Corporate Governance & Business

Ethics
Presentation
by
Anita Chouhan
Executive Trustee
 Lecture 4
Theories of CG
Regulatory Framework- Clause 49
Decision Making for Stakeholders

Anita Chouhan
Executive Trustee
 Theories of Corporate Governance

 Agency theory: Principal-agent concept – reducing agency cost

as crux of governance- role of financial disclosure &
independent board of directors eg listed cos
 Stewardship theory: propounded by MK Gandhi.- ethical
foundation of social wealth- helps cut bureaucracy & increase
motivation eg family business
 Shareholder theory: Freidman – conservative capitalist view of
individual wealth/property-hence all value addition is solely a
shareholder’s privilege
 Stakeholder theory: based on social justice & social
responsibility
 Role of Board
 As per the directions of Companies Act, a duly constituted
company becomes an artificial person or a legal entity, and to
function, it must have a decision making body…according to the
wishes of the principals constitutes a body to govern the affairs
of the company.
 In CG the board of governors/directors is the highest decision
making body & it exercises threefold powers:
1. Legislative powers: formulate bye-laws, new policies for business
& employees
2. Executive powers: appoint executives & empower them to the
planned task
3. Judicial powers: attend to the grievances not solved at the
managerial level & take appropriate actions, as per company
policies, against the offending managers & employees
 Governing through Listing
Agreement – Clause 49
Salient Features
 Composition of the board
 Board procedures
 Selection & appointment of ID’s
 Role & responsibilities of directors
 Directors remuneration
 Conflict of interest – related party transactions
 Committee’s of the board-their role & function
 Postal ballot/ e-voting
 Issuance of compliance certificate
 Responsibilities of Board
 Governs
 Strategic role in MD&A, M&A, divestment, capital
expenditure
 long term plans, vision & direction, policy
development
 Risk management
 Internal control
 Timely & accurate disclosure to stakeholders
 Compliance
 Performance evaluation
 Related party transactions
 Responsibilities of Directors & the
inherent ethical dilemmas
 Independence in decision making
 Strategy inputs
 Performance evaluation
 Risk Management
 Management of Conflict
 Minority shareholder & stakeholder perspective
 Distribution of decision making power
 Responsibility in audit, nominating & remuneration
committee and CSR Committee
 What this means

 Board represents the shareholders interest in

actively perpetuating a successful business so as to
maximize shareholder value keeping in view the
interests of all stakeholders
 Corporate Governance is the system by which
organizations are directed and controlled. Boards of
directors are responsible for the governance of their
organization : The Cadbury Report
 Corporate Management

The management comprises of the Chief Executive, Executive

Directors and the key managers of the company involved in
the day to day operations of the company.
Functions of Management.
1. Assisting the board in its decision making process in respect
to strategy, policies, code of conduct and performance
targets by providing necessary inputs.
2. Implementing the policies and the code of conduct as laid
down by the board.
3. Managing the day to day affairs of the co. to maximize the
shareholder value.
4. Providing timely, accurate information on financial matters
to the board, board committees and the shareholders.
 Functions of Management….

5. Ensure compliance of all regulations and laws.

6. Setting up and implementing an effective internal
control system.
7. Co-operating and facilitating efficient working of board
committees.
8. It recommends to the board, its plans on M&A, divestment,
new markets etc and implement the same after the board’s
approval.

Good Corporate Governance casts an obligation on the

management in respect of disclosures at all levels and kinds to
the Board. This is a mandatory recommendation.
The complete Picture
 Mandatory CG Reporting in India

Gatekeepers to CG – RBI, SEBI, MCA, Stock Exchanges

 ILO and its conventions
 OECD Guidelines for MNE’s 1970
 New Companies Bill 2013
 Listing Agreement – Clause 49
 MCA’s NVG & SEBI’s BRR
 DPE guidelines for PSU’s
Instruments for Reporting / disclosures:
 Annual Report & quarterly reports/disclosures
 Company website
 Regulatory disclosures of all kinds, RTI Act
 Media tools
 Reports, journals, studies, research papers etc
 Lecture 5
Introduction to Business Ethics
Business Case & Theories
Ethical Decision Making Models

Anita Chouhan
Executive Trustee
 Introduction : What is Ethics

‘The obedience of the un enforceable’ - The Institute of

Global Ethics
 Greek Word- Ethos- - meaning character

 Ethics is person, context & culture specific.

 Two fold objectives: evaluation & prescription

 How we act & how we live our life

 Normative , descriptive & applied ethics

 Practical- act, choose, behave & do things

 Is based on our value structures, defined by our moral

system
 Ethics- Business case

 Ethics is all about making decisions-personal & professional

 Ethical decision making inevitable at all levels of management
 Decisions that set precedents & affect entire organizations
 Decisions have organizational & social consequences
 Trust in business at lowest ebb
 Direct cost of unethical decisions more visible
 Ethical failures responsible for half of all quality costs or 5-15 %
of operating cost
 Dependency of most savings on wall street performance
 Critical to know which values & principles should guide business
decisions
 How to integrate ethics into business
 Significance of Ethics

