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L.J.

INSTITUTE OF MANAGEMENT STUDIES


MBA – II Semester – IV

Business Ethics and Corporate Governance

1. What is Corporate Governance Rating (CGR)? What would it reveal about the
company? Explain ICRA’s methodology for CGR.

Corporate Governance Rating (CGR) The corporate governance rating industry acts as a form
of corporate oversight. These companies provide an objective third-party analysis of corporate
governance practices through rating systems designed to inform investor about management and
how it stacks-up against the management at other companies.

ICRA’s Methodology for Corporate Governance Rating ICRA’s Corporate Governance


Rating (CGR) is meant to indicate the relative level to which an organization accepts and follows
the codes and guidelines of corporate governance practices. Following methodologies are used
by ICRA for corporate governance rating:

(1) Ownership/Shareholding Structure:


The key issues analyzed are the extent to which dominant shareholders are easily
identifiable, extent of shareholdings that may compromise minority interest, extent of
shareholding by promoter group, extent of institutional shareholding, and pattern of
shareholding.
(2) Governance Structure and Management Processes:
The key issues analyzed are the to which clearly- defined governance arrangement are
present and followed, appropriateness of the decision-making process, and quality of
information submitted to the board.
(3) Board Structure and Processes:
ICRA’s CGR process evaluates the board structure and processes in relation to the
following:
(a) Structure Aspects: It includes issues related to size of the board; proportion of
“independent” director(s); and mix of skill sets which the “independent” directors
bring to board.
(b) Effectiveness of the Board: It includes issues related to frequency of board meeting;
attendance track record of rectors; quality of transactions; and Board’s role in
determining executive compensation.

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(c) Functioning of Board Committees: Among the Board committees, the Audit
Committee is clearly the most important in terms of scope of activates. The key
aspects relating to the effectiveness of audit Committees as reviewed by ICRA
includes composition of the Audit Committee; deliberations at Audit Committee
meeting; and Audit Committee’s role in the appointment of statutory auditors, and its
policy on lead partners and on “non-audit” services provided by the auditors.
(4) Stakeholder Relationship:
The issues analyzed include conduct of Annual/Extraordinary General Meetings and the
extent of disclosures at such meetings; procedures for transfer and registration of share
and payment of dividend; company’s responsiveness to investor complaints; timeliness of
release of any market sensitive information of statutory provisions.
(5) Transparency and Disclosures:
The key parameters used to assess a company’s transparency and disclosure standards
include compliance with industry best practices; changes in accountings, associates, and
other related parties; and additional information to shareholder.
(6) Financial Discipline:
While discussing financial discipline, ICRA says that the ultimate objective of corporate
governance is goes down in its governance record, no matter how excellent otherwise,
will mean nothing. But what if a company’s shareholder are happy with it but its workers
or society at large are not, then the conflict of interest need to be dealt with and a
mutually beneficial situation needs to be arrived at.
(7) Ethical Practices:
ICRA’s analysis covers issues related to comprehensiveness of code of ethics and
integrity; steps taken to effectively communicate the principles of corporate ethics; extent
to which compliance with the codes and guidelines is monitored; and extents to which
feedback systems have been established to encourage whistle blowing.

2. Why Ethical decision making is difficult? Analyze the steps of ethical decision making.
Reasons for Difficulty in Ethical Decision- Making
Ethical decision- making is difficult because of the following reason:
(1) Due to globalization, as companies deal with other countries where cross cultural
diversity to standardize ethical standards as they do change as society change.
(2) Sometimes the decision- making do not follow what they must follow as they have
conflict in individual values versus organizational goals.
(3) Individual moral standards affect whole organization decisions if they are morally
strong, ethical decision would be the outcomes.
(4) If the decision-makers/manages/policy-makers who are greedy, look for shortcut
routes to earn in earliest possible time, they have an upper hand on the moral values,
therefore ethically the decision process would be corrupt.

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(5) Competitive pressure is also the main cause which forces decision-making to choose
such path where they have to kill their morals, values and move on unethical path just
to cope-up with the competition.
(6) Poor decisions without deep thinking of implications.
(7) Ambiguous situation create problem which put the manager in dilemma as to which
decision they should make and follow.
(8) Pressures of budget systems.

Steps of Ethical Decision-Making

Various steps of ethical decision- making are as follows.

(1) Recognizing an Issue as an Ethical One:


While the ethical thing to do is often also the legal, economic, or political thing to do,
failing to recognize the ethical dimension is not inconsequential. A rule may require
something unethical, or there may be no rule at all, or the situations are important, but
may not occur because of:
(a) The level of our social or cognitive development (young children who cannot
comprehend the effect of their act on someone else are absolved of ethical and legal
responsibility),
(b) Our distance from the affected people (selling adulterated fruit juice or distributing
tainted medical supplies does not raise the same ethical concerns for many people
when done in faraway places rather than in their own country),
(c) The deliberate minimizing of an act’s impact on potential victims (e.g., the military’s
depersonalization of the enemy to ease ethical qualms of combat trainees).Acting
ethically depends on the extent to which we are close to the victim of our action.
(2) Making the Ethical Judgment:
Ethical dilemmas require ethical responses. While generally agreeing that the process of
formulating a response (or considering whether someone else’s response is ethical)is a
cognitive one, experts disagree about the role of reason in this process. Some believe that
moral judgments are reached by a deliberate and conscious reasoning process, and that
the reasons one uses to make ethical decisions evolve as he develops and becomes
mature.
(3) Resolving to do the Ethical Thing:
Once we determine an ethical response, we must take the next step, and accord of action.
Doing so successfully depends on how we perceive ourselves and the importance we
attach to ethical values.
(4) Actually Acting Ethically:
To be ethical, our intention to do the ethical thing must be followed by our really doing it.
Thus, individuals who, despite the negative pull exerted by rules, have recognized an
ethical issue, decided on an ethical response, and resolved to act on it, still need to

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contend with pressures and other obstacles that interfere with actually implementing their
decision.

3. Discuss the Concept of Utilitarianism as a theory of Ethics. List and explain the types
and limitations of Utilitarianism with relevant examples.

Concept of Utilitarianism as a theory of Ethics

in normative ethics, a tradition stemming from the late 18th- and 19th-century English
philosophers and economists Jeremy and John Stuart Mill that an action is right if it tends to
promote happiness and wrong if it tends to produce the reverse of happiness—not just the
happiness of the performer of the action but also that of everyone affected by it. Such a theory is
in opposition to egoism, the view that a person should pursue his own self-interest, even at the
expense of others, and to any ethical theory that regards some acts or types of acts as right or
wrong independently of their consequences. Utilitarianism also differs from ethical theories that
make the rightness or wrongness of an act dependent upon the motive of the agent; for,
according to the Utilitarian, it is possible for the right thing to be done from a bad motive.

Types of Utilitarianism

Some people believe that it is morally right to break a rule in order to do a greater good. With
this argument, it becomes morally right to steal food or medicine to save a life. But then, will it
be also morally right to kill a pedophile in order to save children from being harmed by him? The
discussion and argument continues as long as people have different views on morality and the
proper way to act in society. Some people adhere to the belief that the moral significance of an
action is determined by its outcome. They believe that the greatest pleasure of the greatest
number of people should be the result of the action that you make which will render it morally
right. Briefly put, Utilitarianism is a theory in normative ethics holding that the proper course of
action is the one that maximizes overall happiness. There are two types of utilitarianism. One is
Act utilitarianism and the other is Rule utilitarianism. While these two reflect on the
consequences or usefulness of an action, they are two different views.

Two types of Utilitarianism

1) Act Utilitarianism

Act Utilitarianism is a utilitarian theory of ethics which states that a person's act is morally right
if and only if it produces at least as much happiness as any other act that the person could
perform at that time. Classical utilitarians, including Jeremy Bentham, John Stuart Mill, and
Henry Sidgwick, define happiness as pleasure and the absence of pain.
To understand how act utilitarianism works, compare the consequences of watching television all
day tomorrow to the consequences of doing charity work tomorrow. You could produce more
overall happiness in the world by doing charity work tomorrow than by watching television all

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day tomorrow. According to act utilitarianism, then, the right thing for you to do tomorrow is to
go out and do charities work; it is wrong for you to stay home and watch television all day
tomorrow. That sounds like an obvious fact, but that actually how simple act utilitarianism is.
Act utilitarianism deals more with consequentialism, what is believed to be right or wrong is
based on the effect or consequence.

