UNIT 5 BUSINESS ETHICS

Structure
5.0 Objectives
5.1 Introduction
5.2 Business Ethics
5.2.1 Nature of Business Ethics
5.2.2 Scope of Business Ethics
5.2.3 Need for Business Ethics
5.3 Ethics in Business Functional Areas
5.3.1 Ethics in Marketing
5.3.2 Ethics in Finance
5.3.3 Ethics in Production and IT
5.3.4 Ethics in Human Resource Management
5.4 Measures to Solve Ethical Problems
5.5 Corporate Social Responsibility
5.5.1 Why is Corporate Social Responsibility Important?
5.5.2 Social Responsibilities of Business towards different Stakeholders
5.5.3 Corporate Social Responsibility in India
5.5.4 Corporate Social Responsibility Voluntary Guidelines (2009)
5.6 Corporate Governance
5.6.1 Corporate Governance - Developments World Over
5.6.2 Corporate Governance – Developments in India
5.6.3 Principles of Corporate Governance
5.6.4 Whistle Blower Policy
5.7 Let Us Sum Up
5.8 Keywords
5.9 Suggested Further Readings /References
5.10 Answers to Check Your Progress

5.0 OBJECTIVES
After studying this unit, you should be able to:
 discuss the concept, nature, scope, importance, and need of business ethics;
 identify ethics in various business functional areas;
 explain the measures to solve ethical problems;
 describe the corporate social responsibility; and
 explain the meaning and principles of corporate governance.

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5.1 INTRODUCTION

Business ethics, corporate social responsibility, and corporate governance have become
topics of interest in present times, worldwide. In recent years, shocking stories of
corporate misconduct and wrongdoings have brought these topics to the forefront and in
limelight. These topics have attracted the attention of authors, researchers, officials,
practitioners, and other stakeholders. The corporate sector has often been plagued with
the onslaught of accusations of unethical practices. The accusations sometimes have a
basis and are well grounded with facts. Although ethical-unethical issues have come to
the limelight, once in a blue moon, throughout the history of business but of late,
especially after the 1970s and 80s, their frequency of occurrence has increased manifold.
Many large firms have been convicted of lawlessness, including bribery, criminal fraud,
illegal campaign contributions, tax evasion, or price-fixing since then. Many new
committees, new codes, and laws have been framed since then but a lot of work remains
to be done. Indian companies too are also facing the heat of ethical issues such as
transparency at the board level, board compensation, unethical marketing, and HR
practices. E.g. Satyam IT, Jaypee builders, and many others from time to time,

5.2 BUSINESS ETHICS

The term 'business ethics' came into common use in the United States in the early 1970s.
The Society for Business Ethics was started in 1980. 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.
Before understanding business ethics, let us first try to understand, what ‘ethics’ are. The
word ‘ethics’ has its origin in the Greek word ‘ethikos’ meaning a set of moral
principles. In simple words, ethics refers to norms, morals, principles, and ideals
prevailing in a group or society. These are some standardized forms of conduct or
behavior. They give an idea of what is wrong or right, true or false, fair or unfair, just or
unjust, and proper or improper. Ethics are, actually, fundamental personal traits that one
adopts and follows as guiding principles in one’s life.
Business ethics focuses on the morals, rules, and principles followed by a business
enterprise. These issues are mainly related to the behavior and obligations of business
professionals. An ethically responsible company is said to have developed a culture of
caring for people and for the environment and where all business decisions are made in
an ethical manner. Business ethics are part of the formal rules and procedures in an
ethical company

5.2.1 Nature of Business Ethics

The nature of business ethics can be understood by the following:

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  Business ethics, also called corporate ethics, are nothing but a form of applied
ethics or professional ethics. They cover the entire range of ethical principles,
morals, conducts, and also ethical situations and problems that are encountered in
running a business on a day-to-day basis.
 Ethical norms reflect the norms of each historical period. As time passes, new
norms evolve, causing accepted behaviors to become objectionable. Business
ethics, actually, are influenced by society and its norms at a particular period of
time.
 The range and quantity of business ethical issues reflect the interaction of profit-
maximizing behaviour with non-economic concerns.
 Governments use laws and regulations to point business behavior in what they
perceive to be beneficial directions. Ethics implicitly regulates areas and details
of behavior that lie beyond governmental control.
 It is believed that unethical behaviour in business more often than not is a
systematic matter. To a large degree, it is the behaviour of generally decent
people who normally would not think of doing anything illegal or immoral but
they get backed into doing something unethical by the systems and practices of
their own firms and industries. Unethical behaviour in business generally arises
when business firms fail to pay explicit attention to the ethical risks that are
created by their own systems and practices.

5.2.2 Scope of Business Ethics

Business ethics come into play at all levels of business and in all functional areas. They
guide corporate strategies, decisions, policies, programmes, and culture. Employees,
vendors, dealers, customers, retailers, wholesalers, shareholders, and other stakeholders
affect and get affected by business ethics. Ethical issues not only confront decision
makers and top managers but also are faced by supervisors and workers in the
origination. Similarly, each department, marketing, finance, production, purchase, and
human resource management, face ethical dilemmas and situations.

5.2.3 Need for Business Ethics

There are several reasons why is ethical behavior needed. Some of them are as under:
 First, ethical behavior is usually associated with positive consequences. Honesty
in professional dealings promotes mutual trust and helps in building a positive
long-term relationship between the two parties. Unethical dealing, on the other
hand, may damage the credibility, reputation, and image of the companies.
 Ethical behavior empowers all the parties involved in business transactions.
Managers who behave ethically establish an organizational climate of
supportiveness, honesty, and trust. This climate in turn empowers employees to
try out new ideas, takes risks, and assume more responsibility.

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  It has been seen that managers who treat other people fairly earn employees’ trust
and this makes them more willing to support the organization. Ethics cultivate
strong teamwork, productivity, and efficiency.
 The government and its laws may not be able to resolve emerging problems, but
ethics can. Regulations always lag behind technology and emerging situations,
ethics, therefore, come to the rescue in new situations.
 Ethical behavior is intrinsically valuable also. Those who behave humanely in
their dealings with others and who are concerned with the welfare of the
organization and society are rewarded with peace of mind that carries no price
tag.
Check Your Progress 1
Note: a) Use the space given below for your answers.
b) Check your answer with those given at the end of the unit.

