Corporate Governance and Ethics

Module Code: OUbs00221

Contents :-

Unit 1: Origins of Ethics

Unit 2: Ethical principles in business

Unit 3: Objectives of Corporate Governance

Unit 4: Corporate Governance in Mauritius

Unit 5: Social Responsibility, Internal Control and Financial Reporting

Unit 6: Code of Ethics for Professional Accountants

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 Unit 1

Origins of Ethics

Unit Structure

1.1 Ethics

1.2 The origins of Ethics

1.3 Problems of Divine Origin

1.4 Prehumans Ethics

1.5 Various Schools of Thoughts

1.6 Self Assessment Questions

1.1 Ethics

Ethics, also called moral philosophy, the discipline concerned with what is morally

good and bad, right and wrong. The term is also applied to any system or theory of

moral values or principles.

How should we live? Shall we aim at happiness or at knowledge, virtue, or the

creation of beautiful objects? If we choose happiness, will it be our own or the

happiness of all? And what of the more particular questions that face us: is it right

to be dishonest in a good cause? Can we justify living in opulence while elsewhere

in the world people are starving? Is going to war justified in cases where it is likely

that innocent people will be killed? Is it wrong to clone a human being or to destroy

human embryos in medical research? What are our obligations, if any, to the

generations of humans who will come after us and to the nonhuman animals with

whom we share the planet?

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Ethics deals with such questions at all levels. Its subject consists of the fundamental

issues of practical decision making, and its major concerns include the nature of

ultimate value and the standards by which human actions can be judged right or

wrong.

The terms ethics and morality are closely related. It is now common to refer to

ethical judgments or to ethical principles where it once would have been more

accurate to speak of moral judgments or moral principles. These applications are an

extension of the meaning of ethics. In earlier usage, the term referred not to

morality itself but to the field of study, or branch of inquiry, that has morality as its

subject matter. In this sense, ethics is equivalent to moral philosophy.

Although ethics has always been viewed as a branch of philosophy, its all-

embracing practical nature links it with many other areas of study, including

anthropology, biology, economics, history, politics, sociology, and theology. Yet,

ethics remains distinct from such disciplines because it is not a matter of factual

knowledge in the way that the sciences and other branches of inquiry are. Rather, it

has to do with determining the nature of normative theories and applying these sets

of principles to practical moral problems. (Encyclopaedia Britannica)

1.2 The origins of ethics

When did ethics begin and how did it originate? If one has in mind ethics proper—

i.e., the systematic study of what is morally right and wrong—it is clear that ethics

could have come into existence only when human beings started to reflect on the

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best way to live. This reflective stage emerged long after human societies had

developed some kind of morality, usually in the form of customary standards of

right and wrong conduct. The process of reflection tended to arise from such

customs, even if in the end it may have found them wanting. Accordingly, ethics

began with the introduction of the first moral codes.

Virtually every human society has some form of myth to explain the origin of

morality. In the Louvre in Paris there is a black Babylonian column with a relief

showing the sun god Shamash presenting the code of laws to Hammurabi (died c.

1750 BCE), known as the Code of Hammurabi. The Hebrew Bible (Old

Testament) account of God’s giving the Ten Commandments to Moses

(flourished 14th–13th century BCE) on Mount Sinai might be considered another

example. In the dialogue Protagoras by Plato (428/427–348/347 BCE), there is an

avowedly mythical account of how Zeus took pity on the hapless humans, who

were physically no match for the other beasts. To make up for these deficiencies,

Zeus gave humans a moral sense and the capacity for law and justice, so that they

could live in larger communities and cooperate with one another. That morality

should be invested with all the mystery and power of divine origin is not surprising.

Nothing else could provide such strong reasons for accepting the moral law. By

attributing a divine origin to morality, the priesthood became its interpreter and

guardian and thereby secured for itself a power that it would not readily relinquish.

This link between morality and religion has been so firmly forged that it is still

sometimes asserted that there can be no morality without religion. According to this

view, ethics is not an independent field of study but rather a branch of theology.

There is some difficulty, already known to Plato, with the view that morality was

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created by a divine power. In his dialogue Euthyphro, Plato considered the

suggestion that it is divine approval that makes an action good. Plato pointed out

that, if this were the case, one could not say that the gods approve of such actions

because they are good. Why then do they approve of them? Is their approval

entirely arbitrary? Plato considered this impossible and so held that there must be

some standards of right or wrong that are independent of the likes and dislikes of

the gods. Modern philosophers have generally accepted Plato’s argument, because

the alternative implies that if, for example, the gods had happened to approve of

torturing children and to disapprove of helping one’s neighbours, then torture would

have been good and neighbourliness bad.

1.3 Problems of divine origin

A modern theist might say that, since God is good, God could not possibly approve

of torturing children nor disapprove of helping neighbours. In saying this, however,

the theist would have tacitly admitted that there is a standard of goodness that is

independent of God. Without an independent standard, it would be pointless to say

that God is good; this could mean only that God is approved of by God. It seems

therefore that, even for those who believe in the existence of God, it is impossible to

give a satisfactory account of the origin of morality in terms of divine creation. A

different account is needed.

There are other possible connections between religion and morality.

It has been said that, even if standards of good and evil exist independently of God

or the gods, divine revelation is the only reliable means of finding out what these

standards are. An obvious

problem with this view is that those who receive divine revelations, or who consider

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themselves qualified to interpret them, do not always agree on what is good and

what is evil. Without an accepted criterion for the authenticity of a revelation or an

interpretation, people are no better off, so far as reaching moral agreement is

concerned, than they would be if they were to decide on good and evil themselves,

with no assistance from religion.

Traditionally, a more important link between religion and ethics was that religious

teachings were thought to provide a reason for doing what is right. In its crudest

form, the reason was that those who obey the moral law will be rewarded by an

eternity of bliss while everyone else roasts in hell. In more sophisticated versions,

the motivation provided by religion was more inspirational and less blatantly self-

interested. Whether in its crude or its sophisticated version, or something in

between, religion does provide an answer to one of the great questions of ethics:

“Why should I be moral?” (See below Ethics and reasons for action.) As will be

seen in the course of this article, however, the answer provided by religion is not the

only one available.

1.4 Prehuman ethics

Nonhuman behaviour

Because, for obvious reasons, there is no historical record of a human society in the

period before it had any standards of right and wrong, history cannot reveal the

origins of morality. Nor is anthropology of any help, because all the human

societies that have been studied so far had their own forms of morality (except

perhaps in the most extreme circumstances). Fortunately, another mode of inquiry is

available. Because living in social groups is a characteristic that humans share with

many other animal species—including their closest relatives, the apes—presumably

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the common ancestor of humans and apes also lived in social groups. Here, then, in

the social behaviour of nonhuman animals and in the theory of evolution that

explains such behaviour may be found the origins of human morality.

Social life, even for nonhuman animals, requires constraints on behaviour. No

group can stay together if its members make frequent, unrestrained attacks on each

other. With some exceptions, social animals generally either refrain altogether from

attacking other members of the social group or, if an attack does take place, do not

make the ensuing struggle a fight to the death—it is over when the weaker animal

shows submissive behaviour. It is not difficult to see analogies here with human

moral codes. The parallels, however, go much further than this. Like humans, social

animals may behave in ways that benefit other members of the group at some cost

or risk to themselves. Male baboons threaten predators and cover the rear as the

troop retreats. Wolves and wild dogs take meat back to members of the pack not

present at the kill. Gibbons and chimpanzees with food will, in response to a

gesture, share their food with other members of the group. Dolphins support other

sick or injured dolphins, swimming under them for hours at a time and pushing

them to the surface so they can breathe.

It may be thought that the existence of such apparently altruistic behaviour is odd,

for evolutionary theory states that those who do not struggle to survive and

reproduce will be eliminated through natural selection. Research in evolutionary

theory applied to social behaviour, however, has shown that evolution need not be

so ruthless.

Some of this altruistic behaviour is explained by kin selection. The most obvious

examples are those in which parents make sacrifices for their offspring. If wolves

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help their cubs to survive, it is more likely that genetic characteristics, including the

characteristic of helping their own cubs, will spread through further generations of

wolves.

1.5 Various schools of thoughts

Virtue ethics

Virtue ethics describes the character of a moral agent as a driving force for ethical

behavior, and is used to describe the ethics of Socrates,Aristotle, and other early

Greek philosophers. Socrates (469 BC– 399 BC) was one of the first Greek

philosophers to encourage both scholars and the common citizen to turn their

attention from the outside world to the condition of humankind. In this view,

knowledge having a bearing on human life was placed highest, all other knowledge

being secondary. Self-knowledge was considered necessary for success and

inherently an essential good. A self-aware person will act completely within his

capabilities to his pinnacle, while an ignorant person will flounder and encounter

difficulty. To Socrates, a person must become aware of every fact (and its context)

relevant to his existence, if he wishes to attain self-knowledge. He posited that

people will naturally do what is good, if they know what is right. Evil or bad actions

are the result of ignorance. If a criminal was truly aware of the intellectual and

spiritual consequences of his actions, he would neither commit nor even consider

committing those actions. Any person who knows what is truly right will

automatically do it, according to Socrates. While he correlated knowledge with

virtue, he similarly equated virtue with joy. The truly wise man will know what is

right, do what is good, and therefore be happy.

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Aristotle (384 BC – 323 BC) posited an ethical system that may be termed “self-

realizationism.” In Aristotle’s view, when a person acts in accordance with his

nature and realizes his full potential, he will do good and be content. At birth, a

baby is not a person, but a potential person. To become a “real” person, the child’s

inherent potential must be realized. Unhappiness and frustration are caused by the

unrealized potential of a person, leading to failed goals and a poor life. Aristotle

said, “Nature does nothing in vain.” Therefore, it is imperative for people to act in

accordance with their nature and develop their latent talents in order to be content

and complete. Happiness was held to be the ultimate goal. All other things, such as

civic life or wealth, are merely means to the end. Self-realization, the awareness of

one’s nature and the development of one’s talents, is the surest path to happiness.

Aristotle asserted that man had three natures: vegetable (physical/ metabolism),

animal (emotional/appetite) and rational (mental/ conceptual). Physical nature can

be assuaged through exercise and care, emotional nature through indulgence of

instinct and urges, and mental through human reason and developed potential.

