BECG - MBA (2011) Slides

Introduction to business ethics Ethics can be defined as “the science of character of a person expressed as right or wrong conduct of action”. :

Introduction to business ethics Ethics can be defined as “the science of character of a person expressed as right or wrong conduct of action”. Nature of Ethics Ethics is a subject that deals with human being. The question of ethics arises, as human beings are associated with values and morals. Experts were of the opinion that ethics is more of a science than an art Ethics is normative science Ethics deals with human conduct that is voluntary and not forced Objective of Ethics Ethics deals with human behavior. It assesses any act or decision taken by an individual is moral or not To establish moral standards and norms of behavior To judge human behavior based on these standards and norms To asses a human behavior and express an opinion about it To set standard / code for moral behavior and make recommendations about desired behavior

Business Ethics Business can be defined as a primary economic institution through which people in modern society carry on the task of producing, distributing good and services. While business ethics refers to the application of ethical judgment to business activities. :

Business Ethics Business can be defined as a primary economic institution through which people in modern society carry on the task of producing, distributing good and services. While business ethics refers to the application of ethical judgment to business activities. Morality We can define morality as the standards that an individual or a group has about what is right and wrong, or good or evil. Moral Standards – The norms about the kind of actions believed to be morally right and wrong as well as values placed on the kind of objects believed to be morally good and morally bad. Exam. – Always tell the truth, It is wrong to kill innocent people Moral Values – can usually can be expressed as statements describing objects or features that have worth such as “Honesty is good” and “Injustice is bad”.

KPMG’S 1999 Business Ethics Report (Representing 800 top Indian Companies):

KPMG’S 1999 Business Ethics Report (Representing 800 top Indian Companies ) The report states that only 14% of Indian companies presently have an ombudsman on their rolls, and merely 40% operate a grievance cell for employees (compared to 30% and 65% respectively in the US). The Ethical violations that came up in the KPMG survey are as follows : Areas Percentage of respondents Misuse of confidential information 71% Poor quality of goods and services rendered 55% Insider Trading 48% Receiving gifts or favors from suppliers 48% Promoting conflicting self-business interests 47%

Nature of Business Ethics - Overt ethical problems deals with bribery, theft, collusion etc Covert ethical situations occur in corporate merger, acquisition, marketing and personnel policies, capital investment etc.:

Nature of Business Ethics - Overt ethical problems deals with bribery, theft, collusion etc Covert ethical situations occur in corporate merger, acquisition, marketing and personnel policies, capital investment etc. Characteristics of ethical decisions in business Business ethics and profits Relationships between business and ethics Moral structure The Unitarian View of ethics Business Moral Ethics The Separatist View of ethics (Adam Smith & Milton Friedman) Business Ethics Society

The Integration View of Ethics (Talcot Parsons):

The Integration View of Ethics (Talcot Parsons) Government Law Business Morality & Ethics Market Systems Business Ethics Society Stages of ethical consciousness Stage 6 - Corp. Citizenship in business Stage 5 - Stakeholder concept Stage 4 - Profit maximization in the long-term Stage 3 - Profit maximization in the short-term Stage 2 - Anything for profit Need for business ethics Stage 1 - Law of Jungle

Stakeholders and their expectations:

Stakeholders and their expectations Stakeholders Expectations Primary Secondary Owners Financial returns Added value Employees Pay Work satisfactions Customers Supply of goods Quality and services Creditors Credit worthiness Security Suppliers Payment Long term relationships Community Safety and security Contribution to the community Government Compliance Improved competitiveness Standards and Values Clutterbuck’s institutional and control oriented approach Drummond and Carmichael’s personalized development approach

Clutterbuck’s approach:

Clutterbuck’s approach Set a clear example Publish a code of ethics Use reward and punishment mechanism Include ethics in recruitment criteria Reinforce policies through training and development Provide mechanism for negotiating concerns Establish openness and transparency into decision making processes Provide feedback

Carmichael and Drummonds approach:

Carmichael and Drummonds approach Acknowledge the personal dimension to ethical behavior Monitor symptoms of personal, ethic related stress Analyze feelings about venture and its activities - link analysis to diagnosis of problems Draw up personal and corporate ethics checklist Explain your ground - rules to others Set up systems of justice and reinforce these through contract and ethics statements Communicate ethics position

Importance of Ethics in Business:

Importance of Ethics in Business Ethical Theories Ethics is the field of enquiry. Morality is the object of that enquiry, the code or code of behavior acceptable within a particular group at a particular time. Metaethics can be defined as “the study of origin and meaning of ethical concepts” Metaethcis deals with > Metaphysical issues, question existence of moral values in humans or their human conventions > Psychological issues question the psychological basis of moral actions > Linguistic issues deals with meaning of key moral terms we use Normative ethics is that branch of ethics that guides human conduct which must be > Prescriptive > Universal > Overriding > Public > Practical Applied Ethics – DEALS WITH CONTROVERSIAL MORAL ISSUES

There are three set of normative ethics, each with own set of moral principles:

There are three set of normative ethics, each with own set of moral principles Utilitarianism : Teleological Ethical Theory is also called Consequentialist Theory Teleological theories hold that * an action is considered morally correct if the consequences of that action are more favorable than unfavorable. Draw back - GOOD, BAD, RIGHT & WRONG Three definitions of ‘good’ gives a different consequentialist moral theory > Egoism *only to the individual performing the action > Utilitarianism * to everyone > Altruism * to everyone except the individual Universalism : Deontological Ethical Theory > Duties to God, including honoring him and praying to him > Duties to oneself includes preserving ones life and sharing happiness > Duties to others, including family duties, social duties and political duties. Virtue may be defined as any disposition of character one desires for self and also for others. Virtue ethics emphasizes character development rather than articulation of abstract moral principles that guide actions

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Universalism or Utilitarianism cannot be used to judge all moral actions under all circumstances. Hence two modern ethical systems have been developed, based more upon values than principles. Distributive justice (John Rawls) – is explicitly based upon the primacy of single value: Justice. Theory of Justice attempts to solve the problem of distributive justice by utilizing the device of the social contract. Personal library is an ethical systems proposed by Robert Nozick is based upon a single value, Liberty. Liberty is thought to be the first requirement of society Lock’es Theory of Rights – Rights can be defined as “something to which one has a just claim: as a A - Power or privilege to which one is justly entitled B – i) the interest that one has a piece of property – often used as plural ii) plural: the property interest possessed under law or custom and agreement in an intangible thing especially of a literary and artistic nature iii) something one may claim as due”.

Ethical organization – An overview:

Ethical organization – An overview Judging the ethical nature of an organization Theory of corporate moral excellence > Espoused values > Values in practice Michael Hoffman’s three types of corporate culture - Basic values, attitudes and belief of the organization - Organizational goals, policies, structure, strategies that are shaped by the values, attitude and belief prevalent in the organization - Organizational procedures and processes Ethics and stakeholders theory Ethics and corporate governance COPORATE CODE The development of corporate code Implementation of corporate code

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Law and Ethics – Law can be defined as a consistent set of universal rules that are widely published, generally accepted, and usually enforced. Characteristics are Consistent Universal Published Accepted Enforced Relationships between the Law and Moral Standards Formation of law – Individual processes Formation of law – Group processes Formation of law – Social processes Formation of law – Political processes Value orientation of the firm The important aspects that managers and entrepreneurs have to consider and which are core to their activities are: Ensuring proper systems of corporate ethics and values in enterprise Definite understanding of questions related to compliance Serving the community by looking into the needs of economically and socially disadvantages Bringing products that are environmentally friendl y

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Framework of ethical decision making - Multiple Analysis Economic Analysis - the underlying belief is that a market economy has a limited number of resources and when consumers are supplied with highest quality goods at the lowest costs, and then those resources are used effectively and efficiently. Legal Analysis - the underlying belief is that a democratic society can establish its own rules. If people and organization follow these rules, then members of the society will be treated as justly as possible. Ethical Analysis - the underlying belief is that is all men and women in a society acted on the same principles of either beneficial or consistency, then members of that society would treated as fairly as possible.

