LectureNotes BusinessEthics

Mgmt study material created/ compiled by - Commander RK Singh rajeshsingh_r_k@rediffmail.
com
BUSINESS ETHICS
(Please note that these notes are not comprehensive and therefore additional reading is
recommended from diverse sources)
Books
Ethics and Mgmt by Hosmer
Business Ethics by Shekher
Business Ethics by Chakrobarthy (Oxford publication)
Syllabus
1. Evolution of thought of ethics in business
2. Culture & ethics
3. Overview of ethics value system, attitudes, beliefs and life patterns
4. Social, economical values & responsibilities
5. Trusteeship Management- Gandhian philosophy of wealth management
6. Ethics and Indian management
7. Basic framework of normative ethics
8. Ethics and decision making
9. Social responsibility of business - ethical aspects of corporate policy
10. Morality and rationality in formal organisation
11. Moral relations between individual and organisations
12. Relation between ethics and corporate excellence
13. Approaches for developing various orientate towards ethical business behaviour.
What is ethics?
Ethics means norms for the conduct of people in social groupings.
Ethics is derived from Greek Word Ethos which means culture the prevalent behaviour
in the society. Thus, it is a code of conduct which has social acceptance.
Ethics has often been misunderstood to be conforming to law. On the contrary, ethics is
about voluntarily conforming to what is good/acceptable/desirable behaviour without the
force of any legal/social obligation. The key word here is VOLUNTARILY. It is about
choosing to do some thing that is not mandated by the law or not doing some thing that is
permitted by the law but may cause harm to some one.
Page 1 of 61 - Business Ethics (Ver 1.3 - 14.04.2007)
Jamnalal Bajaj Institute of Mgmt Studies
Mgmt study material created/ compiled by - Commander RK Singh rajeshsingh_r_k@rediffmail.com
Ethics are not universal. Ethics are derived from social values. Word Ethnicity is a
derived word from Ethics which means relating to a specific social group. Thus, a set of
ethical values relate to certain group which may not completely match with other group.
Ethics keep changing from place to place, group to group, country to country and time to
time. What is considered ethical today may have been considered unethical a few centuries
back. What is ethical in one religious group may be considered unethical in other group.
So, ethics are time and space dependent. Ethics are what you have learnt from the society
as right or wrong behaviour. Law of the land might change from time to time but ethics
remain relatively constant over a fairly long period of time. Whatever is bound by the
law, does not remain ethics any longer. Donation to poor people or organisations is an
accepted good conduct but there is no law mandating it. It is ethical to do so. Tomorrow,
govt might make a law requiring certain percentage of your earnings to be donated as
charity. This ethical behaviour of today once coded into a law will no more be ethical
practice tomorrow. That practice would loose the high ground of ethics from that moment
because ethics is about voluntarily conforming to a good behaviour.
Ethics almost always appear on the fringes of the law. It might often cross the boundaries
either way by small margins. What it means is that some thing which is lawful could still
be unethical and even vice versa. Ethics is what a true human being is expected to do in
a certain situation without the binding of law. No breach of law is committed by a person
who accosts and demands his outstanding loan from his debtor in front of marriage party
of the debtors daughter. But would any person support such an act? It would be termed
outright unethical. (He should consider himself lucky if does not get beaten up by some self appointed
conscience keepers of the society). Similarly, many consider Robin Hood to be perfectly ethical,
though his acts were out rightly unlawful. It is widely accepted norm that any act which
achieves greater good for greater number of people is ethical. Even a refusal to forego
ones lawful right would be termed unethical if it is going to cause a disproportionate and
catastrophic loss to other person.
Business is as old as human civilisation. Laws came into existence much much later. But
code of ethics began to take roots when man began to live in groups. Laws are nothing
but formal codification of certain ethics of the society. But laws are constrained by the
infinite contingencies and subjectivities of the situations to be able to codify every thing.
Thus, ethics will continue to be there to guide the mankind on to the right path. Ramayana
is believed to be the oldest treatise on code of ethics. Bhagwad Gita is similarly treated as
most scholarly book on code of ethics.
Role of ethics in business has been a perpetual issue. It has been gaining importance in the
recent times due to geographical spread, growing size of businesses and their ever growing
capability to impact the lives of more and more people. It has also been highlighted by the
colossal scams in some businesses in recent times.
The purpose of business is to earn profits. And almost every business tries to maximise its
profits. But the question that arises here is how much profit and at what social and other
costs? In a market place, beyond a certain point, one mans profit is at the cost of loss to
some one else. Market forces generally are able to balance the amount of profit among all
participants in a trade. But situations arise when there is concentration of power, legal or
illegal, in certain pockets which can be exploited to usurp unduly large share of profit to
great detriment of others. Any amount of law making can not cover every contingency.
At such times, a good corporate citizen is expected to limit his greed and not indulge
in irrational behaviour even though the existing laws may be helpless in curbing such
practices. Sense of fair play should prevail.
Take the case of TCS IPO. The IPO was heavily oversubscribed at the upper band of
offering. There was nothing stopping Tata management from charging maximum amount
from its subscribers. Yet the management decided to charge Rs 50 less than it could have.
It was a profit that the company left voluntarily for its prospective shareholders to encash.
On the other hand, take the case of Allahabad Bank IPO. Share prices just before the IPO
were manipulated to almost twice its earlier prices and then sold at the maximum price
despite share prices having fallen at the time of actual allotment. Allahabad Bank can not
be nailed legally, but were they ethical?
Tatas have been at the forefront in establishing and financing various institutions of social
and national relevance like Tata Institute of Fundamental Research, Tata Institute of Social
Sciences, Tata Cancer Hospital, IISc and so on. Tatas have no legal commitment to invest
such huge sums in these esteemed centres of social and national cause. And yet they do it
out of corporate ethics of considering it as their pay back to society.
In the western world, oldest work on ethics is by Plato followed by his student Aristotle,
a Greek philosopher, from 384 to 322 BC. And the latest work is by English philosopher
George Edward Moore who wrote about 70 years ago.
Between these two extremes was the German philosopher Emmanuel Kant who lived in
18
th
Century. His idea of ethics was to think of an act and then trying to universalise it.
(Each person committing that act). Check if it leads to any contradiction. If it leads to no
contradiction, it is ethical. If it does, it is not. For example, if every poor person is allowed
to steal wheat from rich persons, a stage will eventually be reached when no rich would be
left with any wheat to be stolen by remaining poor. This is a contradiction. Therefore, it is
not ethical. But a reverse stipulation does not lead to a situation where some people would
be left who could not exercise the option of stealing. Thus, not stealing is ethical.
Another closely related word is Moral. The two are used almost as synonyms but there
is subtle difference between the two. While ethics begin from the smallest issues, morality
generally addresses issues of grave consequences.
As per Webster, ethics is the discipline that deals with that which is good or bad or with
moral duty and obligation. It is branch of philosophy considered as normative science.
Thus, ethics is a system of values, relating to human conduct and motives.
Business ethics are not different from ethics in normal sense. It is ethics applied in conduct
of business activity. According to Peter Drucker, there neither is a separate ethics of
business nor is one needed. What is ethical in other walks of life is ethical in business and
vice versa. Yet, if a separate definition is needed for Business Ethics, then, Controlling
greed in the face of unrestricted profit opportunity is Business Ethics.
Many Pharmaceutical companies have been often accused of unethical behaviour. They
have been accused of profiteering in the face of human suffering by charging exorbitant
and unaffordable prices for their new formulations. But it is premature to make a
judgement in absence of concrete data about their investments, risks and rewards, etc.
Law and Ethics
The law is a formal set of rules and standards that is associated with significant legitimate
power and authority to ensure adherence and inflict punishment on defaulters in society.
Ethics on the other hand, is far less formal sometimes not even written down set of values
which are to be observed morally.
Simply stated Law is obedience to the enforceable whereas ethics is obedience to
unenforceable (from Module from International Trade Centre).
ETHICAL DILEMMAS
Ethical Dilemma
When all choices are deemed undesirable because of potentially negative
ethical consequences, or more than one choice appear correct making it
difficult to select the course of action.
Ethical dilemmas often arise when a person has moral responsibility towards more
than one entity and they are on conflicting course. In the day to day situations, think of a
man whose wife and mother are constantly on the war path and both want him to take their
side. He is expected to support of his mother who has given him birth, suffered
unaccounted miseries and made innumerable sacrifices for years in bringing him up. But he
also has responsibility towards his wife who has given up her entire clan of loved ones to
be with him. Whose side does he take in this war? Either way, he is betraying one person.
It is an ethical dilemma that he faces on daily basis.
A manager has responsibility towards his company, his boss, his mates, society, his family,
and so on. Quite often he finds his boss asking him to give him cover for some goof-up he
may have committed or asked to project some inflated figures to allow boss project a better
image of the department which will enable him a promotion. Now, if he follows bosss
orders, he is betraying his company. If he does not, he is betraying his boss. Similarly,
the company may want him to do some thing which may be against larger interests of the
society. Company may want him to spy on competitors. If he does so, he will be working
against the society; and if he does not, then he is betraying the company. And when he
betrays the company, he will have to either resign or be fired and then his wife and children
may suffer as a consequence of his action towards whom also he has responsibility. Which
side should he take?
Take the most classical case of Jalianwala Bagh firing on 13 April 1919.
The order to fire on those peaceful, innocent, unarmed and un-warned gathering of Indian
people was given by British Brigadier General ODyer. He wanted to quell the rebellion
against his government among the Indian masses through some exemplary punishment to
people who had dared to defy ban on assembly of people in Amritsar. But the soldiers who
actually fired the bullets were all Indians. Those Indian soldiers had responsibility towards
their British masters and also towards their countrymen. Being in the military, where the
philosophy is to Do or die, but not to question why, should they have refused the orders
of General Dyer which were against their country as well as humanity?
Or
What choice did the American Pilots, who dropped nuclear bombs on Hiroshima and
Nagasaki, two cities of Japan, on 06 and 09 Aug 1945, have? They were fully aware of the
human costs of their actions in terms of the deaths of lacs of innocent people. Should they
have refused in the name of their responsibility to humanity?
Common Ethical Dilemmas for Business Managers
Honesty in advertising and in communications with superiors, clients, and
government.
Problems relating to special gifts, entertainment, and kickbacks.
Overlooking wrong doings of others
Criteria for Decision Making During Ethical Dilemma
Utilitarian Approach
Individualism Approach
Moral-Rights Approach
Justice Approach
Utilitarian Approach Moral behaviour that produces the greatest good for the
greatest number.
Individualism Approach Acts are moral when they promote the individual's
best long-term interests (e.g., the golden rule). This rule works on the principle
that unethical approaches may lead to short term gains but harm the long term
interest.
Moral-Rights Approach Behaviour that acknowledges that every human being
has some fundamental rights (e.g., free consent, privacy, due process)
Justice Approach Standards of equity, fairness, and impartiality.
Teleological Theory Consequence Theory. It states that moral worth of an
action/practice is determined solely by the consequences of action or practice. In
simple words, ethicality of an action is determined solely by the results it produces.
Deontological Approach It is exact opposite of Teleological approach. It
believes that Actions are not justified by their consequences. Factors other than
good or bad outcomes determine the rightness or wrongness (ethicality) of actions
or practices. It believes that value of action lies in motives. (I personally endorse this
view. We have all read the story of sparrow who decided not to fly south when winters came. How
she was revived from frozen condition by warmth of cow dung and then how a cat pulled it out of
cow dung, cleaned and ate it up. Morale of the story Every guy who throws shit at you is not your
enemy and every guy who pulls you out of shit is not your friend).
Factors Affecting Ethical Choices
1. For the Manager
a. Level or stage of moral development
b. Learned Ethics
2. The Organization
a. Systems
b. Culture
Process of Moral Development (Kohlbergs 3 level of moral development)
Moral values are not born characteristics but are acquired gradually over a period of time.
A newly born child has no moral values. He learns them from his surroundings as he
grows. Some are taught to him by his family and teachers, some he acquires from reading
religious literature and some he learns by observing and feeling. (That is the reason that
value system of separated twins are different). This process can be broadly categorised into three
distinct categories: -
1. Pre-Conventional Level . In the early stage of childhood, he is taught by mother,
father and teachers to follow certain rules and he does that more out of fear of
punishment or for promised reward.
a. Stage1 : Punishment Avoidance The person has no concept of right or wrong.
He follows the dictates of law and good behaviour out of fear of punishment
The person has little awareness of others needs.
b. Stage2 : Reward Seeking Right conduct is out of expectation of reward.
Awareness of others needs but still no right & wrong concept. This is pre-
ethical stage or preparation stage for ethics.
2. Conventional Level Person conforms to the behavioural standards to meet the
expectations of peers and society to avoid ridicule and gain acceptance.
a. Stage 3 : Good Person - Acting right to be a good person to be accepted by
others.
b. Stage 4 : Law and Order - Acting right to comply with law and order & norms
in the society
3. Post-Conventional (Principled) Level Person develops a personal, internal set of
standards and values which he is not willing to compromise even in the face of
threat or personal loss. He sticks to these values for his own sake (About 20% of
adults reach this stage fully or partially)
a. Stage 5 : Social Contract - Acting right to meet the agreement by mutual
agreement
b. Stage 6 : Universal Ethical Principles - Acting right according to universal
principles of justice, rights etc
Guidelines for Dealing with Ethical Dilemmas
1. Do you think it is right ? (Dont worry about legal status. Every thing legal is not ethical nor is
every ethical decision legal. Ethics transcends legality).
2. Is it beneficial? To whom? How much?
3. Is it harmful? To whom? How much?
(You should not be considering your own benefit/harm. You are out of this benefit/loss calculation.
Ethics are profit/loss neutral as far as you are concerned. When in dilemma, it is about people
around you)
Further Guidelines for Dealing with Ethical Dilemmas
1. Would you be willing to allow others to do to you what you are considering? (This is
the litmus test of ethicality. Do to others what you would want to be done to you).
2. Would you like your family to know?
3. Would you like your decision printed in the newspaper?
4. Have you consulted others who are objective and knowledgeable?
Ethical Responsibilities
To be ethical, an organization should seek a higher standard than merely obeying the law:
Act with equity, fairness, and impartiality
Respect the rights of individuals
Act for the common good
TRUSTEESHIP MANAGEMENT
Gandhian Philosophy of Wealth Management
(Courtesy - Article published in Eco Times- 02 Jul 02 by Piya
Mukherjee, visiting faculty at JBIMS)
Trusteeship, as applicable to the corporate world, refers to the act of holding and managing
resources on behalf of the stakeholders of the firm. Whats new about that, one may
query. Given that the traditional take on wealth has almost always been tilted towards
owners of corporations, this concept brings in an element of equity, by placing other
stakeholders such as employees, customers and society on the same rung as large and small
shareholders.