 Business ethics are standards of actions or decisions that (a)

constrain one (legally or morally) to a right course (b) that require
a concern for the impact of one’s actions or decisions on others
 A company’s ethics has important implications for its functioning
as an organization, its ability to manage risk, its reputation in the
marketplace, & its standing in the community
 Business activity would grind to a halt without trust, fair dealings,
and honest communication.
 Markets are amoral but market participants use personal value
systems for decision making.
 Most individuals make ethical judgments on the basis of instinct &
emotions. Challenging to keep the bias/prejudice aside
 Ethical Framework for Rational
Decision Making Process

4 ethical standards for Applying the framework:

consideration: 1. Understanding the facts
1. Duties
2. Identifying relevant
2. Rights standards
3. Best practices 3. Maintaining objectivity
while applying: visibility,
4. Commitments
generality, legacy
• Ethical analysis requires rigorous thought & careful
deliberation most of the times
• Responsible decision making & deliberation will result in more
responsible behavior
 Ethical Decision Making Model

1. Determine the facts: Perceptual differences

2. Identifying the ethical issues involved: Normative
myopia, In attentional blindness, Change blindness
3. Identify stakeholders: be careful of tradeoffs
4. Consider the available alternatives: moral imagination
5. Compare & Weigh the alternatives: understanding
personal & social consequences
6. Make a Decision: monitor & learn from the
consequences
 Business Ethics - 8 Basic Principles

1. Fiduciary principle: Act in the best interests of the company

and its investors.
2. Property principle: Respect property and the rights of those
who own it.
3. Reliability principle: Keep promises, agreements, contracts,
and other commitments.
4. Transparency principle: Conduct business in a truthful and
open manner.
5. Dignity principle: Respect the dignity of all people.
6. Fairness principle: Deal fairly with all parties.
7. Citizenship principle: Act as responsible members of the
community.
8. Responsiveness principle: Be responsive to the legitimate
claims and concerns of others.
 Ethics & law
 Legal v/s ethical:
1. Ambiguous, different in each country
2. Minimum starting point
3. Can prevent harm - not effective at promoting good
4. Over regulation
5. Cannot anticipate every new dilemma
 Competitive managerial decision making becomes a
balance of risk assessment, cost benefit analysis &
ethics
 Even those committed to strictly obeying the law will be
confronted regularly with fundamental ethical questions
 Ethical Theories & Managerial
Decision Making
 Ethical Theories
1. Utilitarianism
2. Deontological ethics
3. Virtue ethics
Ethical values are those beliefs & principles that impartially promote
human well being
 A company’s core values are those beliefs and principles that provide
the ultimate guide to its decision making
 Effect of workplace culture on decision making
 Compliance or value based culture
 Effective leadership & ethical effective leadership
 What is corporate culture? Building a values based corporate culture
 Recognizing Ethical Dilemmas.

Categories:
 Taking things that don’t belong to you
 Saying things you know are not true
 Giving or allowing false impressions
 Buying influence or engaging in conflict of interest
 Hiding or divulging information
 Taking unfair advantage
 Perpetrating interpersonal abuse
 Permitting organizational abuse
 Violating rules
 Condoning unethical actions
 Balancing ethical dilemmas
 Key Causes Of Unethical Behavior

 meeting overly aggressive financial or business objectives

 meeting schedule pressures
 helping the organization survive
 rationalizing that others do it
 resisting competitive threats
 saving jobs
 Rapid Expansion and Decentralization of Control
 Narrow View of Stakeholders
 Lack of “Owner” Accountability/Spin
 Fixation on “Results”
 Speed/Carelessness
 Ethical Illiteracy
 Ethical Challenges

“An ethical issue is a situation, a problem, or an opportunity in

which an individual must choose among several actions that
must be evaluated as right or wrong.”
Areas of Ethical Challenge:
 Individual values & the business organization: conflict of
interest, gifts, security of company records, personal honesty
 Individual Rights & business organization: employee screening,
employee privacy, sexual harassment, discrimination, whistle
blowing, employee rights, comparable worth
 Business Operations: financial & cash management procedures,
conflicts between ethical code of orgn & accepted business,
practices in foreign countries, unauthorized payments,
workplace safety, closures & downsizing, environmental issues,
purchasing conflicts & bribery
 Areas of Ethical Challenges…

 Business & its competition: advertising content, product

pricing appropriation of other’s ideas,
 Business & its Product: contract relation, product safety,
product quality, customer privacy
 Business & its stakeholders: shareholders’ interest, executive
salaries, corporate contributions, social issues
 Business & Government: govt employees, govt contracts,
govt responsibilities
 To sum it up…

The enormous amount of corporate executive

compensation, lack of oversight of corporate decisions,
significant distance between decision makers & those
they impact, financial challenges, and a set of ethical
values that has not yet caught up to technological
advances – all of these factors can create an environment
rife with ethical challenges and unethical decisions.
That business purpose and business mission are so rarely
given adequate thought is perhaps the most important
cause of business frustration and failure. Peter F. Drucker,
American Management Guru (1973)
 Thank You
 “What is right is right even if no one is doing it. What is
wrong is wrong even if everyone is doing it”. Unknown
 We do not act rightly because we have virtue or
excellence, but we rather have those because we have
acted rightly. Aristotle 384 B.C.-322 B.C., Greek
philosopher and scientist, student of Plato and teacher
of Alexander the Great
anita.chouhan@gmail.com