Rairangpur College, Rairangpur

MAYURBHANJ
Senior: Commerce faculty
In partial fulfilment of bachelor of commerce under MSCB

Topic:- .................................................................................................................................
Name of Student:- ..........................................Guided by:- .......................................
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SUBMITTED BY SIGNATURE OF THE GUIDE

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 Certificate

I hereby certify that Sanjib Naik has completed a descriptive study titled
Corporate Governance and Ethics in Business Research subject under my
supervision the year 2023-24.
I wish him best of luck.

Signature of guide

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 Declaration

I hereby declare that the project entitled CORPORATE GOVERNANCE

AND ETHICS submitted to the commerce faculty Rairangpur College, is a
record of an original work done by me under the guidance Mrs. Menka
Mohakud. Lect. In Commerce, Rairangpur College, Rairangpur. The
results embodied in this project report have not been submitted to any
other institution for the award of any degree.

Signature of students

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CORPORATE GOVERNANCE AND
ETHICS
ABSTRACT
Corporate governance and ethics play pivotal roles in shaping the conduct and
performance of organizations worldwide. This project report delves into the
intricate relationship between corporate governance, ethical standards, and
organizational behaviour, focusing primarily on the Indian context. Through an
extensive review of literature, methodological considerations and analysis of case
studies, the report aims to shed light on the importance of robust corporate
governance mechanisms in preventing corporate scandals, ensuring transparency,
and fostering ethical business practices. By examining various case studies and
theoretical frameworks, the report seeks to offer insights and recommendations for
enhancing corporate governance standards in the contemporary business landscape.

LIST OF CONTENTS
01. Introduction
Statement of problems
Objective of research
02. Methodology
Sampling of design
Research design
Limitations
03. Understanding of corporate governance
About
Principal of corporate governance
Importance of corporate governance
04. Corporate governance mechanisms
Board of directors
Internal control and risk management
Transparency and disclosure
Shareholder activism and engagement
05. Role of corporate governance in preventing corporate scandals
Board of directors oversight
Internal control and audits
Ethical codes and policies
06. Transparency in corporate governance
07. Ethical business practices
08. Challenges and limitations of corporate governance
09. Case studies
10. Recommendation
11. Conclusion

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1. INTRODUCTION
Business and society are interrelated to each other in such a way that both find their
existence in each other. Business runs in a social environment and largely depends
on it for its input or factors of production – land, labour, capital etc. On the other
hand business makes various contributions to society such as providing goods and
services, creating opportunities of employment and wealth and facilitating various
innovations for betterment of mankind.
To meet above social needs the business needs to be make profit; it is an ethical act.
But making profit without taking care of the needs of society is definitely an
unethical act. Ethics is essentially deals with what is right of conduct and morally
good in business.
Corporate governance are internationally accepted norms for business and to
promote honesty and integrity, to protect the interest of society and stakeholders-
customers, shareholders and investors and above all to avoid all types of conflict of
interest, whether actual or apparent, in personal and professional relationships.

A. Statement of problems:
i. Lack of transparency and accountability within corporate structures
ii. Ethical lapses and misconduct among corporate executives and employees
iii. Inadequate regulatory oversight and enforcement mechanisms
iv. Complexity and ambiguity in governance frameworks
v. Pressure to prioritize short-term financial gains over long-term sustainability
B. Objective of research:
The primary objective of this research is to examine the relationship between
corporate governance practices, ethical standards, and organizational
performance. Specifically, the study aims to:

 Evaluate existing literature on corporate governance and ethics to

identify key themes, trends, and challenges.
 Investigate the role of corporate governance mechanisms in preventing
corporate scandals and fostering ethical business practices.
 Analyse case studies of corporate scandals in India to understand the root
causes, implications, and lessons learned.
 Provide recommendations for enhancing corporate governance
frameworks and promoting ethical behaviour in organizations.
 Protecting the rights of shareholders and stakeholders in organizations.

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2. METHODOLOGY
A. Sample Design: The research will adopt a multi-disciplinary approach,
drawing upon insights from management studies, economics, law, and ethics. A
diverse sample of scholarly articles, books, reports, and case studies will be
reviewed to provide a comprehensive understanding of the subject matter.