The idea is that all wealth, including human, financial and technological resources,
belongs to society and the rewards accruing from their use must revert to society at large.
The principles of trusteeship can be traced to the concept of collective endeavour and
community living. Briefly, these are: Resources must be held and utilised for the benefit of
society. Managers are the trustees of the stakeholders and must work towards optimising
stakeholder value, not merely maximising shareholder value. The small investor has as
much a say in decisions as the large investor.
Thus, the overall approach is towards the macro and the long-term perspective, rather than
the short-term, micro perspective which is often geared exclusively to suit the shareholder
and top management. At first sight, this seemingly idealistic concept invariably raises a
few protests. The owner/s must be rewarded for bearing risks and supplying expertise:
Definitely. But the reward must be in proportion to the skills and expertise supplied. The
increasing instances of ethical transgressions on the part of leaders and CEOs indicate
the need for better balance in the risk-reward relationship. The Enron fiasco and the sale
of shares worth over $70m by erstwhile chief Rebecca Mark, a few months before its
bankruptcy, is a case in point. Corporations exist for profits: They exist to fulfil the
needs of society and in the process, generate profits. Moreover, even if profits were to be
the only determinant of policies, trusteeship would still score over inequitable sharing of
wealth, since better wealth management automatically leads to more lasting and stable
equations with stakeholders. This, in turn, leads to higher profits, goodwill and trust.
Trusteeship might lead to a disincentive for efficiency and efforts: When individual and
group efforts are correctly aligned with social needs, the possibility of de-motivation or
deliberate inefficiency does not arise. Conviction in the utility of the concept, coupled with
the commitment of top leadership, would ensure efficiency as well as effectiveness.
The Indian Perspective: The wisdom of the Vedas and Upanishads point towards holistic
progress, not fragmented movement in which one section gains at a cost to others.
Moreover, the cycle of give-and-take is explained at great length. The Arthashastra of
Kautilya and The Kural of Tiruvalluvar both describe the role of the king as trustee, with
respect to the citizens and the wealth of the land. In the last century, Swami Vivekananda
taught that sustainable progress calls for progress for all members and components of
society. Fragmented progress is temporary and often illusory. It is only when all elements
of the environment are taken care of that an individual or organisation can hope to
consistently succeed in its ventures.
The Gandhian Philosophy of Wealth Management is based on the principle that a wealthy
man does not truly have the right to hoard wealth solely for the self; the only right he has
is that to an honourable livelihood. In an article called, Corporate Barbarism to Corporate
Citizenship, carried in The Journal of Corporate Citizenship, eminent academician and
author Dr SK Chakraborty of IIM Calcutta described the concept of lok sangraha,
oriented towards the common good. This is distinct from capitalistic economics, with its
attendant social ecological and psychological woes.
Indian Corporate Leaders and Trusteeship: One of the most inspiring examples of
corporate trusteeship, in recent times, comes from Infosys, particularly from its former
CEO and current chief mentor, Narayana Murthy. His rationale for creating this company
along with a small group of people (better sharing of wealth in society), the involvement
of employees in the companys fortunes (through ESOPs) and his contentment with a mere
7% of company stock (he prefers it that way) reflect a deep-rooted commitment towards
trusteeship. Other notable examples include the house of the Tatas with their corporatised
initiatives for socio-corporate benefits; the WIPRO Cares Foundation, with a targeted
corpus of Rs 100 crore for primary education; and the Birla foundation with its focus
on socio-economic improvement in the lives of the people touched by the corporation.
The possibility of feel-good exercises induced with an eye on the bottom-line cannot be
ignored. Yet, corporate boardrooms are increasingly discovering a match between the long-
term interests of the company and their willingness to expand focus to all categories of
stakeholders. As the roles of wealthy CEOs and influential policy-makers continue to gain
public scrutiny, the question that management must periodically ask themselves is: Does
our existence lead to any benefits for society?
CODE OF ETHICS
These are statements of behavioural ideals, exhortations, or prohibitions common to a
culture, religion, traditional profession, corporations and trade associations. Codes combine
philosophical with admonitions to avoid certain illegal actions and espouse certain moral
principles, especially those that elevate personal behaviour.
The Ten Commandments is the most well known code of ethics worldwide. In addition, we
have all heard of Code of Ethics in the form of Hippocratic Oath that all the Doctors are
supposed to take prior to being awarded permission to practice medicine.
Types of Codes of Ethics
Principle-Based Designed to enable the employee to make ethical decisions based on
appropriate values e.g., treat people fairly or dont be dishonest
Policy-Based Guideline as to how to act in specific ethical dilemma situations (reducing
the need for thinking)
a. Conflicts of interest
b. Disseminating proprietary information
c. Receiving and giving political gifts
d. Equal opportunities
Organizational Structures to Promote Ethics
a. Ethical Ombudsman Corporate conscience keeper is appointed who can
be reported to for any ethical wrong doing by any employee in the company.
b. Ethics Committee Group appointed to monitor company ethics.
c. Ethics Training Programs
d. Hot lines- Employees can report questionable behaviour, possible fraud,
waste, or abuse ( i.e., Blow the Whistle) on those numbers.
ETHICAL ISSUES IN STRATEGIC MANAGEMENT
Introduction
Let us revise definition of Ethics. Ethics is voluntarily conforming to what is good/
desirable behaviour without the force of any legal obligation or fear of loss or threat.
The key word here is VOLUNTARILY. It is about choosing to do some thing that is not
mandated by the law or not doing some thing that is permitted by the law because you
dont believe it to be the right course of action. Never mind that what you consider right
may not be right as per my code of values.
Ethics is choosing to follow the law even to your detriment when you could have avoided
it. Buying a train ticket before boarding the train does not qualify for ethical highground,
but buying the ticket and tearing it after completing the journey without getting caught is
ethical conduct.
Ethics is following the SPIRIT of law even when you could have taken a convenient shelter
under the LETTER of the law.
The purpose of business is to earn profits. And almost every business tries to maximise
its profits. But the question that arises here is how much profit and at what social and
other costs? In a market place, beyond a certain point, one mans profit is at the cost of
loss to some one else. Market forces generally are able to balance the amount of profit
among all participants in a trade. But situations arise when there is concentration of power,
legal or illegal, in certain pockets, which can be exploited within the realm of letter of the
law to generate unduly large share of profit to great detriment of others. Any amount of
law making can not cover every contingency. At such times, a good corporate citizen is
expected to limit his greed and not indulge in irrational behaviour even though the existing
laws may be helpless in curbing such practices. Sense of fair play should prevail.
Now, we derive the definition of business ethics from above discussions; Business Ethics
is voluntary self denial of a legal profit opportunity in business in favour of a behavioural
standard that has not been bounded by the law.
Case Study - I
Let us take a small case study of two companies who actions were in exact contrast
to each other in two exactly similar situations at around the same time.
Aug 2004. Indian Stock Market was on fire. Every IPO/FPO was getting
oversubscribed. And at such a time, Tata Consultancy Services (TCS) launches
its IPO through book building route. Price Band was Rs 775 to 900. At the upper
band of Rs 900, issue was oversubscribed by almost 5 times. And yet, the company
decided not to charge the maximum rate of Rs 900 per share. Company priced the
shares at Rs 850 leaving Rs 50 on the table voluntarily for the investors. Referring
to fixing the price at Rs 850 despite the oversubscription at Rs 900 per share, Tata
said, We priced the issue at this level to provide attractive upside to investors once
the scrip is listed on the exchanges. Share, immediately after listing, rose to
Rs 1400 and since then has maintained that level despite a 1:1 bonus issue
(effective price approx Rs 2,400).
There was no statute in any law which could have forbidden the company
management from charging full Rs 900 per share. And no one could have
questioned the decision even at a later date given the performance of the company.
Yet, as verbalised by Mr Tata, company wanted to leave for its investors an
attractive upside upon listing. And just to let you know as to what was the total sum
that TCS had foregone by its decision Rs 275 Cr.
Now contrast this with Allahabad Bank FPO.
April 2005. Allahabad Bank launched its second public issue at a price band of
Rs 75 to Rs 82. On 25 Apr 2005, management fixed the allotment price at the
maximum rate of Rs 82 per shares despite the fact that share price on that day had
fallen to Rs 83 per share from a high of Rs 105 during the subscription period.
Allahabad Bank Shares were trading at Rs 60 on 01 Dec 04 and had risen to Rs
105 for a short while during the subscription period. Even today, despite NSE index
having risen from 1960 on 25 Apr 2005 to Approx 4000 today, share is still being
quoted at Rs 77; Rs 5 below allotment price.
Even though there is enough circumstantial evidence of share price manipulation in
the run up to the FPO, company can not be nailed legally. About ethical standards,
lesser said the better.
(There is a possibility that Allahabad Bank management did not act unethically since, being a
public sector bank, management had very little to gain from share price manipulations. However,
realising that share price was on the downslide and almost touching the issue price levels,
management should have prevailed upon the Lead Managers to the issue to reduce the allotment
price. Thus, even though prima facie, it appears to be the act of stock market cartel of brokers, it is
hard to give the bank management a clean chit).
Concentration of power to generate large profits comes from sound business strategy.
Strategy is after all a business plan to develop sustainable competitive advantage.
Deception/decoy is the most important element of any strategy. Deception can be against
competitors, suppliers or customers. Many companies price their products in a manner that
customers are fooled into believing that product is very cheap where as it could be much
costlier. Or they market their product to the customers who the companies are fully aware
that do not require it.
Case Study - II
There is nothing more precious in this world than your childs smile. Insurance
Companies capitalise on this fact. They keep selling insurance policies to people in
the name of their children. That poor father and mother eat a chapati less every day
and even deny their child a few things to be able to pay his/her insurance premium.
But of what use will that insurance claim money be to that poor heartbroken
father when that smile is not there? Every insurance company knows that the main
purpose of life insurance is to replace lost income when a person dies. But the child
has no income. So, what is the purpose of childs life insurance? Can we call this
business strategy of insurance companies an ethical strategy? And if someone has a
counter in mind that insurance provides a saving plan, let it be known that the yield
on an insurance premium is less than half of a bank deposit. When the interest/yield
is compounded over a 20 year period, which is the normal life insurance period,
you are poorer by more than half of what you would have got if you were depositing
the same insurance premium amount in a recurring deposit in the bank. And if tax
saving is the purpose, then buy an additional policy for your self but not for child.
But no insurance company will ever tell you this because it is much easier for them
to convince a father in the name of child than in his own name.
Case Study III
Unlike many other companies who offer free home loan insurance, HDFC charges
approximately 7% of the loan amount as insurance charge. If you examine the issue
minutely, you would realise that such insurance is hardly required by borrower. In
case of unfortunate death of borrower, bank is the biggest sufferer since, given the
state of Indian Judicial system, it is almost impossible to get the money from legal
heirs despite the mortgage and all kinds of collateral securities. And they convince
you to sponsor that insurance for their convenience in the name of convenience for
your loved ones. Is it an ethical strategy?
Linking Strategy with Ethics
Ethical responsibilities of firm towards Stakeholders
Owners/Shareholders - Expect good return on their investment
Employees - Expect respect for their worth & devoting their energies to firm
Customers - Expect reliable, safe product or service at fair prices
Suppliers - Expect equitable relationship with firm
Community - Expect businesses to be good citizens in their community
Thus, on the face of it, ethics and strategic management look like two banks of a river who
can never meet. On one hand, you want to strategise your business to earn more profit (for
shareholders sake), and on the other hand you want to surrender a legal opportunity to
earn profit in the name of ethics (for other stakeholders sake). What a paradox! But such
paradoxes are not impossible. There are many such paradoxes which exist in real life and
a fine balancing act is required in such situations. Give the customer honest prices through
efficiency in production and give the shareholder bumper profits through productivity and
growth in business rather than rip-off pricing.
Honesty does not always mean bad business. Similarly, following business ethics does not
always mean surrendering profits. Often a profit opportunity surrendered in the short run
becomes the key to the bigger door of profits in the long run. Ethical practices in strategic
management create a new resource called Social Capital through Trust; trust of society,
trust of customers, trust of suppliers and so on. This capital manifest profits in terms
of customer loyalty and increased sales, lesser requirement for marketing effort, higher
leverage in dealings, lesser employees turnover, etc.
Strategic Management is the starting point for ethical conduct of a company. As brought
out earlier, a companys business plan, the products it plans to offer, its positioning,
market segmentation, marketing strategy, promotion, pricing, capital structuring, etc are all
decided at the strategy session. Deception and decoy being an integral part of the strategy,
dilemma lies in deciding their extent.
The ethical challenge in companies is often triggered by financial problems. When
financial problems occur, it is tempting to do business with people you might not normally
choose to do business with or in ways that you might not normally use. It is very hard to
consider ethical issues when the company is in trouble.
So, as a general rule, the best approach to avoiding temptation is try and make sure that the
strategic approach of the company involves achieving early and fast success. Small wins
not only provide feedback to guide a company, but also reinforce the strategic perspective
of the company. The paradox surfaces here once again. Ethical approach is a slow path
on the way to enduring success. Rarely does any one get spectacular success in the initial
phase of business through ethical means. Probably, what this rule suggests is that achieve
some early and fast success by may be not so ethical means and once you have your feet
firmly planted on the terra-firma of the business world, turn completely ethical.
Many empirical studies have proved that companies following ethical practices have
generally gained in the long term. It is not to say that unethical companies have not gained
ever. We have a few examples in our own country where a few most unethical companies
have risen in corporate ladder to dizzying heights. But exceptions dont make the rule.
Situations Promoting Unethical Behaviour
Let us now see the situations in which ethical issues are set aside in strategic management
process: -
There are perhaps four basic situations:
1. One-Time Product Sale - The product sold is a one time sale and the life cycle of
the product is such that it will be sold to many people before bad word of mouth
kills the product. An example of this might be Tourist traps e.g. restaurants in
tourist locations. There is always another new customer coming along. One could
argue that when the stock market is high, issuing of an IPO is very similar to the
sale of a one time product. Allahabad Bank IPO quoted in Case Study II is one such
example.
2. Durable Goods - The quality of the product is poor, but does not show up for
some time. During the period of adequate performance, people continue to buy.
This tends to be an issue with durable products like consumer electronics,
equipment, housing, etc.
3. Survival Instincts - A company when faced with basic survival issues due to
competitive pressures of various kinds is most likely to set aside ethics.
4. Hubris/Greed - Perhaps the most remarkable examples of unethical behaviour
are the situations where the senior management team is making remarkably high
amounts of money and they go even further into excess. The Reliance example,
wherein Mr Anil Ambani had spilled the beans about his brother Mr Mukesh
Ambani siphoning off Rs 7000 Cr of investor money is one such example.