2) Rule Utilitarianism

Rule utilitarianism is a form of utilitarianism that says an action is right insofar as it conforms to
a rule that leads to the greatest good, or that the rightness or wrongness of a particular action is a
function of the correctness of the rule of which it is an instance. For rule utilitarians, the
correctness of a rule is determined by the amount of good it brings about when followed.
There is a difference between rule and act utilitarianism. The act utilitarian considers only the
results or consequences of the single act while the rule utilitarian considers the consequences that
result of following a rule of conduct. Rule utilitarianism measures the amount of 'good' an
individual action does in reference to a rule or law. For example, there is a law in our country
that murder is wrong. Rule Utilitarianism would say that murder is wrong because if everyone
follows the law, no one will have to be afraid of being murdered in his or her sleep. Our society
will be more orderly, because people won't kill each other randomly and we can be in public and
private spaces without fear. Act Utilitarianism doesn't judge the value of an action in terms of
laws. Rather it states that actions are moral when they benefit the most people. Whether or not
there is a law or rule associated with the action in question is irrelevant to act utilitarianism.
Going back to our murder example, act utilitarianism might say that it is moral to murder
someone if they are a danger to society. Even though there is a law against citizens murdering
each other, in act utilitarianism murdering a serial rapist is moral because more people would be
safe. Act condones vigilante justice. Rule does not, because there are typically laws in most
countries about citizens carrying out justice.
Limitations of Utilitarianism

Utilitarianism is the foundation of modern economics. It is the belief that at some level people
try to maximize their utility (happiness) and that good social policy aims to maximize the sum of
individual utilities. This is central to most economic analysis, notably cost-benefit analysis.
Unfortunately, this philosophy has many problems that are not discussed frequently enough in
economic and political circles.
We all are acutely aware that there are some things that we are forbidden to do to other
people regardless of whether the loss of that individual’s utility would be made up by increases
in other people’s utility. For example, a modern day Robin Hood who robbed from the rich and
helped the poor might very well increase total utility in society, but theft is wrong and unlawful
nonetheless. On a more extreme note, we could certainly increase overall utility if we infected a

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small population of humans with AIDS and studied them in labs (because it would greatly
increase our knowledge of the disease), but this is rightly viewed as morally abhorrent.
However, through such public policy tools as cost-benefit analysis we often engage in actions
that are in many ways equivalent. For example, when new coal power plants are built the
benefit– cheap electricity for large numbers of people– is weighed against the costs– a certain
number of premature deaths due to particulate pollution. The fact that these deaths are statistical
makes it easier for us to trade off human suffering against the economic benefits. But imagine if
we could precisely identify the people who were going to suffer and die because of each new
power plant and then had to ask ourselves whether it was alright to go ahead and build it; it
would obviously be much more difficult and morally problematic.
In addition, utilitarianism is incapable of differentiating the root sources of utility. For example,
some people may get utility from viewing beautiful scenery and others from performing sadistic
acts. In the value-free world of utility theory 10 units is 10 units no matter how it is derived. This
is troubling since we clearly want to differentiate between the sources of happiness; deriving
pleasure from helping people shouldn’t be equivalent to getting pleasure from harming others in
any sensible moral calculus.
When it comes to the environment utilitarianism runs into even greater problems because
humans are the sole deciders of what has value, and intrinsic value for non-humans is
paradoxically granted only through human action. If a person gains utility from shooting an
elephant or eating whale meat that can only be weighed against other people’s utility derived
from protecting that elephant or whale; the animal’s interests for its own sake are assumed to be
zero.
Q: 4. “There is one and only one social responsibility of business---to increase its profits”
Milton Friedman. Do you agree with the above statement? Justify your answer with
relevant theory and examples.

Yes I agree with the above statement.

When I hear businessmen speak eloquently about the "social responsibilities of business in a
free-enterprise system," I am reminded of the wonderful line about the Frenchman who
discovered at the age of 70 that he had been speaking prose all his life. The businessmen believe
that they are defending free enterprise when they declaim that business is not concerned
"merely" with profit but also with promoting desirable “social" ends; that business has a "social
conscience" and takes seriously its responsibilities for providing employment, eliminating
discrimination, avoiding pollution and whatever else may be the catchwords of the contemporary
crop of reformers. In fact they are--or would be if they or anyone else took them seriously--
preaching pure and unadulterated socialism. Businessmen who talk this way are unwitting
puppets of the intellectual forces that have been undermining the basis of a free society these past
decades. The discussions of the "social responsibilities of business" are notable for their

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analytical looseness and lack of rigor. What does it mean to say that "business" has
responsibilities? Only people have responsibilities. A corporation is an artificial person and in
this sense may have artificial responsibilities, but "business" as a whole cannot be said to have
responsibilities, even in this vague sense. The first step toward clarity in examining the doctrine
of the social responsibility of business is to ask precisely what it implies for whom Friedman
here suffers from the very malady he sees endemic in Discussions of the 'social responsibility'
point of view--analytical looseness and lack of rigor. In the first sentence, Friedman speaks of
social responsibilities, while in what follows he simply speaks of responsibility.

This is not a meaningless distinction, for implied in Friedman's argument is the notion that
because businesses are not moral persons, they cannot therefore have responsibilities. This is true
enough if Friedman were speaking of moral responsibility: since businesses are not moral
persons, they can have no moral responsibility. However, Friedman's argument lacks rigor in that
he never carefully distinguishes between moral and social responsibility. While it may be true
enough that institutions, including business, carry no moral responsibilities, one cannot conclude
from their lack of moral personhood that institutions have no social responsibilities. In The
Elements of Moral Philosophy, Rachels provides readers with a useful definition of social
contract theory: "Morality consists in the set of rules, governing how people are to treat one
another that rational people will agree to accept, for their mutual benefit, on the condition that
others follow those rules as well." While seeming to deal only with the actions of persons, the
notion of the social contract can easily and legitimately be extended to institutions as well. If, for
example,

one of these contractual rules were that individuals not knowingly harm one another, this
dimension of the social contract would be in force within society at large--and would place
legitimate social (although not necessarily moral, in spite of the first word in Rachel’s'
definition)responsibilities on the conduct of business by owners and managers alike. Presumably,
the individuals who are to be responsible are businessmen, which mean individual proprietors or
corporate executives. Most of the discussion of social responsibility is directed at corporations,
so in what follows I shall mostly neglect the individual proprietors and speak of corporate
executives. In a free-enterprise, private-property system, a corporate executive is an employee of
the owner of the business. He has direct responsibility to his employers. That responsibility is to
conduct the business in accordance with their desires, which generally will be to make as much
money as possible while conforming to their basic rules of the society, both those embodied in
law and those embodied in ethical custom. Of course, in some cases his employers may have a
different objective. A group of persons might establish a corporation for an eleemosynary
purpose--for example, hospital or a school. The manager of such a corporation will not have
money profit as his objectives but the rendering of certain services. In either case, the key point
is that, in his capacity as a corporate executive, the manager is the agent of the individuals who
own the corporation or establish the eleemosynary institution, and his primary responsibility is to
them.

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Q. 5. Define corporate governance. Discuss the nature, evolution and mechanism of
corporate governance practices in the business word?

Corporate governance broadly refers to the mechanisms, processes and relations by which
corporations are controlled and directed. Governance structures identify the distribution of rights
and responsibilities among different participants in the corporation (such as the board of
directors, managers, shareholders, creditors, auditors, regulators, and other and includes
stakeholder) the rules and procedures for making decisions in corporate affairs. Corporate
governance includes the processes through which corporations' objectives are set and pursued in
the context of the social, regulatory and market environment. Governance mechanisms include
monitoring the actions, policies and decisions of corporations and their agents. Corporate
governance practices are affected by attempts to align the interests of stakeholders. Interest in the
corporate governance practices of modern corporations, particularly in relation to accountability,
increased following the high-profile collapses of a number of large corporations during 2001–
2002, most of which involved accounting fraud; and then again after the recent financial crisis in
2008. Corporate scandal of various forms has maintained public and political interest in the
regulation of corporate governance.

