Ethics For Business - Applied Part

Shareholder vis-à-vis
Stakeholder, CSR and

CG
Ethics for Business (MGT 163)
UG Programmes
Winter Semester 2021
Introduction
• What is the purpose of Business?
• Whose Interest does the business serve?
• Who are business managers loyal to?
AU/AMSoM/UG/Winter2021/NT 05/11/2022 2
Shareholders’ Superiority – Stockholder
Theory
Milton Friedman : The Purpose of Business is to make money for the
owner or stockholders.
Arguments by Friedman- I
• “The Social Responsibility of Business is • Purpose of Business is ‘NOT’ to –
to increase its profits”
• Provide Employment
• To think business should do anything other
than make a profit is to preach socialism • eliminate discrimination
and undermine free society. • avoid pollution
• The Underlying Ethical principle: Manager • help the community
has Fiduciary Responsibility to Owners…
• make life better for workers
• Charity
Arguments by Friedman-II
• Businesses cannot have responsibility,
because only people can have
responsibilities.
• Ethical Caveat-
• “…while conforming to the basic rules of
the society, both those embodied in law and
those embodied in ethical custom.”
Business Responsibilities vs Personal Social
Responsibilities
• social responsibilities of the executive:
Family, conscience, feelings of charity, church, clubs, city, country
• Fiduciary responsibility: To make money for stockholders
• Managers are agents of shareholders, not the society in general
Arguments by Friedman-III
• No way for Executive to know how to solve social ills—that’s not their
expertise!
Arguments by Friedman-IV
• Imposing Charity on business amounts to implementing a subversive

Private Tax
Let’s take an example-
• X Limited as a Profit after tax of ₹ 10.00 Crores for FY 2021
• Directors of the company decide to spend ₹ 30.00 Lakhs towards donation/charity
• The distributable profit is reduced to ₹ 9.70 Crores & hence the possible dividend
• Do Directors have the authority to –
• Decide the amount of money they spend on charity?
• Decide the manner of spending the money?
Assumptions by Friedman
• Freidman thinks firms ought to maximize their profits (they have
social obligation to do so) Because “profit really represents the net
contribution that the firm makes to the social good and the profits should
therefore be made as large as possible.”
• Freidman also assumes natural constraints of the market will help
keep companies in check. If a company is known to be dishonest or
terrible to their employees, then consumers will not buy from that
company
Criticisms of Shareholder Approach
• It assumes that forces of competition are Examples-
sufficiently vigorous—but they aren’t.
(a)Financial Frauds
• Regulations are essential to force companies (b)Consumer Rights
to act in an ethical manner. Such regulations
(c)Labour Rights
direct the market towards ethical behavior.
(d)Tax Evasion
• Distribution of income that results
from unrestrained profit
maximization is very unequal.
• Maximizing profits is socially inefficient when costs are not paid
• Examples:
• pollution
• traffic congestion
• No taxes– poorly educated workforce
• Superior position of Seller vis-à-vis Buyer
Stakeholder Theory: Edward R Freeman
Who is a Stakeholder?
•Stakeholder -
• Any individual or group who can affect or is
affected by the actions, decisions, policies,
practices, or goals of the organization.
• Stakeholder is a variant of the concept of
stockholder (or shareholder) – an
investor/owner of businesses.
Shareholder vs. Stakeholder
• ….is any person, company or other institution that owns at

least one share of a company’s stock.
• Shareholders are stakeholders in a corporation
• Shareholders are usually not personally liable for the company's debts
and other financial obligations.
• Stakeholders are not always shareholders
AU/AMSoM/UG/Winter2021/NT
Who are Business’s Stakeholders?
Stockholders Employees
Customers Community Competitors
Business Stakeholder Groups
Special-Interest
Suppliers Media
Groups
Natural Environment:
Society
Part of Sustainability
Types of Stakeholders
Primary social stakeholders Secondary social
(direct) stakeholders (indirect)
Shareholders and investors Government regulators
Employees and managers Civic institutions
Customers Social pressure groups