Unfortunately, in a rotten political and legal system that we have, their financial
clout never allowed this issue to get the prominence that it deserved. In US,
Adelphia Communications (Founder John Rigas was found guilty of siphoning off
USD 2.3 billion from company and has been jailed for 30 years) and Tyco
International (whose CEO Dennis Kozlowski was found guilty of stealing over
USD 150 million from the company), appear, to many, to fall into this category. By
most peoples standards, the senior executives involved in these cases seem to have
been exceptionally well paid, and yet they crossed a line that seems to defy
rationale explanation. Hubris is the only explanation.
And while taking decisions, an organization should base its decisions on two basic theories
that enable an ethical approach to take strategic decisions. These are
Stakeholders theory,
Loyalty and psychological contract and cultural relativism
Stakeholders Theory
Stakeholders Theory is a diametrically opposite view of Friedmans theory of 1970.
Friedman thought that social responsibility was some kind of mask for socialism, and
called it a fundamentally subversive doctrine in a free society and had said that in such
society, there is one and only one social responsibility of business --to use its resources and
engage in activities designed to increase its profits so long as it stays within the rules of the
game
In contrast Stakeholders Theory basically recognizes that the corporation has some duties
in relation with groups other than stockholders (Freeman, 1997). However, the theory
faces some significant problems, for example, it is difficult to say where the limits to each
groups claims are. Besides this, different groups are in different positions to defend their
interests; therefore, balancing their claims seems to be a major difficulty.
Despite its problems, the stakeholders theory has helped to communicate the idea that big
corporations are not allowed to ignore the present historic circumstances, because their
actions have enormous impact on the entire society.
Loyalty and Psychological Contract
What is psychological contract? In an employer-employee context - The psychological
contract is, in essence, the set of economic and normative expectations developed mutually
between an employer and an employee when he or she enters the organization. This
contract, which the participants ground in trust, is a nebulous concept. Psychological
contract is the bed rock of ethics.
The gist of the psychological contract is as follows:
The employee expects fair compensation for work performed.
The employee expects respect and dignity from the employer.
The employee expects consistent and just evaluations.
The employee expects continual employment in exchange for meritorious job
performance.
The employer expects loyalty from the employee
The employer expects employee to guard its business secrets which employee may
be exposed to.
The employer expects employee to work towards benefit of the company A
production worker who has no role in marketing of the product is expected to
promote the companys products when the opportunity presents itself.
These tenets of psychological contracts have to be kept in mind during strategic planning.
In weak market conditions, you might feel that down sizing of the organisation is the right
strategic move to improve profitability and think nothing before issuing Pink Slips the next
day to employees who have been with you for last 20 years. Rest assured that even those
who escaped the pink slips will start looking for a new job from the next day. Even their
loyalty is no more with you. They will ditch you when you need them most, during the
boom in business, they will walk up to your competitor for a small rise.
Epilogue
Even though, prima facie, business and ethics appear like two banks of a river which can
never meet, ethics do play a strong role in business. Ethics may not yield positive results
in short run, but they do pay handsomely in the long run. Capital of Trust created in the
minds of consumer forms slowly but surely and pays rich dividends in the long run. The
ease with which every stakeholder of Corus agreed to take over by Tata Steel as against
the dirty political battle faced by Ispat Group of LN Mittal is proof enough of benefit of
Business Ethics.
WHISTLE-BLOWING
(Contributed by - Ms Savli Mangle)
Definition:
Whistle blowing is the voluntary act of disclosure of malpractices in his/ her workplace by
an insider at a level not generally expected of him.
A Whistleblower is a person who reveals wrongdoings within his/her organization to public
or persons of authority.
(Please note that not every act of whistle blowing is an act of ethical conduct. On the contrary, a large
number of whistle blowings are motivated by desire to draw revenge on boss or management. Such ill
motivated acts of whistle blowing are actually breach of psychological contract and patently unethical
conduct).
When can the whistle be blown?
Any insider may wave the red flag when he witnesses the following in the organization
a. Crime
b. Corruption
c. Civil offences (including negligence, breach of contract, etc)
d. Harassment
e. Injustice
f. Danger to health and safety or environment
g. Cover up of any of these
Whistleblowers Act
The Whistle Blowers Act defines various terms relating to whistle blowing and lays down
the legislative framework relating to this concept. Basically, the act mandates a company
to establish a Whistleblowers Policy. The policy supports and protects the rights of a
whistleblower
Many countries have enacted the Whistleblowers Act, like US has included the Whistle
Blowers Act as part of Sarbanes Oxley Act.
What does a Whistle Blowers policy contain?
a. A whistleblowers policy defines the scope of malpractices of an organization.
b. It lays down the procedure to report such allegations.
c. Policy establishes an independent investigation team who would investigates
these claims. And
d. Most importantly, it defines the roles, responsibilities and the rights of a
whistleblower.
Roles, Rights and Responsibilities of Whistle Blowers
a. A whistleblower must behave responsibly when he makes a claim under the
policy. He should make his report in confidence to the extent of the
limitations of the law and the policy. He must understand that his motive
is irrelevant for the validity of the report and if it is found that there was an
intentional filing of a false report which is improper he will be severely
penalized depending upon the policy, facts of the matter and the final
decision of the independent committee.
b. All the employees of the company have a duty to cooperate with the
investigations made thereon.
c. The whistleblowers confidentiality is maintained. However, in a breach in this, in
events wherein his identity to become known to select few is crucial, he will
be informed of this citing the reasons for doing so. He also has a right to be
protected from retaliation this could be in the form of harassment, loss of
job, humiliation etc.
Advantages of WB policy
The advantages of a whistle blowers policy are many.
a. If done at early stages, it can help check corruption. By protecting the
whistleblowers, corruption and misbehaviour in others can be deterred.
b. It acts as a very effective anti corruption tool as the insider has first hand fresh
information and he is able to supply clinching evidence for pinning down
the guilty.
c. It also helps to place honest ethical employees right in the centre of administration
unlike situations where they are helpless spectators or are bullied into
acceptance by their corrupt colleagues who dominate the show.
d. Making whistle blowing official and acceptable would also obviate anonymous
petitioning and unauthorized leaking of news to the media leading to the
loss of reputation of the company.
Problems in Whistle Blowing
a. A squealer (Your Freedom Fighter is my Terrorist. So, your Whistle Blower is my Squealer)
disrupts trust, teamwork and open communication creating fear &
suspicion.
b. Expectation of loyalty from every employee may face organizational ostracism.
c. WB discourages corruption but can also discourage initiative, willingness to
take bold decisions and encourage negativism, defensiveness.
d. Risk of WB blackmailing colleagues or even bosses.
e. Most often than not, it is seen that the very few subordinates have the courage to
blow the whistle on top officers. Ultimately, these big game hunters go scot-
free and the poor small fish get caught and fried!
Balancing the Pros and Cons
It is now necessary to balance the pros and cons that we looked at.
a. Legalization of whistle blowing could help in fanning out some problems. Like
stated earlier, Whistle blowing does not have an unimpeachable moral basis
and must be defined precisely and operationally.
b. This brings us to examine whether whistle blowing is a right or a duty? Once
immunity is given to an employee, does it not also mean that in cases
where the whistle is not blown when it should be should it not be treated
as connivance. Or what about cases where an employee is afraid to reveal
a wrongdoing in fear that the wrongs he may have done in the past could
come to light?
c. There are many other support systems required to make a whistle blowing work
effectively. And foremost among them is that Companies need to put in
place a value system and a leadership that sets an example. Far too often
employees are expected to be unethical in dealings outside the organization
but absolutely clean inside. Such paradox does not work.
d. The policy can be reviewed and changed as per experience. It could be started
out as a pilot project in few sensitive departments and learn from experience
before extending and modifying the policy. Internal whistle blowing that
is approaching higher levels in ones own department could be looked into
before allowing access directly to the committee.
Whistle Blowing in the Indian Context
a. India does not have a Whistleblowers act.
b. Law Ministry is working on a Whistle Blowers bill for a while now!
c. SEBI amended Clause 49 of Listing Agreement listed companies to have a WB
policy but this is not mandatory!
d. Companies like Infosys, Wipro, Tata Motors have a sound WB policy in place.
e. Great need for WB policy especially for companies working in global
environments
And finally, remember that, all that is needed for evil to prevail is for good men to do
nothing!

ENRON SCANDAL
Enron, a large Houston-based energy company, long held the reputation as a great
American innovator and was a stock market darling. However, the company fell apart
publicly in 2001due to questionable managerial decisions,. Enron eventually was forced to
lay off thousands of employees and to undergo the largest Chapter 11 bankruptcy in U.S.
history. Meanwhile, in early 2002, the Securities and Exchange Commission and the U.S.
Justice Department began conducting criminal investigations surrounding allegations of
fraudulent financial reports and manipulation of energy markets.
Waist-deep in the scandal was Andersen, Enrons auditor. Andersen was indicted
by the Deptt of Justice in March 2002 when it came to light that the firm had destroyed
thousands of Enron documents and assisted the company in cover up of losses and other
dubious financial dealings. Three months later, a federal jury found the firm guilty of
obstruction of justice.
Granted, Andersens misdeeds lay with the accounting side of the firm, and with
a small number of people working out of one office at that. In the court of public opinion
though, the resulting stigma potentially could rub off on anyone even remotely associated
with the scandal. Who is likely to be affected? There is of course Andersen, whose
consulting arm, while not accused of any wrongdoing, garnered millions in fees from
Enron. The Big Five firms sea of troubles has been well documented and continues to
make headlines even today. Then there is McKinsey, a long time Enron adviser and former
employer of the now-notorious Jeffrey Skilling, the Enron executive primarily responsible
for engineering many of the companys shady reporting practices.
Eggs of Whistle Blowers
Name Company Allegations
Personal
Outcome
Company Outcome
David
Chacon
Salomon Smith
Barney
Improper IPO
allotments
Left firm, filed
lawsuit
Subject of
congressional and
NASD probes
Cynthia
Cooper
WorldCom
Massive accounting
fraud
Talking to
U.S. Justice
Department
Forced into
bankruptcy
Roy
Olofson
Global
Crossing
Round-trip trades
and improper
accounting
Fired, filed
lawsuit
Forced into
bankruptcy
Barron
Stone
Duke Energy
Improper
accounting
Forced to change
jobs at Duke
Awaiting results of
an audit
Sherron
Watkins
Enron
Massive accounting
fraud
Testified to
Congress
Forced into
bankruptcy
ETHICS IN ADVERTISING
Advertising is about as ethical as the American public. About as ethical as you and your
neighbors. About as selfish as you and your acquaintances. It has about the same moral
standards as the upper socioeconomic strata of society because it is created, approved
and paid for by the upper echelons of modern U.S. society. I'll modify that to say that it is
a little more ethical, a little more moral, than the upper economic strata of society. Why?
Because advertising lives in a fish bowl. It is the most visible of all commercial practices.
It has 200 million critics. And no business, no communications medium, no art form (or
whatever you want to call advertising), no other enterprise has so many watchdogs."
Morris Hite, quoted in Adman: Morris Hite's
Methods for Winning the Ad Game, 1988
So, like common public, Advertising too has its ethical values. Advertising
communications may be artfully presented facts with a dash of exaggeration and drama
to make an impact but the same are subservient to ethical principles. In order to be
consumer-oriented, an advertisement will have to be truthful and ethical. It should not
mislead the consumers. If it so happens and word does get out, the credibility is lost and the
communication becomes ineffective; rather futile.
Advertisements truth should be viewed from the consumers point of view, and not in
the narrow legalistic frame in order to find a loophole and to get out after an irresponsible
action.
Many times a clear line of demarcation between truth and lies is difficult to establish. But
the advertisement is as much judged by its impact as by its acceptance by the consumers.
What it promises must be there in the performance of products. Advertisements should not
be indecent and obscene. As advertising is a social act, it must honour the traditional norms
of social behaviour, and should not affront the moral senses of a society.
Endorsement of products by celebrities who are opinion leaders is also sometimes
criticized for spreading falsehood. Especially, if the word gets out that the celebrity has
endorsed without actual personal experience, it can have a very detrimental effect on
consumers in an informed society like US. But in a society of Demi Gods worshippers like
India, it is the best known secret. We have seen the Bollywood heartthrobs attributing the
secret of their beauty to soaps and creams they would never allow in their homes.
In order to enforce an ethical code, we in India now have Advertising Standards Council of
India; ASCI. It is a non-profit organization set up by 43 founder members who are involved
with advertising in one way or the other. It puts forward a regulating code. ASCI proposes
to adjudicate on whether an advertisements is offensive and its decision will be binding on
its members. It proposes to deal with government if there are any disputes.
Tell-tale Signs of Unethical Behaviour
By Language:
1. Everybody else does it
2. If we dont do it, somebody else will.
3. That is the way it has always been done
4. We will wait until the lawyers tell us it is wrong
5. It does not hurt anyone
6. The system is unfair
7. I was just following the orders
By category
1. Taking things that dont belong to you
2. Saying things you know are not true
3. Giving or allowing false impression
4. Buying influence or engaging in conflict of interest
5. Hiding or mutilating information
6. Taking unfair advantage
7. Perpetrating interpersonal abuse
8. Permitting organization abuse
9. Violating rules
10. Condoning unethical actions
11. Balancing ethical dilemma

Q: Can Profitability & Morality co-exist?
Ans: Many believe that the phrase Business Ethics is an Oxymoron (self contradictory)
Phrase. But, far from it, the answer to this question is an emphatic YES and let me justify
this resounding YES.
Nobel Prize Winner (Economics 1976) Mr Milton Friedman said, There is one and only
social responsibility of business and that is to use its resources and engage in activities
designed to increase its profits so long as it stays within the rules of the game, which is to
say, engage in open and free competition without deception or fraud
This one statement says it all. There is no denying the fact that a business is no charity
and exists to earn profit. But profits should come in an honest way. There should be no
deception or fraud in the pursuit of profits. Honest product at honest prices. Profit with
honesty. A paradox?
There are many such paradoxes which exist in real life and a fine balancing act is required
in such situations. Give the customer honest prices through efficiency in production and
give the shareholder bumper profits through productivity and growth in business rather
than rip-off pricing.
Honesty does not mean bad business. Adopting moral way of business does not mean
surrendering profits. Often a profit opportunity surrendered in the short run becomes the
key to the bigger door of profits in the long run. Moral practices in business create a new
resource called Social Capital through Trust; trust of society, trust of customers, trust of
suppliers and so on. This capital manifest itself as profits in terms of customer loyalty and
increased sales, lesser requirement for marketing effort, higher leverage in dealings, lesser
employees turnover, etc.
