Business ethics and corporate governanace

Jayashree Sadri and Sorab Sadri

BUSINESS ETHICS AND CORPORATE GOVERNANACE

Professor Jayashree Sadri

And

Dr Sorab Sadri


Definition

Corporate Governance is a system of structuring operating and controlling a company with a view to achieve long run strategic goals. These goals are meant to satisfy shareholders, creditors, employees, suppliers and society at large in such a manner that legal and regulatory requirements would be met on the one hand and society needs would be satisfied on the other.


WHO IS A STAKE HOLDER?

The definition of stakeholders was expanded to include customers, creditors, employees, purchasers and the public at large. Hence the ambit of concern for corporate governance expanded to cover all aspects of society.

The basic argument runs thus: An organization is a social entity and impacts various sections of society to each of which it owes an obligation. It must be based on values that must conform to the values of society in which the organization exists.


Corporate Governance and Values Corporate Governance is thus viewed as a

value based system along which companies are run, managerial activities are judged and efficiency is achieved.

The concept of Corporate Governance hinges on total transparency, integrity and accountability of the management.


Argument

The role of Corporate Governance is to ensure that the directors of a company are subject to their duties, obligations and responsibilities to act in the best interest of their company, to give direction and to remain accountable to their shareholders and other beneficiaries for their actions.


Argument

Corporate Governance is in essence determination of how companies are governed, how executive actions are supervised and how a company is accountable to regulations imposed on it by law or other commitments to shareholders.

One of the most important aspects of the modern corporation is that quality, ethics and excellence must be built into the system at the level of the person, process and the product. In the process, the corporation adopts the learning organization mode of existence.


Argument

However, all this is not possible unless the Corporate Governance function is in place. This needs managerial maturity, civic consciousness and a high sense of values. It is no wonder therefore that in organizations that have well defined and empowered corporate governance functions, the public perception is enhanced and is reflected in higher share prices.


Various committees on CG

Dr. J.J. Irani Report on New Company's Act 2005: The aim of the report was to make the Directors on the Board of companies both accountable and empowered. The role and status of the independent directors was consequently examined and recommendations were made accordingly. Its notable achievements include recommending the deletion of Section 208 of the Companies Act 1956 under which government approval was needed for payment of interest on share capital and maintaining that corporate governance cannot be regulated by law but brought out through peer pressure. However, it may be remarked that the small investor was somewhat overlooked by the Irani Committee Report.


Various committees on CG Concept Paper on Companies Bill 2004 (Ministry of

Company Affairs, Govt. of India): Following the recommendations of the Company Law Committee known as the Bhabha Committee set up in 1950 the Companies Act, 1956, was enacted with the object to amend and consolidate the law relating to companies and certain other associations by repealing the Companies Act, 1913.

Concept Paper on Companies Bill 2004 (CII's Views): The Companies Act, 1956, has been in force now for nearly five decades. The present Companies Act, 1956, has been amended in the past, for more than 20 times. The proliferation and diversity of amendments aggravated the complexities of the Law and its comprehensive review became inevitable. However, no new path was charted. Even FICCI voiced the concern that the Concept Paper did not veer away from the bias towards regulators and regulations. This over emphasis on framing rules for every aspect of law may indeed do more harm than good to Indian business.



Clause 49 (2004) (SEBI): Listed companies in India (with paid-up capital of Rs.3 crore and more) have to comply with the corporate governance related provisions of Clause 49 of the Listing Agreement of Stock Exchanges. Clause 49 has been prepared by the Securities and Exchange Board of India (SEBI). SEBI has issued a circular dated 13th January 2006 amending certain clauses of Clause 49 of the Listing Agreement to take effect from 1st January 2006. The changes proposed by SEBI were:

(a) the maximum time gap between two Board meetings has been increased from three months to four months.

(b) .Sitting fees paid to non-executive directors as authorized by the Companies Act, 1956 would not require the previous approval of shareholders.

(c) Certification of internal controls and internal control systems by CEO/ CFO would be for the purpose for financial reporting.

