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Managing ethics:

An Overview
• Ethics is derived from Latin word 'ethicus' and
greek word 'ethikos' meaning character or
manners.
• Ethics is moral principle and recognized rules of
conduct.
• Business ethics refers to application of ethical
judgements to business activites.

Nature of Business ethics

 Overt ethical problems- which are transparent and


reprehensible. Ex: bribery, theft,etc.
 Covert ethical problems- which are complex and
deft ethical solutions. Ex: corporate acquisition.

Stages of ethical consciousness in business.

 Law of jungle- business decisions were driven by


the philosophy of 'might makes right' Ex: price
fixing.
 Anything for profit- business is ready to do
anything for profit. Assumption that one does not
get caught by law. Ex: false representation of
products.
 Profit maximizing in short term- to maximize the
profit within the constraints of law.Ex: Satyam.
 Profit maximizing in the long term- business
acknowledge that sound ethics is good business in
long run. Ex: Pepsi
 Stakeholders concept- strike a balance between
providing service to the stakeholders and working
towards the good of society.
 Corporate citizenship- proposes higher level of
ethical consciousness. Ex: promoting community
health.

Ethical theories

 Divided into three areas:


 Metaethics.
 Normative ethics.
 Applied ethics.

Metaethics
 It is the study of the origin and meaning of ethical
concepts. It deals with:
 Metaphysical issues that deal with the question
whether the moral values exist independently of
humans.
 Psychological issues that deal with the
psychological basis of the moral action.
 Linguistic issues that deal with the meaning of the
key moral terms used.Ex: Mist means manure in
german.
Normative Ethics.

 Normative implies- guides or controls.


 Normative ethics is that branch of ethics that
guides human conduct.
 Ex:Golden Rule- we should treat others the same
way that we want others to treat us.
 Three theories are: Teleological ethical theory,
Deontological ethical theory and virtue ethics.

Teleological ethical theory

 Teleological means thinking rationally about ends.


 This theory holds that an action is considered
morally correct if the consequences of that action
are more favorable than unfavorable.
 Limitation is difficult to quantify favorable and
unfavorable consequences.

Deontological ethical theory

 Derived from Greek word deno meaning duty or


obligation.
 This theory focus on certain fundamental duties
that we have as humanbeing.
 Three type of duties- Duties to God, Duties to
Oneself and Duties to others.
Virtue Ethics

 It may be defined as any disposition of character or


personality that an individual desires in himself or
others.
 The theory emphasizes on character development
rather than the articulation of abstract moral
principles that guide actions.

Applied Ethics
 Applied ethics is a branch of ethics that deals with
specific controversial issues.
 Ex: misleading ad, insider trading, influence.

Factors influencing Business ethics.


 Social forces. Ex: Consumer forum.
 Legislation. Ex: malpractices.
 Industry Norms. Ex: Code of conduct in
companies. Doctors dont disclose one persons'
information to another.
 Personal values. Ex: honesty.
 Professionalisation. Ex: Doctors, teachers.

Ethical Decision making

 Ethical Issues in Strategic Management.


 Ethical issues in Marketing Management.
 Ethical issues in purchase management.
 Ethical issues in Human Resources Management.
 Ethical issues in Finance and accounting

Ethical Issues in Strategic Management.


 Developing Vision Statement- stakeholders
involvement.
 CEOs Remuneration-justification of salary paid.
 Implementing Strategic changes- positive and
negative outcome of change.
 Changes in Organization Ownership- mergers,
acquisitions and restructuring.
 Global Strategic operations- should co have
different set of std in foreign countries.

Ethical issues in Marketing Management.

 Product- Cigarettes.
 Price- higher price for products high in demand.
 Place- marketer stopping distribution in
unprofitable area.
 Promotion- Giving information.
 CRM- Privacy of information.

Ethical Issues in Purchase Management.

 Accepting free gifts from suppliers.


 Deceiving suppliers.
 Discrimination and favoritism.
 Disclosure of confidential information.

Ethical issues in Human Resources Management.


 Discrimination in selection.
 Lack of equitable remuneration.
 Ethics in retrenchment.

