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28.12.

2016

Note by Bala

Corporate Ethics (CE), Corporate Governance (CG) &


Corporate Social Responsibility (CSR) Hand out 3
Note: To be read in conjunction with PPT slides and other material
provided

Background:
In handout 2, we could learn the different provisions under various acts and the
relevant statutory authorities in India. In this handout, let us see some finer
points of corporate ethics and how great organizations are built around the
globe. This would be in terms of:
1. Ethics in work place
2. Ethical decision making
3. Ethical leadership and new thinking on the same
4. Concept of organizational trust and when this gets eroded &
5. Steps in building great organizations
6. More about CG & CSR including:
I.
Narayana Murthy committees mandatory recommendations
II.
Gist of survey report, 2013 conducted by TERI & NFCG
Note: This handout has to be read in conjunction with other material
given and the PPT slides.

1. Ethics in work place:


Corporate ethics or the absence of it is demonstrated by actions of corporates
at the management level and or its employees clearly establishing that their
actions are executed with a conscience. The conscience could be any one or
more or all of the following:
a. Social Actions Do they benefit/harm the society?
b. Moral What is right and what is wrong in generally accepted terms?
c. National Are corporate actions in conformity with the laws of the
land?
d. International Do the corporates indulge in certain high impact
actions like money laundering or illegal arms and ammunition or
sponsoring terrorism?
Further it should be remembered that there are no laws or statutory
provisions regarding Business ethics by any country. The ethical practices
have been codified in the form of corporate governance for which there are
statutory provisions in most of the countries. It all began with Cadbury
Committee recommendations in Great Britain. The USA had also adopted this
and hence this model is known as Anglo-American model. Being ethical or
unethical has been exercising the minds of executives of business
organizations right from times immemorial in the history of mankind. The

moment commerce or business was born as is known currently, greed and


hence unethical practices had also begun. History is replete with examples of
cheating, frauds, scams etc. throughout the world with no notable exception
of a country or a region.
There are any number of examples of good ethical behaviour in organizations
while there are equally good number if not more examples of bad behaviour
too. In fact it is due to the scams of the 70s and 80s of the 20 th century that
had given rise to appointment of Cadbury Committee and its
recommendations. This is the beginning of codification of ethical business
practices. The second point is that in unethical practices, it is not only the
management which had been involved. It is also the senior managers who
had had a hand in such malpractices. Please refer to scams of Enron, Satyam
Computers and 2008 global crisis about which material has been separately
given. The students are encouraged to search on the web and get to
know other noted global scams including India and learn for
themselves rather than the faculty providing details.
The Essentials:
Every company is different but they all should take the following into
consideration:
Trustworthiness
Respect
Responsibility
Fairness
Caring
Relationships and Ethics:
Ethics applies to any relationship between the following individuals:
Management/Supervisors
Colleagues/Employees
Customers
Communication is the key among management, employees, and
customers in order for respect to be extended to each person within
the organization, and promote relationships that are based on honesty
and integrity
Be cautious not to cross the line between personal friendships in the
workplace and professionalism
Good

Workplace Ethics: (Other than given in HO 1)


Staying productive
Be accountable for your actions
Take initiative
Think critically to be able to solve problems
Blowing the whistle
Be punctual
Stay positive
Stay professional
Take pride in your work

Immediately attempting to correct an issue


Set the example

How to Encourage Good Ethics in the Workplace:


Fair consequences
Fair treatment
Recognition
Communication (be clear and consistent)
Have office policies
Transparency
Trainings
Have plans of action
Constructive feedback
Benefits of good ethics in the Workplace:
Loyalty
Desirable work environment
Produce results
Build good references
Good office morale
Growth and expansion
Recognition
Examples of Poor Ethics: (Other than given in HO 1)
Illegal practices
Stealing
Ignoring procedures and policies
Abusing confidentiality agreements
Falsifying information
Making decisions for your own personal gain
Lack of communication
Withholding information
Poor customer services
Gossiping
Abusing computer privileges
Ignoring problems
Blackmail
Lying
Bribes
Taking on roles that are not under your job title
Being unpunctual; poor attendance
Consequences of Poor Ethics in the Workplace:
Stricter rules
Fewer privileges
An undesirable work environment
Stunts growth and productivity
Causes a domino effect among other colleagues
Potential job loss

Potential closing of the organization

As has been detailed in the class during the lectures, it would be good to
remember the difference between the following terms:
1. Profit making and profiteering
2. Good profits and bad profits
3. Responsibility and accountability

