BUSS 426 Governance and Ethics Notes

BUSS 426: CORPORATE GOVERNANCE & ETHICS
Course Purpose
To apply relevant knowledge, skills and exercise professional judgment in carrying out the role of
the Manager relating to governance, internal control, compliance and the management of risk
within an organization, in the context of an overall ethical framework.
Expected Learning Outcomes

On successful completion of this course, candidates should be able to:
i. Define governance and explain its function in the effective management and control of
organizations and of the resources for which they are accountable
ii. Evaluate the manager’s role in risk management and internal control, including review and
compliance
iii. Explain the role of the manager in identifying and assessing risk
iv. Explain and evaluate the role of the manager in controlling and mitigating risk
v. Demonstrate the application of professional values and judgment through an ethical
framework that is in the best interests of society and the profession, in compliance with
relevant professional
Course content
1.0 Nature and overview of corporate governance
1.1 Nature and meaning of corporate governance
1.2 Characteristics of corporate governance
1.3 Pillars of corporate governance
1.4 Major issues in corporate governance
1.5 Importance of corporate governance
1.6 Indicators of bad corporate governance
2.0 Stakeholders in corporate governance & social contract.
2.1 Meaning of social contract
2.2 Meaning of stakeholder
2.3 Classification of stakeholders
2.4 Importance of stakeholder management
2.5 Multiple stake holdings
2.6 Mendelow model of stakeholder management
3.0 Approaches to corporate governance
3.1 Principles of corporate governance
3.2 Different types of corporate code of ethics
3.3 Good governance and corporate behaviour
3.4 Good governance and sustainability
3.5 Board members and their roles
3.6 Directors remuneration
3.7 Reporting on corporate governance
4.0 Audits & Internal control systems
4.1 Internal control frameworks
4.2 The role of audits
4.3 Overview of auditors’ liability
1 Governance and Ethics Notes By Paul Mwenda

4.4 Classification of control systems
4.5 The internal audit standards
4.6 Risks and corporate governance
4.7 Different types of corporate risk
5.0 Guidelines for Managing Ethics in the Workplace and developing codes of Ethics.
5.1 Meaning of business ethics
5.2 Reasons why we study business ethics
5.3 Interrelationship between Values, Attitudes and Behaviour in Business
6.0 Theories of corporate governance.
6.1 Agency theory.
6.2 Stewardship theory
6.3 Transaction cost theory.
6.4 Stake holder theory
7.0 Corporate social Responsibility
7.1 meaning of corporate social responsibility
7.2 scope of corporate social responsibility
7.3 Arguments for and against corporate social responsibility
8.0 Leadership
8.1 Introduction to leadership
8.2 Leadership styles.
8.3 Approaches to leadership
8.4 Theories of leadership
9.0 Ethical Decision Making
9.1 meaning of ethical decision making
9.2 Tucker’s 5-question model
9.3 Stages of ethical decision making
9.4 Factors influencing the moral decision
Assessment and Examinations

Assignment 10%
CAT 20%
Final examination 70%
100%
Recommended Reading
 Sison, A. J. G. (2008). Co-operate governance and ethics: An Aristotelian perspective.
Massachusetts: Edward Elgar Publishing House
 Kane, J. (2006). The politics of moral capital. New York: Cambridge University Press
The Oxford Handbook of Business Ethics

NATURE AND OVERVIEW OF CORPORATE GOVERNANCE
Meaning of Corporate governance

 Refers to the mechanisms, processes and relations by which corporations are controlled
and directed. Governance structures identify the distribution of rights and responsibilities
among different participants in the corporation (such as the board of directors, managers,
shareholders, creditors, auditors, regulators, and other stakeholders) and includes the rules
and procedures for making decisions in corporate affairs.
 The framework of rules and practices by which a board of directors ensures accountability,
fairness, and transparency in a company’s relationship with its all stakeholders (financiers,
customers, management, employees, government and the community).
 Corporate governance includes the processes through which corporations' objectives are
set and pursued in the context of the social, regulatory and market environment.
Governance mechanisms include monitoring the actions, policies and decisions of
corporations and their agents. Corporate governance practices are affected by attempts to
align the interests of stakeholders.
Good Corporate Governance seeks to promote:
 Efficient, effective and sustainable corporations that contribute to the welfare of
society by creating wealth, employment and solutions to emerging challenges.
 Responsive and accountable corporations
 Legitimate corporations that are managed with integrity and transparency
 Recognition and protection of stakeholder rights
 An inclusive approach based on democratic ideals, legitimate representation and
participation
Good Corporate Governance is necessary in order to:
 Attract investors both local and foreign – and assure them that their investments
will be secure and efficiently managed, and in a transparent and accountable
process.
 Create competitive and efficient companies and business enterprises.
 Enhance the accountability and performance of those entrusted to manage
corporations.
 Promote efficient and effective use of limited resources.
Characteristics of Corporate Governance.

i. Transparency. This means that the Board of Directors must release all relevant
information to the stakeholders. They must show all the necessary financial and operational
data to the stakeholders. They must not hide any important information or maintain any
secrecy.
ii. Protection of Shareholders' Rights. The Board of Directors must protect the rights of the
stakeholders. They must protect all the stakeholders, especially the minority stakeholders.
iii. More Powers to CEO. The CEO must be given more powers so that he can approve the
company’s plans and strategies independently without undue influence.
iv. Based on Ethics. Corporate governance is based on ethics, moral principles and values.
So, the Board of directors must avoid unfair practices, cheating, exploitation, etc.

v. Universal Application. Corporate governance has universal application. That is, it is used
by companies all over the world. It is given a legal recognition in many countries. All
companies must use corporate governance voluntarily.
vi. Systematic. Corporate governance is very systematic. It is based on laws, procedures,
practices, rules, etc. All these laws are made to increase the wealth of the shareholders and
to protect the rights of all the stakeholders of the company.
Goals of Corporate Governance

i. Shareholder recognition. This is key to maintaining a company’s stock price. More often
than not, however, small shareholders with little impact on the stock price are brushed aside
to make way for the interests of majority shareholders and the executive board. Good
corporate governance seeks to make sure that all shareholders get a voice at general
meetings and are allowed to participate.
ii. Stakeholder interests should also be recognized by corporate governance. In particular,
taking the time to address non-shareholder stakeholders can help your company establish
a positive relationship with the community and the press.
iii. Board responsibilities must be clearly outlined to majority shareholders. All board
members must be on the same page and share a similar vision for the future of the company.
iv. Ethical behavior. Violations in favor of higher profits can cause massive civil and legal
problems down the road. Underpaying and abusing outsourced employees or skirting
around lax environmental regulations can come back and bite the company hard if ignored.
A code of conduct regarding ethical decisions should be established for all members of the
board.
v. Business transparency. This is the key to promoting shareholder trust. Financial records,
earnings reports and forward guidance should all be clearly stated without exaggeration or
“creative” accounting. Falsified financial records can cause your company to become a
Ponzi scheme, and will be dealt with accordingly.
Pillars of corporate governance

i. Leadership. An effective board should head each company. The Board should steer
the company to meet its business purpose in both the short and long term.
ii. Capability. The Board should have an appropriate mix of skills, experience and
independence to enable its members to discharge their duties and responsibilities
effectively.
iii. Accountability. The Board should communicate to the company’s shareholders and
other stakeholders, at regular intervals, a fair, balanced and understandable assessment
of how the company is achieving its business purpose and meeting its other
responsibilities.
iv. Sustainability. The Board should guide the business to create value and allocate it
fairly and sustainably to reinvestment and distributions to stakeholders, including
shareholders, directors, employees and customers.
v. Integrity. The Board should lead the company to conduct its business in a fair and
transparent manner that can withstand scrutiny by stakeholders.

vi. Fairness. The Company undertakes to protect the rights of its shareholders and treat
all shareholders on an equal basis. The Board of Directors enables its shareholders to
receive efficient protection if their rights are violated.
vii. Transparency. The Company shall provide timely disclosure of credible information
on all the important facts related to its activities, including information on its financial
condition, social and environmental measures, results of activities, ownership and
management structures; the Company shall provide free access to such information for
all interested parties.
viii. Responsibility. The Company acknowledges the rights of all interested parties
envisaged by the legislation in force, and aims at cooperation with such parties in order
to provide steady development and ensure financial stability of the Company.
Major issues in corporate governance
i. Bribery. Accepting bribe create a conflict of interest between the person receiving bribe
and his organization. And this conflict would result in unethical practices.
ii. Coercion. It is forcing a person to do things which are against his personal believes. E.g.
blocking a promotion, loss of job or blackmailing.
iii. Insider Trading. Insider trading is misuse of official position eg where employee leaks
out certain confidential data to outsiders or other insiders which effect the reputation and
performance of company.
iv. Conflicts of Interest. Conflict of interest when Private interests are important for
employees which are against the desire of employer
v. Unfair Discrimination. Unfair treatment or given privileges to persons on the base of race,
age, sex, nationality or religion. It is failures to treat all persons equally.
vi. Political Donations and Gifts. Gifts, donations or contribution to political leaders or
parties to get any unconditional act done e.g. sanctioning of any special contract, issue of
licenses etc.
vii. Presentation of false returns of income and statements. It is to prepare false income
returns and statements of accounts for evasion of tax and getting various govt. benefits and
incentives.
viii. Accumulation of profits by illegal means. Sometimes business undertakes various
unethical and unconstitutional activities to maximize its profits e.g. hoarding of goods,
black marketing, speculation etc.

