CHAPTER 1

Business Ethics: An Overview

INTRODUCTION

The study of ethics has become an important ingredient of the syllabus of management schools
in recent years. This is because of ethical issues that have come to the forefront as a result of
many well-known failures of corporates. The fraudulent activities of these corporates have
resulted in the defrauding of stockholders, consumers, employees, creditors and governments to
varying degrees. It has therefore become important that students of B-schools as future managers
of business should imbibe ethical values. Ethics reflects a society’s notions about the rightness or
wrongness of an act. Ethics also involves the evaluation and application of certain moral values
that a society or culture has come to accept as its norms. It is generally described as a set of
principles or moral conduct. Business ethics, therefore, is a sum total of principles and code of
conduct businessmen are expected to follow in their dealings with their fellowmen such as
stockholders, employees, customers, creditors, and comply with to enact the laws of the land and
to protect all these stakeholders.

The word ‘ethics’ is derived from the Greek word ethikos meaning custom or character. The
Concise Oxford English Dictionary defines ethics as the treating of moral questions. But this
definition is imprecise and leaves a number of loose ends. Whose morals? Which moral
questions? Business ethics covers diverse areas ranging from labour practices, free and fair trade,
health concerns, euthanasia to animal welfare, environmental concerns, to genetic modification,
to human cloning. Perhaps the definition provided by the Chambers Dictionary comes closest to
providing a workable definition: ‘Ethics is a code of behaviour considered correct.’ What the
society considers correct may have been arrived by the crystallization of consumer pressure on
corporations and governments and regulatory forces. It is the science of morals describing a set
of rules of behaviour. Business ethics itself is an offshoot of applied ethics. The study of business
ethics essentially deals with understanding what is right and morally good in business.

Ethics is a branch of philosophy and is considered a normative science because it is concerned

with the norms of human conduct, as distinguished from formal sciences such as mathematics
and logic, physical sciences such as chemistry and physics, and empirical sciences such as
economics and psychology. As a science, ethics must follow the same rigours of logical
reasoning as other sciences. Ethics, as a science, involves systemizing, defending and
recommending concepts of right and wrong behaviour.1

The principles of ethical reasoning are useful tools for sorting out the good and bad components
within complex human interactions. For this reason, the study of ethics has been at the heart of
intellectual thought since the time of early Greek philosophers, and its ongoing contribution to
the advancement of knowledge and science makes ethics a relevant, if not vital, aspect of
management theory.

PRINCIPLES OF PERSONAL ETHICS

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Personal values are the conception of what an individual or a group regards as desirable.
Personal ethics refer to the application of these values in everything one does. Personal ethics
might also be called morality, since they reflect general expectations of any person in any
society, acting in any capacity. These are the principles we try to instil in our children, and
expect of one another without needing to articulate the expectation or formalize it in any way.2
The principles of personal ethics are:

1. Concern and respect for the autonomy of others.

2. Honesty and the willingness to comply with the law.
3. Fairness and the ability not to take undue advantage of others.
4. Benevolence and preventing harm to any creature.

People are motivated to be ethical for the following reasons:

1. Most people want to maintain a clear conscience and would like to act ethically under
normal circumstances.
2. It is natural for people to ensure that their actions do not cause any injury, whether
physical or mental, to others.
3. People are obliged to obey the laws of the land.
4. Social and material wellbeing depends on one’s ethical behaviour in society.

PRINCIPLES OF PERSONAL ETHICS

A profession is a vocation or calling, especially one that involves a specific branch of advanced
learning or a branch of science, for example, the profession of a doctor, advocate, professor,
scientist or a business manager. A professional is one who is engaged in a specified activity as
one’s paid occupation like a salaried business manager who is paid for his specific skill in
managing the affairs of the business enterprise he is engaged in.

There are certain basic principles people are expected to follow in their professional career.
These are the following:

 impartiality: objectivity;
 openness: full disclosure;
 confidentiality: trust;
 due diligence/duty of care;
 fidelity to professional responsibilities; and
 avoiding potential or apparent conflict of interest.

WHAT IS BUSINESS ETHICS?

Ethics is a conception of right and wrong behaviour, defining for us when our actions are moral
and when they are immoral. Business ethics, on the other hand, is the application of general
ethical ideas to business behaviour. Ethical business behaviour is expected by the public, it
facilitates and promotes good to society, improves profitability, fosters business relations and
employee productivity, reduces criminal penalties from public authorities and regulators, protects

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business against unscrupulous employees and competitors, protects employees from harmful
actions by their employer, and allows people in business to act consistently with their personal
ethical beliefs. Ethical problems occur in business for many reasons, including the selfishness of
a few, competitive pressures on profits, the clash of personal values and business goals, and
crosscultural contradictions in global business operations. Ethical issues, such as bribery and
corruption, are evident throughout the world, and many national governments and international
agencies are actively attempting to minimize such actions through economic sanctions and
international codes of ethical behaviour. Although laws and ethics are closely related, they are
not the same: ethical principles tend to be broader than legal principles. Illegal behaviour by
business and its employees imposes great costs on business itself and the society at large.

To be precise, ‘Business ethics is the art and discipline of applying ethical principles to examine
and solve complex moral dilemmas’.3 Business ethics proves that business has been and can be
and ethical and still make profits. Until the last decade, business ethics was thought of as being a
contradiction in terms. But things have changed; today more and more interest is being shown to
the application of ethical practices in business dealings and the ethical implications of business.
‘Business ethics is that set of principles or reasons which should govern the conduct of business
whether at the individual or collective level.’4

Ethical solutions to business problems may have more than one right answer or sometimes no
right answer at all. Thus logical and ethical reasoning are tested in that particular business
situation. ‘A business or company is considered to be ethical only if it tries to reach a tradeoff
between its economic objectives and its social obligations, such as obligations to the society
where it exists and operates; to its people for whom it pursues economic goals; to the
environment, from where it takes its resources; and the like.’5

Business ethics is based on the principle of integrity and fairness and concentrates on the benefits
to the stakeholders, both internal and external. Stakeholders include those individuals and groups
without which the organization does not have an existence. It includes shareholders, creditors,
employees, customers, dealers, vendors, government and the society.

WHAT IS NOT BUSINESS ETHICS?

It is also equally important to clarify what is not ethics.

Ethics is Different From Religion

Though all religions preach high ethical/moral standards generally, they do not address all the
types of problems people confront today. For instance, cyber crimes and environment-related
issues are totally new in the context of most religions. Moreover, many persons today do not
subscribe to religious beliefs and have turned agnostics. But ethics applies to all people,
irrespective of their religious affiliations.

Ethics Is Not Synonymous With Law

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Generally, a good legal system may incorporate many moral/ethical standards. However, there
are several instances where law deviates from what is ethical. Legal systems may vary from
society to society depending upon its social, religious and cultural beliefs. For instance, the
United States law forbids companies from paying bribes either domestically or overseas;
however, in other parts of the world, bribery is an accepted way of doing business. Similar
contradictions may be seen in child labour, employee safety, work hours, wages, discrimination,
and environmental protection laws. Law can be corrupted and debased by dictators and made to
cater to serve interests of narrow groups. Sometimes, law could be unreasonable and even stupid,
as for instance, it is illegal in Israel for a hen to lay an egg on a Friday or Saturday! (The Trends
Team, Times of India, Chennai, July 7, 2008). It is also slow to respond to ethical needs of the
society. People are often sceptical about the objectives of any legal system and comment ‘Law is
an Ass’, while few people question ethical standards.

Ethical Standards Are Different From Cultural Traits

The English adage ‘When in Rome, do as the Romans do’ leads to an unethical cultural
behaviour. Some cultures may be ethical, but many of them are not. They may be quite oblivious
to ethical concerns. For instance, our system of castes reflects an unethical streak inasmuch as it
tends to take for granted that some people are superior to others in God’s creation.

Ethics Is Different From Feelings

Our ethical choices are based on our feelings. Most of us feel bad when we indulge in something
wrong. But many, especially hardened criminals, may feel good even when they do something
bad. Most people when they do something wrong for the first time, may feel bad, but if they find
it to be beneficial or if it brings them pleasure, they may make it a habit without feeling any
remorse.

Ethics Is Not a Science in the Strictest Sense of the Term

We draw data from the sciences to enable us make ethical choices. But science is not prescriptive
and does not tell us what we ought to do in certain situations leading to ethical dilemmas. But
ethics being prescriptive offers reasons for how humans ought to act under such situations.
Moreover, just because something is scientifically or technologically possible, it may not be
ethical to do it; human cloning, for instance.

Ethics Is Not Just a Collection of Values

Values are almost always oversimplifications, which rarely can be applied uniformly. Values
tend to be under-defined, situational by nature and subject to flawed human reasoning such that
by themselves they cannot assure true ethical conduct. Consider the sought-after value of
employee loyalty. Should employees be loyal to co-workers, supervisors, customers, or
investors? Since it may be impossible to be absolutely loyal to all the four simultaneously, in
what order should these loyalties occur? Employers who demand employee loyalty rarely can
answer this question completely or satisfactorily.

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CODE OF CONDUCT AND ETHICS FOR MANAGERS

Having gone through the definitions of what is and what is not ethics, let us see now how ethics
and values should form the bases of the code of conduct that ought to govern the behaviour of
business managers. In the exercise of their duties and responsibilities, managers must observe the
following ethical values:

 Integrity: Integrity is the cornerstone of all values. A business manager should be

morally upright. It is this characteristic that distinguishes a professional manager from a
mercenary.
 Impartiality: A manager should look at and treat all aspects of an issue in a fair and
unprejudiced manner.
 Responsiveness to the public interest: Though a manager is paid to serve the interests of
the stockholders of the company, public interest is no less important. In fact, managers
should consider it as of paramount importance, if they have to be successful in their tasks.
 Accountability: Accountability is one of the basic characteristics of a good business
manager. Business managers are responsible for all their actions and are accountable to
all the stakeholders—stockholders, creditors, employees, consumers, government and the
society at large.
 Honesty: A cardinal ethical value that a manager should possess is this quality. Managers
should be fair, just and sincere both in character and behaviour. They should not indulge
in cheating or stealing and should be free of deceit and untruthfulness.
 Transparency: Good business managers should be transparent and set standards for
others to follow. They should be frank and open. Their actions should be easily discussed
and understood by others.

