Ethics Ethics is a branch of social science. It deals with moral principles and social values. It

helps us to classifying, what is good and what is bad? It tells us to do good things and avoid doing bad things.

So, ethics separate, good and bad, right and wrong, fair and unfair, moral and immoral and proper and improper human action. In short, ethics means a code of conduct.

In short, business ethics means to conduct business with a human touch in order to give welfare to the society.

So, the businessmen must give a regular supply of good quality goods and services at reasonable prices to their consumers. They must avoid indulging in unfair trade practices like adulteration, promoting misleading advertisements, cheating in weights and measures, black marketing, etc. They must give fair wages and provide good working conditions to their workers. 

Definition of Business EthicsAccording to Andrew Crane,

“Business ethics is the study of business situations, activities, and decisions where issues

of right and wrong are addressed.”

According to Raymond C. Baumhart, “The ethics of business is the ethics of responsibility. The business man must promise

that he will not harm knowinfly.

Nature of Business EthicsThe characteristics or features of business ethics are:-

Code of conduct :   Business  ethics is a code of conduct. It tells what to do and what not to do for the welfare of the society. All businessmen must follow this code of conduct.

Based on moral and social values  : Business ethics is based on moral and social values. It contains moral and social principles (rules) for doing business. This includes self-control, consumer

protection and welfare, service to society, fair treatment to social groups, not to exploit others, etc.

Gives protection to social groups  : Business ethics give protection to different social groups such as consumers, employees, small businessmen, government, shareholders, creditors, etc.

Provides basic framework  : Business ethics provide a basic framework for doing business. It gives the social cultural, economic, legal and other limits of business. Business must be conducted within these limits.

Voluntary  : Business ethics must be voluntary. The businessmen must accept business ethics on their own. Business ethics must be like self-discipline.

New concept  : Business ethics is a newer concept. It is strictly followed only in developed countries. It is not followed properly in poor and developing countries.

Theories Of Business Ethic

Ethics is a branch of social science. It deals with moral principles and social values. It helps us to classifying, what is good and what is bad? It tells us to do good things and avoid doing bad things.

So, ethics separate, good and bad, right and wrong, fair and unfair, moral and immoral and proper and improper human action. In short, ethics means a code of conduct.

In short, business ethics means to conduct business with a human touch in order to give welfare to the society.

So, the businessmen must give a regular supply of good quality goods and services at reasonable prices to their consumers. They must avoid indulging in unfair trade practices like adulteration, promoting misleading advertisements, cheating in weights and measures, black marketing, etc. They must give fair wages and provide good working conditions to their workers. 

Moral Theories (Normative Theories of Ethics)

Normative theories of ethics or “moral theories” are meant to help us figure out what

actions are right and wrong. Popular normative theories include utilitarianism, the

categorical imperative, Aristotelian virtue ethics, Stoic virtue ethics, and W. D. Ross’s

intuitionism. I will discuss each of these theories and explain how to apply them in

various situations.

Normative Theories of Business ethics This theory is divided in two parts –

1. Consequentialist Theories

2. Nonconsequentialist Theories

1. Consequentialist Theories:-

Those theories that determine the moral rightness or wrongness of an action based on the action’s consequences or results.

2. Nonconsequentialist Theories:-Those that determine the moral rightness or wrongness of an action based on the action’s intrinsic features or character.

Consequentiality Theories is also further divided in to two types-

1. Egoism:

The view that morality coincides with the self-interest of an individual or an organization.

Egoists: Those who determine the moral value of an action based on the principle of personal advantage.

An action is morally right if it promotes one’s long-term interest.

An action is morally wrong if it undermines it.

Personal egoists: Pursue their own self-interest but do not make the universal claim that all individuals should do the same.

Impersonal egoists: Claim that the pursuit of one’s self-interest should motivate everyone’s behavior.

Egoists do not necessarily care only about pursuing pleasure (hedonism) or behave dishonestly and maliciously toward others.

Egoists can assist others if doing so promotes their own advantage.

Psychological egoism: The theory of ethical egoism is often justified on the ground that human beings are essentially selfish.

Even acts of self-sacrifice are inherently self-regarding insofar as they are motivated by a conscious or unconscious concern with one’s own advantage.

Objections to egoism

(1) The theory is not sound : The doctrine of psychological egoism is false – not all human acts are selfish by nature, and some are truly altruistic.

(2) Egoism is not a moral theory at all : Egoism misses the whole point of morality, which is to restrain our selfish desires for the sake of peaceful coexistence with others.

(3) Egoism ignores blatant wrongs : All patently wrong actions are morally neutral unless they conflict with one’s advantage.

