. key employees or executives who have access to the strategic
information about the company, use the same for trading in the company's stocks or
securities, it is called insider trading and is highly discouraged by the Securities and
Exchange Board of India to promote fair trading in the market for the benefit of the
common investor.

• Insider trading is an unfair practice, wherein the other stock holders are at a great
disadvantage due to lack of important insider non-public information.

• However, in certain cases if the information has been made public, in a way that all
concerned investors have access to it, that will not be a case of illegal insider trading.
 • As per SEBI’s ‘material financial relationships’ rules, company insiders will have to
disclose details of all people with whom they have significant financial dealings,
including such deals where the executive has paid money to a family member or
relative — that amount to higher than 25 per cent of the individual’s last one-year
earnings.

• The move is to check insider trading.

• Lately, a top executive of Gujarat State Petronet Ltd (GSPL) informed the Sebi that
he pays for his granddaughter’s studies abroad.

• He mentioned that the money is deposited in the university’s bank account, seeking
an arrangement for it to be exempted from being called a ‘material financial
relationship’.

• The Sebi, however, turned down his request.

Churning

• Churning is a term applied to the practice of a broker conducting excessive trading in

a client's account mainly to generate commissions.

• Churning may often result in substantial losses in the client's account, or if profitable,
may generate a tax liability.

• Since churning can only occur when the broker has discretionary authority over the
client's account, a client may avoid this risk by maintaining full control.

• Another way to prevent the chances of churning or paying excessive commission fees
is to use a fee-based account.

• However, placing a customer in a fee-based account when there is little to no activity

to justify the fee is indicative of another form of churning called reverse churning.

Ethics in HR

1. Discrimination on the basis of age, gender, race.

2. Sexual Harassment

3. Privacy of Employees

4. Fairness of Employment Contracts

Discrimination on the basis of Age, gender, race.

• There are several examples of organizations where, until recently, the employees were
treated differently based on the race, gender, origin, and their disability.

• This is not the case anymore since the evolution of laws and a regulatory framework
standardized for the employee behavior. In ethical organisations, the only factor of
appraisal is performance.

Age Discrimination

• Whenever an employer puts an employee to an obvious unfair disadvantage on the

basis of their age, without objectively justifying the act, it is termed as age
discrimination.

• Such discriminations will •unfavourably affect an individual and his or her

employment opportunities, regardless of their age;

• It results in a failure to consider skills-based potential, abilities, and experience in the

workplace; •ends up in significant legal costs, settlements and compensation paid to
avoid defending the age discrimination claim

Gender Discrimination

• Workplace gender discrimination comes in many different forms, but generally it

means that an employee or a job applicant is treated differently or less favorably
because of their sex or gender, or because the person is affiliated with an organization
or group that is associated with a particular sex or gender.

• Even though the words “sex” and “gender” have different meanings, laws against
discrimination at work often use them interchangeably.

Some examples of treatment that could be gender discrimination include:

• not being hired, or being given a lower-paying position because of your sex (for
example, when an employer refuses to hire women, or only hires women for certain
jobs)

• being held to different or higher standards, or being evaluated more harshly, because
of your sex, or because you don’t act or present yourself in a way that conforms to
traditional ideas of femininity or masculinity.
 • Being paid less than a person of a different sex who is similarly or less qualified than
you, or who has similar (or fewer) job duties than you.

• Being denied a promotion, pay raise, or training opportunity that is given to people of
another sex who are equally or less qualified or eligible as you

Race Discrimination

• Race discrimination constitutes any unfavorable treatment against a job applicant or

employee, specifically because of his or her race or race-related characteristics, such
as skin tone, hair texture, or facial features.

• Discrimination in favour of a particular racial group may be permitted as a special

measure that is a positive step to combat disadvantage or to meet the group’s specific
needs, such as providing welfare services targeted at a particular racial group.

• Employers are liable for their employees’ acts of discrimination or sexual harassment.

• Employers also have a positive duty to eliminate discrimination, sexual harassment

and victimisation as far as possible.

Sexual Harassment

• Sexual harassment is unwelcome sexual behaviour, which could be expected to make

a person feel offended, humiliated or intimidated.

• It can be physical, verbal or written.

• Sexual harassment is covered in the workplace when it happens:

– at work

– at work-related events or where people are carrying out work-related functions

– between people sharing the same workplace

• The act which covers sexual harassment against women at work place is ‘The Sexual
Harassment of Women at Workplace (Prevention, Prohibition and Re-dressal)’ Act.

Privacy of Employees

• Employees typically must relinquish some of their privacy while at the workplace, but
how much they must do so can be a contentious issue.
 • The debate rages on as to whether it is moral, ethical and legal for employers
to monitor the actions of their employees.

• Employee privacy rights are the rules that limit how extensively an employer can
search an employee’s possessions, monitor their actions, speech, or correspondence;
and know about their personal lives.

• Employees must remember that workplace surveillance is legal.