We have a live example of co-existence of morality and profitability. Tata Sons, the most
respected Industrial House of India Inc, is a living example
Tatas have been known to be conducting their business with morality. They have been
offering honest products at honest prices. Job in a Tata company is supposed to be as safe
as Govt job. Rarely has any one ever been fired from a Tata company. Despite being the
largest Indian corporate house for almost whole of the last century, hardly ever was it even
suspected of any misdeed by the govt or the public or shareholders or employees and not
even by competitors.
Tatas have been at the forefront in establishing and financing various institutions of social
and national relevance like Tata Institute of Fundamental Research, Tata Institute of Social
Sciences, Tata Cancer Hospital, Indian Institute of Sciences, Bangalore and so on. Steel
City Jamshedpur is a story of corporate indulgence in social matters like none other. Each
of the Tata company has a commitment to adopt a social cause.
Despite practicing Morality like probably no other company in India, profits of the
company have constantly grown. Do we need any further justification that morality and
profits can co-exist? Success of Infosys and Wipro further justify the foregoing.
Q: Discuss Morality in Advertising.
Ans. Anyone who has worked in business organizations learns that the specific
challenges thrown up in the marketing area are amongst the most taxing.
Advertising is in effect attracting customers to buy your product by first informing of
availability of the product and then promising them better value for their money. Should
advertising make the promises that product is not capable of delivering? Or use means that
are damaging to the society, like, indecent pictures or promoting harmful products among
children, etc.
We have to admit that there is plenty of grey area in advertising. The distinction between
misrepresentation, or making claims which are false and surreptitiously exaggerated
(believable by the gullible public) and transparent exaggeration (which even idiots wont
believe to be true) to make a TV Advt eye catching, is too thin.
Let us see it with a live example. On one hand we have gigantically exaggerate
advertisements, like Fevicol advts (Exaggeration has been adopted as a theme by Fevicol. People
travelling Fevicoled to sides of the bus, or egg not breaking by hammer because hen was feeding from a
Fevicol can, etc), where exaggeration is transparent enough for every viewer to know that
it is exaggeration for the sake of making the advertisement eye catching and driving
the message home. No one is even remotely likely to believe the suggestions in the
advertisement as true. On the other hand, we get exaggerated claims in the advertisement
designed to be passed as truth. It is most common in personal care segment and services
sector.
An advertisement suggests that drinking a special brand of Whisky will transport one into
a fairyland of delights. The unspoken pre-supposition here of course is that the potential
customer will be not only resistant but also sensible and reasonable in assessing the claims
for various goods and services and will not take it all absolutely literally.
It is in such areas particularly that regulation and monitoring of advertisements have an
important social function by protecting the vulnerable in the society from being exploited.
Another more ethically interesting sphere in which advertising needs to be scrutinized is
the pressure on individuals to make particular choices. There are many health care and
insurance companies who create a fear psychosis through their advertisement to sell their
product to people who might not need them. Take the case of child life insurance plans
and water purification machines. (Child Insurance Plan has already been discussed in Ethics and
Strategy Chapter). People, in developing and under developed countries, generally develop
fair amount of immunity to water borne diseases by virtue of being constantly exposed to
less than pure water. Many doctors also advice against use of ultra pure water produced by
machines like Aqua Guard. Medical science believes that regular use of ultra pure water
kills or hampers development of auto immunity by the body and exposes the person to
illness even with slightest impure water which is inevitable given that it is impossible to get
ultra pure water every where. We have all heard how British, Australian and New Zealand
teams suffer from gastric problems whenever they travel to Indian subcontinent despite
taking all precautions.
Same is the case with breast milk supplements (tinned milk) being sold by pharma
companies. Their advertisements push use of tinned milk against established wisdom of use
of breast feed for infants.
In addition, there are plenty of wrong and false allurements and promises, like
a. Advertising unhealthy products (Cigarettes)
b. Advertising to Children (Cola adsinjurious to childrens health in the long
run), and
c. Using Puffery in advertising (Free Dental Insurance if you buy Rs. 20 worth
tooth paste. In reality, there are strings attached!
And finally there are cases of omitting certain facts about the product or being economical
with the truth which is ethically wrong. But companies do it nevertheless. There have been
cases of pharma companies pushing sales of certain drugs in poor countries even after their
harmful effects were well documented and drugs had been banned in certain advanced
countries.
Q: Why good managers make bad ethical decisions?
Ans. Managers at various levels have been found very frequently to be indulging in
unethical practices. When questioned, they always have a reason for their conduct.
Following are some of the reasons that are offered as explanation for their conduct
a. I have to satisfy the inspector from the electricity board to maintain
adequate power supplies in times of recurrent shortage.
b. I am obliged to entertain and enrich purchase manager of a high value
customer to keep him from switching over to our competitor.
c. I have to fiddle around with year-end inventories to show a higher profit
figure to the Board of Directors.
d. I have to produce fake securities and bills receivable to procure ready cash.
e. I have to over-invoice import bills and under-invoice export bills to oblige
overseas owners.
f. I have to sign the transfer order of an officer to satisfy the higher-level boss.
g. I have to arrange for cash payments to govt officials from tax departments to
keep them from creating trouble for the company.
h. I have to manipulate data when preparing the project report to meet the
hurdle rate of financial institution.
These are invoked to circumvent the conflict between the instant, relative and enduring
universal values (honesty, responsibility etc). This side-stepping is also an excuse at times
to subvert personal ethics in favour of company goals, under the argument that personal
values are inappropriate as standards for corporate decisions.
Primary reasons for bad decisions by good managers are as follows
a. No Co-relation between Managerial Ability and Ethics There is actually
nothing surprising about good managers taking bad ethical decisions
because there is not much co-relation between the two. Managerial ability is
about planning, organising, developing/deploying/directing, co-ordinating
and controlling a particular activity. Hardly do any of these functions
require ethical input. On the contrary, control function when dealing with
human element, often requires employment of cunning to extract best out of
people in the short term.
b. Greed is one of the prime reasons for managers taking bad ethical decisions.
Material success is high on most managers mind. Desire to achieve material
success drives them towards unethical conduct.
c. Short Term Focus is another reason. Ethical conduct is a sure but slow way
to success. Managers lack patience and take short cut of unethical way to
achieve quick material success. However, long term consequences of such
unethical conduct are often disastrous.
d. Inadequate Moral Development is another reason. Many managers during
their development process dont get exposed to reach Post Conventional
Level (page 6) of moral development and remain at Pre-conventional level
where they are guided in their actions by rewards and punishments.
e. Misplaced Loyalty Many managers fall due to their misplaced loyalties.
These are people who are perfectly ethical in their personal conduct.
However, they indulge in all sort of unethical practices as managers. That
is because they attach more loyalty to their companies rather than society.
They take bad decisions in order to benefit the company. They are ethical in
their own right but not in popular sentiments of society who are at receiving
end of their skewed loyalty. General ODyer was one such person.
f. Peer Pressure is another reason. A man living in an environment where
unethical decisions are routine among peers, ethical conduct becomes a
reason for ridicule and derision from the peer group.
g. Companys Policies are next reason. Many companies give little importance
to ethical issues in their business. Profit is their only God. In order to retain
their livelihood in such companies, many desperate managers succumb to
the pressure.
Q: Personal Values maketh the man, Discuss.
Ans. Values are part of the psychological traits of the person. Psychological traits are
part inherited and part learned from the environment. Some values are learned
automatically by observation and experiences from the surroundings while some values are
instilled assiduously by the elders, teachers and society.
Both managers and academics have often debated whether Values/Ethics can be taught.
A frequently stated view is that these are learned, (whether from ones parents and teachers or
from surroundings), and fully formed in early life, so that later efforts at teaching are really
pointless. The final caveat, however, is that ethical conduct in business context can still be
taught in the early stages of ones working life. Again, like personal ethics which can be
taught in the early part of ones life, business ethics can also be taught only in the early part
of ones business life. A person practicing unethical business practices in the beginning of
his business career, would be hard to convert to a business ethicist.
CORPORATE GOVERNANCE
Corporate Governance is acceptance by management to safeguard the rights of
shareholders as true owner of the corporation and their role as trustees on behalf of the
shareholders. Corporate Governance is all about commitment to values, about ethical
business conduct and about making a distinction between personal and corporate funds in
the management of a company.
Corporate Governance emanates from business ethics. It is about conducting the business
in an honest and transparent manner where by every stake holder, viz, owners, employees,
shareholders, suppliers, customers, government, society and even competitors, gets its
rightful share from the business and no single entity is able to corner disproportionate share
of profits.
Voluntary adherence to honest business practices has been eroding over the years as
evident by exposures in the recent past. Enron/Arthur Anderson, Worldcom and Zerox are
rather infamous examples, but there have been many in the recent past. Watergate scam of
80s in US had led to formation of what is now popularly called Cadbury Committee. Some
very large multinational banks have failed in the last decade. Failure of Bank of Credit and
Commerce International in 1992 being the largest and most rattling one. The malpractices
were so heinous and rampant that it earned the epithet of Bank of Crooks and Criminals
International.
But such happenings are not new. Only their scale has grown due to globalization. But
such failures of seemingly healthy businesses brought into focus the need for corporate
governance. It led to a feeling that many of the good business practices, hitherto left
as ethical choice, need to be codified. And thus, took the birth of concept of Corporate
Governance.
In India, the concept of Corporate Governance took its birth after the Stock Market scams
of 90s first led by Harshad Mehta and later by Ketan Parikh. Securities and Exchange
Board of India was formed in 1992 to check Irregularities and ensure smooth functioning
of Stock Exchanges. However, even before it could plant its feet firmly, Harshad Mehta
scam broke out. Even later, there were large scale scams involving Co-operative Banks
(continuing even today unabated), Finance companies, Plantation companies, large Stock
Broking Houses and so on. Even Unit Trust of India was not spared of the irregularities.
But while so many companies turned sick and small investors lost billions of their hard
earned money, promoters continued to prosper nevertheless.
SEBI constituted a committee on corporate governance under the Chairmanship of Mr
Kumar Mangalam Birla, a leading Industrialist and member of Board of SEBI.
Need for Corporate Governance
1. No information is given to investors regarding diversification, expansion, change in
business, loss of business, etc and instead used by promoters and top management
for insider trading at the cost of small investors.
2. Many large companies are known to manipulate rules and even Govt Policies with
the help of bureaucracy and political meddling.
3. If investors, FII and general public, put their money, they have every right to ask
information about company.
Objective of Corporate Governance
The fundamental objective of Corporate Governance is the enhancement of shareholders
value, keeping in view the interest of other stake holders. This harmonises the need to
strike a balance at all times between the need to enhance shareholders wealth whilst not
being detrimental to the interests of other stakeholders in the company.
Factors Influencing Corporate Governance - Four factors which influence corporate
governance: -
1. The ownership structure of company
2. Financial Structure
3. The structure of the company Board
4. The Legal, political and regulatory environment within which company operates.
How to Achieve Good Corporate Governance?
Since the voluntary compliance to sound corporate practices have failed in large measure,
there is a need to codify the good practices as law. There is a need to institute checks and
balances in the functioning of the Management and the Board. Thus, Kumar Mangalam
Birla Committee was appointed by SEBI to make recommendations.
The committee made number of recommendation, some being for mandatory compliance
(Suffixed with M in following text) and others being non mandatory (suffixed with V).
Kumar Mangalam Birla Committee laid a great emphasis on Board of Directors for
ensuring Corporate Governance. Even among the directors, it trusted independent directors
to be the real watch dogs for ensuring corporate governance. Independence has been
unambiguously defined in the report and following are the salient recommendations of
Birla Committee:
1. Number of Non Executive Directors (M) The Non-Executive Directors
bring external and wider perspective and independence to the decision making.
Committee recommended that minimum 50% of the directors should be non-
executive directors.
2. Increasing the Number of Independent Directors (M) Even though non
executive directors are expected to bring in better objectivity and independence in
decision making, there is still ample room for bigotry since every non executive
director is not an independent director (Nominee Directors are not independent
directors). Therefore, it recommended following minimum numbers of independent
directors in the board
a. In case Chairman of the Board of Directors is a Non Executive Director, one
third of total Directors should be Independent Directors.
b. If Chairman is an Executive Director, half the Directors should be
Independent Directors.
3. Attractive Financial Remuneration (V) Committee recommended attractive
financial remuneration to ensure that people of merit are attracted to take up the
directorship of the companies.
4. Nominee Directors (M) Nominee directors not only represent their own
company but also the general stakeholders. They, thus, have same responsibility
and accountability towards general shareholders as any other director. They are,
therefore, prohibited from communicating material information to any department
of parent company which they could use to play in stock market.
5. Audit Committee (M) It should consist of at least 3 members and all non
executive directors with majority being independent directors. The Chairman
should be an Independent Director. The committee should meet at least thrice a
year. Committee has powers to investigate any activity within its terms of reference.
6. Frequency of Board Meetings (M) The Committee recommended that Board
Meetings should be held at least four times in a year, with a maximum time gap of
four months between any two meetings.
7. Limit on Number of Directorships (M) The Committee recommended that a
director should not be a member in more than 10 committees or act as Chairman of
more than five committees across all companies in which he is a director.
8. Transparency in Declaring Remuneration of all Directors (M).
9. Accounting Standards and Financial Reporting (M)
a. Consolidation of Accounts of Subsidiaries The companies should be
required to give consolidated accounts in respect of all its subsidiaries in
which they hold 51 % or more of the share capital.
b. Segment Reporting Financial reporting in respect of each product segment
should be available to shareholders and the market to obtain a complete
financial picture of the company.
c. Disclosure and treatment of related party transactions
10. Disclosure of Interest by Directors (M) The Committee recommended that
disclosures must be made by the management to the Board relating to all material
financial and commercial transactions, where they have personal interest, that may
have a potential conflict with the interest of the company at large (for e.g. dealing
in company shares, commercial dealings with bodies, which have shareholding of
management and their relatives etc.)
11. Report on Corporate Governance (M) The Committee recommended that there
should be a separate section on Corporate Governance in the Annual Reports of
companies, with a detailed compliance report on Corporate Governance.
Unfortunately, there is more of lip service than real intent in this field. The industry,
Company Law Board, SEBI and even Government have all been less than keen on
achieving good corporate governance. Despite the reports on Corporate Governance being
available with every implementation agency for over 10 years, little has been done to
implement the recommendations. While there is talk of SEBI issuing a guideline increasing
the number of independent directors, there is virtually no talk in any quarter on the
suggestion to introduce a random appointment of auditor from a selected pool of auditors.
CLAUSE 49
The term Clause 49 refers to clause number 49 of the Listing Agreement between a
company and the stock exchanges on which it is listed (the Listing Agreement is identical for all
Indian stock exchanges, including the NSE and BSE).