Local communities Media and academic
commentators
Suppliers and other business Trade bodies
partners
Competitors
Types of Stakeholders
Primary nonsocial Secondary nonsocial

stakeholders stakeholders
Natural environment Environmental interest
groups (e.g., Greenpeace)
Future generations Animal welfare
organizations (e.g., shelter)
Nonhuman species
Key Questions for Stakeholder
Management
1. Who are our organization’s stakeholders?
2. What are our stakeholders’ stakes?
3. What opportunities and challenges do our stakeholders present
to the firm?
4. What responsibilities (economic, legal, ethical, and
philanthropic) does the firm have to its stakeholders?
5. What strategies or actions should the firm take to best address
stakeholder challenges and opportunities?
Ethical Grounds of Stakeholder Theory
• Three Approaches to Stakeholder Theory
• Descriptive- Whether Stakeholder Interests are taken into consideration?
• Instrumental- Impact of Stakeholders on business performance
• Normative- Why businesses should consider stakeholder interests even in absence
of benefit
Understanding CSR
• Firm’s consideration of, and response to, issues beyond the narrow
economic, technical and legal requirements of the firm
• The economic, legal, ethical and discretionary expectations that the
society has from organizations
• Policies and practices of corporations that reflect business responsibility
for some of the wider social good. Yet the precise manifestation and
direction of the responsibility lie at the discretion of the Corporation
Key Features of CSR
• Voluntary Activity beyond legal realms
• Internalizing or managing externalities
• Multiple Stakeholder orientation
• Alignment of Social and Economic responsibilities
• Practices values – Why is it done?
• Reflection of Corporate Philanthrophy
Why Companies must to CSR
Economic Arguments Legal Arguments Ethical Arguments
Improved social acceptance Principle of Natural Justice Utilitarianism and CSR
Compensates negative Democracy and Liberties Kant and CSR
externality
Improved customer & employee Idea of economic and social
engagement levels justice
Better brand image and
goodwill
Utilitarianism and CSR
• Every Moral agent is bound to perform that action by which he or she can
maximize the net expectable utility, that is, the greatest net benefits or
lowest net costs for all parties affected by that action.
• In simple terms, moral agents, including companies should maximize the
total sum of well-being thereby bringing greater happiness for all
• Businesses seen as a economic powerhouse with substantial possibility of
benefiting people associated with it to increase the well-being
Ethics of Duty and CSR
• Universal acceptability of the profit maximization – Not recommended
• Treating Stakeholders as an End and not as means – Taking care of
stakeholder interests
• Upholding the dignity of persons associated with business- Respecting the
contribution of each stakeholder and treating them as equal contributors to
success of business
Mandatory CSR requirements- Applicability
Criteria 1 Net Worth of the company as per last audited Financial Statements
• Net worth of the company is exceeding ₹ 500 Crore
Criteria 2 Turnover of the company as per last audited Financial Statements

• The Turnover of the company is exceeding ₹ 1000 Crore
Criteria 3 Profit of the company as per last audited Financial Statements

• Net Profit of the company is exceeding ₹ 5 Crore
Mandatory CSR requirements- Amount
Profit after Tax is