Rational development was considered the most important, as essential to

philosophical self-awareness and as uniquely human. Moderation was encouraged,

with the extremes seen as degraded and immoral. For example, courage is the

moderate virtue between the extremes of cowardice and recklessness. Man should

not simply live, but live well with conduct governed by moderate virtue. This is

regarded as difficult, as virtue denotes doing the right thing, to the right person, at

the right time, to the proper extent, in the correct fashion, for the right reason.

Stoicism

The Stoic philosopher Epictetus posited that the greatest good was contentment

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and serenity. Peace of mind, or Apatheia, was of the highest value; self-mastery

over one’s desires and emotions leads to spiritual peace. The “unconquerable will”

is central to this philosophy. The individual’s will should be independent and

inviolate. Allowing a person to disturb the mental equilibrium is in essence offering

yourself in slavery. If a person is free to anger you at will, you have no control over

your internal world, and therefore no freedom. Freedom from material attachments

is also necessary. If a thing breaks, the person should not be upset, but realize it was

a thing that could break. Similarly, if someone should die, those close to them

should hold to their serenity because the loved one was made of flesh and blood

destined to death. Stoic philosophy says to accept things that cannot be changed,

resigning oneself to existence and enduring in a rational fashion. Death is not

feared. People do not“lose” their life, but instead “return”, for they are returning to

God

(who initially gave what the person is as a person). Epictetus said difficult problems

in life should not be avoided, but rather embraced. They are spiritual exercises

needed for the health of the spirit, just as physical exercise is required for the health

of the body. He also stated that sex and sexual desire are to be avoided as the

greatest threat to the integrity and equilibrium of a man’s mind. Abstinence is

highly desirable. Epictetus said remaining abstinent in the face of temptation was a

victory for which a man could be proud.

Hedonism

Hedonism posits that the principal ethic is maximizing pleasure and minimizing

pain. There are several schools of Hedonist thought ranging from those advocating

the indulgence of even momentary desires to those teaching a pursuit of spiritual

bliss. In their consideration of consequences, they range from those advocating self-

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gratification regardless of the pain and expense to others, to those stating that the

most ethical pursuit maximizes pleasure and happiness for the most people.

Cyrenaic hedonism

Founded by Aristippus of Cyrene, Cyrenaics supported immediate gratification or

pleasure. “Eat, drink and be merry, for tomorrow we die.” Even fleeting desires

should be indulged, for fear the opportunity should be forever lost. There was little

to no concern with the future, the present dominating in the pursuit for immediate

pleasure. Cyrenaic hedonism encouraged the pursuit of enjoyment and indulgence

without hesitation, believing pleasure to be the only good.

Epicureanism

Epicurean ethics is a hedonist form of virtue ethics. Epicurus “presented a

sustained argument that pleasure, correctly understood, will coincide with virtue”.

He rejected the extremism of the Cyrenaics, believing some pleasures and

indulgences to be detrimental to human beings. Epicureans observed that

indiscriminate indulgence sometimes resulted in negative consequences. Some

experiences were therefore rejected out of hand, and some unpleasant experiences

endured in the present to ensure a better life in the future. To Epicurus the summum

bonum, or greatest good, was prudence, exercised through moderation and caution.

Excessive indulgence can be destructive to pleasure and can even lead to pain. For

example, eating one food too often will cause a person to lose taste for it. Eating too

much food at once will lead to discomfort and ill-health. Pain and fear were to be

avoided. Living was essentially good, barring pain and illness. Death was not to be

feared. Fear was considered the source of most unhappiness. Conquering the fear of

death would naturally lead to a happier life. Epicurus reasoned if there was an

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afterlife and immortality, the fear of death was irrational. If there was no life after

death, then the person would not be alive to suffer, fear or worry; he would be non-

existent in death. It is irrational to fret over circumstances that do not exist, such as

one’s state in death in the absence of an afterlife.

Modern normative ethics

Traditionally, normative ethics (also known as moral theory) was the study of what

makes actions right and wrong. These theories offered an overarching moral

principle one could appeal to in resolving difficult moral decisions. At the turn of

the 20th century, moral theories became more complex and are no longer concerned

solely with rightness and wrongness, but are interested in many different kinds of

moral status. During the middle of the century, the study of normative ethics

declined as meta-ethics grew in prominence. This focus on meta-ethics was in part

caused by an intense linguistic focus in analytic philosophy and by the popularity

of logical positivism.

In 1971 John Rawls published A Theory of Justice, noteworthy in its pursuit of

moral arguments and eschewing of meta-ethics. This publication set the trend for

renewed interest in normative ethics.

Consequentialism

Consequentialism refers to moral theories that hold that the consequences of a

particular action form the basis for any valid moral judgment about that action (or

create a structure for judgment, see rule consequentialism). Thus, from a

consequentialist standpoint, a morally right action is one that produces a good

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outcome, or consequence. This view is often expressed as the aphorism “The ends

justify the means”.

The term “consequentialism” was coined by G.E.M. Anscombe in her essay

“Modern Moral Philosophy” in 1958, to describe what she saw as the central error

of certain moral theories, such as those propounded by Mill and Sidgwick. Since

then, the term has become common in English-language ethical theory.

The defining feature of consequentialist moral theories is the weight given to the

consequences in evaluating the rightness and wrongness of actions. In

consequentialist theories, the consequences of an action or rule generally outweigh

other considerations. Apart from this basic outline, there is little else that can be

unequivocally said about consequentialism as such. Consequences count as good

states of affairs. According to hedonistic utilitarianism, a good action is one that

results in an increase in pleasure, and the best action is one that results in the most

pleasure for the greatest number. Closely related is eudaimonic consequentialism,

according to which a full, flourishing life, which may or may not be the same as

enjoying a great deal of pleasure, is the ultimate aim. Similarly, one might adopt an

aesthetic consequentialism, in which the ultimate aim is to produce beauty.

However, one might fix on non-psychological goods as the relevant effect. Thus,

one might pursue an increase in material equality or political liberty instead of

something like the more ephemeral “pleasure”. Other theories adopt a package of

several goods, all to be promoted equally. Whether a particular consequentialist

theory focuses on a single good or many, conflicts and tensions between different

good states of affairs are to be expected and must be adjudicated.

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Utilitarianism

Utilitarianism is a hedonistic ethical theory that argues the proper course of action is

one that maximizes overall “happiness”. Jeremy Bentham and John Stuart Mill

are influential proponents of this school of thought. In A Fragment on Government

Bentham says ‘it is the greatest happiness of the greatest number that is the measure

of right and wrong’ and describes this as a fundamental axiom. In An Introduction

to the Principles of Morals and Legislation he talks of ‘the principle of utility’ but

later prefers “the greatest happiness principle”.

Hedonistic utilitarianism is the paradigmatic example of a consequentialist moral

theory. This form of utilitarianism holds that what matters is the aggregate

happiness; the happiness of everyone and not the happiness of any particular

person. John Stuart Mill, in his exposition of hedonistic utilitarianism, proposed a

hierarchy of pleasures, meaning that the pursuit of certain kinds of pleasure is more

highly valued than the pursuit of other pleasures.

Deontology

Deontological ethics or deontology (from Greek δέον, deon, “obligation, duty”;

and -λογία, -logia) is an approach to ethics that determines goodness or rightness

from examining acts, or the rules and duties that the person doing the act strove to

fulfill. This is in contrast to consequentialism, in which rightness is based on the

consequences of an act, and not the act by itself. In deontology, an act may be

considered right even if the act produces a bad consequence, if it follows the rule

that “one should do unto others as they would have done unto them”, and even if

the person who does the act lacks virtue and had a bad intention in doing the act.

According to deontology, we have a duty to act in a way that does those things that

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are inherently good as acts (“truth-telling” for example), or follow an objectively

obligatory rule (as in rule utilitarianism). For deontologists, the ends or

consequences of our actions are not important in and of themselves, and our

intentions are not important in and of themselves.

Immanuel Kant’s theory of ethics is considered deontological for several different

reasons. First, Kant argues that to act in the morally right way, people must act from

duty (deon). Second, Kant argued that it was not the consequences of actions that

make them right or wrong but the motives (maxime) of the person who carries out

the action.

Immanuel Kant

Kant’s argument that to act in the morally right way, one must act from duty, begins

with an argument that the highest good must be both good in itself, and good

without qualification. Something is‘good in itself’ when it is intrinsically good,

and ‘good without qualification’ when the addition of that thing never makes a

situation ethically worse. Kant then argues that those things that are usually thought

to be good, such as intelligence, perseverance and pleasure, fail to be either

intrinsically good or good without qualification. Pleasure, for example, appears to

not be good without qualification, because when people take pleasure in watching

someone suffering, this seems to make the situation ethically worse. He concludes

that there is only one thing that is truly good:

Nothing in the world—indeed nothing even beyond the world— can possibly be

conceived which could be called good without qualification except a good will.

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1.6 Self Assessment Questions

 What is ethics?

 What were the first propositions?

 What caused the evolution of the thinking on ethics?

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 Unit 2

Ethical principles in business

Unit Structure

2.1 History

2.2 Overview

2.3 Functional business areas

2.4 International issues

2.5 Economic systems

2.6 Law and regulation

2.7 Corporate policies

2.8 Self Assessment Questions

2.1 History

Business ethics (also corporate ethics ) is a form of applied ethics or professional

ethics that examines ethical principles and moral or ethical problems that arise in a

business environment. It applies to all aspects of business conduct and is relevant to

the conduct of individuals and entire organizations.

Business ethics has both normative and descriptive dimensions.

As a corporate practice and a career specialization, the field is primarily normative.

Academics attempting to understand business behavior employ descriptive

methods. The range and quantity of business ethical issues reflects the interaction of

profit-maximizing behavior with non-economic concerns. Interest in business ethics

accelerated dramatically during the 1980s and 1990s, both within major

corporations and within academia. For example, today most major corporations

promote their commitment to non-economic values under headings such as ethics

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codes and social responsibility charters. Adam Smith said, “People of the same

trade seldom meet together, even for merriment and diversion, but the conversation

ends in a conspiracy against the public, or in some contrivance to raise prices.”[2]

Governments use laws and regulations to point business behaviour in what they

perceive to be beneficial directions. Ethics implicitly regulates areas and details of

behavior that lie beyond governmental control. The emergence of large corporations

with limited relationships and sensitivity to the communities in which they operate

accelerated the development of formal ethics regimes. Business ethical norms

reflect the norms of each historical period.