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Market system The right to own and control private property Freedom of choice in buying and selling of goods and services Accesses to quick, reliable and precise market information Implication of Unethical behavior in Market system Behavior Impact on Decision Maker Likely result of behavior Coercion Fear of harm Increased cost Alter decision choice Reduce product or service quality Deceptive False impression Reduce satisfaction information After decision choice Theft Lose resources Increased costs or eliminate product or service Bribery Unearned personal gain Increase cost After decision choice Reduced product or service quality

Importance of trust in business > Dependability > Predictability > Faith:

Importance of trust in business > Dependability > Predictability > Faith Importance of unethical behavior on trust in business relations Supplier relations Customer relations Employee relations Integrate Social Contract Theory Hypernorms – are universal norms that apply equally to all individuals Macro social contracts - provides global norms Micro social contracts - are developed for a community

Corporate Social Responsibility - A Historical Perspective :

Corporate Social Responsibility - A Historical Perspective Keith Davis defined Social Responsibility as “ Social responsibilities refer to businessman’s decisions and actions taken for reasons at least partially beyond the firm’s direct economic or technical interest”. - Socio- economic obligation - Socio-human obligation Historical Perspective The Industrial Revolution 1700-1900 The first Industrial Revolution: Textiles and Steam: 1772-1830 1712: The Newcomen steam engine 1733: John Kay invents the flying shuttle 1764: James Hargreaves invents the spinning jenny. 1769: Richard Arkwright patents the water frames. James Watt patents a series of improvements on Newcomen engine making it more efficient. 1779: Samuel Crompton perfects the spinning mule 1785: Edmond Cartwright patents a power loom 1793: Eli Whitney patents the cotton gin 1807: Robert Fulton begins steamboat service on the Hudson river 1830: George Stephenson begins rail service between Liverpool and London Cont.

The spread of the industrial revolution: 1830 - 1875 1840: Samuel Cunard begins transatlantic steamship service 1856: Henry Bessemer develops the Bessemer converter 1859: The first commercial oil well is drilled in Pennsylvania 1866: The Siemens brothers improved steel making by developing open hearth furnace:

The spread of the industrial revolution: 1830 - 1875 1840: Samuel Cunard begins transatlantic steamship service 1856: Henry Bessemer develops the Bessemer converter 1859: The first commercial oil well is drilled in Pennsylvania 1866: The Siemens brothers improved steel making by developing open hearth furnace The second industrial revolution: Electricity and Chemicals: 1875-1905 1836: Samuel F.B.Morse invents the telegraph 1866: Cyrus Field lays the first successful transatlantic cable 1876: Alexander Graham Bell invents the telephone 1879: Thomas Edison invents the incandescent light bulb. 1892: Rudolf Diesel patents the diesel engine 1899: Guglielmo Marconi invents the wireless 1903: The Wright Brothers make the first successful airplane flight Dark Satanic Mills - Change in British Economy late eighteenth to early nineteenth century Technological innovation Agricultural development Improvement in communication Growing trade Rising population and consumer demand cont.

Shift from agrarian economy to industrial economy brought changes the economic life of people:

Shift from agrarian economy to industrial economy brought changes the economic life of people Working conditions deteriorated Locals were deprived of the enclosed common land share ( known as Enclosure) New technology and Enclosure resulted into migration of labor Migration lead to development of cities like Bradford, Cardiff and Manchester Labor mobility, shifts of land ownership, population pressure reduced the sense of ‘responsibility’ for others ( seen as characteristic feature of older and rural communities) Victorian capitalism came into existence Samuel Smiles popularized a feeling that saving, thrift, sobriety and self-restraint will improve the community Britain experienced a rapid growth of wealth in the early part of century compared to Europe and Germany Change in per capita GNP The positive effects of redistribution of wealth and power were shadowed by increasing unemployment and recession A common belief prevailed that the concentration of power could threaten the state and allocation of resources The values that influenced the behavior of individuals and the ethics that were followed in their businesses were under stake. Cont.

According to Lord Macaulay ”Our rulers will best promote the improvement of the nation by strictly confining themselves to their own legitimate duties, by leaving capital to find its own most lucrative course, commodities their fair price, industry and intelligence their natural reward , idleness and folly their natural punishment”. :

According to Lord Macaulay ”Our rulers will best promote the improvement of the nation by strictly confining themselves to their own legitimate duties, by leaving capital to find its own most lucrative course, commodities their fair price, industry and intelligence their natural reward , idleness and folly their natural punishment”. Corporations were suspected to threaten the freedom of citizen Business entities had no ‘conscience’ and were focusing on increasing power of their ownership The new working class faced severe problem Poverty grew as landlords moved tenants from the estates to maximize their revenue No intervention from Government as citizens played important role to make Britain a powerful nation Henry VIII and Elizabeth I introduced legislation against ‘Enclosure’ Adam Smith emphasized the importance of maintaining restrictions of trade, movement and minimum intervention, to enable every individual to pursue freely his own interest in his own way, and to compete with his own capital and industry. Improvements in manufacturing, commercial and economic skills form the British power Cont.

In 1788, Britain passed a Humanitarian legislation to protect the chimney sweeps from exploitation:

In 1788, Britain passed a Humanitarian legislation to protect the chimney sweeps from exploitation In 1802, focused on controlling the condition of pauper children In 1803, protection of immigrants In 1833, introduced the Factory’s Act In 1842, to channelize the condition of mines In 1848, created Public Health Act. Victorian Philanthropy Prior to Victoria’s accession to throne, The Times commented “ The two great division of society there, are masters, who have reduced the wages, and the workmen, who complain their masters for having done so”. Support from British Intellectuals who were not benefited from Industrial Revolution End of Eighteenth century saw the growth of Methodism, which formed a base for those who identified the difference between equality before God and inequality before man Different types of responses from individuals, entrepreneurial and corporate sectors towards Government initiatives Industrialists formed philosophical societies like Manchester Library Civic Universities were started in Manchester, Liverpool, New Castle and Birmingham Cont.

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The Nonconformist Challenge in Britain Religion played important role in influencing attitudes and actions Variance in the practice of Christianity, especially between Catholicism and Quakerism Quakers like brewing families Whitbreads and Truman, bankers like Lloyds and Barclays, confectioners like Cadburys and Rowntrees, glass maker Pilingtons, and many of the cotton and tobacco families Wills and Players played important roles in shaping the entrepreneurial values. British Parliamentary reform was in full swing throughout the century Efforts to widen franchise, and direct invention to eradicate abuses in factories, mines and homes The Utilitarian and the Nonconformist creates opportunities for self-employment and tried to bring changes in personal behavior. As a result, Sunday schools, subscription libraries, mechanic’s institute, engineering institutions, the new civic Universities and the Society for the diffusion of Useful Knowledge started As part of social responsibility poor were given guidelines to improve themselves In the nineteenth century, the concept of self-help was replaced by a number of movement for political, economic and social reforms The leaders from entrepreneurial class believed that corporate social responsibility means a new form of corporation Cont.

Progressive movements motivated industrialist like Whitworth, Milenes, Bauwens and Bessy:

Progressive movements motivated industrialist like Whitworth, Milenes, Bauwens and Bessy Robert Owen and his colleagues experiences three problems 1) Shortage of fund, tried to raise though donations but failed to get any 2) Artisan supporters lacked the education and trading skills necessary for developing ventures. 3) The link between wealth creation, capital accumulation and wealth distribution were not liked by many Yet some of the ideas of Robert Owen reverberate in the history of corporate responsibility Progressives in North America Robert Owen ideas were adopted by entrepreneurs like Francis Lowell, the designer of the first American Power Loom Early nineteenth century saw the shortage of labor reflected the similarity in the origin of freedom of movement Different economic, political and social conditions signified that corporate responsibility in North America varied from Europe Cont.