2. Utilitarianism

Definition: The moral theory that we should act in in ways that produce the most pleasure or happiness for the greatest number of people affected by our actions.

Main representatives: The British philosophers Jeremy Bentham (1748–1832) and John Stuart Mill (1806–1873).

The principle of utility: Actions are morally praiseworthy if they promote the greatest human welfare, and blameworthy if they do not.

Six points concerning utilitarianism:

(1)In choosing between alternative courses of action, we should consider the net worth of happiness vs. unhappiness produced by each course of action.

(2)We should give equal consideration to all individual preferences, then calculate the net worth of the various kinds of pleasures and pains.

(3) Anything can be morally praiseworthy in some circumstances if it promotes the greatest balance of pleasure vs. pain for the greatest number of people.

(4) We should seek to maximize happiness, not only immediately, but in the long run.

(5) We should avoid choosing actions if their consequences are uncertain.

(6) We must guard against bias in our utilitarian calculations when our own interests are at stake. So it is advisable to rely on rules of thumb.

Utilitarianism in an organizational context:

Provides a clear and straightforward standard for formulating and testing policies. Offers an objective way for resolving conflicts of self-interest. Suggests a flexible, result-oriented approach to moral decision making.

Criticisms of utilitarianism:

(1) The practical application of the principle of utility involves considerable difficulties.

(2) Some actions seem to be intrinsically immoral, though performing them can maximize happiness.

(3) Utilitarianism is concerned with the amount of happiness produced, not how the amount is distributed, so the theory can run counter to principles of justice.

Nonconsequentialist Theories

Nonconsequentialist Theories it is also called Kantian theory.

Kant’s Ethics

Immanuel Kant (1724–1804): A German philosopher with a nonconsequentialist approach to ethics.

Said the moral worth of an action is determined on the basis of its intrinsic features or character, not results or consequences. Believed in good will, that good actions proceed from right intentions, those inspired by a sense of duty.

The categorical imperative : Morality as a system of laws analogous to the laws of physics in terms of their universal applicability.

The morality of an action depends on whether the maxim (or subjective principle) behind it can be willed as a universal law without committing a logical contradiction.

An example of the categorical imperative :

A building contractor promises to install a sprinkler system in a project.

But he is willing to break that promise to suit his purposes.

His maxim can be expressed as: “I’ll make promises that I’ll break whenever keeping them no longer suits my purposes.”

By willing the maxim to become a universal law, the contractor undermines promises in general.

Formulations of the categorical imperative:

(1) Universal acceptability : To determine whether a principle is a moral law, we need to ask whether the command expressed through it is acceptable to all rational agents.

(2) Humanity as an end, never as a means : We must always act in a way that respects human rationality in others and in ourselves.

Kant in an organizational context:

(1) The categorical imperative provides a solid standard for the formulation of rules applicable to any business circumstances.

(2) Kant emphasizes the absolute value and dignity of individuals.

(3) Kant stresses the importance of acting on the basis of right intentions.

Criticisms of Kant’s ethics:

(1) Kant’s ethics is too extreme insofar as it excludes emotion from moral decision making and makes duty paramount.

(2) Kant fails to distinguish between excepting oneself from a rule and qualifying a rule on the basis of exceptions.

(3) It is not always clear when people are treated as ends and merely as means.

CSR As a business strategy for sustainable development

CSR basically means is that a business does more for the wellbeing of others than required in an economical (make a profit) and legal (obey the law) sense.

Different types of CSR

Environmental CSR: focuses on eco-issues such as climate change.

Community based CSR: businesses work with other organizations to improve the quality

of life of the people in the local community.

HR based CSR: projects that improve the wellbeing of the staff.

Advantages of Corporate Social Responsibility

1. Satisfied employees.

Employees want to feel proud of the organization they work for. An employee with a positive

attitude towards the company, is less likely to look for a job elsewhere. It is also likely that you

will receive more job applications because people want to work for you.

2. Satisfied customers

Research shows that a strong record of CSR improves customers’ attitude towards the company.

If a customer likes the company, he or she will buy more products or services and will be less

willing to change to another brand.

3. Positive PR

CSR provides the opportunity to share positive stories online and through traditional media.

Companies no longer have to waste money on expensive advertising campaigns. Instead they

generate free publicity and benefit from worth of mouth marketing.

4. Costs reductions

Yes, you read this correctly. A CSR program doesn’t have to cost money. On the contrary. If

conducted properly a company can reduce costs through CSR.

