Business Ethics: Meaning, Sources and Importance

The term ‘Business Ethics’ refers to the system of moral principles and rules of the conduct

applied to business. Business being a social organ shall not be conducted in a way detrimental to

the interests of the society and the business sector itself. Every profession or group frames

certain do’s and do not’s for its members. The members are given a standard in which they are

supposed to operate. These standards are influenced by the prevailing economic and social

situations. The codes of conduct are periodically reviewed to suit the changing circumstances.

Definitions:

“Business Ethics is generally coming to know what is right or wrong in the work place and

doing what is right. This is in regard to effects of products/services and in relationship with the

stake holders.” —Cater Mcnamara

“Business ethics in short can be defined as the systematic study of ethical matters pertaining to

the business, industry or related activities, institutions and beliefs. Business ethics is the

systematic handling of values in business and industry.” —John Donaldson

There is no unanimity of opinion as to what constitutes business ethics. There are no separate

ethics of business but every individual and organ in society should abide by certain moral orders.

Business ethics should take into consideration the following factors:

1. A business should aim to have fair dealing with everyone dealing with it.

2. Ethics should be fixed for everyone working in the organisation at any level and their

implementation should be linked with reward- punishment system.

3. Any violation of ethics should be detected at the earliest and remedial measures taken

immediately.
4. Business ethics should be based on broad guidelines of what should be done and what should

be avoided.

5. The ethics should be based on the perception of what is right.

Sources of Business Ethic:

In every society there are three sources of business ethics-Religion, Culture and Law. The HR

manager in every organisation, thus, has to be well versed with the unique system of values

developed by these three sources.

These sources are discussed as follows:

1. Religion:

Religion is the oldest source of Religion is the oldest source of ethical inspiration. There are

more than ethical inspirations. 1, 00,000 religions which exist across the whole world, but all of

them are in agreement on the fundamental principles. Every religion gives an expression of what

is wrong and right in business and other walks of life. The Principle of reciprocity towards one’s

fellow beings is found in all the religions. Great religions preach the necessity for an orderly

social system and emphasize upon social responsibility with an objective to contribute to the

general welfare. With these fundamentals, every religion creates its own code of conduct.

2. Culture:

Culture is the set of important understandings that members of a community share in common. It

consists of a basic set of values, ideas, perceptions, preferences, concept of morality, code of

conduct etc. which creates distinctiveness among human groups. When we talk about culture we

typically refer to the pattern of development reflected in a society’s pattern of knowledge,

ideology, values, laws, social norms and day to day rituals. Depending upon the pattern and stage

of development, culture differs from society to society. Moreover culture is passed from

generation to generation. Culture facilitates the generation of commitment to something larger

than one’s individual self interest.

Culture encourages the members of the organisation to give priority to organizational goals over

and above their personal interests. Culture also serves as a sense making and control mechanism

that guides and shapes the attitudes and behaviour of people. Managers have to run an industrial

enterprise on the cutting edge of cultural experience. The tension that their actions create makes

the business ethically more complex.

3. Law:

The legal system of any country, guide the human behaviour in the society. Whatever, ethics the

law defines are binding on the society. The society expects the business to abide by the law.

Although it is expected that every business should be law abiding, seldom do the businesses

adhere to the rules and regulations. Law breaking in business is common eg. Tax evasion,

hoarding, adulteration, poor quality & high priced products, environment pollution etc.

Importance of Business Ethics:

1. Corresponds to Basic Human Needs:

The basic need of every human being is that they want to be a part of the organisation which they

can respect and be proud of, because they perceive it to be ethical. Everybody likes to be

associated with an organisation which the society respects as a honest and socially responsible

organisation. The HR managers have to fulfill this basic need of the employees as well as their

own basic need that they want to direct an ethical organisation. The basic needs of the employees

as well as the managers compel the organizations to be ethically oriented.

2. Credibility in the Public:

Ethical values of an organisation create credibility in the public eye. People will like to buy the

product of a company if they believe that the company is honest and is offering value for money.

The public issues of such companies are bound to be a success. Because of this reason only the

cola companies are spending huge sums of money on the advertisements now-a-days to convince

the public that their products are safe and free from pesticides of any kind.
3. Credibility with the Employees:

When employees are convinced of the ethical values of the organisation they are working for,

they hold the organisation in high esteem. It creates common goals, values and language. The

HR manager will have credibility with the employees just because the organisation has

creditability in the eyes of the public. Perceived social uprightness and moral values can win the

employees more than any other incentive plans.

4. Better Decision Making:

Respect for ethics will force a management to take various economic, social and ethical aspects

into consideration while taking the decisions. Decision making will be better if the decisions are

in the interest of the public, employees and company’s own long term good.

5. Profitability:

Being ethical does not mean not making any profits. Every organisation has a responsibility

towards itself also i.e., to earn profits. Ethical companies are bound to be successful and more

profitable in the long run though in the short run they can lose money.

6. Protection of Society:

Ethics can protect the society in a better way than even the legal system of the country. Where

law fails, ethics always succeed. The government cannot regulate all the activities that are

harmful to the society. A HR manager, who is ethically sound, can reach out to agitated

employees, more effectively than the police.

Values: it’s Meaning, Characteristics, Types, Importance!

Meaning:

Generally, value has been taken to mean moral ideas, general conceptions or orientations

towards the world or sometimes simply interests, attitudes, preferences, needs, sentiments and

dispositions. But sociologists use this term in a more precise sense to mean “the generalised end

which has the connotations of rightness, goodness or inherent desirability”.

These ends are regarded legitimate and binding by society. They define what is important

worthwhile and worth striving for. Sometimes, values have been interpreted to mean “such

standards by means of which the ends of action are selected”. Thus, values are collective

conceptions of what is considered good, desirable, and proper or bad, undesirable, and improper

in a culture.

According to M. Haralambos (2000), “a value is a belief that something is good and desirable”.

For R.K. Mukerjee (1949) (a pioneer Indian sociologist who initiated the study of social values),

“values are socially approved desires and goals that are internalised through the process of

conditioning, learning or socialisation and that become subjective preferences, standards and

aspirations”. A value is a shared idea about how something is ranked in terms of desirability,

worth or goodness.

Familiar examples of values are wealth, loyalty, independence, equality, justice, fraternity and

friendliness. These are generalised ends consciously pursued by or held up to individuals as

being worthwhile in themselves. It is not easy to clarify the fundamental values of a given

society because of their sheer breadth.

Characteristics:

Values may be specific, such as honouring one’s parents or owning a home or they may be more

general, such as health, love and democracy. “Truth prevails”, “love thy neighbour as yourself,

“learning is good as ends itself are a few examples of general values. Individual achievement,

individual happiness and materialism are major values of modern industrial society.

Value systems can be different from culture to culture. One may value aggressiveness and

deplores passivity, another the reverse, and a third gives little attention to this dimension

altogether, emphasising instead the virtue of sobriety over emotionality, which may be quite

unimportant in either of the other cultures. This point has very aptly been explored and explained
by Florence Kluchkhon (1949) in her studies of five small communities (tribes) of the American

south-west. One society may value individual achievement (as in USA), another may emphasise

family unity and kin support (as in India). The values of hard work and individual achievement

are often associated with industrial capitalist societies.

The values of a culture may change, but most remain stable during one person’s lifetime.

Socially shared, intensely felt values are a fundamental part of our lives. Values are often

emotionally charged because they stand for things we believe to be worth defending. Often, this

characteristic of values brings conflict between different communities or societies or sometimes

between different persons.

Most of our basic values are learnt early in life from family, friends, neighbourhood, school, the

mass print and visual media and other sources within society. These values become part of our

personalities. They are generally shared and reinforced by those with whom we interact.

Types:

Values can be classified into two broad categories:

(1) Individual values:

These are the values which are related with the development of human personality or individual

norms of recognition and protection of the human personality such as honesty, loyalty, veracity

and honour.

(2) Collective values:

Values connected with the solidarity of the community or collective norms of equality, justice,

solidarity and sociableness are known as collective values.

Values can also be’ categorised from the point of view their hierarchical arrangement:
(1) Intrinsic values:

These are the values which are related with goals of life. They are sometimes known as ultimate

and transcendent values. They determine the schemata of human rights and duties and of human
virtues. In the hierarchy of values, they occupy the highest place and superior to all other values

of life.

(2) Instrumental values:

These values come after the intrinsic values in the scheme of gradation of values. These values

are means to achieve goals (intrinsic values) of life. They are also known as incidental or

proximate values.

Importance and functions of values:

Values are general principles to regulate our day-to-day behaviour. They not only give direction
to our behaviour but are also ideals and objectives in themselves. Values deal not so much with

what is, but with what ought to be; in other words, they express moral imperatives. They are the

expression of the ultimate ends, goals or purposes of social action. Our values are the basis of

our judgments about what is desirable, beautiful, proper, correct, important, worthwhile and

good as well as what is undesirable, ugly, incorrect, improper and bad. Pioneer sociologist

Durkheim emphasised the importance of values (though he used the term ‘morals’) in controlling

disruptive individual passions.

He also stressed that values enable individuals to feel that they are part of something bigger than

themselves. Modem sociologist E. Shils (1972) also makes the same point and calls ‘the central

value system’ (the main values of society) are seen as essential in creating conformity and order.

Indian sociologist R.K. Mukerjee (1949) writes: “By their nature, all human relations and

behaviour are imbedded in values.”

The main functions of values are as follows:

1. Values play an important role in the integration and fulfillment of man’s basic impulses and

desires in a stable and consistent manner appropriate for his living.

2. They are generic experiences in social action made up of both individual and social responses

and attitudes.

3. They build up societies, integrate social relations.

4. They mould the ideal dimensions of personality and range and depth of culture.

5. They influence people’s behaviour and serve as criteria for evaluating the actions of others.

6. They have a great role to play in the conduct of social life.

7. They help in creating norms to guide day-to-day behaviour.

Definition of Workplace Ethics:

Workplace ethics are nothing but the rules and procedures that should be carried out in an office

by the employer and the employees to maintain a professional company culture and to build a

better relationship with their customers by providing better services.

Workplace ethics plays an important role in company growth and development.

Examples of Workplace Ethics:

Secular values are the basis from where the ethics of the workplace have been derived from.

Some of them are,

1. Loyalty

2. Comradery

3. Citizenship
 4. Trustworthiness

5. Integrity

6. Respect

7. Caring

8. Fairness

9. Responsibility

10. Accountability

Most Important Ethical Terms and Principles:

1. Values:

The values of a person can be defined as the acts and actions which we make in our daily life.

The true values of a person are devotion, respect, hard work and love. These acts of values

make a person more valuable. These values tell more about a person’s behavior and responsive

qualities which he can possess during work.

2. Morals:

Morals are the certain duties which he needs to do for the betterment of society. Moreover, these

are certain duties which make society work in a synchronized manner. These morals apply to

every single human being of the society and they can’t be judged in a specific manner, because

the things in moral are either right or wrong.

3. Integrity:
Integrity means to be always honest and sincere under any circumstances. When any individual

shows integrity in a professional environment and his work, it means that the person can be

trusted as well as he is an honest man to rely on. The person who is honest and sincere always

sustains for a longer duration in the company as compared to others.

4. Character:

The character is one of the most important ethics which in short describes a person. It tells about

your behavior towards others and your reactions towards the different situations. A bad thinking

mind can destroy your character and a positive attitude and healthy mind always keep you with a

good character.

5. Laws:

These are certain rules and regulation fixed by you yourself. These rules define you and put a

limit to events that are dangerous for your lifestyle. A man with rules always shapes up in the

laws of the company and work accordingly in the best way possible, and a man with no rules

always lands up in troubles. These laws give us the ability to differentiate between right and

wrong.

6. Dedication:

This is also a person defining ethic. The stronger dedication in work, the greater the output and

results. Dedication in work makes a man stronger for tough situations and he also becomes a key

player in motivating the others during the hard times.

7. Accountability of responsibility:
The more a person is responsible in nature, the more efficiently and responsibly he will do the

given task. Responsibility towards everything such as parents, family, society, nature, works,

office, etc are certain things which not only should be kept in mind but also these must be

followed by every human being for a healthier environment.

These were the 7 ethical principals which matter the most in a professional environment and

these ethics must be present in every human being so that he leads towards a successful and

healthier life. Ethical behavior in the workplace helps us to remain healthy. Yes healthy, but

healthy not only means to remain healthy physically but it gives you the mental peace of mind.

This experience is the most beautiful experience of life, when you don’t have any regrets for

anything and daily you are appreciated for who you are, gives your mind so much satisfaction

and peace that in difficult situations when others can’t think of any solution, you are the only one

thinking calmly and quietly and finally coming up with the solution. This is the strength of the

stable inner mind of an individual. Moreover, there are some professional benefits which can be

gained by professional ethics; let us see some of the benefits below.

Ethical Decision Making

To take ethical decisions at personal level or in the capacity of a business man or a manager one

needs good understanding of the subject and courage. It is not only taking fair and good

decisions but also acting on the decisions taken.

In any given situations in business the general question one has to ask are:

i. Is it right?

ii. Is it fair?
iii. Who gets benefits and who gets hurt and who is untouched and why?

iv. How the public will view your decision?

v. How your decision will be questioned or will it come on the front page of the newspaper?

The general thumb rules used for quick ethical tests are:

1. Common sense:

One has to think before acting if the common sense of the man says it is ok.

2. The Golden Rule:

Do not harm others. Take decisions to others on the basis of how you would like others to treat

you.

3. The means-ends ethics:

One may choose bad means to reach really good hands which are worthwhile and significant.

Ends should not be treated as means.

4. The Intuition Ethic:

We should follow our gut feel of what is right and what is wrong. Follow what is right and take
decisions.

5. Use the Best Judgment:

Based on your moral concept take the most optimal decision to harm less and benefit the

maximum.

6. The Test of Ventilation:

Before taking a decision wait for a minute isolate yourself from the problem. Wait for the

feedback from others before taking a decision or acting, that is, you allow others to ventilate their

ideas.
7. The Purified Idea:

Do not take any action based on guidelines from higher ups or your friends. You are responsible

for all the decisions you make. The manager has to understand the implicit morality of an

organisation which is interwoven in the day-to-day working logic in the organisation. Once the

internal logic is clearly understood a manager can evaluate the behaviours and decisions against

different ethical dilemma situations.

Ethical decisions should be good, practical and stand moral test. It is necessary that companies

and top managers have close relations with stakeholders. Understand and share those ethical

values that define the parameters of business decisions and actions. That is following stakeholder

management principles, while keeping in mind company codes of ethics and commercial profit

targets.

Ethical decision making steps for a manager are:

(1) Study:

Study the ground realities of business practices, traditions, industry norms and cultural patterns.

Clarify unclear and gray areas.

(2) Limits of Power:

Understand guidelines from the top and views or recommendations of officers of different levels

in the organisation.

(3) Many solutions:

Develop many responsible, independent solutions taking into account objectives of the company

and meeting values of maximum number of stakeholders.

(4) Check past cases:

Find similar dilemmas cases in the past in your company or other similar cases in other

companies. How the problems were solved and outcomes be studied to help the present case.
(5) Negotiate:

Negotiate the optional choice that gives maximum good to more stakeholders. Negotiation skills

are necessary to see when to negotiate, how much and what to negotiate.

Steps in Ethical Decision Making:

(I) Integrity and accountability Integrity:

i. Find right and wrong (personal values)

ii. Act on what you have found (your values)

iii. Say openly what you have found and acting

Accountability:

i. Identify possible courses of actions in line with values

ii. Identify impact of decisions on others and on you

iii. Balance the impact with personal interest

iv. Be accountable to others when you choose to impact them

(II) Moral decision making in Business Individual processes:

(1) Genetic inheritance

(2) Religion

(3) Philosophical systems

(4) Cultural experience

(5) Legal system

(6) Codes of conduct

(III) Moral decision making in Business Corporate processes:

i. Companies can be considered as an ‘Actor’:

a. Organisation chart makes a system

b. A set of policies and procedures are laid for action

c. The judgments and actions of individuals in a company are governed by company

ii. Companies do not have right to life as any individual.

iii. Companies could be treated as moral actor.

iv. Finding the guilty is not possible within the corporate jungle.

(IV) Business Ethics in practice:

i. Nature of company policies in doing ethical or unethical, wrong doing willfully

ii. Market place does not help ethical or honest behaviour

iii. Persons act honest because of high cost of dishonesty

iv. Truth is good policy. “Time discovers truth”. If truth is slightly weakened all are doubtful.

Different Approaches towards Ethical Behaviour in Business:

There are different ways of thinking about ethical behaviour. Some situations offer clean-cut

ethical choices. Stealing is unethical. There is no debate about it. There are other situations

where two or more values, rights, or obligations conflict with each other and a choice has to be

made.
For example, suppose that a police officer attends his brother’s wedding and finds some guests

using drugs there, which is against the law. Should the officer arrest the drug users? Should he be

loyal to his brother or to his job? It offers a difficult choice. Various approaches to ethical

behaviour give some guidance in making some choices. Some of these approaches are:

1. Teleological approach:

Also known as consequentiality approach, it determines the moral conduct on the basis of the

consequences of an activity. Whether an action is right or wrong would depend upon the

judgement about the consequences of such an action. The idea is to judge the action moral if it

delivers more good than harm to society. For example, with this approach, lying to save one’s

life would be ethically acceptable.

Some of the philosophers supporting this view are nineteenth century philosophers John Stuart

Mill and Jeremy Bentham. They proposed that ethics and morality of an act should be judged on

the basis of their ultimate utility.

An act would be considered moral if it produced more satisfaction than dissatisfaction for

society. It must be understood that this satisfaction or happiness should be for the society in

general and not to the people committing the act or the people who are directly involved in the

act.

For example, not paying the money to someone whom you owe may make you happy but it

disrupts the social system of fairness and equity thus making the society as a whole unhappy.

Accordingly, this would not be considered as a Similarly, a party who breaks a contract may be

happy because it is beneficial to it, but it would damage the society’s legal framework for

conducting business in an orderly fashion. Hence, it would not be an ethical act.

2. Deonotological approach:
While a “teleologist” focuses on doing what will maximize societal welfare, a “deonotologist”

focuses an doing what is “right” based an his moral principles. Accordingly, some actions would

be considered wrong even if the consequences of these actions were good. According to

DeGeorge:

“The deonotological approach is built upon the premise that “duty” is the basic moral category

and that the duty is independent of the consequences. An action is right if it has certain

characteristics or is of a certain kind and wrong if it has other characteristics or is of another

kind”.

This approach has more of a religious undertone. The ethical code of conduct has been dictated

by the Holy Scriptures. The wrongs and rights have been defined by the word of God. This gives

the concept of ethics a fixed perception. Since the word of God is considered as permanent and

unchangeable, so then is the concept of ethics.

Holy Scriptures like those of the Bible, the Holy Quran, Bhagwad Gita and Guru Granth Sahib

are considered to be the words of God and hence must be accepted in their entirety and without

question. In similar thinking, though based upon rationality, rather than religious command,

Emmanuel Kant, an eighteenth century German philosopher suggested morality as universally

binding on all rational minds.

According to him, “Act as if the maxim of thy action were to become by thy will a universal law

of nature.” This mode of thinking asks whether the rationale for your action is suitable to become

a universal law or principle for everyone to follow. For example, “not breaking a promise”

would be a good principle for everyone to follow. This means that morality would be considered

unconditional and applicable to all people at all times and in all cases.

This approach suggests that moral judgments be made on the determination of intrinsic good or

evil in an act which should be self evident. For example, the Ten Commandments would be
considered as one of the guidelines to determine what is intrinsically good and what is

intrinsically evil.