Ethical issues in Finance and Accounting


 Hostile takeovers.
 Insider trading.
 Money laundering.
 Accounting practices- fictitious revenue, fraudulent
timing differences, concealed liabilities and
expenses, fraudulent asset valuations.

Corporate Governance
 It is a system by which business corporations are
directed and controlled.
 The corporate governance structure specifies the
distribution of rights and responsibilities among
different participants in the corporation and spells
out the rules and procedures for making decisions
on corporate affairs.

Models of corporate governance.


 Anglo- american model.
 German model.
 Japanese model
 Indian model

Anglo- american model.

Elect
BOD(Supervise)þ Shareholders(owners)þ

Appoints& Supervises

Officers

Manages Company
German model

Employees & labor unions

Supervisory board

Appoints & Supervise Reports to Shareholders

Management Board Independently runs


Company

Japanese Model
Shareholders
Supervisory board incld
President

Banks

Ratifies
Consults
president
decision

President Company

Consults Executive Manages


Management

Indian model:

 Mix of Anglo-American and German models.


 Private companies- owned by family and role of
external equity finance is minimal.
 Public companies- central and state govt chose the
board.

Board structure and styles

 The structure and composition of the board play a


crucial role in corporate governance.
 Types of directors-
 Executive
 Non- executive
 Nominee
 Representative.
 Alternate
 Shadow

Types of Board Structures

 All- executive board- does not have outside


directors. Common in family owned business.
 Majority executive board- outside directors are in
an minority. Bring in required expertise,
knowledge and experience.
 Majority outside board- effectiveness is
questionable.
 Two-tier Supervisory board- same like German
model.
 Advisory board- done by companies operating in
many countries. They donot have executive power.

Issues in designing a Board

 Board size.- size of board depends upon size of the


organization. Too many directors will raise to
interpersonal relations issues.
 Role of the Chairman and Chief Executive- to
separate the CEO from chairman or not?
 Subsidiary Company Boards- role of executive of
parent company in subsidiary.

Lessons to Learn

 Limit the size of BOD to avoid coalitions.


 Separate the roles of CEO and Chairman to avoid
conflict of interest.
 Avoid inside directors on committes so that
executives do not audit, evaluate and reward
themselves.
 Require directors to resign.
 Establish a set of qualifications.
 Insist on regular attendance.
 Reports on succession planning.

Global Management Issues.

Multi National Company


 MNCs are companies that have significant
investments in several countries, which derive a
substantial part of their income from foreign
operations.

Reasons for companies Going Global


 Reduce distribution costs.
 Lower wage rates.
 Saturation of local markets.
 To maintain growth rate.
 To exploit opportunities in new markets.

Political relations and MNCs

 Political restrictions on MNCs-


 Regulations on product/market choice, use of
technology, level of employment etc.
 Ex: Spain set explicit sales and export volume for
Ford- sales 10% of previous year automobile sales
and export-2/3 of the production.
 To share strategic decision making with local
constituents.
 MNCs have been accused of:
 Supporting repressive regimes. Ex: attraction of
investment.
 Paying bribes to secure political influence.Ex: to
get visa.
 Not respecting human rights.Ex: Child labor.
 Paying protection money to terrorist groups.
 Destabilizing national governments of which they
do not approve.

Ethical issues in Marketing

 Their advertising and marketing methods


sometimes undermine ancient cultures and
traditions.
 Engage in misleading advertising.
 Promote goods that waste valuable resources.
 Not accepting responsibility for unsafe products.
 Environmental degradation.

Ethical issues in technology

 Not engaging in research and development in host


countries.
 Encouraging brain drain.
 Making host countries technologically dependent
on the home countries.
 Not giving local employees access to information
about key technologies.
 Not training local nationals in the use of imported
technologies.
 Not transfering latest technology and dumping old
technology.

Personnel Management and Industrial Relations

 Refusal to recognise trade union.


 Not ensuring equal opportunity policies for all in
the workplace.
 Using expatriate staff for all significant managerial
positions.
 Ignoring safety needs of work place.
 Exploiting host country labour.
 Not involving local employees in management
decision making.
KFC and issues in various Countries

 KFC accused in US for destructing Amazon rain


forest- illegal soy extraction.
 Wages and working condition- in New zealand.
Pay less than minimum wages.
 Animal rights issue PETA in India.
 Hygiene issue in Sydney.