The perspective of individual, entrepreneurial and corporate responsibility in North America was centered on education:

The perspective of individual, entrepreneurial and corporate responsibility in North America was centered on education There was a close relationship between early entrepreneurs and educational institutions The great private Universities of Harvard, Yale, Cornell, Princeton, Duke, Dartmouth and Columbia benefited from their relation with emerging entrepreneurs Responses in The Thirties The World experienced a new economic order due to industrial revolution Increase in output, population, concentration and power of motivated individuals, entrepreneurs and communities to understand and interrelationship The growth of corporations dominated economic life The businesses needed skilled operational talent and managers The depression due to war, recession and political change in 1930s affected the existing system The decline of prices in New York Stock exchange As a result of depression the government began to be viewed to be an important agent of change in Britain and USA F.D.Roosevelt believed in in government intervention to solve social and economic problems Cont.

This belief showed developments at various part of the World.:

This belief showed developments at various part of the World. Scottish Council for development and industry reflected the changed responsibilities. The aims were > To streamline existing resources that support industrial development and job creation in Scotland > To encourage firms to locate in Scotland > To support government and other remedial action > To create a climate for growth and prosperity > To remove myths and misinformation about Scotland and its economic prospects In Europe and North America employees depended on philanthropic employers Post-war statism The end of World War II necessitated a re-examination of the relationship between industry, the state and the community The US economy experienced strong economic growth in post-war period The nation’s GNP rose to more than $ 500 thousand million in 1960

Current CSR practices of the firms in India and abroad:

Current CSR practices of the firms in India and abroad In 2002, Pricewaterhouse Coopers surveyed 1200 Business Leaders found that 70% of CEO agree that CSR is vital to the profitability of any company. Among leading Indian companies, those taking initiative in CSR are LEAD INDIA by Bennett Colman TATA ITC BIRLA Even small companies at Adityapur in the state of Jharkhand has shown the impact of CSR in that region. However, Indian PM’s recent address in annual meeting of CII, stressed the need of corporate India to pay greater heed to CSR has stimulated deeper thinking among corporate heads about their social responsibilities.

The Nature of Ethics in Management:

The Nature of Ethics in Management Ethical problems as Managerial dilemmas > A conflict between an organizations economic performance (measured by revenues, costs and profits) and its social performance ( stated in terms of obligations to persons both inside and outside the organization) An ethical dilemma in environmental protection An ethical dilemma in foreign bribery Characteristics of ethical problems in management > Most ethical decisions have extended consequences > Most ethical decisions have multiple alternatives > Most ethical decisions have mixed outcomes > Most ethical decisions have uncertain consequences > Most ethical decisions have personal implications

Examples of ethical problems in management:

Examples of ethical problems in management Pricing level Advertising Product promotions Working conditions Consumer service Workforce reduction Environmental pollution Community relations Supplier relations Ethical Issues in Strategic Management / Top Management Developing vision statement > Lea dership and senior manager’s remuneration > Implementing strategic changes > Changes in organization ownership Exchange offers Share repurchase Going private Leveraged buy-outs Cont.

Merger and acquisition Restructuring Corporate raiders Poison pills Global strategic operations:

Merger and acquisition Restructuring Corporate raiders Poison pills Global strategic operations Ethical Decision Making Model Step 1 Step 2 Step 3 Step 4 Evaluate decision Evaluate decision Establish moral Engage in ethical from ethical from ethical intent behavior standpoint standpoint in the Identity affected context of moral stakeholders principles Are rights of stakeholders violated?

Principles underlying an ethical approach to strategic management > Stakeholders theory, strategy and ethics > Loyalty and psychological contract > Cultural relativism:

Principles underlying an ethical approach to strategic management > Stakeholders theory, strategy and ethics > Loyalty and psychological contract > Cultural relativism Ethical issues in Marketing Management Empirical evidence (Burke, Maddock & Rose) - The Study titled ‘attitude of business ethics’ with 498 senior managers & 165 junior managers in US, focused on - Conduct of business - Employee relations - Social responsibility - Environmental concern Ethical Issues in Marketing Strategy Ethical issues in Marketing mix - Mc Carthy’s 4 Ps > Product > Price > Place > Promotion & Three service aspects of marketing mix > People, physical evidence and process Cont.

Marketing research > The right to be informed of critical research results - Using market research guise to sell products - Use of research to obtain information for sales leads or as an opportunity to pitch a sales information - Telephones or personal interviews mail surveys used to generate sales leads or to solicit sales:

Marketing research > The right to be informed of critical research results - Using market research guise to sell products - Use of research to obtain information for sales leads or as an opportunity to pitch a sales information - Telephones or personal interviews mail surveys used to generate sales leads or to solicit sales > Issues involving the rights of the researcher >Protection against improper solicitation of proposals >Misrepresentations of findings >Excessive requests > Reneging on promises > Availability of funds > Right to expect ethical subject behavior

Ethical issues in Operation management Role of Operations Manager PRODUCTION Job responsibilities > Receiving raw materials > Storing them in safe and secure environment > Supervising the movement of materials in the in the whole plant > Ensuring that the employees produce the right quality > Scheduling errors > Maintaining and established quality standards > Negotiating with suppliers and customers > Packaging the products > Distributing the products > Ensuring proper health and safety for the workers in work environment > Assessing the standard time values used in the manufacturing processes > Initiating employee suggestion schemes > Taking decisions on operational and quality issues Cont. :

Ethical issues in Operation management Role of Operations Manager PRODUCTION Job responsibilities > Receiving raw materials > Storing them in safe and secure environment > Supervising the movement of materials in the in the whole plant > Ensuring that the employees produce the right quality > Scheduling errors > Maintaining and established quality standards > Negotiating with suppliers and customers > Packaging the products > Distributing the products > Ensuring proper health and safety for the workers in work environment > Assessing the standard time values used in the manufacturing processes > Initiating employee suggestion schemes > Taking decisions on operational and quality issues Cont.

SERVICE Job responsibilities > Receiving incoming calls and mails > Storing the documents in relevance > Prioritizing the jobs according to their importance > Motivating quality performers among staff and giving directions to the staff > Negotiating with suppliers > Dealing with inquiries > Taking decisions on the policies that have to be implemented > Ensuring the health and safety of the workers > Maintaining computers and office equipment > Taking decisions on operational issues > Ensuring quality management:

SERVICE Job responsibilities > Receiving incoming calls and mails > Storing the documents in relevance > Prioritizing the jobs according to their importance > Motivating quality performers among staff and giving directions to the staff > Negotiating with suppliers > Dealing with inquiries > Taking decisions on the policies that have to be implemented > Ensuring the health and safety of the workers > Maintaining computers and office equipment > Taking decisions on operational issues > Ensuring quality management Other activities of operation managers include Total quality management Forecasting Improving technology

Ethical issues at the workplace:

Ethical issues at the workplace Drug and alcohol Employee thefts Conflicts of interest Quality control Discrimination Misuse of propriety information Fiddling of expense accounts Plant closure and lay-off Misuse of company assets Environmental pollution Misuse of other information Industrial espionage Inaccuracies in documents and records Receiving excess gifts and entertainment False or misleading advertisements Receiving back handers Insider trading Relations with local communities Antitrust issues Bribery Political contribution and activities Improper relationship with local government personnel Improper relationship with national government personnel Inaccurate charging to government bodies

Quality control - ethical dilemmas - Managerial roles in Quality Control:

Quality control - ethical dilemmas - Managerial roles in Quality Control An analytical framework for ethical problems in Operation Management, like decisions on Employing a person from a competitor Bidding for a contract with competitors to fix prices Six factors involve ethical decision making. If more than one factors affects the dilemmas then the ethical intensity increases. Ethical intensity is the degree of importance given to an ethical issue. The six factors involved in decision making are Magnitude of consequence Probability of the effect Social agreement Time interval Proximity Concentration of effect Analysis of ethical issues at workplace

Ethical issues in Purchase Management:

Ethical issues in Purchase Management Role of Purchase Manager Role of purchasing departments To ensure the availability of proper quantity and quality of materials for smooth functioning of the production department. To procure materials at reasonably low cost ( without compromising on quality) for the company. To ensure supply of quality materials. To be aware of various substitute materials available in the market, their prices and utility to the organization. To pass on information regarding purchasing to other departments of the company such as design, production, sales, finance etc. To study possible substitutes for raw materials. To ensure continuity of suppliers of raw materials. To identify and develop new vendors and maintain good relationship with existing vendors To develop good procedures and systems for purchase departments To coordinate with other functional departments, to achieve continuity of information flow and integration between different departments to the extent possible

Ethical issues in purchasing:

Ethical issues in purchasing Research conducted by Browning and Zabriskie (1983) showed that purchasing personnel adopt high ethical standards. Another study conducted by Farker and Janson (1990) also corroborated this view. The conclusions drawn from the studies found that Purchasing personnel are ethical wile dealing with sales people Actions of buyers are more ethical than their beliefs, and Young buyers were more ethical than their older counter-parts In another study conducted by Rudelius and Buchholz (1979) revealed that most purchase managers were concerned about accepting gifts. Therefore, wanted guidance from top management. However, most purchasing managers counter the following unethical. Accepting free gifts Deceiving suppliers Showing favoritism to suppliers Revealing confidential information

Principles and standards of purchasing practice :

Principles and standards of purchasing practice The followings are the principals and standards of purchasing practice as established by National Association of Purchasing Management Avoid the intent and appearance of unethical or compromising practices in relationships, actions and communications. Demonstrate loyalty to the employer by diligently following the lawful instructions of the employer, using reasonable care only and the authority granted. Refrain from any private business or professional activity that would create a conflict between personal interests and the interest of the employer. Refrain from soliciting or accepting money, loans, credits, or prejudicial discounts, and from accepting gifts, entertainment, favors or services, from present or potential suppliers that might influence, or appear to influence, purchasing decisions. Handle confidential or proprietary information belonging to employers or suppliers with due care and proper consideration of ethical and legal ramifications and governmental regulations Promote positive suppliers relationships through courtesy and impartiality in all phases of purchasing cycle. Refrain from reciprocal agreement that restrain competition. Cont.

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Know and obey the letter and spirit of the law governing the purchasing function and remain alert to the legal ramifications of purchasing decisions. Encourage all segments of society to participate by demonstrating support for small, small disadvantaged, women-owned, and disabled veteran-owned businesses. Discourage purchasing involvement in employer-sponsored programs of personal purchases that are business-related. Enhance the proficiency and stature of the purchasing profession by acquiring and maintaining current technical knowledge and the highest standard of ethical behavior. Conduct International purchasing in accordance with the laws, customs and practices of foreign countries, consistent with US laws, your organization policies and these ethical standards and guidelines. Empirical evidence for the ethical issues in Global Buyer - Suppliers Relationships The research objectives were The factors that impact the level unethical activities Whether buyers and their foreign suppliers follow the same code of ethics for judging business transactions. Impact of that the level of unethical activities has on effectiveness of the buyer-suppliers relationships Cont.

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The result of the summary can be summarized as follows Analysis of the survey data found that an activity such as bribery was not included in either of the two buyer categories of unethical practices or unethical supplier activities. Significant differences did exist between buyers’ and suppliers’ perceptions regarding how involved each believed the other to be in these activities. The deceitful practices of buyers are minimized when companies communicate ethics policies to suppliers and have an ethic hotline in place. Ethics training can help make new, inexperienced and even seasoned buyers more aware of these less obvious, unethical behaviors. In turn, including ethical issues as a part of buyer’s formal evaluations can help to reinforce material and policies covered during training. It appears that both buyers and suppliers realize that employing unethical practices will result short-term success at best, but will inevitably culminate damage to both their careers and the buyer-suppliers relationship. There is no relationship between the supplier’s nationality and the level of unethical activity in buyer-supplier relationship. Buyers who were least satisfied with the supplier relationship were those who perceived their suppliers to be the most involved in unethical practices. When buyers perceive that suppliers are involved in unethical practices, they also believe that suppliers are performing less effectively.

Ethical issues in Human Resource Management:

Ethical issues in Human Resource Management Nature of employment contract Hiring / Recruitment - The principle of ethical selection Discrimination > Ageism > Credentials > Testing Working condition Remuneration Ethical remuneration - Need, Effort and Ability > A person with pressing needs do not automatically qualify to greater remuneration > Mere possession of superior skills and abilities do not determine the remuneration. > Employees who work hard to perform a task need not be rewarded more than those who do it effortlessly. > A person who works hard but fails to achieve results, deserves no reward but sympathy

Ethical Remuneration - Seniority and Loyalty:

Ethical Remuneration - Seniority and Loyalty Ethics in retrenchment Firing Downsizing of workforce Ethical issues in Finance Importance of financial statements > Determining the key elements of the business like the objectives of the firm and see how they are defined and measured. > Making sure that the funds are allocated to different activities on the basis of their importance. > Frame rules that have a positive effect on business activities. It is important to ensure that each project or department is allotted its fair share of funds and that projected earning of the project or department are in accordance with the funds allocated to it. Ethical issues in mergers and acquisitions > Hostile takeovers - POISON PILLS GREENMAIL GOLDEN PARACHUTE PEOPLE PILL SAND BAG

> Management buyouts:

> Management buyouts Ethical issues at Top Managemen t Insider trading Money laundering Ethics in Financial markets and investors protection Ethical responsibility towards competitors and business partners Ethical issues in accounting and other functions The importance of financial statements > Fictitious revenues > Fraudulent timing differences > Concealed liabilities and expenses > Important or fraudulent disclosures or omissions > Fraudulent asset valuations Types of financial accounts > Financial accounts > Internal management accounts Importance of transparency in disclosure of accounts

Role of accountants:

Role of accountants > Accountants employed by an organization - Financial accountant - Management accountant > Accountants in professional practice - The auditor - Related services > The rules regulating the professional conduct of accountants - The ethical audit > Ethical issues in information technology - The information technology act > The importance of software audit Ethical dilemmas at workplace - Power, trust and authority - Secrecy, confidentiality and loyalty > Resolving dilemmas - Manager - Employees

Complexity of Ethical Issues :

Complexity of Ethical Issues Managerial ethics and individual decisions Ethical analysis and a bribery case Ethical analysis and ethical dilemmas > Pricing of checking accounting practices > Exaggerated or misleading claims in Advertising > Misuse of ‘Frequent Flyer” discounts and trips > Working conditions in a Manufacturing plant > Customer service and declining product quality > Workforce reduction > Property tax reduction > Environmental pollution Solving ethical dilemmas

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Managerial Integrity and decision making Internal stakeholders External stakeholders Ethical Leadership Personal integrity and self development Wisdom based-leadership

Leadership styles that get result:

Leadership styles that get result Basis Coercive Authoritative Affiliative Democratic Pace setting Coaching The leaders Demands Mobilizes Creates harmony Forges Set high standards Develops modus immediate people toward and builds consensus for performance people for operandi compliance a vision emotional bonds through the future The style in “ Do what “ Come with “ People come “ What do you “Do as I do now” “ Try this” a phrase I tell you” me” first” think?” Underlying Drive to Self-confidence Empathy Collaboration, Conscientiousness Developing emotional achieve, empathy, change building team leadership drive to achieve others and initiative, catalyst relationship communication initiative empathy intelligence self-control self-awareness competen- cies When the In a crisis When changes To heal rifts in To build buy-in To get quick To help an style works to kick-start require a new a team or to or consensus, or results from a employee best a turnaround vision, or when motivate people to get input highly motivated improve or problem a clear direction during stressful from valuable and competent performance employees is needed circumstances employees team or develop long -term strength Overall Negative Most strongly Positive Positive Negative Positive Impact on Positive climate

Understanding team work and Leadership - The use of team in organizations has increased because team performs better than traditional work groups:

Understanding team work and Leadership - The use of team in organizations has increased because team performs better than traditional work groups The use of teams have resulted Improved organizational performance Employee benefits Reduced costs Organizational enhancement The leader acts as facilitator and coach, who helps team members make effective decisions. How culture constraints or enhances leadership Superleadership Transformational leadership

Essential leadership skills > Problem solving > Decision making:

Essential leadership skills > Problem solving > Decision making Visionary Leaders Jack Welch - Ex chairman & CEO, GE Akio Morita - Founder - Chairman Sony Corp Ted Turner - Turner Broadcasting Systems Micheal Dell - Dell Computers Narayan Murthy - Chairman, Infosys

Corporate Governance (CG) - History of corporate forms and models > An integral part of capitalism is the business corporation which was developed from the sixteenth century joint stock company and acquired its current characteristics during nineteenth century. > It is known as corporation in USA and public limited company in India. > The corporation / company consists of shareholders who contribute capital and own the corporation but whose liability for the act is limited to their contribution to the share capital of the company > The law allows anyone the privilege of forming a company, public or private for any purpose :

Corporate Governance (CG) - History of corporate forms and models > An integral part of capitalism is the business corporation which was developed from the sixteenth century joint stock company and acquired its current characteristics during nineteenth century. > It is known as corporation in USA and public limited company in India. > The corporation / company consists of shareholders who contribute capital and own the corporation but whose liability for the act is limited to their contribution to the share capital of the company > The law allows anyone the privilege of forming a company, public or private for any purpose Company Form of organization conducive to efficiency > The law enables the organization of economic activity, be it production, trade or provision of services with limited liability through the establishment of a company > It has the same rights to buy and sell and make contracts as a person would have > This is an improvement over the propriety and partnership form of business organization > If the firm has wider participation it enjoys the benefit of access to capital market

CG – An overview:

CG – An overview Issues in corporate Governance - Ethical issues - Efficiency issues - Accountability issues The growing scale of corporation and their style of functioning have raised many issues that must be addressed by corporate governance. Some of these are: The growth of private companies The magnitude and complexity of corporate groups Importance of institutional investors Rise in hostile activities of predators (take over) Insider trading Litigation against directors Needs for restructuring of board Changes in auditing practice

Definition of corporate governance - Corporate governance is the system by which business corporations are directed and controlled:

Definition of corporate governance - Corporate governance is the system by which business corporations are directed and controlled Difference between corporation and corporate governance CORPORATE GOVERNANCE CORPORATE MANAGEMENT 1.External focus 1. Internal focus 2.Governance assumes an open system 2. Management assumes a closed system 3.Strategy oriented 3. Task Oriented 4.Concerned with where the company is 4. Concerned with getting the going company there Theories of corporate governance The first theory of corporate governance (theory of McGregor) The stewardship theory (theory of Donanldson and Davis)

McGregor Theory Y of human behavior - The management of a corporation is responsible for productive use of its resources in best possible way to accomplish corporate goals. - Employees by nature are not averse to behaving in accordance to corporation’ requirements - Every employees has an in-built motivation to behave in way that will help the corporation to achieve its objectives :

McGregor Theory Y of human behavior - The management of a corporation is responsible for productive use of its resources in best possible way to accomplish corporate goals. - Employees by nature are not averse to behaving in accordance to corporation’ requirements - Every employees has an in-built motivation to behave in way that will help the corporation to achieve its objectives Some of the reasons put forth by critics of stewardship theory Separation of ownership from management There is no single shareholder who holds a major chunk of equity capital The inability of small investors to directly monitor the activities of the corporation in which they have invested. Control over the corporation changing from the owners to the management Divergent interests of the owners and management

Corporate objectives and goals Ownership pattern - Issues in managing public limited firms Major features of a public limited company (PLC) are, > Ownership is determined by the ownership of company’s share. PLCs are valued on a stock exchange where their shares are listed and traded, and > Shareholders control the company they own Voting rights of shares depend of voting rights attached to the shares:

Corporate objectives and goals Ownership pattern - Issues in managing public limited firms Major features of a public limited company (PLC) are, > Ownership is determined by the ownership of company’s share. PLCs are valued on a stock exchange where their shares are listed and traded, and > Shareholders control the company they own Voting rights of shares depend of voting rights attached to the shares Agency Problems – agency problem exists because managers might misuse their position and there are costs associated with prevention of abuse. Corporate governance has to subordinate manager’s interest to that shareholders. Since, shareholders are the residual claimants they have the greatest incentive to ensure the success of the corporation

Nature and evolution of corporate governance Global and National Perspectives – Global CG Models:

Nature and evolution of corporate governance Global and National Perspectives – Global CG Models Anglo- American Model Corporate Structure Board of Directors Elect (Supervisors) Shareholders (Owners) Appoints and supervises Own Creditors Officers Lien ( Managers) Stakeholders Manage Hold stake Structural framework Company Legal System

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German Model / French Model (modified) Corporate structure Supervisory Board Appoint 1/2 Appoints Reports to and Supervise Employees and Labor unions Managing Board (Including Labor relations) Independently runs day to day Appoint 1/2 Shareholders (own) Company own

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Japanese model of corporate governance Corporate structure Supervisory Board Appoint (including president) Shareholder own Ratifies Consults President Consults Monitors and act in emergencies Provide Mangers Executive Management (Primary board of Directors) Banks Manages Loans Company

Evolution of Corporate governance:

Evolution of Corporate governance Many factors have contributed for the evolution of corporate governance The responsibility for ensuring good corporate conduct shifted from Government to free market economy Active participation of individual and institutional investors Increasing competition in global economy. SEBI has taken various steps to strengthen corporate governance in India. Some of these steps are Strengthen disclosure norms for IPOs following the recommendations of the committee set up by SEBI Providing information in directors’ report for utilization of funds and variations between projected and actual use of funds according to the requirement of Companies Act; inclusion cash flow and fund flow statement in annual reports; Declaration of quarterly results Cont.

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Mandatory appointment of compliance officer for monitoring the share transfer process and ensuring compliance with various rules and regulations Timely disclosure of material and price sensitive information including details of all material events having a bearing on the performance of the company Dispatch one copy of complete balance sheet to every household and abridged balance sheet to all shareholders Issue of guidelines for preferential allotment ay market related prices; and Issue regulations providing for a fair and transparent framework for takeovers and substantial acquisitions

Claims of various stakeholders :

Claims of various stakeholders Stakeholders may be Any group of people who have a stake in the business Those who are vital to the survival and success of the organization Any group that is affected by the activities of the organization Based on the relationship with the organization stakeholders can be categorized as: Internal stakeholders External stakeholders Internal stakeholders are > Shareholders > Employees > Management

Share holders > Shareholders responsibility:

Share holders > Shareholders responsibility Maintaining good relationships with top management Exercising their voting rights Similarly, the organization must honor the trust of the shareholders. Therefore, the responsibilities of the organization towards the shareholders are: > Managing company efficiently in order to secure a fair and competitive return on the owners investment > Disclosing relevant information to shareholders, subject only to legal requirements and competitive constraints. > Conserving, protecting and increasing the shareholders assets. > Respecting the shareholders requests, suggestions, complaints, and formal resolutions. Employees > Responsibility of Employees and Employers

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Some specific responsibilities of organization towards their employees are: To provide adequate compensation To provide working conditions that respect each employees health and dignity To be honest in communications with employees and open in sharing information To listen to and, where possible, act on employee suggestions, ideas, requests, and complaints. To engage negotiations when conflicts arises. To avoid discriminatory practices and guarantee equal treatment and opportunity regardless of gender, age, race, and religion. To protect employees from avoidable injury and illness in the workplace. To encourage and assist employees in developing skills and knowledge that are required for accomplishing the task. Management

External stakeholders > Consumers > Suppliers > Creditors > Competitors:

External stakeholders > Consumers > Suppliers > Creditors > Competitors Responsibility of business corporations towards consumers are: 5 Rs Right Quality Right quantity Right time Right place Right Price Responsibility towards suppliers Seek fairness and truthfulness in all activities, including pricing and licensing . Cont.