This clause was inserted as late as 2000 consequent to the recommendations of the Kumar
Mangalam Birla Committee on Corporate Governance constituted by the Securities
Exchange Board of India (SEBI) in 1999. (Was modified later wef 01.01.2006 on the basis of
Narayan Murthy Committee Report)
Clause 49, when it was first added, was intended to introduce some basic corporate
governance practices in Indian companies and brought in a number of key changes in
governance and disclosures (many of which we take for granted today). It specified the
minimum number of independent directors required on the board of a company. The setting
up of an Audit committee, and a Shareholders Grievance committee, among others, were
made mandatory as were the Managements Discussion and Analysis (MD&A) section and
the Report on Corporate Governance in the Annual Report, and disclosures of fees paid to
non-executive directors. A limit was placed on the number of committees that a director
could serve on.
In late 2002, SEBI constituted the Narayan Murthy Committee to assess the adequacy
of current corporate governance practices and to suggest improvements. Based on the
recommendations of this committee, SEBI issued a modified Clause 49 on October 29,
2004 (the revised Clause 49) which came into operation on January 1, 2006.
Whats new in Clause 49?
The revised Clause 49 has suitably pushed forward the original intent of protecting the
interests of investors through enhanced governance practices and disclosures. Five broad
themes predominate. The independence criteria for directors have been clarified. The
roles and responsibilities of the board have been enhanced. The quality and quantity of
disclosures have improved. The roles and responsibilities of the audit committee in all
matters relating to internal controls and financial reporting have been consolidated, and the
accountability of top managementspecifically the CEO and CFOhas been enhanced.
INSIDER TRADING
(Courtesy Presentations by Ms Jaya Mishras and Tejbirs Groups)
Definition
Insider Trading refers to the trading (buying as well as selling) of a companys speculative
financial instruments like shares, bonds or stock options, by the insiders such as officers,
directors, or major share holders (holding more than a specified percentage of the
companys shares) or any individual who has access to privileged non-public information
by virtue of his official duties. Such individuals include Govt Officials, auditors, etc.
Legal and Illegal Insider Trading
Insider trading based on material non-public information is considered to be fraudulent
since the insiders are benefiting themselves at the cost of shareholders from information
availed in the course of their duty. Such act is considered to be violation of the trust or the
fiduciary duty towards the shareholders.
However, any insider trading which is not based on privileged non-public information is
perfectly legal.
In common parlance, Insider Trading has a negative resonance and invariably refers to
illegal trading only.
Example of Illegal Insider Trading
The CEO sells holding of his stock in company before releasing news to the public
that company is likely to lose a massive lawsuit or its supply contract with a major
customer will not be renewed upon expiry next month.
The CEO's son sells the company stock after learning from his dad about the
imminent fall in share prices due to negative development in the company.
However, in this case, it is not the CEOs son but CEO himself who is guilty of
insider trading since he has tipped his son of non-public information.
The Judge dealing with the lawsuit realizes that the company will lose the lawsuit
and therefore sells his stock in the company before the pronouncement of judgment.
However, catching insider trading is difficult without installing some software which can
maintain database of holding of shares by insiders, track their trades and report any large
transaction prior to large movement in stock prices. Even then, proving insider trading
can be difficult, because traders often hide behind proxies. Most trading by promoters is
actually never known and is therefore never reported or investigated. In some recent cases
where trading was done in own name, offenders got away scot-free due to inability of
prosecutors to establish their offence beyond doubt.
Laws on Inside Trading United States
United States Stock Market is the single largest stock market as also one of the best
regulated markets in the world. It has been actively pursuing against illegal insider trading.
Like SEBI in India, Securities Exchange Commission is the regulatory body in US.
SEC prohibits short-swing profits (from any purchases and sales within any six
month period) made by corporate directors, officers, or stockholders owning more
than 10% of a firms shares.
Stiff penalties for illegal Insider Trading which can be as high as three times the
profit gained or the loss avoided from the illegal trading.
Laws on Insider Trading India
Code of Conduct. The Securities and Exchange Board of India (Prohibition of
Insider Trading) Regulations, 1992, was amended on 22nd February, 2002 which
mandates every company to frame a Code of Conduct for prevention of insider
trading.
Ban on Trade. Employees, including Directors, when in possession of any
unpublished price sensitive information, as defined in the Regulations, pertaining to
the Company, shall not:
Buy/sell securities of the Company, either on their own behalf or on behalf
of any other person.
Communicate, counsel or procure any unpublished price sensitive
information to / from any person
Designated Employees. The Designated Employees shall cover the following:
Directors, Executive and Non-Executive;
Managers at Levels 1 & 2, or its equivalent;
Employees in Finance and Secretarial functions located at the Corporate
Headquarters; and
Such other employees as may be determined by the CMC from time to time.
Trading Window. Designated Employees shall not buy/sell securities of the
Company during Closure of the 'Trading Window', i.e. the period during which
trading in the securities of the Company is prohibited
Trading Window shall be closed during the following periods:
From 15th March up to twenty-four hours after the announcement of the
annual financial results (and dividend, if any) to the Stock Exchanges.
From 15th June up to twenty-four hours after the announcement of the first
quarter financial results to the Stock Exchanges.
From 15th September up to twenty-four hours after the announcement of the
second quarter and half-yearly financial results to the Stock Exchanges.
From 15th December up to twenty-four hours after the announcement of the
third quarter financial results to the Stock Exchanges.
From the date of circulation of the agenda for the meeting of the Board of
Directors, in which any material, price sensitive and unpublished event,
including public/rights/bonus issues, expansion plans, M&A plans, disposal
of part or whole of undertaking, are proposed. The closure of the Trading
Window for these events will be advised by the Compliance Officer
appointed by the Board of Directors for the purpose of this code.
Disclosures by Designated Employees. Designated Employees shall make the
following disclosures of shares and other securities held in the Company by them
and their dependant family members, to the Compliance Officer
Initial disclosure of number of shares and other securities held as on 31st
March, 2002. This disclosure shall be made by 30th April, 2002.
Annual disclosure of number of shares and other securities held as on 31st
March, including details of purchase / sale of shares and other securities
during the financial year. This disclosure shall be made within 30 days from
the close of each financial year.
Changes in shareholding, when such change exceeds 50,000 shares. This
disclosure shall be made within 4 working days of such change.
Disclosure shall also be made of the number of shares and other securities held,
upon becoming a Designated Employee, at any point of time. This disclosure shall
be made within 4 working days of becoming a Designated Employee.
Case Study Samir Arora
Digital Global Soft and HP ISO were planning a merger in 2003. Samir Arora was the
head of equity investments in India for Alliance Mutual Fund. Samir was aware of the
impending merger announcement and sold shares of Digital Global thereby saving the loss
to his company.
Added to this, before selling, he made statements of promising returns from the scrip. SEBI
ruled Samir Arora guilty of insider trading. However, when Samir Arora appealed, SAT
overruled SEBI on following grounds: -
a. Samir could not have known the exchange ratio as it was given in sealed
cover.
b. Further, Samir sold many other scrips along with Global Soft.
c. Other Research Houses had downgraded Digital Global Soft and
recommended sale.
d. Mere fact that MD of Global Soft and Samir were good friends does not
lead one to believe that Samir had all the inside information.
Despite all the circumstantial evidences, Samir Arora got scot-free because of legalities.
There will not be many cases with better evidences than this case. If the law enforcement
agencies are going to take such lenient view of the offences, this law will also become, as
many other laws are, a Pomeranian Dog (which barks a lot but never bites and is used only as a
decorative pet without any real use), without any conviction to their credit.
CASE STUDIES
Case Study 1 The Parable of the Dark Child of Narhi-La
The events of three weeks at far away Narhi-La had a deep significance for Chandra in
understanding and resolving the ethical discord he was having with his organization for
the past two years. He was the export manager of Mansukhani Sarkar & Co who were in
the business of handlooms and handicrafts. They had exclusive boutiques in several urban
centres in India and a few abroad and all making large profits. Their two directors, Mrs.
Mansukhani and Mrs. Sarkar had close connections with politicians and were therefore
able to garner a lot of government support for their company in the form of subsidies and
other benefits. Whereas they projected themselves as great social workers, helping the
preservation of ancient crafts and skills of the country, when it came to sharing profits
with the primary producers, Chandra felt that they were harsh and unethical. Further, they
operated through middlemen, who they knew took big cuts before paying the primary
producers.
Mrs. Sarkar also has an embarrassing habit of lifting items she liked from the showroom
of the middlemen and not ever paying for them. Some of them complained to Chandra, but
did not pursue the matter as Mrs. Sarkar had powerful politician friends. Chandra often
felt like resigning from his job. But his wife always dissuaded him. You cannot expect
every person in the organization to have exemplary ethics. As long as they are doing
good overall, you should turn a blind eye to their faults, she said. Chandra was not sure if
she said so only to prevent him from taking any disastrous course which would hurt her
and their children. It was however true that the company gave him considerable freedom
to develop a network of artisans in the deserts of Kutch in Gujarat and in the poverty
stricken Erode district of Tamil Nadu. Mrs. Sarkar was invaluable in getting contracts from
abroad and the company was free with its finances and could support a large turnover with
sufficient credit arrangements. Admittedly, this large number of artisans who manufactured
for exports through Mansukhani & Sarkar were much better off than other artists of the
area. A couple of them even managed a free trip abroad with government support and high
profile publicity. Chandra was in the last stages of clinching a long term contract with
an American Party. He had sent them samples and a quotation. Before he went abroad
to negotiate with them, he thought he should undertake a Himalayan trek to spiritually
recharge himself away from his mundane life at Mansukhani & Sarkar.
The trip had unexpected consequences. The group had a mixed crowd geographers
from Japan, a black American medical technician, a Norwegian journalist, Chandra and
Dr. Gulati, a pediatrician from Delhi. They were to assemble at Tehridun at Uttarakhand,
transported 350 km by jeep to Jyoti Math and then trek to Narhi-La 150 km away. After
acclimatization at Narhi-La they had to go to the Chinese border.
Narhi-La had a scanty population of 30, mostly the aged. The able bodied had all gone to
the plants. Five year old Lakhan was one of the few children whose parents had gone to the
plants for work, leaving him in the care of his old grandmother. Unusually dark for a child
from Narhi-La, he was held in reverence by the villagers as in their mythology the gods
when they came to earth were dark. The team members became great friends with Lakhan.
The weeks trek along the border was spiritually elevating for all the members of the team.
They reflected on the follies of humanity inflicting violence on each other. The spirit of
the mountains seemed to help them in communicating with each other without words and
without language.
Back at Narhi-La they were horrified to find Lakhan in Coma due to high fever. Lakhans
grandmother was wailing. The whole village was in panic. The team was rudely awakened
from their spiritual euphoria to the realities of the world. It seemed the spiritual centre of
their world was now in Narhi-La. Every ones first inclination was to see Lakhan through
his difficult days and leave only after he was well. But each had second thoughts.
How could Dr. Gulati miss his sister-in-laws wedding? How could the Japanese miss the
conference at Beijing?, where they hoped to present an important paper. How could the
American leave his wife for so long, when she was battling with the task of looking after
his old mother? Chandra had this most important meeting in New York which was the
fruition of two years effort to get a good deal for his artisans. The Norwegian had little
more time as he could mail his story a little later. But what could he do sitting there and
watching the child die. Chandra found that everyone had devious ways of legitimizing
their ethical stand of not wanting to go full length in their ethical duty. They were however
willing to do their best within their self-imposed constraints.
The Japanese rummaged their rucksack and brought out some medicines luckily good
enough for Dr. Gulati to revive the child. Dr. Gulati remembered he had a friend at
Tehridun who was a good pediatrician. The Norwegian said his wait would be worthwhile
if he could carry the child to Tehridun first on his back to Jyoti math and thereafter by
motor transport. The American remembered he had noted the telephone number of a
medical laboratory at Jyoti Math where some help may be available. Chandra would
monitor the entire operations by telephone from New York and Bombay, and support it
with Money. All the team members gave whatever money they could spare. Everyone
seemed a little relieved but not entirely free from a feeling of guilt. But the plan worked.
Lakhan was nearly cured when the Norwegian left him at Tehridun in the care of the
doctor. Chandra came back after a successful trip from the USA and organized the
shipment. He then went to Tehridun, picked up Lakhan and dropped him back to Narhi-La.
He felt the entire episode was a clear answer to his worries he had had with the ethics of
Mansukhani & Sarkar.
WHAT DO YOU THINK WAS THE ANSWER WHICH CHANDRA FOUND IN THIS
EPISODE?
Case Study 2 - The Portable Ultrasonograph
Never before has it happened in my life. We have failed in our public relations, bemoaned
Virji Suratwala, Chairman, of Universal Electronics as he watched the small group
headed by Dr. Arulnayagam (hereafter referred to as the doctor), fasting in front of his
factory gates. Their banners proclaimed to the whole world that Universal Electronics
are mercenary murderers of innocent babies. As they caught a glimpse of his face, they
roared lustily. The doctor was protesting against the latest Universal Electronics product,
a much vaunted revolutionary technology in ultrasonography brought into the country in
collaboration with a world famous American multinational. The product was a small sized
portable ultra scan sonographic recorder small enough to be packed in a briefcase. The
foetus tests would become much easier and could be carried out even at home. For a year
the doctor had tried every other means to persuade Universal Electronics not to make this
product. Picketing was his last desperate step to stop them.
The doctor felt that in India it could have only one effect. It would dramatically increase
the number of female foeticides as it would be easier to determine the sex of the child. If it
was a girl it would be aborted. For their complicity in this unethical outcome, he branded
UE as the most unethical company in India. Paradoxically, both UE and the American
multinational with whom they were collaborating prided themselves as being ultra ethical.
Both the companies had won many international awards for ethical excellence. Ironically,
the American company had also provided that the Indian company should distribute along
with the machine a note by a known American doctor on the ethics of using the ultrascan
machine. It said that the chances of a baby girl being mistaken for a baby boy were 7%
in the first 20 weeks of pregnancy and therefore it would be unethical for parents with a
history of haemophilia to abort a child identified as male just because the chances of males
getting the disease were high. But the notes ignored that baby boys can never be mistaken
for baby girls. It frivolously also added that one might as well wait for the baby to be born
before deciding if the nursery walls should be colored pink or blue.
UE had been chosen after a long search for an ethically strong Indian Company. Virji still
recalled the demeaning ethical examination he was put to by the foreign multinational. As
if all Indians are crooks and all Americans are angels he remarked. We have given up
crores of rupees of profits because we refused to offer bribes and everyone knows that in
this industry, bribery is most rampant he added. He was speaking the absolute truth. He had
ensured that the induction program for his new recruits drilled them on ethics. The slightest
fall in standards would mean the sack. For him unethicality only meant corruption. This
perception of unethicality was also shared by the foreign collaborator.