Coco Cola- Issues in various countries

 Trade practices in Mexico- threatened small


distributors from selling competitors products.
 Environment and product issues in India-
underground water, pesticides.
 Labor practices in Columbia- Killed union people
to replace cheap labor.
 Discrimination against Africans- all whites were
employed.

Fiscal Policy

Meaning
 Fiscal policy is a policy under which the
government uses its expenditure and revenue
programmes to produce desirable effects on
national income, production and employment.
 Policy of government pertaining to public
revenue, public expenditure and public debt.

Tools of Fiscal Policy


 Taxation.
 Public expenditure
 Public debt
 Deficit financing.

VAT
 VAT is a multi-stage tax, levied only on value
that is added at each stage in the cycle of
production of goods and services with the provision
of a set-off for the tax paid at earlier stages in the
cycle/chain.

VAT

ax implication under Value Added Tax Act

Seller Buyer Selling Price


Tax(Excluding
Rate Invoice
Tax)value
Tax(InclTax)
Payable
Tax Credit
A B 100 4% CST 104 4 0
B C 114 12.5% VAT 128.25 14.25 0*
C D 124 12.5% VAT 139.5 15.5 14.25
D Consumer 134 12.5% VAT 150.75 16.75 15.5
Total to Govt.
VAT CST

Advantages of VAT

 Coverage
 Revenue Security- atleast at one stage tax is
collected.
 Selectivity- only selected items.

Disadvantages of VAT

1. VAT is regressive- applicable to poor also.


2. VAT is difficult to operate from position of
both administration and business- applicable to all
business.
3. VAT is inflationary
4. VAT favors capital intensive firms

Items Covered under VAT

 550 items covered-


 270 items of basic needs, like medicine, drugs,
agro & industrial inputs, capital & declared goods
4% VAT
 Rest 12.5% VAT. Gold & silver jewellery -
1%

Problems in implication of VAT in India

 Billing.
 Lack of uniformity.- different states.
 Number of taxes imposed by the Govt.
 Lack of infrastructure facilities.
 Dealing in variety of goods.- classification.
Mod vat

 Modvat stands for "Modified Value Added


Tax".
 It is a scheme for allowing relief to final
manufacturers on the excise duty borne by their
suppliers in respect of goods manufactured by
them.
 Ex:ABC Ltd is a manufacturer and it
purchases certain components from PQR Ltd for
use in manufacture. POR Ltd would have paid
excise duty on components manufactured by it and
it would have recovered that excise duty in its sales
price from ABC Ltd. Now, ABC Ltd has to pay
excise duty on toys manufactured by it as well as
bear the excise duty paid by its supplier, PQR Ltd.
This amounts to multiple taxation. Modvat is a
scheme where ABC Ltd can take credit for excise
duty paid by PQR Ltd so that lower excise duty is
payable by ABC Ltd.

Scope and applicability

 Input includes:-
» Inputs which are manufactured and used within
the factory of production in or in relation to the
manufacture of the final product.
» Paints and packing material
» Inputs used as fuel
» Inputs used for the generation of electricity, used
within the factory of production for manufacturing
of final products or for any other purpose.

 Modvat credit will not be available if the final


good is not an excisable goods or is exempt from
duty or is chargeable at nil rate of duty.
 Modvat credit will not be denied or varied just
because some of the raw materials and other inputs
in respect of which excise has been paid become
waste or scrap in the course of the manufacturing
process.
 If the excise duty paid on modvatable inputs is
subsequently increased or refunded, the modvat
claimed on the basis of those inputs will also be
increased or reduced, as the case may be.

Service Tax
 Introduced in 1994-95.
 Case For:
 Applying priniple of neutrality-equality
between goods and service.
 Raising revenues for govt.
 Taxing luxuries-large portion of service is in
sphere of luxury.
 Widespread phenomenon- developing and
printing photographs.

Service Tax problems.


 Need for separate tax legislations.-3 to 96
services.
 Vague scope of taxable services and limit.
 Deemed import of services- taxable service is
provided from outside India and received by any
person in India.
 Reimbursement of expense tax- double tax.

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