B. Research design: The study will involve a comprehensive review of academic

literature, regulatory guidelines, industry reports, and news articles on
corporate governance and ethics. Data collection will include secondary sources
such as corporate governance disclosures, media coverage of corporate scandals
and case studies will be used to explore the intricacies of governance
mechanisms and ethical dilemmas within organizations.

C. Limitations: Limitations of the research may include data availability, sample

representativeness, and generalizability of findings. The study may also
encounter challenges in accessing proprietary information, confidential
documents, and insider perspectives on corporate governance practices and
ethical dilemmas.

3. UNDERSTANDING OF CORPORATE GOVERNANCE

A. About:
i. Corporate governance is the set of rules and processes that guide how a
company is managed and overseen. It’s vital for ensuring that businesses
operate ethically and in the best interests of those involved. A primary goal of
corporate governance is to prevent corporate greed and promote responsible
and transparent business practices.
ii. By establishing and enforcing high ethical standards and holding individuals
accountable for their actions, corporate governance serves as a safeguard
against misconduct, protecting the interests of shareholders, customers, and
the wider community.
B. Principles of Corporate Governance:
i. Fairness: The board of directors must treat shareholders, employees,
vendors, and communities fairly and with equal consideration.
ii. Transparency: The board should provide timely, accurate, and clear
information about such things as financial performance, conflicts of interest,
and risks to shareholders and other stakeholders.
iii. Risk Management: The board and management must determine risks of all
kinds and how best to control them. They must act on those

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 recommendations to manage them. They must inform all relevant parties
about the existence and status of risks.
iv. Responsibility: The board is responsible for the oversight of corporate
matters and management activities.
 It must be aware of and support the successful, ongoing performance of
the company. Part of its responsibility is to recruit and hire a Chief
Executive Officer (CEO). It must act in the best interests of a company and
its investors.
v. Accountability: The board must explain the purpose of a company’s activities
and the results of its conduct. It and company leadership are accountable for
the assessment of a company’s capacity, potential, and performance. It must
communicate issues of importance to shareholders.

C. Importance of corporate governance in modern business:

i. Preventing Corporate Scandals: Strong corporate governance practices help
mitigate the risk of corporate scandals by promoting ethical conduct,
accountability, and oversight. It establishes clear lines of responsibility and
ensures that decision-making processes are transparent and fair.
ii. Protecting Shareholder Interests: Corporate governance mechanisms
safeguard the interests of shareholders by ensuring that management acts in
their best interests. This includes providing accurate and timely financial
information, preventing conflicts of interest, and maintaining effective risk
management practices.
iii. Enhancing Investor Confidence: Transparent and accountable corporate
governance practices enhance investor confidence and attract investment

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 capital. Investors are more likely to trust companies with robust governance
structures that prioritize integrity and ethical behaviour.
iv. Fostering Long-Term Sustainability: Effective corporate governance is
essential for the long-term sustainability of businesses. By aligning corporate
strategies with stakeholder interests and ethical principles, companies can
create value for shareholders while contributing to the welfare of society.
v. Ethical Standards: Corporate governance frameworks often include codes of
conduct and ethical guidelines that guide decision-making processes within
organizations. Adherence to these standards minimizes the risk of unethical
behaviour and corporate misconduct.

4. CORPORATE GOVERNANCE MECHANISMS

A. Board of Directors: The board plays a crucial role in overseeing corporate
strategy, monitoring executive performance, and ensuring compliance with legal
and ethical standards. Independent directors bring diverse perspectives and
provide effective oversight of management actions.

B. Internal Controls and Risk Management: Strong internal control systems,

including risk assessment, internal audits, and compliance programs, help
identify and mitigate operational, financial, and compliance risks.

C. Transparency and Disclosure: Timely and accurate financial reporting,

along with comprehensive disclosure of relevant information, promotes
transparency and enables stakeholders to assess the company’s performance
and risk profile.

D. Shareholder Activism and Engagement: Shareholders exert influence on

corporate governance practices through active engagement, voting rights, and
advocacy for governance reforms aligned with shareholder interests.

5. ROLE OF CORPORATE GOVERNANCE IN PREVENTING

CORPORATE SCANDALS
A. Board of Directors Oversight: The board is responsible for overseeing
corporate strategy, risk management, and the integrity of financial reporting. A
diligent and independent board can detect and prevent misconduct and
unethical behaviour within the organization.