Definitions

Corporate governance has also been more narrowly defined as "a system of law and sound
approaches by which corporations are directed and controlled focusing on the internal and
external corporate structures with the intention of monitoring the actions of management and
directors and thereby, mitigating agency risks which may stem from the misdeeds of corporate
officers."

Mechanisms and controls

Corporate governance mechanisms and controls are designed to reduce the inefficiencies that
arise from moral hazard and adverse selection is both internal monitoring systems and external
monitoring systems. Internal monitoring can be done, for example, by one (or a few) large
shareholder(s) in the case of privately held companies or a firm belonging to a business group
Furthermore, the various board mechanisms provide for internal monitoring. External monitoring
of managers' behavior, occurs when an independent third party (e.g. the external Auditors attests
the accuracy of information provided by management to investors. Stock analysts and debt
holders may also conduct such external monitoring. An ideal monitoring and control system
should regulate both motivation and ability, while providing toward corporate goals and
objectives. Care should be taken that incentives are not so strong that some individuals are
tempted to cross lines of ethical behavior, for example by manipulating revenue and profit
figures to drive the share price of the company up.

Internal corporate governance controls

Internal corporate governance controls monitor activities and then take corrective action to
accomplish organizational goals. Examples include:

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 Monitoring by the board of directors: The board of directors, with its legal authority to
hire, fire and compensate top management, safeguards invested capital. Regular board
meetings allow potential problems to be identified, discussed and avoided. Whilst non-
executive directors are thought to be more independent, they may not always result in
more effective corporate governance and may not increase performance. Different board
structures are optimal for different firms. Moreover, the ability of the board to monitor
the firm's executives is a function of its access to information. Executive directors
possess superior knowledge of the decision-making process and therefore evaluate top
management on the basis of the quality of its decisions that lead to financial performance
outcomes, ex ante. It could be argued, therefore, that executive directors look beyond the
financial criteria.
 Internal control procedures and internal auditors: Internal control procedures are
policies implemented by an entity's board of directors, audit committee, management,
and other personnel to provide reasonable assurance of the entity achieving its objectives
related to reliable financial reporting, operating efficiency, and compliance with laws and
regulations. Internal auditors are personnel within an organization who test the design
and implementation of the entity's internal control procedures and the reliability of its
financial reporting.
 Balance of power: The simplest balance of power is very common; require that the
President be a different person from the Treasurer. This application of separation of
power is further developed in companies where separate divisions check and balance
each other's actions. One group may propose company-wide administrative changes,
another group review and can veto the changes, and a third group check that the interests
of people (customers, shareholders, employees) outside the three groups are being met.
 Remuneration: Performance-based remuneration is designed to relate some proportion
of salary to individual performance. It may be in the form of cash or non-cash payments
such as shares and share option or other benefits. Such incentive schemes, however, are
reactive in the sense that they provide no mechanism for preventing mistakes or
opportunistic behavior, and can elicit myopic behavior.
 Monitoring by large shareholders and/or monitoring by banks and other large
creditors: Given their large investment in the firm, these stakeholders have the
incentives, combined with the right degree of control and power, to monitor the
management.

In publicly traded U.S. corporations, boards of directors are largely chosen by the President/CEO
and the President/CEO often takes the Chair of the Board position for him/herself (which makes
it much more difficult for the institutional owners to "fire" him/her). The practice of the CEO
also being the Chair of the Board is fairly common in large American corporations. While this
practice is common in the U.S., it is relatively rare elsewhere. In the U.K., successive codes of
best practice have recommended against duality.

External corporate governance controls

External corporate governance controls encompass the controls external stakeholders exercise
over the organization. Examples include:

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 competition
 debt covenants
 demand for and assessment of performance information (especially financial statement)
 government regulations
 managerial labor market
 media pressure
 takeovers

Q. 6. Ethisphare institute, USA has recently published a ranking of world’s most ethical
companies. out of 144 companies from 41 industries, all over the world there are two Indian
companies, Tata power and Wipro in this list. Taking this as a background, discuss the importance
of ethical practices for business corporations of today. Can being ethical be a good strategy for a
successful company? Justify your answer with relevant examples.

In 2015, there were as many as 132 honorees across 21 countries and five continents representing
over 50 industries. "Honorees not only promote ethical business standards and practices
internally, they exceed legal compliance minimums and shape future industry standards by
introducing best practices today"

According to Ethisphere Institute, “Wipro is one of the three IT services companies named in the
list this year. The other two firms are Japan's Ricoh Company and US-based Xerox Corporation.
Being featured in the list for the fourth consecutive year underscores Wipro's commitment to
leading ethical business standards and practices, ensuring long-term value to key stakeholders,
including customers, employees, suppliers, regulators and investors, the IT major said. Tata Steel
is one of the two companies named in the metal industry vertical, the other being US-based
Schnitzer Steel Industries. The other Tata Group Company Tata Power got featured in the energy
and utility (electrical) industry. The coveted list was dominated by US-based companies as out of
the 132 honorees as many as 100 firms were from that country.

The designation of "World's Most Ethical Companies" recognizes those organizations who truly
go beyond making statements about doing business "ethically". In 2015, there were as many as
132 honorees across 21 countries and five continents representing over 50 industries.

"Honorees not only promote ethical business standards and practices internally, they exceed legal
compliance minimums and shape future industry standards by introducing best practices today,"
Ethisphere Institute said. Wipro is one of the three IT services companies named in the list this
year. The other two firms are Japan's Ricoh Company and US-based Xerox Corporation.

Being featured in the list for the fourth consecutive year underscores Wipro's commitment to
leading ethical business standards and practices, ensuring long-term value to key stakeholders,
including customers, employees, suppliers, regulators and investors, the IT major said.

Tata Steel is one of the two companies named in the metal industry vertical, the other being US-
based Schnitzer Steel Industries. The other Tata Group Company, Tata Power, got featured in the
energy and utility (electrical) industry. The coveted list was dominated by US-based companies
as out of the 132 honorees as many as 100 firms were from that country.

These notes have been prepared by LJMBA


Wipro, a global information technology and consulting company, has reportedly been named as
the World's Most Ethical Company 2015.The list was prepared by the Ethisphere Institute and
recognized those organizations that have had a material impact on the way business is conducted
by fostering a culture of ethics and transparency at every level of the company. Wipro secured
the position for the fourth consecutive year and was one of the only three companies in the
Information Technology Services industry honored this year.

Speaking about this achievement, Anurag Behar, Chief Sustainability Officer, Wipro Ltd said,
"At Wipro ethics, integrity and responsible citizenship are a foundational first principle and at
the core of how we think and act. We are happy to be recognized by Ethisphere for the fourth
time in succession. We see this as a reaffirmation of what we stand for."

"The World's Most Ethical Companies embrace the correlation between ethical business practice
and improved company performance. These companies use ethics as a means to further define
their industry leadership and understand that creating an ethical culture and earning the World's
Most Ethical Companies recognition involves more than just an outward facing message or a
handful of senior executives saying the right thing," said Ethisphere's Chief Executive Officer,
Timothy Erblich."Earning this recognition involves the collective action of a global workforce
from the top down. We congratulate everyone at Wipro for this extraordinary achievement."

The World's Most Ethical Company assessment is based upon the Ethisphere Institute’s Ethics
Quotient(tm) (EQ) framework developed over years of research to provide a means to assess an
organization's performance in an objective, consistent and standardized way.

Q 7. Explain concept of Utilitarianism. Give suitable examples.

Utilitarianism: Utilitarianism is a normative ethical theory that places the locus of right and
wrong solely on the outcomes (consequences) of choosing one action/policy over other
actions/policies. As such, it moves beyond the scope of one's own interests and takes into
account the interests of others.

Bentham's Principle of Utility:

(1) Recognizes the fundamental role of pain and pleasure in human life.

(2) Approves or disapproves of an action on the basis of the amount of pain or pleasure brought
about i.e., consequences,

(3) Equates good with pleasure and evil with pain.

(4) Asserts that pleasure and pain are capable of quantification.