1) Discuss the nature of Business Ethics.

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2) Highlight any two advantages of Business Ethics.

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Activity 5.1:
Visit any company or a business organization of your choice and discuss business ethics
and ethical situations with senior managers or executives. Based upon the discussion,
give your opinion about business ethics and ethical situations in business.
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5.3 ETHICS IN BUSINESS FUNCTIONAL AREAS

Many ethical issues may arise in the course of operating a business enterprise. These
ethical issues may relate to different functional areas like marketing, finance, production,
and human resources management. A clear understanding of ethical issues related to
these functional areas provides us with a broader picture of business ethics. There may
be hundreds of situations that may arise during the day-to-day functioning of a business
enterprise and require ethical decision-making. A few of these situations and ethical
issues, related to business functional areas, have been discussed below:

5.3.1 Ethics in Marketing

The marketing department is one of the most important departments of a company as it
generates revenues by disposing of products and services for a profit. Marketing actually
is taking the right kinds of products and services to the targeted customers at the right
prices with the right promotion and distribution. Fair pricing, fair advertising, etc. are
essential while marketing; but in actual practice, is it so?
There are many issues related to the way companies sell and market their products. Many
companies sell products, e.g., cigarettes, which are harmful but not illegal. Many food
products, especially junk food and soft drinks also are bad for the health. Production,
marketing, and distribution of junk food is a big ethical dilemma because the products
are not illegal, yet they create negative impacts on society in terms of health concerns for
consumers especially the younger generation
Securing business through gifts isn’t a bribe? Somehow, this is a way of marketing in
some organizations. What about the customer’s personal details? Should they be
disclosed to others or exploited? Similarly, what about piracy and copyrights? Don’t you
think this is being done in our country? Is it copyright or right to copy? What about
deceptive and misleading advertising? What about hoarding and black marketing? Don’t
you think these exist although morally wrong and illegal?
Marketing practices are deceptive if customers believe they will get more value from a
product or service than they actually receive. Deception, which can take the form of
misrepresentation, omission, or misleading practice, can occur when working with any
element of the marketing mix. Deceptive pricing practices cause customers to believe
that the price they pay for some unit of value in a product or service is lower than it
really is. The deception might take the form of making false price comparisons,
providing misleading suggested selling prices, omitting important conditions of the sale,
or making very low price offers available only when other items are purchased as well.
Promotion practices are deceptive when the seller intentionally misstates how a product
is constructed or performs or employs bait-and-switch selling techniques, a technique in
which a business offers to sell a product or service, often at a lower price, in order to

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attract customers who are then encouraged to purchase a more expensive item. When
packages are intentionally mislabelled as to contents, size, weight, or use information,
that constitutes deceptive packaging. Selling hazardous or defective products without
disclosing the dangers, failing to perform promised services, and not honoring warranty
obligations are also considered deception.

During the past 20 years or so, much greater attention has been paid to how and where
our clothes are made, particularly in light of tragedies such as the blaze that tore through
a garment manufacturing facility in Bangladesh in 2012, killing 117 people – a factory
that supplied clothing to American retailers including Walmart and Sears. Following this,
the demand for ethically made clothing has soared in recent years, a trend that has given
rise to dozens of companies that want to change how we make and view clothing,
including Everlane.
At Everlane, a garment manufacturing firm, the garments are made in factories that meet
the most stringent quality standards – not only in terms of the clothes themselves but also
in how workers are treated. Everlane only partners with manufacturers that demonstrate a
strong commitment to their workers’ welfare, a fact the company prides itself upon in its
marketing material.
Everlane isn’t content to merely tell you that its clothes are manufactured and sold
ethically; the company also provides customers with a detailed cost breakdown for each
and every one of its stylish, minimalist garments. This includes details on the cost of
materials, labor, transportation and logistics, excise taxes and duties, and even hardware
such as zippers and buttons.
The company’s Elements jacket, for example, costs $60 to produce, and you can see
exactly how much each of the manufacturing and logistical elements affects the retail
price:
Source: https://www.wordstream.com/blog/ws/2017/09/20/ethical-marketing

5.3.2 Ethics in Finance

A business enterprise must follow strict ethical standards in accounting and also in
disclosures to various stakeholders. All the information must be accurate, timely, and
comprehensive. Transparency and disclosure become very important issues. What about
window dressing, financial fraud, and money laundering? Laws are there for them but
ethics are more important.
Fraudulent financial dealings, influence peddling and corruption in governments, brokers
not maintaining proper records of customer trading, cheating customers of their trading
profits, unauthorized transactions, insider trading, misuse of customer funds for personal
gain, mispricing customer trades, and corruption and larceny in banking have become
common occurrences.
Ethical issues related to securities include insider trading, manipulation of financial
markets, etc. Bribery, kickbacks, overbilling, under-invoicing, tax payments, internal

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audits, and external audits are the other areas in which ethical financial practices need to
be followed.

Applying Virtue Ethics: The Rajat Gupta Case

Virtue ethics is an ethical approach based on agents. This approach focuses on the
fundamental character and motivations of the individual moral agent. Moral behavior is
not constrained by rules or guidelines, but rather involves an individual rationally
pursuing moral excellence as an end in itself. Virtue, according to Aristotle's virtue
ethics, is a desirable character trait that falls between two extremes, rashness, and
cowardice. The virtuous agent is always seeking balance in ethical decision-making.
Such an agent does not follow any specific "rules" when making ethical decisions but
rather attempts to make decisions that are consistent with the pursuit of a specific kind of
excellence, which entails exercising sound moral judgment guided by virtues like
courage, wisdom, temperance, fairness, integrity, and consistency.