Companies reduce costs by:

More efficient staff hire and retention

Implementing energy savings programs

Managing potential risks and liabilities more effectively

Less investment in traditional advertising

6. Long term future for your business

CSR is not something for the short term. It’s all about achieving long term results and business

continuity. Large businesses refer to: “shaping a more sustainable society” (Vodafone 2010

report):

“ Deliver a sustainable society in which business and its stakeholders can prosper in the long

term”

A popular explanation of the term CSR is the continuing commitment by businesses to behave ethically and contribute to economic development, while improving the quality of life of the workforce and their families as well as of the local community and society at large

. Over the last years an increasing number of companies worldwide started promoting their business through Corporate Social Responsibility strategies because the customers, the public and the investors expect them to act sustainable as well as responsible

In some cases, CSR as many large corporations, it is primarily a strategy to divert

attention away from the negative social and environmental impacts of their lives. It

enables the company to leverage its products, employee strength, networks and profits

and up to some extent to create a sustainable change

Despite certain criticisms on the CSR activities, more and more companies in the world

are inclined towards corporate social responsibility

CSR can not only refer to the compliance of human right standards, labor and social

security arrangements, but also to the fight against climate change, sustainable

management of natural resources and consumer protection.

In the Developed nations, the basic needs of the population do not need so much support

as in the under-developed nations. The demographies, literacy rate, poverty ratio and

GDP of the country have significant role in determining the directions of CSR initiatives

of an organization

In the Asian context, CSR mostly involves activities like adopting villages for holistic

development, in which they provide medical and sanitation facilities, build school and

houses, and helping villages become self-reliant by teaching them vocational and

business skills.

So it is necessary for each businessman the impacts of CSR on the working population,

society and environment and therefore to elaborate the various frameworks for it with a

view towards developing its practice in an evolutionary way

Corporate Governance and its Models

CORPORATE GOVERNANCE SYSTEMS

The board of directors seldom appears on the management organization chart yet it is the

ultimate decision making body in a company. The role of management is to run the

enterprise while the role of the board is to see that it is being run well and in the right

direction

Management always operates as a hierarchy. There is an ordering of responsibility, with

authority delegated downwards through the organization and accountability  By contrast,

the board members need to work together as equals and  each director bears the same

duties and responsibilities under the law. A useful way of interaction between

management and the board is to present the board as a circle superimposed on the

hierarchical triangle of management.

This model can be applied to the governance of any corporate entity, private or public,

profit oriented or service-based organization. The circle and triangle model mentioned

earlier is a powerful analytical tool.

Corporate governance systems vary around the world. Scholars tend to suggest three

broad versions: (i) the Anglo-American Model; (ii) the German Model; and (iii) the

Japanese Model.

THE ANGLO-AMERICAN MODEL

This is also known as unitary board model, as illustrated in Figure 14.1 in which all directors

participate in a single board comprising both executive and non-executive directors in varying

proportions. This approach to governance tends to be shareholder-oriented. It is also called the

‘Anglo—Saxon’ approach to corporate governance, being the basis of corporate governance in

America, Britain, Canada, Australia and other commonwealth countries including India.

The major features of the Anglo—Saxon or Anglo-American model of corporate governance are

as follows:

1. The ownership of companies is more or less equally divided between individual shareholders and institutional shareholders.

2. Directors are rarely independent of management.3. Companies are typically run by professional managers who have neligible ownership

stakes. There is a fairly clear separation of ownership and management.4. Most institutional investors are reluctant activists. They view themselves as portfolio

investors interested in investing in a broadly diversified portfolio of liquid securities. If they are not satisfied with a company’s performance, they simply sell the securities in the market and quit.

5 The disclosure norms are comprehensive.

GERMAN MODEL

In this model, also known as the two-tier board model, corporate governance is exercised

through two boards, in which the upper board supervises the executive board on behalf of

stakeholders. This approach to governance is typically more societal-oriented and is sometimes

called the Continental European approach, being the basis of corporate governance adopted in

Germany, Holland, and to an extent, France.

In this model although the shareholders own the company, they do not entirely dictate the governance mechanism.

As shown in Figure 14.2, shareholders elect 50 per cent of members of supervisory board and the other half is appointed by labour unions. This ensures that employees and labourers also enjoy a share in the governance.

The supervisory board appoints and monitors the management board. There is a reporting relationship between them, although the management board independently conducts the day-to-day operations of the company.

THE JAPANESE MODEL

This is the business network model, which reflects the cultural relationships seen in the Japanese

keiretsu network, in which boards tend to be large, predominantly executive and often

ritualistic.The reality of power in the enterprise lies in the relationships between top management

in the companies in the keiretsu network. The approach bears some comparison with

Korean chaebol.