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Ensure that business activities are free from coercion and unnecessary litigation. Foster long-term stability in the supplier relationship in return for value, quality, competitiveness and reliability Share information with suppliers and integrate them in the planning processes; Pay suppliers on time and in accordance with the agreed terms of trade; and Seek, encourage and prefer suppliers and sub-contractors whose employment practices respect human dignity. Creditors Government Community

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A firm’s responsibility towards society include: Respecting human rights and democratic values. Supporting public policies and practices that promote human development through harmonious relations between business and other segments of society. Collaborating with such activities that aim at improving the standards of health, education, workplace safety and economic well-being. Promoting and stimulating sustainable development and playing a leading role in preserving and enhancing the physical environment and conserving the earth’s resources. Supporting peace, security, diversity and social integration; respecting the integrity of local cultures Encouraging charitable donations, educational and cultural contributions and employee participation in community and civic affairs

Why Governance? - Change in eighties > Deregulations of financial markets contributed to finance driven governance > Merger activity became an important source of profits for the finance sector > Towards the end of 80s there were no underline pressures or incentives > Volatility was generated endogenously > Takeover activity itself became a powerful tool for speculation > Speculators invested in stocks of takeover target for higher earnings > Valuation was not based on future earning ability, but on break up value, dismember parts and sold off. :

Why Governance? - Change in eighties > Deregulations of financial markets contributed to finance driven governance > Merger activity became an important source of profits for the finance sector > Towards the end of 80s there were no underline pressures or incentives > Volatility was generated endogenously > Takeover activity itself became a powerful tool for speculation > Speculators invested in stocks of takeover target for higher earnings > Valuation was not based on future earning ability, but on break up value, dismember parts and sold off. Self regulatory codes – International Capital Markets Groups (1992) proposed the following benefits of self-regulation: In “self-regulation,” it is possible to impose ethical standards , which go beyond those, which can be imposed by statutory legislation. Self regulators are directly accountable to the members of their group, as self regulatory systems have in built motivation to regulate for effectiveness and least interference. Self–regulation operates in an environment where there is a willingness to accept regulations formulated from within for the common good of the group. Self-regulators being ‘part’ of the group understand the issues facing the group more intimately and are therefore more sensitive to the needs of entire group. Cont.

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The ‘regulated’ have an opportunity to participate at all levels of the self-regulatory process. Thus makes it easier for them to appreciate and accept new regulations Self – regulation has a built-in systems of checks and balances as the regulated see it as the regulated see it as their duty to expose non-compliance. Self-regulators can identify complex regulatory problems at an early stage and develop suitable solutions before these problems reach a stage where they can disrupt group operations. Self regulators are more comprehensive than official regulations and are easier to operate and implement. Reports of Committees on Corporate Governance Cadbury Committee Report Greenbury report Hampel report OECD Report

Cadbury Committee Report – Committee set up in May 1991:

Cadbury Committee Report – Committee set up in May 1991 The recommendations made by the Cadbury Committee on 27 th May 1992 are as follows: Decision making power should not be vested in a single person, i.e. there should be separation of roles of chairman and CEO. Non-executive directors should act independently while giving their judgment on issues of strategy, performance, allocation like resources and designing codes of conduct. A majority of directors should be independent non-executive directors , i.e. they should not have any financial interests in the company. The term of a director should not exceed three years. This can be extended only with the prior approval of the shareholders. There should be full transparency in matters relating to directors emoluments . There should be a judicious mix of salary and performance related pay. A remuneration committee made up wholly or largely to non-executive directors, should decide on the pay of the executive directors. The interim company report should give the balance sheet information duly reviewed by the auditor.

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The pension funds should be managed distinct from the company There should be a ‘professional and objective’ relationship between the board and the executives. Information regarding the audit fee should be made public and there should be regular rotation of auditors Greenbury Report (1995) – showed concern about Director’s remuneration. Hampel Report (1998) - Made a review of Cadbury report. Recommended no need to revolutionize the CG systems in UK. It aimed to harmonize the Cadbury and Greenbury recommendations OECD Report – On 27 th -28 th April ’98, OECD Ministers asked OECD to develop a set of Corporate Governance principles that would be useful for its members and non-members countries. The principles by OECD fall into five broad areas: The rights of the shareholders The equitable treatment to shareholders The role of stakeholders Disclosure and transparency The responsibilities of board

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. Sarbanes Oxley Act (SOX Act.) – July 2002 Adopted for changes virtually in every areas of Corporate Governance particularly in areas of Auditor independence Conflicts of interest Corporate responsibility Enhanced financial disclosures and penalties The aim of the SOX Act was to clean up the auditing process. It sets up a Public Company Accounting Oversight Board to oversee auditors > It makes it unlawful for accounting firms to offer a number of other kind of services to companies whose accounts they audit > It demands that directors sitting on corporate audit committees (who are responsible for choosing the firm’s auditors) be independent.

Internal Corporate Governance Mechanism – Board Style and structure:

Internal Corporate Governance Mechanism – Board Style and structure Types of Directors Executive directors Non-executive directors Nominee directors Representative directors Alternative directors Shadow directors Associate directors Types of Board structure All- Executive board Majority executive board Majority outside board Two tier Supervisory board

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Governance Board Management All- Executive Board

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Governance Board Management Majority-Executive Board

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Governance Board Management Majority outside board

Two-tier Supervisory Board Advisory Boards:

Two-tier Supervisory Board Advisory Boards Issues in designing a board The board size The role of chairman and the chief executive Duality in subsidiary company board Board Styles Rubber stamps boards Representative boards Country club boards Professional board Functional Committees of the board Audit committee Remuneration committee Nomination committee

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HIGH Country Club Professional board board Concern for relations among Directors Rubber stamp Representative board board LOW Commitment to HIGH effective communication

Corporate governance – Roles and responsibilities of directors (Code of conduct):

Corporate governance – Roles and responsibilities of directors (Code of conduct ) Role of directors The Performance role The conformance role Responsibilities of directors – common responsibilities world over Responsibilities to shareholders Obligation to maintain honesty and integrity Legal aspects and liabilities of directors Misrepresentations in offer documents and annual accounts Failure to refund subscription money to investors Contravention of law

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Duties of directors Exercise care in the discharge of functions as directors Attend board meetings and devote sufficient time and attention to the affairs of the company Not to be negligent and not to commit or let others commit tort-liable acts Act in the best interest of the company and its stockholders and customers Not to misuse power Protect interests of creditors Maintain confidentiality Not to make secret profits and make good loss, if accrued due to breach of duty, of negligence Not to exercise powers for collateral purpose Not to waste company assets

The role of the chairman > Relationship with the CEO > Relationships with executive directors > Relationships with non-executive directors:

The role of the chairman > Relationship with the CEO > Relationships with executive directors > Relationships with non-executive directors Functions of the chairman To set standards and ensure that policies and practices are in place To ensure that the directors make good decisions. To make sure that directors are continuously upgraded to the levels required by investors to meet current and future needs of the company. To act decisively in times of crisis To act as a representative of the company Role of CEO Relation with the chairman Relation with directors

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Functions of the CEO To assist executive directors in formulating strategic proposals that have to be endorsed by the board To provide leadership and direction to all his executive directors. To develop a plan for implementing the strategy formulated by the board and /or management, and to convince the non-executive directors that the strategy can work. To act as representative of the executive directors when interacting with the non-executive directors. To present the company to major investors, the media and government. To be a source of inspiration, leadership and direction to the employees , customers and suppliers To be able to identify the situations that requires intervention.

Functions of the board > Strategic role of the board:

Functions of the board > Strategic role of the board Systematic level strategy Structural and portfolio strategy Implementation strategy > Policy making role of the board > Monitoring and supervisory roles Whistle blowers policy The recommendation of the Committee on CG (2003) that personnel who observe an unethical or improper practice should have access to the audit committee to report is likely to have restraining effect on management A key provision of SOX Act. is whistle blowing. Board audit committees should provide employees with an anonymous and confidential way to lodge complaints about suspected financial shenanigans in their midst. Employees have to be informed about how the system works.