Rajat Gupta and Insider Trading

The Players
Rajat Gupta is an Indian-American businessman who was previously the managing
director of the management consulting firm McKinsey & Company and a business leader
in both India and the United States. Rajat Gupta has also served as corporate chairman,
board director, or strategic advisor to Goldman Sachs, Procter & Gamble, and American
Airlines, as well as non-profit organizations like The Gates Foundation, The Global
Fund, and the International Chamber of Commerce.

In June 2012, Rajat Gupta was convicted of insider trading. He was sentenced to two
years in prison, one year on supervised release and a $5 million fine in October 2012.
His trial began on May 22, 2012. On June 15, 2012, Gupta was found guilty of three
counts of securities fraud and one count of conspiracy.

The primary beneficiaries are Rajat Gupta, McKinsley & Company, Goldman Sachs, Raj
Rajaratnam, Galleon Group, Warren Buffet, and the US equity markets. Rajat Gupta's
family and friends, employees at McKinsley & Company and Galleon Group, Goldman
Sachs investors and creditors, and government and officials involved in the case are all
indirectly affected.

The Transactions
In September 2008, Warren Buffet agrees to pay Goldman Sachs $5 billion in exchange
for preferred stock in the company. This is likely to boost the stock price of Goldman
Sachs. The announcement or dissemination of the news should be delayed until the end
of the day. Less than a minute after the board approves the Buffet purchase, Rajat Gupta
calls his longtime friend Raj Rajaratnam, a hedge fund manager and billionaire founder

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of Galleon Group. When Rajaratnam learns of this information, he buys Goldman Sachs
stock right away. When the stock market opens the next day, Raj Rajaratnam makes
nearly $1.2 million as Goldman Sachs shares rise. The SEC estimates the tip leaked by
Rajat Gupta generates profits and avoids losses of more than $23 million.

Ethical Analysis
Would a good person have given Raj Rajaratnam the information? Rajat Gupta
demonstrated a lack of character

Integrity:

Integrity refers to a person's honesty, truthfulness, or accuracy in their actions. Rajat

Gupta is untrustworthy to his former employer, Goldman Sachs, where he served on the
Board of Directors. Instead, he shares insider information for personal gain.

Trust:

Rajat Gupta betrayed the trust of other Goldman Sachs directors and others with whom
he has done business. His actions have an impact on the relationship with McKinsley &
Company.

Fairness:

Rajat Gupta's actions are reprehensible for two reasons. First, other investors who are
unaware of Buffett's transaction are at a disadvantage. Second, he makes good use of the
information entrusted to him by Rajaratnam.

Honesty:

He lied to Goldman Sachs and his fellow board members, to whom he impliedly
promised not to share inside information

Self-Control:

Rajat Gupta would not have leaked inside information to Rajaratnam for personal gain if
he had exercised self-control.

People who knew Gupta praised him for being a kind person. He was deeply involved in
the provision of medical and humanitarian aid to developing countries. He rose from
humble beginnings to become a consulting community pillar and trusted advisor to the
world's leading businesses and organizations. In the media coverage of Rajat Gupta's
trial, the word "respected" was frequently used. People in positions of power used to be
assumed to be moral, but that is no longer the case. Incidents such as the Rajat Gupta
insider trading case and other financial scandals, however, show that this assumption is
incorrect.

A good manager strives for moral excellence as a true professional, which includes
honesty, fairness, prudence, and courage. Several mechanisms are proposed to help

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practitioners develop moral character and avoid ethical lapses like the Rajat Gupta case.
Tighter government regulations, improved financial institution systems and processes,
better corporate governance, and increased customer awareness are all suggestions.
However, the underlying cause of the problem is not addressed: financial ethics are not
taught in business schools, where moral decision-making should be emphasized.
Situations like "Rajat Gupta and Insider Trading" may become less common if business
schools provide proper ethical education to future financial managers.

5.3.3 Ethics in Production and IT

Production is nothing but the conversion of raw material into finished goods. Quality is
expected in all manufactured goods. What if the product is harmful, especially eatables?
Ethical issues in production also relate to; Defective, addictive, and dangerous products;
Emission norms and pollution; genetically modified food; New technologies; and
Product testing especially the use of animals and disadvantaged groups, etc. Selling
expired products are also considered unethical.
The internet, private exchanges, global satellite linkages, RFID, and other forms of new
technology hold great promise in terms of allowing global supply chains to operate more
efficiently and provide faster responses to demand. However, these new technologies
also present some cultural and ethical challenges to firms operating in the global
environment. There may be varying views among countries on goals, decision-making
approaches, information sharing, trust, and many other cultural differences. Another
central issue is that of intellectual property, in particular, digital assets such as software
programs.

5.3.4 Ethics in Human Resource Management

In the human resource management area, there are clear-cut ethical issues related to
recruitment and selection, transfer, dismissal, compensation, appraisal, etc. Managers
have to be fair while selecting and hiring employees. There should not be any
discrimination based on gender, nationality, religion, caste, colour, and creed. The best
candidate should be selected and hired. The whole process should be transparent. In pre-
placement talks with the prospective candidates during campus placements, the true
picture of the nature of the job, duties and responsibilities, remuneration and facilities,
etc. should clearly be revealed.
Conflicts of interest, however, can become a serious issue in some situations. A conflict
of interest arises when an individual or organization is involved in multiple interests,
where one could potentially corrupt the actions regarding the other. For example, a
manager interviewing job applicants would face a conflict of interest if a family member
applied for the job. Their obligations towards helping out a relative could compromise
their responsibility as a manager to hire the best candidate for the position. This type of
situation is also known as an ethical dilemma, which is a complex situation where your
moral or ethical obligations to different parties contradict each other, making it difficult
to come to a resolution.

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Many ethical issues are related to the health and safety of employees. Although
occupational health and safety conditions are mandated by law in many countries
including India, a business enterprise should also be bound by its ethical values to ensure
that workers are provided with safe conditions at the workplace.
While tackling the difficult issue of employee dismissal, managers need to be aware of
some important ethical considerations. Employees should not be dismissed unless a valid
reason related to their employment can be provided. Managers also need to think about
whether dismissing an employee is actually the best option in the circumstances or if can
they consider other options such as further training, job sharing, or temporary leave.
What about discrimination based on caste, gender, religion, nationality, etc.? And what
about sexual harassment and exploitation?