As time passes norms evolve, causing accepted behaviors to become objectionable.

Business ethics and the resulting behavior evolved as well. Business was involved

in slavery, colonialism, and the cold war.

The term ‘business ethics’ came into common use in the United States in the early

1970s. By the mid-1980s, at least 500 courses in business ethics reached 40,000

students, using some twenty textbooks and at least ten casebooks along supported

by professional societies, centers and journals of business ethics. The Society for

Business Ethics was started in 1980. European business schools adopted business

ethics after 1987 commencing with the European

Business Ethics Network (EBEN). In 1982 the first single-authored books in the

field appeared. Firms started highlighting their ethical stature in the late 1980s and

early 1990s, possibly trying to distance themselves from the business scandals of

the day, such as the savings and loan crisis. The idea of business ethics caught the

attention of academics, media and business firms by the end of the Cold War.

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However, legitimate criticism of business practices was attacked for infringing the “

freedom” of entrepreneurs and critics were accused of supporting communists. This

scuttled the discourse of business ethics both in media and academia.

2.2 Overview

Business ethics reflects the philosophy of business, one of whose aims is to

determine the fundamental purposes of a company. If a company’s purpose is to

maximize shareholder returns, then sacrificing profits to other concerns is a

violation of its fiduciary responsibility. Corporate entities are legally considered as

persons in USA and in most nations. The ‘corporate persons’ are legally entitled to

the rights and liabilities due to citizens as persons.

Economist Milton Friedman writes that corporate executives’ “responsibility...

generally will be to make as much money as possible while conforming to their

basic rules of the society, both those embodied in law and those embodied in ethical

custom”.

Friedman also said, “the only entities who can have responsibilities are individuals

... A business cannot have responsibilities. So the question is, do corporate

executives, provided they stay within the law, have responsibilities in their business

activities other than to make as much money for their stockholders as possible? And

my answer to that is, no, they do not.” A multi-country 2011 survey found support

for this view among the “informed public” ranging from 30 to 80%.

Ronald Duska views Friedman’s argument as consequentialist rather than

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pragmatic, implying that unrestrained corporate freedom would benefit the most in

long term. Similarly author business consultant Peter Drucker observed, “There is

neither a separate ethics of business nor is one needed”, implying that standards of

personal ethics cover all business situations. However, Peter Drucker in another

instance observed that the ultimate responsibility of company directors is not to

harm—primum non nocere. Another view of business is that it must exhibit

corporate social responsibility (CSR): an umbrella term indicating that an ethical

business must act as a responsible citizen of the communities in which it operates

even at the cost of profits or other goals. In the US and most other nations corporate

entities are legally treated as persons in some respects. For example, they can hold

title to property, sue and be sued and are subject to taxation, although their free

speech rights are limited. This can be interpreted to imply that they have

independent ethical responsibilities Duska argues that stakeholders have the right to

expect a business to be ethical; if business has no ethical obligations, other

institutions could make the same claim which would be counterproductive to the

corporation.

Ethical issues include the rights and duties between a company and its employees,

suppliers, customers and neighbors, its fiduciary responsibility to its shareholders.

Issues concerning relations between different companies include hostile take-overs

and industrial espionage. Related issues include corporate governance;corporate

social entrepreneurship; political contributions; legal issues such as the ethical

debate over introducing a crime of corporate manslaughter; and the marketing of

corporations’ ethics policies. According to IBE/ Ipsos MORI research published in

late 2012, the three major areas of public concern regarding business ethics in

Britain are executive pay, corporate tax avoidance and bribery and corruption.

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2.3 Functional business areas

2.3.1 Finance

Fundamentally, finance is a social science discipline. The discipline borders

behavioral economics, sociology, economics, accounting and management. It

concerns technical issues such as the mix of debt and equity, dividend policy, the

evaluation of alternative investment projects, options, futures, swaps, and other

derivatives, portfolio diversification and many others. It is often mistaken] to be a

discipline free from ethical burdens. The 2008 financial crisis caused critics to

challenge the ethics of the executives in charge of U.S. and European financial

institutions and financial regulatory bodies. Finance ethics is overlooked for another

reason—issues in finance are often addressed as matters of law rather than ethics.

2.3.1.1 Finance paradigm

Aristotle said, “the end and purpose of the polis is the good life. Adam Smith

characterized the good life in terms of material goods and intellectual and moral

excellences of character. Smith in his The Wealth of Nations commented, “All for

ourselves, and nothing for other people, seems, in every age of the world, to have

been the vile maxim of the masters of mankind.”

However, a section of economists influenced by the ideology of neoliberalism,

interpreted the objective of economics to be maximization of economic growth

through accelerated consumption and production of goods and services. Neoliberal

ideology promoted finance from its position as a component of economics to its

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core. Proponents of the ideology hold that unrestricted financial flows, if redeemed

from the shackles of “financial repressions”, best help impoverished nations to

grow. The theory holds that open financial systems accelerate economic growth by

encouraging foreign capital infllows, thereby enabling higher levels of savings,

investment, employment, productivity and “welfare”, along with containing

corruption. Neoliberals recommended that governments open their financial

systems to the global market with minimal regulation over capital flows. The

recommendations however, met with criticisms from various schools of ethical

philosophy. Some pragmatic ethicists, found these claims to unfalsifiable and a

priori, although neither of these makes the recommendations false or unethical per

se. Raising economic growth to the highest value necessarily means that welfare is

subordinate, although advocates dispute this saying that economic growth provides

more welfare than known alternatives. Since history shows that neither regulated

nor unregulated firms always behave ethically, neither regime offers an ethical

panacea.

Neoliberal recommendations to developing countries to unconditionally open up

their economies to transnational finance corporations was fiercely contested by

some ethicists. The claim that deregulation and the opening up of economies would

reduce corruption was also contested.

Dobson observes, “a rational agent is simply one who pursues personal material

advantage ad infinitum. In essence, to be rational in finance is to be individualistic,

materialistic, and competitive.

Business is a game played by individuals, as with all games the object is to win, and

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winning is measured in terms solely of material wealth. Within the discipline this

rationality concept is never questioned, and has indeed become the theory-of-the-

firm’s sine qua non”. Financial ethics is in this view a mathematical function of

shareholder wealth. Such simplifying assumptions were once necessary for the

construction of mathematically robust models. However signalling theory and

agency theory extended the paradigm to greater realism.

2.3.2 Other issues

Fairness in trading practices, trading conditions, financial contracting, sales

practices, consultancy services, tax payments, internal audit, external audit and

executive compensation also fall under the umbrella of finance and accounting.

Particular corporate ethical/legal abuses include: creative accounting, earnings

management, misleading financial analysis, insider trading, securities fraud,

bribery/kickbacks and facilitation payments. Outside of corporations, bucket shops

and forex scams are criminal manipulations of financial markets. Cases include

accounting scandals, Enron, WorldCom and Satyam.

2.3.3 Human resource management

Human resource management occupies the sphere of activity of recruitment

selection, orientation, performance appraisal, training and development, industrial

relations and health and safety issues. Business Ethicists differ in their orientation

towards labour ethics. Some assess human resource policies according to whether

they support an egalitarian workplace and the dignity of labor.

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Issues including employment itself, privacy, compensation in accord with

comparable worth, collective bargaining (and/or its opposite) can be seen either as

inalienable rights or as negotiable. Discrimination by age (preferring the young or

the old), gender/sexual harassment, race, religion, disability, weight and

attractiveness. A common approach to remedying discrimination is affirmative

action.

Potential employees have ethical obligations to employers, involving intellectual

property protection and whistle-blowing.

Employers must consider workplace safety, which may involve modifying the

workplace, or providing appropriate training or hazard disclosure. Larger economic

issues such as immigration, trade policy, globalization and trade unionism affect

workplaces and have an ethical dimension, but are often beyond the purview of

individual companies.

2.3.3.1 Trade unions

Unions for example, may push employers to establish due process for workers, but

may also cost jobs by demanding unsustainable compensation and work rules.

Unionized workplaces may confront union busting and strike breaking and face the

ethical implications of work rules that advantage some workers over others.

2.3.3.2 Management strategy

Among the many people management strategies that companies employ are a “soft”

approach that regards employees as a source of creative energy and participants in

workplace decision making, a “hard” version explicitly focused on control and

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Theory Z that emphasizes philosophy, culture and consensus. None ensure ethical

behavior. Some studies claim that sustainable success requires a humanely treated

and satisfied workforce.

2.3.4 Sales and marketing

Marketing came of age only as late as 1990s. Marketing ethics was approached

from ethical perspectives of virtue or virtue ethics, deontology, consequentialism,

pragmatism and relativism.

Ethics in marketing deals with the principles, values and/or ideals by which

marketers (and marketing institutions) ought to act. Marketing ethics is also

contested terrain, beyond the previously described issue of potential conflicts

between profitability and other concerns. Ethical marketing issues include

marketing redundant or dangerous products/services transparency about

environmental risks, transparency about product ingredients such as genetically

modified organisms possible health risks, financial risks, security risks, etc. respect

for consumer privacy and autonomy, advertising truthfulness and fairness in pricing

& distribution.

According to Borgerson, and Schroeder (2008), marketing can influence

individuals’ perceptions of and interactions with other people, implying an ethical

responsibility to avoid distorting those perceptions and interactions. Marketing

ethics involves pricing practices, including illegal actions such as price fixing and

legal actions including price discrimination and price skimming. Certain

promotional activities have drawn fire, including greenwashing, bait and switch,

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shilling, viral marketing, spam (electronic), pyramid schemes and multi-level

marketing. Advertising has raised objections about attack ads, subliminal messages,

sex in advertising and marketing in schools.

2.3.5 Production

This area of business ethics usually deals with the duties of a company to ensure

that products and production processes do not needlessly cause harm. Since few

goods and services can be produced and consumed with zero risk, determining the

ethical course can be problematic. In some case consumers demand products that

harm them, such as tobacco products. Production may have environmental impacts,

including pollution, habitat destruction and urban sprawl. The downstream effects

of technologies nuclear power, genetically modified food and mobile phones may

not be well understood. While the precautionary principle may prohibit introducing

new technology whose consequences are not fully understood, that principle would

have prohibited most new technology introduced since the industrial revolution.