B. Internal Controls and Audits: Robust internal control systems and regular
audits help identify irregularities, fraud, and non-compliance with regulations.
They provide assurance to stakeholders and mitigate the risk of corporate
scandals.

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 C. Ethical Codes and Policies: Companies establish ethical codes of conduct and
policies to guide employee behaviour and decision-making. Clear guidelines
promote a culture of integrity and discourage unethical practices.

6. TRANSPARANCY IN CORPORATE GOVERNANCE

Transparency is essential for building trust and confidence among stakeholders,
including investors, employees, customers, and the public. Corporate governance
practices that prioritize transparency involve open communication channels,
timely disclosure of financial information, and adherence to reporting standards
and regulations. By fostering a culture of transparency, companies can enhance
credibility and mitigate the risk of reputational damage.
 Implementing robust reporting and disclosure requirements to provide
stakeholders with accurate and timely information.
 Establishing ethical codes of conduct and values that guide employee
behaviour and decision-making processes.
 Encouraging ethical leadership and accountability at all levels of the
organization.
 Conducting regular audits and assessments to ensure compliance with
legal and ethical standards.
 Encouraging stakeholder engagement and dialogue to address concerns
and build trust.

7. ETHICAL BUSINESS PRACTICES

Ethical business practices are essential for building trust, maintaining
reputation, and sustaining long-term relationships with stakeholders. Corporate
governance mechanisms play a vital role in fostering ethical conduct by
establishing clear expectations, promoting accountability, and aligning incentives
with ethical principles.

A. Code of Ethics and Conduct: A code of ethics and conduct articulates the
organization’s values, principles, and behavioural expectations for employees,
directors, and stakeholders. It outlines ethical standards, prohibitions against
misconduct, and procedures for reporting violations, providing a framework for
ethical decision-making and behaviour across the organization.

B. Ethics Training and Awareness: Ethics training programs raise awareness

of ethical issues, dilemmas, and responsibilities, equipping employees with the

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 knowledge, skills, and tools to navigate ethical challenges effectively. Training
initiatives promote a culture of integrity, encourage ethical decision-making, and
empower employees to uphold ethical standards in their day-to-day activities.

C. Whistle-blower Protection: Whistle-blower protection mechanisms provide

avenues for employees to report suspected misconduct, unethical behaviour, or
violations of laws and regulations without fear of retaliation. Whistle-blower
policies ensure confidentiality, impartial investigation, and appropriate
disciplinary action, fostering trust and confidence in the organization’s
commitment to integrity and accountability.

D. Incentives and Performance Evaluation: Incentive structures and

performance evaluation criteria should align with ethical principles, emphasizing
not only financial performance but also ethical behaviour, compliance with
policies, and adherence to core values. Rewarding ethical conduct and exemplary
behaviour reinforces organizational culture, motivates employees to act
ethically, and fosters a climate of trust, fairness, and integrity.

8. CHALLENGES AND LIMITATIONS OF CORPORATE

GOVERNANCE
A. Selection Procedure and Term of Board: The selection of board members
and their term is highly misused in Indian corporate governance. The term of the
board members should be long enough to ensure stability, but not so long that
they become complacent.
 For example, the Tata-Mistry fallout in 2016 was due to the disagreement
between Cyrus Mistry and the board of Tata Sons over the appointment of
independent directors.

B. Performance Evaluation of Directors: The performance evaluation of

directors is a challenging aspect of corporate governance. It helps to identify
areas of improvement and ensure that the board is functioning effectively.
However, the evaluation process should be transparent and objective.
 For example, in 2018, SEBI directed listed companies to disclose the
criteria for evaluating the performance of independent directors.

C. Missing Independence of Directors: In many cases, the independence of

directors is compromised due to their close association with the promoters or
management.

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  For example, in 2018, the ICICI Bank controversy arose when it was
alleged that the bank’s CEO had approved a loan to Videocon Industries in
exchange for a quid pro quo deal for her husband.

D. Removal of Independent Directors: The removal of independent directors

is a serious issue in corporate governance. It is important to ensure that
independent directors are not removed for raising concerns or dissenting
opinions.
 For example, in 2018, the board of Fortis Healthcare removed its
independent director after he raised concerns over the company’s
acquisition by IHH Healthcare.