Check Your Progress 2

Note: a) Use the space given below for your answers.
b) Check your answer with those given at the end of the unit.

1) Discuss any two ethical issues related to the functional area of marketing.

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2) “Transparency and disclosure promote ethical practices in finance area”. Comment.

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3) Are ethical issues also related to human resource management?

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Activity 5.2:
Visit any company or a business organization of your choice and discuss business ethics
and ethical situations with senior managers or executives of different functional areas.
Based upon the discussion, highlight a few ethics as related to different functional areas.
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5.4 MEASURES TO SOLVE ETHICAL PROBLEMS

Managers of business enterprises need to make their own decisions with regard to the
ethical standards and moral values that they wish to maintain in their business. By
following a carefully and thoroughly thought out set of business principles, they give
themselves the best opportunity for achieving sustainable business success.

There are, however, business situations or dilemmas when there is no simple choice
between right and wrong. These situations have no clear-cut guidelines for managers
either in law or in religion. Managers, therefore, find themselves in a fix. The dilemmas
arise because managers have to choose between situations that are equally important like
truth versus loyalty, organization versus community, short term versus long term,
concern for customers versus profits, etc.

Normally, business organizations must set up procedures for dealing with ethical
dilemmas. A typical procedure may contain various steps like identification of the
problem; determination of factors and actors affecting the problem situation; gathering
information related to the problem; generating of alternative courses of action to tackle
the problem; evaluation of each alternative; selection of the best ethical alternative;
implementation the best alternative; and follow up, modification and updating, if any
Some other measures are as follows:
 An ethics committee of senior managers must be constituted to tackle these
dilemmas. Managers and employees may seek advice from this committee if the
situation so warrants.
 An ethical checklist or code of conduct may be developed and circulated to
various departments of the organization. This checklist or code of conduct must
also be updated from time to time.
 Training and development programme may contain topics related to ethical issues
and codes of ethics. This will help managers and employees to keep updated
themselves and also how to resolve ethical situations.

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Check Your Progress 3
Note: a) Use the space given below for your answers.
b) Check your answer with those given at the end of the unit.

1) What are various ethical dilemmas in a business enterprise?

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2) Suggest two measures to resolve ethical dilemmas in an organizational setting.

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5.5 CORPORATE SOCIAL RESPONSIBILITY

All thoughtful people believe that corporate enterprise should be organized and operated
to serve the interests of society as a whole and that the interests of shareholders deserve
no greater weight in this social calculus than do the interests of any other members of
society. This type of thinking has given birth to the concept of Corporate Social
Responsibility (CSR)

Social Responsibility of business means the obligation of business enterprise to make

decisions and to take steps for the well-being of all stakeholders and society while
focusing on its own objective. Every decision of the manager may have social
implications. Be it the opening of a new branch; closure of an existing branch;
replacement of men with machines; laying off employees, subcontracting, etc. All affect
society in general and concerned stakeholders in particular. It is, therefore, striking a
balance between measures for well being of society and own interest.

Traditionally, in the United States, CSR has been defined much more in terms of a
philanthropic model. Companies make profits, unhindered except by fulfilling their duty
to pay taxes. Then they donate a certain share of the profits to charitable causes. Over the
years, things, however, have changed fast. This is reflected in CSR documents of US
companies. The European model is much more focused on operating the core business in
a socially responsible way, complemented by investment in communities for solid
business case reasons. If we take a look at Europe, European Commission has come out

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with a new policy on corporate social responsibility in October 2011. It states that in
order to fully meet their social responsibility, enterprises “should have in place a process
to integrate social, environmental, ethical and human rights concerns into their business
operations and core strategy in close collaboration with their stakeholders”. The aim is
both to enhance positive impacts – for example through the innovation of new products
and services that are beneficial to society and enterprises themselves – and to minimize
and prevent negative impacts. Corporate social responsibility is a critical issue across
Asia also. From local companies to multi-national conglomerates, how successfully
business interacts with their environs and community is of supreme importance.

5.5.1 Why is Corporate Social Responsibility Important?

This question has raised enormous amounts of controversy in the past, but it is by now
widely accepted that businesses do indeed have responsibilities beyond simply making a
profit. This is based on a number of arguments as under:
 Corporations exist because they satisfy the needs of society. If corporations at
any time fail to live up to society’s expectations, they may extinct.
 Corporations perceived as being socially responsible might be rewarded with
extra and/or more satisfied customers. On the other hand, perceived
irresponsibility may result in boycotts or other undesirable consumer actions.
 Employees might be attracted to work for, and even be more committed to,
corporations perceived as being socially responsible.
 Voluntarily committing to social actions and programmes may forestall
legislation and ensure greater corporate independence from the government.
 A firm that is more responsive to the improvement of community quality of life
will get a better community in which to conduct business.
 Responsible corporations enjoy better brand image and reputation
These are primarily good business reasons why it might be advantageous for the
corporation to act in a socially responsible manner. In addition to these business
arguments, it is also important to consider moral arguments for corporate social
responsibility:
 Corporations depend on society for the needed inputs like money, men, etc., and
also for a market where products may be sold. Being so much dependent,
corporations have definite responsibility toward society.
 Corporations cause social problems, such as pollution, and hence have a
responsibility to solve those they have caused and to prevent further social
problems from arising.
 As powerful social actors, with recourse to substantial resources, corporations
should use their power and resources responsibly in society.

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  All corporate activities have social impacts of one sort or another, whether
through the provision of products and services or some other corporate activity.
Hence, they can’t escape responsibility for these impacts.
 Corporations rely on the contributions of a much wider set of actors or
stakeholders, such as consumers, suppliers, intermediaries, etc., rather than just
shareholders, and hence have a duty to take into account the interests and goals of
those stakeholders also.