• Globally, such practices, whether for the enforcement of discipline or for the
protection of business interests, are generally considered to be valid. It is crucial,
however, that the surveillance be reasonable, and that the employees be aware of the
surveillance.

• Justice AP Shah report gives a general guideline on the matter of privacy.

• Notice has to be given, employee consent, degree of intrusion, justification for the
intrusion, consequences etc.

Fairness of Employment Contracts

• Contracts should be genuine and beneficial for both the parties.

• Employer expects loyalty, sincerity, integrity, hard work etc. from the employee.

• Conditions like working hours, salary, bonus, incentives etc. must be clearly
mentioned.

• Work location, tenure of the contract also must be mentioned.

Occupational Safety

• Safety of the employees is the responsibility of the employer.

• The safety norms differ from industry to industry.

• The safety norms of a factory is different from that of an office.

• For hazardous areas the safety norms are different, for example coal fields, oil and gas
stations etc. require additional safety.

Marketing Ethics

• Marketing ethics is an area that deals with the moral principles behind marketing.
 • Ethics in marketing applies to different spheres such as in product, pricing,
Placing(Distribution), promotion & advertising etc...

Ethical Issues in Marketing

We discuss Marketing issues by using 4P’S OF MARKETING:

• PRODUCT & PACKAGING

• PRICE

• PLACING (DISTRIBUTION)

• PROMOTION (ADVERTISING & BRANDING)

Product

• Consumer safety

• Product liability and reliability

• Designing for special needs

Packaging

• Label information

• Packaging graphics

• Packaging safety

• Environmental implication of packaging

Price: Second P of Marketing

• Bid rigging:

Illegal practice in which businesses conspire to allow one another to secure contracts at raised
prices, thereby undermining free-market competition

• Supra competitive pricing:

Pricing above what can be sustained in a competitive market. This may be indicative of a
business that has a unique legal or competitive advantage or of anti-competitive behavior

• Price fixing:
Price fixing is setting the price of a product or service, rather than allowing it to be
determined naturally through free-market forces.

A practice whereby rival companies come to an illicit agreement not to sell goods or services
below a certain price

• Price skimming: Charging too high

• Penetration Pricing: Charging too low

PLACING (DISTRIBUTION)

• Product distribution (or place) is one of the four elements of the Marketing MIX.

• Distribution of product or service is transporting them from manufacturer to

wholesalers, retailer and then to consumers.

• Many retailers sell products that have crossed expiry date is unethical.

• Exerting influence to cause vendors to reduce display space for competitors' products
is unethical.

• Promising shipment when knowing delivery is not possible by the promised date is
also unethical.

• Paying vendors to carry a firm's product rather than one of its competitors are also
unethical.

• Most drug stores would give too many drugs without prescription from a qualified
doctor are also unethical.

• Products moved in unsafe vehicles ,are also unethical.

• Tying Arrangement:

The term tying arrangement refers to the practice of selling a product to a buyer with their
agreement to buy another product from the same seller. Tying arrangements can be
considered an anticompetitive practice if it restricts trade or decreases competition in a given
market.
PROMOTION (ADVERTISING & BRANDING)

• Promotion is one of the four elements of marketing mix (product, price, promotion,
place). It is the communication link between sellers and buyers for the purpose of
influencing, informing, or persuading a potential buyer's purchasing decision.

• To present information to consumers as well as others

• To increase demand

• To differentiate a product

Ethical Issues in Advertising

• Puffery ( Nothing to support the fact. ): Advertising or promotional material that

makes broad exaggerated or boastful statements about a product or service

• Advertising to Children

• Promoting Unhealthy Products

• Subliminal Advertising: Subliminal messages in advertising are designed to engage

people subconsciously.

• Deceptive Advertising:

Deceptive advertising, or false advertising, is any type of advertising that is false, misleading,
or has the effect of deceiving consumers. An ad can be deceptive in many aspects, including:
Price of a product Quantity of a product The quality or standard of the item etc.

• Surrogate advertising is a form of advertising which is used to promote banned

products, like cigarettes and alcohol, in the disguise of another product.

Ethics in Production

Process Issues

• Effluent Discharge

• Optimal use of resources like power and water

Product Issues

• Intrinsically hazardous products

 • Genetically modified products

• Flawed products

Unethical attributes of products

• Product may be unsafe and damaging to health either in the short run or in the long
run.

• The product is not reliable, which means that product on its application does not serve
the purpose for which it was bought in spite of the claim by the producer.

• The product may be sub-standard

• The service life of the product may be shorter than what is claimed.

• The maintenance standard as claimed by the producer may not be correctly stated. It
needs more frequent attention and involves expenditure.

• The product may produce unwanted side effects.

• The product may be contaminated and adulterated by another product whose effect is
unknown and uncertain.

Unethical Working Conditions

• Many serious diseases like cancer, asthma and bronchitis are job-related.

• Noise pollution

• Death due to physical accidents in factories

• Occupational hazards

• Choice of unhealthy production site

• Working conditions and facilities may be inadequate like long working hours, high
temperature, lack of privacy, no separate washrooms for men and women, no
provision for first aids etc.