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External Corporate Governance Mechanism Regulators - Ministry of Corporate Affairs, Government of India Ministry’s vision – “ To be a leader and partner in initiatives of corporate reforms, good governance, and enlightened regulation with a view to promote and facilitate effective corporate functioning, investor’s protection and inclusive growth; empower the Indian citizen and have a global footprint”. Initiatives by Ministry of Corporate Affairs LAW - Limited liability and partnership Act - Accounting standard - Amendment to Acts governing professionals - Comprehensive revision of Companies Act, 1956 INSTITUTION AND SYSTEMS BUILDING - Indian Institute of Corporate Affairs - Competition commission of India - National Foundation of Corporate Governance - Streamlining Field Organization

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PEOPLE ISSUES - Rebuilding Indian Corporate law service - Empowering Investors and citizen Market Regulator – Security and Exchange Board of India (SEBI) SEBI has laid down that the board set up a remuneration committee to determine on their behalf and on behalf on the shareholders with agreed terms, the company ‘s policy on specific packages for executive directors. It is important for shareholders to be informed of the remuneration of directors of the company SEBI committee on CG (2003) made a mandatory recommendation that compensation of non-executive directors as well as independent directors be fixed by the board and approved by shareholders Issue of stock options to non-executive directors as well as independent directors in any year and in total should be limited and should vest only one year after retirement

Gate keepers – All board of directors are prisoners of their gate keepers and only if the board’s agents properly advice and warn it, the board can function efficiently? - John Kofee:

Gate keepers – All board of directors are prisoners of their gate keepers and only if the board’s agents properly advice and warn it, the board can function efficiently? - John Kofee Who are these gate keepers? Third parties (intermediaries) > who’s cooperation if of essential > who can prevent misconduct by withholding cooperation Example Accountants and lawyers Bankers Rating agencies Physician, ISPs, Bartenders, Gun dealers

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Role of Gatekeepers in CG - gatekeepers Provide information and certification for directors and investors Have ability to detect and deter misconduct Are relied on effective CG Recent scandals – World com, Enron, Satyam due to multiple failure of gatekeepers Responsibility of gatekeepers – gatekeepers role Is largely a by-product of providing a for –free service Imposes a cost on gatekeeper’s institution and the economy Conclusion Each intermediary institution is different, no ‘one-size-fits-all answer is possible Moral responsibilities are linked to legal responsibility / liability The appropriate moral and legal principle is what investor would choice Answer to cost-effective deterrence

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Institutional Investors – Institutional investors are becoming an integral part of monitoring the corporate governance in companies Organizations which pool and invest large sum of money in companies Often act on behalf of others as institutional investor Type of Institutional investor Pension fund Mutual fund Investment fund Unit trust Investment bank Hedge fund Corporate Governance in India – The Companies Act. 1956 The central legislation in India Empowers the central government to regulate the formation , financing and winding up companies The Company Bill, 2004 Introduced to provide the comprehensive review of the company law

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Involvement of Institutional Investors – PRO Have significant stake in companies Ability to exercise control on promoter’s management and prevent abuse Have assess to information and better monitoring capabilities Significant positive stock market performance and corporate governance Research shows companies and countries weak in corporate governance suffer larger collapses when hit by greater volatility Major influence in attracting FDI Involvement of Institutional Investors – CON Investment objectives and compensation system discourage participation Conflict of interest with primary fiduciary responsibility to own investors and beneficiaries Investors like MFs have short term performance measurement which works against active monitoring

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Conclusion – Active role should ensure Board members have adequate experience and are truly independent Executive remuneration, particularly for family members is not excessive Early warning signals are detected from the wealth of information made available to shareholders Company’s funds are not diverted to non-core activities or for benefit to related parties Institutional investors should lead share holders in demanding corrective action, where such action is warranted Corporate Raiders – create an environment of threat of take over and force the target company to buy back shares at premium i.e. ‘ green mail ’ technique. These are countered by - Poison Pills - Golden Parachute - People Pills - Sand bag

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Corporate Governance Ratings At the instances of SEBI two credit rating agencies (CRISIL and ICRA) have launched a unique model for rating CG in an enterprise. The index subsumes the ability/track record of an enterprise in wealth creation, wealth management and wealth sharing The governance audit comprises a special comprehensive audit on the corporate governances and business practices of the company The report of governance audit will help to measure how best a company is governed: excellent - complying with mandatory governance requirements or below average or badly governed or misgoverned company The audit is done mainly on the basis of disclosures keeping in view the information needs of investors , employees, customers and general public. However, the committee on CG (2003) was of the view that corporate governance ratings should not be mandatory

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The checklist of disclosures and compliance compiled by governance audit in such areas: Composition of board Board procedures Appointment of new director Audit committee Remuneration committee Shareholders committee Previous general meetings and postal ballots Management discussion and analysis report Means of communication Rating of debts / deposits Related party transactions Penalties / enquiries by any statutory authority Information needs – shareholders, customers, employees, community Internal control and management assessment thereto Statutory auditors report

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Corporate Governance In India: Corporate form in India 50s to 90s Development of CG in India during 90s and 2000s Various reports on CG CII Report under chairmanship of Rahul Bajaj Kumar Mangalam Birla Committee Report Narayan Murthy Report Naresh Chandra Report JJ Irani Committee report CII Report - A task force was set up in mid 1996 under the leadership of Rahul Bajaj

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Recommendations made by CII Committee are: The full board should meet a minimum of six times a year, preferably at an interval of two months, which should have agenda at least for half day’s discussion Any listed company with 100 crore or more turnover, should have professionally competent non-executive, independent directors, who should constitute at least 30% of the board if the chairman is a non-executive director or at least 50% if the chairman and managing director (MD) is the same person. No single person should hold directorships in more than ten companies. This ceiling excludes directorships in subsidiaries (holding of 50% or more) or associate companies (stake between 25% to 50%) Non-executive directors need to play material role in corporate decision making , maximizing long term shareholder value and become active participants of the board. These excludes those who joined board as experts from technology and science fields. To secure better effort from non-executive directors, companies should pay a commission over and above sitting fees for professional inputs. The present commission is 1% if there is a MD and 3% where there is no MD is sufficient

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While re-appointing members of the board, companies should give attendance record of concerned directors. If the director has not been present (absent with or without leave) for 50% or more meetings , then this should be explicitly stated in the resolution that is put to vote. One should not re-appoint any director who has not had the time to attend even one half of the meetings Key information that must be reported and placed before the board must contain > Annual operating plans and budgets, together with up-dated long term plans > Capital budgets, manpower and overhead budgets > Quarterly results for the company as a whole and its operating divisions or business segments > Internal audits reports, including cases of theft and dishonesty of a material nature > Show cause, demand and prosecution notices received from revenue authorities that are considered to be materially important ( more than 1% of net worth) > Fatal or serious accidents, dangerous occurrences, and any affluent or pollution problems

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> Default in payment of interest or non-payment of the principal on any public deposit, and/or to any secured creditor or financial institution > Defaults such as non-payment of inter-corporate deposits by or to the company , or materially substantial non-payment of goods sold by the company > Any issue which involves possible public or product liability claims of substantial nature, including judgment or any order which might passed strictures on conduct of the company or taken an adverse view regarding another enterprise that can have negative implications for the company > Details of any joint venture or collaboration > Transactions that involve substantial payment towards goodwill, brand equity , or intellectual property > Recruitment and remuneration of senior officers just below the board level, including appointment or removal of the chief financial officer and the company secretary > Labor problems and their proposed solutions > Quarterly details of foreign exchange exposure and the steps taken by management to limit the risks of adverse exchange rate movement, if material

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Listed companies with either a turnover of Rs.100 crore or a paid up capital of Rs.20 crore should set up audit committee within two years Under “ Additional shareholder’s Information” , listed companies should give data on high and low monthly averages of share prices in a major stock exchange where the company is listed for the reporting year; greater details of business segments, up to 10% of turnover, giving share in sales revenue, review of operations, analysis of markets and future prospects Consolidation of group accounts should be optional and subject to financial institutions allowing Companies to leverage on the basis of group’s assets and the income tax department using the group concept in assessing corporate income tax Major stock exchanges should gradually insist upon a compliance certificate , signed by CEO and CFO which clearly states that, the management is responsible for the preparation, integrity and fair presentation of the financial statements and other information in the annual report, and which also suggest that the company will continue in the business in the following year; the accounting policies and principles confirm to standard practice, and where they do not, full disclosure has been made of any material departures; the board has overseen the company’s systems of internal accounting and administrative control systems either directly or through audit committee (100 crore T.O or 20 PC)

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12. For all companies with a paid up capital of Rs.20 crore or more, the quality and quantity of disclosure . A company’s GDR issue should be the norm for any domestic issue Government must allow far greater funding to the corporate sector against the security of shares and other paper It should be desirable for financial institutions as pure creditors to re- write theirs covenants to eliminate having nominee directors except in events of serious and systematic debt default and in cases of debtor company not providing six monthly or quarterly operational data to the concerned financial institution If the company goes to more than one credit rating agency, then it must divulge in the prospectus and issue document, the rating of all the agencies that did such an exercise Companies that default on fixed deposits should not be permitted to accept further deposits and make inter-corporate loans or investments until the default is made good , and declare dividends only after the default is made good Reduction in number of companies where there are nominee directors. Many financial institutions have argued that they are in too many companies on the board, where only few operate their tasks properly.