In measuring pleasure and pain, Bentham introduces the following criteria: INTENSITY,
DURATION, CERTAINTY (or UNCERTAINTY), and its NEARNESS (or FARNESS). He also

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includes its "fecundity" (will more of the same follow?) and its "purity" (its pleasure won't be
followed by pain & vice versa). In considering actions that affect numbers of people, we must
also account for its EXTENT.

John Stuart Mill adjusted the more hedonistic tendencies in Bentham's philosophy by
emphasizing

(1) It is not the quantity of pleasure, but the quality of happiness that is central to utilitarianism.

(2) The calculus is unreasonable qualities cannot be quantified (there is a distinction between
'higher' and 'lower' pleasures)

(3) Utilitarianism refers to "the Greatest Happiness Principle" -- it seeks to promote the
capability of achieving happiness (higher pleasures) for the most amounts of people (this is its
"extent").

Act and Rule Utilitarianism

We can apply the principle of utility to either PARTICULAR ACTIONS or GENERAL RULES.
The former is called "act-utilitarianism" and the latter is called "rule-utilitarianism."

Act-utilitarianism -- The principle of utility is applied directly to each alternative act in a


situation of choice. The right act is then defined as the one which brings about the best results (or
the least amount of bad results).

 Criticisms of this view point to the difficulty of attaining a full knowledge and certainly
of the consequences of our actions.
 It is possible to justify immoral acts using AU: Suppose you could end a regional war by
torturing children whose fathers are enemy soldiers, thus revealing the hide outs of the
fathers.

Rule-utilitarianism -- The principle of utility is used to determine the validity of rules of conduct
(moral principles). A rule like promise-keeping is established by looking at the consequences of
a world in which people broke promises at will and a world in which promises were binding.
Right and wrong are then defined as following or breaking those rules.

 Some criticisms of this position point out that if the Rules take into account more and
more exceptions, RU collapses into AU.
 More general criticisms of this view argue that it is possible to generate "unjust rules"
according to the principle of utility. For example, slavery in Greece might be right if it
led to an overall achievement of cultivated happiness at the expense of some mistreated
individuals.

Utilitarian Ethics Examples

Examples in Business

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If we delve deeper, we can see a lot of examples of utilitarianism in business and workplace. One
very good example is the airlines industry. We all know that business class passengers pay a
premium price to get all the luxuries of that class that the airline offers. Now, if you know the
huge difference between the price of an economy class ticket and a business class ticket, do you
think that the extra amenities that are being offered to the business class travelers, traveling for
the same amount of time as the economy class, really worth the exorbitant price? Now, once you
come to delve deeper into this, you'll realize that the premium price charged from the business
class travelers - the ones who can easily afford it - are actually used to ease out the burden of
deficit that the airline would have to bear if it is to allow the economy class passengers the
opportunity for air travel at a lower price. The principle also plays in case of discriminatory
pricing strategies of companies when pricing products for different customer segments having
different income levels.

Q8. Discuss the sources of ethical dilemma and the method of resolving the same. Give
example from own life experience.

Sources of ethical dilemma

1) Pressure to meet sales or profit goals

In this competitive environment there is a very pressure on employee to meet the sales and profit
and to achieve the target they started using unfair means.

2) Little or No recognition of Achievement

When the employee work hard and give good results but in return they did not get any
recognition, this made them dishonest and they stated to use unfair means.

3) Company Politics

Now-a-days politics become very common in any organization. These politics are also the reason
for the use of unfair practices in Indian organization.

4) Personal Financial Worries

In most the times poor financial condition also indulges a person to use unfair means to fulfill the
need.

5) Lack of Transparency and Accountability in the system

Due to lack of transparency in the system, person in the organization becomes very relax that if
they practices any unethical means they are not going to trace.

Methods of Resolving Ethical Dilemmas

1) Utility Approach

These notes have been prepared by LJMBA


This approach emphasizes the overall amount of goods that can be produce by an actions or a
decision. It judges that can be produced by an action or a decision. It judges actions, plans and
policies by their consequence. The primary objective of this approach is to provide the greatest
goods for the greatest number of people.

2) Human Rights Approach

This approach to ethics holds that human being have certain morale entitlements that
should be respected in all decisions. These entitlements guarantee an individual’s most
fundamental personal rights. Denying these rights to other person and group of failing to protect
their rights approach to ethical dilemmas holds that individuals are to be treated as valuable ends
in themselves.

3) Justices Approach

Under the justices approach decisions are based on equitable, fair, and impartial
distributions of benefit and costs among individual and groups. Justices is essentially a
conditions characterized by an equitable distributions of the benefits and burdens of working
together, according to some acceptable rule.

Examples of ethical dilemmas

1) Bribery

Bribery is a manipulative method where manager buys the power or the influence of
other person in order to satisfy need. Bribery is communally practices in India today and is
considered to be part of conducting everyday business. Bribery creates conflict of interest
between the person receiving bribe and his or her organization.

2) Coercion

Coercion is forcing a person to act in manner that is against his or her personal benefits. It
is an external force or a man made constraint created that compels the other to act against his free
will. It may be in the form of blackmail to an individual in an organization. It may be in the form
of a threat of blocking a promotion or loss of a job.

3) Conflict of Interest

In and organization, conflict of interest arises when manager as well as employee at any
level behave with private interest that are substantial enough to interfere with their job or duties.
This would result in the individual’s interest acting against the interest of owner.

9. How are Independent Directors in the Board, different from other directors? Discuss the
role of Independent Directors in ensuring good Corporate Governance.

These notes have been prepared by LJMBA


 How Independent Directors different from other directors.

 Apart from receiving director’s remuneration, does not have any material
pecuniary relationships or transactions with the company, its promoters,
its senior management or its holding company, its subsidiaries and
associated companies.
 Independent Directors are not related to promoters or management at the
board level, or one level below the board.
 Independent Directors are not a substantial shareholder of the company,
i.e., owning 2% or more of the block of the voting shares.
 An employee, Executive Director of nominee of any blank, financial
institution, corporations, who is normally called the ‘nominee directors’
will be excluded from the pool of directors in the determination of the
number of Independent Directors.
 Moreover, if an Executive in, says, company X, becomes an Non-
Executive Directors in another becomes company Y, while another
executive of the company Y becomes a Non-Executive Directors in
company X, then neither will be treated as an Independent Directors.

 Role of Independent Directors


1) Monitor and control the Chairman/Chief Executive, to provide an
international perspective.
2) Steer the company through a difficult or sensitive transition: sort-out the
conflicts for the managerial position in acquisition cases,
3) Bring specialist knowledge,
4)
5) Provide continuity, facilitate changes that encourage new ideas, and
6) Help in identifying alliances and acquisition; to help to maintain an ethical
climate and improve the status of the company among others.

Q10. The collapse of the World com, Tyco and Enron in US led to an important
piece of legislation which has drastically changed laws related to corporate
governance in US and all over the world. List and explain some of the important of
this Act. (Details of Sarbanes-Oxley Act) Q11 is related to SOX.

1) Represent the framework under which business decisions are taken Corporate
Governance represents the value framework, the ethical framework and the moral
framework under which business decisions are taken. Corporate governance calls for
three factors;
A) Transparency in decision making, Accountability which follows

These notes have been prepared by LJMBA


From transparency because responsibility could be fixed easily for actions
Taken or not taken, and
B) The accountability is for the safeguarding the interest of the stakeholders and
the investors in the organization.
2) Depends on the rules and practices
Good Corporate Governance depends on the rules and practices that govern the
relationship between the managers and the shareholders of company, as well as
stakeholders like employee, pensioners and local community. It ensures transparency,
fairness and accountability.
3) Key part of the contract
Good governance goes beyond common sense. It is a key part of the contract that
underpins economic growth in a market economy and public faith in the system.
4) Assurance to well-Functioning of the markets
The role of good governance and corporate responsibility in helping to assure the
well-functioning markets needed for economic growth and development cannot be
taken for granted.

Q 12. Define CGR and explain ICRA’s methodology for corporate governance rating
(CGR):

The corporate governance rating industry acts as a form of corporate oversight. These
companies provide an objective third-party analysis of corporate governance practices through
rating system designed to inform investors about management and how it stacks-up the
management at other companies.