2. Ethical decision making: (Other than Ethical dilemmas as given


in HO 1)
Charity begins at home. Hence the spirit of ethics and ethical behaviour
should start from the top management. Top management and senior
management through their actions should demonstrate fully and consistently
ethical behaviour. Then the chances are bright that the entire organization is
imbued with the spirit of ethical behaviour. The top and senior management
should be complete in walking the talk. Let us see some principles and steps
involved in ethical decision making in an organization.
a. Prepare a check list of likely unethical practices overall, across all
functions. This should be shared with all employees with distinct penalties
for non-compliance.
b. Prepare a check list of likely unethical practices, department, division,
function-wise covering all the functions of the organization. This should be
shared with the respective employees with distinct penalties for noncompliance
c. Evolve Standard Operating Procedures (SOPs) for all routine decisions
across all functions and make a manual of the same. This has to be
mandatorily followed by all the departments, divisions, offices, branches,
plants etc.
d. Evolve a process flow chart for all non-routine decisions and complex
problems and make a manual of the same. Such decisions and problems in
which the junior level do not have authority could still facilitate the senior
managers with a supportive role; in turn the senior level managers could
facilitate the decision making of top level management executing a
supporting role.
e. Evolve a detailed procedure for exceptions handling in non-standard
situations and problems. Again make a manual of the same. This is to
ensure that no time is wasted in dealing with such situations and prompt
reference is made wherever necessary to the relevant higher authorities
for immediate action.
f. SOPs, process flow charts and exception handling procedure are like bible
to the ethical functioning of the organization and exception should really
be an exception worthy of special consideration of deviation with very
clear understanding across the organization. The understanding is that
this should not be quoted as a precedent in future.
In fact, the top management and senior management have a crucial role
in this. They should respect the organizational processes and procedures;
in a number of cases, it is the knowledge of the author of this handout that

g.

h.
i.

j.

k.

l.

m.

n.

it is usually the top management which initiates deviation from the


standard processes and procedures as per their whims and fancies,
showing scant regard to the laid down and accepted practices. In the
long run, thus the SOPs and process flow get diluted by the employees
down the line who derive courage from the knowledge and experience
that top management itself is not serious in these matters. The ethical
fabric of the organization gets mutilated with practically no scope
for revival.
The ethical leader always aims for fairness and would not seek self
glorification while conducting business or taking decisions or solving
problems. He or she would not satisfy the hunger for personal power or
authority or acclaim while being ethical in his/her decisions.
Strong conviction in the democratic process and full commitment to the
same.
Being humane in approach with mastery over fundamentals of human
psychology. Empathy and Johari window concepts should be applied in all
inter-personal situations.
Evolving an effective Knowledge management system based on past
experience that gets recorded for being used in future. This is with the full
knowledge that past experience may not be fully applicable to the current
situation although it is a similar one. The reasons are not far to seek they
can be summarized as under:
i. Different times
ii. Different environment
iii. Organization would have grown
iv. Employees involved would have grown up in the organization
v. The expectations of the employees involved would be different now,
even if they would have been involved in similar situation/s in the
past
All facts relating to a situation or a problem should be collected. The data
should be converted into information and complete analysis should be
done objectively before choosing the alternative options.
If required where solution is evasive, consultations with specialists are to
be done. Further meetings are to be conducted after holding brain
storming sessions if called for. Please understand the difference between
brain storming and meeting.
Consider cause and effect in the deepest sense. Also evaluate the
alternative options from a long-term perspective in the organizational
context. This is to ensure that decisions are not arbitrary but robust and
maintainable in the foreseeable future. While open mindedness to
feedback and mindset for accepting the same and implementing are
virtues, frequent modification of a management decision is not
wholesome; it send wrong signals across the organization.
Guard against arrogance at the senior management or top management
level. Delusion does happen in case the top management has been
operating for a long time in a protected environment. Power and authority
could make persons heady over a period of time and this is what top
management and senior management personnel should guard against
while making decisions, especially the path breaking ones.

o. Business decisions should not be based on the following:


i. Personal opinions
ii. Prejudices
iii. Persons involved or who will be impacted by the decisions
iv. Personal values as distinct from organizational values
v. Personal beliefs
vi. Religious faith
ETC.
p. It would pay well to keep in mind the following:
Do not try to influence
Do not oversell any solution
Diffuse situations
Determine common ground for one and all
Whenever your immediate team is totally taken in by any decision
arrived at by all of you, be on guard; defer taking the decision and
communicating the same to those who would be impacted by the
decision
Most of the times, the best ethical decisions are made by the persons
who would be impacted by such decisions and not by those who sit in
ivory towers, far removed from the ground realities. Ethical decisions
are definitely not made by leaders who do not trust their people.

3. Ethical leadership: (Other than detailed in HO 1)


Unlike in HO 1, this section will focus on organizational trust and not traits of
an ethical leader etc.
Very simply articulated, the development of leadership ability and the
capacity to recognize leadership in practice involves moving through the
following 6 stages of recognition for the individual:
I.
I know who I am and what I can do; I understand my role in the
relationships I choose to perpetuate; I understand how my own motives
and desires compare to my actual abilities, and I am aware of the
emotional as well as the cognitive dimensions of the relationships I
choose to perpetuate
II.
I understand that there are realities in my life and in my relationships
that I do not control (i.e., the nature of the national economy, the
behavior of other people), and I realize that the relationships in which I
function may make demands I cannot satisfy neither can my
demands always be satisfied by them
III.
I understand that real tensions emerge between myself and others
based on both emotional and cognitive factors
IV.
I understand that there is a gap between my intuitive sense of what
those tensions may mean and a potentially objective definition which
takes into account factors that I may not know or be able to recognize;
V.
I further understand that in order to remain dynamic, relationships and
groups depend on someone being able to find a way to transcend the
tensions and ambiguities than threaten dynamism
VI.
I recognize the capacity to transcend the tensions and ambiguities that
threaten the dynamism of human interaction to be leadership, and
even if I am unable to practice it, I am capable of recognizing
leadership practice as the capacity to move individuals beyond the