• Inside and outside pollution by chemical substances and obnoxious gases are the
regular features of many industrial enterprises.

In India, there are norms and rules provided in the Indian Factory Act of 1948 but these are
not strictly followed in POM.
Ethical Issues and Dilemmas in IT Industry

• Level of informational privacy

• Ensuring the accuracy of information

• Informational property rights

• Accessibility of information

• Availability without payment

• Use the information in a modified form

Unethical practices in IT industry

• Spreading viruses

• Piracy

• Hacking

• Hijacking

• Spoofing

• Infringement of copyright materials

• Credit card fraud

• Account take-over

• Phishing

• Unauthorised sharing of information

• Emails threat
 MODULE 4

Ethics Programme

• An ethics program helps communicate your company’s business philosophy to

employees, vendors, investors and customers.

• A good ethics program can help strengthen your relationships with employees and
customers and improve your company’s reputation.

• Although your employees might be familiar with your company’s informal stance on
ethics, instituting a program eliminates any confusion and provides everyone with the
same information regarding ethical business behavior.

• Ethics program provides employees with clear guidelines regarding acceptable and
ethical behavior.

• Organisations should develop an organisational ethics program by establishing,

communicating and monitoring uniform ethical values and legal requirements.

• For example, the program guidelines might explain when employees can accept gifts
from vendors, what type of gifts can be accepted and the maximum allowable Rupee
amount for gifts.

• Part of an ethics program involves ensuring that your company is in compliance with
all laws and regulations for your industry. Compliance is not only good for your
reputation; it can save you thousands of Rupees in fines or legal fees if you fail to
meet the requirements of a specific regulation.

• Ethics programs that stress that employees treat customers fairly, provide accurate
information and make every effort to resolve problems provide a benchmark for good
customer service practices.
 • Unhappy customers are likely to take their business elsewhere, but not before they
tell a few friends about their negative experience with your company.

• Customers are particularly upset when a company doesn’t perform as promised.

• Your ethics program can not only help you retain current customers, but also attract
new customers familiar with your stellar reputation

• A positive reputation will not only help you keep customers; it can also help you
recruit and retain employees. When people are eager to work for your company
because of its reputation as a good employer, you can attract a much more qualified
pool of potential employees

• A program developed in the absence of a misconduct will be more effective than one
imposed as a reaction to scandal.

Code of Ethics

• A code of ethics is a document, usually issued by a board of directors, that outlines a

set of principles that affect decision-making.

• For example, a code of ethics might stipulate that XYZ Corporation is committed to
environmental protection and green initiatives.

• The expectation is that individual employees, when faced with the option, will select
the greenest solution.

• Code of ethics is the most comprehensive document which consists of general

statements, sometimes altruistic or inspirational, that serve as principles and the basis
for rules of conduct.

• A code of ethics generally specifies methods for reporting violations, disciplinary

action for violations, and a structure of due process.

• A code of conduct typically is issued by a board of directors; however, it outlines

specific behaviors that are required or prohibited as a condition of ongoing
employment.

Corporate Codes of Ethics

Often contains six core values

 1. Trustworthiness

2. Respect

3. Responsibility

4. Fairness

5. Caring

6. Citizenship

• These values will not be effective without distribution, training, and the support of top
management in making these values part of the corporate culture.

Developing and Implementing a Code of Ethics

1. Consider areas of risk and state the values as well as conduct necessary to comply
with laws and regulations. Values are an important buffer in preventing serious
misconduct.

2. Identify values that specifically address current ethical issues.

3. Consider values that link the organization to a stakeholder orientation. Attempt to find
overlaps in organizational and stakeholder values.

4. Make the code understandable by providing examples that reflect values.

5. Communicate the code frequently and in language that the employees can understand.

6. Revise the code every year with input from organizational members and stakeholders.

Ethics Officers

• They are responsible for managing their organization’s ethics and legal compliance
programs. They are usually responsible for:

1. Assessing the needs and risks that an organization-wide ethics program must address

2. Developing and distributing a code of conduct of ethics

3. Conducting training programs for employees

4. Establishing and maintaining a confidential service to answer employees' questions

about ethical issues
 5. Making sure that the company is in compliance with government regulation

6. Monitoring and auditing ethical conduct

7. Taking action on possible violations of the company's code

8. Reviewing and updating the code

Ethics Training

1. Help employees identify the ethical dimensions of a business decision.

2. Give employees a means to address ethical issues.

3. Help employees understand the ambiguity inherent in ethical situations.

4. Make employees aware that their actions define the company's ethical posture both
internally and externally.

5. Provide direction for employees to find managers or others who can help them resolve
ethical conflicts

6. Eliminate the belief that unethical behavior is ever justifiable by stressing that

a. Stretching the ethical boundaries results in unethical behavior

b. Whether discovered or not, an unethical act is just that

c. An unethical act is never in the best interests of the company

d. The firm is held responsible for the misconduct of its members

Ethics Audit

• Ethics audit refers to an audit conducted in order to adjudge whether the organization
is following the code of ethics and code of conduct goals and values that it has set for
itself.