Kumar Managalam Birla (KMB) headed the committee appointed by SEBI on May 7, 1999. the committee was formed to promote and raise the standard of CG. The objective of the K M B committee was to > Suggest suitable amendments to the listing agreement executed by the stock exchanges with the Companies and any other measures to improve the standards of corporate governance in the listed Companies, in areas such as continuous disclosure of material information both financial, manner and frequency of such disclosures, responsibilities of independent and outside directors. > Draft a code of corporate best practices > Suggest safeguards to be instituted within the Companies to deal with insider information and insider trading:

Kumar Managalam Birla (KMB) headed the committee appointed by SEBI on May 7, 1999. the committee was formed to promote and raise the standard of CG. The objective of the K M B committee was to > Suggest suitable amendments to the listing agreement executed by the stock exchanges with the Companies and any other measures to improve the standards of corporate governance in the listed Companies, in areas such as continuous disclosure of material information both financial, manner and frequency of such disclosures, responsibilities of independent and outside directors. > Draft a code of corporate best practices > Suggest safeguards to be instituted within the Companies to deal with insider information and insider trading Recommendation made by KMB Committee are The board should have an optimum combination of Executive and Non-Executive directors A qualified ‘Audit Committee’ should be set up by the board or company The board should set up a ‘Remuneration Committee’ Cont.

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The board should set up a committee under the chairmanship of non-executive director to look into shareholders issues. Board should delegate power to registrars or share transfer agents to expedite the process of share transfers. The CG section of Annual Report should make disclosures on issues related to stakeholders Board meetings should be held at least four times in a year A s part of disclosure, apart from Directors’ report, management discussion and analysis report should be part of annual report issued to the shareholders. All company related information like quarterly reports should be made available in website for analysis Cont.

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There should be separate section of CG in the Annual report, with details on level of by the compliance by the Company. Reason for non-compliance if any must be mentioned No Director should be a member more than 10 committee or act as Chairman of more than 5 Companies. It is mandatory to inform the position he / she occupies. The company should provide brief resume, expertise in specific functional areas and names of the companies in which the person holds Directorship. Disclosure to be made by board by the management relating to all material, financial and commercial transactions where they have personal interest. The half yearly disclosure of financial performance including summary of the significant events in last six months should be sent to each shareholders. Cont.

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The financial institutions should under normal circumstances have no direct roles in the decision making in the company. They should not nominate anyone in the board. However, the term lending institution may have nominees in the board. A separate section on compliance with mandatory recommendation of clause 49 should form part of the report and details of non-compliance should be highlighted. A certificate from the auditors on compliance should be form part of the Annual Report and Annual Return and a copy has to be sent to the Stock Exchange. SEBI constituted a committee on CG under the chairmanship of N.R. Narayana Murthy whose report was presented on 8 th February 2003 The issue discussed by the committee (2003) presented are related to

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Audit committee Audit report Independent directors Related parties Risk management Directorship and director’s compensation Codes of conduct Financial disclosure This report has also set out the recommendations of Naresh Chandra Committee (2003) on corporate audit and governance set up by Department of Company Affairs. These relate to Contingent liabilities CEO / CFO certification Definition of independent directors Independence of audit committee Exemption of independent directors from civil and criminal liabilities under certain circumstances

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J. J. Irani Report on Company Law, dated 31 st May 2005 Management and Board Governance Board of Directors Minimum and Maximum number of Directors Manner of appointment, removal and resignation of Directors Age limit of Directors Independent Directors > The concept and numbers of independent Directors Definition of independent Directors / Attributes of Independent Directors Mode of Appointment of Independent Directors ‘Material’ Transactions Numbers of Directorships and Alternate Directors Directors Remuneration Sitting fees to Non-Executive Directors Disclosure of Remuneration Remuneration of Non- Executive Directors Board Committees Audit Committee for Accounting and Financial Matters Shareholders ‘ Relationship Committee Remuneration Committee Duties and responsibilities of Directors Disqualification of Directors

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Vacation of offices by Directors Resignation by Directors Liabilities of Independent and Non- Executive Directors Knowledge Test Directors and Officers (D&O) Insurance Rights of Independent / Non- Executive Directors Meetings of Directors – Related Matters Quorum for emergency meetings Matters to be discussed at a Board Meeting Restrictions of Board’s Powers Meetings of Members Demand for Poll Other recommendations– Higher deposit amount for notice regarding nominating / appointing a Director Options of buy-back for shareholders of de-listed companies Corporate Structure Key Managerial Personnel Interested Shareholders General Related Party Transactions Director’s duty to disclose interest Certain transactions, in which directors are interested, subject to approval

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Disclosure Restrictions on Loan to directors or holding office or place of profit by relative of director Duty on directors to disclose information relating to directorship and shareholding in the company and in other companies Introduction of CG - Clause 49 in the Listing Agreement issued via circulars dated 21st February, 9 th March and 12 th Sept 2000 and 22 nd January, 16 th March and 31 st December 2001 Revision of Clause 49 listing agreement with effect from 01.04.2005 Board of Directors a) Composition of Board b) Non- Executive Director’s compensation and disclosure c) Other provision to as to Board and Committees d) Code of conduct

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Audit committee a) Qualified and independent audit committee b) Meeting of audit committee c) Powers of audit committee d) Role of audit committee e) Review of information by audit committee Subsidiary companies Disclosures a) Basis of related party transactions b) Disclosure of accounting treatment c) Board disclosure – Risk management d) Proceeds form public issues, right issues. Preferential issues etc e) Remunerations of directors f) Management g) Shareholders

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Corporate Governance in practice in India The Ministry of Company Affairs, set up National Foundation for Corporate Governance (NFCG) in partnership with CII, ICSI and ICAI The NFCG has the following Vision and Mission VISION: Be a catalyst in making India the best in Corporate Governance practices MISSION: To foster a culture for promoting good governance, voluntary compliance and facilitate effective participation of different stakeholders To create a framework of best practices, structure, processes and ethics To make significant difference to Indian corporate sector by raising the standard of Corporate Governance towards achieving stability and growth The NFCG focuses on the following areas Creating awareness on the importance of implementing good CG practices both at the level of individual corporations and for the economy as a whole. The foundation would provide a platform for quality discussions and debates among academicians, policy makers, professionals and

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corporate leaders through workshops, conferences, meetings and seminars Encouraging research capability in area of CG in the country and providing key inputs in developing laws and regulations, which meet the twin objectives of maximizing wealth creation and fair distribution of this wealth. Working with regulatory authorities at multiple levels to improve implementation and enforcement of various laws related to CG In close co-ordination with the private sector, work to instill a commitment to CG reforms to facilitate the development of a CG culture Cultivating international linkages and maintaining the evolution to-wards convergence with international standards and practices for accounting, audit, and non-financial disclosure Setting up ‘National Centers for Corporate Governance’ across the country, which would provide quality training to Directors as well as produce quality research and aim to receive global recognition.