ICRA’s Methodology for corporate governance rating

ICRA’s corporate governance rating is meant to indicate the relative level to which an
organization accepts and follows the codes and guidelines of corporate governance practices.
The following methodology was used by ICRA for corporate governance rating.

1) Ownership structure: The key issue analyzed is the extent to which dominant shareholder
are compromise minority interest. Extent of institutional shareholding, and pattern of
retail shareholding.
2) Governance structure and Management processed: The key issue analyzed are the extent
to which clearly defined governance arrangements are presents and followed,
appropriateness of the decision making process, and quality of information submitted to
the board.

These notes have been prepared by LJMBA


3) Stakeholder and relationship: The issues has analyzed include conduct of annual general
meeting and the extent of discloser at such meeting: procedures for transfer and
registration of share and payment of dividend history of penalties levied by regulators for
violation of statutory provisions.
4) Financial discipline: While discussing financial discipline ICRA says that the ultimate
objective of corporate governance is to maximize shareholder value to the extent that if
the company goes down in its governance record, no matter how excellent otherwise, will
mean nothing.
5) Ethical practice: ICRA’s analysis covers issue related to comprehensiveness of code of
ethics and integrity steps taken to effectively communicate the principle of corporate
ethics extent to which compliance with the codes and guidelines is monitored and extent
to which feedback system have been established to encourage whistle blowing.
6) Board structure and processes: ICRA’s CGR processes evaluate the board structure and
processes in relation to the following.
 Structural Aspects: It includes issue related to size of the board proportion of independent
directors other directorships held by the independent directors and mix of skill sets which
the independent directors bring to the board.
 Function of board Committees: Among the board committees, the audit committee is
clearly the most important in terms of scope of activities. The key aspects relating to the
effectiveness of audit committees as reviewed by ICRA includes composition of the
Audit committee deliberations at Audit committee meetings and Audit committee role’s
in the appointment of statutory auditors.
7) Transparency and disclosure:

The key parameters used to assess a company’s transparency and disclosure standards
include compliance with accepted accounting standards and comparison with industry best
practices.

Q13. Discuss roles and responsibilities of Directors. Which types of action you would like to
take to increase the standards of corporate governance in your business?

Role and responsibilities of Director

These notes have been prepared by LJMBA


 Establish an Organizational vision and mission: Organizations’ activities should be
consistent with its stated purpose and effectively work towards achieving its mission and
be committed to continual quality improvement .based on value of quality ,openness
,integrity ,responsibility and accountability board members and employees should can act
in the best interest of achieving the organization mission at all times.
 Giving strategic direction and advice: Board are in an excellent position provide input
and advice to the CEO and to the top management regarding the company‘s strategic
direction .they can contribute opinions, viewpoints and information that are not always
readily available to the company management.
 Overseeing strategy implementation and performance: The board plays a crucial role in
advising, evaluating and monitoring strategy implementation. The board can best monitor
strategy implementation by setting benchmarks to measure progress and by drawing on
objective sources of information.
 Developing and evaluating the CEO: The evaluation of CEO and top management team
is a very important activity of the board. In the rapidly changing environment, boards
need to be proactive in evaluating the performance of CEO and top management.
 Ensuring effective stakeholder relations: Directors serves as a communication links with
members and other involved in an organization. He also serves as a communication link
with the general public. Promote the organizations purpose, goals and objective
programmes and activities before the public to faster awareness, accomplishment and
opportunities for involvement.
 Risk mitigation: in management risk directions have a responsibility to owners to foresee
what could affect the organization and to make sure plans are in place that will minimize
the impact of events or changes that will have a negative effect.
 Procuring Resources: Financial resources, human resources, technological resources,
business relationship are the key resources that are essential to an organization’s success.
Board plays an important role in helping the organization in procuring the resources.

Action to increase standard of corporate governance

 Hold meetings: - Director should hold meetings amongst all those who have a share in
determining how he runs business. He should also consult managers who help keep

These notes have been prepared by LJMBA


business running smoothly because they will generally have their finger on the pulse of
the company.
 Create a manual:- Director should create a manual for governing company relation. The
manual should include information that clearly less out the expectation for those who
work for the company. Include manager and in will see their proper behaviour within the
company start the top rather than simply being impose on there. He should also provide
employees with an opportunity to contribute the company manual by having them
complete survey or offer suggestion.
 Disclose corporate rules:- Director should disclose rules to the general public. place this
on website so that anyone who want o learn about ethical behavior of organization can do
so .by placing the information the information out there in the public view he can
increase corporate responsibility by making himself and his company subject to public
scrutiny.
 Audit: - director should audit the behavior all those who work for the company. It should
be done on regular basis. He can hire external auditing or consulting farm to examine
corporate policy and behavior. Auditing the behavior of manager owners and employee
will make everyone responsible for following rules maintaining responsible behavior.

Q 14. Explain the Sarbanes-Oxley Act of 2002 for corporate governance.

The Sarbanes-Oxley act of 2002 is mandatory. All organization, large and small, must
comply. The Sarbanes-Oxley act came into force in July 2002 and introduced major
changes to the regulation of Corporate Governance and financial practice.

The Sarbanes-Oxley act is arranged into eleven titles, as far as compliance is concerned,
the most important section within these eleven titles are usually considered to be
302,401,404,409,802,and 906.

1. PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD:


Title 1 consists of nine sections and establishes the public company accounting oversight
board, to provide independent oversight of public accounting firms providing audit
service.

2. AUDITOR INDEPENDENCE:

These notes have been prepared by LJMBA


Title 2 consists of nine section and establish standards for external auditor independents
to limit conflicts of interest. It also addresses new auditor approval requirement, audit
partner rotation and auditor reporting requirements.

3. CORPORATE RESPONSIBILITY:
Title 3 consists of eight sections and mandates that senior executives take individual
responsibility for the accuracy and completeness of corporate financial reports. it defines
the interaction of external auditors and corporate audit committees, and specifies the
responsibility of corporate officers for the accuracy and validity of corporate financial
reports.

4. ENHANCED FINANCIAL DISCLOSURES:


Title 4 consists of nine sections. It describes enhanced reporting requirements for
financial transaction, including, off balance sheet transaction, performa figure and stock
transaction of corporate officers. It requires internal controls for assuring the accuracy of
financial reports and disclosure, and mandates both audits and reports on those controls.

5. ANALYST CONFLICTS OF INTEREST:


Title 5 consists of only one section, which includes measures designed to help to restore
investor confidence in the reporting of security analysts. It defines codes of conduct for
security analysts and requires disclosure of knowledge conflicts of interest.

6. COMMISSION RESOURCES AND AUTHORITY:


Title 6 consists of four sections and defines practices to restore investor confidence in
security analysts. It also defines the SECs authority to censure or bar securities.

7. STUDIES AND REPORTS:


Title 7 consists of five sections and required the comptroller general and the SEC to
perform various studies and reports their findings. Studies and reports include the effect
of consolidation of public accounting firms, the role of credit rating agencies in the
operation of securities markets, securities violation and enforcement actions, and whether
investment banks assisted Enron, global crossing and other to manipulate earnings and
confuse the true financial conditions.

8. CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY:


Title 8 consists of seven section and its also referred to as the corporate and criminal
fraud act of 2002. It describes specific criminal penalties for manipulation, destruction or
alteration of financial records or other interference with investigations, while providing
certain protection for whistle blowers.

These notes have been prepared by LJMBA


9. WHITE COLLA CRIME PENALTY ENHANCEMENT:
Title 9 consists of two sections. This section is also called the white collar crime penalty
enhancement act of 2002. This section increases the criminal penalties associated with
white collar crimes and conspiracies.

10. CORPORATE TAX RETURNS:


Title 10 consists of one section. Section 1001 states that the chief executive officers
should sign the company tax return.

11. CORPORATE FRAUD ACCOUNTABILITY:


Title 11 consists of seven sections. Section 1101 recommends a name for this title as
corporate fraud accountability act of 2002. It defines corporate fraud and records
tampering as criminal offence and joins those offences to specify penalties.