3. Emotive approach:

This approach is proposed by A.J. Ayer. He suggests that morals and ethics are just the personal

viewpoints and “moral judgements are meaningless expressions of emotions.” The concept of

morality is personal in nature and only reflects a person’s emotions.

This means that if a person feels good about an act, then in his view, it is a moral act. For
example, using loopholes to cheat on income tax may be immoral from societal point of view,

but the person filing the income tax returns sees nothing wrong with it.

Similarly, not joining the army in time of war may be unethical and unpatriotic from the point of

view of the society and the country, but the person concerned may consider war as immoral in

itself. According to this approach, the whole idea about morality hinges on the personal view

point.

An extension of Emotive theory puts focus an the integrity of the person. While the person is

looking for his own “long term” benefit, he must have a “virtue ethics perspective” which

primarily considers the person’s character, motivations and intentions.

Character, motivations and intentions must be consistent with the principles accepted by society

as ethical. The advantage of this approach is that it allows the ethical decision maker to rely on

relevant community standards, “without going through the complex process of trying to decide

what is right in every situation using deontological or teleological approaches.”

4. Moral-rights approach:

This approach views behaviour as respecting and protecting fundamental human rights, equal

treatment under law and so on. Some of these rights are set forth in documents such as Bill of
Rights in America and U.N. Declaration of Human Rights. From ethical point of view, people

expect that their health and safety is not endangered by unsafe products.

They have a right not to be intentionally deceived on matters which should be truthfully

disclosed to them. Citizens have a fundamental right to privacy and violation of such privacy

would not be morally justifiable.

Individuals have the right to object and reject directives that violate their moral or religious

beliefs. For example, Sikhs are allowed to wear turbans instead of putting on a hat as required by
Royal Canadian Police, because of their religious beliefs.

5. Justice approach:

The justice view of moral behaviour is based on the belief that ethical decisions do not

discriminate people on the basis of any types of preferences, but treat all people fairly, equitably

and impartially, according to established guiding rules and standards. All mankind is created

equal and discriminating against any one on the basis of race, gender, religion, nationality or any

such criteria would be considered unethical.

From organizational point of view, all policies and rules should be fairly administered. For

example, a senior executive and an assembly worker should get the same treatment for the same

issue, such as a charge of sexual harassment.

 UNIT II

Globalization

Globalization and business ethics is becoming an important issue and is slowly making its way

into the media and policy maker's minds. After all, globalization is a development, which

increases the internationalization of production and manufacturing, governing and financing

processes. While international economic relations are nothing new, the global integration of

production, governing and financing processes within the structures of multinational, globally

operating corporations certainly is. A final question is how philosophical ethics can contribute to

the processes described here. Can ethics set limits to global business; indeed, is this the task it

has to fulfill? Before we can really discuss global ethics we should take just a moment to define

what ethics really is.

Ethics may be referred to as some standardized form of conduct/behaviour of individuals

understood and accepted in a particular field of activity. Ethics is a mass of moral principles or

sets of values about what conduct ought to be. They give an idea what is right or wrong, true or

false, fair or unfair, just or unjust, proper or improper, e.g. honesty, obedience, equality, fairness,

etc. and respect and then doing the right thing.

Ethics is a fundamental, personal trait, which one adopts and follows as a guiding principle in

one‘s life. Those placed in positions of trust and recognized for their knowledge and expertise

like managers, shall perform their duty with integrity, independence, sincerity and honesty. That

is the basic norm of professional ethics. A professional cannot justify his failure, negligence of

compromise, with excuses and explanations. Every rational human being practices ethics for his

own and others‘ welfare and safety.

Ethical issues occur frequently in management and extend far beyond the commonly discussed

problems of bribery, collusion and theft, reaching into areas such as corporate acquisitions,
marketing policies and capital investments. For example, after the merger of two firms, ethical

question arises whether to demote or fire the employees those who have been serving honestly

for so many years.

Globalization and Business Ethics: Under globalization, products are not manufactured any

more in one country and then exported, rather, products are designed and produced in production

sites in various locations around the world and financed by global investors and holding

companies. A prerequisite of globalised production is the globalization and liberalization of

financial markets, which enables or dramatically facilitates direct investment in foreign

countries, like India. A flood of mergers in the year 2000 is a good indicator for the globalization

of financial investment as well as for the global integrations of structures of production.

Globally acting corporations often promote Western ideals and images of consumption in

marketing and distribution, and they are supported in this role by the globally dominating

position of Western mass media. Globalization of markets and production, greatly diminish the

efficiency of national politics, in particular, national economic and labour market policy, as these

markets are not nationally organized anymore and can only to a limited extent be controlled

through national legislation and politics.

Globalization must now be regarded as a fact. But for business ethics, this fact poses a severe

problem: a legal framework that would be able to govern the interactions within the global

society in both an efficient and ethical way is only beginning to be developed.

It would be nearly impossible for a business do deal with another business without some level of

ethical behavior. Cheating, lying, and squeezing the other company or country is likely to cause

great anxiety between the two parties. They may decide not to work with each other at all.

As the global economy expands people will begin to deal more often with other from different

cultures, values, religions, and beliefs. In the business world this can be very frustrating if we
don't have enough knowledge about the other culture; even worse if we refuse to learn anything

about our business partners. Several global companies have set up various councils in their

organizations to be ethically responsible to employees.

Indian Ethos in Management

In order to understand how globalization and global values affects business ethics, or how the

two are related, we need to first understand what the Indian ethos is in business. Hence,

comparisons can be easily made in relation to India and the world.

Global imperatives and indigenous ethical values in India:

The key question of ethical centrality for today‘s managers and leaders in India from divergent

perspectives is the global imperatives and indigenous values in India. Domination of global

economic logic as the central theme gives rise to organizational prioritization away from ethical

core and it inevitably leads to serious consequences for people, institutions and society. In

addition, the idea that managers have responsibilities extending beyond this economic logic

needs to be a central theme of organizational sustainability. The societal level ethics and social

responsibilities are not easily distinguished in countries like India. The internal politics,

procedures and administrative behavior often reflect the values of the managerial elite. Indian

organizations have received wide spread negative rankings in various global, regional, national

surveys on corporate integrity and managerial probity in recent decades. This part highlights the

ethical gap common in Indian organizations.

The need for ethical analysis along economic, technical, financial and other decision parameters

are very important managerial priority. One of the most prominent scholars in managerial ethics

in India, S.K.Chakraborty, views the broad scene from a kaleidoscope of long tradition of Indian

heritage. One of the key themes is the distinction between intellectual ethics and consciousness

ethics. He extends the meaning and content of the number of related issues a range of practical

ethical challenges. Increasing the global linkages and professionalization of managerial cadre is

creating a new imperative of ethical imagination and deepening of managerial roots. While has

been extensive theoretical and practical debate and discussion on role of corporate governance in

East Indian societies, powerful indigenous doctrines of Indian tradition have not been
significantly featured in the literature on business ethics. Given the reality and perception of the

managerial ethics in India ,a great deal of progress is urgently needed in this area .linking the

modern corporate context to traditional Indian values and ethical roots is a blue print that needs

further attention.

A Macro Glance:

A few initial, general points are worthwhile. Systematic empirical investigation in the field has

yet to start in India. In fact, until the year 1992, ethics in business was hardly a topic of concerted

engagement at any level except in two or three business schools in the country. It was the only 2

billion dollar stock exchange fiasco in 1992 which threw up the ethics issue at the macro level.

Since then, investigate journalism has been playing a key role in highlighting corrupt and

fraudulent practices within the business politics criminals (BPC) triangle.

Presently the citizens are hopefully looking up to the assertive judiciary as the ultimate resort in

these ethically troubled times. The competitive fray among global corporations to enter the

Indian economy, and the eager overtures of Indian business to grow fast through 12

collaborations with them, have begun to manifest fresh varieties of business non-ethics .the

possibility of a two way traffic is not imaginary: business veering towards criminals and

criminals veering towards business.

The Semantics of Business Ethics:

The phrase ―black market‖ ruled into circulation during the second world war and has remained

since that time it denotes the process of clandestine cells of scarce ,rationed ,controlled

commodities at inflated prices .since 1992 the two words ―scam ‖and scandal have become very

common .they cover corrupt financial /economic practice of vast magnitude affecting large

section of the public .the B-P-C triangle has being prominently involved in these
episodes .business enterprises themselves ,with some highly honorable exception ,often consider

such practices to be part of the normal business process.

Whatever recent efforts the business community has been making seem all to be directed towards

offering better deal to domestic consumers in respect of consumables and consumer durables.

Consciousness of ethical imperatives in international business remains to be separately attended

to at least in terms of articulated norms and guidelines.

The Basis for Will to Ethics in Business:

A mute minority feels that a true long term challenge for several major Indian business and

financial sectors is: how far is it ethical to spread greed for goods and mercenaries for money in

the name of business growth, economic development, and higher living standards? In fact, to

make the point sharper, it is ethical to pronounce on ―higher standard of living‖ when it is really

―higher standard of consumption‖ which is being espoused?

Another general ethical problem relates to social consequences of employment contraction in

man power intensive basic industries .modern capital intensive technology replacing older

technologies is a process not without severe social –psychological fallout in a highly populated

country like India. The ethical issue is: global economical competitiveness or local social

psychological stability? Is there really any objective method of rating one to be more desirable

than the other?

The third general challenge appears to be one of abuse and misuse of sophisticated

communication technology.

Fourth, with increasing psychological drift and volatility in a artificially stimulated and

exteriorized mind set fueled by business, will society tend to lose mental health, replacing peace

and harmony by conflict and violence.

Fifth, how is ―corruption-in-a-poor-society‖ to be dealt with on a footing different from

―corruption in an affluent society‖ artificial cost escalation in tender bids, evasion,

misappropriation of bank funds, cornering of institutional finance, and diversion of funds from

productive channels are common place event in the formers.

Lastly has touched upon earlier, the entry of big multinationals in a certain key sectors of the

economy, although welcome in general, is yet throwing up new challenges in business ethics.

The capacity to corrupt and the willingness to be corrupted seem to be moving in alliance in a

several cases. Example, the Enron contract for power generation in Maharashtra.

Will to ethics in the practical business world:

In July 1956, the forum of free enterprise has published a manifesto .it contained the following

stern words:‖the certain malpractices have crept into the system of company management. They

are to be condemned and should be removed .hoarding, black marketing and profiteering are anti

social and evil .honest business practices can be promoted and encouraged by an honest efficient

administration in a democratic state. During the period of downslide the positive side of will to

ethics has also remained alive. To mention a notable instance ,the conceal of fair business

practices(CFBP) was established in 1966 by several leading private sector industrialists in

western India it adopted the following code of fair business practices.

i. To charge only fair and reasonable prices and take every possible step to ensure that

the prices to be charge to the consumer are brought to his notice.

ii. To take every possible step to ensure that the agent or dealers do not charge prices

higher than fixed.

iii. In time of scarcity ,not to withhold or suppress stocks of goods with a view to

hoarding or profiteering

iv. Not to produce or trade in spurious goods of standard lower than specified.

v. Not to adulterate goods supplied.

vi. Not to publish misleading advertisements.

vii. To avoid goods exported or imported at their correct prices.

viii. To maintain accuracy in weights and measures of goods offered for sale.

ix. Not to deal knowing in smuggled goods.

x. Providing after sales service was necessary or possible.

xi. Honoring the fundamental rights of the consumer –rights of safety, right to choose,

right to information and right to be heard

xii. Discarding social responsibility and the responsibility to protect the environment and

nature‘s infrastructure.

xiii. Ensuring that the product warranty is offered on simple, unambiguous and concise

language, highlighting the right of consumer under it.

Indian Capital Market: 8 Developments

1. Growth in Financial Intermediation:

The Indian capital market has grown due to innovation of the mechanism of indirect
financing.
This innovation has enhanced the efficiency of flow of funds from ultimate savers to
ultimate users through newly established financial intermediaries like UTI, LIC and
GIC. The LIC has been mobilising the savings of households to build a ‘life fund’.
It has been deploying a part of ‘life fund’ to purchase the shares and debentures of the
companies. Until 1991 UTI was amongst the top ten shareholders in one out of every
three companies listed in the Stock Exchange in which it had a shareholding.
Likewise, UTI has been mobilising savings of households through the sale of ‘units’
to invest in securities of ‘blue-chip’ companies.
In short, financial intermediaries like LIC, UTI and GIC have activated the growth
process of Indian capital market. It is evident from the rising intermediation ratio. The
intermediation ratio is a ratio of the volume of financial instruments issued by the
financial institutions, i.e., secondary securities to the volume of primary securities
issued by non-financial corporate firms rose from 0.27 during 1951-56 to 0.37 during
1979-80 to 1981-82.
2. Growth in Underwriting of Securities:
The New Issue Market as a segment of capital market can be activated through
institutional arrangements for the underwriting of new issues of securities. During the
pre-independence period, the volume of securities underwritten was quite minimal
due to lack of an adequate institutional arrangement for the provision of underwriting.
Stock brokers and banks used to perform this function.
In recent years, the volume and amount of securities underwritten have tremendously
increased owing to increasing participation of specialized financial institutions like
LIC and UTI and the developed banks like 1FC1,1CICI and IDBI in underwriting
activities. It is evident from the fact that the amount of securities underwritten was
only 55 per cent in 1960-61, whereas at present it is about 99 per cent.
3. Growth in Response to the Offer of Public Issues of Shares and Bonds:
Traditionally investors in India being risk-investors had been reluctant to invest in
shares of public limited companies. Hence, industrial securities as a form of
investment were not popular in India before 1951. However, since 1991 public
response to corporate securities has been improving. But equity-cult has yet to be
developed in rural areas.
It is important to point out that the public response to new issues of shares and bonds
depends upon number of factors such as rates of return on industrial securities relative
to rates of return on non-marketable financial assets and real assets, government’s
monetary policy and fiscal policy and above all legal protection to investors in recent
years.
All the above mentioned factors have contributed to the growth of public response to
new issue of corporate securities. In short, growing response to public issues has
strengthened the Indian capital market. It is evident from the fact that the number of
shareholders rose from 60 lakh in 1985 to 160 lakh in 1994.

4. Growth of Merchant Banking:

The role of merchant banking in India’s capital market can be traced back to 1969
when Grind lays Bank established a special cell called the ‘Merchant Banking’. Since
then all the commercial banks have set up the ‘Merchant Banking Division’ to play an
important role in the capital market.
The merchant banking division of commercial banks advises the companies about
economic viability, financial viability and technical feasibility of the project. They
conduct the initial ‘spade work’ to find out the investment climate to advise the
company whether the public issue floated would be fully subscribed or under-
subscribed.
The merchant banks in India act as the underwriter as well as the manager of new
issues of securities. The Securities and Exchange Board of India (SEBI) regulates all
merchant banks as far as their operations relating to issue activity are concerned. To
sum up, the emergence of merchant banking has strengthened the institutional base of
Indian capital market.
5. Growth of Credit Rating Agencies:
Of late, credit rating agencies have emerged in the financial sectors. This is an
important development for the growth of Indian capital market. Investment
Information and Credit Rating Agency of India (ICRA) rates bonds, debentures,
preference shares, CDs (Corporate Debentures) and CPs (Commercial Papers).
As Credit Rating Information Services of India Ltd. (CRISIL) is a pioneer in credit
rating, it rates debt instruments of banks, financial institutions and corporate firms.
The credit assessment of companies issuing securities helps in the growth of New
Issue Market segment of the capital market.

6. Growth of Mutual Funds:

Mutual funds companies are investment trust companies. Mutual funds schemes are
designed to mobilise funds from individuals and institutional investors, who in
exchange get units which Can be redeemed after a certain lock-in period, at their Net
Asset Value (NAV). The mutual fund schemes provide tax benefits and buy back
facility.
The Unit Trust of India (UTI) can be regarded as pioneer in the setting up of mutual
funds in India. Of late, commercial banks have also launched in India mutual funds
schemes. Can-stock scheme of the Canara bank and LIC’s scheme, such as
Dhanashree, Dhanaraksha and Dhanariddhi are mutual funds schemes.
Since mutual funds schemes help to mobilise small savings of the relatively smaller
savers to invest in industrial securities, so these schemes contribute to the growth of
capital market. The total assets of mutual funds companies increased from Rs. 66,272
crore in 1993-94 to Rs. 99,248 crore in 2005 and to Rs. 4,13,365 crore in 2008. The
investment of mutual funds in the secondary market influences the share prices in the
stock exchange.
7. Stock Exchange Regulation Act:
The growth of capital market would not have been possible had the Government of
India not legislated suitable laws to protect the investors and regulate the Stock
Exchanges. Under this Act, only recognized stock exchanges are allowed to function.
This Act has empowered the Government of India to enquire into the affairs of a
Stock Exchange and regulate it’s working.
The Government of India established the Securities and Exchange Board of India
(SEBI) on April 12, 1988 through an extra ordinary notification in the Gazette of
India. In April 1992, SEBI was granted statutory recognition by passing an Act. Since
1991, SEBI has been evolving and implementing various measures and practices to
infuse greater transparency in the capital market in the interest of investing public and
orderly development of the securities market.