5.5.2 Social Responsibilities of Business towards different Stakeholders

Let us now discuss the social responsibilities of businesses towards different

stakeholders. All stakeholders may be divided into two broad categories namely internal
and external interest groups.
(i) Internal Interest Group: This includes the owners, employees, etc.
(a) Responsibilities towards owners: It is expected that owners, shareholders,
partners, etc. get a fair dividend or a fair return on the capital invested. Shareholders
also expect security of investment and share in profits, capital appreciation, and
bonus shares.
(b) Responsibilities towards employees: Employees should be viewed as partners in
running a business. They are expected to be given fair wages based on productivity.
There should not be any discrimination on the basis of caste, gender, religion, etc.
Favoritism and harassment should not be there and grievances, if any, may be
solved amicably. Responsibility of business is also in the form of fair selection,
training, promotion, participation, etc., and includes the welfare of employees –
health, safety, working conditions, etc.
(ii) External Interest Group: This includes the consumers, community, government, etc.
(a) Responsibilities towards consumers: Products and services must satisfy
consumers’ needs. They must be of good quality and reasonably priced. After-sale
services are expected.
(b) Responsibilities towards Government: Companies must follow all rules,
regulations, and laws framed by the government. They must pay their dues and taxes
honestly. They should not use bribes and corrupt government officials. The
government also expects fair trade practices from companies.

5.5.3 Corporate Social Responsibility in India

Many large groups and companies are discharging corporate social responsibility in India
since independence and even before. Tatas, Birlas, etc. have done it over the years and
also doing it now. Relatively newer firms like Infosys, Wipro, Reliance, etc. are doing it
now. Public sector undertakings like SAIL, BHEL, ONGC, etc. have contributed
tremendously since their inception. Most of the programmes were in the areas of rural
development, environment protection, upliftment of the poor, employment generation,

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management of natural calamities, women empowerment, etc. Opening up of schools,
colleges, technical institutions, and hospitals; Plantation of trees; Upgradation of schools,
and parks; helping disabled by providing artificial limbs, and means of transport;
Scholarship and uniforms to needy; supply of clean water, food, and other amenities, etc.
are some of the ways in which society is being helped by these corporate.

5.5.4 Corporate Social Responsibility Voluntary Guidelines (2009)

Ministry of Corporate Affairs, Government of India has issued voluntary guidelines for
corporate in India. According to it, each business entity should formulate a CSR policy
to guide its strategic planning and provide a roadmap for its CSR initiatives, which
should be an integral part of overall business policy and aligned with its business goals.
The policy should be framed with the participation of various level executives and
should be approved by the Board. The CSR Policy should normally cover the following
core elements:
(i) Care for all Stakeholders: The companies should respect the interests of, and be
responsive towards all stakeholders, including shareholders, employees, customers,
suppliers, project-affected people, society at large, etc. and create value for all of
them. They should develop a mechanism to actively engage with all stakeholders,
inform them of inherent risks and mitigate them where they occur.
(ii) Ethical functioning: Their governance systems should be underpinned by Ethics,
Transparency, and Accountability. They should not engage in business practices that
are abusive, unfair, corrupt, or anti-competitive.
(iii) Respect for Workers' Rights and Welfare: Companies should provide a
workplace environment that is safe, hygienic, and humane and which upholds the
dignity of employees. They should provide all employees with access to training and
development of necessary skills for career advancement, on an equal and non-
discriminatory basis. They should uphold the freedom of association and the
effective recognition of the right to collective bargaining of labour, have an effective
grievance redressal system, should not employ child or forced labour, and provide
and maintain equality of opportunities without any discrimination on any grounds in
recruitment and during employment.
(iv) Respect for Human Rights: Companies should respect human rights for all and
avoid complicity with human rights abuses by them or by third party.
(v) Respect for Environment: Companies should take measures to check and prevent
pollution; recycle, manage and reduce waste, should sustainably manage natural
resources and ensure optimal use of resources like land and water, should
proactively respond to the challenges of climate change by adopting cleaner
production methods, promoting the efficient use of energy and environment-friendly
technologies.
(vi) Activities for Social and Inclusive Development: Depending upon their core
competency and business interest, companies should undertake activities for the

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 economic and social development of communities and geographical areas,
particularly in the vicinity of their operations. These could include education, skill
building for the livelihood of people, health, cultural and social welfare, etc.,
particularly targeting disadvantaged sections of society.
Implementation Guidance of Ministry of Corporate Affairs, Government of India, in this
regard is as under:
(i) The CSR policy of the business entity should provide for an implementation strategy
which should include the identification of projects/activities, setting measurable
physical targets with timeframe, organizational mechanism and responsibilities, time
schedules, and monitoring. Companies may partner with local authorities, business
associations, and civil society/non-government organizations. They may influence
the supply chain for CSR initiatives and motivate employees to voluntary efforts for
social development. They may evolve a system of need assessment and impact
assessment while undertaking CSR activities in a particular area. Independent
evaluation may also be undertaken for selected projects/activities from time to time.
(ii) Companies should allocate a specific amount in their budgets for CSR activities. This
amount may be related to profits after tax, the cost of planned CSR activities, or any
other suitable parameter.
(iii) To share experiences and network with other organizations the company should
engage with well-established and recognized programmes/platforms which
encourage responsible business practices and CSR activities. This would help
companies to improve their CSR strategies and effectively project the image of
being socially responsible.
(iv) The companies should disseminate information on CSR policy, activities, and
progress in a structured manner to all their stakeholders and the public at large
through their website, annual reports, and other communication media.
CSR was made mandatory under section 135 of the Companies Act 2013
In a revolutionary move, CSR in India was made mandatory in India. All the companies
registered under the Indian Companies Act 2013 must comply with CSR obligations
as part of section 135 of the act. The law states that all companies:
 Private or public or a subsidiary of a foreign company
 Has a net worth of 5 bn Indian rs or more
 A turnover of 10 bn or more or a net profit of 50 mn rs or more
Any company coming under the preview of mandatory CSR must :
 Create a CSR committee of its board members consisting of three or more
directors, at least one of whom is independent. The CSR committee of a private
company may be made up of two directors, neither of whom needs to be
independent.