Product testing protocols have been attacked for violating the rights of both humans

and animals.

2.3.6 Property

The etymological root of property is the Latin ‘proprius’ which refers to ‘nature’,

‘quality’, ‘one’s own’, ‘special characteristic’, ‘proper’, ‘intrinsic’, ‘inherent’,

‘regular’, ‘normal’, ‘genuine’, ‘thorough, complete, perfect’ etc. The word property

is value loaded and associated with the personal qualities of propriety and

respectability, also implies questions relating to ownership. A ‘proper’ person owns

and is true to herself or himself, and is thus genuine, perfect and pure.

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2.3.6.1 Modern history of property rights

Modern discourse on property emerged by the turn of 17th century within

theological discussions of that time. For instance, John Locke justified property

rights saying that God had made “the earth, and all inferior creatures, [in] common

to all men”. In 1802 Utilitarian Jeremy Bentham stated, “property and law are born

together and die together”.

One argument for property ownership is that it enhances individual liberty by

extending the line of non-interference by the state or others around the person. Seen

from this perspective, property right is absolute and property has a special and

distinctive character that precedes its legal protection. Blackstone conceptualized

property as the “sole and despotic dominion which one man claims and exercises

over the external things of the world, in total exclusion of the right of any other

individual in the universe”.

2.3.6.1.1 Slaves as property

During the seventeenth and eighteenth centuries, slavery spread to European

colonies including America, where colonial legislatures defined the legal status of

slaves as a form of property. During this time settlers began the centuries-long

process of dispossessing the natives of America of millions of acres of land.

Ironically, the natives lost about 200,000 square miles (520,000 km2) of land in the

Louisiana Territory under the leadership of Thomas Jefferson, who championed

property rights.

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Combined with theological justification, property was taken to be essentially natural

ordained by God. Property, which later gained meaning as ownership and appeared

natural to Locke, Jefferson and to many of the 18th and 19th century intellectuals as

land, labour or idea and property right over slaves had the same theological and

essentialized justification. It was even held that the property in slaves was a sacred

right. Wiecek noted, “slavery was more clearly and explicitly established under the

Constitution as it had been under the Articles”. Accordingly, US Supreme Court

Chief Justice Roger B. Taney in his 1857 judgment stated, “The right of property in

a slave is distinctly and expressly affirmed in the Constitution”.

2.3.6.1.2 Natural right vs social construct

Neoliberals hold that private property rights are a non-negotiable natural right.

Davies counters with “property is no different from other legal categories in that it

is simply a consequence of the significance attached by law to the relationships

between legal persons.” Singer claims, “Property is a form of power, and the

distribution of power is a political problem of the highest order”. Rose finds,

“’Property’ is only an effect, a construction, of relationships between people,

meaning that its objective character is contestable. Persons and things, are

‘constituted’ or ‘fabricated’ by legal and other normative techniques.”. Singer

observes, “A private property regime is not, after all, a Hobbesian state of nature; it

requires a working legal system that can define, allocate, and enforce property

rights.”[ Davis claims that common law theory generally favors the view that

“property is not essentially a ‘right to a thing’, but rather a separable bundle of

rights subsisting between persons which may vary according to the context and the

28
object which is at stake”.

In common parlance property rights involve a ‘bundle of rights’ including

occupancy, use and enjoyment, and the right to sell, devise, give, or lease all or part

of these rights. Custodians of property have obligations as well as rights.

Michelman writes, “A property regime thus depends on a great deal of cooperation,

trustworthiness, and self-restraint among the people who enjoy it.”

Menon claims that the autonomous individual, responsible for his/her own existence

is a cultural construct moulded by Western culture rather than the truth about the

human condition. Penner views property as an “illusion”—a “normative phantasm”

without substance. In the neoliberal literature, property is part of the private side of

a public/private dichotomy and acts a counterweight to state power. Davies counters

that “any space may be subject to plural meanings or appropriations which do not

necessarily come into conflict”.

Private property has never been a universal doctrine, although since the end of the

Cold War is it has become nearly so. Some societies, e.g., Native American bands,

held land, if not all property, in common.

When groups came into conflict, the victor often appropriated the loser’s property.

The rights paradigm tended to stabilize the distribution of property holdings on the

presumption that title had been lawfully acquired.

Property does not exist in isolation, and so property rights too. Bryan claimed that

property rights describe relations among people and not just relations between

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people and things. Singer holds that the idea that owners have no legal obligations

to others wrongly supposes that property rights hardly ever conflict with other

legally protected interests. Singer continues implying that legal realists “did not

take the character and structure of social relations as an important independent

factor in choosing the rules that govern market life”. Ethics of property rights

begins with recognizing the vacuous nature of the notion of property.

2.3.7 Intellectual property

Intellectual property (IP) encompasses expressions of ideas, thoughts, codes and

information. “Intellectual property rights” (IPR) treat IP as a kind of real property,

subject to analogous protections, rather than as a reproducible good or service.

Boldrin and Levine argue that “government does not ordinarily enforce monopolies

for producers of other goods. This is because it is widely recognized that monopoly

creates many social costs. Intellectual monopoly is no different in this respect. The

question we address is whether it also creates social benefits commensurate with

these social costs.”

International standards relating to Intellectual Property Rights are enforced through

Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). In the

US, IP other than copyrights is regulated by the United States Patent and Trademark

Office.

The US Constitution included the power to protect intellectual property,

empowering the Federal government “to promote the progress of science and

useful arts, by securing for limited times to authors and inventors the exclusive

30
right to their respective writings and discoveries”. Boldrin and Levine see no value

in such state-enforced monopolies stating, “we ordinarily think of innovative

monopoly as an oxymoron. Further they comment, ‘intellectual property’ “is not

like ordinary property at all, but constitutes a government grant of a costly and

dangerous private monopoly over ideas. We show through theory and example that

intellectual monopoly is not necessary for innovation and as a practical matter is

damaging to growth, prosperity, and liberty” . Steelman defends patent monopolies,

writing, “Consider prescription drugs, for instance. Such drugs have benefited

millions of people, improving or extending their lives. Patent protection enables

drug companies to recoup their development costs because for a specific period of

time they have the sole right to manufacture and distribute the products they have

invented.” The court cases by 39 pharmaceutical companies against South Africa’s

1997 Medicines and Related Substances

Control Amendment Act, which intended to provide affordable HIV medicines has

been cited as a harmful effect of patents.

One attack on IPR is moral rather than utilitarian, claiming that inventions are

mostly a collective, cumulative, path dependent, social creation and therefore, no

one person or fiirm should be able to monopolize them even for a limited period.

The opposing argument is that the benefits of innovation arrive sooner when patents

encourage innovators and their investors to increase their commitments.

Roderick Long, a libertarian philosopher, observes, “Ethically, property rights of

any kind have to be justified as extensions of the right of individuals to control their

own lives. Thus any alleged property rights that conflict with this moral basis—like

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the “right” to own slaves—are invalidated. In my judgment, intellectual property

rights also fail to pass this test. To enforce copyright laws and the like is to prevent

people from making peaceful use of the information they possess. If you have

acquired the information legitimately (say, by buying a book), then on what grounds

can you be prevented from using it, reproducing it, trading it? Is this not a violation

of the freedom of speech and press? It may be objected that the person who

originated the information deserves ownership rights over it. But information is not

a concrete thing an individual can control; it is a universal, existing in other

people’s minds and other people’s property, and over these the originator has no

legitimate sovereignty. You cannot own information without owning other people”.

Machlup concluded that patents do not have the intended effect of enhancing

innovation.] Self-declared anarchist Proudhon, in his 1847 seminal work noted,

“Monopoly is the natural opposite of competition,” and continued, “Competition is

the vital force which animates the collective being: to destroy it, if such a

supposition were possible, would be to kill society”.

Mindeli and Pipiya hold that the knowledge economy is an economy of abundance

because it relies on the “infinite potential” of knowledge and ideas rather than on

the limited resources of natural resources, labor and capital. Allison envisioned an

egalitarian distribution of knowledge. Kinsella claims that IPR create artificial

scarcity and reduce equality. Bouckaert wrote, “Natural scarcity is that which

follows from the relationship between man and nature. Scarcity is natural when it is

possible to conceive of it before any human, institutional, contractual arrangement.

Artificial scarcity, on the other hand, is the outcome of such arrangements.

Artificial scarcity can hardly serve as a justification for the legal framework that

causes that scarcity. Such an argument would be completely circular. On the

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contrary, artificial scarcity itself needs a justification” Corporations fund much IP

creation and can acquire IP they do not create, to which Menon and others object.

Andersen claims that IPR has increasingly become an instrument in eroding public

domain.

Ethical and legal issues include: Patent infringement, copyright infringement,

trademark infringement, patent and copyright misuse, submarine patents, biological

patents, patent, copyright and trademark trolling, Employee raiding and

monopolizing talent, Bioprospecting, biopiracy and industrial espionage, digital

rights management.

Notable IP copyright cases include Napster, Eldred v. Ashcroft and Air Pirates.

2.4 International issues

While business ethics emerged as a field in the 1970s, international business ethics

did not emerge until the late 1990s, looking back on the international developments

of that decade. Many new practical issues arose out of the international context of

business. Theoretical issues such as cultural relativity of ethical values receive more

emphasis in this field. Other, older issues can be grouped here as well. Issues and

subfields include:

 The search for universal values as a basis for international commercial

behaviour.

 Comparison of business ethical traditions in different countries. Also on the

basis of their respective GDP and [Corruption rankings].

 Comparison of business ethical traditions from various religious perspectives.

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 Ethical issues arising out of international business transactions; e.g.,

bioprospecting and biopiracy in the pharmaceutical industry; the fair trade

movement; transfer pricing.

 Issues such as globalization and cultural imperialism.

 Varying global standards—e.g., the use of child labor. The way in which

multinationals take advantage of international differences, such as outsourcing

production (e.g. clothes) and services (e.g. call centres) to low-wage countries.

 The permissibility of international commerce with pariah states.