limits of their own emotions and cognitive abilities when those limits
threaten the development of the individual or the dynamism of the
team or group.
Trust men and they will be true to you; treat them greatly, and they will
show themselves great. Ralph Waldo Emerson wrote this about the
courage it takes to develop business relationships in his 1944 essay,
Prudence. He emphasized that such relationships can develop only after
one has carefully assessed the present times, persons, property, and
existing forms of organizations.
There are four different types of trust in general - Basic, simple, blind and
authentic.
The different characteristics of these four types of trust are captured in the
following matrix:
Basic
Simple
Blind
Authentic
Without thought Remains
Exposed
to Reflective
and
or reflection
unthinking
or violation
and honest
reflective
betrayal but not
open
to
possibility
Open ended
Is uncritical and Willfully
self- Open
to
unquestioning
deceptive
possibilities
of
betrayal and can
cope
with
situations
Indiscriminate
Does not even Refuses
to Focused
on
conceive
consider
relationships
possibility
of evidence
of rather
than
distrust
distrust
single
transactions and
outcomes
May be inherited Based
on Developed
Not naive or self
as innate
familiarity
through beliefs destructive
about
other
people
Enhanced
or Takes
security Maintained with Self confident
undermined by for granted
effort
experience with
others
Basis for ones Developed
Strong, intensive Self scrutinizes
personality and through beliefs and emotional
demeanour
about
other
people
Largely negative, Reaction
to Betrayal
is Demands
believes
bad betrayal is denial devastating
reasons for trust
things
will
happen
Relies on ones Cannot
be Results
in Chosen
and
own security
recovered once defensiveness
maintained with

Conditional

lost
Conditional

and narrowness
Unconditional

effort
Develops
through relations
with others
Involves choices
Matter
of
commitment and
integrity
Cannot be taken
for granted
Conditional

Basic trust is the ability and willingness to meet people without inordinate
suspicion, the ability to talk comfortably to and deal with strangers, and the
willingness to enter into intimate relationships. Basic trust provides the basis
for ones entire personality and demeanor toward the world.

Simple trust is the utter absence of suspicion: it demands no reflection, no


conscious choice, no scrutiny, and no justification. It may come about
because no reason has ever arisen to question the others trustworthiness,
but it may also be that the one who trusts is simply nave.

Blind trust has been exposed to violation and betrayal but refuses to believe
it has occurred. Blind trust denies the possibility that anything could shake or
betray the trust.

Authentic trust is fully self-aware, cognizant of its own conditions and


limitations, open to new and even unimagined possibilities, based on choice
and responsibility rather than the mechanical operations of predictability,
reliance, and rigid rule following. Authentic trust is well aware of the risks and
willing to confront distrust and overcome it. Authentic trust leads to
productive organizational relationships. An authentic trusting relationship
doesnt simply happen, nor can it be mandated or forced. Authentic
relationships evolve over time, starting with small acts and progressing to full
strength based on individual experiences. Building such a relationship in the
workplace is a reciprocal process with both the employee and the employer
voluntarily assuming responsibility for its initiation, development, and
maintenance through high levels of affection and respect

4. Barriers to Building a Culture of Organizational Trust


We have seen in HO 1 three pillars of an ethical organization, namely, Ethical
employees, Ethical leadership and Organizations structure and systems.
Ethical and unethical practices in organizations have been given both in HO 1 &
in this handout. Ethical leadership has been given in detail in this handout.
Through ethical leadership, organizational trust is built and that is what we will
see in this section. In the subsequent section, we will see the steps to build an
effective organization, other than organizations structures and systems detailed
in HO 1.
An organizations employees, policies, and practices may contribute to the
perceptions of disappointment and breaches of trust. In The Trusted Leader,

Galford and Seibold Drapeau list several factors that hinder organizational
cultures of trust. These factors include:

Employees with personal agendas and needs for promotion, power, and
recognition that do not align with the organizations strategies.
Employees with volatile personalities that reflect a need for vengeance.
Employees who intentionally clutter communication channels.
Employees who are incompetent or perceive their co-workers or management
to be incompetent.
An organizational environment with a history of underperformance, complex
situations, numerous reorganizations, or management changes.
Organizations with inflexible or inconsistent organizational policies and
standards. Strong leadership can help organizations overcome these barriers
to organizational trust.