Six Steps to Highly Effective Ethics Audits

• Start with a detailed foundation

An ethics audit is a comparison between actual employee behavior and the guidance
for employee behavior provided in the code of ethics. The more descriptive and specific
ethics-related policies and procedures are, the easier it is to make these comparisons.
 • Develop metrics.

Ethics audits may not be as black-and-white as financial or operational audits, but they
run more smoothly when tangible ethics measures are in place. Consider adding ethics
goals to annual performance reviews and, where possible, tying compensation to ethical
behavior.

• Create a cross-functional team.

Include an HR professional familiar with people in the business unit being audited.
Most ethics audit teams include an ethics and compliance manager where possible as
well as an internal auditor and legal managers.

• Audit efficiently.

Audits frequently disrupt normal operations in business areas subjected to review.

Before scheduling an audit, find out if internal auditors or the finance team may be
conducting reviews of the same area. If so, combine these efforts to limit disruptions.
Once the audit has been scheduled, create a plan that spells out employees to be
interviewed, information that requires review and any processes that require
observation.

• Look for other issues.

Keep an eye out for other improvement opportunities, and share those with relevant
colleagues. For example, ethics issues in a sales area may have revenue-recognition
implications from a financial reporting perspective.

• Respond consistently and communicate.

Discipline ethics violations in complete accord with policies and procedures and the
code of conduct every time. Also, use ethics issues, when possible, as grist for "lessons
learned" in ethics-related communications and training.

Whistleblowing

• Whistleblowing is the act of drawing public attention, or the attention of an authority

figure, to perceived wrongdoing, misconduct, unethical activity within public, private
or third-sector organisations.
 • A whistleblower is anyone who has and reports insider knowledge of illegal activities
occurring in an organization. Whistleblowers can be employees, suppliers, contractors,
clients, or any individual who becomes aware of illegal business activities.

Classification

• Internal

• External

Internal whistleblowing

• The whistleblower reports misconduct on a fellow employee or superior within their

company through anonymous reporting mechanisms often called hotlines.

• Anonymous reporting mechanisms, help foster a climate whereby employees are more
likely to report or seek guidance regarding potential or actual wrongdoing without fear
of retaliation.

External Whistleblowing

• The whistleblower reports misconduct to outside persons or entities. In these cases,

depending on the information's severity and nature, whistleblowers may report the
misconduct to lawyers, the media, law enforcement or watchdog agencies, or other
local, state, or federal agencies. In some cases, external whistleblowing is encouraged
by offering monetary reward.

Legal Support to Whistle Blowers

• Experience of various whistleblowers in the past forced the government to pass the
Whistle Blowers Protection Act in 2011.

• It provides 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.

• The Act will also ensure punishment for false or frivolous complaints.

Salient Features
 • The Act seeks to protect whistle blowers, i.e. persons making a public interest
disclosure related to an act of corruption, misuse of power, or criminal offense by a
public servant.

• Any public servant or any other person including a non-governmental organization may
make such a disclosure to the Central or State Vigilance Commission.

• Every complaint has to include the identity of the complainant.

• The Vigilance Commission shall not disclose the identity of the complainant except to
the head of the department if he deems it necessary. The Act penalizes any person who
has disclosed the identity of the complainant.

• The Act prescribes penalties for knowingly making false complaints.

Tips to Successful Whistle Blowing

1. Document your findings carefully. Don’t hesitate to record conversations and make
copies of files and emails that support your conclusions.

2. Keep copies of all documentation in a secure place that is independent from the
influence of the organization you plan to expose.

3. Promptly report your findings to the proper authorities. Face-to-face meetings help
establish your credibility and create personal connections that may help protect you.

4. Retain lawyers who specialize in fighting defamation. The most common response to
whistle blowing is character assassination. You want experienced lawyers who will
fight back promptly with anti-defamation lawsuits.

5. Reach out to journalists who specialize in covering financial fraud and related topics.
Meet with them in person so they get the story directly from you—not from sources
who are trying to discredit you.

6. Know your rights

7. Limit your discussions of the situation to the authorities. Sadly, some whistle-blowers
have been put in danger even by close friends and family members who were swayed
by bribery or intimidation.
 • Eg: In 2003, Satyendra Dubey, an engineer employed with National Highways
Authority of India was murdered after he exposed corruption in road projects under his
watch.

• In 2005, Indian Oil Corporation officer, Shanmugam Manjunath, was shot dead for
acting against petrol adulterers in the northern state of Uttar Pradesh.

Corporate Governance

• Corporate governance is the coordination and maintenance of a set of relations that

promote the interests of shareholders and stakeholders of a business corporation.

• “It is a system by which companies are directed and controlled” OECD definition.

• It is a set of relationships between a company’s management, board, shareholders and

stakeholders.

• World Bank has given two definitions:

• From public policy perspective: “ it is about nurturing a company with

accountability in the exercise of power and control over the company”.

