Business ethics and corporate governance are two significant factors that impact a company and how it operates.

Business ethics represent the values, principles or characteristics that a company follows when conducting business in the economy. Corporate governance is the internal framework that a company designs and implements to govern and protect those invested into the company. The relationship between ethics and governance comes from an organizations owner or executive managers, who create the governance and decide which ethical principles employees will follow. Business ethics typically follow a normative theory. This theory states that individuals and firms will follow ethical principles that are commonly found in society and accepted by society as a norm, hence the term normative, or standard, ethics. Three normative ethic theories which we have already discussed are stockholder, stakeholder, and social contract theories. The stockholder ethical theory states that a company should create a relationship between business ethics and corporate governance that focuses on stockholders. Managers will employ strategies and activities that advance or increase the investments of share holders and utilize the funds as proposed and outlined by the shareholders. Under the stakeholder theory of ethics, business ethics and corporate governance focuses on anyone who has a stake in the business. So managers have to strike a balance between primary as well as secondary stakeholders and ensure interests of all parties get satisfied.Although wide ranging, this connection between these factors is often stronger, as recent changes to corporate governance include now any individual who is affected by the company. This connection ensures that everyone receives equal or fair treatment when dealing with the business. For example, customers who purchase a faulty product may receive a replacement at no charge and a few extra benefits. This promotes business ethics throughout the organization. A third and final ethical theory is the social contract theory. This theory focuses on companies that improve the overall welfare of society. Shareholders may be less willing to invest money into a company that follows this ethical theory, as shareholders may lose money to causes or other benefits that are outside of the companys normal operating context. To make investors fully aware of the companys social contract theory of ethics, business owners, executives and board members will often include this information in the corporate governance. Another relationship between business ethics and corporate governance is a companys mission statement. The mission statement clearly outlines a companys planned standard of excellence for operating in the business environment. This mission statement can focus more on a social aspect of the operations rather than a profit motive to repay shareholders. In these types of companies, shareholders will invest in the company because they believe in the company and desire to see the company succeed in its social mission.

What is corporate governance? Corporate Governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The corporate governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society THE CADBURY REPORT(1992) The Cadbury committee was set up in May 1991 with an aim to address the financial aspects of Corporate Governance. Other objectives include (i) uplift the low level of confidence both in financial reporting and in the ability of auditors to provide the safeguards which the users of company's reports sought and expected; (ii) (ii) review the structure, rights and roles of board of directors, shareholders and auditors by making them more effective and accountable; (iii) (iii) address various aspects of accountancy profession and make appropriate recommendations, wherever necessary; (iv) (iv) raise the standard of corporate governance; etc The final report was published on 1st December 1992. The report had 3 parts Part1. Reviewing the structure and responsibilities of Boards of Directors and recommending a Code of Best Practice All listed companies should make a statement about their compliance with the Code in their report and accounts as well as give reasons for any areas of non-compliance Code of Best Practice is segregated into four sections and their respective recommendations are:a) BOD: The board should meet regularly, retain full and effective control over the

company and monitor the executive management. There should be a clearly accepted division of responsibilities at the head of a company, which will ensure a balance of power and authority, such that no one individual has unfettered powers of decision. Where the chairman is also the chief executive, it is essential that there should be a strong and independent element on the board, with a recognised senior member. Besides, all directors should have access to the advice and services of the company secretary, who is responsible to the Board for ensuring that board procedures are followed and that applicable rules and regulations are complied with.

b) NED: The non-executive directors should bring an independent judgement to bear on

issues of strategy, performance, resources, including key appointments, and standards of conduct. The majority of non-executive directors should be independent of management and free from any business or other relationship which could materially interfere with the exercise of their independent judgment, apart from their fees and shareholding. (NED does not participate in the day-to-day management of the firm. He or she is usually involved in planning and policy making, and is sometimes included to lend prestige to the firm due to his or her standing in the community. Non-executive directors are expected to monitor and challenge the performance of the executive directors and the management, and to take a determined stand in the interests of the firm and its stakeholders. They are generally held equally liable as the executive directors under certain statutory requirements such as tax laws. Also called external director, independent director, outside director or director at large)
c) Executive Directors : There should be full and clear disclosure of directors total

emoluments and those of the chairman and highest-paid directors, including pension contributions and stock options, in the company's annual report, including separate figures for salary and performance-related pay. d) Financial reporting and control: It is the duty of the board to present a balanced and understandable assessment of their companys position, in reporting of financial statements, for providing true and fair picture of financial reporting. The directors should report that the business is a going concern, with supporting assumptions or qualifications as necessary. The board should ensure that an objective and professional relationship is maintained with the auditors.