What values are to individuals, ethics is to business.

EVOLUTION OF ETHICS OVER THE YEARS

If we trace the history of ethics in business, we would realize that ethics had been a part of
theological discussions prior to 1960. Before the 1970s, there were a few writers like Raymond
Baumhart who dealt with ethics and business. Ethical issues were mostly discussed as part of
social issues. Men of religion and theologians continued writing and teaching on ethics in
business. Professors in B-schools wrote and continued to talk about corporate social
responsibility (CSR), the handmaid of ethics. However, the catalyst that led to the field of
business ethics was the entry of several ‘philosophers, who brought ethical theory and
philosophical analysis to bear on a variety of issues.’6 Norman Bowie7 dates the genesis of
business ethics as November 1974, with the first conference on the subject held at the University
of Kansas. In 1979, three anthologies on business ethics appeared. They were (i) Ethical Theory
and Business by Tom Beauchamp and Norman Bowie; (ii) Ethical Issues in Business: A
Philosophical Approach by Thomas Donaldson and Patricia Werhane; and (iii) Moral Issues in
Business by Vincent Berry. In 1982, Richard De George brought out Business Ethics, while
Manuel G. Velasquez published his Business Ethics: Concepts and Cases. All these books
created a lot of interest on the subject and business ethics courses were offered in several
management schools. The emergence of business ethics, however, was not restricted to textbooks

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and courses in B-schools. By 1975, business ethics became institutionalized at many levels
through writings and conferences. By the 1980s, the subject was taught in several universities in
the United States and Europe. There were also, by this time, many journals of business ethics,
apart from centres and societies established to promote ethical practices.

By the year 1990, business ethics as a management discipline was well-established. ‘Although
the academicians from the start had sought to develop contacts with the business community, the
history of the development of business ethics as a movement in business, though related to the
academic developments, can be seen to have a history of its own.’8

Parallel to these academic pursuits, around the time from the 1960s to the 1980s, the Consumers’
Association in Britain multiplied its membership and campaigned hard on issues such as
consumer rights, quality, safety, price, customer service and environmental concerns. The late
1980s and early 1990s saw increased concern for the environment and by 1989 environment was
the issue of greatest concern in Britain. In 1988, more than 50 per cent of the people in West
Germany called themselves green consumers, that is, those who preferred to select one product
over another for environment-friendly reasons. The United States followed with 45 per cent,
Australia with 27 per cent, Great Britain with 14 per cent, which within one year shot up to 42
per cent.

Simultaneously with these developments or even anticipating them, religion also lent its
powerful voice. Catholic teachings such as Papal Encyclicals emphasized the need for morality
in business, such as workers’ rights and living wages as in Rerum Novarum of Pope Leo XIII.
Some of the Protestant seminaries developed ethics as part of their curriculum. During the 1960s,
there was a rise of social issues in business and many business practices came under social
scrutiny during this period. President John F Kennedy’s Consumer Bill of Rights reflected a new
era of consumerism. During the 1970s, professors teaching business began to write about
business ethics and philosophers began to involve themselves in the theoretical evolution of the
subject. Businessmen became more concerned with their public image and addressed ethics more
directly. From this historical development, we can see that business ethics as a field of study and
research is a fairly nascent subject.

IMPORTANCE AND NEED FOR BUSINESS ETHICS

Ethics is closely related to trust. Most people would agree on the fact that to develop trust,
behaviour must be ethical. Ethical behaviour is a necessity to gain trust. Trust will be used as an
indicator variable of ethics. Basically, trust is three-dimensional, that is, trust in supplier
relationships, trust in employee relationships and trust in customer relationships. In such a
situation, the entire stakeholders of the company are taken care of. If the company is able to
maintain this trust-relationship with the internal as well as external stakeholders, then we can call
that company as an ethical company.

Trust leads to predictability and efficiency of business. Ethics is all about developing trust and
maintaining it fruitfully so that the firm flourishes profitably and maintain good reputation. Lack
of ethics would lead to unethical practices in organizations as well as in personal life. One
wonders why sometimes even educated, well-positioned managers or employees of some reputed
companies act unethically. This is because of lack of ethics in their lives. We can point out to
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numberous examples of companies whose top managements are involved in unethical practices,
for example, Enron and WorldCom, in 2002 and a host of others including investment bankers
Lehman Brothers and Merrill Lynch in 2008.

Earlier it was said that ‘business of business is business’. Now there is a sudden change in the
slogan. In the contemporary scenario where ethics has got its due importance, the slogan has
taken the form: ‘the business of business is ethical business’. Applying ethics in business makes
good sense because it induces others to follow ethics in their behaviour. Ethics is important not
only in business but also in all aspects of life. The business of a society that lacks ethics is likely
to fail sooner or later.

People as investors and members of civil society are concerned about unethical and anti-social
development in organizations. The collapse of the Global Trust Bank, the UTI fiasco and the spat
between the Ambani brothers caused concern to the investing and general public. A study of
business ethics helps us to unravel the underlying forces—Why these things happen? What are
their implications and what are the options available to solve the problems that arose? Business
ethics enables us ‘to assess the benefits and problems associated with different ways of managing
ethics in organizations’.9 It helps us assess the role of business in contemporary society. Even as
business contributes to the growth of the society by offering products and services, enhancing
incomes and standard of living, providing jobs, paying taxes to the government and being the
facilitator for economic development, its functioning often raises several ethical issues such as
pollution, environmental degradation, and corrupt practices. ‘That go to the heart of the social
role of business.’10 By enabling people to understand these malpractices and the consequent
repercussions, business ethics seeks to improve the welfare of the society by offering a social and
political platform for remedial, and sometimes proactive action.

There are thousands of companies which, notwithstanding the poor image business community
as a whole has among the public, have succeeded in making profit and enhanced public esteem
by following ethical practices in their realm of business. Some of such companies are: Johnson &
Johnson, Larsen & Toubro, Wipro, Infosys and Tata Steel. They have gained the trust of the
public through ethical practices. In India, the House of Tatas, for instance, adheres to, and
communicates key ethical standards in several ways. The Tata Code of Conduct affirms that
‘The Tata name represents more than a century of ethical conduct of business in a wide array of
markets and commercial activities in India and abroad. As the owner of the Tata mark, Tata Sons
Ltd, wishes to strengthen the Tata brand by formulating the Tata Code of Conduct, enunciating
the values that have governed and shall govern the conduct and activities of companies
associating with or using the Tata name and of their employees’.11

SIGNIFICANCE OF BUSINESS ETHICS

Events in corporate America, Europe, and in many emerging economies at the beginning of the
new millennium and more recently in the fag end of 2008, have demonstrated the destructive
fall-outs that take place when the top management of companies do not behave ethically. Lack of
ethics has led highly educated, resourceful and business savvy professionals at mega
corporations like Enron, Tyco, Waste Management, WorldCom and Adelphia Communications
to get themselves into a mess. In India too, we have had several instances of highly successful
corporations like ITC and Reliance getting into severe problems when the top brass misled them
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to unethical practices. Recently, the chairman of the South Korean automobile giant, Hyundai,
Chung Mong-Koo was arrested and jailed for diverting more than $1 billion from the company
as bribe to government officials.

If we analyse the reasons as to why such unethical practices take place in corporations, we may
come across several dimensions to the discussion on the importance and significance of business
ethics. There are quite a few businessmen and entrepreneurs who are of the opinion that business
and ethics do not go hand in hand, as there is no proven evidence that following ethical practices
does bring profits to the firm. They think that a company may not be in a position to reap the full
benefits offered by the business environment if they were to worry about how ethically they
should run the organization. It may not be able to take advantage of the opportunities provided
by circumstances if they have to worry about ethical considerations all the time. Besides, the
choice of an ethical alternative among many other alternatives and getting due benefits after
investing on ethical practices may take time, which may act as a constraint. There are others to
whom making profit and increasing market capitalization are the only imperatives and yardsticks
of efficiency and successful corporate management. To them, the end justifies the means. There
are hundreds of CEOs who hold this opinion and act unethically, though many of them were
proved wrong when nemesis caught up with them as in the cases of top executives of WorldCom
and Enron.

Real-life situations have shown that use of ethical practices in business does create high returns
for companies. There have been many empirical studies that have shown that companies that
follow ethical practices are able to double their profits and show increased market capitalization
compared to companies that do not adhere to ethics. In our own country, Tata Steel and Infosys
are two classic examples that illustrate this line of thinking.

Running a business ethically is good for sustaining business. Applying ethics in business also
makes good sense. The corporation that behaves ethically prompts other business associates, by
its good example, to behave ethically as well. Organizations work on synergy and delegation. It
is the feeling of the oneness with the company, which is called as a feeling of ownership, that
enhances the sincerity of a worker in an organization. Organizations cannot work in a manner
where the employees are not given due importance in their affairs. For example, if a management
exercises particular care in meeting all responsibilities to employees, customers and suppliers, it
usually is rewarded with a high degree of loyalty, quality and productivity. Likewise, employees
who were treated ethically will more likely behave ethically themselves in dealing with
customers and business associates. A supplier who refuses to exploit his advantage during a
seller’s market condition retains the loyalty and continued business of its customers when
conditions change to those of a buyer’s market. A company like Sakthi Masala Pvt. Ltd, that
does not discriminate against elderly or handicapped employees and uses every opportunity to
convince them that they are wanted as much as others, discovers that they are fiercely loyal, hard
working and productive.

There is a cultivated belief in society for thousands of years, may be due to religious influence or
an unwavering faith in morality, that a ‘good man’ who steadfastly tries to be ethical is bound to
overtake his immoral or amoral counterpart in the long run. A plausible explanation of this view
on ethical behaviour is that when individuals operate with a conviction on the ethical soundness

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of their position, their minds and energies are freed for maximum productivity and creativity. On
the other hand, when practising unethical behaviour, persons find it necessary to engage in
exhausting subterfuge, resulting in diminished effectiveness and reduced success.

Professionals like Kenneth Lay, Martha Stewart, Dennis Kozlowski or Bernard Ebbers, the CEO
of WorldCom who earned themselves disrepute by paying themselves millions of dollars in
compensation while their companies were in dire financial straits were certainly aware of what
constitutes ethics.12 They were either too blinded by self-interest or simply did not care that they
were not following the standards that they had set for their subordinates.