• From corporation perspective: “ corporate governance is relations between

owners, management, board and stakeholders”.

Need for Corporate Governance

There are various reasons for the need for corporate governance in an organization:

1. A corporation, which is a union of many stakeholders, such as employees, customers,

investors, vendors, and so on, must be fair and transparent to its stakeholders in all its
dealings. If a corporation does not take up and show ethical conduct, it is not considered
to be successful.

2. It is beyond the sphere of law, i.e., it stems from the background and outlook of the
management and cannot be regulated by legislation alone. It deals with running the
affairs of a company in such a way that it is fair to all the stakeholders and that its
dealings benefit the greatest number of stakeholders. It is about honesty, integrity and
responsibility.
 3. Corporations should realize that it is necessary for all the stakeholders to cooperate in
order to facilitate development. Such cooperation and support can only be possible by
adhering to the best practices of corporate governance.

4. The economic competence of a company can be improved through corporate

governance. Corporate governance also ensures that corporations consider the interests
of a wide range of constituencies and also of the communities within which they
function.

5. If the execution of good governance fails, heavy losses can result in terms of cost other
than regulatory problems. Many organizations that do not give due importance to
corporate governance end up paying a large risk premium while contending for scarce
capital in the public markets. Of late, stock market analysts have started realizing,
accepting and appreciating the relationship between returns and corporate governance

6. The confidence of both foreign and domestic investors is maintained and upheld due to
the trustworthiness that comes from good measures of corporate governance.

7. Corporate governance is aimed at increasing the long-term value of an organization.

Corporate governance includes the entire stakeholder and at the same time the process
is economic as well as social.

Principles of Corporate Governance

Corporate governance includes principles such as honesty, trust, integrity, responsibility,

accountability and commitment to the organization. Apart from these, the other principles of
corporate governance are as follows:

• Rights and equitable treatment of shareholders: The organizations must acknowledge

the rights of the shareholders and they must help the shareholders in exercising their
rights effectively. Shareholders must also be encouraged to participate in the general
meetings of an organization.

• Interests of other stakeholders: It is the duty of an organization to recognize the legal

and other obligations of certain stakeholders.

• Role and responsibilities of the board: In order to deal with various issues of a business,
an organization needs a wide range of skills among the members of the board. The
members of the board must work with great responsibility.
 • Integrity and ethical behaviour: In order to promote ethical and responsible decision-
making, organizations must develop a code of conduct for the directors of an
organization.

• Disclosure and transparency: The roles and duties of directors must be clearly defined
by an organization. Organizations must implement certain procedures in order to verify
and safeguard the integrity of the organization. An organization must disclose the
financial information to investors and shareholders.

Elements of Good Corporate Governance

1. Direction

Providing overall direction for the business, its leaders and employees is a major part of
corporate governance. Making strategic decisions and discussing current and future concerns
of the company are tactics of this element. Company mission and vision statements stem from
the governance role of business. These statements provide a sense of purpose and illustrate
primary motives for the company's business activities.

2. Oversight

The corporate governance role also provides some level of leadership oversight in companies.
In publicly owned companies, for instance, company boards monitor and evaluate decisions
and actions of CEOs and other executive officers. This ensures that leaders act in the best
interest of shareholders and other stakeholders. In smaller businesses, executive teams
normally assume this role of preventing too much power falling to one person. Without a
governing board, though, this is more of a challenge.

3. Stakeholder Relations

Corporate governance encompasses a business's accountability to each of its stakeholder

groups. Traditionally, this role has largely centered on investor relations and communication
of company decisions. Investors can often find contact information for board members on
company websites. In the early 21st century, there is more emphasis on balancing investor
interests with concern for other stakeholders, such as customers, employees and business
partners. Governance web pages often indicate specific things companies do to meet
expectations of each.

4. Corporate Citizenship
 • Another major evolution in the early 21st century is increased focus on corporate
citizenship. Companies commonly include a corporate citizenship statement on
corporate governance or investor relationships web pages. Such statements
communicate the business's intent to act with social and environmental responsibility.
Philanthropy and other charitable contributions are among common things noted within
corporate citizenship statements. In general, governance includes an awareness that
companies should balance profit-generating activities with responsible policies and
practices.

5. Independence of Directors

If the directors of the company are also the owners and/or their family members, entrepreneurs
appointed by friends, or individuals who are involved in the daily management of the company,
the board is unlikely to be impartial. Having a majority of non executive independent directors
will help avoid prejudice and conflicts of interest between the board and management.
Independent judgement is almost always in the best interest of the company.

6. Effective Risk Management

Even if your company implements smart policies, competitors might steal your customers,
unexpected disasters might cripple your operations and economy fluctuations might erode the
buying capabilities of your target market. You can’t avoid risk, so its vital to implement
effective strategic risk management. One example is Diversification of business.

7. Transparency

Managers sometimes keep their own counsel, limiting the information that filters down to
employees. But corporate transparency helps unify an organisation. When employees
understand management’s strategies and are allowed to monitor the company’s financial
performance, they understand their roles within the company. Transparency is also important
to the public, who tend not to trust secretive operations.