Part 2. Role of Auditors and recommendations to the Accountancy Profession The annual audit is a major aspect of corporate governance that provides an objective unbiased check on the way the financial statements have been prepared and presented by the directors. Recommendations of the Cadbury committee for process of auditing:
a) Professional and objective relationship between the board of directors and auditors for a

true and fair picture of the financial statements.

b) Auditors have to ensure the avoidance of any material misstatements (refers to such
misstatements that may affect the economic decisions of the users of financial statements) in the financial statements.

c) Develop more effective accounting standards, which provide important reference points

against which auditors exercise their professional judgement.

d) Every listed company should form an audit committee which gives the auditors direct

access to the non-executive members of the board.

e) Regular rotation of audit partners to prevent unhealthy relationship between auditors and

the management f) Disclosure of payments to the auditors for non-audit services to the company. Part 3. Dealing with the Rights and Responsibilities of Shareholders The shareholders, in their capacity as the owners of the company, elect the directors to run the business on their behalf and hold them accountable for its progress. They appoint the auditors to provide an external check on the directors financial statements. The Cadbury committee recommendations: a) Emphasis on the need for fair and accurate reporting of a company's progress to its shareholders, which is the responsibility of the board. b) Institutional investors/shareholders should make greater use of their voting rights and take positive interest in the board functioning

KUMAR MANAGALAM BIRLA REPORT 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', in the context of prevailing conditions of governance in Indian companies, as well as the state of capital markets. 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 in respect of each of these constituents, their roles and responsibilities as also their rights in the context of good corporate governance. The Report had been prepared by the committee, keeping in view primarily the interests of a particular class of stakeholders, namely, the shareholders, who together with the investors form the principal constituency of SEBI while not ignoring the needs of other stakeholders. Mandatory recommendations of the committee: a) Applies To Listed Companies With Paid Up Capital Of Rs. 3 Crore And Above

b) The Board of a company should have an optimum combination of executive and nonexecutive Directors with not less than 50% of the Board comprising the nonexecutive Directors. c) The Board of a company should set up a qualified and an independent Audit Committee. The Audit Committee should have minimum three members, all being non-executive Directors, with the majority being independent, and with at least one Director having financial and accounting knowledge. The Chairman of the Audit Committee should be an independent Director. d) Audit Committee With 3 Independent Directors With One Having Financial And Accounting Knowledge. e) Remuneration Committee f) Board Procedures Atleast 4 Meetings Of The Board In A Year With Maximum Gap Of 4 Months Between 2 Meetings. To Review Operational Plans, Capital Budgets, Quarterly Results, Minutes Of Committee's Meeting.Director Shall Not Be A Member Of More Than 10 Committee And Shall Not Act As Chairman Of More Than 5 Committees Across All Companies g) Management Discussion And Analysis Report Covering Industry Structure, Opportunities, Threats, Risks, Outlook, Internal Control System h) Information Sharing With Shareholders (The board of directors is a combination of executive directors and non-executive directors. The non-executive directors comprise of promoter directors and independent directors. Independent directors are those, who, apart from receiving director's remuneration, do not have any material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries that in the judgement of the Board may affect their independence of judgement.) Non-mandatory recommendations: The Board should set up a Remuneration Committee to determine the company's policy on specific remuneration packages for executive Directors.

Half-yearly declaration of financial performance including summary of the significant events in the last six months should be sent to each shareholder. Non-executive chairman should be entitled to maintain a chairman's office at the company's expense. This will enable him to discharge the responsibilities effectively. Remuneration Committee Of Board Sale Of Whole Or Substantial Part Of The Undertaking Corporate Restructuring Further Issue Of Capital Venturing Into New Businesses