In the Japanese model (Figure 14.3), the financial institution plays a crucial role in governance.

The shareholders and the main bank together appoint the board of directors and the president.

The distinctive features of the Japanese corporate governance mechanism are as follows:

The president who consults both the supervisory board and the executive management is included.

Importance of the lending bank is highlighted.

Narayan Murthy Committee on Corporate Governance

Corporate governance is the acceptance of the inalienable rights of shareholders as the true owners of the corporation.

The Committee on Corporate Governance was constituted by SEBI, to evaluate the existing corporate governance practices and to improve these practices as the standards themselves.

The committee’s recommendations are based on the relative importance, fairness, accountability, transparency, ease of implementation, verifiability, audit reports, independent directors, related parties, risk management

The key mandatory recommendations focus on

Strengthening the responsibilities of audit committees: At least one member should be ‘financially knowledgeable’ and at least one member should have accounting or related financial management proficiency.

Improving the quality of financial disclosures, including those related to related party transactions.

Companies raising money through an IPO should disclose to the Audit Committee the uses / applications of funds by major category like capital expenditure, sales and marketing, working capital, etc.

Requiring corporate executive boards to assess and disclose business risks in the annual reports of companies.

Board of a company to lay down the code of conduct for all Board members and senior management of a company.

Improved disclosures relating to compensation paid to non-executive directors. Nominee of the Government on public sector companies shall be similarly elected and

shall be subject to the same responsibilities and liabilities as other directors

Whistle Blower Policy : Personnel who observe an unethical or improper practice should be able to approach the audit committee without necessarily informing their superiors.

Implementation issue A primary issue that arises with implementation is whether the recommendations

should be made applicable to all companies immediately or in a phased manner, since the costs of compliance may be large for certain companies. 

Naresh Chandra Committee Report on Corporate Audit and Governance (2002)

The Ministry of Corporate Affairs had appointed a high level committee in August 2002 to examine various corporate governance issues. The committee had been entrusted to analyse and recommend changes, if necessary, in diverse areas such as:

The statutory auditor-company relationship so as to further strengthen the professional nature of this interface

The need, if any, for rotation of statutory audit firms or partners The procedure for appointment of auditors and determination of audit fees Restrictions, if necessary, on non-audit fees Independence of auditing functions Measures required to ensure that the management and companies actually present 'true and

fair' statement of the financial affairs of companies The need to consider measures such as certification of accounts and financial statements by the

management and directors; Role of independent directors, and how their independence and effectiveness can be ensured.

The Committee's recommendations relate to:

Disqualifications for audit assignments; List of prohibited non-audit services

Compulsory Audit Partner Rotation; Auditor's disclosure of contingent liabilities Appointment of auditors Defining an independent director Percentage of independent directors Minimum board size of listed companies Remuneration of non-executive directors Training of independent directors

Kumar Mangalam Birla Committee Report (2000)

In early 1999, Securities and Exchange Board of India (SEBI) had set up a committee under Shri Kumar Mangalam Birla, member SEBI Board, to promote and raise the standards of good corporate governance. The report submitted by the committee is the first formal and comprehensive attempt to evolve a ‘Code of Corporate Governance

The primary objective of the committee was to view corporate governance from the perspective of the investors and shareholders and to prepare a ‘Code' to suit the Indian corporate environment.

The committee had identified the Shareholders, the Board of Directors and the Management as the three key constituents of corporate governance and attempted to identify , their roles and responsibilities as also their rights in the context of good corporate governance.

Corporate governance has several claimants –shareholders and other stakeholders - which include suppliers, customers, creditors, and the bankers, the employees of the company, the government and the society at large.

The Report had been prepared by the committee, keeping in view primarily the interests of a particular class of stakeholders, namely, the shareholders.

Mandatory and non-mandatory recommendations

The committee divided the recommendations into two categories, namely, mandatory and non- mandatory.

A. Mandatory Recommendations:

Applies To Listed Companies With Paid Up Capital Of Rs. 3 Crore And Above Composition Of Board Of Directors – Optimum Combination Of Executive & NonExecutive

Directors

Audit Committee – With 3 Independent Directors With One Having Financial And Accounting Knowledge.

Remuneration Committee At least 4 Meetings of the Board in a Year with Maximum Gap of 4 Months between 2 Meetings Information Sharing With Shareholders

B. Non-Mandatory Recommendations:

Role Of Chairman Remuneration Committee Of Board Corporate Restructuring Further Issue Of Capital Venturing Into New Businesses

CORPORATE GOVERNANCE CHALLENGES IN DEVELOPING, EMERGING AND TRANSITION ECONOMIES

Establishing any one of institutions is a necessary and challenging undertaking without democratic markets and corporate governance. Success requires that the private and public sectors work together to establish the necessary legal and regulatory framework through ethical behaviour.