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  After taking into account the recommendations of the CSR committee, the
company must approve a CSR policy, including the contents of the policy in its
annual performance and financial reports, publish the policy on its website, and
ensure that activities specified in the policy are actually undertaken.
 The company must ensure that in every fiscal year it spends at least 2 percent of
its average net profits from the three preceding fiscal years in pursuit of its CSR
policy.
 The Companies (CSR Policy) Amendment Rules 2021 have overhauled India’s
CSR regime.
 Besides giving effect to changes introduced in Section 135 of the Companies Act,
as a result of the Companies Amendment Act of 2019 (regarding the transfer of
unspent CSR amount) and Companies Amendment Act 2020 (regarding setting
off of excess CSR expenditure), the New Rules have introduced new
requirements like
 impact assessment of CSR contributions,
 engagement of International Organisations for CSR Projects in limited capacity
etc.
 Even with respect to the concepts earlier present in the 2014 Rules, such as the
meaning of CSR, CSR Policy, and CSR Implementation, the provisions of the
New Rules appear to be more detailed and structured

Role of CSR Committee

 Approve CSR policy ( After considering the recommendation made by

the CSR committee
 Disclose the content of CSR policy in Boards report and
 Ensure the company undertakes the activities included in the CSR policy

List of activities to be undertaken under CSR

1. Eradicating extreme hunger and poverty;
2. Promotion of education;
3. Promotion of gender equality and empowering women;
4. Reducing child mortality and improving maternal health;
5. Employment enhancing vocational skills;
6. Ensuring environmental sustainability, ecological balance, the protection of flora
and fauna, animal welfare, agroforestry, the conservation of natural resources;
and maintaining the quality of soil, air, and water, including contribution to the
Clean Ganga Fund set up by the central government to rejuvenate the Ganga
River.

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 7. Protecting India’s national heritage, art, and culture, including the restoration of
buildings and sites of historical importance and works of art; setting up public
libraries; and contributing to the promotion and development of traditional arts
and handicrafts.
8. Setting forth measures for the benefit of veterans, war widows, and their
dependents.
9. Training to promote rural sports, nationally recognized sports, Paralympic sports,
and Olympic sports.
10. Contributing to the prime minister’s National Relief Fund or any other fund set
up by the central government for the socio-economic development, relief, and
welfare of marginalized classes, minorities, and women.
11. Contribution to publicly-funded business incubators and public bodies (such as
publicly-funded universities and national laboratories) conducting research in
science, technology, engineering, and medicine to promote the Sustainable
Development Goals (SDGs).
12. Working on rural development projects.
13. Developing slum areas.
14. Disaster management, including relief, rehabilitation, and reconstruction
activities
Such other matters as may be prescribed. (Corporate Social Responsibility) Companies
act, 2013

Check Your Progress 4

Note: a) Use the space given below for your answers.
b) Check your answer with those given at the end of the unit.

1) What is the significance of CSR for a firm?

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2) Suggest novel measures to discharge Corporate Social Responsibility.

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Activity 5.3:
Visit the website of a big business organization and search what measures are being
taken by the organization to discharge corporate social responsibility. Give your opinion
on their efforts.
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5.6 CORPORATE GOVERNANCE

Corporate governance is a system by which companies are directed and controlled. It is a
conscious, deliberate, and sustained effort on the part of a corporate entity to strike a
judicious balance between its own interest and the interest of various constituents of the
environment in which it is operating. Corporate Governance extends beyond corporate
law. Its fundamental objective is not mere fulfillment of the requirements of the law but
in ensuring the commitment of the Board of Directors to transparently managing the
company for maximizing stakeholder value. Basic ingredients for good governance
include:
 Accountability of the Board of Directors and their responsibilities to various
stakeholders.
 Transparency and disclosure.
 System of checks and balances.
 Adherence to rules and conformity.

5.6.1 Corporate Governance – Developments World over

In view of many scandals and frauds in companies, the world over, many developed
countries like the U.K. and the U.S.A. have set up many committees and laws for good
and effective corporate governance. These committees have focussed on various aspects
of corporate governance. Some of these committees and their recommendations, in brief,
are presented below:
(i) Sir Adrian Cadbury Committee (1992) recommended the separation of the
role of CEO and Chairman of the Board. The committee also recommended the
formation of an audit committee, balanced composition of the Board of
Directors with executive and non-executive directors, and selection process of
non-executive directors.
(ii) Mervyn E. King’s Committee (1994) also recommended the establishment of
an audit committee and ensuring effective internal audits. Committee pressed

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 on the observance of the highest level of business and professional ethics.
According to it accounting standards should be in line with international
standards.
(iii) Richard Greenbury Committee (1995) focussed on director remuneration,
particularly compensation packages, large pay increases, and share options. The
important recommendation was the establishment of a Remuneration committee
composed of non-executive directors which would be responsible for deciding
the remuneration for executive directors.
(iv) Ronnie Hampel Committee (1998) focussed on the role of the board of
directors and auditors.
(v) Blue Ribbon Committee (1999) recommended independent members of the
audit committee. The audit committee should have a minimum of three
directors, and all of them should be financially literate. The audit committee
must have a formal written charter, approved by the full board, specifying the
responsibilities, structure, process, and membership.
(vi) OECD principles of corporate governance (1999) also highlighted principles
of corporate governance.
(vii) CACG guidelines (1999) provided principles for corporate governance in the
Commonwealth.
(viii) Sarbens –Oxley Act (2002), a recent enactment in the USA, has emphasized
audit function, auditor independence, and financial disclosures. It has
recommended severe penalties, both fines, and imprisonment for wilful default
by managers and auditors.
(ix) The Combined Code of Corporate Governance (2003, 2006, and 2008) sets
out standards of good practice in relation to shareholders. All companies in the
U.K. and listed on London Stock Exchange are required to report in their
annual reports and accounts about the implementation of the combined code of
corporate governance.