The top management of organizations, who take personal pay cuts in difficult financial times for
their organizations are respected by everyone. Companies should have the flexibility of adjusting
cost structures during bad times, replace old factories with new ones, or change technology in
ways that would require fewer people to do the work. These decisions should be taken after
ensuring that those affected are empathized with and are provided adequate and financial
support.

Managers may face situations where they are not sure, or are perplexed about the ethical side of
their actions. If a company believes that profits are more important than environmental
protection, the decision of its manager to halt a process on account of his concern about its
impact on the environment might not be appreciated by the company. It is up to the manager to
analyse whether the proposed action would be in terms with the goals of the firm and take a
decision accordingly.

Moral or ethical behaviour can neither be legislated nor taught in a vacuum. Authority, it is said,
cannot bring about morality. The best way to promote ethical behaviour is by setting a good
personal example. Teaching an employee ethics is not always effective. One can explain and
define ethics to an adult, but understanding ethics does not necessarily result in behaving
ethically. Personal values and ethical behaviour are taught at an early age by parents and
educators.

The innate human belief that ethical, moral or good behaviour will find its reward ultimately is
deeply ingrained in people psyche. This is demonstrated in stage plays and films where the
‘virtuous’ hero wins over the ‘wicked’ villain. The fact that people would rarely accept the
success of evil or unethical forces over the ethical or good ones has been demonstrated time and
again by the failure in box office of such plays or films depicting such on unconventional
formula.

Ethics are important not only in business but also in all aspects of life because it is an essential
part of the foundation on which a civilized society is built. A business, as much as a society, that
lacks ethical principles is bound to fail sooner than later.

HONESTY, INTEGRITY AND TRANSPARENCY ARE THE TOUCHSTONES OF BUSINESS ETHICS

Ethical corporate behaviour is nothing but a reiteration of the ancient wisdom that ‘honesty is the
best policy’. The dramatic collapse of some of the Fortune 500 companies such as Enron and
WorldCom or the well-known auditing firm Andersen showed that even successful companies
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could ultimately come to grief, if their managers did not practise the basic principles of integrity.
For every profession ‘we would think of a code of conduct or a set of values, which has a moral
content and that would be the essence of ethics for that profession’.13 There should be
transparency in operations leading to accountability, which should ensure safety and protect the
interest of all stakeholders.

VALUES AND ETHICS IN BUSINESS

Business ethics are related to issues of ‘what is right’ and ‘what is wrong’ while doing business.
The constituents of business ethics include adherence to truth, a commitment to justice and
public integrity. What values are to individuals, ethics are to business.

Personal values as we have seen earlier, refer to a conception of what an individual or group
regards as desirable. A value is a view of life and judgement of what is desirable that is very
much part of a person’s personality and a group’s morale. Thus, a benign attitude to labour
welfare is a value which may prompt an industrialist to do much more for workers than what the
labour law stipulates. Service-mindedness is a value which when cherished in an organization
would manifest in better customer satisfaction. Personal values are imbibed from parents,
teachers and elders, and as an individual grows, values are adapted and refined in the light of
new knowledge and experiences. Within an organization, values are imparted by the founder-
entrepreneur or a dominant chief executive and they remain in some form, even long after that
person’s exit.

J.R.D. Tata once said this when asked to define the House of Tatas and what links that forge the
Tata companies together: ‘I would call it a group of individually managed companies united by
two factors: First, a feeling that they are part of a larger group which carries the name and
prestige of Tatas, and public recognition of honesty and reliability—trustworthiness. The other
reason is more metaphysical. There is an innate loyalty, a sharing of certain beliefs. We all feel a
certain pride that we are somewhat different from others.’14 These several values that J.R.D. Tata
refers to have been derived from the ideals of the founder of the group, Jamsedji Tata.

Business ethics operate as a system of values relating business goals and techniques to meet
specific human ends. This would mean viewing the needs and aspirations of individuals as part
of society. It also means realization of the personal dignity of human beings. A major task of
leadership is to inculcate personal values and impart a sense of business ethics to the
organizational members. At one end, values and ethics shape the corporate culture and dictate the
way how politics and power will be used and, at the other end, clarify the social responsibility in
the organization.

A typical dilemma faced by people in business is to decide whether to reconcile the pragmatic
demands of work which often degenerate to distortion of values and unethical business practices,
or to listen to the call of the ‘inner voice’ which somehow prevents them from using unethical
means for achieving organizational goals. This dilemma stems from the fact that apparently the
value system of the organization has already been contaminated beyond redemption. Some
analysts attribute this to the acceptable behaviour in society at a particular point of time or justify
it in terms of the rapid transition of a developing society where social mechanisms become
obsolete. For instance, many multinational companies (MNCs) in India indulge in some
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undesirable practices such as resorting to payment of speed money, bribery, use of substandard
inputs, evasion of excise duties and corporation taxes, etc., which they would be wary of doing in
their home countries because of the stigma and penalty attached to such activities. Besides, the
dire need to make a profit in a fiercely competitive environment also makes them indulge in such
malpractices.

Corruption in industry, which is a major by-product of degradation of values and ethics, is also
related to the inability of industry to stand up to the discretionary powers of a regulatory system
designed and administered by an unholy alliance of bureaucrats and politicians. But repeated
observations have shown that excellent organizations—besides other values—have explicit
belief in, and recognition of the importance of economic growth and profits, and are driven by
values rather than avarice. It has been possible for Indian companies such as Infosys, Tata Steel,
Asian Paints, Bajaj Auto and Wipro to excel on the basis of super-ordinate goals—a set of values
and aspirations and corporate culture. Managers, therefore, have to provide the right values and
ethical sense to the organizations they manage.

Take for instance, such issues as consumers being taken for a ride on matters such as warranty,
annual maintenance contracts, consumers being asked to pay very high prices for components,
discriminating prices, management’s collusion with union leadership, FEMA violations, insider
trading, lack of transparency, lack of integrity and unfair presentation of financial statements,
feeding top managements only with information they want to hear, window dressing of balance
sheets, backdating of contracts, manipulation of profit and loss accounts, hedging and fudging of
unexplainable and inordinate expenditures and resorting to suppressio veri, suggestio falsi, and
continuous upward revaluation of assets to conceal poor performance, etc. These are only the tips
of the iceberg.

VALUES, ETHICS AND BUSINESS STRATEGY

Personal values and ethics are important for all human beings. They are especially important for
business managers as they are custodians of the immense economic power vested in business
organizations by society. However, can managers prevent their personal values from affecting
business strategy formulation and implementation? This is a tricky question.

It is often observed from failed corporations that management executives while working out their
business strategy are guided generally by what they personally want to do, rather than what they
have been directed to do by the board, or the company policy in the absence of any direct
supervision. As a result, somewhere down the line, the right connection between values, ethics
and strategy is lost while their managing business. However, it is vitally necessary that business
managers should be guided as much by values and ethics as by economic reasons. Guided by
this, it can be added that ‘purity of mind’, can come only from having the right connection
between values ethics and strategy. It is imperative that executives take business decisions not
only on the basis of purely economic reasons but on ethical and moral values as well.

‘Using ethical considerations in strategic decision making will result in the development of most
effective long-term and short-term strategies. Specifically, ethical criteria must be included as
part of the strategic process in before-profit decisions rather than after-profit decisions.’15 This

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will enable the company to maximize profits and enhance the development of strategy and its
implementation.

DISTINCTION BETWEEN VALUES AND ETHICS

At this point, it is necessary to differentiate between values and ethics. Values are personal in
nature (e.g., a belief in providing customer satisfaction and being a good paymaster) while ethics
is a generalized value system (e.g., avoiding discrimination in recruitment and adopting fair
business practices). Business ethics can provide the general guidelines within which management
can operate. Values, however, offer alternatives to choose from. For example, philanthropy as a
business policy is optional. An entrepreneur may or may not possess this value and still remain
within the limits of business ethics. It is values, therefore, that vary among managers in an
organization and such a variance may be a source of conflict at the time of business strategy
formulation and implementation.

Managers have to reconcile divergent values and modify values, if necessary. A typical situation
of value divergence may arise while setting objectives and determining the precedence of
different objectives. One group of managers (may be a coalition) may be interested in
production-oriented objectives-standardization, and mass production while another group may
stress marketing-related objectives product quality and variety, small-log production, etc. These
interests may be legitimate in the sense that they arise from their functional bias. It is for the
chief executive to reconcile the divergent values. Obviously, this can best be done in the light of
strategic requirements and environmental considerations.

Modification of values is frequently required for business strategy implementation. A particular

business strategy, say of expansion, may create value requirements such as stress on efficiency,
risk-taking attitude, etc. Implementation may be sub-optimal if existing values do not conform to
these requirements. In such cases, modification of values is necessary. But what was said of
corporate culture is true for values too: They are difficult, if not impossible, to change. A
judicious use of politics and power, redesigning of corporate culture, and making systematic
changes in organizations can help to modify values gradually.

ROOTS OF UNETHICAL BEHAVIOUR

People often wonder why employees indulge in unethical practices such as lying, bribery,
coercion, conflicting interest, etc. There are certain factors that make the employees think and act
in unethical ways. Some of the influencing factors are ‘pressure to balance work and family,
poor communications, poor leadership, long work hours, heavy work load, lack of management
support, pressure to meet sales or profit goals, little or no recognition of achievements, company
politics, personal financial worries, and insufficient resources’.16 The statistical data given by
Ethics Officers Associationin 1997 show how certain practices or factors contribute to unethical
behaviour.17

Balancing work and family 52%

12
Poor leadership 51%
Poor internal communication 51%
Lack of management support 48%
Need to meet goals 46%

From the above statistics it is very much evident that conflicting interests lead to most of the
unethical practices.

WHY DOES BUSINESS HAVE SUCH A NEGATIVE IMAGE?

The fact that by and large business has a negative image cannot be overstressed. Books, journals,
movies and TV shows invariably depict business in bad light. Even though businessmen may not
want to be unethical, factors such as competitive pressures, individual greed, and differing
cultural contexts generate ethical issues for organizational managers. ‘Further, in almost every
organization some people will have the inclination to behave unethically (the ethical egoist)
necessitating systems to ensure that such behaviour is either stopped or detected and remedied.’18

WHY SHOULD BUSINESSES ACT ETHICALLY?