Virjis legal advisors first disputed the doctors statistics. But that was a fruitless approach.
He was a well respected public health statistician. He could back his statistics to the hilt.
Then the PR line harped on the womans right to abort abnormal foetuses. The doctor then
detailed case histories to show that in most of the decisions, the new portable instrument
could be used secretively. The family seniors could overrule the mother. Social activists
had little opportunity to intervene. Otherwise they could at least park themselves in front
of the sonography clinics. The abortion usually pushed mothers to months of intense
depression. UEs next line of defence was that the instrument did nothing more than make
the currently used technology more efficient and cost effective. The machine could easily
be moved into labour rooms in hospitals and used concurrently with the delivery of the
child. If sonographs were right, portable sonographs too were right. The doctor countered
this by saying that the new portable technology was like giving users a pistol with a
silencer to kill a person and destroy evidence.
Lastly UE stated that the instrument was only a means of ascertaining the medical facts
correctly and could have many other positive uses other than determining the sex of the
child. It could detect foetal abnormalities. If used for criminal purposes, the perpetrators
of the crime were both the mother and those who forced her or her doctor and not UE.
They quoted the provisions of the prenatal diagnostic Techniques act 1994 under which
communicating the sex of the foetus to the mother is an offence punishable with a three
year sentence and the doctor concerned can be struck off the membership of the state
medical council. The mother and the other family members can also be punished. All users
of such machines had to be registered under the act. UE thought they had clinched the
legal angle. The doctor had no patience for legal or ethical analysis. He said that he was
not doing a right or wrong analysis, but a with or without analysis. With the instrument
babies were killed. Virjis world was crumbling. His companys ethical image was being
mercilessly shaken up. He was convinced that UE was not being unethical, but he doubted
if others would look at it the same way. If only I had persuaded the doctor before his views
had got hardened, everything would have been fine. It was a failure of my PR and not
ethics he said and cursed his fate.
If he now went back on the project, UE would lose at least Rs.20 Crores.
IF YOU ARE IN THE POSITION OF VIRJI SURATWALA HOW WOULD YOU
SOLVE THE PROBLEM?
Case Study 3 The computer Whiz-Kid
Dr. P. Rajarathnam (hereafter called Rathnam a name by which he was popularly known)
had a wide variety of qualifications that included a doctorate in petroleum engineering and
a masters degree in computer science. He was a well-known authority in the application
of knowledge engineering in the field of petroleum refining. He was a professor at the
University of Texico in Texas. In 1986, a team of high level executives from Colorado
Petroleum Incorporated (CPI) an oil company in the Gulf, was on a study tour of the
school of petroleum engineering at Texico. They were highly impressed with the work
of Rathnam, particularly in the field of knowledge engineering applications to solve
process problems associated with petroleum refineries. The sequel was a fantastic offer of
appointment by CPI to Rathnam, which he accepted, little realizing the master plan of his
new employers.
Rathnam was the chief executive engineer of their computer installations which were
primarily used for geological analysis, planning drilling programmes and trouble shooting
refinery problems. Soon after joining, he was introduced to Dr. S C Bose, the chief
geologist, who became his close friend. They freely exchanged experiences over many
hours of professional discussions. Bose was a true scientist who did not hold back any
knowledge. Rathnam knew all about Boses methods of investigation and developed an
expert system that embodied this knowledge. The top management of CPI supported this
project beyond the expectations of the two scientists.
The news that CPI had decided to give Bose the golden handshake was a terrible moral
shock to Rathnam who had no difficulty in identifying the cause the much regarded
knowledge base of his own creation. Rathnam pleaded with the top management to change
their minds. He reminded them that Bose was a heart patient and would find it impossible
to another good job, and also that this action of theirs would result in many brilliant persons
shying away from the companys employment. They did take him seriously. Much to their
shock Rathnam resigned from his job.
As a permanent resident of the USA, Rathnam could have returned there after his stint with
CPI. But he did not intend to return to Texico though he was welcome there .He had just
turned 56 and he could have worked as professor for at least another 10 years. He chose
to come back to India in spite of the offers from several Universities in the USA as he
expected to be more comfortable with the ethical climate in India.
Rathnam had offers from several institutes of management in India. He decided to make his
choice only after acquainting himself with each of them for a period of two to three days.
He told them all that he would like to belong to the growing segment of early retirees who
spent their time and expertise to serve the society at large and educational institutions are
the best media he would prefer.
However Rathnam soon started showing signs of disapproval of the things happening in
India. The Indian world seems to have changed from my student days and I see much petty
dishonesty and a permissive ethical climate though not as ruthless as CPI but saddening
nevertheless, he said. He was disturbed by three problems. There was large scale use of
pirated software, this weighed on his conscience. Second, there was hardly any spirit
of knowledge-sharing among computer professionals. Third, Indian systems had little
protection for ensuring privacy of Information. Admittedly, this would require very high
cost, but he felt that the price was worth paying.
In one of the institutes, he had heart-to-heart discussions with Professor Kulkarni who
belonged to his generation. Rathnam was further bewildered by Kulkarnis views. Kulkarni
felt that the ethics of piracy must also be seen in the light of the ethics in fair pricing by
foreign software manufacturers. But it seemed that the Indian Copyright Act was now
tightened and foreign manufacturers had posted representatives who could help police
raids to capture evidences of Piracy. Greater liberalization had also provided greater
opportunities for equable bargains by educational institutions. Some others felt that the
Indian legal system was unequal to the task of regulating piracy as corruption could destroy
all semblances of law and order.
As for the reluctance of many Indians to share their knowledge, he found most heads of
institutions unable to do anything about it as computer personnel were in short supply with
a high turnover. He had hoped that the Indian culture would have been able to reassure
persons that organizations would not behave in the manner that CPI had with Dr. Bose after
getting all his knowledge. But nowhere did he find such a relationship of trust.
Lastly he found most institutions unwilling to go all out to ensure privacy of information
using foolproof systems, they attempted to ensure this only by a better code of ethics
among computer professionals. But with shortage of personnel in the field, strict
enforcement of this code was not always possible. Rathnam was wondering if he had
indeed taken a wrong decision in returning to India, or whether he should now give up his
earlier ambition of serving the society at large through educational institutions. He could
also go in for business to avoid all these hassles. Or maybe his entire rationalization had
been a faade to cover his overwhelming self-righteousness and inability to view ethics as a
means of larger good than the application of rigid codes of conduct.
1. IF YOU WERE RATHNAM WHAT WOULD YOU DO?
2. DO YOU THINK PROFESSIONAL CODES FOR COMPUTER
PROFESSIONAL NEED TO BE DIFFERENT IN THE USA AND INDIA?

Issues in business
1. Can profitability and morality go together?
2. Do companies have conscious?
3. Sales representation & product launches how ethical can it be?
Morality and advertising 3As Allurement, Advantage
4. How bureaucrat can shape the life of people
5. Personal value of ethics
6. Indian system, western system & comparison
Bhakti Devotion - mother taking care of child.
Yukti Path of skill relation between student and leader, saam, daam dand, bhed
Mukti Path of salvation Indirect method used by company
7. Business & business ethics

CEO SPEECH TO EMPLOYEES
ABOUT COMPANYS ETHICAL POLICY
Good Evening Ladies and Gentlemen,
I welcome each member of Nisha Tech Ltd family to this quarterly interactive session.
During our last interaction, I had hinted about my growing vision to see our company
among the torch bearers for Business Ethics.
Taking that theme further, I take this opportunity to draw your attention towards our social
responsibility as business and need for adherence to highest standards of ethics in our
personal life as well as in conduct of our business.
Business is part of the society and society is one of the important stake holders in our
business. Like we are constantly mindful of our shareholders interest, we ought to
be equally mindful of societys interest. Our business owes its existence to society. It
functions with approval of the society. It draws its sustenance from the society. Our profits
come from the society. And therefore, it is of vital importance that the society is healthy
and growing. Notwithstanding our future dependence on robust growth of the society, it is
our moral duty to invest in growth of society as a pay back measure and that is precisely
how we will consider it.
We accept Tata Sons as our role model in Corporate Social Responsibility. We will strive
to emulate them in fulfilling our responsibility towards the society.
Your company has therefore decided, with full consent of the shareholders and the Board
of Directors, to launch Nisha Social Development Trust with a corpus fund of Rs 50
Crores from Reserves and Surplus to start investing in worthy social causes. Hereafter, the
company will donate 10% of the annual profits to this fund. To begin with, the Trust will
adopt 50 most backward villages in Maharashtra. Trust will operate one well equipped
free primary school in each village with mid day meal facility to ensure nutrition along
with education. In due course of time, these schools will be expanded to secondary level.
The coverage will also increase gradually to more villages. In addition, the Trust will start
Micro Credit Scheme in these villages to help villagers, especially women, to become
entrepreneurs and supplement their incomes for their economic growth.
But our commitment does not end here by parting with a small share of earnings. Besides
Dhan, all of us also need to invest Tan and Man. So, let us pledge to provide all kinds of
support to the activities of the Trust. I would expect each member of Nisha Family to spend
at least one week every year in any one village actively participating in all the activities.
Our commitment towards development of the villages is completely selfless without any
kind of expectations. None of the beneficiaries of our welfare programs are or will be our
customers in foreseeable future. But, for those who view business only as a source of profit
and may be concerned about drop in dividend, let me assure them that no good deed ever
remains unpaid. Like the indulgent mother, society is extremely kind and rewards its honest
members handsomely. Society will reward our good deed with its faith in us. And societys
faith is the surest way to long term growth and profits.
I am fully alive to the possibility that such large investments in social causes may have
impact on distributable profits as well as net worth of the company in the short run.
However, I am sure that it will not affect our capitalization in the market. And even if
it does, we should not be worried. It will be a small price to pay for fulfilling our moral
obligations towards the society.
Another equally important issue is following ethics in our daily lives as well as in conduct
of our business. Let us pledge to conduct our business in most ethical manner. I have
already instructed to draw an ethical code of conduct for our company. But before we
unveil and formally implement the code of ethics in the company, I would like to discuss
some of the salient aspects of the code with you.
Your company acknowledges its responsibility towards each of its stakeholders;
shareholders, employees, suppliers, customers, society, govt and so on. We will work
towards providing each stakeholder with his fair share of profit. We will follow the laws of
the land not only in letter but in spirit also.
We will pay the taxes honestly and truthfully. Our company will not pay any bribes of any
kind to anyone for any purpose. I am aware of our external environment and prevalent
social order. We may face a few hurdles and there could be a few losses due to our denial
to pay bribes. But let us be prepared to bear losses rather than earn business orders and
other favours at the cost of corrupting the society.
We will be honest to our customers in delivering timely and quality work at a fair price.
We will be opportunity seeker but not opportunist. We will seek healthy profit but not
become profiteers.
We will be fair to even our competition. We will use no unethical means to curb
competition. We will never use any unethical means to seek trade secrets of our
competitors.
Each of our employees will get fair wages. Company is committed to share its growth with
its employees. We will respect their right to dignity, equality of opportunity for growth,
safety, privacy, and reasonable comforts in the work place. New employees are not to
divulge any proprietary information about their former employers.
We are committed to dealing fairly with the Suppliers and Vendors of the company. We
seek a long term relationship with them. They will be treated as partners in business. They
will receive all support from the company towards earning a reasonable amount of profits
for their supplies and services. Their dues will be paid without any delays. Any billing
errors will be promptly corrected through credits and refunds.
We are committed to providing superior returns to our shareholders and to protecting and
improving their investments through prudent utilization of corporate resources.
Each member of the Nisha Tech family is to follow the code of conduct vigorously not in
letter but in spirit. Our conduct has to pass not merely the test of legality but of ethicality
as well. In case of dilemma between legality and ethicality, ethicality is to be given
preference.
The code of conduct is not only applicable to the members of the Nisha Tech Family but
also to agents, representatives and consultant hired by the company. We will hire only
those people whose ethical conduct is above reproach.
Ladies and Gentlemen, it is my vision to see this company become a bench mark for
corporate social responsibility and ethical conduct. I am sure all of you share this vision of
mine in true sense.
May God be with us all.

The field of ethics, also called moral philosophy, involves systematizing, defending, and
recommending concepts of right and wrong behaviour. Philosophers today usually divide
ethical theories into three general subject areas:
1. Metaethics,
2. Normative ethics, and
3. Applied ethics
Metaethics investigates where our ethical principles come from, and what they mean. Are
they merely social inventions? Do they involve more than expressions of our individual
emotions? Metaethical answers to these questions focus on the issues of universal truths,
the will of God, the role of reason in ethical judgments, and the meaning of ethical terms
themselves.
Normative ethics takes on a more practical task, which is to arrive at moral standards that
regulate right and wrong conduct. This may involve articulating the good habits that we
should acquire, the duties that we should follow, or the consequences of our behaviour on
others.
Finally, applied ethics involves examining specific controversial issues, such as abortion,
infanticide, animal rights, environmental concerns, homosexuality, capital punishment, or
nuclear war. By using the conceptual tools of metaethics and normative ethics, discussions
in applied ethics try to resolve these controversial issues. The lines of distinction between
metaethics, normative ethics, and applied ethics are often blurry. For example, the issue
of abortion is an applied ethical topic since it involves a specific type of controversial
behaviour. But it also depends on more general normative principles, such as the right of
self-rule and the right to life, which are litmus tests for determining the morality of that
procedure. The issue also rests on metaethical issues such as, "where do rights come from?"
and "what kind of beings have rights?"
1. Metaethics
a. Metaphysical Issues: Objectivism and Relativism
b. Psychological Issues in Metaethics
i. Egoism and Altruism
ii. Emotion and Reason
iii. Male and Female Morality
2. Normative Ethics
a. Virtue Theories
b. Duty Theories
c. Consequentialist Theories
i. Types of Utilitarianism
ii. Ethical Egoism and Social Contract Theory
3. Applied Ethics
a. Normative Principles in Applied Ethics
b. Issues in Applied Ethics
4. References and Further Reading
1. Meta-ethics
The term "meta" means after or beyond, and, consequently, the notion of met-aethics
involves a removed, or bird's eye view of the entire project of ethics. We may define
meta-ethics as the study of the origin and meaning of ethical concepts. When compared to
normative ethics and applied ethics, the field of meta-ethics is the least precisely defined
area of moral philosophy. Two issues, though, are prominent: (1) metaphysical issues
concerning whether morality exists independently of humans, and (2) psychological issues
concerning the underlying mental basis of our moral judgments and conduct.