Benefits of good corporate governance
An article in the managementstudyguide.com (2012) outlined the following as benefits derived
from effective implementation of corporate governance principles. These include the following:
i. Strong corporate governance maintains investors’ confidence, as a result of which,
company can raise capital efficiently and effectively.
ii. Good corporate governance also minimizes wastages, corruption, risks and
mismanagement.
iii. It helps in brand formation and development.
iv. It provides proper inducement to the owners as well as managers to achieve objectives
that are in interests of the shareholders and the organization.
v. There is a positive impact on the share price.
vi. It lowers the capital cost
vii. Good corporate governance ensures corporate success and economic growth.
Indicators of Bad Corporate Governance
 Increased reported cases of corruption

 High labor turnover
 Low investment from external investors
 Poor performing firms
 Poor public relations
 Collapse of many firms
 Misuse of public funds

STAKEHOLDERS IN CORPORATE GOVERNANCE & SOCIAL CONTRACT.
Meaning of social contract
 Social contract is the idea that any given society has a set of conventions and trade-offs
which it demands or requires, in order for participation in it to be possible and for the
society to continue to exist. In particular, it recognizes that authority exists in as much as
the members of society cede power to the authority (voluntarily and on average ideally,
though not necessarily, as a carefully considered decision).
 An agreement for mutual benefit between an individual or group andthe government or
Community as a whole.
 Unwritten and tacit agreement said to exist among the members of
a community or group that guides individual behavior and establishes
personal rights and responsibilities. Social contract is deemed essential for
any organized group behavior and, in democratic societies, is embodied in the
national constitution.
 Social audit is the process of evaluating a firm's various operating procedures, code of
conduct, and other factors to determine its effect on a society. The goal is to identify what,
if any, actions of the firm have impacted the society in some way. A social audit may be
initiated by a firm that is seeking to improve its cohesiveness or improve its image within
the society. If the results are positive, they may be released to the public. For example, if a
factory is believed to have a negative impact, the company may have a social audit
conducted to identify actions that actually benefit the society.
Meaning of stakeholders
 Stakeholders are person, groups or organization(s) that has interest or concern in an

organization. Stakeholders can affect or be affected by
the organization's actions, objectives and policies and their actions can also affect the
business in one way or another.
Classification of Stakeholders
There are various ways and different classification models in which you can classify and analyze
the project stakeholders. For example, stakeholders can be analyzed based on their:
i. Power and Interest. In this classification, stakeholders are grouped as per their power
and interest towards the project and its outcome.
ii. Power and Influence. Here, stakeholders are grouped according to their power and
level of influence on the project and its outcome.
iii. Influence and Impact. This classification is based on the influence and impact of the
stakeholders on the project.
iv. Power, Urgency and Legitimacy. This model is also known as the Salience Model.
Here, stakeholders are classified as per their power, urgency and legitimacy. Power. Is the
ability stakeholders have to influence the outcome of an organization, deliverables, or a
project. Legitimacy. Is the authority, level of involvement stakeholders have on a project.

Urgency. Is the time expected by stakeholders for responses to their expectations. Among
all model discussed above, the power/interest model is most widely used by the project
managers throughout the world.
Stakeholders can be broadly categorized into three main categories.
i. Internal stakeholders. Internal stakeholders are usually members of the organization.

They are those members within an organization who directly benefit financially from their
contributions to an organization's success. They include
 Directors- Director refers to a rank in management. A director is a person who
leads, or supervises a certain area of a company, a program, or a project.
Directors are interested in Salary, Share Option, Job Satisfaction, Status, and
Bonuses & Perks.
 Employees- an Employee contributes labor and expertise to an endeavor of an
employer and is usually hired to perform specific duties which are packaged
into a job. Employees are interested in High pay, Job security, Good working
conditions, Fair treatment, Fringe benefits, Health and safety, Promotion
prospects and Training opportunities.
ii. Connected stakeholders. Connected stakeholders, also called primary stakeholders, are
those that have an economic or contractual relationship with the organisation. They
include;
 Shareholders. A shareholder or stockholder is an individual or institution
(including a corporation) that legally owns a share of stock in a public or private
corporation. Shareholders are interested in High profit, High dividend, Long term
growth, Prospect of capital gain, A say in the business, A positive corporate image
and Preferential treatment as customers.
 Customers. A customer (also known as a client, buyer, or purchaser) is the
recipient of goods, service, product, or idea, obtained from a seller, vendor,
or supplier for a monetary or other valuable consideration. They are interested in

Low prices, Value for money, High quality products, Good services, Innovation,
Certain and regular supply, Clear and accurate information.
 Suppliers. A party that supplies goods or services. A supplier may be distinguished
from a contractor or subcontractor, who commonly adds specialized input to
deliverables. Also called vendor. They are interested in a long term relationship
with the firm, large size and value of contracts, frequent and regular orders, prompt
payment, fair prices and growth of the firm leading to more orders.
 Advisers. An adviser is normally a person with more and deeper knowledge in a
specific area i.e. a specialist. They look for profit maximization, returns on money
invested and repayment of loans.
iii. External stakeholders. They are also called secondary stakeholders. They are individuals,
groups or organizations who are not directly connected to the organisation. They have an
interest in the organizations’ activities or they might be impacted by the organizations’
activities in some way. They include:
 Governments. A Government is the system by which a state or community is
governed. Government normally consists of legislators, administrators,
and arbitrators. Government is interested in Compliance with laws and regulation,
efficient use of resources, employment, contribution to national economy, and
payment of taxes, to control the business operation and to assist business.
 Pressure groups. Pressure Groups are organizations that want to influence
the organization to act in certain way. They are interested in interest of members,
trade union, peace and clean environment.
 Media. Communication channels through which news, entertainment, education,
data, or promotional messages are disseminated. They are interested in keeping the
public informed on all issues, monitor the company, and support freedom of
expression, independence and accessibility of the mass media and to combat
harmful elements in the mass media.
Role of Stakeholders in Business
i. Voting and Decision-making. Stakeholders may be responsible for voting on significant

changes in the business. Voting can take place annually based on the corporate structure of
the business or during any meeting.
ii. Management. Stakeholders can hold significant management positions where they may
report directly to the president, CEO or chief financial officer.
iii. Investing. Stakeholders are responsible for reviewing the financial data of the company to
ensure that the business is performing well and that they are not losing their investment.
iv. Social and Environmental Responsibilities. Stakeholders must continuously ensure that
decisions they are making for the business are doing little to harm society and the
environment. They may choose to use an alternate resource if they realize that current
resources are becoming scarce.

Stakeholder Management
 Stakeholder management is the process of managing the expectations of anyone that has
an interest in a project or will be affected by its deliverables or outputs.
 Stakeholder management is the process by which an individual establishes and maintains
support from internal staff members and external parties for a new product or project or
change within the organization.
How does stakeholder management work?
Stakeholder management, in any organization works through a strategy. This strategy is created
using information gathered through the following processes:
i. Stakeholder Identification. It is first important to note all the stakeholders involved,
whether internal or external. An ideal way to do this is by creating a stakeholder map.
ii. Stakeholder Analysis. Through stakeholder analysis, it is the manager's job to identify a
stakeholder's needs, interfaces, expectations, authority and common relationship.
iii. Stakeholder Matrix. During this process, managers position stakeholders using
information gathered during the stakeholder analysis process. Stakeholders are positioned
according to their level of influence or enrichment they provide to the project.
iv. Stakeholder Engagement. This is one of the most important processes of stakeholder
management where all stakeholders engage with the manager to get to know each other
and understand each other better, at an executive level. This communication is important
for it gives both the manager and stakeholder a chance to discuss and concur upon
expectations and most importantly agree on a common set of Values and Principals, which
all stakeholders will stand by.
v. Communicating Information. Here, expectations of communication are agreed upon and
the manner in which communication is managed between the stakeholders is established,
that is, how and when communication is received and who receives it.
vi. Stakeholder Agreements. This is the Lexicon of the project or the objectives set forth.
All key stakeholders sign this stakeholder agreement, which is a collection of all the agreed
decisions.
Failures in stakeholder management

Some organizations still endure poor stakeholder management practices and this arises because of
the following reasons;
i. Communicating with a stakeholder too late. This does not allow for ample revision of
stakeholder expectations and hence their views may not be taken into consideration.
ii. Inviting stakeholders to take part in the decision making process too early. This results in
a complicated decision making process.
iii. Involving the wrong stakeholders in a project. This results in a reduction in the value of
their contribution and this leads to external criticism in the end.
iv. The management does not value the contribution of stakeholders. Their participation is
viewed as unimportant and inconsequential.

How to Achieve Good Stakeholder Management
The following are a few ideas that can be used to achieve good stakeholder management practices:
i. Management and stakeholders should work together to draw up a realistic list of goals and
objectives. Engaging stakeholders will improve business performance and they take an
active interest in the project.
ii. Communication is the key. It is important for stakeholders and management to
communicate throughout the course of the project on a regular basis. This ensures that both
parties will be actively engaged and ensure smooth sailing during the course of the project.
iii. Agreeing on deliverables is important. This makes sure there is no undue disappointment
at the end. Prototypes and samples during the course of the project helps stakeholders have
a clear understanding regarding the end project.
Mendelow model of stakeholder management
The Mendelow Matrix is a useful matrix for determining the potential influence of the stakeholder
groups of an organisation. It looks at two dimensions
 The level of interest the group has in the organisation,
 The level of power or influence the group has over the organisation.
This model is particularly useful tool during times of strategic change such as the introduction of
a new strategy, or the modification of an existing one. The stakeholder group can take one of four
positions in the matrix, based on their level of interest and power or influence. The model identifies
the responses which management needs to make to the stakeholders in the different quadrants.
Understanding the matrix

The matrix is normally completed with regard to the stakeholder impact of a particular strategy.
The purpose is to assess:
 whether stakeholder resistance is likely to inhibit the success of the strategy
 What policies may ease the acceptance of the strategy?
In order to apply this technique to your project, follow these steps

i. List all the stakeholders in your project, no matter how little their power or interest in your
project
ii. Categorize them based on their interest in the project and their decision-making power
iii. Place them in the appropriate quadrant
iv. Monitor them continuously and move them round the quadrant as their interest/power
evolves.
The general recommendation is:
i. Low Power, Low Interest - A stakeholder group in the lower left box is considered
‘minimal effort’ and of little focus to the organisation as they are both low level of interest
and low power/influence. This means they are more likely to go along with change with no
resistance.
ii. Low Power, High Interest - The organisation should ‘keep informed’ stakeholder groups
in the lower right box as they have high level of interest but do not have any power of note.
However, due to their interest in the organisation, they must be kept informed in order to
prevent them from joining forces with other stakeholder groups and perhaps increasing
their power.
iii. High Power, Low Interest - ‘Keep satisfied’ those in the upper left box with low interest
in the organisation, but high power. By keeping these stakeholders satisfied, it will prevent
them from gaining more interest and shifting into the ‘key player’ box.
iv. High Power, High Interest - These are the ‘key players’ with both high power and high
interest, and are a very strong group that can oppose new strategy effectively and drive
change if they so wish. It is up to the organisation to invest in the relationship with these
stakeholder groups by educating them as to the reasons for change to get them on board,
communicating to them and consulting with them to gain their support.
NB. Read on;
 importance of stakeholder management