 The success of any business depends on its financial performance.

Financial accounting helps the management to report and also control the business

performance. The information regarding the financial performance of the company

plays an important role in enabling people to take right decision about the company.

Therefore, it becomes necessary to understand how to record based on accounting

conventions and concepts ensure accurate records.

Foreign countries often use dumping as a competitive threat, selling products at

prices lower than their normal value. This can lead to problems in domestic

markets. It becomes difficult for these markets to compete with the pricing set by

foreign markets. In 2009, the International Trade Commission has been researching

anti-dumping laws. Dumping is often seen as an ethical issue, as larger companies

are taking advantage of other less economically advanced companies.

2.5 Economic systems

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Political economy and political philosophy have ethical implications, particularly

regarding the distribution of economic benefits. John Rawls and Robert Nozick are

both notable contributors.

For example, Rawls has been interpreted as offering a critique of offshore

outsourcing on social contract grounds, whereas Nozick’s libertarian philosophy

rejects the notion of any positive corporate social obligation.

2.6 Law and regulation

Very often it is held that business is not bound by any ethics other than abiding by

the law. Milton Friedman is the pioneer of the view. He held that corporations have

the obligation to make a profit within the framework of the legal system, nothing

more. Friedman made it explicit that the duty of the business leaders is, “to make as

much money as possible while conforming to the basic rules of the society, both

those embodied in the law and those embodied in ethical custom”. Ethics for

Friedman is nothing more than abiding by ‘customs’ and ‘laws’. The reduction of

ethics to abidance to laws and customs however has drawn serious criticisms.

Counter to Friedman’s logic it is observed that legal procedures are technocratic,

bureaucratic, rigid and obligatory whereas ethical act is conscientious, voluntary

choice beyond normativity. Law is retroactive. Crime precedes law. Law against a

crime, to be passed, the crime must have happened. Laws are blind to the crimes

undefined in it. Further, as per law, “conduct is not criminal unless forbidden by law

which gives advance warning that such conduct is criminal. Also, law presumes the

accused is innocent until proven guilty and that the state must establish the guilt of

35
the accused beyond reasonable doubt. As per liberal laws followed in most of the

democracies, until the government prosecutor proves the firm guilty with the limited

resources available to her, the accused is considered to be innocent. Though the

liberal premises of law is necessary to protect individuals from being persecuted by

Government, it is not a sufficient mechanism to make firms morally accountable.

2.7 Corporate policies

As part of more comprehensive compliance and ethics programs, many companies

have formulated internal policies pertaining to the ethical conduct of employees.

These policies can be simple exhortations in broad, highly generalized language

(typically called a corporate ethics statement), or they can be more detailed policies,

containing specific behavioural requirements (typically called corporate ethics

codes). They are generally meant to identify the company’s expectations of workers

and to offer guidance on handling some of the more common ethical problems that

might arise in the course of doing business. It is hoped that having such a policy

will lead to greater ethical awareness, consistency in application, and the avoidance

of ethical disasters.

An increasing number of companies also require employees to attend seminars

regarding business conduct, which often include discussion of the company’s

policies, specific case studies, and legal requirements. Some companies even

require their employees to sign agreements stating that they will abide by the

company’s rules of conduct.

Many companies are assessing the environmental factors that can lead employees to

36
engage in unethical conduct. A competitive business environment may call for

unethical behaviour. Lying has become expected in fields such as trading. Examples

of this are the issues surrounding the unethical actions of the Saloman Brothers.

Not everyone supports corporate policies that govern ethical conduct. Some claim

that ethical problems are better dealt with by depending upon employees to use their

own judgment. Others believe that corporate ethics policies are primarily rooted in

utilitarian concerns, and that they are mainly to limit the company’s legal liability,

or to curry public favour by giving the appearance of being a good corporate

citizen. Ideally, the company will avoid a lawsuit because its employees will follow

the rules. Should a lawsuit occur, the company can claim that the problem would

not have arisen if the employee had only followed the code properly.

Sometimes there is disconnection between the company’s code of ethics and the

company’s actual practices. Thus, whether or not such conduct is explicitly

sanctioned by management, at worst, this makes the policy duplicitous, and, at best,

it is merely a marketing tool.

Jones and Parker write, “Most of what we read under the name business ethics is

either sentimental common sense, or a set of excuses for being unpleasant.” Many

manuals are procedural form filling exercises unconcerned about the real ethical

dilemmas. For instance,

US Department of Commerce ethics program treats business ethics as a set of

instructions and procedures to be followed by ‘ethics officers’, some others claim

being ethical is just for the sake of being ethical. Business ethicists may trivialize

the subject, offering standard answers that do not reflect the situation’s complexity.

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2.8 Self Assessment Questions

 Why is ethics important in business?

 Who are the main proponents of business ethics and what did they

recommend?

 Why is doing business with some parties desirable, though apparently

ethically wrong?

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 Unit 3

Objectives of Corporate Governance

Unit Structure

3.1 Defining Corporate Governance

3.2 Separation of ownership from control

3.3 Stakeholders in a company

3.4 Issues in corporate governance

3.5 Concepts of good governance

3.6 Empirical evidence that good corporate governance makes good business sense

3.7 References and further reading

3.8 Self Assessment questions

After studying this chapter, learners should be able to:

 Define corporate governance

 Understand how separation of ownership from control leads to governance

issues

 Identify stakeholders in a company

 Explain the key issues corporate governance

 Identify the core concepts underlying best practices in corporate governance

 Appreciate why good governance practices make good business sense.

3.1 Defining Corporate Governance

Corporate governance is the system by which companies are directed and controlled

(Sir Adrian Cadbury, UK, 1992). Corporate governance provides the guidelines as

to how companies are governed and for what purpose. Given that governance

39
provides the framework to attain company objectives, it would necessarily include

every sphere of management from internal control to performance measurement to

corporate disclosure.

A company is a legal entity which is owned by its shareholders. They appoint

Directors (also referred to as the Board of Directors”) to run the company on their

behalf. To demonstrate how they accomplished this duty, the directors produce a set

of records referred to as financial statements. To enhance the reliability of these

financial statements, shareholders appoint auditors to examine the records that were

the source for the preparation of the financial statements, as well as the statements

themselves and express an opinion thereon.

Governance should not be confused with management. Management is about

running the company to attain corporate objectives that have been set by the Board

of directors. Common management activities would include setting the yearly

budget, directing and making strategic plans of the company. In contrast

Governance is about leading the company and at the same time ensuring proper

control and monitoring of management activities so that company aims and

objectives are achieved. ‘If management is about running business, governance is

about seeing that it is run properly’: (Professor Bob Tricker, 1984).

Boards of directors are responsible for the governance of their companies. The

shareholders’ role in governance is to appoint the directors and the auditors and to

satisfy themselves that an appropriate governance structure is in place. The

responsibilities of the board include setting the company’s strategic aims, providing

the leadership to put them into effect, supervising the management of the business

and reporting to shareholders on their stewardship. The board’s actions are subject

40
to laws, regulations and the shareholders in general meeting. (UK Code of

Corporate Governance – from the

Cadbury Committee 1992).

Corporate Governance refers therefore to the relationships between these various

parties and other interested parties which are called stakeholders. Other than the

forenamed, the other stakeholders comprise the customers, the suppliers, the

external providers of finance, the government and its various departments, and the

public.

All of these parties are interested in one way or another in the company and its

operations.

3.2 The separation of ownership and control

Corporate governance problems normally arise because of lack of goal congruence

which usually occurs because of separation of ownership from control. The basic

paradigm under which all corporations is arranged segregates the role of owners

from that of managers. Managers typically would be responsible for operational

control of corporations and it would be expected that the corporate ship is run in

such a way that shareholders’ wealth is maximised.

However, shareholders (Principals or owners) do not have the same interests as

managers (agents). This gives rise to agency cost. The principal-agent problem is

complex as it not only involves asymmetry of information (the agent having more

information) but also requires more than monetary incentives to resolve.

Problems with separation of ownership from control

41
When ownership is separated from control, this gives rise to problems for good

governance because directors might be running the company in such a way as to

achieve their own personal objectives which might not necessarily be in the best

interests of shareholders and shareholders might not be able to prevent directors

from doing this. This is due to the fact that the direction and control of the corporate

ship are left in the hands of the board of directors.

Fundamentally, problems of corporate governance arise when there are many

shareholders and consequently it becomes difficult to monitor the activities of the

directors. In these companies the power of the shareholders is relatively weak as

they are diverse leaving the board of directors extensive powers for controlling the

company. The directors ought to be accountable to the shareholders for the way they

are running the company and both the directors and executives are bound by

fiduciary duties (usually set under company legislation) which require executives

and directors to run the company so as to act in the best interests of the company

which usually equates to maximising shareholders’ wealth. However in practice the

shareholders might have little or no influence and do not have the ability to prevent

the directors from running the company in the way that the directors themselves

consider to be best.

Problems of corporate governance are therefore particularly severe in large

companies where shareholders continually buy and sell their shares, so that many

shareholders are not long-term investors in the company that, for a time at least,

they partly own. This is why attempts to improve corporate governance have

focused mainly on stock market companies (listed companies) and to a lesser extent

on smaller public companies and large private companies.

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3.3 Stakeholders in a company

A stakeholder in a company is someone who has a direct or an indirect stake in a

company and is therefore affected by what the company does. The expectations of

different groups of stakeholders are not the same, and they are often inconsistent

with each other. One of the objectives of corporate governance should be to provide

enough satisfaction for each stakeholder group.

Key parties involved in corporate governance include stakeholders such as the

board of directors, management and shareholders.

External stakeholders such as creditors, auditors, customers, suppliers, government

agencies, and the community at large also exert influence. The agency view of the

corporation posits that the shareholder forgoes decision rights (control) and entrusts

the manager to act in the shareholders’ best (joint) interests. Partly as a result of this

separation between the two, investors and managers, corporate governance

mechanisms include a system of controls intended to help align managers’

incentives with those of shareholders.

Stakeholder interests

All parties to corporate governance have an interest, whether direct or indirect, in

the financial performance of the corporation. Directors, workers and management

receive salaries, benefits and reputation, while investors expect to receive financial

returns. For lenders, it is specified interest payments, while returns to equity

investors arise from dividend distributions or capital gains on their stock.