Theories of Corporate Governance

1. Agency Theory

2. Stewardship Theory

3. Shareholder Theory
 4. Stakeholder Theory

Agency Theory

• Agency theory defines the relationship between the principals (such as shareholders of
company) and agents (such as directors of company).

• According to this theory, the principals of the company hire the agents to perform work.
The principals delegate the work of running the business to the directors or managers,
who are agents of shareholders.

• The shareholders expect the agents to act and make decisions in the best interest of
principal.

• On the contrary, it is not necessary that agent make decisions in the best interests of the
principals.

• The agent may be succumbed to self-interest, opportunistic behavior and fall short of
expectations of the principal.

• The key feature of agency theory is separation of ownership and control. The theory
prescribes that people or employees are held accountable in their tasks and
responsibilities. Rewards and Punishments can be used to correct the priorities of
agents.

Stewardship Theory

• The stewardship theory states that a steward protects and maximises shareholders
wealth through firm Performance.
 • Stewards are company executives and managers working for the shareholders, protects
and make profits for the shareholders.

• The stewards are satisfied and motivated when organizational success is attained.

• It stresses on the position of employees or executives to act more autonomously so that

the shareholders’ returns are maximized. The employees take ownership of their jobs
and work at them diligently.

• Unlike agency theory stewardship theory stresses not on the perspective of

individualism, but rather on the role of top management being as stewards, integrating
their goals as part of the organisation.

• The stewardship perspective suggests that stewards are satisfied and motivated when
organisational success is attained.

Stakeholder Theory

• Stakeholder theory incorporated the accountability of management to a broad range of

stakeholders.

• It states that managers in organizations have a network of relationships to serve – this

includes the suppliers, employees and business partners
 • The theory focuses on managerial decision making and interests of all stakeholders
have intrinsic value, and no sets of interests is assumed to dominate the others.

• Unlike agency theory in which the managers are working and serving for the
stakeholders, stakeholder theorists suggest that managers in organisations have a
network of relationships to serve.

Shareholder Theory

• The owners seek a return on their investment and that is why they invest in a
corporation.

• But this narrow role has been expanded into overseeing the operations of the
corporations and its mangers to ensure that the corporation is in compliance with
ethical and legal standards set by the government.

• Directors are responsible for any damage or harm done to their property i.e., the
corporation.

• The role of managers is to maximize the wealth of the shareholders.

• They, therefore should exercise due diligence, care and avoid conflict of interest and
should not violate the confidence reposed in them.
 MODULE 5