 Multiple stake holdings

APPROACHES TO CORPORATE GOVERNANCE
Principles of Corporate Governance
i. Lay solid foundations for management and oversight. Companies should establish
and disclose the respective roles and responsibilities of board and management.
ii. Structure the board to add value. Companies should have a board of an effective
composition, size and commitment to adequately discharge its responsibilities and
duties.
iii. Promote ethical and responsible decision making. Companies should actively
promote ethical and responsible decision making.
iv. Safeguard integrity in financial reporting. Companies should have a structure to
independently verify and safeguard the integrity of their financial reporting.
v. Make timely and balanced disclosure. Companies should promote timely and
balanced disclosure of all material matters concerning the company.
vi. Respect the rights of shareholders. Companies should respect the rights of
shareholders and facilitate the effective exercise of those rights.
vii. Recognize and manage risk. Companies should establish a sound system of risk
oversight and management and internal control.
viii. Remunerate fairly and responsibly. Companies should ensure that the level and
composition of remuneration is sufficient and reasonable and that its relationship to
performance is clear.
Different Types of Corporate Code of Ethics.
In any given corporation, code of ethics can be categorized into three as follows.
i. Codes of conduct. They typically prohibit behavior and inform employees what is
expected of them. Codes of conduct often outline penalties for failure to comply with the
code. Common topics include conflicts of interest, political contributions, and acceptance
of gifts.
ii. Codes of practice. They attempt to explain and illustrate the values and principles of the
organization. Instead of providing strict rules to follow, codes of practice educate
employees on how 'things are done' in the organization. These codes attempt to empower
the employee by making him/her an ethical decision maker.
iii. Codes of ethics. They codify the values and principles of the company and define the
responsibilities, duties and obligations organizational members have to the organization
and its stakeholders.

Importance of code of Ethics
i. Stop business malpractices. Some unscrupulous businessmen do business malpractices
by indulging in unfair trade practices like black-marketing, artificial high pricing,
adulteration, cheating in weights and measures, selling of duplicate and harmful products,
hoarding, etc. These business malpractices are harmful to the consumers. Business ethics
help to stop these business malpractices.
ii. Improve customers' confidence. Business ethics are needed to improve the customers'
confidence about the quality, quantity, price, etc. of the products. The customers have more
trust and confidence in the businessmen who follow ethical rules. They feel that such
businessmen will not cheat them.
iii. Survival of business. Business ethics are mandatory for the survival of business. The
businessmen who do not follow it will have short-term success, but they will fail in the
long run. This is because they can cheat a consumer only once. After that, the consumer
will not buy goods from that businessman. He will also tell others not to buy from that
businessman. So this will defame his image and provoke a negative publicity. This will
result in failure of the business. Therefore, if the businessmen do not follow ethical rules,
he will fail in the market. So, it is always better to follow appropriate code of conduct to
survive in the market.
iv. Safeguarding consumers' rights. The consumer has many rights such as right to health
and safety, right to be informed, right to choose, right to be heard, right to redress, etc. But
many businessmen do not respect and protect these rights. Business ethics are must to
safeguard these rights of the consumers.
v. Protecting employees and shareholders. Business ethics are required to protect the
interest of employees, shareholders, competitors, dealers, suppliers, etc. It protects them
from exploitation through unfair trade practices.
vi. Develops good relations. Business ethics are important to develop good and friendly
relations between business and society. This will result in a regular supply of good quality
goods and services at low prices to the society. It will also result in profits for the businesses
thereby resulting in growth of economy.
vii. Creates good image. Business ethics create a good image for the business and
businessmen. If the businessmen follow all ethical rules, then they will be fully accepted
and not criticized by the society. The society will always support those businessmen who
follow this necessary code of conduct.
viii. Smooth functioning. If the business follows all the business ethics, then the employees,
shareholders, consumers, dealers and suppliers will all be happy. So they will give full
cooperation to the business. This will result in smooth functioning of the business. So, the
business will grow, expand and diversify easily and quickly. It will have more sales and
more profits.
ix. Consumer movement. Business ethics are gaining importance because of the growth of
the consumer movement. Today, the consumers are aware of their rights. Now they are
more organized and hence cannot be cheated easily. They take actions against those
businessmen who indulge in bad business practices. They boycott poor quality, harmful,
high-priced and counterfeit (duplicate) goods. Therefore, the only way to survive in
business is to be honest and fair.

x. Consumer satisfaction. Today, the consumer is the king of the market. Any business
simply cannot survive without the consumers. Therefore, the main aim or objective of
business is consumer satisfaction. If the consumer is not satisfied, then there will be no
sales and thus no profits too. Consumer will be satisfied only if the business follows all the
business ethics, and hence are highly needed.
xi. Importance of labor. Labor, i.e. employees or workers play a very crucial role in the
success of a business. Therefore, business must use business ethics while dealing with the
employees. The business must give them proper wages and salaries and provide them with
better working conditions. There must be good relations between employer and employees.
The employees must also be given proper welfare facilities.
xii. Healthy competition. The business must use business ethics while dealing with the
competitors. They must have healthy competition with the competitors. They must not do
cut-throat competition. Similarly, they must give equal opportunities to small-scale
business. They must avoid monopoly. This is because a monopoly is harmful to the
consumers.
Board of Directors
Definition: A board of directors is a group of people who are elected by a company's
shareholders to meet periodically to oversee the company's management and represent the interests
of the shareholders. As such, it is the governing body of a corporation. The board has overall
authority for decisions made by the company. They attract investment, raise finance from the
public/shareholder. The following should be noted on the BOD.
 The board will be ineffective if dominated by CEO.
 CEO and chairman should not be one and same person.
 The board must consist largely of independent non-executive directors. Because they are
not the full-time employees of the company.
 Non-executive directors should be responsible for the remuneration packages for executive
directors and senior management.
 Board becomes less effective if it grows in size. Large board makes slow decisions.
Principal Duties and roles of the Board of Directors

i. To Oversee Management and Evaluate Strategy. The fundamental responsibility of the
directors is to exercise their business judgment to act in what they reasonably believe to be
the best interests of all stakeholders.
ii. To Select the Chair and Chief Executive Officer. It is the duty of the board of directors
to select the chairman of the board and also to appoint the chief executive officer of the
organization in accordance with the policies and procedures of that organization.
iii. To Evaluate Management Performance and Compensation. At least annually, the
Leadership Development and Compensation Committee will evaluate the performance of
the chief executive officer and the other officers. It reviews and approves the compensation
plans, policies and arrangements for executive officers and other officers. It also evaluates
the compensation plans, policies and programs for officers and employees to ensure they

are appropriate, competitive and properly reflect the organizational objectives and
performance.
iv. To Review Management Succession Planning. The Leadership Development and
Compensation Committee reviews and recommend to the Board plans for the development,
retention and replacement of executive officers of the organization.
v. To Monitor and Manage Potential Conflicts of Interest. All members of the Board must
inform the Audit Committee of the Board of all types of transactions between them
(directly or indirectly) and the organizations as soon as reasonably practicable even if these
transactions are in the ordinary course of business.
vi. To Ensure the Integrity of Financial Information. The Audit Committee of the Board
evaluates the integrity of the organization accounting and financial reporting systems,
including the audit of the organization annual financial statements by the independent
auditors, and that appropriate disclosure controls and procedures and systems of internal
control are in place
vii. To Monitor the Effectiveness of Board Governance Practices. The Nominating and
Corporate Governance Committee of the Board will annually review and evaluate the
effectiveness of the governance practices under which the Board operates and make
changes to these practices as needed.
Corporate Governance Models

A board of directors is a collection of individuals trying to operate as a group. Functioning as a
group is something many people are not comfortable with. So each board evolves with its own
culture. Each culture is dictated by the backgrounds of the individuals on the board. However,
there are several governance models of how a board of directors can function. Examining and
choosing the right model is important because it will impact the success of the value-added
business. The board of directors must decide which model is best for them.
i. Advisory Board Model/manager focus. This model emphasizes the helping and
supportive role of the Board and frequently occurs where the CEO is the founder of the
organization. The Board's role is primarily that of helper/advisor to the CEO. It acts as a
“rubber stamp” Board members are recruited for three main reasons:
 They are trusted as advisors by the CEO;
 They have a professional skill that the organization needs but does not want to pay
for;
 They are likely to be helpful in establishing the credibility of the organization for
fundraising and public relations purposes.
Individual board members may be quite active in performing these functions and
consequently feel that they are making a valuable contribution to the organization. Board
meetings tend to be informal and task-focused, with the agenda developed by the CEO.
The Advisory Board model can work well for a short time in many organizations but it
exposes the board members to significant liability in that it fails to provide the
accountability mechanisms that are required of boards of directors. By law, the board has
the obligation to manage the affairs of the organization and can be held accountable for
certain actions of employees and committees. It must therefore maintain a superior position
to the CEO.

ii. Patron Model. The board of directors in the Patron Model has even less influence over the
organization than an advisory board. Composed of wealthy and influential individuals with
a commitment to the mission of the organization, the Patron Board serves primarily as a
figurehead for fund raising purposes. Such boards meet infrequently as their real work is
done outside board meetings. Writing cheques and getting their friends to write cheques is
their contribution to the organization. Many organizations maintain a Patron Board in
addition to their governing boards. For capital campaigns and to establish credibility of a
newly formed organizations, Patron Boards can be especially helpful. They cannot be
relied upon, however, for governance tasks such as vision development, organizational
planning, or program monitoring.
iii. Traditional (primary focus: governance) – The board governs and oversee operations
through committees but delegates management functions to the CEO. Committees,
established along functional lines (e.g., finance, human resources, and programs) that
parallel management functions, are used to process information for the board and
sometimes do the work of the board. The committee structure and ambiguity in roles may
invite board interference in management functions. The CEO may have a primary reporting
relationship to the board through the chair.
iv. Results-based (primary focus: governance) – This type of board is focused on setting a
clear direction for the organization and getting the best results for the money invested. The
CEO is a non-voting member of the board, carries substantial influence over policy-making
and direction, is viewed as a full partner with the board and has a relatively free hand at
managing to achieve objectives established by the board. Committees are used for
monitoring/auditing the performance of the board, CEO and organization. Board members
are selected for community representativeness and commitment to the organization’s
purpose, and may be used for selected tasks in their area of expertise.
v. Constituent representational (primary focus: constituent interests) – An approach
used by publicly elected bodies, federations or other constituency elected boards whose
primary responsibility is to balance the best interests of the overall organization against the
interests of its constituents. Members of such boards often find it difficult to achieve this
balance and are sometimes pressured to favour constituent interests. They may, as in the
case of publicly elected bodies, carry grievance resolution/ombudsman functions and may
consequently be drawn inappropriately into operational matters to solve constituent
problems. They may also, as in the case of some school boards, have prescribed
responsibilities for public consultation and human resources. This approach to governance
may also be an element of other board types.
vi. Policy governance (primary focus: governance) – The board governs through policies
that establish organizational aims (“ends”); governance approaches or processes;
management limitations; and that define the board/CEO relationship. The CEO has broad
freedom to determine the “means” that will be implemented to achieve organizational aims.
The CEO reports to the full board. The board does not use committees but may use task
teams to assist it in specific aspects of its work.