1a. Metaphysical Issues: Objectivism and Relativism
"Metaphysics" is the study of the kinds of things that exist in the universe. Some things
in the universe are made of physical stuff, such as rocks; and perhaps other things are
nonphysical in nature, such as thoughts, spirits, and gods. The metaphysical component of
metaethics involves discovering specifically whether moral values are eternal truths that
exist in a spirit-like realm, or simply human conventions. There are two general directions
that discussions of this topic take, one other-worldly and one this-worldly. Proponents of
the "other-worldly" view typically hold that moral values are objective in the sense that
they exist in a spirit-like realm beyond subjective human conventions. They also hold that
they are absolute, or eternal, in that they never change, and also that they are universal
insofar as they apply to all rational creatures around the world and throughout time. The
most dramatic example of this view is Plato, who was inspired by the field of mathematics.
When we look at numbers and mathematical relations, such as 1+1=2, they seem to be
timeless concepts that never change, and apply everywhere in the universe. Humans do
not invent numbers, and humans cannot alter them. Plato explained the eternal character
of mathematics by stating that they are abstract entities that exist in a spirit-like realm.
He noted that moral values also are absolute truths and thus are also abstract, spirit-like
entities. In this sense, for Plato, moral values are spiritual objects. Medieval philosophers
commonly grouped all moral principles together under the heading of "eternal law" which
were also frequently seen as spirit-like objects. 17
th
century British philosopher Samuel
Clarke described them as spirit-like relationships rather than spirit-like objects. In either
case, though, they exist in a sprit-like realm. A different other-worldly approach to the
metaphysical status of morality is divine commands issuing from God's will. Sometimes
called voluntarism, this view was inspired by the notion of an all-powerful God who is
in control of everything. God simply wills things, and they become reality. He wills the
physical world into existence, he wills human life into existence and, similarly, he wills all
moral values into existence. Proponents of this view, such as medieval philosopher William
of Ockham, believe that God wills moral principles, such as "murder is wrong," and these
exist in God's mind as commands. God informs humans of these commands by implanting
us with moral intuitions or revealing these commands in scripture.
The second and more this-worldly approach to the metaphysical status of morality follows
in the skeptical philosophical tradition, such as that articulated by Greek philosopher
Sextus Empiricus, and denies the objective status of moral values. Technically skeptics did
not reject moral values themselves, but only denied that values exist as spirit-like objects,
or as divine commands in the mind of God. Moral values, they argued, are strictly human
inventions, a position that has since been called moral relativism. There are two distinct
forms of moral relativism. The first is individual relativism, which holds that individual
people create their own moral standards. Friedrich Nietzsche, for example, argued that
the superhuman creates his or her morality distinct from and in reaction to the slave-
like value system of the masses. The second is cultural relativism which maintains that
morality is grounded in the approval of one's society - and not simply in the preferences
of individual people. This view was advocated by Sextus, and in more recent centuries
by Michel Montaigne and William Graham Sumner. In addition to espousing skepticism
and relativism, "this-worldly" approaches to the metaphysical status of morality deny the
absolute and universal nature of morality and hold instead that moral values in fact change
from society to society throughout time and throughout the world. They frequently attempt
to defend their position by citing examples of values that differ dramatically from one
culture to another, such as attitudes about polygamy, homosexuality and human sacrifice.
b. Psychological Issues in Metaethics
A second area of metaethics involves the psychological basis of our moral judgments and
conduct, particularly understanding what motivates us to be moral. We might explore this
subject by asking the simple question, "Why be moral?" Even if I am aware of basic moral
standards, such as don't kill and dont steal, this does not necessarily mean that I will be
psychologically compelled to act on them. Some answers to the question "Why be moral?"
are to avoid punishment, to gain praise, to attain happiness, to be dignified, or to fit in with
society.
i. Egoism and Altruism
One important area of moral psychology concerns the inherent selfishness of humans. 17
th

century British philosopher Thomas Hobbes held that many, if not all, of our actions are
prompted by selfish desires. Even if an action seems selfless, such as donating to charity,
there are still selfish causes for this, such as experiencing power over other people. This
view is called psychological egoism and maintains that self-oriented interests ultimately
motivate all human actions. Closely related to psychological egoism is a view called
psychological hedonism which is the view that pleasure is the specific driving force behind
all of our actions. 18
th
century British philosopher Joseph Butler agreed that instinctive
selfishness and pleasure prompt much of our conduct. However, Butler argued that we also
have an inherent psychological capacity to show benevolence to others. This view is called
psychological altruism and maintains that at least some of our actions are motivated by
instinctive benevolence.
ii. Emotion and Reason
A second area of moral psychology involves a dispute concerning the role of reason
in motivating moral actions. If, for example, I make the statement "abortion is morally
wrong," am I making a rational assessment or only expressing my feelings? On the one side
of the dispute, 18
th
century British philosopher David Hume argued that moral assessments
involve our emotions, and not our reason. We can amass all the reasons we want, but that
alone will not constitute a moral assessment. We need a distinctly emotional reaction in
order to make a moral pronouncement. Reason might be of service in giving us the relevant
data, but, in Hume's words, "reason is, and ought to be, the slave of the passions." Inspired
by Hume's anti-rationalist views, some 20th century philosophers, most notably A.J. Ayer,
similarly denied that moral assessments are factual descriptions. For example, although the
statement "it is good to donate to charity" may on the surface look as though it is a factual
description about charity, it is not. Instead, a moral utterance like this involves two things.
First, I (the speaker) I am expressing my personal feelings of approval about charitable
donations and I am in essence saying "Hooray for charity!" This is called the emotive
element insofar as I am expressing my emotions about some specific behavior.
. Second, I (the speaker) am trying to get you to donate to charity and am essentially giving
the command, "Donate to charity!" This is called the prescriptive element in the sense that I
am prescribing some specific behavior.
From Hume's day forward, more rationally-minded philosophers have opposed these
emotive theories of ethics and instead argued that moral assessments are indeed acts of
reason. 18
th
century German philosopher Immanuel Kant is a case in point. Although
emotional factors often do influence our conduct, he argued, we should nevertheless resist
that kind of sway. Instead, true moral action is motivated only by reason when it is free
from emotions and desires. A recent rationalist approach, offered by Kurt Baier, was
proposed in direct opposition to the emotivist and prescriptivist theories of Ayer and others.
Baier focuses more broadly on the reasoning and argumentation process that takes place
when making moral choices. All of our moral choices are, or at least can be, backed by
some reason or justification. If I claim that it is wrong to steal someone's car, then I should
be able to justify my claim with some kind of argument. For example, I could argue that
stealing Smith's car is wrong since this would upset her, violate her ownership rights, or put
the thief at risk of getting caught. According to Baier, then, proper moral decision making
involves giving the best reasons in support of one course of action versus another.
iii. Male and Female Morality
A third area of moral psychology focuses on whether there is a distinctly female approach
to ethics that is grounded in the psychological differences between men and women.
Discussions of this issue focus on two claims: (1) traditional morality is male-centered,
and (2) there is a unique female perspective of the world which can be shaped into a value
theory. According to many feminist philosophers, traditional morality is male-centered
since it is modeled after practices that have been traditionally male-dominated, such as
acquiring property, engaging in business contracts, and governing societies. The rigid
systems of rules required for trade and government were then taken as models for the
creation of equally rigid systems of moral rules, such as lists of rights and duties. Women,
by contrast, have traditionally had a nurturing role by raising children and overseeing
domestic life. These tasks require less rule following, and more spontaneous and creative
action. Using the woman's experience as a model for moral theory, then, the basis of
morality would be spontaneously caring for others as would be appropriate in each unique
circumstance. On this model, the agent becomes part of the situation and acts caringly
within that context. This stands in contrast with male-modeled morality where the agent
is a mechanical actor who performs his required duty, but can remain distanced from and
unaffected by the situation. A care-based approach to morality, as it is sometimes called, is
offered by feminist ethicists as either a replacement for or a supplement to traditional male-
modeled moral systems.
2. Normative Ethics
Normative ethics involves arriving at moral standards that regulate right and wrong
conduct. In a sense, it is a search for an ideal litmus test of proper behavior. The Golden
Rule is a classic example of a normative principle: We should do to others what we would
want others to do to us. Since I do not want my neighbor to steal my car, then it is wrong
for me to steal her car. Since I would want people to feed me if I was starving, then I
should help feed starving people. Using this same reasoning, I can theoretically determine
whether any possible action is right or wrong. So, based on the Golden Rule, it would also
be wrong for me to lie to, harass, victimize, assault, or kill others. The Golden Rule is an
example of a normative theory that establishes a single principle against which we judge all
actions. Other normative theories focus on a set of foundational principles, or a set of good
character traits.
The key assumption in normative ethics is that there is only one ultimate criterion of moral
conduct, whether it is a single rule or a set of principles. Three strategies will be noted here:
(1) virtue theories, (2) duty theories, and (3) consequentialist theories.
a. Virtue Theories
Many philosophers believe that morality consists of following precisely defined rules of
conduct, such as "don't kill," or "don't steal." Presumably, I must learn these rules, and
then make sure each of my actions live up to the rules. Virtue theorists, however, place
less emphasis on learning rules, and instead stress the importance of developing good
habits of character, such as benevolence. Once I've acquired benevolence, for example,
I will then habitually act in a benevolent manner. Historically, virtue theory is one of
the oldest normative traditions in Western philosophy, having its roots in ancient Greek
civilization. Plato emphasized four virtues in particular, which were later called cardinal
virtues: wisdom, courage, temperance and justice. Other important virtues are fortitude,
generosity, self-respect, good temper, and sincerity. In addition to advocating good habits
of character, virtue theorists hold that we should avoid acquiring bad character traits, or
vices, such as cowardice, insensibility, injustice, and vanity. Virtue theory emphasizes
moral education since virtuous character traits are developed in one's youth. Adults,
therefore, are responsible for instilling virtues in the young.
Aristotle argued that virtues are good habits that we acquire, which regulate our emotions.
For example, in response to my natural feelings of fear, I should develop the virtue of
courage which allows me to be firm when facing danger. Analyzing 11 specific virtues,
Aristotle argued that most virtues fall at a mean between more extreme character traits.
With courage, for example, if I do not have enough courage, I develop the disposition
of cowardice, which is a vice. If I have too much courage I develop the disposition of
rashness which is also a vice. According to Aristotle, it is not an easy task to find the
perfect mean between extreme character traits. In fact, we need assistance from our reason
to do this. After Aristotle, medieval theologians supplemented Greek lists of virtues with
three Christian ones, or theological virtues: faith, hope, and charity. Interest in virtue
theory continued through the middle ages and declined in the 19
th
century with the rise
of alternative moral theories below. In the mid 20
th
century virtue theory received special
attention from philosophers who believed that more recent approaches ethical theories were
misguided for focusing too heavily on rules and actions, rather than on virtuous character
traits. Alasdaire MacIntyre defended the central role of virtues in moral theory and argued
that virtues are grounded in and emerge from within social traditions.
b. Duty Theories
Many of us feel that there are clear obligations we have as human beings, such as to care
for our children, and to not commit murder. Duty theories base morality on specific,
foundational principles of obligation. These theories are sometimes called deontological,
from the Greek word deon, or duty, in view of the foundational nature of our duty or
obligation. They are also sometimes called nonconsequentialist since these principles
are obligatory, irrespective of the consequences that might follow from our actions. For
example, it is wrong to not care for our children even if it results in some great benefit,
such as financial savings. There are four central duty theories.
The first is that championed by 17th century German philosopher Samuel Pufendorf, who
classified dozens of duties under three headings: duties to God, duties to oneself, and duties
to others. Concerning our duties towards God, he argued that there are two kinds: (1) a
theoretical duty to know the existence and nature of God, and (2) a practical duty to both
inwardly and outwardly worship God. Concerning our duties towards oneself, these are
also of two sorts: (1) duties of the soul, which involve developing one's skills and talents,
and (2) duties of the body, which involve not harming our bodies, as we might through
gluttony or drunkenness, and not killing oneself. Concerning our duties towards others,
Pufendorf divides these between absolute duties, which are universally binding on people,
and conditional duties, which are the result of contracts between people. Absolute duties
are of three sorts: (1) avoid wronging others; (2) treat people as equals, and (3) promote the
good of others. Conditional duties involve various types of agreements, the principal one of
which is the duty is to keep one's promises.
A second duty-based approach to ethics is rights theory. Most generally, a "right" is a
justified claim against another person's behavior - such as my right to not be harmed by
you. Rights and duties are related in such a way that the rights of one person implies the
duties of another person. For example, if I have a right to payment of $10 by Smith, then
Smith has a duty to pay me $10. This is called the correlativity of rights and duties. The
most influential early account of rights theory is that of 17
th
century British philosopher
John Locke, who argued that the laws of nature mandate that we should not harm anyone's
life, health, liberty or possessions. For Locke, these are our natural rights, given to us by
God. Following Locke, the United States Declaration of Independence authored by Thomas
Jefferson recognizes three foundational rights: life, liberty, and the pursuit of happiness.
Jefferson and others rights theorists maintained that we deduce other more specific rights
from these, including the rights of property, movement, speech, and religious expression.
There are four features traditionally associated with moral rights. First, rights are natural
insofar as they are not invented or created by governments. Second, they are universal
insofar as they do not change from country to country. Third, they are equal in the sense
that rights are the same for all people, irrespective of gender, race, or handicap. Fourth,
they are inalienable which means that I ca not hand over my rights to another person, such
as by selling myself into slavery.
A third duty-based theory is that by Kant, which emphasizes a single principle of duty.
Influenced by Pufendorf, Kant agreed that we have moral duties to oneself and others, such
as developing one's talents, and keeping our promises to others. However, Kant argued
that there is a more foundational principle of duty that encompasses our particular duties.
It is a single, self-evident principle of reason that he calls the "categorical imperative." A
categorical imperative, he argued, is fundamentally different from hypothetical imperatives
that hinge on some personal desire that we have, for example, "If you want to get a
good job, then you ought to go to college." By contrast, a categorical imperative simply
mandates an action, irrespective of one's personal desires, such as "You ought to do X."
Kant gives at least four versions of the categorical imperative, but one is especially direct:
Treat people as an end, and never as a means to an end. That is, we should always treat
people with dignity, and never use them as mere instruments. For Kant, we treat people
as an end whenever our actions toward someone reflect the inherent value of that person.
Donating to charity, for example, is morally correct since this acknowledges the inherent
value of the recipient. By contrast, we treat someone as a means to an end whenever we
treat that person as a tool to achieve something else. It is wrong, for example, to steal
my neighbor's car since I would be treating her as a means to my own happiness. The
categorical imperative also regulates the morality of actions that affect us individually.