5.6.2 Corporate Governance – Developments in India

India also has formulated codes of corporate governance through various committees, the
more important ones being:
(i) CII (Rahul Bajaj) Committee (1996) recommended a simple structure of
board which should meet 6 times a year. According to it, listed companies in
excess of Rs. 200 crores and above should have at least 30%, non-executive
directors. Directors should not be on the board of 10 or more companies. The
director who does not attend 50% or more meetings is not to be considered for
re-appointment.
(ii) Kumar Mangalam Birla Committee (2000) recommended the board set up a
qualified and independent audit committee to enhance the credibility of

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 financial disclosures and to promote transparency. According to it, shareholders
have to show a greater degree of interest and involvement in the appointment of
directors and auditors.
(iii) Naresh Chandra Committee (2002) recommended that every five years, audit
partners should rotate. Companies are to have at least 50%, independent
directors. An audit committee is to be set up of all independent directors and
certain professional assignments should not be undertaken by auditors.
(iv) Narayana Murthy Committee was constituted by SEBI under the
chairmanship of N.R. Narayana Murthy. The committee included
representatives from the stock exchanges, chambers, commerce and industry,
investor associations, and professionals and made some mandatory
recommendations related to audit committees of listed companies, disclosure of
accounting treatment, risk management, nominee directors, non-executive
director’s compensation, and whistleblower policy, etc.
(v) Corporate Governance Voluntary Guidelines (2009) have been released by
the Ministry of Corporate Affairs, Government of India. These guidelines relate
to the Board of Directors, audit committee, auditors, and whistle-blowing
policy.
Satyam case led to a re-look at corporate governance practices and frameworks prevalent
in the country. The role of independent directors and also auditors came under the
scanner. Actually, the Satyam episode opened a window of opportunity for corporate
governance reforms in the country.
In India, the office of the Comptroller and Auditor General (CAG) functions as an
oversight audit body for the audit of public sector companies. There are certain statutory
provisions related to audit committees in India. These are contained in section 292A of
the companies act, 1956, and clause 49 of the uniform listing agreement prescribed by
SEBI.
The Ministry of Heavy Industries and Public Enterprises, Department of Public
Enterprises has issued guidelines on corporate governance for Central Public Sector
Enterprises (CPSEs). To evolve guidelines, CPSEs have been categorized into two
groups namely – (i) those listed in the Stock exchanges; (ii) those not listed in the stock
exchanges. In so far as the listed CPSEs are concerned, they have to follow the SEBI
guidelines on corporate governance. In the case of non-listed CPSEs, each enterprise
should strive to institutionalize good corporate governance practices broadly in
conformity with the SEBI guidelines. The guidelines for listed and unlisted CPSEs deal
with the subject of corporate governance, under the headings: Board of Directors; Audit
Committee; Subsidiary Companies; Disclosures; Report, Compliance, and Schedule of
Implementation.

5.6.3 Principles of Corporate Governance

The principles of corporate governance as evolved by The Institute of Company
Secretaries of India (ICSI) are as under:

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  Sustainable development of all stakeholders – to ensure the growth of all
individuals associated with or affected by the enterprise on a sustainable basis.
 Effective management and distribution of wealth – to ensure that the enterprise
creates maximum wealth and judiciously uses the wealth so created for providing
maximum benefits to all stakeholders and enhancing its wealth creation
capabilities to maintain sustainability.
 Discharge of social responsibility – to ensure that enterprise is acceptable to the
society in which it is functioning.
 Application of best management practices – to ensure excellence in s functioning
of the enterprise and optimum creation of wealth on a sustainable basis.
 Compliance of law in letter and spirit – to ensure value enhancement for all
stakeholders guaranteed by law for maintaining socio-economic balance.
 Adherence to ethical standards – to ensure integrity, transparency, independence,
and accountability in dealings with all stakeholders.

5.6.4 Whistle Blower Policy

The concept of the whistleblower is generating much-needed heat nowadays. This
concept is very important from the point of view of corporate governance. A whistle-
blower is a person who publically complains about concealed misconduct on the part of
an organization or body of people, usually from within that same organization. This
misconduct may be a violation of a law, rule, or regulation, and/or a direct threat to
public interest such as fraud, health/safety violations, and corruption. Whistleblowers
frequently are likely to face retaliation, sometimes at the hands of the organization or
group of which they have accused unless a system is in place that would ensure
confidentiality. It is in this context, that whistleblowers are needed to be protected under
the law from employer retaliation. In India, clause 49 of the listing agreement provides
non-mandatory guidelines with regard to the whistle-blower policy.
The company may establish a mechanism for employees to report to the management,
concerns about unethical behavior, actual or suspected fraud, or violation of the
company’s code of conduct or ethics policy. This mechanism could also provide for
adequate safeguards against the victimization of employees who avail of the mechanism
and also provide for direct access to the chairman of the audit committee in exceptional
cases. Once established, the existence of the mechanism may be appropriately
communicated within the organization.
Check Your Progress 5
Note: a) Use the space given below for your answers.
b) Check your answer with those given at the end of the unit.

1) What do you understand by “Corporate Governance”?

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 ………………………………………………………………………………………
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2) Throw light on the recommendation of a few committees on corporate governance in

India.

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3) Who is a Whistle Blower in the context of corporate governance?

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Activity 5.4:
Go through the annual reports of any two big companies and write down what they have
disclosed about corporate governance in their annual reports.
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5.7 LET US SUM UP

Business is an integral part of society. It can not survive for long if the focus is only on
making profits and maximizing wealth. The concern for moral values and well being of
society is also very important. Not only the Profits but concern for the People and Planet
is of paramount importance. Business ethics, corporate social responsibility, and
corporate governance, therefore, have gained the focus of attention the world over.
Ethics refers to norms, morals, principles, and ideals prevailing in a group or society.
They are some standardized form of conduct or behavior. Business Ethics are the morals,

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rules, and principles followed by a business enterprise. Corporate Social Responsibility
of business means the obligation of business enterprise to make decisions and to take
steps for the well-being of all stakeholders and society while focusing on its own
objective. Corporate Governance is a system or set of processes to ensure that company
is managed to suit the best interest of all stakeholders. These are interlinked and are vital
to the success of an enterprise.