Director’s remuneration
Executive compensation or executive pay is composed of the financial compensation and other
non-financial awards received by an executive from their firm for their service to the organization.
It is typically a mixture of salary, bonuses, shares of or call options on the company stock, benefits,
and perquisites, ideally configured to take into account government regulations, tax law, the
desires of the organization and the executive, and rewards for performance. However,
the amount of remuneration cannot exceed the amount specified in the articles of association, and
the stockholders (shareholders) may sue the directors if they exceed the stated
amount or pay themselves too big a share of profit, instead of distributing it as dividends. It is
generally illegal for firms to compensate directors for loss of office without the approval of
shareholders.
i. The directors’ remuneration should be sufficient to attract and retain directors to run the
company effectively and should be approved by shareholders.
ii. The executive director’s remuneration should be competitively structured and linked to
performance.
iii. The non-executive directors’ remunerations should be competitive in line with
remuneration for other directors in competing sectors.
While determining the director’s remuneration, the following factors need to be considered;
 Company size
 Company profitability
 Risk of the work involved
 Market rate
 Level of qualifications needed
The following are six basic tools of compensation or remuneration:
 salary
 short-term incentives (STIs), sometimes known as bonuses
 long-term incentive plans (LTIPs)
 employee benefits
 paid expenses (perquisites)
 insurance
Reporting on corporate governance

Corporate reporting is a series of activities that allows companies to record operating data and
report accurate information at the end of each transaction period.
Types of Corporate Reports

i. Balance Sheet .A corporate balance sheet is also known as a statement of financial
condition or statement of financial position. It provides information about a company's
assets, liabilities and equity capital.

ii. Income Statement. It refers to a financial statement that measures a company's financial
performance over a specific accounting period. Financial performance is assessed by
giving a summary of how the business incurs its revenues and expenses through both
operating and non-operating activities.
iii. Cash Flow Statement. Is a summary of the actual or anticipated incomings and outgoings
of cash in a firm over an accounting period (month, quarter, and year). It answers the
questions:
 Where the money came (will come) from?
 Where it went (will go)?
Cash flow statements assess the amount, timing, and predictability of cash
inflows and cash-outflows, and are used as the basis for budgeting and business-planning.
iv. Equity Statement. Also known as a statement of retained earnings, a corporate equity
statement provides insight into the ownership of a company. In short, the report helps
identify who owns the company.
How to Write a Corporate Report

 Identify the audience for your report and its purpose.
 Find out if your organization has a required format for corporate reports and use it.
 Collect the data needed to write all sections of the report.
 Create a list of key points for each report section.
Users of corporate reports:

 Corporate report is relevant to the company's shareholders, whose concern is with profit
figures
 Also its important for auditors
 External users like banks
Characteristics of the Reported Information

i. Relevant – Financial information should be relevant to the decisions being made. It should
enable investors to evaluate risks, past and present performance, and be able to draw
inferences regarding future performance.
ii. Complete Reliable / Faithful Representation – Financial information should be a faithful
representation of the events it purports to represent. Thus the information should be neutral
and report activity in a fair and unbiased way that is not skewed towards a particular result.
There should be substance over form. Any off-balance sheet items should be appropriately
disclosed.
iii. Verifiable – Financial information should be verifiable so that when a systematic approach
and methodology is used different parties reach the same conclusion (e.g., different people
counting cash reach the same total amount of cash).
iv. Timely – Financial information that is material should be disclosed in a timely manner.

v. Comparable and Consistent – Financial information is not static and to enable it to be
evaluated, it should be presented in consistent manner to enable comparison to be drawn
of both the entity’s performance overtime and against other entities.
vi. Transparent – Financial information should provide the transparency equity investors
need for optimal decision making.
vii. Understandable – Financial information should be presented in a way that can be
understood by users.
viii. Prudence - A degree of caution is exercised when making judgments and estimates where
there is a degree of uncertainty, such that assets and income are not overstated and liabilities
and expenses are not understated.

AUDITS & INTERNAL CONTROL SYSTEMS
 Auditing is a continuous systematic examination and verification of a firm’s books of

account, transaction records, other relevant documents and physical inspection of inventory
by qualified accountants called auditors.(either internal or external auditors)
 Internal control is a continuous process, effected by an entity's Board of Trustees,
management, and other personnel, designed to provide reasonable assurance regarding the
achievement of objectives in the following categories:
 Reliability of financial reporting,
 Effectiveness and efficiency of operations, and
 Compliance with applicable laws and regulations.
The role of audits
Auditors perform the following roles in any given organization in relation to corporate governance.
 Verify the existence of assets and recommend proper safeguards for their protection
 Evaluate the adequacy of the system of internal controls
 Recommend improvements in controls
 Assess compliance with policies and procedures and sound business practices
 Assess compliance with state laws and contractual obligations.
 Review operations/programs to ascertain whether results are consistent with established
objectives.
 Review whether operations/programs are being carried out as planned.
 Investigate reported occurrences of fraud, embezzlement, theft, waste, etc.
The internal audit standards
Standards are principles-focused, mandatory requirements consisting of:

 Statements of basic requirements for the professional practice of internal auditing and for
evaluating the effectiveness of performance, which are internationally applicable at
organizational and individual levels.
 Interpretations, which clarify terms or concepts within the Statements.
The purpose of the Standards is to:

i. Form basic principles that represent the practice of internal auditing.
ii. Provide a framework for performing and promoting a broad range of value-added internal
auditing.
iii. Establish the basis for the evaluation of internal audit performance.
iv. Foster improved organizational processes and operations.
The following are some of the professional standards of auditors
i. Proficiency Internal auditors must possess the knowledge, skills, and other competencies
needed to perform their individual responsibilities. The internal audit activity collectively
must possess or obtain the knowledge, skills, and other competencies needed to perform
its responsibilities

ii. Confidentiality. Auditors must maintain high levels of confidentiality, they should only
disclose information when needed and to the right authorized party.
iii. Integrity. Auditors must adhere to moral and ethical principles by doing the right thing at
the right time and remain and maintain honesty.
iv. Due Professional Care. Internal auditors must apply the care and skill expected of a
reasonably prudent and competent internal auditor. Due professional care does not imply
infallibility (not capable of being wrong or making mistakes).
v. Individual Objectivity. Objectivity is an unbiased mental attitude that allows internal
auditors to perform engagements in such a manner that they believe in their work product
and that no quality compromises are made. Objectivity requires that internal auditors do
not subordinate their judgment on audit matters to others. Threats to objectivity must be
managed at the individual auditor, engagement, functional, and organizational levels.
vi. Independence is the freedom from conditions that threaten the ability of the internal audit
activity to carry out internal audit responsibilities in an unbiased manner. To achieve the
degree of independence necessary to effectively carry out the responsibilities of the internal
audit activity, the chief audit executive has direct and unrestricted access to senior
management and the board. This can be achieved through a dual-reporting relationship.
Threats to independence must be managed at the individual auditor, engagement,
functional, and organizational levels.
Types of Internal Controls
i. Preventive Controls are designed to discourage errors or irregularities from occurring.

They are proactive controls that help to ensure organizational objectives are being met.
Examples of preventive controls are:
 Segregation of Duties: Duties are divided, or segregated, among different people
to reduce the risk of error or inappropriate actions. For instance, responsibilities for
authorizing transactions, recording them and handling the related asset should
be divided.
 Approvals, Authorizations, and Verifications: Management authorizes
employees to perform certain activities and to execute certain transactions within
limited parameters. In addition, management specifies those activities or
transactions that need supervisory approval before they are performed or executed
by employees. A supervisor’s approval (manual or electronic) implies that he or
she has verified and validated that the activity or transaction conforms to
established policies and procedures.
 Security of Assets (Preventive and Detective): Access to equipment, inventories,
securities, cash and other assets is restricted; assets are periodically counted and
compared to amounts shown on control records.
ii. Detective Controls are designed to find errors or irregularities after they have occurred.
Examples of detective controls are:
 Reviews of Performance: Management compares information about current
performance to budgets, forecasts, prior periods, or other benchmarks to measure
the extent to which goals and objectives are being achieved and to identify
unexpected results or unusual conditions that require follow-up.