A leader who can inspire trust is invaluable for bringing together individuals and
holding them together until trust can form. John Gardner

5. Assessing Organizational Trust


It is also important that leadership assess the current level of trust within the
organization beginning with leadership. Kouzes and Posner identified four
questions to measure ones trustworthiness as a leader:
1. Is my behavior predictable or erratic?
2. Do I communicate clearly or carelessly?
3. Do I treat promises seriously or lightly?
4. Am I forthright or dishonest?
Measure employees trust in the organization by using the five statements
created by Gabarro and Athos:
1. I believe my employer has high integrity.
2. I can expect my employer to treat me in a consistent and predictable fashion.
3. In general, I believe my employers motives and intentions are good.
4. I think my employer treats me fairly.
5. Managers from my organization are open and upfront with me.
6. Leading a Culture of Organizational Trust
A high trust culture is essential for adapting to continuous change and
continuous improvement. To develop and maintain a culture of authentic trust,
leaders may find the following ten suggestions helpful:

Practice humane leadership. Ensure employees know you are aware of,
sensitive to, and understanding of their individual feelings, thoughts, and
experiences. Assure them promises will be kept, confidences maintained, and
sensitive information handled judiciously.
Be a paragon of trustworthiness. Be honest by saying what will be done, act
with integrity by doing what was said will be done, and be credible by
following through with commitments.
Be willing to acknowledge, accept responsibility for, and repair perceived
breaches or betrayals of trust with employees.

Develop, communicate, and apply organizational vision, mission, and values


statements to ensure compatible beliefs and a shared focus on the work at
hand. Incorporate trust objectives into the organizational strategic plan.
Determine if organizational policies, procedures, and rules are applied
consistently and equitably, and send the message that employees can be
trusted. For example, Dr. W. Edwards Deming suggested that organizational
forms requiring hierarchies of signatures are a signal of distrust.
Unclog organizational communication channels by implementing open-door
and open-book policies and establishing user-friendly networks. Share the
results of organizational assessments of work with employees to build a
culture of openness.
Demonstrate faith in employees by reducing supervision and monitoring of
employees while they are working and by implementing organizational
structures that encourage delegation of authority, responsibility, and
teamwork.
Sponsor employee workshops on organizational trust. Workshops can help
employees understand the different types of trust, learn how to build
authentic trusting relationships, identify perceptions of broken trust, and learn
how to take corrective actions.
Develop an organizational collective identity by having employees work
together in the same or co-located buildings.
When problems are investigated, attempt to determine what went wrong and
why rather than who was responsible.

7. When is organizational trust eroded?


1. When people dont feel a sense of belonging Promote a sense of identity
at all levels so that they have a pride of belonging and job
satisfaction
2. When people dont respect each other Mutual trust and respect is a
must for organization to be effective and growing
3. When people dont feel safe Use disciplining as a constructive tool and
not destructive
4. When employees are not recognized for doing a good job Evolve a just
rewards system and the recognition should be immediate and timely.
The timing is far more critical in recognition rather than the value or
size of the reward
5. When people are inconsistent in honouring their commitments Response
to suggestions should be immediate. Deliver as per commitment and
promise
6. When people are not fully informed Communication is the life line of
any organization. The top management should employ 5 Ws and 1 H
7. When people promote turf protection (selective protection especially
practiced by top management) Top and senior management should
realize that it is not enough being fair but it is required to be seen to
be fair by all the employees
8. Lack of competency in senior managers and supervisors Walk the talk
What the top and senior management expect from their juniors, they
should exhibit in ample measure plans for growth, sustainable
growth strategy, being ready for global changes in the sector etc.
9. When employees are micromanaged Once the tasks are delegated and
lines of responsibilities and functions are clear, top and senior

management should not be control freaks; through effective


monitoring system by reports, control should be exercised and not
by micromanagement.
10.When employees think that they are being treated unfairly Same as for
point no. 7

Note: Once the leaders of the organization strive and succeed in


building trust into the rank and file of the organization, values
are easily built in. Ethical practices automatically result. There
need be no special efforts for this.
8. How to build great organizations through ethical leadership,
ethical employees, ethical practices and trust
12 great things for building a great organization
Value Staff Opinions
At a recent conference in Denver, Inc. and an organization called Winning
Workplaces brought together leaders from a range of businesses to talk about
building and maintaining great company cultures. What's the value if you have a
great culture? "If your staff believes that they matter, that their opinions matter,
the company soars," says Tom Walter CEO of Tasty Catering in Chicago. "People
are not just productivity units. I believe in democracy because the future is as
secure as people are with working together."

Listen to the Pronouns


"If an employee comes to you with a problem, ask those questions first before
offering a solution," says Bob Rosner, author of The Boss's Survival Guide.
"Listen to the pronouns; if your employees use they/them and not we/us, you
have problems." If your culture seems to be weak, Rosner suggests you start
small. For example, before every meeting, give employees wadded up paper to
throw at you when you say something wrong.

Hire Wisely
Norm Brodsky, a longtime Inc. columnist and founder of CitiStorage in New York
City, says that culture starts with hiring. "It takes almost a year to find out what
people who work for you are like," he explains. "We give every new hire 90 days
probation. I hire for attitude not for aptitude; we can train for the skills we need
them to have. Education is the key to sustainability of your culture while you are
growing."