E. Liability Toward Stakeholders: In many cases, companies prioritize the

interests of their promoters or management over the interests of their
stakeholders.
 For example, in 2019, the Infrastructure Leasing & Financial Services
(IL&FS) crisis occurred due to the company’s mismanagement and failure
to meet its financial obligations to its stakeholders.

F. Founder/Promoter’s Extensive Role: The role of the founder or promoter

in the company’s governance can be a double-edged sword. While their vision
and leadership can be beneficial, their extensive role can lead to conflicts of
interest and lack of transparency.
 For example, in 2019, SEBI directed companies to disclose the reasons for
the appointment of the founder or promoter as the chairman of the board.

G. Transparency and Data Protection: Lack of transparency and inadequate

data protection are the harmful corporate practices. They should ensure the
protection of sensitive data and information.
 For example, in 2018, the Reserve Bank of India (RBI) directed banks to
ensure the protection of their customers’ data and information.

H. Business Structure and internal conflicts: The business structure and

internal conflicts are often visible in corporate sector. Companies should have a
clear and well-defined business structure to avoid conflicts of interest. They
should also have mechanisms in place to resolve internal conflicts.
 For example, in 2019, the board of IndiGo Airlines had a public spat over
the appointment of its CEO, which led to concerns over the company’s
corporate governance.

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 I. Conflict of Interest: The challenge of managers potentially enriching
themselves at the cost of shareholders is a significant issue in corporate
governance.
 For example, in 2018, SEBI directed companies to disclose the details of
related party transactions.

J. Weak Board: Lack of diversity of experience and background represents a

major area of weakness for these boards. Companies should ensure that their
board members have diverse backgrounds and experiences to ensure effective
decision-making.
 For example, in 2018, SEBI directed companies to have at least one
woman director on their board.

K. Insider Trading: Insider Trading occurs when corporate insiders, such as

officers, directors etc. use confidential information to make personal profits. The
problem arises because SEBI lacks a robust investigative mechanism and a
vigilant approach, enabling culprits to escape.

9. CASE STUDIES OF CORPORATE SCANDALS IN INDIA

India has witnessed several high-profile corporate scandals that have underscored
the critical need for robust governance mechanisms and ethical standards. Some
notable examples include:

A. Case 1: Satyam Computer Services Scandal (2009)

The Satyam Computer Services scam, also known as India’s Enron, was one of the
largest corporate scandals in India’s history. It involved India’s fourth-largest
software services company, Satyam Computer Services Limited, founded by
Ramalinga Raju.
The scandal came to light in January 2009 when Ramalinga Raju, the chairman of
Satyam, confessed in a letter to the company’s board of directors and the stock
exchanges that he had been manipulating the company’s accounts for years. He
admitted to inflating the company’s revenues and profits, creating fictitious
assets, and understating liabilities. The magnitude of the fraud was staggering,
with Raju admitting to fabricating over $1 billion in cash and bank balances.
The revelation of the fraud sent shockwaves through India’s corporate sector
and financial markets, leading to a significant loss of investor confidence. The
Indian government intervened swiftly, appointing a new board to manage
Satyam and initiating investigations by various regulatory authorities.

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 In April 2015, Ramalinga Raju and several other individuals involved in the scam
were found guilty of accounting fraud, conspiracy, and other charges by an
Indian court. Raju was sentenced to seven years in prison, and others involved
received varying sentences as well.
The Satyam scandal highlighted the need for better corporate governance,
transparency, and regulatory oversight in India’s corporate sector. It also
underscored the importance of ethical business practices and the consequences
of fraudulent activities on investors, employees, and the broader economy.