15. Explain Japanese model of corporate governance in details.

These notes have been prepared by LJMBA


appoints

Supervisory board

Provide
managers
Ratifies presidents
decision

presidents

Main
bank
consults

Executive managements

manages

company

owns

In Japanese model, the financial institutes has accrual role in governance. The shareholders and
the bank together appoint board of directors and the presidents.

The distinctive features are:

These notes have been prepared by LJMBA


 Inclusion of presidents who consult both supervisory board and the executive
management.
 Importance of the lending bank is highlighted.

Q. 16.Explain creative accounting and its role in business scandals.

Creative accounting means accounting practices that attempts to manage earning and other
aspects of corporate financial statement by staying within the letter of the rule contained in
accounting standards but with no intention of adhering to the spirit of these rules.

Company management may adopt method to dress up financial statement to show improved
performance. Accounting methods can have a significant impact on the balance sheet valuation
of an asset. Valuation methods for stocks, choice of depreciation method and decision on the
capitalization of expenses related to fixed assets can affect reported profits.

According to Kamal Naser, creative accounting is the transformation of financial accounting


figures from what they actually are to what prepares desire by taking advantages of the existing
rules and ignoring some or all of them.

According to Barnea et al., creative accounting is the deliberate dampening of fluctuation about
some level of earnings considered to be normal for the firm.

ROLE OF CREATIVE ACCOUNTING IN BUSINESS SCANDALS

SATYAM COMPUTER SERVICE LIMITED (2009)

On 7 january,2009, Mr. B. Ramalinga Raju, chairman computer service ltd. Admitted in a press
conference in Hyderabad to a 78000 million fraud weeks after in a bid to acquire the two maytas
firms failed. He also admitted that he had been cooking the books of satyam since 2001 to inflate
profits and cash flows and the maytas acquisition bid was an attempt to fill fictitious asset with
real once.

Satyam- A global organization

Satyam the fourth ranking company in the IT sector was founded by Mr. B.Ramalinga Raju on
24 June 1987 and Mr.Raju, a graduate from Ohio University, became founder. Since inception
the company had grown in terms of lines of business and subsidiaries and also in terms of
accounting numbers, over time its service included- application service, product and application
testing, product life cycle etc.

In financial term, Satyam displayed its report statement specula results in all key operating
parameters. Despite the companies reported best performance on all fronts, this was not reflected

These notes have been prepared by LJMBA


in its share price performance. He advised a review to see if the company is lacking in
communication front to the market.

Alleged possible processes and their impact

 Cooking the books of account-window-dressing, fudging or creative and fraudulent


accounting
 Information asymmetry-insider trading: and
 Corporate misgovernance

Enron:

The spectacular collapse of Enron in December 2001 has bought creative accounting once more
back on the agenda, center stage. Enron, at one time, was the seventh biggest U.S company.
However, from august 2000 its share price began to fall as a result of doubts about the strength
of its balance sheet and significant sales of shares by managers. Enron’s main business was to
supply and make in oil and gas throughout the world. Enron first made gains on investment in
technology and energy business followed by losses. Following these losses, Enron built up huge
debts, which have been estimated at $ 80 billons. From the accounts it was not obvious that these
liabilities existed. They were buried in rather complex legal jargon.

In order to manipulate income, to avoid reporting losses and keep its debts-off the group balance
sheet Enron set-up special purpose entities. Under U.S. regulations, if the SPEs were not
controlled by Enron and if outside equity capital controlled at least 30% of total assets then
Enron would not have to bring the SPEs into its group accounts. However, in other cases it is
alleged that control was held by Enron not by third parties and that Enron had provided third
parties with funds so that the 3% was not truly held independently.

Overall, therefore, Enron demonstrate that even well-known companies still indulge in creative
accounting.

17. Discuss managerial and ethical dilemmas at work and managing ethical problems.

A managerial ethical dilemma is a problem, situation or opportunity that requires an individual,


groups or organization to choose among several wrong or unethical actions at work place. There
is not simply one right or ethical choice in dilemmas only less unethical or illegal choice as
perceived by any and all stakeholders.

A constructive next step towards identifying and resolving ethical issues is to classify the issues
that are relevant to most business organizations. In the past, various companies only thought that
ethical issues in business are only a term used to define administrative rules and regulation that
everyone must adhere or a standards that must be followed. However, today, big and small
companies are now slowly realizing the importance of ethics in business that is crucial for them

These notes have been prepared by LJMBA


to succeed. A successful company must learn that confidence and respects of its customer are
vital to its business.

Manager are now held accountable for their own actions, as more and more people are now
demanding that they meet their social duty not just for their country, but most especially to their
customers, which are considered as their life and blood. An unsatisfied customer can definitely
hurt any company, something that no one would want to happen.

Fairness and honesty are big issue, a very complex dilemma especially if this will somehow hurt
business, since ethics are moral issues, thus making the decision that will have negative effect on
the company is going to be tough for the person who will be making the decision.

Ethical problems: If it is said or assured that behavior in organization is just because of some
wrong doers or some greedy people, some bad individuals who are always behind money, then
somewhere one would be wrong. Due to globalization, as companies deals with other countries
where cross culture diversify issues arise. Managers working in MNCs find it very difficulties to
standardize ethical standards as they do change as society change. Sometimes the decision
makers do not follow what they must follow as they have conflicts in individual values versus
organizational goals. Individual moral standards affects whole organization decision if they are
normally strong, ethical decision would be the outcomes.

If the decision makers who are greedy, look for shortcut routes to earn in earliest possible time,
they have an upper hand on the moral values, therefore ethically the decision process would be
corrupt. Competitive pressure is also the main cause which forces decision makers to choose
such path where they have to kill their moral, values and move on unethical path just to cope- up
with the competition. Poor decision without deep thinking of implication. Ambiguous situation
create problems which put the manager in dilemma as to which decision they should make and
follow.

18. Explain creative accounting and its role in business scandals.

Creative accounting means accounting practices that attempts to manage earning and other
aspects of corporate financial statement by staying within the letter of the rule contained in
accounting standards but with no intention of adhering to the spirit of these rules.

Company management may adopt method to dress up financial statement to show improved
performance. Accounting methods can have a significant impact on the balance sheet valuation
of an asset. Valuation methods for stocks, choice of depreciation method and decision on the
capitalization of expenses related to fixed assets can affect reported profits.

According to Kamal Naser, creative accounting is the transformation of financial accounting


figures from what they actually are to what prepares desire by taking advantages of the existing
rules and ignoring some or all of them.

These notes have been prepared by LJMBA


According to Barnea et al., creative accounting is the deliberate dampening of fluctuation about
some level of earnings considered to be normal for the firm.

ROLE OF CREATIVE ACCOUNTING IN BUSINESS SCANDALS

SATYAM COMPUTER SERVICE LIMITED (2009)

On 7 january,2009, Mr. B. Ramalinga Raju, chairman computer service ltd. Admitted in a press
conference in Hyderabad to a 78000 million fraud weeks after in a bid to acquire the two Maytas
firms failed. He also admitted that he had been cooking the books of satyam since 2001 to inflate
profits and cash flows and the Maytas acquisition bid was an attempts to fill fictitious asset with
real once.

Satyam- A global organization

Satyam the fourth ranking company in the IT sector was founded by Mr. B.Ramalinga Raju on
24 June 1987 and Mr.Raju, a graduate from Ohio University, became founder. Since inception
the company had grown in terms of lines of business and subsidiaries and also in terms of
accounting numbers, over time its service included- application service, product and application
testing, product life cycle etc.

In financial term, Satyam displayed, its report statement secular results in all key operating
parameters. Despite the companies reported best performance on all fronts, this was not reflected
in its share price performance. He advised a review to see if the company is lacking in
communication front to the market.

Alleged possible processes and their impact

 Cooking the books of account-window-dressing, fudging or creative and fraudulent


accounting
 Information asymmetry-insider trading: and
 Corporate misgovernance

Enron:

The spectacular collapse of Enron in December 2001 has bought creative accounting once more
back on the agenda, center stage. Enron, at one time, was the seventh biggest U.S Company.
However, from august 2000 its share price began to fall as a result of doubts about the strength
of its balance sheet and significant sales of shares by managers. Enron’s main business was to
supply and make in oil and gas throughout the world. Enron first made gains on investment in
technology and energy business followed by losses. Following these losses, Enron built up huge
debts, which have been estimated at $ 80 billons. From the accounts it was not obvious that these
liabilities existed. They were buried in rather complex legal jargon.