 Reconciliations: An employee relates different sets of data to one another,
identifies and investigates differences, and takes corrective action, when necessary.
 Physical Inventories
iii. Corrective controls are designed to prevent the recurrence of errors. They begin
when errors occur and are detected and keep the "spotlight" on the problem until
management can solve the problem or correct the defect. Budget variance reports and
quality circle teams are examples of corrective controls.
Internal control frameworks
 A control framework is a data structure that organizes and categorizes an organization’s

internal controls, which are practices and procedures established to create business value
and minimize risk.
The framework of a good internal control system includes the following:
i. Control environment. A sound control environment is created by management through
communication, attitude and example. This includes a focus on integrity, a commitment to
investigating discrepancies, diligence in designing systems and assigning responsibilities.
ii. Risk Assessment. This involves identifying the areas in which the greatest threat or risk of
inaccuracies or loss exist. To be most efficient, the greatest risks should receive the greatest
amount of effort and level of control. For example, dollar amount or the nature of the
transaction (for instance, those that involve cash) might be an indication of the related risk.
iii. Monitoring and Reviewing. The system of internal control should be periodically reviewed
by management. By performing a periodic assessment, management assures that internal
control activities have not become obsolete or lost due to turnover or other factors. They should
also be enhanced to remain sufficient for the current state of risks.
iv. Information and communication. The availability of information and a clear and evident
plan for communicating responsibilities and expectations is paramount to a good internal
control system.
v. Control activities: These are the activities that occur within an internal control system.
Risk assessment
Risk assessment is the process where you:

 Identify hazards.
 Analyse or evaluate the risk associated with that hazard.
 Determine appropriate ways to eliminate or control the hazard.
In practical terms, a risk assessment is a thorough look at your workplace to identify those things,
situations, processes, etc that may cause harm, particularly to people. After identification is made,
you evaluate how likely and severe the risk is, and decide what measures should be in place to
effectively prevent or control the harm from happening. Examples of frequently performed risk
assessments include:
i. Strategic risk assessment. Evaluation of risks relating to the organization’s mission and
strategic objectives, typically performed by senior management teams in strategic planning
meetings, with varying degrees of formality.

ii. Operational risk assessment. Evaluation of the risk of loss (including risks to financial
performance and condition) resulting from inadequate or failed internal processes, people,
and systems, or from external events. In certain industries, regulators have imposed the
requirement that companies regularly identify and quantify their exposure to such risks.
While responsibility for managing the risk lies with the business, an independent function
often acts in an advisory capacity to help assess these risks.
iii. Compliance risk assessment. Evaluation of risk factors relative to the organization’s
compliance obligations, considering laws and regulations, policies and procedures, ethics
and business conduct standards, and contracts, as well as strategic voluntary standards and
best practices to which the organization has committed. This type of assessment is typically
performed by the compliance function with input from business areas.
iv. Internal audit risk assessment. Evaluation of risks related to the value drivers of the
organization, covering strategic, financial, operational, and compliance objectives. The
assessment considers the impact of risks to shareholder value as a basis to define the audit
plan and monitor key risks. This top-down approach enables the coverage of internal audit
activities to be driven by issues that directly impact shareholder and customer value, with
clear and explicit linkage to strategic drivers for the organization.
v. Financial statement risk assessment. Evaluation of risks related to a material
misstatement of the organization’s financial statements through input from various parties
such as the controller, internal audit, and operations. This evaluation, typically performed
by the finance function, considers the characteristics of the financial reporting elements
(e.g., materiality and susceptibility of the underlying accounts, transactions, or related
support to material misstatement) and the effectiveness of the key controls (e.g., likelihood
that a control might fail to operate as intended, and the resultant impact).
vi. Fraud risk assessment. Evaluation of potential instances of fraud that could impact the
organization’s ethics and compliance standards, business practice requirements, financial
reporting integrity, and other objectives.
vii. Market risk assessment. Evaluation of market movements that could affect the
organization’s performance or risk exposure, considering interest rate risk, currency risk,
option risk, and commodity risk. This is typically performed by market risk specialists.
viii. Credit risk assessment. Evaluation of the potential that a borrower or counterparty will
fail to meet its obligations in accordance with agreed terms. This considers credit risk
inherent to the entire portfolio as well as the risk in individual credits or transactions, and
is typically performed by credit risk specialists.
ix. Customer risk assessment. Evaluation of the risk profile of customers that could
potentially impact the organization’s reputation and financial position. This assessment
weighs the customer’s intent, creditworthiness, affiliations, and other relevant factors. This
is typically performed by account managers, using a common set of criteria and a central
repository for the assessment data.
x. Supply chain risk assessment. Evaluation of the risks associated with identifying the
inputs and logistics needed to support the creation of products and services, including
selection and management of suppliers (e.g., up-front due diligence to qualify the supplier,
and ongoing quality assurance reviews to assess any changes that could impact the
achievement of the organization’s business objectives

Importance of Risk Assessment
Risk assessments are very important as they form an integral part of a good occupational health
and safety management plan. They help to:
 Create awareness of hazards and risks.

 Identify who may be at risk (employees, cleaners, visitors, contractors, the public, etc).
 Determine if existing control measures are adequate or if more should be done.
 Prevent injuries or illnesses when done at the design or planning stage.
 Prioritize hazards and control measures.
Managing business risks

Risk management is a structured approach to managing uncertainty and includes actions taken to:
 identify
 assess
 monitor and
 Reduce the impact of risks to your business.
Risks are events, situations or circumstances which lead to negative consequences for your
business.
The strategies to manage risk typically include transferring the risk to another party, avoiding the
risk, reducing the negative effect or probability of the risk, or even accepting some or all of the
potential or actual consequences of a particular risk.
Different types of corporate risk
Business risks are of a diverse nature and arise due to innumerable factors. These risks may be
broadly classified into two types, depending upon their place of origin.
i. Internal Risks are those risks which arise from the events taking place within the business
enterprise. Such risks arise during the ordinary course of a business. These risks can be
forecasted and the probability of their occurrence can be determined. Hence, they can be
controlled by the entrepreneur to an appreciable extent.
The various internal factors giving rise to such risks are:-
 Human factors are an important cause of internal risks. They may result from
strikes and lock-outs by trade unions; negligence and dishonesty of an employee;
accidents or deaths in the industry; incompetence of the manager or other important
people in the organisation, etc. Also, failure of suppliers to supply the materials or
goods on time or default in payment by debtors may adversely affect the business
enterprise.
 Technological factors are the unforeseen changes in the techniques of production
or distribution. They may result in technological obsolescence and other business
risks. For example, if there is some technological advancement which results in
products of higher quality, then a firm which is using the traditional technique of
production might face the risk of losing the market for its inferior quality product.

 Physical factors are the factors which result in loss or damage to the property of
the firm. They include the failure of machinery and equipment used in business;
fire or theft in the industry; damages in transit of goods, etc. It also includes losses
to the firm arising from the compensation paid by the firm to the third parties on
account of intentional or unintentional damages caused to them.
ii. External risks are those risks which arise due to the events occurring outside the business
organisation. Such events are generally beyond the control of an entrepreneur. Hence, the
resulting risks cannot be forecasted and the probability of their occurrence cannot be
determined with accuracy. The various external factors which may give rise to such risks
are :-
 Economic factors are the most important causes of external risks. They result
from the changes in the prevailing market conditions. They may be in the form
of changes in demand for the product, price fluctuations, changes in tastes and
preferences of the consumers and changes in income, output or trade cycles.
The conditions like increased competition for the product, inflationary tendency
in the economy, rising unemployment as well as the fluctuations in world
economy may also adversely affect the business enterprise. Such risks which
are caused by changes in the economy are known as 'dynamic risks'. These risks
are generally less predictable because they do not appear at regular intervals.
Also, such risks may not necessarily result in losses to the firm because they
may also contain an element of gain for the firm. For instance, due to market
fluctuations, a well-known product of a firm may either lose its demand or may
occupy a larger market share.
 Natural factors are the unforeseen natural calamities over which an
entrepreneur has very little or no control. They result from events like
earthquake, flood, famine, cyclone, lightening, tornado, etc. Such events may
cause loss of life and property to the firm or they may spoil its goods. For
example, Gujarat earthquake caused irreparable damage not only to the
business enterprises but also adversely affected the whole economy of the State.
 Political factors have an important influence on the functioning of a business,
both in the long and short term. They result from political changes in a country
like fall or change in the Government, communal violence or riots in the
country, civil war as well as hostilities with the neighbouring countries.
Besides, changes in Government policies and regulations may also affect the
profitability and position of a enterprise. For instance, changes in industrial
policy and Trade policy annual announcement of the budget amendments to
various legislations, etc. may enhance or reduce the profits of a business
enterprise.

GUIDELINES FOR MANAGING ETHICS IN THE WORKPLACE AND
DEVELOPING CODES OF ETHICS.
 Business ethics, also called corporate ethics, is a form of applied ethics or professional
ethics that examines the ethical and moral principles and problems that arise in a business
environment. It can also be defined as the written and unwritten codes of principles
and values, determined by an organization's culture, that govern decisions and actions
within that organization.
Levels of Business Ethics
Business ethics can be categorized in the following levels

i. Macro Level. At a macro level, sometimes called the systemic level, ethics are defined
and influenced by the wider operating environment in which the company exists. Factors
such as political pressures, economic conditions, societal attitudes to certain businesses,
and even business regulation can influence a company's operating standards and policies.
Business owners and managers must be aware of how these pressures affect operations and
relationships, and how they may impact on markets locally, nationally and internationally.
ii. Company Level. At a company or corporate level, ethical standards are embedded in the
policies and procedures of the organization, and form an important foundation on which
business strategy is built. These policies derive from the influences felt at macro level and
therefore help a business to respond to changing pressures in the most effective way. There
can be a gap between the company policy on ethical standards and the conduct of those in
charge of running the business, especially if they are not the direct owners, which can
present an ethical challenge for some employees.
iii. Individual Level. At this level ethics are made at personal level and are important
consideration for individuals working for organization. Individual ethics may be influenced
by factors like peer pressure, personal financial position, and socio-economic status.
Managers and business owners should be aware of this to manage potential conflicts.
Why study Business Ethics
i. Ethics allows you to live an authentic life. An authentic and meaningful life requires you
to live with a sense of integrity. Integrity is making commitments and sticking to them
through thick and thin, no matter how much violating them may benefit you. Having a firm
character or set of principles to guide your life and the choices you make is what ethics is
all about.
ii. Ethics makes you more successful. You may think that ethics can hold you back in all
kinds of ways, but the truth is the opposite. Ethical people embody traits that unethical
people have to work at to fake, they’re honest, trustworthy, loyal, and caring. As a result,
ethical people are perfectly suited not only for interpersonal relationships generally, but
also more specifically for the kinds of interactions that make for thriving business.
Unethical people generally don’t do so well at these things.