Suicide, for example, would be wrong since I would be treating my life as a means to the
alleviation of my misery. Kant believes that the morality of all actions can be determined
by appealing to this single principle of duty.
A fourth and more recent duty-based theory is that by British philosopher W.D. Ross,
which emphasizes prima facie duties. Like his 17th and 18th century counterparts, Ross
argues that our duties are "part of the fundamental nature of the universe." However, Ross's
list of duties is much shorter, which he believes reflects our actual moral convictions:
Fidelity: the duty to keep promises
Reparation: the duty to compensate others when we harm them
Gratitude: the duty to thank those who help us
Justice: the duty to recognize merit
Beneficence: the duty to improve the conditions of others
Self-improvement: the duty to improve our virtue and intelligence
Non-malfeasance: the duty to not injure others
Ross recognizes that situations will arise when we must choose between two conflicting
duties. In a classic example, suppose I borrow my neighbor's gun and promise to return it
when he asks for it. One day, in a fit of rage, my neighbor pounds on my door and asks for
the gun so that he can take vengeance on someone. On the one hand, the duty of fidelity
obligates me to return the gun; on the other hand, the duty of nonmaleficence obligates me
to avoid injuring others and thus not return the gun. According to Ross, I will intuitively
know which of these duties is my actual duty, and which is my apparent or prima facie
duty. In this case, my duty of nonmaleficence emerges as my actual duty and I should not
return the gun.
c. Consequentialist Theories
It is common for us to determine our moral responsibility by weighing the consequences
of our actions. According to consequentialist normative theories, correct moral conduct is
determined solely by a cost-benefit analysis of an action's consequences:
Consequentialism: An action is morally right if the consequences of that action
are more favorable than unfavorable.
Consequentialist normative principles require that we first tally both the good and
bad consequences of an action. Second, we then determine whether the total good
consequences outweigh the total bad consequences. If the good consequences are greater,
then the action is morally proper. If the bad consequences are greater, then the action is
morally improper. Consequentialist theories are sometimes called teleological theories,
from the Greek word telos, or end, since the end result of the action is the sole determining
factor of its morality.
Consequentialist theories became popular in the 18
th
century by philosophers who wanted a
quick way to morally assess an action by appealing to experience, rather than by appealing
to gut intuitions or long lists of questionable duties. In fact, the most attractive feature of
consequentialism is that it appeals to publicly observable consequences of actions. Most
versions of consequentialism are more precisely formulated than the general principle
above. In particular, competing consequentialist theories specify which consequences for
affected groups of people are relevant. Three subdivisions of consequentialism emerge:
Ethical Egoism:an action is morally right if the consequences of that action are
more favorable than unfavorable only to the agent performing the action.
Ethical Altruism: an action is morally right if the consequences of that action are
more favorable than unfavorable to everyone except the agent.
Utilitarianism: an action is morally right if the consequences of that action are more
favorable than unfavorable to everyone.
All three of these theories focus on the consequences of actions for different groups of
people. But, like all normative theories, the above three theories are rivals of each other.
They also yield different conclusions. Consider the following example. A woman was
traveling through a developing country when she witnessed a car in front of her run off the
road and roll over several times. She asked the hired driver to pull over to assist, but, to her
surprise, the driver accelerated nervously past the scene. A few miles down the road the
driver explained that in his country if someone assists an accident victim, then the police
often hold the assisting person responsible for the accident itself. If the victim dies, then the
assisting person could be held responsible for the death. The driver continued explaining
that road accident victims are therefore usually left unattended and often die from exposure
to the country's harsh desert conditions. On the principle of ethical egoism, the woman
in this illustration would only be concerned with the consequences of her attempted
assistance as she would be affected. Clearly, the decision to drive on would be the morally
proper choice. On the principle of ethical altruism, she would be concerned only with the
consequences of her action as others are affected, particularly the accident victim. Tallying
only those consequences reveals that assisting the victim would be the morally correct
choice, irrespective of the negative consequences that result for her. On the principle of
utilitarianism, she must consider the consequences for both herself and the victim. The
outcome here is less clear, and the woman would need to precisely calculate the overall
benefit versus disbenefit of her action.
i. Types of Utilitarianism
Jeremy Bentham presented one of the earliest fully developed systems of utilitarianism.
Two features of his theory are noteworty. First, Bentham proposed that we tally the
consequences of each action we perform and thereby determine on a case by case basis
whether an action is morally right or wrong. This aspect of Bentham's theory is known
as act-utilitiarianism. Second, Bentham also proposed that we tally the pleasure and pain
which results from our actions. For Bentham, pleasure and pain are the only consequences
that matter in determining whether our conduct is moral. This aspect of Bentham's theory is
known as hedonistic utilitarianism. Critics point out limitations in both of these aspects.
First, according to act-utilitarianism, it would be morally wrong to waste time on leisure
activities such as watching television, since our time could be spent in ways that produced
a greater social benefit, such as charity work. But prohibiting leisure activities doesn't seem
reasonable. More significantly, according to act-utilitarianism, specific acts of torture or
slavery would be morally permissible if the social benefit of these actions outweighed the
disbenefit. A revised version of utilitarianism called rule-utilitarianism addresses these
problems. According to rule-utilitarianism, a behavioral code or rule is morally right if
the consequences of adopting that rule are more favorable than unfavorable to everyone.
Unlike act utilitarianism, which weighs the consequences of each particular action, rule-
utilitarianism offers a litmus test only for the morality of moral rules, such as "stealing
is wrong." Adopting a rule against theft clearly has more favorable consequences than
unfavorable consequences for everyone. The same is true for moral rules against lying or
murdering. Rule-utilitarianism, then, offers a three-tiered method for judging conduct. A
particular action, such as stealing my neighbor's car, is judged wrong since it violates a
moral rule against theft. In turn, the rule against theft is morally binding because adopting
this rule produces favorable consequences for everyone. John Stuart Mill's version of
utilitarianism is rule-oriented.
Second, according to hedonistic utilitarianism, pleasurable consequences are the only
factors that matter, morally speaking. This, though, seems too restrictive since it ignores
other morally significant consequences that are not necessarily pleasing or painful. For
example, acts which foster loyalty and friendship are valued, yet they are not always
pleasing. In response to this problem, G.E. Moore proposed ideal utilitarianism, which
involves tallying any consequence that we intuitively recognize as good or bad (and not
simply as pleasurable or painful). Also, R.M. Hare proposed preference utilitarianism,
which involves tallying any consequence that fulfills our preferences.
ii. Ethical Egoism and Social Contract Theory
We have seen that Thomas Hobbes was an advocate of the methaethical theory of
psychological egoism - the view that all of our actions are selfishly motivated. Upon
that foundation, Hobbes developed a normative theory known as social contract theory,
which is a type of rule-ethical-egoism. According to Hobbes, for purely selfish reasons,
the agent is better off living in a world with moral rules than one without moral rules.
For without moral rules, we are subject to the whims of other people's selfish interests.
Our property, our families, and even our lives are at continual risk. Selfishness alone will
therefore motivate each agent to adopt a basic set of rules which will allow for a civilized
community. Not surprisingly, these rules would include prohibitions against lying, stealing
and killing. However, these rules will ensure safety for each agent only if the rules are
enforced. As selfish creatures, each of us would plunder our neighbors' property once
their guards were down. Each agent would then be at risk from his neighbor. Therefore,
for selfish reasons alone, we devise a means of enforcing these rules: we create a policing
agency which punishes us if we violate these rules.
3. Applied Ethics
Applied ethics is the branch of ethics which consists of the analysis of specific,
controversial moral issues such as abortion, animal rights, or euthanasia. In recent years
applied ethical issues have been subdivided into convenient groups such as medical ethics,
business ethics, environmental ethics, and sexual ethics. Generally speaking, two features
are necessary for an issue to be considered an "applied ethical issue." First, the issue needs
to be controversial in the sense that there are significant groups of people both for and
against the issue at hand. The issue of drive-by shooting, for example, is not an applied
ethical issue, since everyone agrees that this practice is grossly immoral. By contrast, the
issue of gun control would be an applied ethical issue since there are significant groups of
people both for and against gun control.
The second requirement for in issue to be an applied ethical issue is that it must be a
distinctly moral issue. On any given day, the media presents us with an array of sensitive
issues such as affirmative action policies, gays in the military, involuntary commitment
of the mentally impaired, capitalistic vs. socialistic business practices, public vs. private
health care systems, or energy conservation. Although all of these issues are controversial
and have an important impact on society, they are not all moral issues. Some are only
issues of social policy. The aim of social policy is to help make a given society run
efficiently by devising conventions, such as traffic laws, tax laws, and zoning codes. Moral
issues, by contrast, concern more universally obligatory practices, such as our duty to avoid
lying, and are not confined to individual societies. Frequently, issues of social policy and
morality overlap, as with murder which is both socially prohibited and immoral. However,
the two groups of issues are often distinct. For example, many people would argue that
sexual promiscuity is immoral, but may not feel that there should be social policies
regulating sexual conduct, or laws punishing us for promiscuity. Similarly, some social
policies forbid residents in certain neighborhoods from having yard sales. But, so long as
the neighbors are not offended, there is nothing immoral in itself about a resident having
a yard sale in one of these neighborhoods. Thus, to qualify as an applied ethical issue, the
issue must be more than one of mere social policy: it must be morally relevant as well.
In theory, resolving particular applied ethical issues should be easy. With the issue of
abortion, for example, we would simply determine its morality by consulting our normative
principle of choice, such as act-utilitarianism. If a given abortion produces greater benefit
than disbenefit, then, according to act-utilitarianism, it would be morally acceptable to
have the abortion. Unfortunately, there are perhaps hundreds of rival normative principles
from which to choose, many of which yield opposite conclusions. Thus, the stalemate in
normative ethics between conflicting theories prevents us from using a single decisive
procedure for determining the morality of a specific issue. The usual solution today to this
stalemate is to consult several representative normative principles on a given issue and see
where the weight of the evidence lies.
a. Normative Principles in Applied Ethics
Arriving at a short list of representative normative principles is itself a challenging task.
The principles selected must not be too narrowly focused, such as a version of act-egoism
that might focus only on an action's short-term benefit. The principles must also be seen as
having merit by people on both sides of an applied ethical issue. For this reason, principles
that appeal to duty to God are not usually cited since this would have no impact on a
nonbeliever engaged in the debate. The following principles are the ones most commonly
appealed to in applied ethical discussions:
Personal benefit: acknowledge the extent to which an action produces beneficial
consequences for the individual in question.
Social benefit: acknowledge the extent to which an action produces beneficial
consequences for society.
Principle of benevolence: help those in need.
Principle of paternalism: assist others in pursuing their best interests when they cannot
do so themselves.
Principle of harm: do not harm others.
Principle of honesty: do not deceive others.
Principle of lawfulness: do not violate the law.
Principle of autonomy: acknowledge a person's freedom over his/her actions or physical
body.
Principle of justice: acknowledge a person's right to due process, fair compensation for
harm done, and fair distribution of benefits.
Rights: acknowledge a person's rights to life, information, privacy, free expression, and
safety.
The above principles represent a spectrum of traditional normative principles and are
derived from both consequentialist and duty-based approaches. The first two principles,
personal benefit and social benefit, are consequentialist since they appeal to the
consequences of an action as it affects the individual or society. The remaining principles
are duty-based. The principles of benevolence, paternalism, harm, honesty, and lawfulness
are based on duties we have toward others. The principles of autonomy, justice, and the
various rights are based on moral rights.
An example will help illustrate the function of these principles in an applied ethical
discussion. In 1982 a couple from Bloomington, Indiana gave birth to a severely retarded
baby. The infant, known as Baby Doe, also had its stomach disconnected from its throat
and was thus unable to receive nourishment. Although this stomach deformity was
correctable through surgery, the couple did not want to raise a severely retarded child and
therefore chose to deny surgery, food, and water for the infant. Local courts supported the
parents' decision, and six days later Baby Doe died. Should corrective surgery have been
performed for Baby Doe? Arguments in favor of corrective surgery derive from the infant's
right to life and the principle of paternalism which stipulates that we should pursue the
best interests of others when they are incapable of doing so themselves. Arguments against
corrective surgery derive from the personal and social disbenefit which would result from
such surgery. If Baby Doe survived, its quality of life would have been poor and in any
case it probably would have died at an early age. Also, from the parent's perspective,
Baby Doe's survival would have been a significant emotional and financial burden. When
examining both sides of the issue, the parents and the courts concluded that the arguments
against surgery were stronger than the arguments for surgery. First, foregoing surgery
appeared to be in the best interests of the infant, given the poor quality of life it would
endure. Second, the status of Baby Doe's right to life was not clear given the severity of the
infant's mental impairment. For, to possess moral rights, it takes more than merely having a
human body: certain cognitive functions must also be present. The issue here involves what
is often referred to as moral personhood, and is central to many applied ethical discussions.
b. Issues in Applied Ethics
As noted, there are many controversial issues discussed by ethicists today, some of which
will be briefly mentioned here. Biomedical ethics focuses on a range of issues which
arise in clinical settings. Health care workers are in an unusual position of continually
dealing with life and death situations. It is not surprising, then, that medical ethics issues
are more extreme and diverse than other areas of applied ethics. Prenatal issues arise
about the morality of surrogate mothering, genetic manipulation of fetuses, the status of
unused frozen embryos, and abortion. Other issues arise about patient rights and physician's
responsibilities, such as the confidentiality of the patient's records and the physician's
responsibility to tell the truth to dying patients. The AIDS crisis has raised the specific
issues of the mandatory screening of all patients for AIDS, and whether physicians can
refuse to treat AIDS patients. Additional issues concern medical experimentation on
humans, the morality of involuntary commitment, and the rights of the mentally retarded.
Finally, end of life issues arise about the morality of suicide, the justifiability of suicide
intervention, physician assisted suicide, and euthanasia.
The field of business ethics examines moral controversies relating to the social
responsibilities of capitalist business practices, the moral status of corporate entities,
deceptive advertising, insider trading, basic employee rights, job discrimination,
affirmative action, drug testing, and whistle blowing. Issues in environmental ethics often
overlaps with business and medical issues. These include the rights of animals, the morality
of animal experimentation, preserving endangered species, pollution control, management
of environmental resources, whether eco-systems are entitled to direct moral consideration,
and our obligation to future generations. Controversial issues of sexual morality include
monogamy vs. polygamy, sexual relations without love, homosexual relations, and
extramarital affairs. Finally, there are issues of social morality which examine capital
punishment, nuclear war, gun control, the recreational use of drugs, welfare rights, and
racism.

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Mgmt study material created/ compiled by - Commander RK Singh rajeshsingh_r_k@rediffmail.

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