8. Liberalisation Measures:
Foreign Institutional Investors (FII) have been allowed access to Indian capital
market. Investment norms for NRIs have been liberalized, so that NRIs and Overseas
Corporate Bodies can buy shares and debentures, without prior permission of RBI.
This was expected to internationalize Indian capital market.
To sum up, the Indian capital market has registered an impressive growth since 1951.
However, it is only since the mid-1980s that new institutions, new financial
instruments and new regularity measures have led to speedy growth of the capital
market. The liberalisation measures under New Economic Policy (NEP) gave a
further boost to the growth of Indian capital market.
BIGGEST SCAMS THAT PUT INDIA TO SHAME
1. Abhishek Verma arms deals scandal: Alchetron One man, three scandals. Abhishek Varma
is believed to be the main arms dealer and the prime suspect in the Scorpene submarines deal
case, AgustaWestland VVIP helicopters bribery scandal, and Navy War Room leak case.
Belonging to a politically connected family with both his parents holding government portfolios,
Abhishek was exposed to the media and public life since his childhood days. He was even named
as the youngest billionaire at the age of 28 in 1997. With a wide range of business associations,
including BSNL, multinational FMCG brands, and even construction of an international airport,
he was known as the ‘Lord of War’ in the international defence and armament company circles.
In 2006, Abhishek was accused of receiving kickbacks of approximately $200 million, through a
$4-5 billion Indian military deal involving the Indian government’s purchase of six Scorpène-
class submarines. Further, in 2012, the CBI raided his residence and establishments after
registration of multiple cases of corruption and money laundering against him and his wife. He
was arrested in 2012. He was also named as a suspect in the 2013 AgustaWestland VVIP
helicopters bribery scandal, where it was alleged that leaders in Indian government revived bribe
exceeding €50 million. In April 2017, a special CBI court acquitted the couple of the charges.
2. Wakf Board land scam Pegged to be possibly the biggest land scam in the country till date,
the Karnataka Wakf Board land scam involves the alleged misappropriation of land allocation
worth Rs 2,000 billion. In 2012, the Karnataka State Minorities Commission submitted a report
alleging that 27,000 acre of land controlled by the Karnataka Wakf Board had either been
embezzled or allocated illegally. The said property was supposed to be donated to the
underprivileged and poor through the Muslim charitable trust. Anwar Manippady, Chairman of
the Karnataka State Minorities Commission, said that over 50 percent of the land has been
misappropriated by politicians and board members. This was supposedly done in collusion with
the real estate mafia for a fraction of its market value under the watch of the Karnataka Wakf
Board. Investigation is currently ongoing.
3. Telgi scam: This scam seems to be straight out of a Hollywood movie. In 2002, Abdul Karim
Telgi was charged for counterfeiting stamp paper in India. He appointed 350 fake agents to sell
stamp papers to banks, insurance companies, and stock brokerage firms. The scam spread across
12 States and the amount involved was pegged at Rs 200 billion. The investigation revealed that
Telgi enjoyed support from various government departments that were involved in the
production and sale of high-security stamps. In January 2006, Telgi and several associates were
sentenced to 30 years rigorous imprisonment.
4. The ‘Coalgate’ scam September 2012 unearthed a scam that involved bureaucrats, political
leaders and several ministers from the ruling political party. The Comptroller and Auditor
General, India’s audit watchdog, reported inefficient and possibly illegal allocation of coal
blocks between 2004 and 2009. While initially the loss to the exchequer was pegged at Rs 10.7
lakh crore, the final report stated that the scam amounted to Rs 1.86 lakh crore. Essentially, the
Government of India followed a system of competitive bidding to allocate coal blocks. However,
CAG’s investigation revealed that the government followed another route that was “opaque and
subjective”. As a result, CAG noted that both the private and public sector enterprises paid less,
resulting in loss revenue for the government.
5. 2G Spectrum scam: This scam surfaced when it was revealed that the government, in 2008,
had undercharged mobile telephone companies for frequency allocation licences. These licences
are used to create 2G spectrum subscriptions for cell phones. The Comptroller and Auditor
General of India stated that “the difference between the money collected and that mandated to be
collected was Rs 1.76 trillion”. In February 2012, the Supreme Court of India declared the
allotment of spectrum as “unconstitutional and arbitrary” and cancelled the 122 licences issued
in 2008 under A. Raja, then Minister of Communications and IT.
6. Adarsh Housing Society scam : A posh 31-storey building located in Colaba, Mumbai, was
constructed for the welfare of war widows and personnel of Defence ministry. In 2011, the
Comptroller and Auditor General of India observed that over a period 10 years the society
flouted various Environment ministry rules. It was noted that politicians, bureaucrats and
military officers bent several rules concerning land ownership, zoning, and floor-space index. It
was also alleged that members allocated flats to themselves in the cooperative society below
market rates. In 2011, the Comptroller and Auditor General of India said, The episode of Adarsh
Co-operative Housing Society reveals how a group of select officials, placed in key posts could
subvert rules and regulations in order to grab prime government land – a public property – for
personal benefit. The scam forced the then Chief Minister of Maharashtra, Ashok Chavan, to
resign in 2010. Further, the CAG also indicted three other former chief ministers — Vilasrao
Deshmukh, Sushilkumar Shinde and Shivajirao Nilangekar Patil — two former urban
development ministers— Rajesh Tope and Sunil Tatkare — and 12 top bureaucrats, for various
illegal acts.
7. Commonwealth Games scam: The Commonwealth Games scam took India by storm in 2010
involving a pilferage of around Rs 70,000 crore. Since its inception, the games were tangled in a
maze of corrupt deals. This included inflated contracts, criminal conspiracy, cheating, and
forgery. And in the centre of the corruption was Suresh Kalmadi, the then Pune Lok Ssabha MP.
Investigation suggested that the organisng committee ran as a sort of “badmaash company,” and
he was charged under the Prevention of Corruption Act. Kalmadi allegedly awarded a Rs 141-
crore contract to Swiss Timing for its timing equipment, a deal inflated by Rs 95 crore. Further,
it was reported that Indian athletes were forced to stay in shabby apartments instead of the flats
allotted to them by the authorities. The case is currently under investigation.
8. Satyam scam Dubbed as ‘India’s Enron scandal’, the 2009 corporate scam shook the Indian
investors and shareholders community. Ramalinga Raju, the Chairman of Satyam Computer
Services, confessed that he had falsified the company's accounts, inflating the revenue and profit.
The fraud involved Rs 14,000 crore. The CBI investigated the case and Raju, along with 10 other
members faced imprisonment. Tech Mahindra took over the company.

Ethics and corporate compliance:

A strong Ethics and Corporate Compliance Program has become a need for every

regulated organisation. In addition to ensuring compliance to various regulations, such a

program helps organisations to proactively identity risks, improve ethical behaviour within

the organisation and become audit ready.

Fraud is never far from the headlines. In 2015, one of the biggest incidents of corporate

fraud that dominated the news was that of German automobile giant, Volkswagen, which

came under fire for inserting a "defeat device" in its diesel engines to cheat on emission

tests. Today, the company is contending with potential regulatory fines and compensation

cases from customers, as well as major reputational repercussions that have severely

affected its market share. Meanwhile, in another instance of fraud, electronics

conglomerate, Toshiba, was found to have overstated its earnings by nearly $2 billion over

seven years, more than four times its initial estimate . With scandals such as these in the

limelight, attention to ethics in the workplace has gained momentum.

Ethics and compliance is one of today’s highest risk concerns for businesses. This is

especially true of organizations in a global marketplace where such risks become harder to

identify and mitigate considering that there are often multiple subsidiaries, business units,

and third parties involved. As the global market place has evolved, so has the role of a

Chief Compliance Officer (CCO) and the corporate compliance teams. These individuals

have their task cut out for them, as they strive to balance the ever-increasing compliance

demands of regulators and internal stakeholders.

Rising Up to the Challenge of Ethics and Corporate Compliance Management

The primary responsibility of a corporate compliance team is to develop compliance

strategies and programs, while also implementing processes and tools to identify, oversee,

and mitigate compliance issues at an enterprise level. Additionally, with increasing

regulatory compliance requirements, the corporate compliance team is required to

collaborate with individual departments and regulatory teams to oversee compliance at

the departmental level.

Every organization needs to have a compliance strategy in place to determine potential

risks, identify ways to mitigate them in time, and outline a future course of action. These

strategies need to extend to the department level where compliance violations and issues

can often pose a threat to the organizational reputation. Programs, processes, and

technologies need to be in place to identify, prioritize, investigate, and address compliance

violations and risks before they morph into black swan events. Strong policies and

processes are also important in mitigating these risks. In fact, having a robust corporate

compliance program helps organizations maintain compliance with external regulations, as

 well as internal policies and processes. Training employees on policies also goes a long

way towards ensuring an ethical environment.

Building a successful compliance and ethics program can often be challenging. How do

you get from where you are to where you want to be? How can you be ready to deal with

risks that you haven’t faced yet? Here are five best practices:

 Be Proactive in Managing Compliance and Ethics

An organization’s readiness to handle a compliance issue is critical as it impacts brand

value and profitability. To that end, successful businesses need to be proactive in terms of

establishing controls and processes, defining accountability, and centrally managing

compliance requirements so that they are easily accessible to all concerned departments.

Being proactive also requires the corporate compliance team to collaborate with other

departments and regulatory compliance groups to manage their compliance processes,

controls, templates, and timelines. This approach gives the corporate compliance team

comprehensive visibility into organizational compliance, so that they can perform regular

or ad-hoc assessments to minimize violations.

 Adopt and Communicate an Ethical Profile

Ethics begins at home. The foundation of an effective ethics and corporate compliance

program is a strong and well-communicated code of ethics which can be best represented

in terms of policies and procedures. These policies and procedures define the culture and

expected behavior of everyone working in or with the organization. When there are

multiple subsidiaries spread out across different geographies, policy creation needs to

take into consideration various factors such as subsidiary location and industry. The key to

policy creation is to ensure that policies are applicable globally as well as locally. This helps

ensure that there are no gaps or loopholes in compliance. Automated tools can add

further value by simplifying the process of policy management

 Train Employees on Compliance Policies

Organizations cannot fully comply with regulations if its employees do not follow

organizational policies and procedures. Investing in employee training is always a smart

move. Employees need to understand the organization’s culture and its ethical boundaries.

Technology can play an important role here in the form of learning or training

management systems that make it easy to conduct and track multiple training programs.

 Integrate Hotlines with the Corporate Compliance Program

Many organizations have found it useful to have hotline numbers for employees to

anonymously report issues of bribery, fraud, ethical violations, discrimination, and other

incidents of misconduct at the workplace. Integrating hotlines with the company’s

corporate compliance program can be effective as it helps in tracking each issue from

creation to closure.

 Adopt a Risk-based Approach to Compliance Management

A risk-based approach to compliance and ethics management involves identifying the high

risk areas within the organization, and then prioritizing, managing, and monitoring those

risks. Compliance risks can be measured and scored from different perspectives such as

per business unit, process, and geography. Based on the risk rating, organizations can

effectively plan control testing. Issues can be also prioritized based on rating, impact,

likelihood, or type.

No organization can comply with rules and regulations overnight. Compliance is a

continuous process that requires businesses to keep setting new goals, leverage

technology to achieve these goals, assess the results, and again work towards improving

the results by setting new objectives. This continuous process will help corporate

compliance become an integral part of the business.

How to Motivate Ethical Behavior in the Workplace

A good manager will tell you that marketing, product placement and budgeting all take careful
planning, not random or unorganized effort. Many managers however, forget that motivating
ethical behavior in a workplace takes careful planning as well. Ethical employees make for an
ethical company, which will receive many benefits from its good reputation. Not only does it
attract more customers, an ethical company will also be able to entice and retain a more skilled
workforce.
1. Analyze your current work environment and the existing company values, mission, goals and
ethical policies. Note any misleading wording or failure to communicate company initiatives to
each employee, including new hires.

2. Solicit the input of each employee about any ethical issues she feels she faces or that others
may face. Your employee will be more likely to adhere to a policy she helped create in some
way. She is also likely to be pleased that you are concerned about an ethical work environment
because ethical companies are better able to care for the needs of their employees.

3. Gain the support of top management to reword any unclear goals and to add or develop an
ethics program in your company based on the feedback you get from your workforce and your
own careful research into common ethical issues in your industry. Study other organizations as
examples.

4. Provide ethics training in the form of employees responding to hypothetical situations that
may arise or scenarios you know take place in other companies. Many employees don't
understand which activities are unethical because certain practices become standard in workplace
and get ingrained in the culture. Employees will be empowered to make better decisions when
ample training is provided.

5. Clearly define the repercussions for wrongdoing. Not only should they be explained during
ethics training and employee evaluations, but these policies should clearly be posted on the
company's intranet or in the break room. Employees should all sign off on the ethics policy;
workers are more inclined to follow something if the punishment for not doing so is effectively
explained.

6. Provide a hotline or other anonymous reporting system that will help employees communicate
breaches of your ethics plan. An employee is more likely to say something if he knows there is
an established, easy way for him to report something. An employee is also more likely to adhere
to behavior policies when he knows any other worker can report him if he doesn't.

7. Provide encouragement and protection to any employee who comes forth to report
wrongdoing in person. Workers may have a tendency to look down on employees who "tell on"
coworkers, however, the accurate, well-intentioned reporting of unethical behavior should be
supported.

8. Set up ongoing workshops and mandatory meetings that discuss emerging ethics issues. Not
only should leaders train workers about new problems, managers should also solicit continual
feedback and ideas from the workforce. Your work environment can change without a moment's
notice so it is important for employees to be able to communicate these changes as well as get
up-to-date information on how to behave. A worker can only follow the policies she knows and
she will be more motivated if she has a clear understanding of the company's wishes.

UNIT III
Business Ethics and Marketing: Definition, Principles and Needs:

Business (or marketing) ethics are the moral principles generally found in forms of formulas,

songs, anecdotes, statements, or words that indicate direct or indirect lessons or guidelines that

businessmen have to observe while dealing with various interested parties. Business ethics and

marketing seem clashing. But, it is not the case always. Nowadays, due to competition, consumer

awareness, government compulsion, and self-restrictions imposed by the regulating body for the

relevant associations, marketers have started observing business ethics in marketing practices.
Marketing ethics are meant for ensuring fair dealings with marketing participants – customers,

dealers, employees, government, and the society. Consumerism, a social movement, is directed

toward compelling the marketing managers to practice such ethics. Ethics are either observed

voluntarily or are forced by the Law. In order to protect consumer rights (for example, right to

know, right to complain, right to be heard, right to safety, etc.) and ensure consumer welfare,

government of India has formulated at least 30 Laws, of which, most of them have been

amended several times to match the contemporary situations.

Definitions:

In fact, it is not possible to define marketing ethics in the exact words as they exert many loose

implications. There can be several definitions of marketing ethics.

In simple words, we can say:

Business ethics are standards or moral principles to judge right or wrong. They determine system

of conduct or behaviour of businessmen in relation to customers and others parties involved in

business activities. Ethics can be expressed in a variety of forms. It can be said: Business ethics

are the moral principles generally found in forms of formulas, songs, anecdotes, statements, or

words that indicate direct or indirect lessons or guidelines that businessmen have to observe

while dealing with various parties.

Ethics put restrictions on dealings and decisions of manager. In this regard, we can define the

term as: Marketing or business ethics are moral restrictions prescribed by the relevant bodies,

including associations, local authorities, or by the governments.

In the same way:

Marketing/business ethics are the business conditions that a marketer is required to observe

while dealing with customers and other participants. The ethics are self-observed or imposed by

relevant bodies for the benefits of customers and society as a whole.

At last, we can say:

Marketing ethics consist of those moral responsibilities of marketing managers related to

protecting the rights and ensuring the welfare of consumers, and fair dealing with all other

parties involved in marketing transactions.

Some Business Ethics:

There are a number of moral principles prescribed by different associations and

governments. They include:

1. Do not cheat customers by defective or inferior products.

2. Avoid black marketing, hoarding, profiteering and speculation for the interest of buyers.

3. Refrain from unhealthy competition, or promote healthy competition.

4. Ensure honesty and precision while packaging, labeling, and advertising the products.

5. Do not defame the image and reputation of other rival firms by improper methods.

6. Create and maintain up-to-date records of economic transactions and produce them when

asked by the relevant authority.

7. Pay taxes and duties honestly in time.

8. Discharge social responsibilities towards suppliers, governments, investors, employees,

service providers, etc.

9. Do not make any contracts with others that affect adversely the long-term social interest and

welfare of people. Do not work against national interest.

10. Extend all possible support and cooperation to the governments in implementing social and

economic plans.
11. Contribute liberally for promoting socially significant activities.

12. Protect ecological environment in all possible ways.

Who form and promote business ethics?

Various parties can contribute to formulation (development) and promotion of business ethics.

Particularly, globally recognized organisations (like the WHO, the World Bank, the UNO, the

UNESCO, the UNICEF, etc.), non-government organisations (NGOs), trade unions,

governments, relevant associations of business units and industries, professionals, spiritual

organisations and religious leaders, active and established political parties, academic and training

institutes, business organisations (their founders/pioneers and managing bodies), customer

organisations, any other registered or non-registered body of people, and a common man can

have valuable direct or indirect contribution in development and promotion of business ethics.

Business ethics are promoted through general or specific circulars, bulletins, reposts, speeches of

well-known personalities, and all other mass media.

Needs and Objectives of Business Ethics in Marketing:

Business ethics are special type of regulatory guidelines. They are vital for making business

operations more authentic. Today’s marketing practices are full of deceptive packing, ambiguous

offers, exaggerated advertising, and aggressive selling. Some marketers practice several unfair

tactics to attract customers in pursuit of sales volumes and profits. Business ethics restrict these

all things. Their presence and compulsion to follow them make a lot of difference in marketing

activities. Business ethics are necessary for marketer as well as consumers. They have many

direct or indirect purposes.

Some common purposes may include the followings:

1. To prevent malpractices in business. Ethics make business activities more authentic.

2. To ensure uniformity in marketing practices among various business enterprises throughout

the country.

3. To make marketers more aware, sensible, and liable to customers and society as a whole.

4. To ensure confirmation of marketing practices with the contemporary legal framework.

5. To enforce government, voluntary social organisations, and others to be alert regarding long-

term interest and welfare of society.

6. To assist government to formulate necessary legal provisions and enforce the marketers to

obey them.

7. To distinguish ideal firms from exploiting firms. They facilitate in taking needed actions

against those firms indulging malpractices.

8. To decide on rewards, awards, certificates, prizes, and other encouragements for deserving

business firms.

UNFAIR OR DECEPTIVE MARKETING PRACTICES

Marketing practices are deceptive if customers believe they will get more value from a product
or service than they actually receive. Deception, which can take the form of a misrepresentation,
omission, or misleading practice, can occur when working with any element of the marketing
mix. Because consumers are exposed to great quantities of information about products and firms,
they often become skeptical of marketing claims and selling messages and act to protect
themselves from being deceived. Thus, when a product or service does not provide expected
value, customers will often seek a different source.

Deceptive pricing practices cause customers to believe that the price they pay for some unit of
value in a product or service is lower than it really is. The deception might take the form of
making false price comparisons, providing misleading suggested selling prices, omitting
important conditions of the sale, or making very low price offers available only when other items
are purchased as well. Promotion practices are deceptive when the seller intentionally misstates
how a product is constructed or performs, fails to disclose information regarding pyramid sales
(a sales technique in which a person is recruited into a plan and then expects to make money by
recruiting other people), or employs bait-and-switch selling techniques (a technique in which a
business offers to sell a product or service, often at a lower price, in order to attract customers
who are then encouraged to purchase a more expensive item). False or greatly exaggerated
product or service claims are also deceptive. When packages are intentionally mislabeled as to
contents, size, weight, or use information, that constitutes deceptive packaging. Selling
hazardous or defective products without disclosing the dangers, failing to perform promised
services, and not honoring warranty obligations are also considered deception.

OFFENSIVE MATERIALS AND OBJECTIONABLE MARKETING PRACTICES

Marketers control what they say to customers as well as and how and where they say it. When
events, television or radio programming, or publications sponsored by a marketer, in addition to
products or promotional materials, are perceived as offensive, they often create strong negative
reactions. For example, some people find advertising for all products promoting sexual potency
to be offensive. Others may be offended when a promotion employs stereotypical images or uses
sex as an appeal. This is particularly true when a product is being marketed in other countries,
where words and images may carry different meanings than they do in the host country.

When people feel that products or appeals are offensive, they may pressure vendors to stop
carrying the product. Thus, all promotional messages must be carefully screened and tested, and
communication media, programming, and editorial content selected to match the tastes and
interests of targeted customers. Beyond the target audience, however, marketers should
understand that there are others who are not customers who might receive their appeals and see
their images and be offended.

Direct marketing is also undergoing closer examination. Objectionable practices range from
minor irritants, such as the timing and frequency of sales letters or commercials, to those that are
offensive or even illegal. Among examples of practices that may raise ethical questions are
persistent and high-pressure selling, annoying telemarketing calls, and television commercials
that are too long or run too frequently. Marketing appeals created to take advantage of young or
inexperienced consumers or senior citizens—including advertisements, sales appeals disguised
as contests, junk mail (including electronic mail), and the use and exchange of mailing lists—
may also pose ethical questions. In addition to being subject to consumer-protection laws and
regulations, the Direct Marketing Association provides a list of voluntary ethical guidelines for
companies engaged in direct marketing (available at their Web site at www.the-dma.org).

ETHICAL PRODUCT AND DISTRIBUTION PRACTICES

Several product-related issues raise questions about ethics in marketing, most often concerning
the quality of products and services provided. Among the most frequently voiced complaints are
ones about products that are unsafe, that are of poor quality in construction or content, that do
not contain what is promoted, or that go out of style or become obsolete before they actually
need replacing. An organization that markets poor-quality or unsafe products is taking the chance
that it will develop a reputation for poor products or service. In addition, it may be putting itself
in jeopardy for product claims or legal action. Sometimes, however, frequent changes in product
features or performance, such as those that often occur in the computer industry, make previous
models of products obsolete. Such changes can be misinterpreted as planned obsolescence.