Create a Dream Map


"You know where you are going but you have to communicate, share where you
are going," says Jill Blashack Strahan founder and CEO of Tastefully Simple in

Alexandria, Minnesota. "When people have hope for the future they will have
power in the present." To share your vision, Strahan suggests you lay out your
goals on a "dream map" that you post in public areas.

Create Bonding Rituals


"Everyone in the service industry has to come up with a test to form camaraderie
around," says Larry O'Toole founder and CEO of Gentle Giant in Boston. So to that
end, he asks all new recruits to run the stairs at Harvard stadium. "It's not how
fast you run in the stadium, it's that you do your best," says O'Toole. "We're
looking for people who want to give 100 percent."

Focus on Consensus
"Ask yourself as CEO, "If I make this decision without employees, could this hurt
the culture more than it helps?'" says Traci Fenton, founder and CEO of WorldBlu
in Austin. "You have to decide what decision-making method is going to work
best for your company. I love working by consensus because I don't have all the
answers."

Forget About Weaknesses


"We hire people for their strengths and then manage them to fix their
weaknesses," observes Marcus Buckingham, author of First, Break All the Rules.
"Weaknesses are weaknesses, not opportunities for growth. Strengths are the
activities that strengthen you. Weaknesses are the activities that weaken you.
Managers don't build on strengths because it asks us managers to be a lot more
creative. What percentage of your typical day do you spend playing to your
strengths?"

Ask, Don't Guess


"Be vulnerable with your staff," says Paul Spiegelman, founder of Beryl, a callcenter business in Dallas. "Tell them you want to change things, then ask, "How
do we do this together?' We can't guess what's important to employees. We have
to give them ways to communicate with us. And we have to get out of our
comfort zone as leaders. The more personal you can be in any situation, while
being professional, that's the way to do it."

Nurture Young Leaders


Younger workers and their managers often fail to understand one another when it
comes to setting goals, says Dan Lissner, general counsel of Free Flow Power
Corporation in Gloucester, Massachusetts. "I see a challenge of communication,"

he says. "Interviewing a younger candidate, I'm interested in understanding their


expectations before I explain what we do. If you can't hold their interest, there's
not a lot that can bring them back. Being more explicit in our expectations is
what has to happen."

Share Responsibility
"We put a tremendous amount of responsibility on those we hire, and make sure
that that's what they're craving," says Darren Paul co-founder of New York Citybased Night Agency. "We try to talk people out of working for us. When they say
yes this is what I want, those are the ones who shine."

Create an Innovative Office


"We have a unique way of working in one big open room," says Rich Sheridan,
president of Menlo Innovations in Ann Arbor, Michigan. "No one has their own
personal chair, table, or computer. On the first day, someone will push the
keyboard over and say, Let's get going. It helps to create an upward spiral of
motivation."

Look to the Future


"Most companies fail because of self-inflicted wounds, not external
circumstances," says Steve Kimball, CEO of Inc. Navigator. "You should be
fundamentally challenging your business model." Kimball advises CEOs to
identify a business's top three "must-do priorities" in 2011 and then make sure
the management team is focused on these goals. Without a clear set of shared
priorities, he believe, a strong company culture will not take root.
9. More

about Corporate
Responsibility

Governance

&

Corporate

Social

The very first step towards regulating corporate practices in India outside the
provisions of The Companies Act, 1956 is the establishment of Securities
Exchange Board of India (SEBI) in 1992. As most of us would be aware, SEBI
replaced the earlier Capital Controller of India (CCI). To recap the evolution of
corporate governance globally, let us revisit what we have seen in HO 1.
1. The Cadbury Committee, 1992 recognizes Corporate Governance as the
system by which companies are directed and controlled. This has
subsequently become the Anglo-American model.
2. According to the OECD (Organization for Economic Co-operation &
Development), Principles of Corporate Governance, first in 1998 & 2004,
"Corporate governance involves a set of relationships between a companys
management, its board, its shareholders and other stakeholders. Corporate
governance also provides the structure through which the objectives of the

3.

4.

5.

6.

7.