iii. Ethics allows you to cultivate inner peace. Lives that are lived ethically tend to be calmer,
more focused, and more productive than those that are lived unethically. Most people can’t
turn off their sympathy for other human beings. Hurting people leaves scars on both the
giver and the receiver. As a result, unethical people have stormier internal lives because
they have to work to suppress their consciences and sympathies to deal with the ways they
treat others. When they fail to properly suppress their sympathies, the guilt and shame that
comes with harming or disrespecting one’s fellow human beings takes deep root within
them.
iv. Ethics provides for a stable society. When people live ethical lives, they tell the truth,
avoid harming others, and are generous. Working with such people is easy. On the other
hand, callous and insensitive people are distrusted, so it’s difficult for them to be integrated
well into social arrangements. A stable society requires a lot of ethical people working
together in highly coordinated ways. If society were mostly composed of unethical people,
it would quickly crumble.
v. Ethics may help out in the afterlife. Some religious traditions believe ethics is the key to
something even greater than personal success and social stability: eternal life. No one can
be sure about an eternal life, but people of faith from many different religions believe that
good behaviour in this life leads to rewards in the next life.
Ethical Behavior
 Ethical behaviour is behaviour that is accepted as “good” and “right” as opposed to “bad”
or “wrong” in the context of the governing moral code.
 Ethical behaviour is acting in ways consistent with what society and individuals typically
think are good values. Ethical behaviour tends to be good for business and involves
demonstrating respect for key moral principles that include honesty, fairness, equality,
dignity, diversity and individual rights.
 Ethical dilemma is a complex situation that often involves an apparent mental conflict
between moral imperatives, in which to obey one would result in transgressing another.
Ethical Theories
Ethical theories emphasize different aspects of an ethical dilemma and lead to the most ethically
correct resolution according to the guidelines within the ethical theory itself. People usually base
their individual choice of ethical theory upon their life experiences.
i. Virtue theory. The virtue ethical theory judges a person by his character rather than
by an action that may deviate from his normal behaviour. It takes the person's morals,
reputation and motivation into account when rating an unusual and irregular behaviour
that is considered unethical. For instance, if a person plagiarized a passage that was
later detected by a peer, the peer who knows the person well will understand the
person's character and will be able to judge the friend. If the plagiarizer normally
follows the rules and has good standing amongst his colleagues, the peer who
encounters the plagiarized passage may be able to judge his friend more leniently.
Perhaps the researcher had a late night and simply forgot to credit his or her source
appropriately. Conversely, a person who has a reputation for scientific misconduct is

more likely to be judged harshly for plagiarizing because of his consistent past of
unethical behaviour
ii. Deontology theory. This theory states that people should adhere to their obligations
and duties when analysing an ethical dilemma. This means that a person will follow his
or her obligations to another individual or society because upholding one's duty is what
is considered ethically correct. For instance, a deontologist will always keep his
promises to a friend and will follow the law. A person who follows this theory will
produce very consistent decisions since they will be based on the individual's set duties.
Deontology provides a basis for special duties and obligations to specific people, such
as those within one's family. For example, an older brother may have an obligation to
protect his little sister when they cross a busy road together. This theory also praises
those deontologists who exceed their duties and obligations, which is called
"supererogation". For example, if a person hijacked a train full of students and stated
that one person would have to die in order for the rest to live, the person who volunteers
to die is exceeding his or her duty to the other students and performs an act of
supererogation.
iii. Utilitarianism theory. The utilitarian ethical theory is founded on the ability to predict
the consequences of an action. To a utilitarian, the choice that yields the greatest benefit
to the most people is the choice that is ethically correct. One benefit of this ethical
theory is that the utilitarian can compare similar predicted solutions and use a point
system to determine which choice is more beneficial for more people. This point system
provides a logical and rationale argument for each decision and allows a person to use
it on a case-by-case context.
iv. Rights theory. In the rights ethical theory the rights set forth by a society are protected
and given the highest priority. Rights are considered to be ethically correct and valid
since a large or ruling population endorses them. Individuals may also bestow rights
upon others if they have the ability and resources to do so. For example, a person may
say that her friend may borrow the car for the afternoon. The friend who was given the
ability to borrow the car now has a right to the car in the afternoon.
v. Casuist theory. The casuist ethical theory is one that compares a current ethical
dilemma with examples of similar ethical dilemmas and their outcomes. This allows
one to determine the severity of the situation and to create the best possible solution
according to others' experiences. Usually one will find paradigms that represent the
extremes of the situation so that a compromise can be reached that will hopefully
include the wisdom gained from the previous examples. One drawback to this ethical
theory is that there may not be a set of similar examples for a given ethical dilemma.
Perhaps that which is controversial and ethically questionable is new and unexpected.
Along the same line of thinking, a casuistical theory also assumes that the results of the
current ethical dilemma will be similar to results in the examples. This may not be
necessarily true and would greatly hinder the effectiveness of applying this ethical
theory.

Views of Ethical Behavior
Ethical behavior can be view from the following four perspectives
i. Utilitarian View. The theory of utilitarianism argues that good things are being done by
doing the right things. Utilitarian’s accept the idea that the welfare of society as a whole
can be maximized at the expense of some. This theory on ethical behaviour assumes that
the decision and behaviour from managers and employees will significantly contribute to
the greatest good of the most people and the benefits for the whole society.
ii. Individual View. The value of individualism is based on independence and making
choices for oneself. An individual has "the right to act as an autonomous agent". The right
to privacy illustrates that individuals have the right to make decisions about their own lives
and the information relevant to it. There are two restrictions to the principle of individual.
 First, individual does not mean unlimited freedom and cannot infringe the other
rights, do then any harm or deprive them of their rights.
 Second, individual is related to competence. If an individual is totally unable to
make rational thought and decisions or act on them, they are not autonomous.
Whether we have to respect an individual's choice depends on whether the
decision-making process is a rational one.
iii. Justice View. Justice is often summarized as 'fairness' by moral philosophers. It refers to
the commitment of managers and employees to provide equal and fair treatment to all
clients. This view implies that all people are entitled to equal access to products and service,
regardless of their age, sex, race, socio-economic status, religion, education level, culture,
lifestyle, disability, and ethnicity. The issue of justice arises because the products and
service in our society are not unlimited. As a result, we have to "develop rules and
procedures for adjudicating claims and distributing goods and services in a fair manner"
iv. Moral-rights View. This view concentrates on the fundamental rights of all human beings.
Since the idea of human rights is complex and steadily evolving. There is no agreed-upon
definition of "human rights" that covers all aspects of the notion. Human integrity, freedom
and equality are considered as the three important aspects of human existence.

THEORIES OF CORPORATE GOVERNANCE
i. Stakeholder theory. This theory was formulated by Edward Freeman. It looks at the
relationships between an organization and others in its internal and external
environment. It also looks at how these connections influence how the business
conducts its activities. Think of a stakeholder as a person or group that can affect or be
affected by an organization. Stakeholders can come from inside or outside of the
business. Examples include customers, employees, stockholders, suppliers, non-profit
groups, government, and the local community, among many others. The core idea of
stakeholder theory is that organizations that manage their stakeholder relationships
effectively will survive longer and perform better than organizations that don't.
Freeman suggests that organizations should develop certain stakeholder competencies.
These include:
 Making commitment to monitor stakeholder’s interest.
 Developing strategies to effectively deal with stakeholders and their concerns.
 Dividing and categorizing interest into manageable segments
 Ensuring that organizational functions address the needs of stakeholders.
ii. Agency theory. Agency theory having its roots in economic theory was exposited by
Alchian and Demsetz (1972) and further developed by Jensen and Meckling (1976).
Agency refers to the relationship between two parties, where one is a principal and the
other is an agent who represents the principal in transactions with a third party. Agency
relationships occur when the principals hire the agent to perform a service on the
principals' behalf. Principals commonly delegate decision-making authority to the
agents. Agency problems can arise because of inefficiencies and incomplete
information.
This theory attempts to deal with two specific problems:
 how to align the goals of the principal so that they are not in conflict (agency
problem),
 How the principal and agent reconcile different tolerances for risk.
iii. Stewardship theory. This theory assumes that managers are stewards whose behaviors
are aligned with the objectives of their principals. The theory argues and looks at a
different form of motivation for managers drawn from organizational theory. Managers
are viewed as loyal to the company and interested in achieving high performance. The
dominant motive, which directs managers to accomplish their job, is their desire to
perform excellently. Specifically, managers are conceived as being motivated by a need
to achieve, to gain intrinsic satisfaction through successfully performing inherently
challenging work, to exercise responsibility and authority, and thereby to gain
recognition from peers and bosses. Therefore, there are non-financial motivators for
managers.
The theory also argues that an organization requires a structure that allows
harmonization to be achieved most efficiently between managers and owners. In the
context of firm’s leadership, this situation is attained more readily if the CEO is also
the chairman of the board. This leadership structure will assist them to attain superior
performance to the extent that the CEO exercises complete authority over the
corporation and that their role is unambiguous and unchallenged. In this situation,
power and authority are concentrated in a single person. Hence, the expectations about

corporate leadership will be clearer and more consistent both for subordinate managers
and for other members of the corporate board. Thus, there is no room for uncertainty
as to who has authority or responsibility over a particular matter. The organization will
enjoy the benefits of unity of direction and of strong command and control.
iv. Transaction Cost Theory. Transaction cost theory was first initiated by Cyert and
March (1963) and later theoretical described and exposed by Williamson (1996). This
theory tries to explain why companies exist, and why companies expand or source out
activities to the external environment. It supposes that companies try to minimize the
cost of exchanging resources with the environment, and that companies try to minimize
the bureaucratic costs of exchanges with the company. Companies are therefore
weighing the costs of exchanging resources with the environment, against the
bureaucratic cost of performing activities in-house. The costs related to the exchange
of resources with the external environment could be reflected by the following factors;
 Environmental uncertainty
 Opportunism
 Risks
 Bounded rationality
 Core company assets

CORPORATE SOCIAL RESPONSIBILITY
 Corporate Social Responsibility is the continuing commitment by business to behave

ethically and contribute to economic development while improving the quality of life of
the workforce and their families as well as of the local community and society at large
 Corporate social responsibility (CSR) is also known as corporate citizenship, corporate
philanthropy, corporate giving, corporate community involvement, community relations,
community affairs, community development, corporate responsibility, global citizenship,
and corporate social marketing
Core objectives of CSR
The core objectives of social responsibility of business are as follows:

i. It is a concept that implies a business must operate (function) with a firm mindset to protect
and promote the interest and welfare of society.
ii. Profit (earned through any means) must not be its only highest objective else contributions
made for betterment and progress of a society must also be given a prime importance.
iii. It must honestly fulfill its social responsibilities in regard to the welfare of society in which
it operates and whose resources & infrastructures it makes use of to earn huge profits.
iv. It should never neglect (avoid) its responsibilities towards society in which it flourishes.
Obligations of Corporate Social Responsibility (models)
Corporates are viewed as citizens in a modern society, like any individual would have
responsibility to the society, the responsibility of corporates is grouped in the following
obligations;
i. Economic responsibility. This obligation is the business version of the human survival
instinct. Companies that don’t make profits in a modern market economy are doomed to
perish. Of course there are special cases. Corporates work hard to make profits and that’s
why majority of them are driven by objective of profit maximization.
ii. Legal responsibility. This is the obligation to adhere to rules and regulations. Like the
previous, this responsibility is not controversial. What proponents of CSR argue, however,
is that this obligation must be understood as a proactive duty. That is, laws aren’t
boundaries that enterprises skirt and cross over if the penalty is low; instead, responsible
organizations accept the rules as a social good and make good faith efforts to obey not just
the letter but also the spirit of the limits. In concrete terms, this is the difference between
the driver who stays under the speed limit because he can’t afford a traffic ticket, and one
who obeys because society as a whole is served when we all agree to respect the signs and
stoplights and limits.
iii. Ethical responsibility. This is the obligation to do what’s right even when not required by
the letter or spirit of the law. This is the theory’s keystone obligation, and it depends on a
coherent corporate culture that views the business itself as a citizen in society, with the
kind of obligations that citizenship normally entails.