Role of Directors
Duties and Responsibilities of Board of Directors
BOD is the heart and soul of Corporate Governance, it is empowered with many duties and
responsibilities of which the following are crucial:
• It works as a friend, philosopher and guide for the whole company. It gives direction,
defines the company’s strategy and plans and ensures that management translates
those plans into action.
• It appoints independent directors
• One of the important responsibilities of the board is to ensure that shareholder’s
interest is given top priority.
• It gives direction and supervises the critical activities of the company.
• It is responsible for the maintenance of accountability and transparency
• Monitoring the overall activities of the company ( and also that of the CEO) is an
important function of the board.
• The fiduciary duties need to be performed with loyalty and good faith, and care and
circumspection.
• The board has to ensure that for the smooth functioning of the organization, the flow
of information is optimum and there is no asymmetry anywhere. There should be a
maximum flow of information for all concerned.
• The board draws critical action plans and programs and formulates policies for
fulfilling corporate social responsibilities which are now regarded as an essential
corporate objective.
• The board ensures the availability of financial resources.
• It approves annual budgets
• It fixes up salaries and compensation
• The board is obviously involved in all types of crucial decision-making processes.
The board conducts frequent meetings and makes plans and resolves issues.
• The board makes sure that the company is based on ethical principles and it is
supposed to give ethical leadership at different levels.
 • The board appoints various critical committees and functions through them.
Corporate Board Committees
In standard corporate governance practices, there are three committees which are helpful to
carry out the functions of the Board of Directors.
1. Audit Committee
2. Remuneration Committee
3. Nomination Committee
Audit Committee
• This is one of the most crucial committees of BOD. It generally consists of three
independent and non executive members.
• The committee meets regularly, not less than twice a year.
• The audit committee has a number of functions and recommendations to make,
including the scope, the method and the procedure of auditing, resolving conflicts in
financial matters, audit fees and change or reappointment of members, systematic
review of the financial system, interim and final accounts and so forth.
• It is an independent committee and has considerable leverage in maintaining checks
and balances.
• The committee is supposed to settle disputes that arise between the team of external
auditors and the management, the committee takes neutral stand.
• It is supposed to make important financial disclosures which are helpful for the
company to understand its financial strength and for the investors to know about the
real worth of the company.
Remuneration Committee
• This committee frames policies regarding all classes of people working in the
company.
• It should be an independent committee that will assess the material contribution of
people before fixing up the remuneration.
• It is a very important committee that may bring loss or gain to the company, hence it
is of much interest to the shareholders.
• It is accepted on all hands that remuneration should be based on performance or
productivity.
• But since some types of corporate performances are not amenable to accurate
measurements, there may remain a gap.
• A system of incentive or bonus may go a long way in the improvement of the
performance scale.
 • Apart from this, it needs to be appreciated that there should be a clear cut policy of
reward and incentive to attract best talents in the company.
Nomination Committee
• The nomination committee selects non-executive directors.
• It works on an adhoc basis, the committee is usually chaired by the CEO.
• The selection process is supposed to be based on merit through a proper interview.
• Some independent firms help to find out competent persons.
• In many cases, the shareholders take some interest in the selection of the right
persons.
Emerging trends in Corporate Governance
• In many countries including India, the role of the board has been made more elaborate
by making management more accountable through the audit committee.
• Increasing use of newer technology and communication system. This has
considerably reduced the problem of information asymmetry.
• There is a growing trend of more external candidates becoming CEO. These CEOs
will have a shorter tenure than internal CEOs.
• In spite of RTI Act in India in 2005, informers and whistle blowers are being
harassed. Recent recommendations are in favour of protecting the whistle blowers to
make corporate governance more streamlined and trouble free.
• All forms of corporate disclosures are now the trend. Disclosures will make things
more transparent.
• A recent trend in corporate governance is to make Audit, Nomination and
Remuneration committees more neutral by bringing in independent directors.
• Many corporations are now looking for a market for corporate governance services.
Such services are going to be outsourced in the near future
• All countries, especially India are engaged in reforming company laws and tax laws in
accordance with the requirements of industrial growth and new responsibilities
towards corporate governance.
• CSR has now been accepted as one of the most important activities of all types of
corporations and is one of the agreed tasks of corporate governance all over the
world.
• Growth of socially responsible investment is a new trend in corporate governance.
This leads to a more organised control and desirable investment opportunities.
• One of the most important emerging trends in the corporate governance now is the
acceptance of a globalised standard of corporate governance. These standards as
norms are already set by the OECD. Many of the world countries have opted for this
standard in recent years.
 • There is now a trend to give greater compensation to CEO. However some expert
committees have recommended the abolition of the post of CEO. SO, regarding the
position of CEOs, things are yet in a fluid stage.
• Following many international business scams and scandals, many authorities are
insisting upon the promulgation of corporate governance codes in both private and
public sector organisations.
Corporate Disclosure
• Corporate disclosure can be defined as the communication of information by people
inside the public firms towards people outside.
•  The main aim of corporate disclosure is “to communicate firm performance and
governance to outside investors” .
• This communication is not only called for by shareholders and investors to analyze
the relevance of their investments, but also by the other stakeholders, particularly for
information about corporate social and environmental policies.
• Disclosure takes different forms. The most important one is financial reporting,
essentially financial statements whose contents are defined by accounting standards.
• Besides reporting, managers also communicate information in a less formal way, for
instance by press conferences, by announcement on websites and so on.
Clause 49 Disclosures
• Compensation philosophy and statement of entitled compensation in respect of non-
executive directors
• Details of shares held by non-executive directors
• Declaration by CEO that all Board Members and senior management comply with
laid down code of conduct
• Disclosure if accounting treatment is different from that prescribed in Accounting
Standards
• Affirmation that it has not denied any personnel access to the audit committee of the
company and that it has provided protection of “whistle blowers” from unfair
termination and other unfair or prejudicial employment practices.
• When money is raised through an Initial Public Offering disclosure of the
uses/application of funds by on a quarterly basis.