An organization has to be ethical in its behaviour because it has to exist in the competitive world.
We can find a number of reasons for being ethical in behaviour, few of them are cited below:
Most people want to be ethical in their business dealings. Values give management credibility
with its employees. Only perceived moral righteousness and social concern brings employee
respect. Values help better decision making.

There are a number of reasons why businesses should act ethically:

 to protect its own interest;

 to protect the interests of the business community as a whole so that the public will have
trust in it;
 to keep its commitment to society to act ethically;
 to meet stakeholder expectations;
 to prevent harm to the general public;
 to build trust with key stakeholder groups;
 to protect themselves from abuse of unethical employees and competitors;
 to protect their own reputations;
 to protect their own employees; and
 to create an environment in which workers can act in ways consistent with their values.

Besides, if a corporation reneges on its agreement and expects others to keep theirs, it will be
unfair. It will also be inconsistent on its part, if business agrees to a set of rules to govern
behaviour and then to unilaterally violate those rules. Moreover, to agree to a condition where
business and businessmen tend to break the rules and also get away with it is to undermine the
environment necessary for running the business.
13
Hard decisions which have been studied from both an ethical and an economic angle are more
difficult to make, but they will stand up against all odds, because the good of the employees,
public interest, and the company’s own long-term interest and those of all stakeholders would
have been taken into account.

Ethics within organizations is a must. It should be initiated by the top management, and percolate
to the bottom of the hierarchy. Then alone, will the company be viewed as ethical by the
business community and the society at large. ‘Further, a well-communicated commitment to
ethics sends a powerful message that ethical behaviour is considered to be a business
imperative.’19 If the company needs to make profit and to have a good reputation, it must act
within the confines of ethics. Ethical communication within the organization would be a healthy
sign that the company is marching towards the right path. Internalization of ethics by the
employees is of utmost importance. If the employer has properly internalized ethics, then the
activities that individuals or organizations carry out will have ethics in them.

ETHICAL DECISION-MAKING

Ethical decision-making is a very tough prospect in this dog-eats-dog world. However, in the
long run all will have to fall in and play fair. The clock is already ticking for the unscrupulous
corporations. In this age of liberalization and globalization, the old dirty games and unethical
conduct will no longer be accepted and tolerated.

Norman Vincent Peale and Kenneth Blanchard20 have prescribed some suggestions to conduct
ethical business.

 Is the decision you are taking legal? If it is not legal, it is not ethical.
 Is the decision you are taking fair? In other words, it should be a win-win-equitable risk
and reward.
 The Eleventh Commandment—‘Though shall not be ashamed when found’, meaning
when you are hauled up over some seemingly unethical behaviour, if one’s conscience is
clear, then there is nothing to be ashamed of.

HOW CORPORATIONS OBSERVE ETHICS IN THEIR ORGANIZATIONS?

Organizations have started to implement ethical behaviour by publishing in-house codes of ethics
which are to be strictly followed by all their associates. They have started to employ people with
a reputation for high standards of ethical behaviour at the top levels. They have started to
incorporate consideration of ethics into performance reviews. Corporations which wish to
popularize good ethical conduct have started to reward ethical behaviour. Codes promulgated by
corporations and regulatory bodies continue to multiply. Some MNCs like Nike, Coca Cola, GM
and IBM, and Indian companies like ICICI, TISCO, Infosys, Dr Reddy’s Lab, NTPC, ONGC,
Indian Oil and several others want to be seen as ‘socially responsible’ and have issued codes
governing all types of activities of their employees. Securities and Exchange Board of India
(SEBI), the Indian capital market regulator, Confederation of Indian Industries (CII) and such
organizations representing corporations have issued codes of best practices and enjoin their
members to observe them. These normative statements make it clear that corporate leaders

14
anxious for business growth should not make plans without looking at the faces and lives of
those oppressed by poverty and injustice. In fact, today, managers and would-be entrepreneurs
are groomed to be ethical and socially responsible even while being educated. The Indian
Institutes of Management (IIMs) and highly rated B-schools like Xavier Labour Relations
Institute (XLRI) and Loyola Institute of Business Administration (LIBA), have courses in their
curriculum and give extensive and intensive instruction in business ethics, corporate social
responsibility and corporate governance. Many corporations conduct an Ethics Audit and at the
same time, they are continuously looking for more ways to be more ethical.

CHANGING BUSINESS ENVIRONMENT AND ETHICAL CHALLENGES

Companies these days respond to the changing business environment by adopting new and
effective tools to communicate their ethical culture. The fast-changing external environment of
business necessitates positive changes in the response of individual organizations. The change
that is created by information and technological explosion is such that organizations cannot resist
change any more. With these changes, several ethical issues have to be faced and solved to the
satisfaction of all stakeholders. Due to the increasing shift in business growth, most of the
organizations tend to give more powers to those at the lower levels of hierarchy leading to
decentralization of powers and decision making. The process of decentralization leads to a
number of ethical issues in the organization. Conflicting goals of the individual and of the
organization are the root cause of several unethical practices. Such strategic alliances have
brought about complex and hitherto unknown ethical conflicts and have caused newer situations
to emerge and challenge ethical decisions. With the huge increase in the availability of
information coming from all sources such as partners, competitors and buyers, the possibility of
unlawful and even illegal use of proprietary information is indeed enormous. When such
conflicts of interest arise, companies have to solve them through ethical practices alone, as
otherwise they will not in the long-run be able to survive in the modern fiercely competitive
world.

The ethical implications of a firm’s behaviour in a fast changing business environment were
considered by McCoy21 who thinks ethics to be the core of business behaviour. He states:
‘Dealing with values requires continual monitoring of the surrounding environment, weighing
alternative courses of action, balancing and (when possible) integrating conflicting
responsibilities, setting priorities among competing goals, and establishing criteria for defining
and evaluating performance.’ Apart from these, there are learning ways that bring this ethical
reflection directly and fully into the policy-making processes. Increasingly, value-based skills are
being recognized as integral components of performance and policy making and as central for
effective management in a society and a world undergoing rapid change.

CORPORATE GOVERNANCE ETHICS

Though the concept of corporate governance may sound a novelty in the Indian business context
and may be linked to the era of liberalization, it should not be ignored that the ancient Indian
texts are the true originators of good business governance as one important sloka from the
Rigveda says, ‘A businessman should benefit from business like a honey-bee which suckles
honey from the flower without affecting its charm and beauty.’22

15
Business ethics and corporate governance of an organization go hand in hand. In fact, an
organization that follows ethical practices in all its activities will, in all probability, follow best
corporate governance practices as well.

The Phoenix School of Management23 defines corporate governance ‘as a set of policies and
procedures that the company’s directors employ in their conduct of the company’s affairs and
their relationship with shareholders to whom they are responsible as managers’. The OECD,
KPMG and the World Bank conceptualize corporate governance as an entire system with well-
defined codes, rules and structures in order to direct and control business and non-business
organizations.

There are some others who define corporate governance as the guiding principle that on one
hand tries to synthesize the seemingly conflicting goals among the individual, the corporation
and the community, and on the other, between the immediate benefits to the corporation such as
profits and the secular ‘and lasting substantive social gains’.24 But more commonly, corporate
governance is understood as a set of rules that govern the administration and management of
companies. It is considered as ‘an entire system with codes, values, rules and structures to
control the goals and goal performance of companies; and also as a method by which to evaluate
the working of an organization in terms of how rights of various parties are defined and
distributed’.25 In all these facets of corporate governance the underlying goalposts are
transparency, integrity, full disclosure of financial and non-financial information, protection of
stakeholders’ interests. These tenets are as much ethical practice as they are part of corporate
governance.

As a public company, it is of critical importance that company’s filings with the regulators are
accurate and timely. The CEO and the senior leadership of the finance department bear a special
responsibility for promoting integrity throughout the organization, with responsibilities to
stakeholders, both inside and outside of the company. A company, well governed in every aspect
of internationally accepted corporate governance norms would put in place the following ethical
practices26:

1. Act with honesty and integrity, avoiding actual or apparent conflict of interest in personal
and professional relationships;
2. Provide information that is accurate, complete, objective, relevant, timely and
understandable to ensure full, fair, accurate, timely, understandable disclosure in reports
and documents that companies file with, or submit to the regulators;
3. Comply with the laws of the land, rules and regulations set forth by the different layers of
governments and those of the regulatory bodies concerned with your business;
4. Act in good faith, responsibly, with due care, competence and diligence, without
misrepresenting material facts or allowing one’s independent judgement to be
subordinated;
5. Protect the confidentiality of the information provided at the workplace and not disclose
it to anyone unless authorized or legally bound to do so;
6. Ensure confidential information made available in the place of work is not used to
promote personal benefit;

16
 7. Share knowledge and maintain skills important and relevant to stakeholders’ needs.
‘Proactively promote and be an example of ethical behaviour as a responsible partner
among peers, in the work environment and the community’; and
8. Achieve responsible use of and control over all assets and resources employed or
entrusted.

HOW ETHICS CAN MAKE CORPORATE GOVERNANCE MORE MEANINGFUL

1. Corporate governance is meant to run companies ethically in a manner such that all
stakeholders—creditors, distributors, customers, employees, and even competitors, the
society at large and governments—are dealt with in a fair manner.
2. Good corporate governance should look at all stakeholders and not just shareholders
alone. Otherwise, a chemical company, for example, can maximize the profit of
shareholders, but completely violate all environment laws and make it impossible for the
people around the area even to lead a normal life. Ship-breaking at Valinokkam, near
Arantangi in Tamil Nadu, leather tanneries and hosiery units in Tirupur, have brought
about too much of environmental degradation, and along with it untold miseries to people
in and around their locations.
3. Corporate governance is not something which regulators have to impose on a
management, it should come from within. There is no point in making statutory
provisions for enforcing ethical conduct. There had been dozens of violations of SEBI
rules, RBI guidelines, etc. when company managements were not inclined to follow
them. On the other hand, there had also been several instances where companies had gone
beyond these rules to serve stakeholders since the top management preferred them that
way.
4. There are several provisions in the Companies Act, e.g., (i) disclosing the interest of
directors in contracts in which they are interested; (ii) abstaining from exercising voting
rights in matters they are interested and (iii) statutory protection to auditors who are
supposed to go into the details of the financial management of the company and report
the same to the shareholders of the company. But most of these may be observed in letter,
not in spirit. Members of the board and top management should ensure that these are
followed both in letter and in spirit.
5. There are a number of grey areas where the law is silent or where the regulatory
framework is weak. These are manipulated by unscrupulous persons like Ketan Parekh
and Harshad Mehta. In the United States, for instance, the courts recognize that new
forms of fraud may arise, which may not be covered technically under any existing law
and cannot be interpreted as violating any of the existing laws. For example, a clever
conman can try to sell a piece of the blue sky. In order to check such crooks, there is the
concept of the ‘blue sky’ law. However, such wide-ranging processes are not available to
courts in developing countries like India.
6. SEBI has jurisdiction only in cases of limited and listed companies and is concerned only
with their protection. What about the shareholders and stakeholders of other unlisted
limited companies that far outnumber listed companies?
7. The Serious Fraud Investigation Office (SIFO) in the Department of Company Affairs
(DCA) has been investigating several ‘vanishing companies’. By 2003, SEBI had
identified 229 ‘vanishing companies’—which tapped the capital market, collected funds

17
 from the public and subsequently became untraceable. However, thousands of investors
have lost their hard-earned money and no agency has come to their rescue so far.