Customers are concerned with the certainty of the provision of goods and services

of an appropriate quality; suppliers are concerned with compensation for their

goods or services, and possible continued trading relationships. These parties

provide value to the corporation in the form of financial, physical, human and other

43
forms of capital. Many parties may also be concerned with corporate social

performance

A key factor in a party’s decision to participate in or engage with a corporation is

their confidence that the corporation will deliver the party’s expected outcomes.

When categories of parties (stakeholders) do not have sufficient confidence that a

corporation is being controlled and directed in a manner consistent with their

desired outcomes, they are less likely to engage with the corporation.

When this becomes an endemic system feature, the loss of confidence and

participation in markets may affect many other stakeholders, and increases the

likelihood of political action. There is substantial interest in how external systems

and institutions, including markets, influence corporate governance

3.4 Issues in Corporate Governance

At the heart of the debate of corporate governance lies the competing tension and

potential conflict between shareholders, board members and management. For

instance shareholders will be mostly interested in increasing the net worth of the

company and their investment while board of directors might take unnecessary risks

to invest in those projects that are not necessarily in the interests of shareholders.

Managers may want to grow the company in ways so as to maximise their own

personal wealth.

The key issues in corporate governance which might give rise to potential conflict

of interests are:

44
 Role and responsibilities of Directors

The board of directors should have a clear understanding of its responsibilities and

it should fulfil these responsibilities and provide suitable leadership to the company.

. These include the fiduciary duties to act in the best interests of the company, use

their powers for that purpose, avoid conflicts of interest and exercise a duty of care.

Governance is therefore concerned with establishing what the responsibilities of the

board should be, and making sure that these are carried out properly.

 Composition and Balance of the Board

There should be a right balance of executive and non-executive directors on board

of directors. The organization should not be dominated by a single person. A

common feature of many corporate governance scandals has been the dominance of

the board by a single individual. The report on the UK Guinness case suggested that

Earnest Saunders. the chief executive. paid himself a reward of £3million without

the consent of other directors. The board of directors should act collectively to bring

independence of thought and judgment to the board. In addition, there needs to be a

right balance of talents, skills and competence among directors for the smooth

running of the board.

 Remuneration and Reward of Directors

Directors should not be paid excessively. However they should be sufficiently

rewarded to encourage them so as they are committed to achieve the objectives of

the company. Usually directors’ remuneration is governed by the company’s

45
remuneration policy. It is usually linked with the performance of the company and

is considered essential for successful corporate governance. However, it should be

appreciated that linking directors’ pay to performance is not very straightforward

and remuneration schemes for directors have not been very successful. Directors’

pay is an aspect of corporate governance where companies are frequently criticised.

It is therefore unavoidable that corporate governance codes have always targeted

this significant hot issue.

 Reliability of Financial Reporting and External Auditors

Financial reporting is a critical issue to corporate governance. This is because it is

the main consideration for investors to consider board accountability. Therefore,

high standards of financial reporting and external auditing should be upheld.

Concerns about misleading financial statements provided an early impetus in the

late 1980s and 1990s to the call for better corporate governance in the UK.

Accounting irregularities in a number of UK companies, for example Maxwell

Communications Corporation and Polly Peck, led to the tightening of regulations

and accounting standards.

In the US, with the collapse of the energy corporation Enron in 2001, followed by a

number of other financial scandals such as Worldcom, Rank Xerox, Global

crossing, had the result of shaking the foundation of the governance structure.

Financial reporting problems were also reported in some European companies, most

notably at the Italian group Parmalat at the end of 2003.

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 Board’s Responsibility for Risk Management and Internal Control

It is the responsibility of the board to ensure that the business does not take

excessive risks. In addition, there should be a sound system of internal control to

ensure that the resources of the company are properly used and that the assets of the

company are safe-guarded. Risk management systems should be in place and

should be constantly reviewed and monitored.

 Shareholders’ Rights and Responsibilities

Shareholders rights vary between countries. In some instances these rights might be

weak and not fully exercised. An important aspect of corporate governance is to

encourage the participation of shareholders. They should be informed of all material

information and should make greater use of their powers such as voting at general

meetings of companies. In addition, companies can make better use of the annual

report and accounts to report to shareholders on a range of issues and policies of the

company for dealing with them.

 Corporate Social Responsibility and Business Ethics

Companies and managers should be able to meet their social responsibilities by not

only acting in the best interests of shareholders but also satisfying the interests of

other stakeholders. For instance, they could ensure that their products are not

hazardous to the environment. Or they might want to invest in social causes for the

benefit of the community. Another good governance practice that overlap with

corporate social responsibility is complying with applicable laws and regulations.

47
Best practice in corporate governance and corporate social responsibility are

consistent with each other.

Usually a lack of consensus on mutual decision and responsibility would result in

business ethics and social responsibility issues, resulting in corporate governance

debates.

3.5 Concepts of Good Governance

According to the Cadbury and the OECD report there are general principles around

which businesses are expected to operate. These principles should be applied to the

company’s dealings withal its stakeholders to assure proper governance. These

concepts are briefly described.

Fairness

Fairness in corporate governance means to be free from bias and treating all

shareholders equally. This would entail that all equity shareholders should be

entitled to the same treatment. Boards should ensure that rights of minority

shareholders are protected. The fair treatment of shareholders is supported by the

Companies Act 2001 in Mauritius. However, this is not necessarily the case in all

countries. For instance in some countries, the law provides little or no protection for

minority shareholders. For example, in a takeover bid for a company, the law might

permit a higher price to be offered to large shareholders than the price offered to

small shareholders.

Openness and transparency

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There should be open and clear disclosure of information. It also means that

information is freely available and directly accessible to those who will be affected

by such decisions and their enforcement. Shareholders and investors in a company

will wish to have access to information which can help assess the position of the

company. Timely information, maybe delivered through the company’s website,

will be beneficial to them.

Transparency means to be open. In corporate governance, it means the ease with

which an outsider can a meaningful analysis of a company and its actions. A

transparent company would be a company which provides information on both its

financial position and non financial issues. Transparency therefore means providing

information about what the company has done, what it intends to do in the future,

and what risks it faces, with due regard to the confidentiality of commercially

sensitive information.

Independence

Independence refers to the extent that an individual is free from the influence of

another individual or group of individual and free from conflict of interest. One of

the cornerstones of corporate governance is that the majority of the directors of a

company should be independent. This means that they are expected to express their

honest opinion in the best interests of the company. Similarly, professional advisers

to a company such as external auditors and solicitors should be independent of the

company, and should give honest and professional opinions and advice.

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Independence can be threatened by having some connection to the company or its

management. Executive directors can never be independent, because their views

will represent the opinions of the management team. Similarly, a retired former

executive might still be influenced by the views of management, because he or she

shares the ‘management culture’. Directors who represent the interests of major

shareholders are also incapable of being independent.

An auditor may not be independent if the audit firm relies on the company for a

large percentage of its annual income. When there is an overreliance on fee income

from one particular client, auditors might choose to accept whatever management

tells them rather than questioning management for fear of any argument. An

example of auditor’s independence being compromised is the Arthur Andersen, the

audit firm that collapsed in 2002 as a result of the Enron scandal.

Independence can also be undermined by familiarity. If a non-executive director or

auditor has known the company’s management for a long time, he or she may be

blinded to management failings and shortcomings. Auditors are at risk of losing

their independence if they work for the same client for too many years.

Honesty and integrity

Honesty is a quality that companies and their directors should have. Where honesty

is lacking, there can be no trust. However, honesty is not as widespread as it could

have bene. Business leaders, as well as political leaders, may prefer to ‘put a spin’

on the facts, and manipulate facts for the purpose of presenting a more favourable

impression.

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Integrity means behaving according to highest standards of professionalism and

probity. It also means the adherence to a code of ethics. Integrity is particularly

important for companies as maintenance of good corporate governance will

sometimes depend on judgement not backed by codes. As integrity is partly about

proper dealing in relationships, it also underpins the principles of fair and equitable

dealing with shareholders in corporate governance, particularly in relation to

directors exercising an agency relationship in respect of shareholders.

Responsibility and accountability

Responsibility usually arises when one has a duty or obligation to perform an

assigned task. In corporate governance, directors are responsible for the way the

company is run. While this power is often delegated to management, the ultimate

responsibility remains with the directors. The board of directors should retain the

responsibility of certain matters for which it should take the decision itself without

delegation to management. Similarly, in instances where boards establish

committees with delegated responsibilities, terms of reference and responsibilities

for such committees should be clearly defined and established, with the Board still

being ultimately responsible.

Accountability refers to the requirement of a person in a position of responsibility to

account for the performance of his or her actions. Board of directors are

accountable to shareholders. . Consequently, shareholders should be able to assess

the actions of their board of directors and board committees and give their approval

or show their disapproval. As discussed above, a lack of goal congruence which

usually arises because of the separation of ownership from control can cause

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conflicts. One way to reduce such conflicts would be to act in transparency and be

accountable to shareholders. However, the problem with accountability is deciding

how directors should be accountable.

Reputation

A large company is known widely by its reputation or character. A reputation may

be good or bad. The reputation of a company is based on a combination of several

qualities, including commercial success and management competence. However, a

company might earn a good reputation with investors, employees, customers and

suppliers in other ways. As concerns for the environment have grown, companies

have recognised the importance of being ‘environment-friendly’ or ‘eco-friendly’.

Reputation is also based on honesty and fair dealing, and on being a good employer.

Judgement

Recent history shows that boards in some cases have failed to play this role,

condoning remuneration packages that have no true link to performance, for

example, and approving excessively ambitious expansion projects that have

undermined a company’s stability. To guard against such practices, the OECD

Principles of Corporate Governance call for directors “capable of exercising

independent judgment” and for boards able to “exercise objective independent

judgment on corporate affairs”, independent, in particular from management and in

many cases from controlling shareholders and others in a position to control the

company.

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3.6 Empirical evidence that good corporate governance makes good business

sense (From the report on Code of Corporate Governance for Mauritius)

In recent years, research has been developed that increasingly supports this

proposition. In its Investor Opinion Survey published in June 2000, McKinsey &

Co., working with Institutional

Investors Inc., found that good governance could be quantified and was significant.