At Least 2% of the considered
Average Net Profits of the Loss Making Companies
Last 3 years exempted
Higher spending is allowed
Mandatory CSR requirements- Areas
Promotion of Gender Equality,
Eradication of Hunger Protection of National
education and Women
& Poverty, Improving Heritage, art and
vocational skill Empowerment, Senior
sanitation facility culture
training citizen welfare
Improving Technology
Benefit of Armed Sustainability, Incubators with Rural sports, Olympic
Forces and Widows of Ecological balance, academic institutes and Paralympic sports
defense personnel Wildlife preservation
PM Relief Fund,
Swacchh Bharat Rural Development
Kosh, Disaster Funds Projects
AU/AMSoM/UG/Winter2021/NT
etc. 05/11/2022 28
Mandatory CSR requirements- Amount
CSR
Board
Committee
Form CSR Committee Frame CSR Policy
Plan, Recommend and
Approve and Ensure
execute
Disclosures for failures Monitor
Corporate Governance- An Introduction
“A system by which
Corporate Governance is the
companies are directed and
acceptance by management of the
controlled”
inalienable rights of the shareholders
Cadbury Committee
as the true owners of
the corporation and of their own
role as trustees on behalf of the
shareholders.
Narayan Murhty Committee
Foundations of Corporate Governance
• Separation of ownership and management
• Control by Directors and Control by Shareholders
• Agency Theory by Jensen and Meckling (1976)
• Directors treated as economically rational individuals
• Preference given to Personal benefits vis-à-vis collective gains
• Fiduciary Duties of Directors
• Duty of Care and Duty of Loyalty
AU/AMSOM/PG/2020-21/NT 11/05/2022 31
Features of Corporate Governance
Transparency Accountability Fairness Independence
Social Stakeholder
Discipline Responsibility Centricity
AU/AMSOM/PG/2020-21/NT 11/05/2022 32
Models of Corporate Governance
Anglo Saxon Model
Shareholders of Company Regulatory Framework
Directors of Company Company Frequent Disclosures
Market Control
Stock Performance
Models of Corporate Governance
German Model
Shareholders of Company Stakeholders of Company
Banks, Employees,
Two – Tier Board Company Creditors
Strategic and
Board Positions
Supervisory
Mechanisms of Corporate Governance
• Shareholder Control
• Appointment of Directors by the Shareholders
• Shareholder Democracy
• Decisions of Strategic nature to be approved by majority of Shareholders
• Shareholder Monitoring
• Appointment of Auditors
• Acceptance and approval of Audited Financial Statements by Shareholders
Mechanisms of Corporate Governance
• Regulatory Compliances • Regulatory Supervision

• Annual General Meetings • Audit Committee
• Board Meetings • Remuneration and Nomination
Committee
• Disclosures on regular Basis
• Shareholder Grievances Committee
• Quarterly Review of Financial
Performance
Building an Ethical Organization
• Let’s take a few ethical dilemmas for our

understanding
Ethical Organizations
• Can Ethical dilemmas be treated as individual issues?
• Are Ethical dilemmas an organizational phenomenon?
• Who caries the responsibility to build an ethical organization?
• What are the values do we need to preserve in an ethical organization?
• Are there any early indicators of a ethical failures in an organization?
• What are the steps that need to be taken in this direction?
Individual v/s Organizational Dilemmas
• What is a dilemma?
• Who faces a dilemma?
• Is it organizational or personal?
Torchbearers of an Ethical Organization
• Ethical Leadership
• Top Down Approach
• Whistle Blowers
• Internal and External
• Employees
Values that need to be preserved
Values that need to be preserved
Warning Signs of Ethical Failures
• Urgency and Fear
• Isolation
• Fragmentation and Plausible
Deniability
• Success and impunity
• In-group languages
Building an ethical organization
Core Ethical Policies,

Values Processes and
Practices
Ethical
Organizations
Formal Ethical
Ethical Code leadership
Building Ethical Organizations
• God practices no favouritism; he loves all those who fear him.
• All animals are equal but some animals are more equal than others.
• I can clearly see through; after all it is made of glass. Where is the ceiling
in “glass ceiling”?
• I do not want to discriminate against anyone; I just want myself to be
treated specially.
• Honesty stands at the gate and knocks and bribery enters in.
• The biggest disease in the world is corruption; it is infectious too.
• Gift is the bribery of the rich and elite.
• Interests are rewarding, conflicts are not

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Ethics For Business - Applied Part

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Shareholder vis-à-vis

Stakeholder, CSR and

• Imposing Charity on business amounts to implementing a subversive

• ….is any person, company or other institution that owns at

Customers Community Competitors

Business Stakeholder Groups

Employees and managers Civic institutions

Customers Social pressure groups

Primary nonsocial Secondary nonsocial

Criteria 2 Turnover of the company as per last audited Financial Statements

Criteria 3 Profit of the company as per last audited Financial Statements

Profit after Tax is

Transparency Accountability Fairness Independence

Shareholders of Company Regulatory Framework

Directors of Company Company Frequent Disclosures

Shareholders of Company Stakeholders of Company

• Regulatory Compliances • Regulatory Supervision

• Let’s take a few ethical dilemmas for our

Core Ethical Policies,

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