A business organization has to compete for a share in the global market on its own internal
strength, in particular on the strength of its human resource, and on the goodwill of its other
stakeholders. While its state-of-the-art technologies and high level managerial competencies
could be of help in meeting the quality, cost, volume, speed and breakeven requirements of the
highly competitive global market, it is the value-based management and ethics that the
organization has to use in its governance. That would enable the organization to establish
productive relationship with its internal customers and lasting business relationship with its
external customers.

BENEFITS FROM MANAGING ETHICS IN WORKPLACE

Several benefits accrue to an enterprise if it is managed ethically. They are the following:

Attention to Business Ethics Has Substantially Improved Society

Establishment of anti-trust laws, unions, and other regulatory bodies has contributed to the
development of society. There was a time when discriminations and exploitation of employees
were high, the fight for equality and fairness at workplace ended up in establishing certain laws
which benefited the society.

Ethical Practice Has Contributed Towards High Productivity and Strong Team Work

Organizations being a collection of individuals, the values reflected will be different from that of
the organization. Constant check and dialogue will ensure that the value of the employee
matches the values of the organization. This will in turn result in better cooperation and
increased productivity.

Changing Situations Requires Ethical Education

During turbulent times, when chaos becomes the order of the day, one must have clear ethical
guidelines to take right decisions. Ethical training will be of great help in those situations. Such
training will enable managers manning corporations to anticipate situations and equip themselves
to face them squarely.

Ethical Practices Create Strong Public Image

Organizations with strong ethical practices will possess a strong image among the public. This
image would lead to strong and continued loyalty of employees, consumers and the general
public. Conscious implementation of ethics in organizations becomes the cornerstone for the
success and image of the organization. It is because of this ethical perception that the employees
of TISCO and the general public protested in 1977 when the then Minister for Industries in the
Janata Government, George Fernandes, attempted to nationalize the company.

18
Strong Ethical Practices Act as an Insurance

Strong ethical practices of the organization are an added advantage for the future function of the
business. In the long run, it would benefit if the organization is equipped to withstand the
competition.

CHARACTERISTICS OF AN ETHICAL ORGANIZATION

Mark Pastin27 in his work, The Hard Problems of Management: Gaining the Ethical Edge
provides the following characteristics of ethical organizations:

1. They are at ease interacting with diverse internal and external stakeholder groups. The
ground rules of these firms make the good of these stakeholder groups part of the
organization’s own good.
2. They are obsessed with fairness. Their ground rules emphasize that the other persons’
interests count as much as their own.
3. Responsibility is individual rather than collective, with individuals assuming personal
responsibility for actions of the organization. These organizations’ ground rules mandate
that individuals are responsible to themselves.
4. They see their activities in terms of purpose. This purpose is a way of operating that
members of the organization highly value. And purpose ties the organization to its
environment.

There will be clear communications in ethical organizations. Minimized bureaucracy and control
paves way for sound ethical practices.

RECOGNIZING ETHICAL ORGANIZATIONS

There are certain characteristics by which we will able to identify an ethical organization.

On the Basis of Corporate Excellence

Corporate excellence mainly centres on the corporate culture. Values and practice of such values
constitute the corporate culture. Values of the organization give a clear direction to the
employee. Values are found in the mission statement of the organizations. Often they remain as a
principle and are never put into practice. Only the practised value creates the organization
culture. When values act in tune with the goals of the organization we call it as the corporate
culture of that organization. Often we see conflicting interests between the value and the
organizations’ goal. Organizations must eradicate such impediments to be identified as ethical.

In Relation to the Stakeholders

Meeting the needs of stakeholders through the activities of the managers determines whether the
organization is ethical or not. The top management is the representation of the stakeholders and
every decision made must satisfy the needs of the stakeholder. It need not be stressed here that it
was the stakeholders’ pressure that has been instrumental in bringing ethical issues into the
centre-stage of corporate agenda. Consumers in most developed societies want corporations to

19
demonstrate ethical responsibility in every area of their functioning and in their treatment of
employees, the community, the environment, etc.

Companies have been prompted to change their way of thinking and working so that ethical
issues and corporate responsibility become an integral part of their business. The management
while making decisions must see that the stakeholders enjoy the maximum benefit of that
decision. For example, Marico, the makers of Parachute Oil, discovered a harmless tint in the oil
from one of its production lines. The company withdrew the batch from the market, shut down
the production line, but kept the workers on payroll and involved them in the investigation of the
cause. Shortly, the workers located the cause, rectified it and resumed normal production.

In Relation to Corporate Governance

Managers are only stewards of the owners of the corporate assets. Thus they are accountable for
the use of the assets to the owners. If they perform well in the prescribed manner, then there
would not be much question of corporate governance. Such behaviour of the top managers would
generate ethical practices or at least would encourage ethical practices in the organization. If
only the top management is paid as per their performance, this approach would work.

SUMMARY

Ethics involves systemizing, defending and recommending concepts of right and wrong
behaviour. It is important to clarify what is not ethics. Ethics is different from religion since it
applies to all people irrespective of their religious affiliations. Ethics is not synonymous with
law. Ethical standards are different from cultural traits. Ethics is also different from feelings.
And strictly speaking, ethics is not a science.

While personal ethics refers to the application of desirable values in everything one does,
business ethics is the application of ethical principles of integrity and fairness, and concentrates
on the benefits to all stakeholders. Business managers should have integrity, impartibility,
responsiveness to public interest, accountability, and honesty.

Prior to 1960, ethics was part of theological discussions. Later on writers like Raymond
Baumhart, Richard T. De George, Thomas Donaldson, Patricia Werhane, Vincent Berry and
Manuel G. Velasquez contributed their mite to the growth of the subject. Along with academic
pursuits, the Church, B-schools and consumer movement also added to the development of
business ethics.

In today’s world, business of business is ethical business. With the globalization of business,
monopolistic market condition or State patronage for any business organization has become a
thing of the past. A business organization has to compete for a share in the global market on its
own internal strength, in particular on the strength of its human resource, and on the goodwill of
its stakeholders. While its state-of-the-art technologies and high-level managerial competencies
of an organization could be of help in meeting the quality, cost, volume, speed and breakeven
requirements of the highly competitive global market, it is the value-based management and
ethics in its governance that would enable it to establish productive relationship with its internal
customers and lasting business relationship with its external customers. Real-type situations
20
show that use of ethical practices in business creates high returns for companies, for example,
Tata Steel and Infosys. Besides, running business ethically is good for sustaining business.

To exist and be successful in a competitive world, business has to be ethical. Moral or ethical
behaviour should come from within and should be driven by examples of the top management.
Managers have to reconcile divergent values and modify them if necessary. Organizations should
work on synergy and delegation which will bring all round progress. Nowadays, companies
adopt innovative tools to communicate their ethical culture as a response to the changing
business environment. These changes bring in new issues and problems.

Several benefits accrue to a firm if it follows ethical practices: it improves society, enhances
productivity and team work, provides cause for ethical education, creates strong public image
and insures against any pitfalls the firm may face.

An ethical organization can be recognized on the basis of its corporate excellence and its relation
to the stakeholders it follows: corporate governance, a set of rules that govern the administration
and management of companies. Its goalposts are transparency, integrity, full disclosure of
financial and non-financial information, and protection of stakeholders’ interests. These tenets
are as much ethical practice as they are part of corporate governance. It is for these reasons that
value-based management and practice of ethics have become imperatives in corporate
governance now, and in the foreseeable future. If values are the bedrock of any corporate culture,
ethics are the foundation of authentic business relationships.

KEY WORDS

 Ethikos
 Moral values
 Consumer pressure
 Regulatory pressure
 Applied ethics
 Empirical sciences
 Personal ethics
 Reasons of conscience
 Social need of non-injury
 Synonymous with law
 Mercenary
 Touchstones
 Collection of values
 Sustaining business
 Subterfuge
 Values and ethics
 Strategy
 Unethical behaviour
 Negative image
 Ethical challenges

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  Corporate governance
 Listed companies
 Ethical organization
 Corporate governance
 Listed companies
 Ethical organization
 Conflicts of interest
 Insider trading
 Credibility

DISCUSSION QUESTIONS

1. What is business ethics? Describe its nature. Is business ethics a necessity?

2. What are the major ethical issues that business faces today? Discuss them with suitable
examples.
3. Explain what business ethics is, and what it is not.
4. What is the importance of ethics in business? Give suitable examples.
5. Explain the role of values in the making of business ethics. How these can be
incorporated in working out business strategy?
6. What is corporate governance? How can ethics make corporate governance more
meaningful?
7. What benefits accrue to business if ethics is made part of its strategy?
8. How would you recognize an ethical organization? What are its characteristics?

FURTHER READINGS

Cowton, C. and Crisp, R., Business Ethics: Perspective on the Practice Theory (New York, NY:
Oxford University Press), p. 9.

Donaldson, T. “Values in Tension: Ethics Away from Home,” Harvard Business Review
(September–October 1996).