iv. Philanthropic responsibility. This is the obligation to contribute to society’s projects even
when they’re independent of the particular business. These public acts of generosity
represent a view that businesses, like everyone in the world, have some obligation to
support the general welfare in ways determined by the needs of the surrounding
community.
Scope of Corporate Social Responsibility

The scope of social responsibility of business mainly covers its obligations or duties towards four
social groups.
These groups are the four areas of social responsibility of business. The main concern of a business
is to fulfill its responsibilities towards these four social groups.
i. The social responsibility of business towards shareholders or investors. Shareholders
are the individuals or business organizations who legaly own a portion of the busines.
Investers are all the parties that have contributed capital to the running of the organization
and they expect returns on investment from the capital contributed. The organization is
responsible to the shareholders in the following ways;
 Provide reasonable return on their investment.
 Protect their investment.
 Increase the market value of their shares by making a fair profit and by building a
good image of the business.
 Regularly provide up-to-date, accurate and full information on the working of
business.
 Treat all shareholders fairly and equally well without any bias or partiality.
 Take necessary steps to expand the business.
 Carry out research and development (R&D) activities to innovate and improve
products and/or services.

ii. The social responsibility of business towards employees or workers. Employees are
individuals who provide labor to the organization. They participate in the daily activities
of running the organization. Their actions and behavior will define the destiny of the
organization. The organization is responsible to the employees in the following.
 Pay fair wages or salaries.
 Provide pleasant working conditions and better work environment.
 Make provisions for the welfare of labor and old age security (OAS) pension
program.
 Arrange training and educational programs for skills enhancement and improve job
performance.
 Appreciate their job well done and also recognize their talents.
 Allow their participation in management and also consider their opinions in matters
of decision making.
 Provide proper and effective grievance redress mechanism for employees.
 Introduce schemes for sharing profit with employees.
 Allow workers to execute their right to form associations or trade unions.
 Introduce schemes for recreation or entertainment of workers.
 Treat them with dignity and respect and not as work slaves.
 Give them a meaningful work that suits their individual expertise or skills.
 Guarantee them their social, religions, cultural, and political freedom.
iii. The social responsibility of business towards the consumers or customers. Customers
are the individuals or business organizations who buy the company’s product for personal
/business use. The organization is responsible to the customers in the following ways
 Provide quality goods and/or services at reasonable prices.
 Provide a good after sales services and customer support.
 Accurately describe and don't falsify any information related to the products and/or
services.
 Guard against adulteration, poor quality, lack of service and courtesy, misleading
and dishonest advertising.
 Make research and development (R&D) to introduce new products and/or services
and enhance their quality.
 Take appropriate steps to remove imperfections in the distribution system,
including black marketing, profiteering and other anti-social elements.
 Provide consumers an opportunity to get heard and resolve their grievances as early
as possible.
 Provide protection against monopoly and restrictive trade practices.
 Understand the needs & wants of customers and try best to satisfy them.
iv. The social responsibility of business towards community. Communities are the
individuals or other business organizations neighboring the organization. The organization
is socially responsible to the community in the following
 Take essential steps to maintain proper ecological balance of the surrounding
environment.
 Prevent environmental degradation caused due to haphazard and unchecked
pollution of air, water and land.

 Keep goodness and safety of infrastructure with regular maintenance, repairs and
up gradation, wherever necessary.
 Rehabilitate the population displaced due to business operations, if any.
 Take initiative in the conservation of scare resources and try to find out their
alternatives and substitutes wherever possible.
 Contribute in the development of socially-backward areas.
 Promote ancillary, small-scaled and cottage industries.
 Make possible contribution to promote education and control population.
 Assist in the overall developments of the locality.
 Improve the efficiency of business operations.
 Contribute help in events of disasters like occurrence of any natural calamities, to
help victims.
 Provide health care facilities for local community, especially for children, women
and senior citizens.
 Provide day-care centers for children of working mothers.
 Provide equal opportunity of employment.
 Make provisions for social accountability.
 Maintain good relationship between business and society.
 Cooperate with government and non-governmental organizations in their efforts to
enhance the development and betterment of the society.
Benefits of Corporate Social Responsibility

CSR should not be viewed as a drain on resources, because carefully implemented CSR policies
can help your organization:
 Win new business
 Increase customer retention
 Develop and enhance relationships with customers, suppliers and networks
 Attract, retain and maintain a happy workforce and be an Employer of Choice
 Save money on energy and operating costs and manage risk
 Differentiate yourself from your competitors
 Generate innovation and learning and enhance your influence
 Improve your business reputation and standing
 Provide access to investment and funding opportunities
 Generate positive publicity and media opportunities due to media interest in ethical
business activities
Read on
 Arguments against CSR

 Theories of CSR

LEADERSHIP
 Leadership is the ability to establish direction and influence others to follow that direction.
 Leadership is having a vision, sharing that vision and inspiring others to support your vision
while creating their own.
 Leadership is the ability to guide others without force into a direction or decision that leaves
them still feeling empowered and accomplished.
 Effective leadership is providing the vision and motivation to a team so they work together
toward the same goal, and then understanding the talents and temperaments of each
individual and effectively motivating each person to contribute individually their
best toward achieving the group goal
 Leadership is the art of serving others by equipping them with training, tools and people
as well as your time, energy and emotional intelligence so that they can realize their full
potential, both personally and professionally.
Leadership Traits
i. Emotional stability. Good leaders must be able to tolerate frustration and stress. Overall,
they must be well-adjusted and have the psychological maturity to deal with anything they
are required to face.
ii. Dominance. Leaders are often times competitive and decisive and usually enjoy
overcoming obstacles. Overall, they are assertive in their thinking style as well as their
attitude in dealing with others.
iii. Enthusiasm. Leaders are usually seen as active, expressive, and energetic. They are often
very optimistic and open to change. Overall, they are generally quick and alert and tend to
be uninhibited.
iv. Conscientiousness. Leaders are often dominated by a sense of duty and tend to be very
exacting in character. They usually have a very high standard of excellence and an inward
desire to do one's best. They also have a need for order and tend to be very self-disciplined.
v. Social boldness. Leaders tend to be spontaneous risk-takers. They are usually socially
aggressive and generally thick-skinned. Overall, they are responsive to others and tend to
be high in emotional stamina.
vi. Tough-mindedness. Good leaders are practical, logical, and to-the-point. They tend to be
low in sentimental attachments and comfortable with criticism. They are usually insensitive
to hardship and overall, are very poised.
vii. Self-assurance. Self-confidence and resiliency are common traits among leaders. They
tend to be free of guilt and have little or no need for approval. They are generally secure
and free from guilt and are usually unaffected by prior mistakes or failures.
viii. Compulsiveness. Leaders are found to be controlled and very precise in their social
interactions. Overall, they were very protective of their integrity and reputation and
consequently tended to be socially aware and careful, abundant in foresight, and very
careful when making decisions or determining specific actions.

Type of Leaders.
In management perspective, leaders can be broadly categorized into two;
i. Transactional Leaders, also known as managerial leaders, focuses on the role of
supervision, organization, and group performance; the leader promotes compliance of
his/her followers through both rewards and punishments. Transactional Leadership has
the following assumptions.
 People perform their best when the chain of command is definite and clear.
 Rewards and punishments motivate workers.
 Obeying the instructions and commands of the leader is the primary goal of the
followers.
 Subordinates need to be carefully monitored to ensure that expectations are met.
ii. Transformational leaders. These are type of leaders who inspire positive changes in
their followers. Transformational leaders are generally energetic, enthusiastic, and
passionate. Not only are these leaders concerned and involved in the process; they are
also focused on helping every member of the group succeed as well. Transformational
leaders have the following components/features/characteristics.
 Intellectual Stimulation – Transformational leaders not only challenge the
status quo; they also encourage creativity among followers. The leader
encourages followers to explore new ways of doing things and new
opportunities to learn.
 Individualized Consideration – Transformational leadership also involves
offering support and encouragement to individual followers. In order to foster
supportive relationships, transformational leaders keep lines of communication
open so that followers feel free to share ideas and so that leaders can offer direct
recognition of the unique contributions of each follower.
 Inspirational Motivation – Transformational leaders have a clear vision that
they are able to articulate to followers. These leaders are also able to help
followers experience the same passion and motivation to fulfill these goals.
 Idealized Influence – The transformational leader serve as a role model for
followers. Because followers trust and respect the leader, they emulate this
individual and internalize his or her ideals.
Sources of Power for Leaders