Ethical questions may also arise in the distribution process. Because sales performance is the
most common way in which marketing representatives and sales personnel are evaluated,
performance pressures exist that may lead to ethical dilemmas. For example, pressuring vendors
to buy more than they need and pushing items that will result in higher commissions are
temptations. Exerting influence to cause vendors to reduce display space for competitors'
products, promising shipment when knowing delivery is not possible by the promised date, or
paying vendors to carry a firm's product rather than one of its competitors are also unethical.

Research is another area in which ethical issues may arise. Information gathered from research
can be important to the successful marketing of products or services. Consumers, however, may
view organizations' efforts to gather data from them as invading their privacy. They are resistant
to give out personal information that might cause them to become a marketing target or to
receive product or sales information. When data about products or consumers are exaggerated to
make a selling point, or research questions are written to obtain a specific result, consumers are
misled. Without self-imposed ethical standards in the research process, management will likely
make decisions based on inaccurate information.

DOES MARKETING OVERFOCUS ON MATERIALISM?

Consumers develop an identity in the marketplace that is shaped both by who they are and by
what they see themselves as becoming. There is evidence that the way consumers view
themselves influences their purchasing behavior. This identity is often reflected in the brands or
products they consume or the way in which they lead their lives.

The proliferation of information about products and services complicates decision making.
Sometimes consumer desires to achieve or maintain a certain lifestyle or image results in their
purchasing more than they need or can afford. Does marketing create these wants? Clearly,
appeals exist that are designed to cause people to purchase more than they need or can afford.
Unsolicited offers of credit cards with high limits or high interest rates, advertising appeals
touting the psychological benefits of conspicuous consumption, and promotions that seek to
stimulate unrecognized needs are often cited as examples of these excesses.

SPECIAL ETHICAL ISSUES IN MARKETING TO CHILDREN

Children are an important marketing target for certain products. Because their knowledge about
products, the media, and selling strategies is usually not as well developed as that of adults,
children are likely to be more vulnerable to psychological appeals and strong images. Thus,
ethical questions sometimes arise when they are exposed to questionable marketing tactics and
messages. For example, studies linking relationships between tobacco and alcohol marketing
with youth consumption resulted in increased public pressure directly leading to the regulation of
marketing for those products.

The proliferation of direct marketing and use of the Internet to market to children also raises
ethical issues. Sometimes a few unscrupulous marketers design sites so that children are able to
bypass adult supervision or control, or sometimes they present objectionable materials to
underage consumers or pressure them to buy items or provide credit card numbers. When this
happens, it is likely that social pressure and subsequent regulation will result. Likewise,
programming for children and youth in the mass media has been under scrutiny recently.

In the United States, marketing to children is closely controlled. Federal regulations place limits
on the types of marketing that can be directed to children, and marketing activities are monitored
by the Better Business Bureau, the Federal Trade Commission, consumer and parental groups,
and the broadcast networks. These guidelines provide clear direction to marketers.

ETHICAL ISSUES IN MARKETING TO MINORITIES

The United States is a society of ever-increasing diversity. Markets are broken into segments in
which people share some similar characteristics. Ethical issues arise when marketing tactics are
designed specifically to exploit or manipulate a minority market segment. Offensive practices
may take the form of negative or stereotypical representations of minorities, associating the
consumption of harmful or questionable products with a particular minority segment, and
demeaning portrayals of a race or group. Ethical questions may also arise when high-pressure
selling is directed at a group, when higher prices are charged for products sold to minorities, or
even when stores provide poorer service in neighborhoods with a high population of minority
customers. Such practices will likely result in a bad public image and lost sales for the marketer.

Unlike the legal protections in place to protect children from harmful practices, there have been
few efforts to protect minority customers. When targeting minorities, firms must evaluate
whether the targeted population is susceptible to appeals because of their minority status. The
firm must assess marketing efforts to determine whether ethical behavior would cause them to
change their marketing practices.

ETHICAL ISSUES SURROUNDING THE PORTRAYAL OF WOMEN IN

MARKETING EFFORTS

As society changes, so do the images of and roles assumed by people, regardless of race, sex, or
occupation. Women have been portrayed in a variety of ways over the years. When marketers
present those images as overly conventional, formulaic, or oversimplified, people may view
them as stereotypical and offensive.
Examples of demeaning stereotypes include those in which women are presented as less
intelligent, submissive to or obsessed with men, unable to assume leadership roles or make
decisions, or skimpily dressed in order to appeal to the sexual interests of males. Harmful
stereotypes include those portraying women as obsessed with their appearance or conforming to
some ideal of size, weight, or beauty. When images are considered demeaning or harmful, they
will work to the detriment of the organization. Advertisements, in particular, should be evaluated
to be sure that the images projected are not offensive.

Ethics in Advertising
Ethics means a set of moral principles which govern a person’s behavior or how the activity is
conducted. And advertising means a mode of communication between a seller and a buyer.

Thus ethics in advertising means a set of well defined principles which govern the ways of
communication taking place between the seller and the buyer. Ethics is the most important
feature of the advertising industry. Though there are many benefits of advertising but then there
are some points which don’t match the ethical norms of advertising.

An ethical ad is the one which doesn’t lie, doesn’t make fake or false claims and is in the
limit of decency.

Nowadays, ads are more exaggerated and a lot of puffing is used. It seems like the advertisers
lack knowledge of ethical norms and principles. They just don’t understand and are unable to
decide what is correct and what is wrong.

The main area of interest for advertisers is to increase their sales, gain more and more customers,
and increase the demand for the product by presenting a well decorated, puffed and colorful ad.
They claim that their product is the best, having unique qualities than the competitors, more cost
effective, and more beneficial. But most of these ads are found to be false, misleading customers
and unethical. The best example of these types of ads is the one which shows evening snacks for
the kids, they use coloring and gluing to make the product look glossy and attractive to the
consumers who are watching the ads on television and convince them to buy the product without
giving a second thought.
Ethics in Advertising is directly related to the purpose of advertising and the nature of
advertising. Sometimes exaggerating the ad becomes necessary to prove the benefit of the
product. For e.g. a sanitary napkin ad which shows that when the napkin was dropped in a river
by some girls, the napkin soaked whole water of the river. Thus, the purpose of advertising was
only to inform women about the product quality. Obviously, every woman knows that this
cannot practically happen but the ad was accepted. This doesn’t show that the ad was unethical.

Ethics also depends on what we believe. If the advertisers make the ads on the belief that the
customers will understand, persuade them to think, and then act on their ads, then this will lead
to positive results and the ad may not be called unethical. But at the same time, if advertisers
believe that they can fool their customers by showing any impractical things like just clicking
fingers will make your home or office fully furnished or just buying a lottery ticket will make
you a millionaire, then this is not going to work out for them and will be called as unethical.

Recently, the Vetican issued an article which says ads should follow three moral principles -
Truthfulness, Social Responsibility and Upholding Human Dignity.

Generally, big companies never lie as they have to prove their points to various ad regulating
bodies. Truth is always said but not completely. Sometimes its better not to reveal the whole
truth in the ad but at times truth has to be shown for betterment.

Pharmaceutical Advertising - they help creating awareness, but one catchy point here is that the
advertisers show what the medicine can cure but never talk about the side effects of that same
thing or the risks involved in intake of it.

Children - children are the major sellers of the ads and the product. They have the power to
convince the buyers. But when advertisers are using children in their ad, they should remember
not to show them alone doing there work on their own like brushing teeth, playing with toys, or
infants holding their own milk bottles as everyone knows that no one will leave their kids
unattended while doing all these activities. So showing parents also involved in all activities or
things being advertised will be more logical.

Alcohol - till today, there hasn’t come any liquor ad which shows anyone drinking the original
liquor. They use mineral water and sodas in their advertisements with their brand name. These
types of ads are called surrogate ads. These type of ads are totally unethical when liquor ads are
totally banned. Even if there are no advertisements for alcohol, people will continue drinking.

Cigarettes and Tobacco - these products should be never advertised as consumption of these
things is directly and badly responsible for cancer and other severe health issues. These as are
already banned in countries like India, Norway, Thailand, Finland and Singapore.

Ads for social causes - these types of ads are ethical and are accepted by the people. But ads like
condoms and contraceptive pills should be limited, as these are sometimes unethical, and are
more likely to loose morality and decency at places where there is no educational knowledge
about all these products.

Looking at all these above mentioned points, advertisers should start taking responsibility of self
regulating their ads by:

 design self regulatory codes in their companies including ethical norms, truth, decency,
and legal points
 keep tracking the activities and remove ads which don’t fulfill the codes.
 Inform the consumers about the self regulatory codes of the company
 Pay attention on the complaints coming from consumers about the product ads.
 Maintain transparency throughout the company and system.

When all the above points are implemented, they will result in:

 making the company answerable for all its activities

 will reduce the chances of getting pointed out by the critics or any regulatory body.
 will help gain confidence of the customers, make them trust the company and their
products.

Ethical Issues Faced by Human Resource

1. Employment Issues:

HR professionals are likely to face maximum ethical dilemmas in the areas of hiring of

employees.
Major challenges in this area are:

a. Pressure to hire a friend or relative of a highly placed executive.

b. Faked credentials submitted by a job applicant.

c. Discovery that an employee who has been with the organisation for some time, is

skilled and has established a successful record, had lied about his educational credentials.
2. Cash and Incentive Plans:

Cash and incentive plans include issues like basic salaries, annual increments or

incentives, executive perquisites and long term incentive plans:

Basic Salaries:

HR managers have to justify a higher level of basic salaries or higher level of percentage

increase than the competitors to retain some employees. In some situations, where the

increase is larger than normal they have to elevate some positions to higher grades.

Annual increment/incentive Plans. This situation is particularly true in case of top

management executives. The fear of losing some outstanding executives, the HR

managers is forced to give higher incentives to them than what the individuals actually

deserve.

Executive Perquisites:

In the name of executive perquisites, sometimes excesses are often committed, the ethical

burden of which falls on the HR managers. Sometimes the costs of these perquisites are

out of proportion to the value added. For example, the CEO of a loss making company

buys a Mercedes for his personal use or wants a swimming pool built at his residence.

Long term incentive Plans. Long term incentive plans are to be drawn by the HR

managers in consultation with the CEO and an external consultant. Ethical issues arise

when the HR manager is put to pressure to favour top executive interests over the

interests of the other employees and the investors.

3. Employees Discriminations:
A framework of laws and regulations has been evolved to avoid the practices of treatment

of employees on the basis of their caste, sex, religion, disability, age etc. No organisation

can openly practice any discriminatory policies, with regard to selection, training,

development, appraisal etc. A demanding ethical challenge arises when there is pressure

on the HR manager to protect the firm or an individual at the expense of someone

belonging to the group which is being discriminated against.

4. Performance Appraisal:

Ethics should be the basis of performance evaluation. Highly ethical performance

appraisal demands that there should be an honest assessment of the performance and

steps should be taken to improve the effectiveness of employees. However, HR

managers, sometimes, face the dilemma of assigning higher rates to employees who are

not deserving them; based on some unrelated factors eg. closeness to the top

management. Some employees are, however, given low rates, despite their excellent

performance on the basis of factor like caste, religion or not being loyal to the appraiser.
5. Privacy:

The private life of an employee which is not affecting his professional life should be free

from intrusive and unwarranted actions.

HR managers face three dilemmas in this aspect:

(i) The first dilemma relates to information technology. A firm’s need for information

particularly about employees while on job may be at odds with the employee’s privacy.

Close circuit cameras, tapping the phones, reading the computer files of employees etc.

breach the privacy of employees.

(ii) The second ethical dilemma relates to the AIDS testing. AIDS has become a public

health problem. HR managers are faced with two issues: Whether all the new employees

should be subject to AIDS test and what treatment should be melted out to an employee

who is affected with the disease. It is however generally understood that since AIDS

cannot be contracted by casual and normal workplace contract, employees with this
 illness should not be discriminated against and they should be allowed to perform jobs for

which they are qualified.

(iii) The third ethical dilemma relates to Whistle Blowing. Whistle blowing refers to a

public disclosure by former or current employees of any illegal, immoral or illegitimate

practices involving their employers. Generally, employees are not expected to speak

against their employers, because their first loyalty in towards the organisation for which

they work. However, if the situation is such that some act of the organisation can cause

considerable harm to the society, it may become obligatory to blow the Whistle. The HR

manager is in the dilemma how to solve this issue between the opponents and defenders

of whistle blowing.
6. Safety and Health:

Industrial work is often hazardous to the safety and health of the employees. Legislations

have been created making it mandatory on the organisations and managers to compensate

the victims of occupational hazards. Ethical dilemmas of HR managers arise when the

justice is denied to the victims by the organisation.

7. Restructuring and layoffs:

Restructuring of the organisations often result in layoffs and retrenchments. This is not

unethical, if it is conducted in an atmosphere of fairness and equity and with the interests

of the affected employees in mind. If the restructuring company requires closing of the

plant, the process by which the plant is chosen, how the news is to be communicated and

the time frame for completing the layoffs is ethically important.

Unethical Practices in Finance and Investment Decisions

Unethical Practices in Finance:

The unethical practices in accounting are more in proprietary, partnership and private limited

companies. It is at lower levels in public limited companies and MNCs.

Some of the unethical practices in financing and accounting are as under:

i. Deliberate abnormal delays in payments to (a) Vendors, (b) Dealers commissions and

promotion costs.

ii. Delays in paying wages, interest to financiers, incentive, bonus to employees.

iii. Holding up bills of vendors on silly reasons and ultimately buying from others to avoid

payment to earlier vendors.

iv. Not prompt in statutory payments of ESI, PF, Sales Tax and Excise Duties.

v. Cheating employees of their dues towards medical expenses, leave travel assistance, children

education fees etc.,

vi. Opening of current accounts in different banks to avoid adjustments against loans by earlier

banker.

vii. Creating bogus bills of purchase to show higher costs and hence losses to avoid bonus

payment to employees.

viii. Collecting loans from private financiers at higher rate of interest to help kith and kin and to

get kick-backs.

ix. Quick release of payments to known or adjustment parties and delaying payment to others.

x. Taking private finance only from those who are ready to do personal favours to the finance

department head.
Unethical Practices in Investment Decisions:

Business and industries do need money. The requirement of funds may be long term, medium

term and start term type.

There are different approaches to raise funds as shown hereunder:

(1) Long Term Financing:

The popular sources for long term financing are as under:

i. Issue of equity shares,

ii. Issue of irredeemable debentures,

iii. Retained earnings (plough back of profits),

iv. Financial assistance from special financing institutions.

(2) Medium Term Financing:

The usual sources of finance are as follows:

i. Issue of redeemable debentures,

ii. Issue of preference shares,

iii. Public deposits,

iv. Medium Term loans,

v. Financial assistance from special financing institutions.

(3) Short Term Financing:

The commonly used modes of short term financing are:

i. Trade credit,

ii. Bank credit and

iii. Advances from dealers and customers.

While taking credit and during public issues the companies have to furnish the accounts and

performance details including the details of promoters. To what extent truthful information and

data is provided to financiers / investor is the ethical issue involved in investment matters.

Organisational Culture: Meaning, Characteristics, Typology and Other Details

To understand the meaning of organisational culture, we must first understand the meaning of

culture. “Culture is the set of important understandings that members of a community share in

common.” It consists of a basic set of values, ideas, perceptions, preferences, concept of

morality, code of conduct etc. which create a distinctiveness among human groups.

When we talk about culture, we typically refer to the pattern of development reflected in a

society’s system of knowledge, ideology, values, laws, social norms and day to day rituals.

Depending upon the pattern and stage of development, culture differs from society to society.

Moreover, culture is passed on from generation to generation.

In simple words we can say that “culture is a combination of factors that are learned through our

interaction with the environment during our developmental and growth years.” After

understanding the meaning of culture, we will now attempt to define organisational culture.
Few Definitions:

“The organisational culture is a system of shared beliefs and attitudes that develop within an

organisation and guides the behaviour of its members.”

“The corporate culture consists of the normal values and unwritten rules of conduct of an

organisation as well as management styles, priorities, beliefs and inters personal behaviour that

prevails. Together they create a climate that influences how will people communicate, plan and

make decisions.”

“Organisational culture can be defined as the philosophies, ideologies, values, assumptions,

beliefs, expectations, attitudes and norms that knit an organisation together and are shared by its

employees.”

According to Edgar Schein, “Organisational culture can be defined as a pattern of basic

assumptions-invented, discovered or developed by a given group as it learns to cope with its

problems of external adaptation and internal integration-that has worked well enough to be

considered valuable and, therefore, to be taught to new members as the correct way to perceive,

think and feel in relation to those problems.”

All the above definitions of organisational culture stress on the sharing of norms and values that

guide the organisational members’ behaviour. These norms and values are clear guidelines as to

how employees are to behave within the organisation and their expected code of conduct outside

the organisation.

Characteristics of Organisational Culture:

The following characteristics help us to understand the nature of organisational culture better.

When we mix and match these characteristics, we get to the basis of culture:
1. Individual Autonomy:
The degree of responsibility, freedom and opportunities of exercising initiative that individuals

have in the organisation.

2. Structure:

The degree to which the organisation creates clear objectives and performance expectations. It

also includes the degree of direct supervision that is used to control employee behaviour.

3. Management Support:

The degree to which, managers provide clear communication, assistance; warmth and support to

their subordinates.

4. Identity:

The degree to which, members identify with the organisation as a whole rather than with their

particular work group or field of professional expertise.

5. Performance Reward System:

The degree to which reward system in the organisation like increase in salary, promotions etc. is

based on employee performance rather than on seniority, favouritism and so on.

6. Conflict Tolerance:

The degree of conflict present in relationships between colleagues and work groups as well as

the degree to which employees are encouraged to air conflict and criticisms openly.

7. Risk Tolerance:

The degree to which, employees are encouraged to be innovative, aggressive and risk taking.

8. Communication Patterns:

The degree to which, organisational communications are restricted to the formal hierarchy of

authority.

9. Outcome Orientation:
The degree to which, management focuses on results or outcomes rather than on the techniques

and processes used to achieve these outcomes.

10. People Orientation:

The degree to which, management decisions take into consideration the impact of outcomes on

people within the organisation. When we appraise the organisation on the basis of the above

characteristics, we get a complete picture of the organization’s culture. This picture becomes the

basis of shared norms, beliefs and understanding that members have about the organisation, how

things are done in it and how the members are supposed to behave.

Cultural Typology:

Goffee and Jones have identified four distinct cultural types. They argue that these four culture

types are based on two dimensions which they call sociability and solidarity. Sociability refers to

high concerns for people i.e. it is people oriented and focuses on processes rather than on

outcomes. The second dimension i.e. solidarity is however task oriented.

These two dimensions create four distinct cultural types:

1. Networked Culture:

Networked culture is high on sociability and low on solidarity. Which means that the

organisation treats, its members in a quite friendly manner and there is open sharing of

information. However, this culture type may lead to poor performance as the focus is on the

people rather than on tasks.

2. Mercenary Culture:

It is low on sociability and high on solidarity. The organisations with mercenary culture are task

oriented and believe in competition. The people are highly focussed and goal oriented but, this

type of culture may at times lead to frustration and stress among poor performers.

3. Fragmented Culture:
Fragmented culture is low on both sociability and solidarity. There is little or no identification

with the organisation. It is the individual members’ commitment, productivity and quality of

work which is of utmost importance. This type of culture however suffers from lack of

collegiality.

4. Communal Culture:

It is high on both sociability and solidarity. The organisations with communal culture value both

people and tasks. Work accomplishment is from committed people, and there is a relationship of

trust and respect.