For the survey, well-governed companies were defined as:

-having a clear majority of outsiders on the board, with no management ties;

-holding formal evaluations of directors;

-having directors with significant stakes in the company and receiving a large

proportion of their pay in the form of stock options;

-being responsive to investor requests for information on governance issues.

The survey found that:

-more than 84% of the more than 200 global institutional investors, together

representing more than US$3 trillion in assets, indicated a willingness to pay a

premium for the shares of a well-governed company over one considered poorly

governed but with a comparable financial record;

-three-quarters of these investors indicated that board practices were at least as

important as financial performance, when evaluating companies for potential

investment;

-the actual premium these investors would be willing to pay varied from country to

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country. In the United Kingdom, they would pay 18% more for the shares of a well-

governed company than for the shares of a company with similar financial

performance but poorer governance practices. In emerging markets or markets

perceived to have poor governance practices, this premium escalated to 22% for a

well-governed Italian company and to as much as 27% for one in Venezuela or

Indonesia.

The implications for companies are profound. Simply by developing good

governance practices, managers can potentially add significant shareholder value

and other stakeholder benefits. The results of this survey should also be apparent to

policy makers and regulators in recognising that the creation of a good governance

climate can make countries, especially in the emerging markets, a magnet for global

capital. This survey emphasised that companies not only need to be well-governed,

but also need to be perceived in the market as being well-governed.

Other similar surveys support the contentions put forward by McKinsey. In March

2001, Stanford University issued a report on corporate governance in emerging

markets, re-enforcing the McKinsey findings. Add to this the immense influence of

US pension funds, where the proportion of overall foreign holdings of some US$

410 billion in 1999 held by the top 25 pension funds leapt from 42% in 1998 to

66%. Amongst these are many of the funds that have been at the forefront of the

governance movement in the United States, such as CalPERS, TIAA-CREF,

CalSTRS, and the States of Wisconsin and Florida. It is notable that these funds are

developing activist strategies abroad, and that a number of such funds are invested

in Southern African companies.

54
3.7 References

1. AA Berle and GC Means, The Modern Corporation and Private Property (2nd

edn Harcourt, Brace and World, New York 1967)

2. Goergen, Marc, International Corporate Governance, (Prentice Hall 2012) ISBN

978-0-273-75125-0

3. Tricker, Adrian, Essentials for Board Directors: An A–Z Guide, Bloomberg Press,

New York, 2009, ISBN 978-1-57660-354-3

4. The report on the Code of Corporate Governance for Mauritius.

5. OECD corporate governance principles - why do we need corporate governance

6. P1 ACCA study test - Emily Woolf publishing

3.8 Self Assessment Questions

 Define corporate governance.

 Why is corporate governance different from management?

 List the main stakeholder groups in a company and explain how their claims

differ.

 In the context of corporate governance, what is meant by:

1) Transparency
2) Accountability

 What is the difference between accountability and responsibility?

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 Unit 4

Corporate Governance in Mauritius

Unit Structure

4.1 Introduction

4.2 Special Considerations relating to Mauritius

4.3 References

4.4 Self Assessment Questions

4.1 Introduction

Corporations have existed in Mauritius from the early days of colonisation. At the

beginning of the French colonial period, Mauritius was in fact administered by a

corporation, “La Compagnie des Indes”. However, it was only in 1984 that

Mauritius stepped into the modern era with the introduction of a new Companies’

Act in that year. In 1989, there was another step forward with the setting up of The

Stock Exchange of Mauritius. However, it was at the beginning of the new

millennium that things really started to move ahead. Both government and the

private sector realised that for Mauritius to make headway in the global economy, it

was essential to adopt laws and conventions that were in tune with the changes

taking place in the developed economies of the world. Therefore, in 2001 a raft of

new measures was introduced,designed to align where possible the practices of

corporate Mauritius with best practice world-wide.

These measures were:

-Introduction of a new Companies Act.

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-Introduction of International Accounting Standards (IAS)

-Introduction of new listing rules for companies listed on the Stock Exchange of

Mauritius.

-Setting up of a National Committee on Corporate Governance.

-The World Bank was asked to complete a Report on Standards and Codes

(R.O.S.C.) on corporate governance in Mauritius that was published in August

2002.

In 2002 and 2003 the World Bank undertook and published Reports on Standards

and Codes in respect of Auditing and Accounting, Insolvency, and the Rights of

Creditors. As a result, in July 2002, the Committee on Corporate Governance

decided that it should prepare a Code of Corporate Governance for Mauritius and

invited Mervyn King, chairman of the King Committee of South Africa, to be its

consultant to help complete this task.

4.2 Special Considerations relating to Mauritius

There are special circumstances relevant to corporate governance in Mauritius that

had to be considered. These are:

Smallness

Mauritius is a small country in terms of geographical size and population. Its

smallness will impact on corporate governance. For instance: In international terms,

Mauritius corporations are small enterprises. Corporate governance has a cost and

because of the size of Mauritius’ corporations, there will be relatively few that will

57
be able to meet the cost of the whole range of governance measures that would be

imposed on corporations operating in larger economies. Mauritius’ smallness brings

with it a fragile ecosystem. This means that corporations need to pay special

attention to the environmental aspects of corporate governance. One of the

recognised international components of good governance is to have independent

non-executive directors. In a country as small as Mauritius, the pool of such skills is

small and true independence is very difficult to achieve.

Isolation

Mauritius is an island 3 1/2 hours flying time from the nearest continent and 12

hours flying time from Europe. With modern means of communication, isolation is

clearly less of a factor than it was, but it can still have an impact. For instance,

because of the difficulty in finding truly independent directors in Mauritius, a

solution is to appoint directors from abroad. The isolation of Mauritius means that a

director from overseas would have to devote 3 days for each board meeting when

travelling is taken into account. If a company has 6 board meetings a year, an

independent director from overseas would have to devote 18 days annually to his

Mauritian directorship, without preparation time, which is a considerable

commitment for a non-executive director.

Diversity

Mauritius is very diverse in terms of ethnic groups, religions and culture. As a result

of this diversity a number of prejudicial behaviour patterns have evolved in

corporate Mauritius, the most important one being a lack of fair employment

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practices in many sectors of the economy. For corporate Mauritius to play its full

part in the economic and social development of Mauritius, employment practices

need to be made fair to all. This needs to be addressed by corporations in a Code of

Ethics, which forms an essential part of good governance.

Statutes and regulations

Corporate activity in Mauritius is regulated by statute and regulation, the main one

being the Companies Act of 2001. Other statutes have been enacted which affect

corporate behaviour, such as the Financial Reporting Act 2004 and the Financial

Services Act of 2007. These statutes and regulations are specific to Mauritius and

any Code that is written must take them into account.

Listing Requirements

The Stock Exchange of Mauritius has introduced Listing Rules which companies

need to respect if they are listed on the Stock Exchange of Mauritius. These Listing

Rules are special to Mauritius.

These special circumstances have been taken into account by the task group on

Compliance and Enforcement.

The Private Sector

The private sector in Mauritius is slowly evolving from a business environment

dominated by family companies. This has had significant implications for corporate

governance. For instance, there are still companies where senior management are

59
also major shareholders or related to major shareholders. The governance issue here

is that the manager must run the business for the benefit of the company and

consequently for all shareholders, not just his or her group of shareholders.

State-owned Enterprises

The State in Mauritius owns a number of enterprises. There are two ways in which

this ownership is exercised. A number of enterprises, e.g. Central Water Authority

and Central Electricity Board, are para-statal bodies that are regulated by their own

Acts of parliament. Other enterprises are owned through public limited liability

companies. In certain of these companies, apart from government, there are other

state-owned enterprises as shareholders. In a number of these companies, there are

minority non-governmental shareholders. One company where government has

effective control, Air Mauritius, is listed on the Stock Exchange of Mauritius.

Government has indicated that they wish state-owned enterprise to practise good

governance and follow the Code. To achieve this will require rethinking the

relationship of the board of each of these state-owned enterprises and its Ministry of

“Tutelle”. Since then, Guidance notes have been issued by the National Committee

on Corporate Governance for State Owned Enterprises.

Stewardship

Directors need to ensure that the necessary skills are in place for them to discharge

their responsibility of stewardship of the assets of the company. Directors empower

management to run the enterprise on their behalf. One of the key aspects necessary

to protect the assets of the company is a proper control environment and a well-

60
functioning system of internal controls.

4.3 References

 Report of the SEBI Committee on Corporate Governance, February 2003.

SEBI Committee on Corporate Governance

4.4 Self Assessment Questions

 How would Mauritian special circumstances impact on corporate

governance?

 Evaluate the effectiveness of the different bodies responsible for corporate

governance in Mauritius.

 How can corporate governance impede growth in certain cases?

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 Unit 5

Social Responsibility, Internal Control and Financial Reporting

Unit Structure

5.1 Social Responsibility

5.2 Reasons for Internal Control and Financial Reporting

5.3 Agency Theory

5.4 Information needs of stakeholders

5.5 Self Assessment questions

After studying this chapter, learners should be able to:

-Explain social responsibility

-Understand the reasons for implementing Internal

-Control and Financial Reporting

-Understand the relationship between directors and shareholders

-The needs for information of other stakeholders

-Understand the provisions relating to Mauritius

5.1 Social Responsibility

The studies carried out demonstrate that those companies which address the issue of

their corporate citizenship are more likely to survive the various crises that arise in

the modern day economic world as compared to those who overlook this important

element. In addition, the current legislation in Mauritius requires all profitable

companies to contribute 2% of their chargeable income to a fund to finance social

responsibility ventures.

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5.2 Reasons for Internal Control and Financial Reporting

The current legal requirements in Mauritius (namely the Companies Act 2001)

imposes on the Board of Directors the duties to ensure that the assets of the

company are safeguarded and not do, or knowingly allow to be done, anything by

which the company’s assets may be damaged or lost, otherwise than in the ordinary

course of carrying on its business (Section 143 (j) Companies Act 2001).

Furthermore, Section 193 of the same Act requires the Directors to keep records of

all transactions entered into by the Company. The meaning of these requirements

are that the Directors have a duty to ensure that there is a proper system to ensure

the safeguarding of the assets of the company and this is usually discharged through

a system of internal control which also encompasses elements of operations.