While the set of institutions is designed to be comprehensive, each region is in a different stage of establishing a democratic, market-based framework and a corporate governance system. Hence, each nation has its own particular set of challenges. Some of the general challenges confronting developing, emerging and transition economies include the following:

Establishing a rule-based system of governance.

Establishing property right systems that clearly and easily identify true owners even if the state is the owner.

Protecting and enforcing minority shareholders’ rights. Finding active owners and skilled managers amid diffuse ownership structures.

Encouraging good corporate governance practices and creating benchmarks through cooperation

Cultivating technical and professional know-how.

Promoting good governance within family-owned and concentrated ownership structures.

WALTON’S SIX MODELS OF BUSINESS CONDUCT

To understand business conduct, Walton13 has classified it into six models.

1. The austere model: It gives almost exclusive emphasis on ownership interest and profit objectives.

2. The household model: Following the concept of an extended family, the model emphasizes employee jobs, benefits and paternalism.

3. The vendor model: In this model, consumer interests, tastes and rights dominate the organization.

4. The investment model: This model focuses on the organization as an entity and thus on long-term profits and survival. In the name of enlightened self-interest, it gives some recognition to social investments along with economic ones.

5. The civic model: Its slogan is ‘corporate citizenship’. It goes beyond imposed obligations, accepts social responsibility and makes a positive commitment to social needs.

6. The creative model: This model encourages the organization to become a creative instrument, serving the cause of an advanced civilization with a better quality of life. Employees in such organizations behave and perform as artists, building their own creative ideas into actions, resulting in new contributions not originally contemplated.

These six models may be thought of as points on a continuum from low to high social

responsibility. As a result, employees become proud of their company’s performance, and

develop a sense of belonging and creativity.

Regardless of the model adopted by an organization, one of its most important jobs is to establish

its value together so that it becomes a effective system that is known and accepted by the

investors, employees, customers and society, including government.

The system must be strong enough and flexible enough to move with the changing society.

The primary responsibility of management is to reduce conflict areasfor sharing benefits of business and to bring harmony of interest among diverse stakeholder groups.

SARBANES—OXLEY ACT, 2002

The Sarbanes—Oxley Act (SOX Act), 2002 is a sincere attempt to address all the issues associated with corporate failures to achieve quality governance

The Act was formulated to protect investors by improving the accuracy and reliability of corporate disclosures

The Act contains a number of provisions that dramatically change the obligations of public companies, the directors and officers.

Important provisions contained in SOX Act are briefly given below:

Establishment of Public Company Accounting Oversight Board (PCAOB):  The SOX Act creates a new board consisting of five members of whom two will

be certified public accountants. All accounting firms will have to register themselves with this Board and submit

among other details, particulars of fees received from public company clients for audit and non-audit services, financial information about the firm, list of firms’ staff who participate in audits, quality control policies, information on civil, criminal and disciplinary proceedings against the firm or any of the staff.

The Board will conduct annual inspections of firms, which audit more than 100 public companies, and once in three years in other cases.

The board will establish rules governing audit quality control, ethics, independence and other standards.

The Board reports to the SEC. The Board is required to send its report to the SEC annually, which will then be forwarded by the SEC to the Congress.

Audit committee: 

The SOX Act provides for a ‘new improved’ audit committee. The members of the committee are drawn from among the directors of the board of the company but all are independent directors as defined in the Act.

The audit committee is responsible for appointment, fixing fees and oversight of

the work of independent auditors. The committee is also responsible for

establishing and reviewing the procedures for the receipt, treatment of accounts,

internal control and audit complaints received by the company from the interested

or affected parties.

The SOX Act requires that registered public accounting firms should report

directly to the audit committee on all critical accounting policies and practices and

other related matters.

Audit partner rotation: The SOX Act provides for mandatory rotation of the lead auditor, co-ordinating partner and the partner reviewing audit once every five years.

Improper influence on conduct of audits: It will be unlawful for any executive or director of the firm to take any action to fraudulently influence, coerce, manipulate or mislead any auditor engaged in the performance of an audit with the view to rendering the financial statements materially misleading.

Prohibition of non-audit services:

Under the SOX Act prohibition of non audit services are:- financial information system, design and implementation, internal audit outsourcing services, management functions or human resources, legal services or expert services unrelated to the audit