The following diagram explains the four cultural typology:

Changing Organisational Culture:

Sometimes an organisation determines that its culture is unfavorable to the organisational

effectiveness and it has to be changed. For example, if there is a change in the external

environment, the organisation must adapt itself to the changing conditions or it will not survive.

Though it is very difficult to change the old cultures, but it is something which the management

cannot do without.

The following conditions must be present only then a cultural change can take place:
1. Dramatic Crisis:
Any dramatic crisis in the organisation like a major financial setback, loss of a major customer,

or a technological breakthrough by a competitor may force the management to look into the

relevance of the existing culture.

2. New Top Leadership:

If some top executives leave the organisation and new leadership takes over, they may provide

an alternative set of key values or a new culture. This new leadership may be more capable of

responding to the crisis.

3. Young and Small Organisation:

When the organisation is new and its size is small, it will be easier for the management to change

the culture.

4. Weak Culture:

Weak cultures are more amenable to change than strong ones. The higher the agreement among

the members on the organisational values, the more difficult it will be to change.

If the above mentioned conditions which support the cultural change are present, the

following suggestions can be considered for implementing the change:

(i) The top management people should become the positive role models. They should set the

examples through their own behaviour.

(ii) As employees learn the culture through stories, symbols and rituals, the old stories, rituals

and symbols should be replaced by creating new ones which are currently in vogue.

(iii) Adding new members, particularly at the higher level, is a powerful strategy to change the

culture, provided the new members bring in new culture.

(iv) The socialization processes should be redesigned to align with the new values.
(v) Reward system establish and reinforce specific cultural behaviours and therefore, a change in

culture can be initiated and supported by change in corporate reward systems.

(vi) Unwritten norms and beliefs should be replaced with formal rules and regulations that are

tightly enforceable.

(vii) Extensive use of job rotations should be made to shake current subcultures.

(viii) Change in the top management can have significant impact on others in the organisation,

because he may be, in a real sense, the personification of the culture.

(ix) Change in culture will be comparatively easy if peer group consensus is got through use of

employee participation and creation of a climate with a high level of trust.

Even if all the above suggestions are implemented, it will not result in an immediate change in

culture. Cultural change is a lengthy process, but still it is not impossible to achieve.
How to Take Ethical Decisions ? | Corporate Governance

To take ethical decisions at personal level or in the capacity of a business man or a manager one

needs good understanding of the subject and courage. It is not only taking fair and good

decisions but also acting on the decisions taken.

In any given situations in business the general question one has to ask are:

i. Is it right?

ii. Is it fair?

iii. Who gets benefits and who gets hurt and who is untouched and why?

iv. How the public will view your decision?

v. How your decision will be questioned or will it come on the front page of the newspaper?

The general thumb rules used for quick ethical tests are:

1. Common sense:

One has to think before acting if the common sense of the man says it is ok.

2. The Golden Rule:

Do not harm others. Take decisions to others on the basis of how you would like others to treat

you.

3. The means-ends ethics:

One may choose bad means to reach really good hands which are worthwhile and significant.

Ends should not be treated as means.

4. The Intuition Ethic:

We should follow our gut feel of what is right and what is wrong. Follow what is right and take

decisions.

5. Use the Best Judgment:

Based on your moral concept take the most optimal decision to harm less and benefit the

maximum.

6. The Test of Ventilation:

Before taking a decision wait for a minute isolate yourself from the problem. Wait for the

feedback from others before taking a decision or acting, that is, you allow others to ventilate their

ideas.

7. The Purified Idea:

Do not take any action based on guidelines from higher ups or your friends. You are responsible

for all the decisions you make. The manager has to understand the implicit morality of an

organisation which is interwoven in the day-to-day working logic in the organisation. Once the

internal logic is clearly understood a manager can evaluate the behaviours and decisions against

different ethical dilemma situations.

Ethical decisions should be good, practical and stand moral test. It is necessary that companies

and top managers have close relations with stakeholders. Understand and share those ethical

values that define the parameters of business decisions and actions. That is following stakeholder

management principles, while keeping in mind company codes of ethics and commercial profit

targets.

Ethical decision making steps for a manager are:

(1) Study:

Study the ground realities of business practices, traditions, industry norms and cultural patterns.

Clarify unclear and gray areas.

(2) Limits of Power:

Understand guidelines from the top and views or recommendations of officers of different levels

in the organisation.

(3) Many solutions:

Develop many responsible, independent solutions taking into account objectives of the company

and meeting values of maximum number of stakeholders.

(4) Check past cases:

Find similar dilemmas cases in the past in your company or other similar cases in other

companies. How the problems were solved and outcomes be studied to help the present case.
(5) Negotiate:

Negotiate the optional choice that gives maximum good to more stakeholders. Negotiation skills

are necessary to see when to negotiate, how much and what to negotiate.

Steps in Ethical Decision Making:

(I) Integrity and accountability Integrity:

i. Find right and wrong (personal values)

ii. Act on what you have found (your values)

iii. Say openly what you have found and acting

Accountability:

i. Identify possible courses of actions in line with values

ii. Identify impact of decisions on others and on you

iii. Balance the impact with personal interest

iv. Be accountable to others when you choose to impact them

(II) Moral decision making in Business Individual processes:

(1) Genetic inheritance

(2) Religion

(3) Philosophical systems

(4) Cultural experience

(5) Legal system

(6) Codes of conduct

(III) Moral decision making in Business Corporate processes:

i. Companies can be considered as an ‘Actor’:

a. Organisation chart makes a system

b. A set of policies and procedures are laid for action

c. The judgments and actions of individuals in a company are governed by company

ii. Companies do not have right to life as any individual.

iii. Companies could be treated as moral actor.

iv. Finding the guilty is not possible within the corporate jungle.

(IV) Business Ethics in practice:

i. Nature of company policies in doing ethical or unethical, wrong doing willfully

ii. Market place does not help ethical or honest behaviour

iii. Persons act honest because of high cost of dishonesty

iv. Truth is good policy. “Time discovers truth”. If truth is slightly weakened all are doubtful.

The traditional theories of ethics include the Ten Commandments, the utilitarianism of John

Stuart Mill, Aristotelian Ethics, teleological ethical systems and deontological ethical systems.
 UNIT IV
Introduction to Corporate Governance:

Corporate is a single word used for multiple components and working together and providing

direction is governance. The CEO with corporate executive’s assistance has to make maximum

efforts to satisfy all types of stakeholders.

There are three broad categories of corporate and each one has its own method of

governance and fair-unfair practices:

(i) Private Corporations:

Some companies are very tightly held by individuals or family members. Both small and big

companies are in this category and managed under authoritative leadership. There will be many

types of unfair practices pertaining to statutory payments, disparity in payments, hiring-firing

and opportunism. There is heavy emphasis to business and profits and no emphasis to society

related activities.

(ii) Public Corporations:

This category consists of state owned, central government owned public sector enterprises, some

of the very old private companies running on the lines of Public Sector Enterprises. This is

almost opposite type of private corporations. Lack of accountability more concern for employee

welfare and lack of competitiveness in product and marketing. There will be many cases of

bribery and unethical practices in various corporate related activities.

(iii) Professional Corporations:

There are MNCs and other private and public limited companies where promoter’s and other

directors are all professionally qualified and competent. They are competent in their industry, do-

well, grow well and take care of the Corporate Social Responsibilities to the maximum possible

extent. The morale of employees is very high and job satisfaction is yet to achieve.
The key issues that guide a company as to how and who are managing is based on the finance

structure of the company which has direct bearing on ownership or who is the boss? This leads to

the board composition and it’s working. The institutional environment inside and outside the

organisation plays a crucial role in decision making issues.

The relationships are shown in Fig. 1.1:

Indian corporate is yet to achieve success in corporate governance, setting values and flextime

working. This is due to the facts that Indians follow discipline under regulations of rules. Ethical

values cover various aspects like fair competition, social responsibility, consumer care and

corporate image.

These aspects can be attended by following methods:

(a) Code of ethics and company policy to be displayed all over the company premises.

(b) Form an ethics committee to look after need of ethical values in individuals and departments.

(c) Seminars, workshops are audio-visual displays to be arranged periodically to educate

employees in ethical values and culture.

(d) Appointing ombudsman to investigate decisions from ethical and moral point of view.
(e) Social audit by inside executives or by outsiders to be conducted annually to know

improvement areas.

If ethics committee is active that itself is enough caution for employees to refrain from unethical

practices. Social audit is a systematic assessment of ethical behaviour and actions and reporting

on some meaningful activities of the company having social impact. For example, pollution

control, social programmes, customer care etc.

Meaning of Corporate Governance:

The concept of corporate Governance has been used in different perspectives. It started as

maximising shareholder’s wealth and then expanded to maximising all stakeholders wealth.

Corporate governance has been defined in many different ways by scholars and agencies.

Some of these definitions/meanings are given below:

(a) Simply stated, corporate governance is about ‘performance as well as conformance’.

(b) According to Ada Demb and Friedrich Neubauer “Corporate governance is the process by

which corporation is made responsive to the rights and wishes of stakeholders”.

(c) As per James D. Wolfensohnn, President of World Bank “Corporate governance is about

promoting corporate fairness, transparency and accountability.

(d) OECD has defined the corporate governance to mean “a system by which business

corporations are directed and controlled”.

(e) Cadbury Committed (U.K.) has defined corporate governance as “(it is) the system by which

companies are directed and controlled”.

(f) According to Y.C. Deveshwar, Chairman of ITC corporate governance refers to the structure,

systems, and processes in a corporation, that are considered most appropriate to enhance its

wealth generating capacity.

(g) Salim Sheikh and William Ress in their treatise ‘corporate governance and corporate control’

stated that “corporate governance is also concerned with the ethics, values and morals of a

company and its directors”. A review of various definitions and views brings out that in its

simplistic form corporate governance is an umbrella term encompassing various issues

concerning senior management, board of directors, shareholders and other corporate

stakeholders.

Definitions of Corporate Governance:

Corporate governance is collective term encompassing various issues concerning top

management, board of directors, shareholders and the corporate stakeholders. It includes ethics

and values of the company and its top management. There is no single definition of corporate

governance. The definitions are evolving. Definitions by experts in the field are noted.

“Corporate governance is a field in economics that investigates how to secure/motivate efficient

management of corporations by the use of incentive mechanisms, such as contracts,

organisational designs and legislation. This is often limited to the question of improving financial

performance. For example how the corporate owners can secure/motivate that the corporate

managers will deliver a competitive rate of return”.

-Mathiesen (2002)

2. “Corporate governance deals with the ways in which suppliers of finance to corporations

assure themselves of getting return on their investment” (Journal of Finance).

-Shleifer and Vishny (1997)

Importance of Corporate Governance:

Introduction of Corporate Governance in a company brings order and methods in decision

making process and fixes who should own the responsibility. That is the goal and role

classification emerges. The company will focus on its mission, vision and not a personal likes

and dislikes of few top officers. The benefits of corporate governance are difficult to quantity in

short range.

Accounting jugglery and showing profits give a company short term gains but they are not long

term policies for financial credibility. True financial performance of a company, openness and

the governance policies give investor’s confidence.

The unethical policies or mismanagement by CEO or director of a company will be exposed by

adhering to corporate governance principles. Corporate governance will throw light on excessive

remunerations given to directors or CEO. It improves, investor confidence and relations.

The occurrence of frauds and mismanagement can be detected early for remedial actions. It is

also agreed that no system can remove fraudulent practices fully. Corporate governance is open

democratic system. They may appear long winded or time consuming or individual decision

making is hindered. The risk of fraud is much bigger and damage to a company.

Introduction of corporate governance has a publicity images or snob value where the companies

with corporate governance are treated by investors and the general public as prosperous and

forward looking. Corporate governance helps institutional investors. The autocratic ways of

working by top brass is removed. Corporate governance creates a new open culture in the

organisation.
The trust generated by corporate governance will improve participative performance of the

organisation. More and more will come forward to provide financial capital, supply goods, buy

goods and service and join the company. The market capitalisation of a company comes down

drastically whenever a company is known to follow unethical practices.

This was seen in the cases of Satyam and Sun group cases in recent past. The society is investing

its resources in a company, naturally it will be duty of the company to provide its stakeholders a

honest and clear performance account. To achieve this company has to initiate corporate

governance and follow-up effective implementation.

The corporate governance policies and methods vary around the world through the basic

principles remain the same. In addition to written laws and codes on proper governance the

companies should have its voluntary codes matching its mission and objectives.

The importance of proper corporate governance is in the area detailed a to z below:

(a) Highlighting and removing lack of commitment from CEO and board of directors and

executive management

(b) Removing culture of secrecy. Bring in openness in the policies and working of a company

(c) Removing the policies that help directors to amass power and money not due to them

(d) Highlighting unethical ways of policies and working in a company

(e) Removing extra protection for a particular group of investors or directors

(f) Protection of rights of minority shareholders

(g) Maximising shareholders value and equal treatment to all shareholders

(h) Respect for rights and democratic ways of working with all stakeholders and shareholders in

particular

(i) Remove administrative lethargy and legislative weaknesses

(j) Meet the competitive logic of global markets

(k) Abide by laws of the country

(l) Adhere to social responsibilities of a company

(m) The set ethical values of a company yield long range reputation, brand image and benefits

(n) Open work culture will have employee loyalty

(o) Increase in market capitalisation and appreciation of wealth invested

(p) Value creation for all stakeholders of a company

(q) Brighter future outlook for the company

(r) The company builds social and political image

(s) International reputation makes a company for growth by mergers and acquisition route

(t) Image of the promoters will be on the increase

(u) Though legal owners should exercise control over any company matter the other who control

affairs of few companies are by lenders by their finance muscle and management group by their

location and insider knowledge. The corporate governance helps in removing unnecessary

controls by vested interests

(v) Contributions from economic value addition and market value addition can be maximised by

corporate governance

(w) Reduces managers incentives to manipulate or window-dress accounts and show more

profits

(x) The checks and balances in corporate governance will have large positive impact to stick to

company set objectives and goals without resorting to personal likes and dislikes

(y) Fair system of processes, performance and measurement

(z) Environment friendly.

Need for Good Corporate Governance:

Late nineteenth century in USA the then large companies like Standard Oil and Rail Road

Company top brass collected pay-checks and perks unheard in history and used them to build

lavish mansions in islands. The resources of a company were clearly siphoned off for private

luxury.

The excesses of the tycoons became too large to ignore. Since 1880s Government of USA is

incrementally putting regulations in place of large industries and rein in the power of robber

barons. It is the beginning of Corporate Governance.

While discussing Corporate Governance one is reminded of in famous words “when the

President does it, that means it is not illegal” of Richard. M. Nixon (1913-1994) who was thirty

seventh President of United States. He was first to resign from the office for his involvement in

Water gate Scandal.

He arrogantly forgot that he was representative of people. Power made him to think that he was

above all laws of the land. This exactly what happens to many chief executives of companies,

more so, in private or family owned companies.

A modern regulatory state must make guidelines, code of conduct; make rules, regulations, laws

and train personnel needed to prevent corporate abuse. The idea is that the top officers like MD.,

CEO Directors of the company should work for growth of the company and make company

govern for its own good and develop overall benefits to all its stakeholders the company on

equitable basis.

The top officers should behave as trustees of the company. They should not use their money and

positional power for enhancing their personal cause like amassing wealth, diverting resources

and using company information for their personal gains, benefiting their families by getting self-

approved fat salaries, bonuses, perks and other luxuries.

In fact, many business barons make ‘Yes Sir’ board of directors of friends and family members

and create a family union meeting in place of board meeting. Few industry barons enter political

arena or indulge in costly habits like flying daily company aircrafts and the like. In few family

owned companies all of these used to go in small measure. The clever accounting practice used

to cover up them.

Now the shareholders, governments and general public gets all the details and information and it

will be difficult for public limited companies to indulge in above activities thanks to the general

awakening awareness and fast or rather up to minute availability of information to all

stakeholders of the company. Economic development and gains of company should not be

allowed to be frittered away by a small group of top officers of a company for their personal

glorification.
The popularity, brand image and longevity of a company apart from high market capitalisation

show good corporate governance in the particular company. Corporate Governance has to be

built brick by brick and consolidated so that it becomes part and vision and a way of life in a

company.

i. With the onset of industrialisation the corporate came into existence.

ii. Corporate evolved out of small family business.

iii. The growth of corporate form small business house is seen more in India. All Indian top

corporate are family business.

iv. Good family business houses developed many excellent corporate based on values and social

responsibilities.

Examples: TATA, Birla’s.

v. Most of Indian family owned companies have their shareholding in the range of 10 to 20

percent. The families enjoy 100 percent ownership. The families also started taking undue

advantage for the positions taken by the family member. Used the clout to use and miss-use the
resources of the company for enhancing further family benefits and political power. There was a

need for introducing corporate governance.

vi. Few started miss using their positions and

(a) Twisted rules for personal gains at cost of their companies.

(b) Few used company resources and powers for their political gains

(c) Employed every kith and kin. Sanctioned for themselves hefty perks remunerations.
(d) Indulge in unlawful activities

(e) Started gaining false accounts or showing huge expenditures or less profits.

(f) Duping shareholders or indulging in few employees getting illegal benefits.

(g) Hiding and twisting information.

(h) Changing policies and people at will.

(i) Gaining individual political benefits at the cost of company.

The Idea of Corporate Governance:

i. Considering above type of activities which ultimately harm the interest of the corporate or its

stable holder, the idea of corporate governance has emerged since last two decades in India.

ii. The present format of corporate governance has evolved since last 15 years. Now it is part of

company laws in India.

Pillars of Governance:

Corporate governance stands on:

i. Integrity and fairness of a company and its fair management

ii. On transparency in all its activities and in particular about disclosures and

iii. Accountability and responsibility.

The 3 pillars are shown in Fig. 1.2:

Models of Corporate Governance:

Only two types of corporate models are discussed in the literature of corporate finance.

These are:

(i) Anglo-American Model and

(ii) German-Japanese Model.

The ownership pattern of companies in India and many other South-Asian countries have a

distinctive corporate model, different from the above two models. The difference is mainly

because of the fact that the Indian-South Asian corporate model comprises three types of owners.

They are:

(i) Promoter shareholders generally controlling 20% to 75% of the total share capital of the

company, the remaining being contributed by

(ii) Individuals and

(iii) Mutual funds and financial institutions, where individuals may not be contributing more than

one-third of the share capital generally.

Hence the three-models can be shown as in Fig. 1.3:

(i) Anglo-American Model:

The special features of this model are:

(i) Pre-1990 period ownership pattern was dominated by a large number of retail shareholders

scattered all over the country. There used to be full divorce between ownership and management

with serious agency problems.

(ii) Post-1990 period ownership of the companies which is generally evenly balanced between

both individual and institutional shareholders, with less agency problems.

(iii) Companies run by professional CEOs and managers with negligible ownership stakes except

in the form of Employees’ Stock Option (ESOP). There is, thus, a clear dividing line between

owners and managers.

(iv) The institutional investors are generally portfolio investors like banks and mutual funds

which are interested in quick exit after booking profit at the right time.

(v) As per Jonathan Charkham this is a “high-tension” model, as the CEO has to ensure

adherence to all regulatory authorities, capital markets, money markets and lurking threats of

takeover as well.

(ii) German-Japanese Model:

The models are similar. They share among them following common features.
These are:

(i) In both the countries the institutional investors namely banks and financial institutions are

long-term investors and play quite an active role in management. Their keen interest and

monitoring help in toning up companies’ performance and in protecting retail shareholders

interest.