• Further, on an annual basis, the company shall prepare a statement of funds utilized
for purposes other than those stated in the offer document/prospectus
Companies Act 2013
• There has been a sea change in companies Act, 2013 which has waved its way from
principle of corporate governance practices as the new key change in the act.
 • The Companies Act, 2013 has taken a foot forward from SEBI’s Clause 49 of listing
agreement by introducing provisions in the companies act 2013 which promotes
corporate governorship code in such a manner that it will no longer be restricted to
only listed public companies but also unlisted public companies.
• The new (Companies Act), 2013 has introduced various key provisions which have
changed the corporate regime in such a way to run the corporate machinery in
alignment with the globalised corporate world by mandatory disclosure requirements
for:
Independent Director Under the Companies Act, 2013
• The strength of number of Independent Directors for the prescribed companies under
Companies Act for listed Public Company is at least one third of total number of
directors and public companies having turnover of 100 crores rupees or more at least
2 directors and public companies having paid up capital of 10 crores rupees or more at
least 2 directors.
Audit Committee
• The Audit Committees of the Companies Act, 2013 has undertaken both private and
public companies within its ambit to constitute audit committees.
• The constitution of audit committee has also seen change as compared to clause 49
with minimum with three independent directors on the board along with the
chairperson who should be able to read and understand the financial statement.
• The Board of directors of every listed company and the following classes of
companies, as prescribed under Rule 6 of Companies (Meetings of Board and its
powers) Rules,2014 shall constitute an Audit Committee.
• All public companies with a paid-up capital of Rs.10 Crores or more;
• All public companies having turnover of Rs.100 Crores or more;
Internal Audit
• Companies Act, 2013 has mandated the internal audit for certain classes of companies
as specified under Section 138 of the Companies Act, 2013.
Serious Fraud Investigation Office (SFIO)
• Section 211 (1) of the Companies Act, 2013 shall establish an office called the
Serious Fraud Investigation office to investigate fraud relating to Company. The
powers are given to SFIO under the act as mentioned that he can investigate into the
affairs of the company or on receipt of report of Registrar or inspector or in the public
interest or request from any Department of Central Government or State Government.
Corporate Social Responsibility
Section 135 of the Companies Act provides the threshold limit for applicability of the CSR to
a Company :
– Net worth of the company to be Rs 500 crore or more;
 – Turnover of the company to be Rs 1000 crore or more;
– Net profit of the company to be Rs 5 crore or more.
– Further, as per the CSR Rules, the provisions of CSR are not only applicable to Indian
companies but also applicable to branch offices of a foreign company in India.
Board Effectiveness
• Board is to ensure the corporate governance of the company on behalf of
shareholders.
• Prevent insiders from expropriation of the shareholder’s wealth, avoid frauds and
stealing of funds.
• Corporate Governance is the collective effort of all the stakeholders.
Six Habits of an Effective Board
1. Own the Strategy (non executive directors should also be a part in the formulation of
strategies, thereby they will feel a sense of ownership)
2. Effective Top Team (Directors should be appointed based on their ability).
3. Match reward and performance (Avoid favoritism)
4. Own the Strategy (non executive directors should also be a part in the formulation of
strategies, thereby they will feel a sense of ownership)
5. Effective Top Team (Directors should be appointed based on their ability).
6. Match reward and performance (Avoid favoritism)
Barriers to Board Effectiveness
• No plan for rotation
• Failure to remove ineffective members
• No Strategic plan
• Too small board
• Lack of clarity (Ambiguity in the roles of individual directors)
• Poor Process Management (Communication Gap)
• Poor team dynamics
• Lack of alignment on company strategy
• Board Composition
BASEL III Norms
• Effective corporate governance is critical to the proper functioning of the banking
sector and the economy as a whole.
 • Banks serve a crucial role in the economy by intermediating funds from savers and
depositors to activities that support enterprise and help drive economic growth.
• Banks’ safety and soundness are key to financial stability, and the manner in which
they conduct their business, therefore, is central to economic health.
• Governance weaknesses at banks that play a significant role in the financial system
can result in the transmission of problems across the banking sector and the economy
as a whole.
Corporate Governance Principles for Banks (BASEL III)
1. Board’s Overall Responsibilities
The board has overall responsibility for the bank, including approving and overseeing the
implementation of the bank’s strategic objectives, governance framework and corporate
culture. The board is also responsible for providing oversight of senior management.
2. Board Qualifications and Composition
Board members should be and remain qualified, individually and collectively, for their
positions. They should understand their oversight and corporate governance role and be able
to exercise sound, objective judgment about the affairs of the bank.
3. Board’s own Structure and Practices
The board should define appropriate governance structures and practices for its own work,
and put in place the means for such practices to be followed and periodically reviewed for
ongoing effectiveness.
4. Senior Management
Under the direction and oversight of the board, senior management should carry out and
manage the bank’s activities in a manner consistent with the business strategy, risk appetite,
incentive compensation and other policies approved by the board.
5. Governance of Group Structures
In a group structure, the board of the parent company has the overall responsibility for the
group and for ensuring that there is a clear governance framework appropriate to the
structure, business and risks of the group and its entities. The board and senior management
should know and understand the bank’s operational structure and the risks that it poses.
6. Risk Management
Banks should have an effective independent risk management function, under the direction of
a Chief Risk Officer (CRO), with sufficient stature, independence, resources and access to the
board.
7. Risk Identification, Monitoring and Controlling
Risks should be identified, monitored and controlled on an ongoing bank-wide and individual
entity basis. The sophistication of the bank’s risk management and internal control
infrastructure should keep pace with changes to the bank’s risk profile, to the external risk
landscape and in industry practice.
8. Risk Communication
An effective risk governance framework requires robust communication within the bank
about risk, both across the organisation and through reporting to the board and senior
management
9. Compliance
The bank’s board of directors is responsible for overseeing the management of the bank’s
compliance risk. The board should approve the bank’s compliance approach and policies,
including the establishment of a permanent compliance function.
10. Internal Audit
The internal audit function provides independent assurance to the board and supports board
and senior management in promoting an effective governance process and the long-term
soundness of the bank. The internal audit function should have a clear mandate, be
accountable to the board, be independent of the audited activities and have sufficient
standing, skills, resources and authority within the bank
11. Compensation
The bank’s compensation structure should be effectively aligned with sound risk
management and should promote long term health of the organisation and appropriate risk-
taking behaviour.