Drinan, R. F., “Globalisation and Corporate Ethics,” 10th J.R.D. Tata Oration on Ethics in
Business, Jamshedpur: XLRI, 21 December 2007.

Ferrel, O. C., Fraedrich, J. P., and Ferrel, L. Business Ethics: Ethical Decision Making and
Cases, 6th ed. (New Delhi: Bizantra, 2006).

Fritzsche, D. J., Business Ethics: A Global and Managerial Perspective (Singapore: McGraw-
Hill, 1997).

India Less Corrupt Than in 2005: Transparency, Deccan Chronicle, Chennai, 7 November 2006.

Lala, R. M., “The Business Ethics of J.R.D. Tata,” The Hindu, 29 July 2004.

22
Mulla, Z., “Corporates in India Cannot Afford to Be Ethical,” Management and Labour Studies
(February 2003) 28 (1).

Raj, R., A Study in Business Ethics (Bombay, Himalaya Publishing House, 1999), p. 3.

Weiss, J. W., Business Ethics: A Stakeholder and Issues Management Approach (Orlando, FL:
Harcourt Brace College Publishers, 1988), p. 7.

CASE STUDY: SATYAM COMPUTER SERVICES LIMITED

(This case study is based on reports in the print and electronic media, and is meant for academic
purpose only. The author has no intention to sully the image of the corporate or executives
discussed.)

A BRIEF HISTORY

Established on 24 June 1987 by B. Ramalinga Raju and his brother-in-law, D. V. S. Raju,

Satyam Computer Services Limited was incorporated in 1991 as a public limited company. In a
short time, it became a leading global consulting and IT-services company spanning 55
countries. During its heyday, it was ranked as India’s fourth largest software exporter, after TCS,
Infosys and Wipro, and was one of the few Indian IT services companies listed on the New York
Stock Exchange (NYSE). The 1990s, an era of considerable growth for the company, saw the
formation of a number of subsidiaries, including Satyam Spark Solutions and Satyam Infoway
(Sify)—the first Indian Internet company to be listed on the NASDAQ.

Satyam acquired a lot of businesses and expanded its operations to many countries, and signed
MoUs with many multinational companies in the early 2000s. The company signed contracts
with numerous international players such as Microsoft, Emirates, TRW, i2 Technologies and
Ford, claiming the privilege of being the first ISO 9001:2001 company to be certified by BVQI,
and earning the reputation of a global IT company by opening offices in Singapore, Dubai and
Sydney. In 2005, it acquired a 100 per cent stake in the Singapore-based Knowledge Dynamix
and 75 per cent stake in London-based Citisoft Plc. Satyam was a company on the fast track to
success and earned for itself a name in consulting in several key areas, from strategy to
implementing IT solutions for customers.

WHAT WENT WRONG WITH SATYAM?

The success-run of the company was halted rather abruptly in early January 2009, when Satyam
promoters resolved to invest the company’s funds in buying stakes for an amount equivalent to
USD 1.6 billion against their book worth of only USD 225 million in two firms, Maytas
Properties and Maytas Infra Limited, founded by chairman Ramalinga Raju’s sons. In response
to the board of directors’ decision that such a move would amount to misuse of shareholders’
funds, the company’s promoters said that the decision did not call for the approval of the
stockholders. However, a backlash in the market prompted the promoters to beat a hasty retreat,
with the board annulling its earlier decision. Following this, the company’s stocks suffered
severe mauling both at the Bombay Stock Exchange (BSE) and the NYSE, reflecting the unease
and the anger of the investor community.

23
On 7 January 2009 Ramalinga Raju confessed to massive fraud leading to the company’s stock
crashing by more than 80 per cent on a single day. Raju then resigned as the Chairman of Satyam
after admitting to major financial wrongdoings, involvement in inflating the profits of the
company ‘for the past couple of years’. As a result of the revelation of the sensational fraud of
about INR 80 billion by its promoters, the price of Satyam shares dived from INR 178.95 on 6
January 2009 to INR 3.80 before closing at INR 4.25 on 8 January 2009. Raju was said to have
falsified accounts, created fictitious assets, padded the company’s profits and cooked up the bank
balances, all the time keeping his employees and the board of directors in the dark. In his letter to
the Satyam Board of Directors, Raju wrote candidly: ‘It was like riding a tiger, not knowing how
to get off without being eaten!’1

In the next two days, the Government of India arrested Ramalinga Raju and his brother and
dissolved the Satyam board. On 19 January 2009 ‘finding an apparent “nexus” between events
taking place in SCSL and Maytas Properties Ltd and Maytas Infra Ltd, the government …
expanded the scope of investigations being undertaken by the Serious Fraud Investigation Office
(SFIO)’.2

WHY DID RAJU CONFESS TO THE CRIME SUDDENLY?

It is intriguing as to why Raju confessed in early January 2009 to a crime which he presumably
had been committing continually, in various forms, for quite some time. It now appears that he
was forced to make a confession as a result of whistle blowing by one of the company’s former
associates. According to a 14,000-page report of the SFIO submitted to the government, an ex-
insider, claiming to be a former senior executive in Satyam associated with its contract with the
World Bank, under the pseudonym of Jose Abraham, acted as the whistle-blower. His e-mail to a
Satyam board member triggered a chain of events that ended in Raju’s decision to confess to the
financial crime. This person had first written to Krishna G. Palepu, one of the company’s
independent directors, on 18 December 2008—a day after Raju was forced to abort Satyam’s
plans to buy the two family-owned companies—that Satyam did not have any liquid assets, and
this fact could be independently verified from its banks. This information spread like wildfire
with Palepu forwarding the e-mail to the other directors and key people, including S.
Gopalakrishnan of PricewaterhouseCoopers (PwC), Satyam’s statutory auditor. A copy of the e-
mail was also forwarded to Ramalinga Raju, who had been then receiving calls from members of
the board’s audit committee. The SFIO report added that Raju discussed the issue with the
company’s CFO and vice president for finance, G. Ramakrishna, between 25 December 2008
and 7 January 2009, presumably to devise a plan to hide the colossal fraud.

SFIO’s attempts to establish contact with Jose Abraham failed. However, on the basis of the
SFIO report, criminal action was initiated against Ramalinga Raju, Rama Raju and Vadlamani
Srinivas; S. Gopalakrishnan and Srinivas Talluri of PwC; and two other company finance
managers, D. Venkatapathy Raju and C. Srisailan.

According to the investigation report, the falsification of the company’s accounts began in the
financial year 2001–02 after there was an informal meeting between Ramalinga Raju, his brother
Rama Raju and Srinivas, apart from G. Ramakrishna. The scope of the falsification of accounts,
which was around INR 2.34 billion in 2001–02, skyrocketed to INR 54.22 billion by 2007–08
and INR 73.33 billion by late-September 2008. But after the unearthing of several hidden
24
records, the CBI, by November 2009, pegged the figure at more than double the amount, as
shown in their additional charge sheet.

MODUS OPERANDI

Using cyber forensic techniques, the CBI has unearthed the modus operandi of the Satyam fraud
in which the company created false invoices to show inflated sales by SCSL. Investigations
revealed the use of fabricated invoices to artificially hike sales and the amounts shown as
receivables in the books of accounts, thereby, inflating the company’s revenues. According to
CBI sources 7561 invoices worth INR 51.17 billion were found hidden in the Invoice anagement
System (IMS).3

Invoices were generated at SCSL through a regular application flow. This had a series of
applications such as the Operational Real Time Management (OPTIMA) for creating and
maintaining projects, Satyam Project Repository (SPR) for generating the project ID, an
application to key in the main hours put in by the employees called On time and a Project Bill
Management Systems (PBMS) for generating the billing advice based on the data received from
On time and the rates agreed upon with the customer. In addition, the regular process flow could
be bypassed to generate invoices directly in IMS using Excel Porting. The accused had entered
6603 of these, amounting to INR 47.46 billion. The computer logs relating to both the IMS
application and the computer network of the SCSL were studied. This study was matched with
the company’s access control swipe card data. The individuals who generated and hid these
invoices were identified. The computer server where these allegedly incriminating electronic
records were stored was also identified, and the records retrieved. Apart from all these misdeeds,
Ramalinga Raju and his associates indulging in crimes against their investors and other
stakeholders have forged board resolutions and unauthorized obtained loans and advances to the
tune of INR 12.2 billion, according to the latest CBI charge sheet. But there were no entries in
the company’s account books reflecting these unauthorized loans. ‘This money is in addition to
the unaccounted INR 12.3 billion that Raju claimed to have been infused into Satyam by
promoters of 37 front companies floated by Raju. Even in this case, there were no entries in their
account books.’4

Raju and his accomplices in the Satyam fraud had resorted to a criminal breach of trust and
falsified accounts to the tune of another INR 1.8 billion by inflating prices pertaining to the
acquisition of shares of Nipuna services Ltd, the ITes arm of Satyam. The CBI also alleged that
the fraudsters garnered INR 2.3 billion in the form of dividends on the highly inflated profits.
The CBI has stumbled on more evidence that Raju and his accomplices had created fake
customers and generated fake invoices against these customers to inflate revenues to the tune of
INR 4.3 billion.5

The CBI has further, for the first time, charged in November 2009, the disgraced Satyam founder
with siphoning off money from the company to tax havens across the globe. Charges of fund
diversion to other countries have surfaced after the CBI team visited other countries to probe
allegations about Raju having siphoned off money to tax havens and then having re-routed it
back to India to pursue his pet passion, buying of more and more lands. ‘The re-routing of funds
was done through European nations and was shown as investments in nearly 300 fictitious
companies floated in the names of Raju’s relatives.’6
25
MONEY LAUNDERING

The Enforcement Directorate (ED) of the Income Tax Department has decided to register a case
against Satyam and its founder-chairman for alleged money laundering. The ED claims to have
found prima facie evidence against Raju and others of violating the Prevention of Money
Laundering Act.7

CBI’s charge sheet has been filed under Sections 120-B, 420, 419, 467, 471, 477-A and 201 of
Indian Penal Code that refer to offences of criminal conspiracy, cheating, cheating by
impersonation, forgery of valuable security, forgery for the purpose of cheating, using a forged
document as genuine, falsification of accounts and for causing disappearance of evidence.