The level of controls and the comprehensiveness of the system depend on the

nature, complexity and volume of operations. However, there are basic elements

that will be seen in most systems, the most common of which is the principle of the

segregation of duties. This principle ensures that the person who performs an action

is not the person who records the transaction. This ensures that powers are not

concentrated in one person, just like the principle of avoiding an all-powerful

person in a Board.

In addition, it is common sense to ensure that work entrusted to other parties is

verified, even more so if the work has to be submitted to other parties under the

obligations one party is required to comply with. It is quite obvious that Directors,

since they are required to have a mix of competencies and skills, are not all experts

63
in the preparation of financial statements or the design or implementation of

internal controls. They therefore delegate this responsibility to a Finance team and a

internal Control team, but ultimately, the Directors are responsible. They should

therefore monitor the performance and output of these departments to ensure they

perform the duties assigned by law.

5.3 Agency Theory

Agency Theory stipulates that the Directors are the agents of the shareholders

(principals). In the past Kings and emperors appointed governors to rule far away

provinces, collect taxes and remit those to the Central power. The kings and

emperors sometimes sent some of the close friends to go and check whether the

governors were carrying out their tasks as they had been ordered. The same rules

apply to modern day companies. The Shareholders are the owners of the company.

They appoint the Directors to manage the company on their behalf. They would

then appoint auditors and internal controllers to check on the performance

according to the rules established. In our case Internal control is a tool used by the

Directors to ensure that management complies with the procedures and systems

devised by the Board for the company’s operations. The Internal Control

Department is required to report to the Audit Committee which is a subcommittee to

the Board of Directors. It usually reports for routine administrative matters to the

General Manager, but its reports in respect of its examinations of systems and

procedures are for the attention of the Directors.

On the other hand, as the Directors are required to report to the shareholders in

relation to the running of the company, there needs to be a format or else one might

see different reports which might be difficult to understand for a person not

64
involved in the effective running of the Company. Financial reporting was therefore

developed. However, as these fall under the control of management and through

them of the Directors, there might be attempts at manipulation. Such manipulation

might be motivated by reasons such as reporting higher profits than realised to earn

additional bonuses, or lower profits to reduce the amount of taxes payable.

Furthermore, even though it might be understandable that shareholders would want

all information relating to the company, the director must pay attention to what they

are stating as some commercially sensitive information, which, if revealed, might

impair the capacity of the company to retain a competitive advantage, should not be

disclosed.

To ensure that shareholders can rely on the financial statements prepared under the

responsibility of the Directors, the Shareholders appoint an independent

professional, the external auditor, to carry out an inspection of the records from

which the financial statements were prepared and of the systems and procedures

implemented. The external auditors address their report to the shareholders and

given that they are independent and qualified, they opinion adds credence to the

financial statements prepared by the Directors.

5.4 Information needs of stakeholders

The different groups of stakeholders are interested in the financial statements in

their own specific requirements.

Shareholders

Shareholders look at the financial statements for the profits earnest or losses

incurred, the dividends paid, the future projects of the company and other

65
information reassuring them of the survival of the company and its capacity to

generate a stable flow of income to them through dividends or capital gains. These

also serve as a tool to evaluate management performance. They also need the

information to take decisions about further investment or divestment in the

company.

Potential investors and Analysts

Their use of the information helps choose which company is more profitable and

whether they should invest or recommend investing in the said companies.

Directors/Board of Directors

This group uses the financial statements to confirm whether targets set have been

achieved; evaluate the different strategies they are devising for the improvement of

the company, and communicate additional information.

Employees

Employees would use the information to determine whether the company is a going

concern and is likely to ensure job security as well as a basis for salary negotiations.

Customers

They use the information to ascertain the sustainability of their supplier as well as

consider whether the supplier is practising fair prices.

Suppliers

They wish the information to determine the credibility of their client and to ensure

that their client base is safe, as well as to whether the client is not likely to suffer

66
cash flow shortages which would in turn affect their own cash flow.

Government Bodies

Various bodies use the information such as number of employees and employee

remuneration for payroll taxes and social security contributions, Income taxes and

VAT payments for the Revenue agencies, Statistics compilation.

The General Public

This group is interested in knowing whether the company is not ripping them off by

making use of an abuse, as well as looking at their social responsibility.

5.5 Self Assessment Questions

 Examine the approach to Social responsibility in Mauritius and one

developed and one developing country.

 What are the distinctions between legislation and agency theory approaches

to internal control?

 What are the distinctions between legislation and agency theory approaches

to financial reporting?

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 Unit 6

Social Code of Ethics for Professional Accountants

Unit Structure

6.1 Purpose of the Code

6.2 Legal Requirement

6.3 Fundamental Principles

6.4 Ethical Conflict Resolution Process

6.5 Self Assessment Questions

6.1 Purpose of the code

The International Ethics Standards Board for Accountants (IESBA) develops and

issues, under its own authority, the Code of Ethics for Professional Accountants (the

Code) for use by professional accountants around the world.

A member body of IFAC or firm shall not apply less stringent standards than those

stated in this Code. However, if a member body or firm is prohibited from

complying with certain parts of this Code by law or regulation, they shall comply

with all other parts of this Code.

Some jurisdictions may have requirements and guidance that differ from those

contained in this Code. Professional accountants in those jurisdictions need to be

aware of those differences and comply with the more stringent requirements and

guidance unless prohibited by law or regulation.

A distinguishing mark of the accountancy profession is its acceptance of the

responsibility to act in the public interest. Therefore, a professional accountant’s

responsibility is not exclusively to satisfy the needs of an individual client or

employer. In acting in the public interest, a professional accountant shall observe

68
and comply with this Code. If a professional accountant is prohibited from

complying with certain parts of this Code by law or regulation, the professional

accountant shall comply with all other parts of this Code. The use of the word

“shall” in this Code imposes a requirement on the professional accountant or firm to

comply with the specific provision in which “shall” has been used. Compliance is

required unless an exception is permitted by this Code.

6.2 Legal Requirement

The Financial Reporting Act 2004 provides for the following:

1. Establishment of a Code of Conduct for all Professional Accountants which is

consistent with the principles contained in IFAC’s Code of Ethics.

46. Functions of Mauritius Institute of ProfessionalAccountants

(1) The Mauritius Institute of Professional Accountants shall-

(a) establish, publish and review a Code of ProfessionalConduct and Ethics for

professional accountants, which shall be consistent with and contain all the

principles of IFAC’s Code of Ethics for Professional Accountants;

2. That no person shall hold himself or herself as a professional accountant unless

he or she is registered with the Mauritius Institute of Professional Accountants

(“MIPA”).

51. Registration of professional accountants

(1) No person shall hold himself out as a professional accountant, or use any

description or designation likely to create the impression that he is a professional

accountant or be employed in Mauritius, unless he is registered as a professional

accountant with the Mauritius Institute of Professional Accountants.

Furthermore, only persons duly licensed by the MIPA as public accountants can be

licensed auditors in Mauritius as per the Rules regarding Licensing of Auditors

69
issued by the Financial Reporting Council.

3. Licensing process

In order to apply for an auditor’s licence, the applicant must:

(1) be a member of the MIPA (registered as a professional accountant);

(2) hold a practising certificate from the MIPA (to practise as a public accountant);

(3) meet such requirements as may be specified in the Financial Reporting Council

(Licensing of Auditors) Rules 2005.

6.3 Fundamental Principles

A professional accountant shall comply with the following fundamental principles:

(a) Integrity – to be straightforward and honest in all professional and business

relationships.

(b) Objectivity – to not allow bias, conflict of interest or undue influence of others

to override professional or business judgments.

(c) Professional Competence and Due Care – to maintain professional knowledge

and skill at the level required to ensure that a client or employer receives competent

professional services based on current developments in practice, legislation and

techniques and act diligently and in accordance with applicable technical and

professional standards.

(d) Confidentiality – to respect the confidentiality of information acquired as a

result of professional and business relationships and, therefore, not disclose any

such information to third parties without proper and specific authority, unless there

is a legal or professional right or duty to disclose, nor use the information for the

personal advantage of the professional accountant or third parties.

(e) Professional Behavior – to comply with relevant laws and regulations and avoid

any action that discredits the profession.

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A professional accountant may be required to resolve a conflict in complying with

the fundamental principles.

6.4 Ethical Conflict Resolution Process

When initiating either a formal or informal conflict resolution process, the

following factors, either individually or together with other factors, may be relevant

to the resolution process:

(a) Relevant facts;

(b) Ethical issues involved;

(c) Fundamental principles related to the matter in question;

(d) Established internal procedures; and

(e) Alternative courses of action.

Having considered the relevant factors, a professional accountant shall determine

the appropriate course of action, weighing the consequences of each possible course

of action. If the matter remains unresolved, the professional accountant may wish to

consult with other appropriate persons within the firm or employing organization

for help in obtaining resolution. Where a matter involves a conflict with, or within,

an organization, a professional accountant shall determine whether to consult with

those charged with governance of the organization, such as the board of directors or

the audit committee.

It may be in the best interests of the professional accountant to document the

substance of the issue, the details of any discussions held, and the decisions made

concerning that issue.

If a significant conflict cannot be resolved, a professional accountant may consider

obtaining professional advice from the relevant professional body or from legal

71
advisors. The professional accountant generally can obtain guidance on ethical

issues without breaching the fundamental principle of confidentiality if the matter

is discussed with the relevant professional body on an anonymous basis or with a

legal advisor under the protection of legal privilege.

Instances in which the professional accountant may consider obtaining legal advice

vary. For example, a professional accountant may have encountered a fraud, the

reporting of which could breach the professional accountant’s responsibility to

respect confidentiality.

The professional accountant may consider obtaining legal advice in that instance to

determine whether there is a requirement to report. If, after exhausting all relevant

possibilities, the ethical conflict remains unresolved, a professional accountant

shall, where possible, refuse to remain associated with the matter creating the

conflict. The professional accountant shall determine whether, in the circumstances,

it is appropriate to withdraw from the engagement team or specific assignment, or

to resign altogether from the engagement, the firm or the employing organization.

6.5 Self Assessment Questions

• Describe the common ethical problems experienced by professional

accountants.

• What are the potential impacts of conflicts on:

(a) The professional accountant?

(b) The company?

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