(ii) In both these countries, the disclosure norms are lax and checks on insider trading is neither

comprehensive nor effective. Similarly, hostile takeovers are generally unheard of.

(iii) Indian-South Asian Model:

The ownership pattern of major Indian Companies allow clearly that:

(i) Promoter-shareholders are dominant owners, owning 25 per cent to 85 per cent of the total

share capital.

(ii) The promoter group head is also generally the Chief Executive Officer (CEO) of the

company.

(iii) The “Principal-agent” is thus, considerably diluted in this model, as the interests of

promoters converge with retail shareholders, at least theoretically.

(iv) The distinction between owners and managers namely principal and agent is blurred,

resulting in altogether different remedial measures to protect the interest of common

shareholders,

(v) Capital market regulators (SEBI in India) are, thus, required to take additional safeguards for

protecting the interest of common shareholders.

(vi) Principal-Agent relation obtaining in this model is not such as may generally create a clash

of interest between the promoter shareholders and retail shareholders.

(vii) If there is any remote possibility of a clash in this model, it can mainly be between (a)

promoter shareholders – Agent deo and (b) retail shareholders.

The good companies attract financial investment from the investors within the country and

number of other countries. The investment will not come if there is lack of investor confidence

particularly that of investors from overseas.

The answer for this is corporate governance and practices being followed by the company. The

features of the changes basically are that of transparency and accountability. The investors would
like to invest more and more in well governed companies.

The OECD has identified the need for corporate governance in the following areas:

The rights and obligations of shareholders:

The corporate governance should ensure protection of the shareholders rights. The government

should be on the lines of one vote one share basis. The management should be open and sharing

relevant information with all the shareholders. It is important that the minority shareholders

should be protected with all the fairness.

Equitable treatment of shareholders:

All the shareholders of a particular class be treated at par. The rights of the shareholders should

be protected by the law of the land.

The role of stakeholders and corporate governance:

All the stakeholders should get the necessary information by clear and open disclosures. The

stakeholders should take active part in formulation of the policies and stopping the wrong

doings. The corporate governance should provide effective mechanism for redressal of the

violation of any rights of the stakeholders.

Transparency, disclosure of information and audit:

The transparency is the corner stone of the corporate governance especially in the areas of

ownership structure, the financial data, balance sheet and results etc., members of the board and

top management, the important aspects regarding employees and other stakeholders, the

government policies and how they affect the company, the target sets by the company and the

achievements, the future outlook and prospects. The information should be made available well

within the time so that the stakeholders should read, digest and make their opinion on the

working of the company.

The board of directors:

The proper board guidance and monitoring of the progress ensure the strategically leadership of

corporate governance of the company. The board structure and the meeting and related processes

should be tuned to get the help of board in achieving the set goals.

Non-executive members of the board:

The outside members are independent board directors are chosen for independent judgment of

the performance of the company, strategies adopted, key appointments and asset management.

The independent member should be away from business relationship with the company.

Executive management, compensation and performance:

The procedure for proper compensation to the management and the overall profitability be

published regularly. The executive management should ensure improve in competitiveness and

excess to capital.

Ethical Issues in Corporate Governance:

Ethical values cover various aspects like fair competition, social responsibility, consumer care

and corporate image.

These aspects can be attended by following methods:

(a) Code of ethics and company policy to be displayed all over the company premises.

(b) Form an ethics committee to look after need of ethical values in individuals and departments.

(c) Seminars, workshops are audio-visual displays to be arranged periodically to educate

employees in ethical values and culture.

(d) Appointing ombudsman to investigate decisions from ethical and moral point of view.

(e) Social audit by inside executives or by outsiders to be conducted annually to know

improvement areas.

If ethics committee is active that itself is enough caution for employees to refrain from unethical

practices. Social audit is a systematic assessment of ethical behaviour and actions and reporting

on some meaningful activities of the company having social impact. For example, pollution

control, social programmes, customer care etc.

A company may or may not publish the social audit report. However it should be published to all

employees to awaken their social responsibility and business ethics. Top management support is
essential to pursue CSR and business ethics together. Box 1.1 and 1.2 gives examples of

corporate governance of ITC and NALCO.

Objectives of Corporate Governance:

Good governance is integral for the existence of a company.

The main objectives of good corporate governance are:

(a) To promote a healthy environment for long-term investment.

(b) To create a trust in the corporate and in its abilities.

(c) To promote business development.

(d) To improve the efficiency of the capital markets.

(e) To enhance the effectiveness in the service of the real economy.

(f) To exercise effective control on corporate affairs by the board at all times.

Corporate is a single word used for multiple components and working together and providing

direction is governance. A corporate is bound by various stake holders. The CEO with corporate

executive’s assistance has to make maximum efforts to satisfy all types of stakeholders.

There are three broad categories of corporate and each one has its own method of

governance and fair-unfair practices:

(1) Private Corporations,

(2) Public Corporations and

(3) Professional Corporations.

Indian corporate are yet to achieve success in flextime working. This is due to the facts that

Indians follow discipline under regulations of rules.

Principles of Corporate Governance:

Governance style may be as different as the nature of companies. For this reason, both Cadbury

Committee and Rahul Bajaj Committee had stated that there is no unique structure of corporate

governance in the developed world. There is no ‘one size fits all’ structure for corporate

governance. Every company may have its own governance style. Despite uniqueness of styles,

there are some fundamental principles of corporate governance.

These principles are given below and also shown in Fig:

(a) Ethics:

A company must observe ethical standards. Deviation from ethical principles corrupts

organisational culture and undermines stakeholder value.

(b) Transparency:

It involves the explaining of company’s policies and actions to those to whom it owes

responsibilities. Transparency leads to appropriate disclosures without endangering company’s

interest. In the case of Enron, the shareholder’s value was destroyed because it did not share is

setbacks with the shareholders.

(c) Accountability:

It signifies that the Board of Directors are accountable to shareholders and management is

accountable to the Board of Directors, and shareholders. Accountability provides impetus to

performance.

(d) Trusteeship:

There exists the principle of trusteeship on the Board of Directors who must act to protect and

enhance shareholders and other stakeholders value. Mahatma Gandhi had advocated this

principle.

(e) Empowerment:
It unleashes creativity and innovation throughout the organisation by truly vesting decision-

making powers at the most appropriate levels in the organisational hierarchy.

(f) Fairness to all Stakeholders:

It involves a fair and equitable treatment of all stakeholders who participate in the corporate

governance structure.

(g) Oversight:

It means the existence of a system of checks and balances. It should prevent misuse of power and

facilitate timely management response to change and risks.

(h) External Audit:

It must be independent and penetrating.

(i) Regulatory Regime:

There must be an appropriate regulatory regime to back these obligations.

(j) Whistle Blower Policy:

Companies should adopt a policy for Whistle blowers. This was specifically recommended by

Narayan Murthy Committee.

While discussing the principles some relevant points that come up are:

(a) Practice prevalent in different modes:

Corporate governance is a practice which is being followed the corporate all over the world.

Each country may adopt its own form of corporate governance.

(b) No single definition:

It is a dynamic concept and can be defined in many ways. It is not defined in only one manner.

(c) Drawn from diverse fields:

Corporate governance is drawn from diverse fields like laws, economics, ethics, politics,

management, finance, etc.

(d) Mere law is not sufficient:

Corporate governance goes far beyond company law. In India company law has been amended to

include better corporate practices like audit committee, director’s responsibility statement, voting

by postal ballot. Strict implementation of the law is essential.

(e) Accounting standard:

In all the developed countries accounting standards have been devised and followed. India has

also evolved its own accounting standards which are required to be followed by all companies.

(f) Professional and competent directors:

The key to good corporate governance is a well-functioning, informed Board of Directors. The

board should have a core group of professionally acclaimed and accredited non-executive

directors.

(g) Evaluation:
Corporate governance can now be evaluated and corporate governance rating has come to stay.

Many Indian companies like ITC, Infosys, Grasim have been evaluated and awarded corporate

governance rating by agencies like CRISIL or ICRA.

In conclusion it can be said that minimal corporate governance can be achieved by following the

law, better governance by having a professional management but best corporate governance is

achieved by following ethical practices and principles.

Players in Corporate Governance:

There are two categories of players in corporate governance in any company they are:
(a) Regulatory body: the regulatory body consists of the Chief Executive Officer or Managing

Director or Chairman cum Managing Director, the Board of Directors, Management and

Shareholders.

(b) The other type are stakeholders are many and scattered they include suppliers, customers,

employees, creditors, government bodies and society at large.

In many companies the shareholders delegate their voting rights to the managers to act in the best

interest of the companies. In other words the ownership of the companies is separated from the
control. The control is exercised by the shareholders over and above the managerial decisions. In

Indian conditions the ownership is not so defused hence there are problems are controlled.

It becomes necessary for the Board of Directors to evolve policies, give directors to strategies

and appoint appropriate people to senior levels in the company. This will be in the direction of

insuring accountability of the organisation to government and shareholders.

The directors, employees and management officers receive their salaries, perks, benefits and

reputation whereas the shareholders or owners who take the risk and receive capital in return. A
shareholder participates in a company by investing his funds or financial capital to the company

so that he receives a fair share of financial returns.

The players in corporate governance are broadly shown as the board and the management

organisation from inside the company and outside the government, the financial institutions,

lenders, suppliers, customers, investors and general public. The question comes who is governing

or who is the real manager? Depending on the money, strength or positional strength the center

of governance shifts.

A simple figure showing who governs is shown in Fig. 3.1:

4Ps of Corporate Governance:

The companies now would have to provide detailed and true of account of their performance in

lieu of the resources spared by the society. The chief executive officer, the board of directors and

executive directors will have to own up the responsibility for the success and failures of an

enterprise, if not fully at least to the extent of their knowledge and actions.

This aspect is making the entry of corporate governance and the enterprise work towards its set

direction effectively. Corporate governance does not go by profit figures or good cash flows, it

goes by long term goals and contribution by its people. Corporate governance has integrated

frame work of 4Ps or it is of people, purpose, processes and performance. The 4Ps have

important role in channelising resources of any company.

The 4Ps of corporate governance and what falls in each category is explained in a flow

diagram as Fig. 3.2:

(i) People:
It is people who run any company. The people are its stakeholders like investor, customers,

employees, lenders, suppliers, government and society at large. The inside stakeholders in a

company should be capable, talented for their jobs, purpose oriented workers and ethical in their

approach.

The management should be fair, equitable and result oriented. The company management must

incorporate ethical practices in the company like transparency and integrity. Cordial relationships

with different stakeholders and their involvement in decision making process reduce conflict

areas.

(ii) Purpose:

The management of a company should be clear in the purpose of a company. The purpose should

be communicated and known to all. The purpose should be altered as time and conditions

change. The established purpose should be measurable and actionable. Purpose definition leads

to vision and mission of a company. In turn setting path for strategic and detailed action plans of

a company processes.

(iii) Process:

The process management in a company be defined and documented. The process management

has subgroups resource management, organisation management, supply chain management,

energy management, marketing management, information management, risk management and

the lie.

The processes management include how these will coordinate and bring the preset results. The

control parameters and mechanisms will show the areas of deficiencies in these processes. The

plant and processes are governed by various rules and laws of the country which need

compliance.

(iv) Performance:
The performance levels should be set and communicated so that all in chain know what is

expected. What is acceptable and what is not. The performance should be measurable. Regular

measurement leads to finding operation efficiencies and shortcomings at different levels. The

performance measurement can be fixed on the monetary transactions in a company like asset

efficiency or supply chain expenditure.

Sarbanes Oxley Act:

In July 2002, the U.S. Congress passed the Sarbanes Oxley Act (SOX), particularly designed to

make US corporations more transparent and accountable to their stakeholders.

The Act seeks to re-establish investor confidence by providing good corporate governance

practice to prevent corporate scams and frauds in business corporations, to improve accuracy and

transparency in financial reporting, accounting service of listed companies, enhance corporate

responsibility and independent auditing.

The applicability of the Act is not confined only to publicly owned US companies, but also

extends to other units registered with the Securities Exchange Commission. However, there is a

common thread running between them, i.e., that governance matters. Unless corporate

governance is integrated with strategic planning and shareholders are willing to bear the

additional required expenses, effective governance cannot be achieved.

The above events encouraged the development of the present situation where different aspects of

the Sarbanes Oxley Act are discusses, and its effects, limitations and internal control after the act

were passed and what lies beyond its compliance.

Also discussed are the varied applications of the act in areas such as IT, the fee structure of the

Big Four Accounting Firms, the mid-size accounting firms, supply chain management and

insurance.

The Anglo-American Model of industry structure and corporate governance is detailed in

Fig.:

OECD Principle of Corporate Governance

One of the most influential guidelines has been the 1999 OECD Principles of Corporate

Governance. This was revised in 2004. The OECD remains a proponent of corporate governance

principles throughout the world.

Building on the work of the OECD, other international organisations, private sector associations

and more than 20 national corporate governance codes, the United Nations Intergovernmental

Working Group of Experts on International Standards of Accounting and Reporting (ISAR) has

produced voluntary Guidance on Good Practices in Corporate Governance Disclosure.

The Organisation for Economic Cooperation and Development (OECD) deals with the

following important issues:

i. Protection of minority interest,

ii. Impediments to cross border voting should be removed,

iii. Insider trading and abusive self-dealing should be prohibited,

iv. Board members and KMPs to disclose their interest in material contracts.

Principles of OECD code on corporate governance 2005:

i. The corporate governance system should promote transparent and efficient markets; should be

consistent with rule of law and should lay down clear roles of various regulatory and

enforcement authorities,

ii. Corporate governance system should protect and facilitate shareholder rights,

iii. The system should facilitate equitable treatment to all shareholders, including minority and

foreign shareholder,

iv. Corporate governance should recognize the rights of stakeholders established by law or

mutual contract; should encourage cooperation between the corporate and the stakeholders to

create value,

v. Disclosure and transparency: System should ensure timely and accurate information about

financial situation, performance, ownership and governance,

vi. Board management structure.

OECD principles on shareholders’ rights:

i. Basic shareholder rights – registration and transfer of shares, right to vote at meetings, obtain

relevant information, appoint and remove directors and share in the profits,

ii. Fundamental corporate structure changes to require shareholder participation,

iii. Shareholders to vote on directors’ and KMP’s remuneration and equity options,

iv. Voting in absentia,

v. Market for transfer of control to be transparent,

vi. In practice, shareholders’ rights have largely been a myth,

vii. Widespread shareholding, including cross-border holding,

viii. Role of the institutional investors.

OECD principles on stakeholders’ interests:

i. Employees participation in management; performance enhancing mechanisms to be promoted,

ii. Whistle-blowers’ interest to be protected,

iii. Creditors’ rights,

iv. Through security interest enforcement and bankruptcy laws,

v. Current enforcement is tardy.

OECD principles Board composition and structure:

i. Some key functions should be fulfilled by Board,

ii. Strategy formulation, budgets, business plans, etc.,

iii. Monitoring the effectiveness of the company’s governance practices,

iv. Selecting, compensating, monitoring key executives and overseeing succession planning,

v. Executive and board remuneration,

vi. Ensuring a formal and transparent board nomination and election process,

vii. Monitoring and managing potential conflicts of interest of management, board members and

shareholders, including misuse of corporate assets and abuse in related party transactions,

viii. Ensuring the integrity of the corporation’s accounting and financial reporting systems,

including the independent audit, ensuring control systems for risk management, financial and

operational control, and compliance,

ix. Overseeing the process of disclosure and communications.

SEBI Code of Corporate Governance:

To promote good corporate governance, SEBI (Securities and Exchange Board of India)

constituted a committee on corporate governance under the chairmanship of Kumar Mangalam

Birla. On the basis of the recommendations of this committee, SEBI issued certain guidelines on

corporate governance; which are required to be incorporated in the listing agreement between the

company and the stock exchange.

An overview of SEBI guidelines on corporate governance is given below, under appropriate

heads:
(a) Board of Directors:

Some points in this regard are as follows:

(i) The Board of Directors of the company shall have an optimum combination of executive and

non-executive directors.
(ii) The number of independent directors would depend on whether the chairman is executive or

non-executive.

In case of non-executive chairman, at least, one third of the Board should comprise of

independent directors; and in case of executive chairman, at least, half of the Board should

comprise of independent directors.

The expression ‘independent directors’ means directors, who apart from receiving director’s

remuneration, do not have any other material pecuniary relationship with the company.

(b) Audit Committee:

Some points in this regard are as follows:

(1) The company shall form an independent audit committee whose constitution would be

as follows:

(i) It shall have minimum three members, all being non-executive directors, with the majority of

them being independent, and at least one director having financial and accounting knowledge.

(ii)The Chairman of the committee will be an independent director.

(iii)The Chairman shall be present at the Annual General Meeting to answer shareholders’

queries.

(2) The audit committee shall have powers which should include the following:

1.To investigate any activity within its terms of reference

2.To seek information from any employee

3. To obtain outside legal or other professional advice

4. To secure attendance of outsiders with relevant expertise, if considered necessary.

(3) The role of audit committee should include the following:

(i) Overseeing of the company’s financial reporting process and the disclosure of its financial

information to ensure that the financial statement is correct, sufficient and credible.

(ii) Recommending the appointment and removal of external auditor.

(iii) Reviewing the adequacy of internal audit function

(iv) Discussing with external auditors, before the audit commences, the nature and scope of

audit; as well as to have post-audit discussion to ascertain any area of concern.

(v) Reviewing the company’s financial and risk management policies.

(c) Remuneration of Directors:

The following disclosures on the remuneration of directors shall be made in the section on

the corporate governance of the Annual Report:

(i) All elements of remuneration package of all the directors i.e. salary, benefits, bonus, stock

options, pension etc.

(ii) Details of fixed component and performance linked incentives, along with performance

criteria.

(d) Board Procedure Some Points in this Regards are:

(i) Board meetings shall be held at least, four times a year, with a maximum gap of 4 months

between any two meetings.

(ii) A director shall not be a member of more than 10 committees or act as chairman of more

than five committees, across all companies, in which he is a director.

(e) Management:
A Management Discussion and Analysis Report should form part of the annual report to the

shareholders; containing discussion on the following matters (within the limits set by the

company’s competitive position).

(i) Opportunities and threats

(ii) Segment-wise or product-wise performance

(iii) Risks and concerns

(iv) Discussion on financial performance with respect to operational performance

(v) Material development in human resource/industrial relations front.

(f) Shareholders:

Some points in this regard are:

(i) In case of appointment of a new director or reappointment of a director, shareholders

must be provided with the following information:

1.A brief resume (summary) of the director

2.Nature of his expertise

3. Number of companies in which he holds the directorship and membership of committees of

the Board.

(ii) A Board Committee under the chairmanship of non-executive director shall be formed to

specifically look into the redressing of shareholders and investors’ complaints like transfer of

shares, non-receipt of Balance Sheet or declared dividends etc. This committee shall be

designated as ‘Shareholders / Investors Grievance Committee’.

(g) Report on Corporate Governance:

There shall be a separate section on corporate governance in the Annual Report of the company,

with a detailed report on corporate governance.

(h) Compliance:

The company shall obtain a certificate from the auditors of the company regarding the

compliance of conditions of corporate governance. This certificate shall be annexed with the

Directors’ Report sent to shareholders and also sent to the stock exchange.

Workplace Diversity: Meaning and Challenges of Workplace Diversity

Meaning:

Workplace diversity is a typical problem faced by the modem organizations due to the

acceptance of the principle of globalization. Many foreign companies came to India and

internally recruited many employees. The top management was vested with outsiders. This has

resulted in diversity among workforce.