The charge sheet was also filed against three senior finance executives of Satyam: G.
Ramakrishna, vice-president, D. Venkatapathi Raju, senior manager and C. Srisailam, assistant
manager. The three were arrested and sent to judicial custody.8

The supplementary CBI charge sheet filed on 24 November 2009 confirms money laundering by
Ramalinga Raju and his cohorts. It affirms these men diverted funds obtained by manipulation of
accounts to tax havens and were later on brought back to India to buy lands.

The public prosecutor in the Satyam case said INR 12.5 billion at the rate of INR 200 million per
month was siphoned off from Satyam by Raju over a period of many years. The diversion of the
funds was routed mainly through Ramalinga Raju’s brother, Suryanarayana Raju and his mother,
Appala Narasimha. In all, there were over 400 benami land deals running into several thousands
of acres. Of these, the maximum were in Ranga Reddy district and were purchased through
Akula Rajaiah, a well-known real-estate broker in the district.9

According to the latest charge sheet filed by the CBI on 24 November 2009 in a Hyderabad city
court, ‘A total of 1065 properties whose documented value is INR 3500 million have been
identified and these include around 6000 acres of land, 40,000 square yards of housing plots and
90,000 square feet of built-up area’.10

INSIDER TRADING

Satyam investigators have uncovered ‘systemic’ insider trading in SCSL.11 Investigations into
the multi-billion fraud in Satyam by the Andhra Pradesh police and Central agencies have
confirmed that the promoters had indulged in insider trading of the company’s shares to raise
money for building a large land bank. It appears Ramalinga Raju and others made a concerted
effort to showcase Satyam as a world leader in IT industry by inflating profits so that its share
prices surged up. They invested the money earned by selling their shares to buy lands. The
prosecution told the trial court that Ramalinga Raju disposed of 92,000 shares in a single
transaction and that this was not possible without the connivance of the former CFO, Srinivas
Vadlamani. The investigations also established the existence of fictitious fixed deposits in banks
to the tune of INR 3.3 billion by forging fixed deposit receipts. Besides, the Income-Tax
Department detected a fund flow of about INR 200 million from the Provident Fund and tax
deductions of Satyam employees to the Rajus.12

26
As per the transaction records, CFO Srinivas Vadlamani has been the most active in offloading
the shares. Srinivas offloaded 92,358 shares in two instalments in September 2008. Ram
Mynampati, president of Satyam and a member of the board, also offloaded 80,000 shares in
three instalments in May and June 2008.13 Interestingly, during this time, none of the top
management team of Satyam has purchased its shares. Instead, it is foreign institutional investors
who had purchased them.

The heavy selling of shares by the Satyam bigwigs in September 2008 was initially attributed to
the developing uncertainty in the economic scenario. However, placed in the larger perspective,
the sale could be a case of insider trading. The trend accentuated in December 2008 when 28,500
shares of the company were sold by its senior officials. In May, 250,000 shares were sold, while
September accounted for sales of 153,000 shares. The most recent sell-out was done by A. S.
Murthy, chief information officer, who sold 21,000 shares between 12 and 15 December 2008.

Sources at the SFIO revealed to the Press that several institutional investors dumped shares in the
firm on ‘large scale’ up to two days before Ramalinga Raju confessed to ‘wildly’ inflating the
company’s assets and profitability by around USD 1.7 billion. Most of the sales seemed to have
taken place after Satyam failed in the bid to acquire Maytas Infra and Maytas Properties. He later
admitted that these deals had been a last-ditch attempt to replace fictitious assets on Satyam’s
books with real ones. It added that the SFIO had worked with experts from the SEBI to
determine whether insider information was used in the share deals.

THE ROLE OF ‘INDEPENDENT’ DIRECTORS

According to SEBI, independent directors are meant to protect the interests of the non-promoter
shareholders and help promote the cause of corporate governance. At Satyam, whether these
directors were ‘independent’ is questionable in view of the fact that each had been allotted
significant stock options equivalent to at an unbelievable strike price of INR 2 per share (as
against the then market price of INR 500 per share). In addition, all the non-executive directors
also earned handsome commissions during 2007–08, as reflected in Satyam’s audited results.
Table 1.1 shows the details of Satyam’s audited results for 2007–08.

Table 1.1 Satyam’s Sumptuous Gift Its Non-executive Directors

Non-execitive Directors No. of Options Commission (INR in millions)

Krishna Palepu 10000 1.2
Mangalam Srinivasam 10000 1.2
T.R. Prasad 10000 1.13
V.P. Rama Rao 10000 0.1
M. Rammohan Rao 10000 1.2
V.S. Raju 10000 1.13
Vinod Dhan 10000 1.2

Source: Satyam’s Balance Sheet for 2007–08, Satyam Computer Services Limited, Hyderebad.

27
How can directors who had enjoyed such a huge largesse from the company’s promoters be
expected to be ‘independent’? The idea of giving stock options to the independent directors, was
perhaps, an intelligent ploy by Raju to successfully implement his plot at Satyam, with little
resistance from the so-called independent directors, to whom, he was supposed to report to. It is
disturbing that highly respected persons like T. R. Prasad and the former dean of the Indian
School of Business, Rammohan Rao received stock options and commissions from Satyam,
without wondering how this was acceptable to their status of independent directors.

Satyam’s scam is one more proof that the mere compliance of SEBI’s rule of the minimum
number of independent directors does not guarantee ethical practices. The concept of
independent directors, which is relatively new in corporate history inasmuch as it was suggested
only in 1940s in the USA to protect the mutual fund investors, does not seem to be a safeguard
against frauds that corporate entities are engaged in. There are several instances to prove that the
mere existence of independent directors in the boards of companies does not ensure ethical
practices, the most prominent one being that of Enron. ‘Enron had 80 per cent of its board
consisting of independent directors, while Tyco had 65 per cent and World com 45 per cent of
such outside directors, and yet all of them had collapsed due to fraud and malfea-sance.’14

There is no statistical relationship between board independence and financial performance of

organizations, as found out by Dalton et al. through a meta-analysis of 54 studies of board
independence.15

In an interesting postscript to the Satyam conundrum, seven independent directors of the

company that included Krishna Palepu and M. Rammohan Rao pleaded that the investor lawsuits
in the USA be dismissed since there were no specific allegations against them and these suits
‘fail to allege an intent to defraud as required by US securities law.’16

Corporate history of the past decade has more than clearly shown that independent directors have
not served their purpose. From this case, it is clear that Indian corporate regulation is inadequate,
and its enforcement pathetic.

AUDITING FAILURE

There are many observers who opine that Satyam’s scam is primarily due to audit failure. An
auditor is a representative of the shareholders, forming a link between the government agencies,
stockholders, investors and creditors. The objective of an audit of financial statements is to
enable an auditor to express an opinion on financial statements, which are prepared within a
framework of recognized accounting policies and practice and relevant statutory requirements.17

The choice of PwC as auditors for Satyam, especially, has been questioned since they had proved
themselves to be untrustworthy in the past both in India and USA.

In Satyam’s case, in January 2009, the CID arrested S. Gopalakrishnan and Talluri Srinivas,
partners in PwC, for their alleged involvement in the INR 71.36 billion fudging and manipulation
of financial statements, as revealed by Ramalinga Raju. According to T. V. Mohandas Pai,
member of the Infosys Board and Trustee of the IASC Foundation, the Satyam fiasco should be
looked at more as an audit process failure and not as an accounting failure. He further said, ‘It is
28
a failure of the auditing process. The auditing process says very clearly that you must ask for an
independent confirmation of bank balances from the banks. To me it looks as if it has not been
done.’18

But this line of arguments is refuted by some auditing experts. For instance, Shankar Jaganathan,
author of Corporate Disclosures 1553–2007, argues that: A defined audit process cannot be a
defence against frauds. He goes on to add that just as a low tide reveals the rubbish accumulated
in a beach, a falling market will throw up frauds. The longer the bull-run, the higher is the
duration of the frauds.19

In most cases, a successful fraudster would have easily overcome the defined audit process.

In one’s attempt to balance these opposite views, one understands there is a wide irreconcilable
difference between these two. It is the popular perception that auditors exist and are paid to
detect fraud and financial wrong doings of unethical corporate managements. On the other hand,
according to Samuel A. Di Piazza Jr, the CEO of PwC, ‘Generally audits are not designed to
detect fraud. They are designed to assess the financial position of a company. While doing
audits, we look carefully to see if there are things that appear unusual and yes, at times we may
uncover fraud. Material fraud like you had in WorldCom, I agree, generally surfaces in an
audit.20

An auditor is seen as a watchdog and not a bloodhound. In that case the judge held, ‘He is
justified in believing the tried servants of the company in whom confidence is placed by the
company’ This approach holds true even today.

As late as 21 November 2009, the CBI arrested Satyam’s ‘internal audit head V. S. Prabhakar
Gupta for alleged breach of trust, forgery, cheating and fabrication of accounts … Gupta is
charged with knowing that the auditing irregularities were perpetrated in a systematic manner
and preventing them from coming into the open’. In Satyam’s case, its statutory auditor did not
verify the authenticity of the account-books. Irregularities were noted in PwC’s handling of
Satyam accounts in 2001, but mysteriously, no probe was conducted. Similarly, a complaint was
filed with SEBI by Ramdas Athavale, Member of Parliament in 2003. But under political
pressure, this was not followed up.

PwC, which has audited Satyam’s accounts since 1991, is thus guilty of grave misconduct and is
likely to face punitive action from the Institute of Chartered Accounts of India (ICAI) in due
course. Ironically, the ICAI disciplinary council has two members from PwC! As a sequel to all
these developments, almost a year after it was rattled by the Satyam scam, PwC announced in
early December 2009 that Ramesh Rajan, India Operations’ chairman based in Singapore, who
was at the helm of affairs when the scam broke out and who was questioned by the CBI in
Hyderabad, stepped down prematurely to hand over charge to Gautam Banerjee.21

CRACKS IN INDIA’S CORPORATE GOVERNANCE STRUCTURES

Above all, the Satyam scam has exposed huge cracks in India’s corporate governance structures
and system of regulation through the SEBI, Ministry of Corporate Affairs and the SFIO. Unless

29
the entire system is radically overhauled and made publicly accountable, corrupt corporate
practices will recur, robbing wealth from the exchequer, public banks and shareholders.22

Raju is estimated to have made INR 20.65 billion by artificially jacking up the price of Satyam’s
shares and selling his holdings (14 per cent of the total). Satyam’s CFO Vadlamani Srinivas has
said the fixed deposits shown in the books were fictitious.23

There are two different opinions about the Satyam scandal—one, our corporate governance
standards are not weak and it was a one-off incident, but on the other hand, there are others who
point out to the several questions that remain to be unanswered. One fails to comprehend as to
how a company with global presence and professionals of high standard can deceive themselves
that they are not aware of what was going on inside their organization for so long. How can one
believe that something as solid as cash and bank balances of the company can be fudged and
nobody in the accounts department or finance department was simply aware of it for such a long
time? What were the internal auditor, statutory auditor and the audit committee doing? Why
were they not ascertaining and reconciling balance from the bank statements considered to be a
very basic audit tool? In the Satyam fraud, there are many dimensions like these that are yet to be
uncovered … the simple suspicion in the minds of foreign investors would be if this can happen
when an international auditor can be as gullible and vulnerable as this, what about Indian
auditors?