company are set, and the means of attaining those objectives and monitoring
performance are determined."
The Cadbury Report (UK, 1992) and the Principles of Corporate Governance
(OECD, 1998 and 2004) present general principles around which businesses
are expected to operate to assure proper governance
The Desirable Corporate Governance A Code was developed by the
Confederation of Indian Industries (CII) in 1998 based on the then existing
three global models for CG. To recap what we have seen in HO 1, there are
three different models for CG globally:
a. The Anglo-American model
b. The German model &
c. The Japanese model
This was followed by the first full-fledged CG recommendations for India by
the Kumar Mangalam Committee report. This was immediately adopted by
SEBI and the result was inclusion of Clause 49 in the listing agreement with
Stock Exchanges for all listed companies.
The Narayana Murthy committee report further amended the requirement of
CG by limited companies in India (2003). The recommendations were also
incorporated by SEBI and clause 49 was duly amended. The current clause 49
of the listing agreement includes both KMB committee and Narayana Murthy
committee recommendations. The revised clause came into effect from 2006
aimed at enhancing the responsibilities of the boards of directors and the
management in all limited companies towards corporate governance.
Details of Narayana Murthy committee terms of reference and
recommendations:
Terms of Reference
To review the performance of corporate governance; and
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.
Mandatory recommendations
Audit committees of publicly listed companies should be required to
review the following information mandatorily:
Financial statements and draft audit report, including quarterly / halfyearly financial information;
Management discussion and analysis of financial condition and results of
operations;
Reports relating to compliance with laws and to risk management;
Management letters / letters of internal control weaknesses issued by
statutory/ internal auditors; and
Records of related party transactions
All audit committee members should be financially literate and at least
one member should have accounting or related financial management
expertise.
Explanation 1 The term financially literate means the ability to read
and understand basic financial statements i.e. balance sheet, profit and
loss account, and statement of cash flows.
Explanation 2 A member will be considered to have accounting or related
financial management expertise if he or she possesses experience in

finance or accounting, or requisite professional certification in accounting,


or any other comparable experience or background which results in the
individuals financial sophistication, including being or having been a chief
executive officer, chief financial officer, or other senior officer with
financial oversight responsibilities
In case a company has followed a treatment different from that prescribed
in an accounting standard, management should justify why they believe
such alternative treatment is more representative of the underlying
business transaction. Management should also clearly explain the
alternative accounting treatment in the footnotes to the financial
statements.
A statement of all transactions with related parties including their bases
should be placed before the independent audit committee for formal
approval / ratification. If any transaction is not on an arms length basis,
management should provide an explanation to the audit committee
justifying the same.
The term related party shall have the same meaning as contained in
Accounting Standard 18, Related Party Transactions, issued by the
Institute of Chartered Accountants of India .
Procedures should be in place to inform Board members about the risk
assessment and
minimization procedures. These procedures should be periodically
reviewed to ensure
that executive management controls risk through means of a properly
defined framework. Management should place a report before the entire
Board of Directors every quarter documenting the business risks faced by
the company, measures to address and minimize such risks, and any
limitations to the risk taking capacity of the corporation. This document
should be formally approved by the Board.
Companies raising money through an Initial Public Offering (IPO) should
disclose to the Audit Committee, the uses / applications of funds by major
category (capital expenditure, sales and marketing, working capital, etc),
on a quarterly basis. On an annual basis, the company shall prepare a
statement of funds utilised for purposes other than those stated in the
offer document/prospectus. This statement should be certified by the
independent auditors of the company. The audit committee should make
appropriate recommendations to the Board to take up steps in this matter.
It should be obligatory for the Board of a company to lay down the code of
conduct for all Board members and senior management of a company.
This code of conduct shall be posted on the website of the company. All
Board members and senior management personnel shall affirm
compliance with the code on an annual basis. The annual report of the
company shall contain a declaration to this effect signed off by the CEO
and COO.
Explanation For this purpose, the term senior management shall mean
personnel of the company who are members of its management /
operating council (i.e. core management team excluding Board of
Directors). Normally, this would comprise all members of management
one level below the executive directors.

There shall be no nominee directors. Where an institution wishes to


appoint a director on the Board, such appointment should be made by the
shareholders. An institutional director, so appointed, shall have the same
responsibilities and shall be subject to the same liabilities as any other
director. 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.
All compensation paid to non-executive directors may be fixed by the
Board of Directors and should be approved by shareholders in general
meeting. Limits should be set for the maximum number of stock options
that can be granted to non-executive directors in any financial year and in
aggregate. The stock options granted to the nonexecutive directors shall
vest after a period of at least one year from the date such nonexecutive
directors have retired from the Board of the Company.
Companies should publish their compensation philosophy and statement
of entitled compensation in respect of non-executive directors in their
annual report. Alternatively, this may be put up on the companys website
and reference drawn thereto in the annual report.
Companies should disclose on an annual basis, details of shares held by
non-executive directors, including on an if-converted basis.
Non-executive directors should be required to disclose their stock holding
(both own or held by / for other persons on a beneficial basis) in the listed
company in which they are proposed to be appointed as directors, prior to
their appointment. These details should accompany their notice of
appointment.