These notes have been prepared by LJMBA


In order to manipulate income, to avoid reporting losses and keep its debts-off the group balance
sheet Enron set-up special purpose entities. Under U.S. regulations, if the SPEs were not
controlled by Enron and if outside equity capital controlled at least 30% of total assets then
Enron would not have to bring the SPEs into its group accounts. However, in other cases it is
alleged that control was held by Enron not by third parties and that Enron had provided third
parties with funds so that the 3% was not truly held independently.

Overall, therefore, Enron demonstrate that even well-known companies still indulge in creative
accounting.

19. Discuss managerial and ethical dilemmas at work and managing ethical problems.

A managerial ethical dilemma is a problem, situation or opportunity that requires an individual,


groups or organization to choose among several wrong or unethical action at work place. There
is not simply one right or ethical choice in dilemmas only less unethical or illegal choice as
perceived by any and all stakeholders.

A constructive next step towards identifying and resolving ethical issues is to classify the issues
that are relevant to most business organizations. In the past, various companies only thought that
ethical issues in business are only a term used to define administrative rules and regulation that
everyone must adhere or a standards that must be followed. However, today, big and small
companies are now slowly realizing the importance of ethics in business that is crucial for them
to succeed. A successful company must learn that confidence and respects of its customer are
vital to its business.

Manager are now held accountable for their own actions, as more and more people are now
demanding that they meet their social duty not just for their country, but most especially to their
customers, which are considered as their life and blood. An unsatisfied customer can definitely
hurt any company, something that no one would want to happen.

Fairness and honesty are big issue, a very complex dilemma especially if this will somehow hurt
business, since ethics are moral issues, thus making the decision that will have negative effect on
the company is going to be tough for the person who will be making the decision.

Ethical problems:

If it is said or assured that behavior in organization is just because of some wrong doers or some
greedy people, some bad individuals who are always behind money, then somewhere one would
be wrong. Due to globalization, as companies deals with other countries where cross culture
diversify issues arise. Managers working in MNCs find it very difficulties to standardize ethical
standard as they do change as society change. Sometimes the decision makers do not follow what
they must follow as they have conflicts in individual values versus organizational goals.

These notes have been prepared by LJMBA


Individual moral standards affects whole organization decision if they are normally strong,
ethical decision would be the outcomes.

If the decision makers who are greedy, look for shortcut routes to earn in earliest possible time,
they have an upper hand on the moral values, therefore ethically the decision process would be
corrupt. Competitive pressure is also the main cause which forces decision makers to choose
such path where they have to kill their moral, values and move on unethical path just to cope- up
with the competition. Poor decision without deep thinking of implication. Ambiguous situation
create problems which put the manager in dilemma as to which decision they should make and
follow.

20. Why ethical decision making is difficult? Analyze the step of ethical decision making.

Earlier this century there was a broad consensus about ethical decision making in
medicine. Ethical codes such as the Hippocratic Oath and its modern restatement The
Declaration of Geneva (1948) were broadly accepted by secular bodies and largely consistent
with the Bible. This is no longer the case.

Both medicine and society have changed dramatically over the last few decades in ways that
have made ethical decision-making much more complicated than before.

First, medical knowledge and technology have advanced astronomically. The general
practitioner managing a case of lobar pneumonia at the turn of the century did not have to make a
decision about whether or not to give antibiotics. There weren't any. We now have surgical
operations for the patient with an aortic aneurysm, ventilators for the premature infant with
respiratory distress and phenothiazines for the schizophrenic, and we have to decide whether to
use them.

Second, because of the influence of the mass media, medical knowledge is less and less secret
and more and more public property. An increasingly educated public knows what technology is
available and is demanding it. This increased scrutiny is making our decisions more visible and
our practice more accountable.

Third, the specialization that has resulted from the increase in knowledge and technology
available has meant a move to team decision-making. The solitary doctor at the bedside has
been replaced by a team of subspecialists, a hierarchy of medical staff, a host of paramedical
specialties and a vast array of technical and management personnel - each expert in his or her
own small field.

Fourth, financial and resource constraints in the face of rapidly advancing knowledge and
technology have meant that we have more acute decisions of resource allocation to make. What

These notes have been prepared by LJMBA


should our priorities be - heart transplants or hypertension, ventilators or venereal disease,
geriatrics or gene therapy?

Finally, and most importantly, all this is taking place in a moral vacuum. We live in a post-
Christian society where there is no agreement on the underlying basis for decision-making. The
plurality of religious traditions, cultural backgrounds, world-views and ideologies makes any real
consensus impossible.

These factors have combine to create a minefield of ethical conflicts for Christian health
professionals. Every new advance in knowledge and technology creates new dilemmas and our
patients have higher expectations. We have to make our decisions in an atmosphere of increasing
financial constraint, increasing public scrutiny and in consultation with those who increasingly
do not share our faith.

Tolerance is paraded as the supreme virtue in such an ethical environment but tolerance of
mutually contradictory views is both ludicrous and unworkable when decisions have to be made.
It's simply impossible to please all of the people all of the time - so one view ends up prevailing.

In practice, the secular humanist world-view has become dominant and ethical codes have
become increasingly 'politically correct'. Over the last few years traditional codes have been
amended and new ones drafted to reflect the new ideology. The World Medical Association has
moved quickly to endorse them.

THE STEPS OF THE ETHICAL DECISION MAKING PROCESS

1. Gather the facts

2. Define the ethical issues

3. Identify the affected parties (stakeholders)

4. Identify the consequences

5. Identify the obligations (principles, rights, justice)

6. Consider your character and integrity

7. Think creatively about potential actions

8. Check your gut

9. Decide on the proper ethical action and be prepared to deal with opposing arguments.

1 - GATHER THE FACTS

These notes have been prepared by LJMBA


 Don’t jump to conclusions without the facts
 Questions to ask: Who, what, where, when, how, and why.
 However, facts may be difficult to find because of the uncertainty often found around
ethical issues
 Some facts are not available
 Assemble as many facts as possible before proceeding
 Clarify what assumptions you are making!

2 – DEFINE THE ETHICAL ISSUE(S)

 Don’t jump to solutions without first identifying the ethical issue(s) in the
situation.
 Define the ethical basis for the issue you want to focus on.
 There may be multiple ethical issues – focus on one major one at a time.

3 – IDENTIFY THE AFFECTED PARTIES

 Identify all of the stakeholders


o Who are the primary or direct stakeholders?
o Who are the secondary or indirect stakeholders?
 Why are they stakeholders for the issue?
o Perspective-taking -- Try to see things through the eyes of those individuals
affected

4 – IDENTIFY THE CONSEQUENCES

 Think about potential positive and negative consequences for affected parties by
the decision (Focus on primary stakeholders to simplify analysis until you become
comfortable with the process).
 What are the magnitude of the consequences and the probability that the
consequences will happen.
 Short term vs. Long term consequences – will decision be valid over time.
 Broader systemic consequences – tied to symbolic and secrecy
 Symbolic consequences – Each decision sends a message.
 Secrecy consequences – What are the consequences if the decision or
action becomes public?
 Did you consider relevant cognitive barriers/biases?
 Consider what your decision would be based only on consequences – then move
on and see if it is similar given other considerations.

5 – IDENTIFY THE RELEVANT PRINCIPLES, RIGHTS, AND JUSTICE ISSUES

 Obligations should be thought of in terms of principles and rights involved

These notes have been prepared by LJMBA


o A) What obligations are created because of particular ethical principles you might
use in the situation?
 Examples: Do no harm; Do unto others as you would have them do unto you; Do what
you would have anyone in your shoes do in the given context.
o B) What obligations are created because of the specific rights of the stakeholders?
o What rights are more basic vs. secondary in nature? Which help protect an
individual’s basic autonomy?
o What types of rights are involved – negative or positive?
o C) What concepts of justice (fairness) is relevant – distributive or procedural
justice?
 Did you consider any relevant cognitive barriers/biases?
 Formulate the appropriate decision or action based solely on the above analysis of these
obligations.