B. Case 2: Nirav Modi and Punjab National Bank Fraud (2018)

The Nirav Modi-PNB (Punjab National Bank) fraud is another significant
financial scandal that rocked India’s banking sector and drew international
attention. Nirav Modi, a high-profile jeweler and businessman, along with his
uncle Mehul Choksi, allegedly defrauded Punjab National Bank, one of India’s
largest public sector banks, of over $1.8 billion (approximately ₹13,000 crore)
through fraudulent Letters of Undertaking (LoUs).
The fraud came to light in early 2018 when Punjab National Bank disclosed to
regulatory authorities that it had detected fraudulent transactions at one of its
branches in Mumbai. Nirav Modi and his associates had allegedly used fraudulent
LoUs to obtain credit from overseas branches of Indian banks, with the funds
being used to settle previous liabilities and finance new transactions.
The modus operandi of the fraud involved the issuance of LoUs without proper
collateral or due diligence, allowing Nirav Modi’s companies to obtain funds from
international branches of Indian banks. These LoUs were essentially guarantees
provided by PNB to other banks to repay the funds if the borrower defaulted.
The scale and audacity of the fraud raised serious questions about the
effectiveness of internal controls, risk management practices, and oversight
mechanisms within Indian banks. The scandal also prompted a broader
examination of the banking sector’s regulatory framework and the need for
stricter supervision and enforcement of banking regulations.
In response to the fraud, Indian authorities initiated investigations, arrested
several individuals involved, and took measures to strengthen banking
regulations and oversight mechanisms. Nirav Modi and Mehul Choksi fled the
country before the scandal broke out and faced legal proceedings and extradition
efforts in other jurisdictions.
The Nirav Modi-PNB fraud served as a wake-up call for the Indian banking
sector, highlighting the importance of robust risk management practices,
enhanced due diligence, and regulatory compliance to prevent such incidents in
the future.

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 C. Case 3: The Ketan Parekh Scam (2001)
In 2001, the Indian stock market received another blow due to fraud committed
by Mr. Ketan Parekh. In this scam the investors lost up to 2000 crore i.e., $ 4
billion. He like Harshad Mehta took the advantage of the gaps and loopholes of
the stock market and the banking system in India. The leniency and
mismanagement on the part of the sectoral regulators proved to be harmful for
the small investors. Ketan Parekh also manipulated the stock market by creating
a demand for certain stocks popularly known as the method of pump and dump
and then by way of circular bidding. In order to pump up the stocks of some
companies, he took huge funds from the Banks, institutional investors etc. He
mostly conducted his trading through the Calcutta stock exchange and lack of
regulations in it made it easy for him to manipulate the market.

10. RECOMMENDATION
The importance of corporate governance and ethics will continue to grow as
businesses navigate an increasingly complex and interconnected global economy.
Companies that prioritize transparency, accountability, and ethical behaviour will be
better positioned to succeed in the long term, attract investment capital, and earn
the trust of stakeholders.
To strengthen corporate governance and foster ethical business practices,
organizations should consider on the enhancement board independence and
diversity to improve oversight and decision-making processes. Implement
comprehensive ethics and compliance programs to promote a culture of integrity
and accountability. Enhance transparency and disclosure practices to provide
stakeholders with timely and accurate information. Strengthen internal controls and
risk management processes to detect and prevent misconduct and fraud. Foster
stakeholder engagement and dialogue to address concerns and build trust.

11. CONCLUSION
Corporate governance is essentially about how the organisations and corporations
are directed, managed, controlled and held accountable to all the stakeholders.
Accountability, transparency, security and responsibility are its pillars particularly
in the era of globalisation and liberalisation but like in foreign countries, India has
also witnessed some mega financial scams viz. Harshad Mehta Scandal, Satyam case
etc. thereby throwing open the question of managing financial risks and ensuring
corporate governance. As Indian companies compete globally for access to capital
markets, many are finding that the ability to benchmark against world-class
organizations is essential. For a long time, India was a managed, protected economy

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with the corporate sector operating in an insular fashion. But as restrictions have
eased, Indian corporations are emerging on the world stage and discovering that the
old ways of doing business are no longer sufficient in such a fast-paced global
environment. In consideration of all the above facts, some preventive measures as
well as punitive measures, tightening of administrative set up, enactment of new
rules etc would be essentially required and in this nefarious game, sadly some big
names in the world of Accountancy and Auditing firms have also been found to be
involved which is also an area of grave concern. To curb and control the menace of
corporate frauds is a big challenge today and it is happening principally due to non-
practicing of ethical practices in business as well as non-adherence to corporate
governance principles which are fast eating up into our economy. This slide is
required to be at once arrested. preventive and punitive measures are not taken, the
business sector and economy may collapse due to cash crunch and absence of
financial liquidity sooner than later and one of the principal contributory factors for
such happening shall be the non-adherence of corporate governance.

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