 Power is the ability of a person or a group to influence the beliefs and actions of
other people. It is the ability to influence events.
i. Referent Power- Referent power is also called as personal power, charismatic power, and
the power of personality. This power comes from each leader individually. It is the
personality of a person that attracts followers. People follow because they are influenced
or attracted by the magnetic personality of the leader. The followers admire their leaders
and may even try to copy their behavior, dress, etc.
ii. Legitimate Power- Legitimate power is also known as position power and official power.
It comes from the higher authority. In an organisation, a manager gets power because of

his position or post. It gives him the power to control resources and to reward and punish
others. For e.g. a chief executive officer (C.E.O) of a company gets legitimate powers
because of the position which he holds.
iii. Expert Power - Expert power is also known as the power of knowledge. It comes from
expert knowledge and skills. Expert power means the expert influences another person's
behavior. This is because the expert has knowledge and skill which the other person needs
but does not possess. Persons like doctors, lawyers, accountants, etc., have expert power
because they have expert knowledge and skills, which others require.
iv. Coercive Power - Coercive power is the ability to punish others or to pose a threat to
others. Coercive power uses fear as a motivator. The leaders or managers with coercive
powers can threaten an employee's job security, cut his pay, withdraw certain facilities,
suspend him, etc. The coercive power may have an impact in the short-run. It will create a
negative impact on the receiver.
v. Reward Power - Reward power is opposite to coercive power. With the help of reward
power, the leader tries to motivate the followers to improve their performance. This power
enables the leader to provide additional facilities, increase in pay, promotion of the
subordinates, etc. The reward power also enables the leader to recognize the services of the
subordinate through appreciation.
Leadership Styles
 A leadership style is a leader's approach of providing direction, implementing plans, and

motivating people.
i. Autocratic style. In this style, leaders make decisions without consulting their team
members, even if their input would be useful. This can be appropriate when you need to
make decisions quickly, when there's no need for team input, and when team agreement
isn't necessary for a successful outcome. However, this style can be demoralizing, and it
can lead to high levels of absenteeism and staff turnover.
ii. Democratic style. In this style leaders make the final decisions, but they include team
members in the decision-making process. They encourage creativity, and people are often
highly engaged in projects and decisions. As a result, team members tend to have high job
satisfaction and high productivity. This is not always an effective style to use, though, when
you need to make a quick decision.
iii. Laissez-faire style. In this style, leaders give their team members a lot of freedom in how
they do their work, and how they set their deadlines. They provide support with resources
and advice if needed, but otherwise they don't get involved. This autonomy can lead to high
job satisfaction, but it can be damaging if team members don't manage their time well, or
if they don't have the knowledge, skills, or self-motivation to do their work effectively.
(Laissez-faire leadership can also occur when managers don't have control over their work
and their people.)
Theories of Leadership
i. Trait Theory. This theory assumes that people inherit certain qualities and traits that make
them better suited to leadership. Trait theories often identify particular personality or

behavioral characteristics shared by leaders. For example, traits like extraversion, self-
confidence, and courage are all traits that could potentially be linked to great leaders. If
particular traits are key features of leadership, then how do we explain people who possess
those qualities but are not leaders? This question is one of the difficulties in using trait
theories to explain leadership. There are plenty of people who possess the personality traits
associated with leadership, yet many of these people never seek out positions of leadership.
ii. Behavioral Theory. This theory is based upon the belief that great leaders are made, not
born. This behavioral theory suggests that a leader do not behave in the same manner under
all situations. Similarly, his actions are not identical under all situations which he faces. He
adjusts his behavior as per the need of the situation. There is an element of flexibility in his
approach and behavior. He studies the situation and adjust his leadership style accordingly.
He adopts different leadership styles to meet the need of different situations.
iii. Contingency Theory. Contingency theory of leadership focus on particular variables
related to the environment that might determine which particular style of leadership is best
suited for the situation. According to this theory, no leadership style is best in all situations.
Success depends upon a number of variables, including the leadership style, qualities of
the followers and aspects of the situation.
iv. Situational Theory. Situational theory propose that leaders choose the best course of
action based upon situational variables. Different styles of leadership may be more
appropriate for certain types of decision-making. For example, in a situation where the
leader is the most knowledgeable and experienced member of a group, an authoritarian
style might be most appropriate. In other instances where group members are skilled
experts, a democratic style would be more effective.
v. Participative Theory. Participative leadership theory suggest that the ideal leadership
style is one that takes the input of others into account. These leaders encourage
participation and contributions from group members and help group members feel more
relevant and committed to the decision-making process. In participative theories, however,
the leader retains the right to allow the input of others.
vi. Management Theory. Management theories, also known as transactional theories, focus
on the role of supervision, organization and group performance. These theories base
leadership on a system of rewards and punishments. Managerial theories are often used in
business; when employees are successful, they are rewarded; when they fail, they are
reprimanded or punished. Learn more about theories of transactional leadership.
vii. Relationship Theory. Relationship theory, also known as transformational theories, focus
upon the connections formed between leaders and followers. Transformational
leaders motivate and inspire people by helping group members see the importance and
higher good of the task. These leaders are focused on the performance of group members,
but also want each person to fulfill his or her potential. Leaders with this style often have
high ethical and moral standards.

ETHICAL DECISION MAKING
 Ethical Decisions. A decision is ethical when it is consistent with the Six Pillars of
Character - ethical decisions generate and sustain trust; demonstrate respect, responsibility,
fairness and caring; and are consistent with good citizenship. If we lie to get something we
want and we get it, the decision might well be called effective, but it is also unethical.
 Effective Decisions. A decision is effective if it accomplishes something we want to
happen, if it advances our purposes. A simple test is: are you satisfied with the results? A
choice that produces unintended and undesirable results is ineffective.
 Ethical decision making is a cognitive process that considers various ethical principles,
rules, and virtues or the maintenance of relationships to guide or judge individual or group
decisions or intended actions
Ethical decision making typically examines three perspectives:
 The ethic of obedience- The ethic of obedience looks not only at the letter of the law, but
also the spirit or moral values behind it.
 The ethic of care- The ethic of care engages our emotional intelligence and empathy in
making a decision from other people’s perspectives: "How would I feel in their shoes?.
 The ethic of reason- The ethic of reason engages our rational brain. Here we might use
wisdom and experience to calculate various likely outcomes. This three dimensional
approach engages both intellect and emotional intelligence and requires "slow thinking"
The quality of the decision will depend on the following:
 An understanding of the facts.
 An awareness of your own values.
 An awareness of the factors that can influence your decision.
 The use of appropriate points of reference to analyze the situation.
 The ability to apply a rigorous ethical decision-making framework.
Frameworks for Ethical Decision-Making

Making good ethical decisions requires a trained sensitivity to ethical issues and a practiced
method for exploring the ethical aspects of a decision and weighing the considerations that should
impact our choice of a course of action. The following are the frameworks for ethical decision
making
i. The Consequentialist Framework. In this framework, the focus is on the future
effects of the possible courses of action, considering the people who will be directly or
indirectly affected. The question is what outcomes are desirable in a given situation,
and consider ethical conduct to be whatever will achieve the best consequences. The
person using the Consequences framework desires to produce the most good. Among
the advantages of this ethical framework is that focusing on the results of an action is
a pragmatic approach. It helps in situations involving many people, some of whom may
benefit from the action, while others may not. On the other hand, it is not always
possible to predict the consequences of an action, so some actions that are expected to
produce good consequences might actually end up harming people. Additionally,

people sometimes react negatively to the use of compromise which is an inherent part
of this approach, and they recoil from the implication that the end justifies the means.
It also does not include a pronouncement that certain things are always wrong, as even
the most heinous actions may result in a good outcome for some people, and this
framework allows for these actions to then be ethical.
ii. The Duty Framework. In this framework, the focus is on the duties and obligations
that one has in a given situation, and consider what ethical obligations one has and what
things one should never do. Ethical conduct is defined by doing one’s duties and doing
the right thing, and the goal is performing the correct action. This framework has the
advantage of creating a system of rules that has consistent expectations of all people;
if an action is ethically correct or a duty is required, it would apply to every person in
a given situation. This even-handedness encourages treating everyone with equal
dignity and respect.
iii. The Virtue Framework. In the Virtue framework, we try to identify the character
traits (either positive or negative) that might motivate us in a given situation. We are
concerned with what kind of person we should be and what our actions indicate about
our character. We define ethical behavior as whatever a virtuous person would do in
the situation, and we seek to develop similar virtues.
Tucker's 5 questions model
One of the useful models for ethical decision making is the Tucker's 5 questions model. In this
model, you ask 5 questions to determine whether a decision is ethical. The 5 questions are:
 Is the decision profitable?

 Is the decision legal?
 Is the decision sustainable/environmentally sound?
 Is the decision right?
 Is it fair?
You will find that answering the first 3 will be straightforward. However right and fairness require
judgment. One way to put is "is it right to shareholders" (for profit making companies) and "is it
fair to stakeholders" although there are many ways to express ideas.

Stages of Ethical Decision Making
Ethical decision making takes four main steps/stages

i. Recognize moral issue. One has to take note of the issue at hand and think whether it
is right or wrong
ii. Make moral judgment. Judgment has to be made on whether the issue at hand is right
or wrong.
iii. Establish moral intent. One has to decide to what is right.
iv. Engage in moral behavior. One has to exercise and do what is right and expected

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BUSS 426: CORPORATE GOVERNANCE & ETHICS

Expected Learning Outcomes

1 Governance and Ethics Notes By Paul Mwenda

Assessment and Examinations

2 Governance and Ethics Notes By Paul Mwenda

Meaning of Corporate governance

Characteristics of Corporate Governance.

3 Governance and Ethics Notes By Paul Mwenda

Goals of Corporate Governance

Pillars of corporate governance

4 Governance and Ethics Notes By Paul Mwenda

Major issues in corporate governance

5 Governance and Ethics Notes By Paul Mwenda

Indicators of Bad Corporate Governance

 Increased reported cases of corruption

6 Governance and Ethics Notes By Paul Mwenda

Meaning of social contract

 Stakeholders are person, groups or organization(s) that has interest or concern in an

7 Governance and Ethics Notes By Paul Mwenda

Stakeholders can be broadly categorized into three main categories.

i. Internal stakeholders. Internal stakeholders are usually members of the organization.

8 Governance and Ethics Notes By Paul Mwenda

Role of Stakeholders in Business

i. Voting and Decision-making. Stakeholders may be responsible for voting on significant

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How does stakeholder management work?

Failures in stakeholder management

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Mendelow model of stakeholder management

Understanding the matrix

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In order to apply this technique to your project, follow these steps

NB. Read on;

 importance of stakeholder management

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Principles of Corporate Governance

Different Types of Corporate Code of Ethics.

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Principal Duties and roles of the Board of Directors

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Corporate Governance Models

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Reporting on corporate governance

Types of Corporate Reports

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How to Write a Corporate Report

Users of corporate reports:

Characteristics of the Reported Information

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 Auditing is a continuous systematic examination and verification of a firm’s books of

The role of audits

The internal audit standards

Standards are principles-focused, mandatory requirements consisting of:

The purpose of the Standards is to:

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Types of Internal Controls

i. Preventive Controls are designed to discourage errors or irregularities from occurring.

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Internal control frameworks

 A control framework is a data structure that organizes and categorizes an organization’s