The term independent director is defined as a non-executive director of


the company
who:
o Apart from receiving director remuneration, does not have any
material pecuniary relationships or transactions with the company,
its promoters, its senior management or its holding company, its
subsidiaries and associated companies;
o Is not related to promoters or management at the board level or at
one level below the board;
o Has not been an executive of the company in the immediately
preceding three financial years;
o Is not a partner or an executive of the statutory audit firm or the
internal audit firm that is associated with the company, and has not
been a partner or an executive of any such firm for the last three
years. This will also apply to legal firm(s) and consulting firm(s) that
have a material association with the entity.
o Is not a supplier, service provider or customer of the company. This
should include
o lessor-lessee type relationships also; and
o Is not a substantial shareholder of the company, i.e. owning two
percent or more of the block of voting shares.
The considerations as regards remuneration paid to an
independent director shall be the same as those applied to a
non-executive director.
Whistle blower policy:

Personnel who observe an unethical or improper practice (not


necessarily a violation of law) should be able to approach the audit
committee without necessarily informing their supervisors.
o Companies shall take measures to ensure that this right of access is
communicated to all employees through means of internal circulars,
etc. The employment and other personnel policies of the company
shall contain provisions protecting whistle
blowers from unfair termination and other unfair prejudicial
employment practices.
o Companies shall annually affirm that they have not denied any
personnel access to the audit committee of the company (in respect
of matters involving alleged misconduct) and that they have
provided protection to whistle blowers from unfair termination and
other unfair or prejudicial employment practices.
The appointment, removal and terms of remuneration of the chief
internal auditor
must be subject to review by the Audit Committee. Such affirmation
shall form a part of the Board report on Corporate Governance that
is required to be prepared and submitted together with the annual
report.
The provisions relating to the composition of the Board of Directors of the
holding company should be made applicable to the composition of the
Board of Directors of subsidiary companies.
At least one independent director on the Board of Directors of the parent
company shall be a director on the Board of Directors of the subsidiary
company.
The Audit Committee of the parent company shall also review the financial
statements, in particular the investments made by the subsidiary
company.
The minutes of the Board meetings of the subsidiary company shall be
placed for review at the Board meeting of the parent company.
The Board report of the parent company should state that they have
reviewed the affairs of the subsidiary company also.
SEBI should make rules for the following:
o Disclosure in the report issued by a security analyst whether the
company that is being written about is a client of the analysts
employer or an associate of the analysts employer, and the nature
of services rendered to such company, if any; and
o Disclosure in the report issued by a security analyst whether the
analyst or the analysts employer or an associate of the analysts
employer hold or held (in the 12 months immediately preceding the
date of the report) or intend to hold any debt or equity instrument
in the issuer company that is the subject matter of the report of the
analyst.
Management should provide a clear description in plain English of each
material contingent liability and its risks, which should be accompanied by
the auditors clearly worded comments on the managements view. This
section should be highlighted in the significant accounting policies and
notes on accounts, as well as, in the auditors report, where necessary.
This is important because investors and shareholders should obtain a clear
view of a companys contingent liabilities as these may be significant risk
factors that could adversely affect the companys future financial condition
and results of operations.
o

For all listed companies, there should be a certification by the CEO (either
the Executive
Chairman or the Managing Director) and the CFO (whole-time Finance
Director or other person discharging this function) which should state that,
to the best of their knowledge and belief:
o They have reviewed the balance sheet and profit and loss account
and all its schedules and notes on accounts, as well as the cash flow
statements and the Directors Report;
o These statements do not contain any material untrue statement or
omit any material fact nor do they contain statements that might be
misleading;
o These statements together present a true and fair view of the
company, and are in compliance with the existing accounting
standards and / or applicable laws / regulations;
o
They are responsible for establishing and maintaining internal
controls and have evaluated the effectiveness of internal control
systems of the company; and they have also disclosed to the
auditors and the Audit Committee, deficiencies in the design or
operation of internal controls, if any, and what they have done or
propose to do to rectify these;
o They have also disclosed to the auditors as well as the Audit
Committee, instances of significant fraud, if any, that involves
management or employees having a significant role in the
companys internal control systems; and
o They have indicated to the auditors, the Audit Committee and in the
notes on accounts, whether or not there were significant changes in
internal control and / or of accounting policies during the year.
Legal provisions must specifically exempt non-executive and independent
directors from criminal and civil liabilities under certain circumstances.
SEBI should recommend that such exemptions need to be specifically spelt
out for the relevant laws by the relevant departments of the Government
and independent regulators, as the case may be.

However, independent directors should periodically review legal


compliance reports prepared by the company as well as steps taken by the
company to cure any taint. In the event of any proceedings against an
independent director in connection with the affairs of the company,
defence should not be permitted on the ground that the independent
director was unaware of this responsibility.
8. Corporate Governance encompasses commitment to values and to ethical
business conduct to maximize shareholder values on a sustainable basis,
while ensuring fairness to all stakeholders including customers, employees,
investors, vendors, Government and society at large. (Note on Corporate
Governance and Ethics - Challenges and Imperatives, Ranjana Kumar, Central
Vigilance Commission, GOI; 2007).
9. The Sarbanes-Oxley Act (US, 2002) is an attempt by the federal government
in the United States to legislate several of the principles recommended in the
Cadbury and OECD reports.
10.November 2010 witnessed the launch of Voluntary International Standard ISO 26000:2010, Guidance for social responsibility - developed in response to
a growing recognition that corporates need to be socially responsible.