Other changes are (i) the maximum time gap between two Board meetings has been increased from three months to four months. (ii) Sitting fees paid to non-executive directors as authorized by the Companies Act, 1956 would not require the previous approval of shareholders. (iii) Certification of internal controls and internal control systems by CEO/ CFO would be for the purpose for financial reporting. In view of the above, certain changes have to be incorporated in the revised Clause 49 and The Stock Exchanges have been advised to accordingly amend the listing agreement with immediate effect.


Various committees on CG Confederation of Indian Industry (CII) in partnership with the Institute of

Company Secretaries of India (ICSI) and the Institute of Chartered Accountants of India (ICAI) has set up the National Foundation for Corporate Governance (NFCG). However this more of a debating and discussion forum of experts rather than a decision making body. True, decisions may emanate from these discussions and debates but the conference can at best make recommendations.

Narayana Murthy Committee Report of the SEBI Committee on Corporate Governance (2003): The Committee was constituted by SEBI to review the performance of corporate governance in the country as well as to determine the role of companies in responding to rumour and other price sensitive information circulating in the market in order to enhance the transparency and integrity of the market. The Committee submitted its report to SEBI in February 2003. While the Naresh Chandra Committee had recommended a nine year term for non-executive directors the Narayana Murthy Committee recommended that it be restricted to three terms of three years each running one after the other. But the main theme of Narayana Murthy Committee was the fillip it gave to whistle blowers. In short, someone could go straight to the top management bypassing the superiors if any unethical practices were unearthed in the company. This was taking the twin issues of transparency and accountability to new heights. Understandably the bureaucratically inclined Company Secretaries were quite critical of this as they saw in it the seeds of depletion of their discriminatory power.


Various committees on CG Recommendations of the Naresh Chandra Committee Report on Corporate

Audit and Governance (2002): In the wake of the corporate scandals of the US, the Department of Company Affairs (DCA), Government of India set up the Naresh Chandra Committee to examine various corporate governance issues so that the same may not be repeated here. Many recommendations of the report were incorporated in the Companies (Amendment) Bill 2003, which is currently being reviewed. It is indeed a pale shadow if not an imitation of the Sarbanes Oxley Act 2002 (SOX) of the USA which deals with four things: (a) Corporate Social Responsibility of management and setting up of Audit Committees (b) Enhancement of financial disclosures in the larger public interest (c) Independence of Auditors and Audit Committees to present a fair picture of corporate ground level reality and (d) the Role of Public Company Accounting Oversight Board. The Naresh Chandra Committee too the cue from SOX and concentrated on the Company-Auditor relationship, Auditing the Auditors and the Role, Status, Appointment and Training of independent directors on the board. A deep study of the Committee Report would show that it lacks teeth. In point of fact it strangely silent on what happens to Independent Directors if an Enron like situation were to emerge.


Various committees on CG Kumar Mangallam Birla Committee on Corporate

Governance (1999): The Committee was set up by SEBI to promote and raise the standards of Corporate Governance. The Committee’s terms of reference included suggesting suitable amendments to the listing agreement executed by the stock exchanges with the companies in order to enhance corporate governance standards of listed companies, drafting a code of corporate best practices; and suggest safeguards to be instituted within the companies to deal with insider information and insider trading. Several of the Committee’s recommendations were incorporated in Clause 49 of the listing agreement of stock exchanges. However there were two gaping lacunae: (i) the Committee did not look beyond the stock exchanges as if the other sectors of business did not need governance and (ii) several corporate giants that were unlisted like TCS and HLL were not covered by the Committee raising questions of whether multinational expropriation of national wealth could be audited adequately let alone checked.



CII Code on Corporate Governance (1998): The Confederation of Indian Industry (CII) published India’s first comprehensive code on corporate governance (Desirable Corporate Governance: A Code) in 1998. This Code was well received by Corporate India and many of its recommendations became part of subsequent regulations. It was a slow beginning and it was evident there was a long way to go further ahead.


Cloned Capitalism?