According to Thomas (1992), dimensions of workplace diversity include, but are not limited to,

age, ethnicity, ancestry, gender, physical abilities/qualities, race, sexual orientation, educational

background, geographic location, income, marital status, military experience, religious beliefs,

parental status and work experience.

The Challenges of Workplace Diversity:

The future success of any organization relies on the ability to manage a diverse body of talent

that can bring innovative ideas, perspectives and views to their work. The challenge and

problems faced due to workplace diversity can be turned into a strategic organizational asset if

an organization is able to capitalize on this melting pot of diverse talents.

With the mixture of talents of diverse cultural backgrounds, genders, ages and lifestyles, an

organization can respond to business opportunities more rapidly and creatively, especially in the
global arena (Cox, 1993), which must be one of the important organizational goals to be attained.

More importantly, if the organizational environment does not support diversity broadly, there is a

risk of losing talent to competitors.

This is especially true for multinational companies (MNCs) who have operations on a global

scale and employ people of different countries, ethical and cultural backgrounds. Thus, an HR

manager needs to be mindful and may employ a ‘Think Global, Act Local’ approach in most

circumstances.

Many local HR managers have to undergo cultural-based human resource management training

to further their abilities to motivate a group of professional that are highly qualified, but

culturally diverse.

Furthermore, the HR professional must assure the local professionals that these foreign talents

are not a threat to their career advancement. In many ways, the effectiveness of workplace

diversity management is dependent on the skillful balancing act of the HR manager.

In order to effectively manage workplace diversity. Cox (1993) suggests that an HR manager

needs to change from an ethnocentric view (our way is the best way) to a culturally relative

perspective (let’s take the best of a variety of ways). This shift in philosophy has to be ingrained

in the managerial framework of the HR manager in their planning, organizing, leading and

controlling of organizational resources.

Monitoring the Behaviour of Individuals

A dimension of human performance that has become of increasing interest in our modern

technology is the ability of people to monitor displays. Since the dawn of time, men have found

themselves in a position of having to keep “vigil” for events of various kinds. The best example

of this can be found in military service where guard duty or “watch keeping” duties require a

man to spend long periods trying to keep alert for certain critical events or stimuli.
The lookout in the “crow’s nest” of the old sailing ship is a perfect example of traditional

vigilance behaviour. During World War II psychologists became involved with the problem of

human vigilance because they wanted to learn more about man’s capacity and tolerance for this

kind of task. Only very recently, however, has this kind of skill become important to modem

industry.

The major reason for it becoming important to industry has been the tremendous shift to

automated production systems by many industrial firms. This automation has typically resulted

in a sharp reduction in the extent to which the worker actually manipulates the production

equipment directly, and a sharp increase in the extent to which his task has become one of simply

monitoring the production process—keeping watch that the machines are doing their job in the

prescribed manner.

Technically speaking, vigilance or monitoring tasks are those which require the individual to

detect or discriminate critical changes occurring in his environment. Typically, these are “rare”

events, that is, the changes occur infrequently and on no predictable schedule. However, such

need not be the case. What is critical to the process is that vigilance tasks involve rather long

periods of such signal monitoring.

Vigilance Decrement:

The outstanding characteristic of most vigilance performance is that there typically occurs what

is known as a performance decrement, that is, the longer a person maintains his vigil, the poorer

his performance becomes, as is shown in Figure 20.19.

It indeed was this decrement that led to much of the original interest in vigilance —what caused

it and how could it best be overcome (a rather important question where poor vigilance can cost
dollars and/or lives). The decrement does not occur universally, it should be pointed out. There is

some evidence that vigilance tasks of high complexity do not result in lowered performance over

time (Jerison, 1963; Adams, 1963).

Some Theories of Vigilance:

A number of theories have been proposed to explain the performance of individuals in a

vigilance-type task. Frankmann and Adams (1962) have investigated these theories and have

found that none seem to explain more than a part of the present vigilance data adequately.

Inhibition Theory:

Mackworth (1950) proposed that the Pavlovian classical conditioning model be used to explain

vigilance performance. He argued that the vigilance decrement was due to extinction of a

previously conditioned response. The major problem with this theory, however, is that complete

extinction is never obtained in vigilance—that is, although individuals do suffer large

performance decrements, they still perform at 50-75 percent efficiency even after very long time

periods.

Attention Theory:

Broadbent (1953) has suggested that vigilance behaviour can best be explained through the use

of basic principles of attention. He argues that individuals “select” those stimuli to which they
attend, and that stimuli of high intensity, great biological importance, and high novelty are those

most apt to be selected by a person. The vigilance decrement is attributed to stimuli losing their

novelty with repeated occurrences.

Expectancy Theory:

Deese (1955) has offered a third explanation for vigilance behaviour, saying that it is the

individual’s “expectancy” level which determines his vigilance level and in turn the likelihood

that an individual will detect the event which occurs.

Other Theories:
Other theories which have been used to explain vigilance are Hebb’s arousal theory (Hebb,

1955) and operant conditioning (Jerison and Pickett, 1964). However, as Howell, Johnston, and

Goldstein (1966) point out, none of these models have been overly successful, and perhaps an

entire new look at the area may be necessary in order to develop a behavioural model which can

explain all the aspects of performance in both simple and complex monitoring tasks.
 UNIT V
Role of Board in Corporate Management

In few countries there are two tier boards; supervisor board and executive or management board.

Indian business system has one board. It is called Unitary board. The unitary board has both non-

executive and executive board members in it.

Basically the duty of board are:

(a) Governing the functions of the company,

(b) Monitoring the management and;

(c) Achieving adequate returns to its investors.

The company board is accountable to the company and the shareholders. It is not accountable to

CEO or MD of the company. The board members should enjoy close working relationships in

working of the company. The Corporate management and board members together take

proactive measures to evolve strategies and achieve the target set by the company.
The company board has a guiding role in evolving corporate strategies. The board is responsible

that the company management follow the laws of land and pays its due taxes and levies to the

government. With their large experience the board members must exercise their objective and

independent judgment.

Corporate Management makes their board papers or agenda papers and provides details. Many

presentations are made to bring the salient points and alternate choices available to the company.

The board must interact with the executive management to get true picture and the methodology

adopted for analysis.

The company board members should get sufficient time to read and digest the data, analysis and

alternate courses of actions. The board members should interact among themselves and compare

similar situations elsewhere or benchmark with good examples. The board members should not

have any commercial relationship with the company. The commercial involvement may affect

independent judgment.

Regular board meetings and interaction by the executive management will help in identifying

potential problems. These can be discussed and avoided. The Corporate Management team

possess superior knowledge of the industry and will be key in decision making. The roles of the

CEO, Lead Directors and other directors are clearly defined in few Indian companies. A leading

company TYCO has given clear roles.

The details are given in box:

Board Committees:

Four board committees are necessary in Corporate Governance frame work:

(1) Adult committee,

(2) Remuneration committee,

(3) Nomination committee,

(4) Share holder grievance committee.

The committee members in the committee has an additional role as watch dog in the particularly

key area. The member have to contribute their best judgment based on their experience and

alternates on hand.

It is also necessary that the committee members:

1. High ethical standards:

The company board must set the ethical standards by its own actions. The board should have
long term commitment. The must set the framework of judgment in dealing with conflicting

issues.

2. The committee should act in best interest of the company:

The company board should be well informed. It a duty of care where it needs the information to

be cross checked and analyzed.

3. Take care of all stakeholders:

The board decisions that take into account the maximum benefit to maximum stakeholders will

be welcome.

4. Review of policy issues:

Guiding corporate decisions, major plans like joint ventures, acquisitions, divestitures and

change of business focus are key areas.

5. Governance practices:

Monitoring and guiding improvement in corporate governance by regular reviews.

6. Well defined mandate for the committees:

The board committees will help in improving the effectiveness of the board and highlight the

areas of shortfalls or non-compliance’s. The board committee should be well defined

composition duties and clear of its purpose.

7. Information:

The committee members should get correct, relevant and timely data and information. Should

have sufficient time to go into details or nitty gritty of the subject. Openness and discussions help

to reach to the root of problems.

8. The committee members must exercise indecent and objective judgment:

To monitor the managerial performance the committee the members must bring objective views.

Independent members can contribute in these committees and ensure effective independence.

Board of Directors of a Company

Origin of Board of Directors:

The control of company management and the framing of the company’s policies is usually the

legal function of a small group of people the Board of Directors.

One of the earliest companies with a Board of Directors was established in Portugal in 1441—

The Lagos Co.

It was a stock company, for maritime trade, its chief object being slave trading. The king of

Portugal, who was an important shareholder in the company, appointed two directors, the

remaining being elected by the shareholders who were mainly Jewish merchants.

In England, the term ‘governor’ and ‘assistant governors’ had applied by medieval guilds to the

chairman and members, respectively, of their governing bodies and this practice was followed in

the case of the early chartered companies such as the East India Company which was established

in 1600 by Royal Charter.

It was not until the end of the 17 century that the term ‘directors’ was commonly used in England

in place of the former expression first assistants or assistant governors.

In the early days of joint stock enterprises, before management became as complex as it is today

and the conduct of business was relatively simple, it was the directors themselves who actually

managed the company, most of which were family concerns, virtually partnerships, which had

adopted incorporation as a convenient form for avoiding the unlimited liability attached to the

proprietary form of organisation.

These directors attended to the day- to-day affairs of the company and took part in most matters,

big or small. They had to appoint salaried employees for technical and administrative duties but

handled the management themselves.

It was much later that they entrusted the management to other managerial personnel as the rapid

growth of corporate enterprise resulted in increasing difficulties of managing so complex an

organisation.

Gradually the Board of Directors left the actual executive and management functions to paid

personnel and confined themselves to decisions of important problems on overall supervision of

management and general business policy-making.

With the growth of giant corporations even this became difficult so that a large part of the

Board’s business was entrusted to special committees. Delegation of director’s duties evolved

out of necessity. The primary function of the director is to direct while the proper function of

management is to implement efficiently the policy decided upon by the Board.

The Board of Directors would be in the best position to take a broad and unbiased view of the

company’s operations as a whole without undue emphasis on any particular department of the or-
ganisation provided the composition of the board of directors does not have a heavy majority of

executive officers of the company.

Policy should come from the Board Room and the Board should consist of a well-balanced

proportion of “inside” or executive and “outside” or ‘non-executive’ directors, the latter being

selected for their wisdom, specialised knowledge, experience, prestige and useful contacts.

Unless there is this well-proportioned balance between outside directors and executive directors

the decision of the Board may lean too heavily in one direction, e.g. if the executive directors are
in a large majority, their enthusiasm may make them decide in favour of an unprofitable venture

which, when viewed objectively from all angles by outside directors, would reveal the reper-

cussions of embarking on an ill-conceived venture.

If, however, the Board comprises wholly or substantially of outsiders they may not have the feel

and pulse of the organisation in their hands and thereby unwittingly curb the initiative of able ex -

ecutives and deprive the corporation of profitable project. The Board of Directors is the top

management organ responsible for implementing the objectives of an enterprise.

The Board’s functions may be said to be trusteeship and entrepreneurial as distinguished from

executive. The Board acts as a trustee for efficient operation of the enterprise and this trust is

held for a group of persons—the shareholders.

Peter Drucker, the authority on management, advocates a Board with a pronounced majority of

outsiders as they would be able to view the company as a whole, being themselves detached

from the operations. These people are likely to see matters in a different light from the

management and provided they are not nominees of management will fearlessly disagree with

management when necessary.

To make such an independent Board possible and not a legal fiction it is necessary to provide the

Board with sufficient financial incentives, otherwise people of the high caliber and status may

not be willing to accept directorships in the average corporation.

In selecting outside members of the Board, the practice in India among small private companies

is to include the family’s legal adviser and wives of the major shareowners while in the case of

large public companies there is an increasing tendency today to appoint well-established

chartered accountants, leading members of the legal profession and business magnates.

Organisation of the Board of Directors:

A company is an artificial person—it has no physical form and it has to act through the agency of

natural persons. The ultimate authority of a company is its shareholders acting through a general

meeting. Since general meetings are few and far between, the right to manage the affairs of the

company is vested in the Board of Directors the supreme executive.

In other words, a company acts through the Board of Directors. The Board is the ultimate

executive authority in all affairs of the company. The Companies Act provides three categories

of persons who can manage the affairs of the company—Directors, Managing Director and Man-

ager.

The Board of Directors is a committee consisting of several elected representatives known as di-

rectors. A director has no power except on matters which are specifically delegated to him. The

powers conferred on the directors are to be exercised by them collectively at board meetings.

Functions of the Board comprise both statutory functions and executive functions.

The first directors are either appointed by promoters or they may be named in the Articles. If not

so appointed or named, the signatories to the Memorandum are deemed to be directors till the

first directors are elected at the general meeting.

A person cannot be appointed as a director (technical or govt. nominated directors being

exceptions) unless he holds qualification shares stated in the Articles. The qualification shares—

if not held at the time of appointment—must be acquired within two months after appointment as

director.

Disqualification of Directors:

The following persons are disqualified to be appointed as directors:

(i) Persons of unsound mind,

(ii) Un-discharged insolvents,

(iii) Persons convicted and imprisoned for at least 6 months during the preceding five years,

(iv) Defaulters of all money on shares

(v) Fraudulent declared by the court and

(vi) Persons holding more than 20 directorships of public companies.

As already mentioned, the Board of Directors is the ultimate executive authority in company

management. It has two sets of powers executive powers and statutory powers. The statutory

powers are derived from two sources the Articles of Association and the Companies Act.

Functions of Directors:
1. To Act as Trustees:

The most important function of the Board of Directors is trusteeship. In the role of trustee, the

directors must look after the interest of shareholders on the one hand and the interests of

consumers, labours, suppliers and the community on the other hand.

There are four ways in which the Board discharges its trusteeship functions:

(i) Original decision-making,

(ii) Confirming executive decisions,

(iii) Counselling with the chief executive and his subordinates and

(iv) Reviewing the past activities and proposed actions.

2. To Determine the Objectives and Policies:

Objectives are the goals for which a company is formed. The Board formulates policies in broad

terms and lays down the major policies of the company. These objectives and policies are

guideposts for executives of the company.

According to E. F. L. Brech, the functions of the Board are threefold:

(i) To determine policy and check-up the progress towards its fulfillment,

(ii) To ensure that the company’s legal obligations are carried out and

(iii) To watch over the financial interests of the shareholders.

3. To Select Top Executive and Other Employees:

The Board is required to select the chief executive who may be either the Managing Director or

Manager. The Chief Executive, in turn, selects the subordinates subject to the approval of the

Board. The Board also appoints all officers of the company including Chairman, General

Manager, Auditor, Solicitor, Additional Directors, Alternate Directors and others.

4. To Approve Budgets and Programmes:

The Chief Executive like Managing Director or General Manager with the help of other

executives prepares budgets and programmes of work in advance and places the same before the

Board of Directors for approval. The Board approves the budgets and programmes after

examining their economies and diseconomies.

5. To Evaluate Executive Performance:

It is an important function of the Board to evaluate the progress of the company. The Board is to

see whether the work is proceeding in accordance with the objectives, plans, policies, programs

and budgets. It is the Board’s function to see that the executives are running the company

efficiently.

The Board evaluates actual results against the budget standards. Budget is the basis of control.

Board’s controlling functions are essential to safeguard the interests of the shareholders.

6. To Declare Dividend:
The Board has to decide how much profits of the company should be distributed as dividend to

shareholders and how much of it should be retained as reserve in the interest of the company.

The Board pays the rate of dividend after considering the following factors – provision for

depreciation, bad debts, creation of reserves, provision for new projects, future financial

commitments.

The Board had to balance the interests of shareholders who expect regular and fair returns on

their investment on the one hand and the growth of the company on the other.

7. To Issue Additional Securities:

Finance is essential for the survival and growth of business. It is the function of the Board to

secure necessary finance. Additional funds of the company may be raised by further issue of

shares and debentures. Issue of new securities must be approved by the company in general

meeting.

According to the Companies Act, further issue of securities which is also known as the right

issue is to be offered to the existing shareholders on pro-rata basis. If the existing shareholders

refuse to take such shares, the Board can allot such shares to others.

8. To Delegate Authority:
It is the function of the Board to delegate authority to executive committee of directors,

managing director, secretary and others and to assume authority of the personnel when they

vacate offices.

9. To Perform Statutory Functions:

The Board is required to issue prospectus or statement in lieu of prospectus, to allot, transfer and

forfeit shares according to the rules. The Board is also required to maintain accounts, hold

different types of company meetings, submit returns to the Registrar of Companies and pay

corporate tax.

10. To Provide for Management Development:

For the continued successful existence of the company it would be the duty of the Board to de-

velop future managers from within by initiating appropriate executive development programs,

training, delegation of authority etc.

11. To Put Questions and Suggestions:

Being detached from the operating details of the company, the Board can take a broad view of

the company’s affairs through searching questions and bright suggestions, which would guide

the company to march ahead in spite of changes of the time. Putting questions and giving

suggestions provide the management team a breadth of vision and imagination to the

management team.

Appointment of Directors:

The first directors are either appointed by the promoters or they are named in the Articles. If not

so appointed or named, the signatories to the Memorandum are deemed to be directors till the

first directors are elected at the general meeting. Each director must be elected by a separate

resolution and only an individual can be a director.

The Board may fill a casual vacancy or appoint additional or alternate directors, provided the

total number remains within the maximum laid down in the articles. The central govt. is also
authorised to appoint directors. The Articles sometimes authorize financial institutions or

debenture-holders to nominate directors on the Board. A person shall not be appointed as

director unless he holds qualification shares stated in the Articles (technical or government

nominated directors being exceptions).

To ensure that the management of companies does not fall into the hands of undesirable

persons, the Companies Act disqualified the following persons to be appointed as directors:

(i) Persons of unsound mind,

(ii) Un-discharged insolvents,

(iii) Persons convicted and imprisoned for at least 6 months during the preceding five years,

(iv) Defaulters of all money on shares,

(v) Fraudulent declared by the court and

(vi) Persons holding more than 20 directorships of public companies.

A director will be required to vacate his office if he:

(i) Fails to obtain qualification shares within the prescribed time,

(ii) Absents himself from three consecutive Board “meeting or for a period of three months—

whichever is longer,

(iii) Fails to pay call money within six months,

(iv) Accepts any loan, guarantee or security for a loan from the company without the approval of

the Central Govt.,

(y) Fails to disclose at the Board meeting his interest in any contract made with the company,

becomes lunatic or insolvent, is convicted of any offence for a term of six months’

imprisonment, is declared fraudulent by the Court.

Number of Directors:

Every public company is required by law to have at least three directors and every private

company is required to have at least two directors. The maximum number is usually determined

by the Articles. Subject to this minimum, the company may, by ordinary resolution, increase or

reduce the number of the directors. Any increase beyond the maximum can be made only with

the approval of the central govt.

In a Board, there may be two kinds of directors—retiring directors, who are retired by rotation

and non-retiring directors, who are appointed by the debenture holders and by the govt. in some

cases. The retiring directors are eligible for reappointment—unless otherwise disqualified. These

directors are elected by the shareholders at the general meeting on the basis of a separate

resolution for each director.

Moreover, the Board is empowered to appoint additional directors to function up to the date of

the next general meeting or alternate directors in place of those absent from the State for a period

of three months or more and to fill the casual vacancies of directorship caused by death, physical

inability or other disabilities.

Of the total number of directors, two-thirds must retire by rotation. One-third of these two- thirds

must retire at every Annual General Meeting. The retiring directors are usually eligible for re-

election and they are almost always re-elected.

Minority Representation:

Minority may be represented on the Board by adopting the principle of proportional

representation based on the system of either cumulative voting or of single transferable votes.
The central govt. may also prevent oppression to the minority shareholders by appointing two

additional directors.