11.However, corporate governance reforms in India have focused primarily on


the company Board, senior-level management and functions and
responsibilities of the audit committee. Very limited studies have been
undertaken on understanding the state of corporate governance in India.
Research undertaken by scholars also has concentrated primarily on the roles
and responsibilities of the board, company directors, and the top-level
management for the protection of investors and shareholders rights. The
other stake holders of business organizations have been ignored by and large.
Hence there was an urgent need to address the concerns of all stake holders.
This has given rise to the current Corporate Social Responsibility in
India. This initiative is by GOI is to promote inclusiveness in
corporate
ethical
practices
and
to
make
the
framework
comprehensive. The first CSR Voluntary guidelines were formulated and
adopted in 2009. These guidelines were refined in 2011 by The Ministry of
Corporate Affairs (MoCA) through National Voluntary Guidelines on the
Social, Environmental and Economic Responsibilities of Business. The
recommendations were given by IICA Indian Institute of Corporate Affairs.
12.The Department of Public Enterprise, in May 2010, published its CSR
Guideline for Central Public Sector Enterprises (CPSEs), making it mandatory
for the profit-making PSUs to create a CSR budget by allocating 0.5% to 5% of
the net profit of the previous year.
13.The final shape to CSR has since been given and the mandatory requirement
for limited companies has been given in HO 1. The norms relate to average
PAT for three years and the companies attracting the norms in terms of
turnover etc. have also been detailed there.
14.One of the key features of good corporate governance practices or ethical
business conduct is the disclosure of financial as well as non-financial
information with respect to the companys performance at the right time and
in a language and manner which is understood by the investor community as
well as other stakeholders at large, in order to enable informed decisions.
Hence the current CSR report is being made in the form of Sustainability
Reporting (SR).
15.Through its board resolution, passed on 24th November 2011, SEBI has
mandated listed companies to report on Environmental, Social and
Governance (ESG) initiatives undertaken by them through a Business
Responsibility (BR) report which would form part of a companys annual
reports/filings. As per SEBIs directive, the business responsibility reports
should describe measures taken by companies covering the key principles of
the 'National Voluntary Guidelines on Social, Environmental and Economic
Responsibilities of Business framed by the Ministry of Corporate Affairs
(MCA). This SEBI directive will be immediately applicable to the top 100
companies (by market capitalization) and remaining companies will come
under its ambit in a phased manner.
16.The Indian corporate sector is replete with examples of firms that profess
strong ethical cultures on paper but become unraveled by corrupt behavior.
Having a strong sense of ethics is not a guarantee that a company will always
do the right thing. But the opposite is also true: many companies have
started from poor reputations and set new benchmarks of corporate ethics.

The key component underlying much of what the best ethical


companies do is leadership. Leadership made visible through
actions, commitment, and examples sets the moral tone that
emanates from the top of a company and that translates ethical
principles into the concrete behavior expected from all persons
acting on behalf of a company.
17.Two organizations came together for undertaking a survey of Indian limited
companies to determine the extent of implementation of CG and CSR
provisions in spirit rather than only on paper. These are TERI and NFCG. These
are respectively The Energy & Resources Institute and National Foundation
for Corporate Governance. This was undertaken in 2013 and the detailed
report has been made available separately to the students along with
handout. As usual there is a substantial gap between what they wanted to
achieve and what they ended up achieving in terms of target companies. The
survey could be completed only for 35 listed companies. In a manner of
speaking, it is not representative of more than 3500 actively traded
companies on stock exchanges. This cannot be helped in the Indian
context, perhaps. What is inferred here is that even listed companies
do not forth come to participate and share information with national
bodies when they undertake a research project of survey.
18.The gist of the survey findings in the form of executive summary is given
below:
a. The study incorporates inputs from 35 companies representing
varied sectors from across the country, namely Cement,
Information Technology, Agricultural Services, Automobile, Metals
and Mining, Energy, Oil & Gas, Information Technology, Chemicals
and Fertilizers, Consumer Goods & Services, Agricultural Services,
Finance, Consulting Services, and Infrastructure
b. Key drivers affecting creation and adoption of a code of conduct:
Company reputation and brand image affecting the business bottom
line, stakeholder expectations, and government regulations.
c. Guidelines and standards affecting the formulation of code of
conduct:
i. All the companies believed that a code of conduct reflected
their values and commitment to the stakeholders and society
at large. MNCs operating in India are guided by their parent
companies while conforming to the laws of the land where
they are operating.
d. Involvement of stakeholders in formulation of code of conduct:
MNCs operating in India were more comprehensive in involving all
stakeholders in this while Indian companies are involving more the
boards of directors, CEOs, governing councils etc.
e. The codes mainly applied to employees, senior executives and
boards of directors. A few MNCs have started involving their
suppliers too.
f. Awareness generation on code of conduct: By and large all the
companies, Indian and MNCs are adequate in their efforts through
training etc.

g. Effective implementation of code of conduct: By and large all the


companies have appointed a body for this function.
h. Mechanisms for handling code of conduct grievances and
compliance issues: By and large the companies have well
established policies and procedures for this. Mechanisms, such as
the Ombudsperson procedure, whistle-blowing policy, annual
employee opinion survey, and so on are in place for employees to
report any grievances and cases of breach of Code of Conduct.
*** End of document ***