5.8 KEYWORDS
Business Ethics: They are the morals, rules, and principles followed by a business
enterprise.
Corporate Governance: It is a system or set of processes to ensure that company is
managed to suit the best interest of all stakeholders.
Corporate Social Responsibility: Social Responsibility of business means the
obligation of business enterprise to make decisions and to take steps for the well-being of
all stakeholders and society while focusing on its own objective.
Ethical Dilemma: They are conflicting decision situations that have no clear-cut
guidelines either in law or in religion and which require morals and ethics to come into
play.
Ethics: They refer to norms, morals, principles, and ideals prevailing in a group or
society. They are some standardized form of conduct or behavior.
Whistle Blower: A whistle-blower is a person who publically complains about
concealed misconduct on the part of an organization or body of people, usually from
within that same organization.

5.9 SUGGESTED FURTHER READINGS/ REFERENCES

 Boatright, J.R., 2003, Ethics and conduct of Business, 4th edition, Pearson
Education Publication, New Delhi, India
 Crane, A. and Matten, D., 2007, Business Ethics – Managing Corporate
Citizenship and Sustainability in the Age of Globalisation, 2 nd edition, Oxford
University Press, New Delhi, India.
 DeGeorge, R.T., 2011, Business Ethics, 7th edition, Pearson Education, Inc./
Dorling Kindersley India, Pvt. Ltd., New Delhi, India
 Hartman, L.P. and Chatterjee, A., 2007, Perspectives in Business Ethics, 3rd
edition, Tata McGraw Hill Publishing Co. Ltd., New Delhi, India.
 Velasquez, M.G., 2002, Business Ethics – Concepts and Cases, 5th edition,
Prentice Hall, NJ, USA
 Weiss, J.W., 2003, Business Ethics – A Stakeholder and Issues Management
Approach, 3rd edition, Thomson Press Asia Pte. Ltd., Singapore.

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  www.nfcgindia.org (National Foundation for Corporate Governance)
 www.mca.go.in (Ministry of Corporate Affairs, Government of India)
 www.timesfoundation.indiatimes.com (Times Foundation, The Times Group)

5.10 ANSWERS TO CHECK YOUR PROGRESS

Check Your Progress 1

1) Business ethics, also called corporate ethics, are nothing but a form of applied ethics
or professional ethics. They cover the entire range of ethical principles, morals,
conducts, and also ethical situations and problems that are encountered in running a
business.
2) The two advantages of business ethics are:
 It has been seen that managers who treat other people fairly earn employees’ trust
and this makes them more willing to support the organization. Ethics cultivate
strong teamwork, productivity, and efficiency.
 The government and its laws may not be able to resolve emerging problems, but
ethics can. Regulations always lag behind technology and emerging situations,
ethics, therefore, come to the rescue in a new situations.

Check Your Progress 2

1) Many food products, especially junk food and soft drinks are not good for the health.
To produce and market them creates a big ethical dilemma because the products are
not illegal, yet the negative impacts on society are considered significant. Similarly
securing business through gifts isn’t a bribe? Somehow, this is a way of marketing in
some organizations.
2) Transparency and disclosure become very important issues in the area of finance. Not
only these are desired by committees and governments all over the world but also fall
in the domain of business ethics. All stakeholders desire transparency in accounts and
also disclosure of finance and account-related facts. There are laws and statutory
provisions for these also.
3) In the human resource management area there are clear-cut ethical issues related to
recruitment and selection, transfer, dismissal, compensation, appraisal, etc.

Check Your Progress 3

1) Ethical dilemmas are conflicting decision situations that have no clear-cut guidelines
for managers either in law or in religion and which require morals and ethics to come
into play.
2) The measures are as follows:

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  A committee of senior managers must be constituted to tackle these dilemmas.
Managers and employees may seek advice from this committee if the situation so
warrants.
 An ethical checklist or code of conduct may be developed and circulated to
various departments of the organization. This checklist or code of conduct must
also be updated from time to time.

Check Your Progress 4

1) There are primarily good business reasons why it might be advantageous for the
corporation to act in a socially responsible manner. In addition to these business
arguments, it is also important to consider moral arguments for corporate social
responsibility. Corporations exist because they satisfy the needs of society. If
corporations at any time fail to live up to society’s expectations, they may extinct.
Corporations perceived as being socially responsible might be rewarded with extra
and/or more satisfied customers. On the other hand, perceived irresponsibility may
result in boycotts or other undesirable consumer actions. Employees might be
attracted to work for, and even be more committed to, corporations perceived as
being socially responsible. Voluntarily committing to social actions and programmes
may also forestall legislation and ensure greater corporate independence from the
government.
2) Plantation of trees, the opening of and upgradation of schools, helping the disabled,
scholarships and uniforms to the needy, supply of clean water and food, etc. are some
of the ways of discharging corporate social responsibility.

Check Your Progress 5

1) Corporate governance is a conscious, deliberate, and sustained effort on the part of a
corporate entity to strike a judicious balance between its own interest and the interest
of various constituents of the environment in which it is operating.
2) Naresh Chandra Committee (2002) recommended that every five years, audit
partners should rotate. Companies are to have at least 50%, independent directors. An
audit committee is to be set up of all independent directors and certain professional
assignments should not be undertaken by auditors.
CII (Rahul Bajaj) Committee (1996) recommended a simple structure of board which
should meet 6 times a year. According to it, listed companies in excess of Rs. 200
crores and above should have at least 30%, non-executive directors. Directors should
not be on the board of 10 or more companies. The director who does not attend 50%
or more meetings is not to be considered for re-appointment.
3) A whistle-blower is a person who publically complains about concealed misconduct
on the part of an organization or body of people, usually from within that same
organization. This misconduct may be a violation of a law, rule, or regulation, and/or
a direct threat to public interest such as fraud, health/safety violations, and
corruption.

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