Meetings of the Board:

A meeting of the Board of Directors of every company must be held at least once in every three

months and at least four such meetings must be held in every year. A meeting is a gathering of

some persons by previous notice for transacting some lawful business by passing resolutions. A

notice of every Board meeting must be given to every director.

The quorum for the Board meeting is one-third of the total number of directors or two directors,

whichever is greater. Decisions at Board meeting are arrived at on the basis of majority vote in

respect of routine matter but decision on matters of policies of vital importance requires

unanimity. If a decision is taken by majority vote, it is compulsory to record in the minutes the

names of the directors who voted against the resolution.

All meetings of the Board must be held during the business hours on a day which is not a public

holiday. If any meeting could not be held for want of quorum, then the meeting would stand ad-

journed to the same day the next week and in case such day is a public holiday, the next day and

if that too is a public holiday, then on a subsequent working day. If at the adjourned meeting the

required quorum is not present, then the members present at the meeting would be the quorum

and the business would be transacted.

To enable members of the company to exercise some degree of control and to express their views

on the working of the company, the law provides for the holding their meetings. There are three

kinds of meetings of the members and are known as General Meetings. These are—Statutory

Meeting, Annual General Meeting and Extra-ordinary General Meeting.

Statutory Meeting is the first general meeting which a public company is required to hold within

a period of not less than one month nor more than six months from the date at which the
company becomes entitled to commence business. The main purpose of this meeting is to give

the members a general idea about the progress made by the company since its formation.

Annual General Meeting is a general meeting of the members of the company which must be

held every year and not more than 15 months must elapse between the date of one Annual

General Meeting and that of the next. But the first Annual General Meeting may be held within

18 months from the date of the incorporation of the company and the company need not hold any

Annual General Meeting in the year of its incorporation or in the following year.

An Extra-ordinary General Meeting is a meeting of the company’s members, usually called by

the directors for transacting some special or urgent business which must be done before the next

Annual General Meeting.

Remuneration of Directors:

A director is not a servant of the company and in the absence of a special agreement is not

entitled to any remuneration for his services. Those who direct the policy of a corporation are

expected, both by law as well as public opinion, to act in the best interest of the corporation and

to abstain from seeking special personal advantages and profit at the expense of the corporation.

They are responsible for the performance of the company and hence they must be compensated

sufficiently.

It is usual to compensate all directors whether executives or not for their activities. The method

of remuneration is usually by way of a fee for attending Board meetings. Those directors who

also perform managerial functions such as managing director or general manager receive in

addition for their special work separate salaries and sometimes special compensation is paid to

the Chairman of the Board of Directors.

The remuneration of directors, managing director, whole-time directors is governed by Sections

198 and 309 of the Companies Act. The total managerial remuneration payable to directors or
managers must not exceed 11% of the net profits of the company. But if in any financial year the

company has no profits or its profits are inadequate, no remuneration must be paid to any

director or manager without previous approval of the central govt.

A director may receive remuneration by way of a fee for each meeting of the Board or a commit -

tee thereof, attended by him. A director who is either in the whole time employment of the

company or a managing director may be paid remuneration either by way of a monthly payment

or at a specified percentage of the net profits of the company. A whole-time director or managing

director cannot be paid more than 5% of the net profits for one such director and more than 10 %

for all of them together.

If any director receives as remuneration any sum in excess of the percentages stated above, he

shall have to refund it to the company. Any increase in the remuneration of any director can be

made only with the approval of the central govt.

The remuneration of directors of a public company and a private company which is a subsidiary

of a public company can be determined only by the articles of the company or by a resolution of

the general body or if the articles so require by a special resolution and the directors themselves

cannot fix the remuneration of all or any one of themselves.

By an amendment it is provided that the remuneration payable to any such director shall be

inclusive of the remuneration payable to such director for services rendered by him in any other

capacity, except in the case of services rendered of a professional nature, provided the director

possesses the requisite qualification for the practice of the profession.

As fringe benefits or perquisites such as rent- free accommodation, free medical aid etc., are

within the meaning of Sections 198 and 309, they can only be provided under authority of the

articles or resolution of the general meeting.

The remuneration of directors may be paid out of capital if there are no profits. As the remunera-

tion of directors is an item of expenditure it does not depend on the existence of profits. There is

an express provision in the Companies Act for the payment of remuneration—not exceeding Rs.

50,000—in case of absence or inadequacy of profits.

Members of the Board:

The Board of Directors is the topmost organ of the company. Drucker has rightly pointed out that

the Board must provide leadership to the company. To perform its managerial functions it must

be properly constituted.

The number of members of the Board will obviously vary according to the nature of the busi-

ness, subject to the minimum laid down by the law—three in case of a public company and two

in case of a private company. The maximum number of directors is 12 without the approval of

the central govt. Naturally a large company will need a large board and a small company a small

board. As far as possible different groups of shareholders should be represented on it. It should

also include some persons with special business knowledge and training.

The Board consists of two types of directors— Inside and Outside directors. The inside or execu-

tive directors are fulltime executives and tend to represent the views of management. The outside

or non-executive directors are generally part time directors who have no association with the

company other than as directors.

The outside directors are usually drawn from different walks of life, but mainly lawyers, bankers

and businessmen fill most of the seats. They are chosen because of some special knowledge or

skill which they are able to contribute for the benefit of the company. There should be a proper

balance between Inside and Outside directors.

Tenure of Office:
Directors should not hold office for a longtime because in such a case vested interests would

develop. They should be compelled to retire by rotation. At every Annual General Meeting, not

less than two-thirds of the total number of directors of a public company or its subsidiary is

liable to retire by rotation. One-third of these retiring directors are to retire from office at every

Annual General Meeting.

Functions of Top Management:

Top management who represents the Board of Directors and the fulltime managing

director is involved in the following twelve responsibilities:

1. Determination of company objectives.

2. Long range planning to attain objectives.

3. Establishment of basic policies to implement the long range plans.

4. Development of an organisation structure and its continuous modification to conform to future

plans.

5. Co-ordination of activities of the enterprise.

6. Selection of qualified personnel for key positions.

7. Provision for a continuous flow of qualified personnel.

8. Adoption of effective means of control.

9. Setting of short-term goals.

10. Appraisal of overall results and current performance.

11. Application of corrective measures as performance falls short of pre-deter- mined goals.
12. Prudent management of the corporate income, that is, that portion of the income available for

discretionary action.

The functions of top management have been grouped by Litterer in three classes:

(i) Decision-making:

They make all the basic decisions committing the resources and direction of the firm.

(ii) Monitoring:

They are responsible for seeking that work is progressing in tune with objectives laid down and
allocation made. Control systems may be established to supply relevant information and others

may be placed under obligation to top management.

(iii) Link with Outsiders:

Top management link the organisation and its environment on such matters as acquiring basic

resources and is being held accountable by other parties (Govt. or Public) for the fulfillment of

obligations.

Powers of Directors:

Formerly the primary organ of the company was considered to be the general meeting, the Board

of Directors being regarded merely as the company’s agents or servants subject to the dictates of

the general meeting.

Today, directors have ceased to be regarded as mere agents of the company, the modern concept

being that both the members in general meeting as well as the Board of Directors are primary

organs of the company and that the company’s powers are divided between these two organs.

The ultimate control is retained by the general meeting. This control, however, can only be

exercised through its powers to amend the Articles, by taking away some of the powers of the di-

rectors and by removing the directors and substituting others more to their liking.
Until this control is exercised, however, the directors may disregard the wishes and instructions

of the members in those matters which are not specifically reserved to the general meeting either

by statute or the Articles. Thus, the residuary powers are with the directors.

A director has no power to act in his individual capacity unless he is vested with authority to do

so by the Board of Directors or unless the Articles provide him with any power. So the rights and

powers of the directors under the Companies Act mean the rights and powers of the Board of

Directors.

The general powers of the Board are specifically mentioned is Section 291. This section gave

statutory recognition to the principle that subject to the specific exceptions, the directors of the

company as its governing body are entitled to exercise all the powers of the company. The Act

also specifies certain powers which can only be exercised by the Board at a meeting of the

Board.

These relate to the:

(i) Power to make calls on shareholders in respect of money unpaid of their shares,

(ii) Power to issue debentures,

(iii) Power to invest the funds of the company,

(iv) Power to make loans.

These powers may be delegated by the Board to the managing director, manager or any other

principal officer of the company. There are various other powers which are specifically vested in

the directors by statute. As the directors stand in a fiduciary position towards their company, a

director must not be placed in a position whereby his action is affected by personal motives or

where his duties and personal interest may conflict.

Therefore, when a director or a firm in which a director is interested enters into a con tract with

the company the consent of the board of directors is necessary. For the appointment of a person

as managing director or manager who is already a managing director or manager of another

company the unanimous consent of the Board is necessary.

Another power which is specifically vested in directors is the power to invest in shares and

debentures of another company in the same group.

Power is given to the Board to appoint the first auditor or auditors of a company within one
month of the date of registration of the company and also to fill any casual vacancy in the office

of an auditor provided such vacancy is not caused by the resignation of the auditor.

The most important power given to the Board of Directors is the power of superintendence and

control overhanging director or managers who may be entrusted with the management of the

affairs of the company. Another important power given to the directors is to carry on the

business of the company when the principal officers of the company are deemed to have vacated

office or have been removed or suspended from office.

The Articles of most companies usually provide for the allotment, transfer and forfeiture of

shares. The articles may even give absolute discretion to the directors to refuse registration of

transfers, in which case, if the directors use their discretion, the Court will not interfere unless it

is proved that the directors acted malafide. In India an appeal to the Central Govt. is available

against refusal to register a transfer.

As a shareholder does not have any right to inspect the books of accounts of the company it is

usual to give the Board the power to determine from time to time whether and to what extent and

under what conditions books of accounts of the company should be open to the inspection of

shareholders.
The power to make a recommendation as to capitalisation of profits or the payment of a dividend

or to declare an interim dividend and to set aside out of profits such amounts as they think fit as

reserved for future contingencies is usually vested in the directors by the Articles.

The power of declaring dividends is usually vested in the shareholders though there is nothing in

the Act to prevent the power of declaring dividends being vested by the Articles in the directors

alone.

Other powers which are usually vested in the directors by the Articles are:
(i) Power to call the general meeting.

(ii) Power to provide the safe custody of the seal.

(iii) Power to authorize by a resolution of the Board the affixing of the seal to any instrument and

(iv) Power of filling casual vacancies on the Board.

Powers subject to approval of Central Govt.:

In order to bring management under the direct control of the Central Govt. various sections of

the Act relating to managerial personnel involving resolutions of the Board are required to be
sanctioned by the Central Govt. Thus, any resolution passed by the Board of Directors amending

any provision relating to the appointment or reappointment of a managing or a whole time

director or of a director not liable to retire by rotation does not take effect unless approved by the

Central Govt.

Similarly, the appointment of a managing or whole time director by the Board or a resolution

increasing the remuneration of any director including a manager or whole time director, the

appointment by the Board of a managing or whole time director at a remuneration higher than
the remuneration which that office previously carried with it, is not effective unless approved by

the Central Govt.

Powers subject to Shareholder’s Approval:

In order to protect the interests of shareholders the Act imposes restrictions on the powers of the

Board by requiring in certain cases the consent of the company in general meeting for the

exercise of such powers.

Thus, in the case of a company formed for working an undertaking the directors are prohibited
without the sanction of the general meeting, from transferring the responsibility of its working to

any lessee or otherwise disposing of the whole of the undertaking or any of its undertakings,

from remitting or giving time of payment of a debt due by a director, from investing otherwise

than in trust securities the compensation received from compulsory acquisition of the whole of

the undertaking of the company or from borrowing money in excess of the company’s paid up

capital and free reserves so that the company may continue to be in a solvent position.

Powers to be Exercised Collectively:

The powers of directors—whether given by statute or the articles—are to be exercised by them

collectively and not individually, unlike in the case of partners because the company is entitled to

the benefit of the combined wisdom and experience of the directors. It follows, therefore, that an

individual director or a committee of directors has no power to act for the company in any way

or to interfere in the management of the company unless such powers have been delegated to

such individual or committee by the Board.

Directors usually exercise their powers at Board meetings which must be duly convened. Unlike

in the case of company meetings where the detailed rules of procedure are laid down by the

charter, statute or articles, the Board of Directors generally frame its own rules of procedure,

known as “Standing Orders” for the conduct of its meetings subject to the provisions of the

statute and the company’s articles.

Rights of Directors Exercisable Individually:

Although the powers vested in the directors either by the Act or the Articles are exercisable by

them collectively as a Board and not individually, except when a director has been specifically

authorised to do so there are certain rights prescribed by the Act which are exercisable by

directors individually.

These include the right to inspect the books of accounts,, the right to receive notice of Board

meetings, the right regarding the passing of resolutions by a circular whenever; director is

entitled to receive the draft resolution together with the necessary papers, if any, the right to the

sitting fee of each meeting attended as provided in the Articles, the right to make a written

representation and to have it sent to the members of the company at the company’s expense and

to be heard orally at the meeting in which the proposed resolution of removal of the directors is

concerned and the right to compensation for loss of office subject to certain statutory conditions.

Duties of Directors:

Those who direct the policy of a corporation are expected both by law as well as public opinion

to act in the best interest of the corporation and to abstain from seeking special personal

advantages and profit at the expense of the corporation.

The legal position of directors has been described as that of trustees as well as agents: trustees of

the company’s money and property; agents in the transactions which they enter into on behalf of

the company.

The nature of directors’ duties must be considered on the basis of these two concepts which are

so interrelated. In their capacity of agents, directors must act collectively as a Board and the acts

of individual directors cannot bind the company, but the duty of good faith is owed to the

company by each director individually. Similarly, trustees are required to act jointly but each

trustee is in a fiduciary position towards the cestuis que trust.

A fiduciary relationship implies the duty of good faith and as far as this duty is concerned it also

applies to trustees, so in this sense the directors can be described as trustees. They are regarded

as trustees in relation to the assets of the company which came into their hands.

Though directors may not be express trustees they would be liable for breach of trust if they

misuse their powers of employing the funds of the company. Directors are also trustees of the

powers conferred on them. They cannot contrive to exercise their powers in a way which may

conflict with their duties.

Directors are expected to work with reasonable care and being ‘merely commercial men’ are not

expected to bring with them any special qualifications for their office. What is required is not a

continuous attention to the company’s affairs, because directors are not bound to attend every

meeting of directors and it is not part of the duty of the director to take part in every transaction

which is considered at a Board meeting. Neglect or omission to attend meetings is not the same

as neglect of a duty which ought to be performed at those meetings.

In the performance of their duties directors are expected to show reasonable care. When directors

fail to exercise reasonable care and the company suffers a loss the directors are liable to make

good such loss. It does not depend on whether the directors are remunerated or not so that even

directors who serve the company without remuneration are so liable.

As per Companies Act, the total number of directorships an individual can hold has been

restricted to 20, subject to certain exceptions.

The Companies Act, thus, impose the following obligations on the directors:

(i) Every director of a company, directly or indirectly, interested in a contract with the company,

shall disclose the nature of his interest at the meeting of the Board of Directors.
(ii) Every director shall, within 20 days of his appointment to such office, disclose to the

company the particulars specified under Section 303(1), i.e., name, surname, address, nationality,

occupation and if he holds office of managing director, manager or secretary, the particulars of

such office held by him.

CORPORATE GOVERNANCE IN TRANSITION COUNTRIES:

The difference in the corporate governance problem in transition countries is one of controlling

versus minority shareholders problem. The early privatization of the state-owned enterprises
(SOEs) resulted in mostly concentrated ownership by dominant or blockshareholders,

(institutional investors - Hungary, management buyout (MBOs) or management-employee

buyouts (MEBOs) - Poland, employee-owners – Czech), giving these controlling shareholders

considerable greater control over corporate assets than their stock ownership warranted. Of even

greater concern than the concentrated ownership is the prevalence of complex ownership

structures through cross-shareholdings, multiple-class shareholdings with different voting rights,

pyramidal corporate shareholdings. A landmark study by Bebchuk et al (1999) shows that

“expropriation costs” are very large when such complex shareholdings are used to increase

control rights beyond their cashflow rights, even larger than concentrated ownerships. The role

of corporate governance to under girth weak competitive market mechanisms and democratic

political institutions is the complementing factor necessary to sustain the long-term

modernization of the transition countries. In other words, the “principalagent” relationship that

governs most capitalist societies that provides the incentives and environment in which investors

(principals) can reap the profits of their investment through their corporations (agents) and the

behavioral relationship are determined by a set of corporate governance standards. EBRD’s

Legal Indicator Surveys reports that transition countries have an implementation gap between the

enactment of laws and its enforcement. Unlike developed countries in the United States and

United Kingdom with widely dispersed shareholders, the principal-agent corporate governance
problems are primarily due to the agent (manager) perpetrating embezzlement and fraud. The

corporate governance regime of the English legal origins (US-UK) emphasizes the protection of

shareholders from being expropriated by the firm’s management. In contrast, the European legal

origin countries (French-German) emphasize the protection of stakeholders (state, blockholders,

employees) from expropriation. A relationship-based system and investor expropriation tends to

prevail in emerging economies. In Russia, Bulgaria and elsewhere mass privatization enriched

the oligarchs and the politically well connected. The “cronyism” and relationship-based structure

carried over from the communist era with most of the post communist corporate owners part of

the politically connected or political elite is difficult to root out. The lack of effective corporate

governance, in particular, Russia, engenders a hostile business environment: corruption,

organized crime, a bias judicial system and government interference. In the post-socialist

European countries, the set of corporate governance standards adopted varies which may depend

on past legal heritage. The group of Central and Eastern Europe and Baltic (CEEB) nations has a

German legal heritage which includes the Czech Republic, Estonia, Croatia, Latvia, Lithuania,

Poland, Hungary, the Slovak Republic and Slovenia. The group of South East European (SEE)

nations has a French legal heritage which includes the Bulgaria, Yugoslavia, Romania, Bosnia

and Albania. The last group consists of most of the Commonwealth of Independent States (CIS).

Pistor (2000) finds that past legal heritage is not significant in explaining what predominant

system of legal structure will be adopted by the transition countries. Rather, the adoption during

the initial transformation period is driven more by the desire to converge with the EU legal

system with an eye to attaining accession or the US system. Pistor also observes that differences

in legal reforms among the transition countries are due primarily to policy makers responding to

economic changes: greater privatization engenders better protection of creditor’s and

stockholder’s rights or whether the dominant external advisors are from the US or EU. Mahoney

(2001) similarly argues that a nation directly or indirectly adopts a set of legal structure in

response to change rather than solely because of its past legal heritage. Poland and the Czech

Republic are good examples of differences in privatization, corporate governance development

and economic growth. An interesting study by Coffee (1999) compares the differences between

Poland and the Czech Republic experience (Table 2). Both countries adopted corporate law

system based on the German civil law heritage. The important difference is that despite the

German heritage, Poland’s securities regulations and practices follow the common law system of

the Anglo-American more closely: greater private ownership protection, stringent disclosure

standards and a strong enforcing securities commission agency. Coffee concludes (1) that better

securities regulation to protect minority shareholders from expropriation is more effective than

ineffective corporate laws, (2) that the Anglo-American common laws structure of corporate

governance outperforms the German-French civil law structure despite their legal heritage. The

result is the successful growth of equity financing for businesses in Poland with a growing

healthy growing stock market. The Polish stock market is one of the largest among the transition

countries with a market capitalization of U$175.85 billion in 2010; in contrast, the Czec ch

Republic stock market capitalization is only U$68,831.