Many experts in corporate governance, however, believe that the Satyam case should be seen as
an aberration of the free-market economy and not as being representative of the Indian corporate
governance standards.

WHICH IS BIGGER: SATYAM OR ENRON?

The Satyam scandal has often been compared to that of Enron by several writers and analysts.
However, a close scrutiny of the facts relating to both the companies reveals that there are more
dissimilarities, than similarities between the two scams: (i) One similarity between the two
companies is like Enron, Satyam too had a board with the required quota of independent
directors. Enron, for instance, had 80 per cent of its board consisting of independent directors,
one of whom, a distinguished accounting professor, chaired the auditing committee of the firm.24
Likewise, in Satyam’s case, Krishna Palepu, one of the seven independent directors on its board,
was the Ross Graham Walker Professor of Business Administration and Senior Associate Dean
for International Development, at the Harvard Business School.25 A specialist in corporate
governance,26 Krishna Palepu was an advocate of tougher auditing rules;27 and (ii) Another
similarity between Enron and Satyam has been the nexus, the heads of both the corporations
established with political bigwigs mainly with the view to currying favours from them. Enron’s
Chairman Kenneth Lay had established very close personal relationship with both President Bill
Clinton and President George Bush and also had donated generously to their election funds.
‘With the political clout they acquired through hefty political contributions, Enron tried to
influence public policies, either covertly or overtly, especially in the areas of business they were
operating.’28 Likewise, Ramalinga Raju had developed close liaison with the then chief ministers
Chandrababu Naidu and Rajesekara Reddy, who were pitted against each other and were heading
parties on the opposite sides of political spectrum. Raju obtained several favours from both of

30
them, managed to get out-of-turn contracts for building gigantic infrastructure projects and
acquired huge tracts of public lands at throwaway prices.

But the dissimilarities between the two are more telling: (i) Satyam’s is a much bigger scandal
than Enron. G. Ramakrishna, former SEBI chairman, holds the view that the Satyam fraud was
unique for its scale, the period of its perpetration and the number of people involved. For
instance, the amount stolen by insiders from Enron was INR 28.66 million at current exchange
rates. In the Satyam case, according to the CBI’s charge sheet, a much bigger amount of INR 140
billion was involved. Viewed from the Indian context, Satyam scam is by far the biggest. Even
globally, it ranks as the largest self-confessed scam. Also greater are the number of defaulting
agencies and their failures;29 (ii) The impact of the Satyam scandal had greater ramifications
inasmuch as it adversely impacted its 53,000 employees—a number higher than the 40,000
Enron employees. Though initially it was suspected that Satyam had only 40,000 employees and
Raju siphoned off the compensations of the non-existent 13,000 employees, a closer scrutiny of
the company’s records supported by Provident Fund accounts confirmed the fact that the
company did have 53,000 employees on its payroll; (iii) The Enron fiasco, besides, was almost a
stand-alone incident which affected only the immediate stakeholders of the company, while in
the case of the Satyam swindle, the entire IT industry was badly hit just when the global
economic slowdown has already been severely hurting it. The World Bank’s ban on Satyam,
Wipro and Mega-soft for unethical practices further aggravated the industry’s difficulties; and
(iv) Satyam’s fiasco has caused a lot of damage to the image, credibility, accountability and trust
of India, Indian Corporate Inc., Indian Outsourcing Industry and the Software Industry in the
eyes of the shareholders/stakeholders/public, the likes of which nobody had ever seen and
probably would never see. The harm cannot be quantified, the extent of the rot, never imagined,
and issues which it has raised and the levels at which it has raised are of gargantuan proportions.

PREVENTING SATYAM-LIKE SCAMS

I With the view to tightening the regulations and ensuring regulatory compliance, so as to
studiously avoiding the recurrence of scams like Satyam’s, the Indian capital market regulator
SEBI should follow two distinct approaches—preventive and palliative. Palliative measures
should aim at detecting similar cases by introducing new processes and additional verification
methods. These proactive measures would help build investor confidence. However, preventive
measures are more important as they are likely to be more effective in the long run. The Central
Government could introduce a simple and brief Act that makes accounting mis-statements
criminal, and impose tough penalty both financial and imprisonment and entrust its
implementation to one specified authority with no possibilities of overlapping. The financial
penalty should be reflecting the size of the fraud. With a view to enforcing the law and to
expedite justice, special courts could be created.

The Satyam fiasco, as indeed all other scams unearthed earlier, make it imperative that corrective
measures need to be taken at the earliest to stem the rot. Corrective action is long overdue if
corporations are not to cheat stakeholders and the public. Indian corporate promoters often milk
their companies by appointing procurement and distribution agents, by under- and over-invoicing
imports/exports, evading taxes, indulging in insider trading and dressing up balance-sheets.
Satyam belonged to this category, which is the normal practice in most brick-and-mortar
companies.
31
In this context, some more corrective steps are possible. More than statutory auditors, we need to
set up a Board of Audit which, like the Comptroller and Auditor General of India, is empowered
to conduct surprise audit suo moto or on complaints of whistle-blowers. Besides, an auditor
should not be allowed to continue for more than 3 years with a company. The Department of
Corporate Affairs in consultation with ICAI, ICSI and ICWAI should create a pool of
independent directors from amongst citizens of high integrity and prescribe them adequate
remuneration. Cross-directorships must be banned. All agent employments must be thoroughly
scrutinized. Penalties must be made stiffer. The conviction rate in corporate frauds, currently
under a pathetic 5 per cent, must be improved. The law and administration should come down
heavily on breach of trust and fraud. If an auditor fails in his/her duty in India, he/she now faces
a ridiculous penalty of INR 10,000 and a maximum of 2 years imprisonment, whereas the US
Sarbanes–Oxley Act prescribes imprisonment for 20 years. The USA has greatly improved fraud
detection by reforming audit methods and offering incentives to whistle-blowers. We must learn
from all this and acknowledge that deregulation promoted in the name of ‘trusting’ CEOs and
creating a ‘favourable investment climate’ is dangerous.30

CONCLUSION

In its efforts to revamp the company, Mahindra Satyam has appointed Vineet Nayyar, the
erstwhile vice chairman as the whole-time director and the chairman of the company. It has also
appointed former SEBI Chairman, M. Damodaran and Gautam Kaji as additional non-executive
directors who will be members of the audit committee, effective from 10 December 2009. The
company had further selected Deloitte Haskins and Sells as the firm’s statutory auditor for fiscal
year ended 31 March 2009 as well as fiscal year ended 31 March 2010.31

The size of the board has been increased to eight comprising four independent directors,
including two nominee directors of the Central Government, two non-executive and two whole-
time directors.32

Even to a casual observer of the Satyam fiasco, the enormity of the scandal is a great eye opener.
Corporate scams and frauds committed against unwary investors have been a regular and almost
an annual feature in India. But the scale, magnitude, the reach and impact that the Satyam scam
had created is unparalleled in the corporate history of India, and as some keen corporate
observers point out, the world itself. That the reckless and ‘could not-careless’ swindlers were
operating with impunity within the company for so long, notwithstanding the army of
professional managers, internal auditors and independent-directors dominated board of directors,
the market regulator SEBI, the Company Law Board, the Department of Corporate Affairs and
the system of jurisprudence only go to show with what great disdain the scamsters looked at all
these institutions and authorities. There is a perception that most Indians, especially the first
generation promoters, hardly make a distinction between a proprietary enterprise and a public
limited company in terms of their rights and privileges and the corresponding responsibilities and
accountability. It is a fact ‘that a vast majority of Indian corporations are controlled by promoter
families which, while owning a negligible proportion of share capital in their companies, rule
them as if they are their personal fiefdoms’.33

The idea of a corporation, and the values and principles that should guide its governance have
hardly been imbibed by these promoters. Besides, the growth of corporate culture, not only was
32
implanted much later in India than in the Western countries, but also checkmated by the very
same forces that make the emergence of ethical business a difficult proportion in the Indian
context. A lax administration, ill-equipped regulatory system and terribly delayed justice
delivery process only make things easier for the corporate crooks to make a killing. It is not our
case that there are more crooks in the Indian corporate world than found elsewhere, but the
overall system here is so conducive and even attractive for them to flourish, rather than make
lives difficult for them to continue their trail of crimes.

KEY WORDS

 Public limited company

 Software exports
 Knowledge dynamix
 Mayt as properties
 Bombay Stock Exchange
 NYSC
 Skyrocket
 Investor community
 Modus operandi
 Project repository
 Electronic records
 Criminal breach of trust
 Falsified records
 Money laundering
 Insider trading tax hovers
 Independent directors
 Dissimilarities
 The Satyam fiasco responsibilities and accountability

DISCUSSION QUESTIONS

1. Trace the genesis and growth of Satyam Computer Services Limited.

2. What were the factors that led to the phenomenal growth of Satyam Computers? Also
discuss the reasons that had to its downfall.
3. Write short notes on any two of the following:
1. Money laundering
2. Insider trading
3. The role of independent directors.
4. Critics claim that the Satyam Scam has exposed huge cracks in India’s corporate
governance structures and the regulation of Satyam through SEBI. Do you agree with this
view? If it is so, suggest measures to remedy the situation.
5. It is an indisputable fact that the Satyam scam has exposed the weaknesses in the Indian
corporate regulatory system. How can we prevent Satyam like scams in future?

33