After 1980 international trade opened up in newer ways and increased communication systems brought about an added transparency in business. Free market capitalism became the norm and competition in every conceivable market began to increase. This increase in completion meant that many people were fighting for a bigger piece of the same pie. This meant that a dog eat dog attitude emerged in the business and industry sector where only the fittest would survive.


Fitness and Free Markets

If only the fit would survive what would happen to those who were weak? Who would decide who and what was fit and who and what was not fit?

Was it the market? The government? The chambers of commerce? Or the company itself?

There was a need for market regulation: either through the Smithian “invisible hand” or the Keynesian “macro interventionism”.


FITNESS WAS DEFINED IN TERMS OF: Better Quality: the product or the service was

dependable. Better delivery: the lead time between order

and receipt was cut down.Logistics became important.

Better prices: People could afford to buy the goods and services. Competition helped reduce price levels.


The Small Fry

However, when any one or more of the above three things was absent people began to adopt foul means for getting business. Trust, Faith and Dependability on products began to be questioned. So people went for known brands whose products they could trust.


The Smaller Fry

The smaller players suffered as a result of business being diverted to the bigger players and wanted a “level playing field”. The governments intervened. Minimum quality standards were laid down and hall marks were placed on products declared that they were good like the Agmark, ISI, etc. A product or a service having such a stamp was considered safe and dependable.


Public Acceptance

This led to a general acceptance of the importance of Business Ethics and along with it the realized need to have good Corporate Governance.


GOOD CORPORATE GOVERNANCE ENSURED: Company actions were guided by a set of known

and accepted values.

Companies acted in the best interests of society at large since the organization itself was a responsible social citizen.

Business Ethics was built into the system and so was reflected in all actions.


The Expanse of CG

Corporate Governance was thus not just about corporate management. It was something broader. It included:

- Fairness

- Efficiency

- Dependability

- Transparent Administration

- Well defined objectives.


LINKAGE of CG with B E

Four points emerge from any definition of Corporate Governance and show its link with Business Ethics.

Effective accountability to all stakeholders. Fair efficient and transparent administration. Diverse interests have to be managed. Competition needs to be tempered with some

sort of value system.


Indian Government and Keynesian Style Interventionism This view taken implies that Government must

pay an increasing role as a referee, a counselor and an active change agent so as to bring about corporate governance. This can be done either through legislation or through influencing industry and business leaders in various forums like the BMA, CII and FICCI. Special seminars can also be organized to spread the message.


What is expected from CG

An effective Corporate Governance system should provide mechanisms for regulating directors’ duties in order to restrain them from abusing their powers and to ensure that they act in the best interests of the company in its broad sense.

Hence it moves from being a compliance mechanism managed by regulators and regulations into being a developmental tool regulated through management strategy.


BUT

Logically it is unfair to expect something unless conditions for it have been laid down and a system is in place to guide it.

In the case of Corporate Governance such conditions and systems exist more by default than by design.


Hence

Corporate Governance is also concerned with the ethics,values and morals of a company and its directors.

Corporate Governance recognizes issues like maintaining continuity by succession planning, identifying opportunities, facing challenges and managing changes within the business and allocation of resources towards the right priority.


Two Routes To C G

The first route to Corporate Governance is through the mechanism of regulators and regulations and here it becomes rule driven and compliance based.

The second route to Corporate Governance is through the enabling of business ethics via well planned and well managed management strategies that are goal driven and value based.


The Need

Given the positivist nature of change in this country the State must lead by example if the effect is to percolate through various levels of civil society.

This need is not adequately fulfilled by those at the helm both in the economy and in the polity.

What we then need is an empowered, responsible, accountable and transparent system of National Level Governance.


Conclusion..

Governance is not only managing share market.

It relates itself with all aspect of management. Governance is not only concerned with

compliance to rules but with overall corporate growth.

WE TAKE THE SECOND ROUTE AND POSIT THAT CORPORATE GOVERNANCE MUST BE BASED ON BUSINESS ETHICS.

Date post:	11-Nov-2014
Category:	Business
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