6 – CONSIDER YOUR CHARACTER & INTEGRITY

 Consider what your relevant community members would consider to be the kind of decision
that an individual of integrity would make in this situation.
 What specific virtues are relevant in the situation?
 Disclosure rule – what would you do if the New York Times reported your action and
everyone was to read it.
 Think about how your decision will be remembered when you are gone
 Did you consider any relevant cognitive biases/barriers?
 What decision would you come to based solely on character considerations?

7 – THINK CREATIVELY ABOUT POTENTIAL ACTIONS

 Be sure you have not been unnecessarily forced into a corner


 You may have some choices or alternatives that have not been considered
 If you have come up with solutions “a” and “b,” try to brainstorm and come up with a
“c” solution that might satisfy the interests of the primary parties involved in the
situation.

8 – CHECK YOUR GUT

 Even though the prior steps have argued for a highly rational process, it is always good to
“check your gut.”
 Intuition is gaining credibility as a source for good decision making – knowing
something is not “right.” Particularly relevant if you have a lot of experience in the area –
expert decision-making.

These notes have been prepared by LJMBA


9 – DECIDE ON YOUR COURSE OF ACTION AND PREPARE RESPONSES TO THOSE
WHO MAY OPPOSE YOUR POSITION

 Consider potential actions based on the consequences, obligations, and character


approaches.
 Do you come up with similar answers from the different perspectives?
 Do the obligation and character help you “check” the consequentiality preferred action?
 How can you protect the rights of those involved (or your own character) while still
maximizing the overall good for all of the stakeholders?
 What arguments are most compelling to you to justify the action ethically? How will you
respond to those with opposing viewpoints?

21. Briefly state OECD principle of corporate governance.

OECD Principles of Corporate Governance:-

The Organization of Economic Cooperation and Development released its first set of corporate
governance principles in 1999. A revised version was then released in 2004.
The principles were developed and endorsed by the ministers of OECD member countries in
order to help OECD and Non-OECD governments in their efforts to create legal and regulatory
frameworks for corporate governance in their countries.
The six OECD Principles are:

 Ensuring the basis of an effective corporate governance framework


 The rights of shareholders and key ownership functions
 The equitable treatment of shareholders
 The role of stakeholders in corporate governance
 Disclosure and transparency
 The responsibilities of the board

Ensure the basis of an effective corporate governance framework

The corporate governance framework should promote transparent and efficient markets,
be consistent with the rule of law and clearly articulate the division of responsibilities among
different supervisory, regulatory and enforcement authorities.
The rights of shareholders and key ownership functions

The corporate governance framework should protect and facilitate the exercise of
shareholders’ rights.
Basic shareholder rights should include the right to:

1. Secure methods of ownership registration;


2. Convey or transfer shares;

These notes have been prepared by LJMBA


3. Obtain relevant and material information on the corporation on a timely and regular
basis;
4. Participate and vote in general shareholder meetings;
5. Elect and remove members of the board; and
6. Share in the profits of the corporation.

The equitable treatment of shareholders

The corporate governance framework should ensure the equitable treatment of all shareholders,
including minority and foreign shareholders. All shareholders should have the opportunity to
obtain effective redress for violation of their rights. The principles also state that:

 All shareholders of the same series of a class should be treated equally


 Insider trading and abusive self-dealing should be prohibited
 Members of the board and key executives should be required to disclose to the board
whether they, directly, indirectly or on behalf of third parties, have a material interest in
any transaction or matter directly affecting the corporation

22. Briefly state Narayan Murthy Committee Report on corporate governance

Ans. With the belief that the efforts to improve corporate governance standards in India must
continue because these standards themselves were evolving in keeping with the market
dynamics, the Securities and Exchange Board of India (SEBI) had constituted a Committee on
Corporate Governance in 2002 , in order to evaluate the adequacy of existing corporate
governance practices and further improve these practices. It was set up to review Clause 49, and
suggest measures to improve corporate governance standards.

The SEBI Committee was constituted under the Chairmanship of Shri N. R. Narayana Murthy,
Chairman and Chief Mentor of Infosys Technologies Limited. The Committee comprised
members from various walks of public and professional life. This included captains of industry,
academicians, public accountants and people from financial press and industry forums.

The terms of reference of the committee were to:

 review the performance of corporate governance; and


 Determine the role of companies in responding to rumor and other price sensitive
information circulating in the market, in order to enhance the transparency and integrity
of the market.

The issues discussed by the committee primarily related to audit committees, audit reports,
independent directors, related parties, risk management, directorships and director compensation,
codes of conduct and financial disclosures.

These notes have been prepared by LJMBA


The committee's recommendations in the final report were selected based on parameters
including their relative importance, fairness, and accountability, and transparency, ease of
implementation, verifiability and enforceability.

The key mandatory recommendations focused on:

 strengthening the responsibilities of audit committees;


 improving the quality of financial disclosures, including those related to related party
transactions and proceeds from initial public offerings;
 requiring corporate executive boards to assess and disclose business risks in the annual
reports of companies;
 introducing responsibilities on boards to adopt formal codes of conduct; the position of
nominee directors; and
 Stock holder approval and improved disclosures relating to compensation paid to non-
executive directors.

Non-mandatory recommendations included:

 moving to a regime where corporate financial statements are not qualified;


 instituting a system of training of board members; and
 Evaluation of performance of board members.

As per the committee, these recommendations codify certain standards of 'good governance' into
specific requirements, since certain corporate responsibilities are too important to be left to lose
concepts of fiduciary responsibility. Their implementation through SEBI's regulatory framework
will strengthen existing governance practices and also provide a strong incentive to avoid
corporate failures.

The Committee noted that the recommendations contained in their report can be implemented by
means of an amendment to the Listing Agreement, with changes made to the existing clause 49.

The Narayana Murthy committee on corporate governance also discussed reports brought out
from time to time by security analysts and the media, specially the financial press.

As for reports of security analysts, the committee has desired SEBI to make rules for:

* Disclosure whether the company that is being written about is a client of the analyst's employer
or an associate of the analyst's employer, and the nature of services rendered to such company, if
any

* Disclosure whether the analyst or the analyst's employer or an associate of the analyst's
employer hold or held (in the 12 months immediately preceding the date of the report) or intend
to hold any debt or equity instrument in the issuer company that is the subject matter of the
report of the analyst.

These notes have been prepared by LJMBA


Regarding scrutiny of the media, particularly the financial press, it has observed the committee
considered views expressed by members.

The Press Council of India has prescribed a code of conduct for the financial media. However,
verifying adherence to the code is difficult. A detailed review by SEBI on the subject is
desirable, keeping in mind issues such as transparency and disclosures, conflicts of interest, etc.
before making any rule. SEBI should consider having a discussion with the representatives of the
media, specially the financial press.

Q. 23. Explain the role of SEBI in corporate governance.

Established in 1992, the Securities Exchange Board of India is essential to corporate governance
of India's securities market, as it serves as the central body that ensures investors are protected
and the securities market is regulated

Origins :SEBI was formed after the Indian Parliament passed the Securities and Exchange
Board of India Act, 1992 in response to the Financial Services Assessment Programme, a
program developed by the World Bank and International Monetary Fund that observes and
reports on global financial systems. The Indian government wanted to establish a strong financial
atmosphere and securities market with a regulator promoting the latest in corporate governance
standards.

Functions; SEBI sets governance standards in which the securities market must operate,
protecting the rights of issuers and investors. SEBI has power to investigate circumstances where
the market or its players have been harmed and can enforce governance standards with
directives. An appeal process in place ensures accountability and transparency. SEBI may
terminate from the securities list any company that does not comply with its governance
standards and regulations.
The Securities and Exchange Board of India (SEBI) is likely to enact a new regulation to
incorporate various provisions in the new Companies Bill. In order to beef up corporate
governance practice among companies, the Companies Bill stipulates strict guidelines on
appointment of independent directors, related party transactions, class action suits, and corporate
social responsibility (CSR) spends.

According to sources, instead of a piece-meal approach, Sebi could detail various provisions
pertaining to corporate governance through a new regulation. Although the Companies Act is
independent of the SEBI Act, the market regulator has the jurisdiction to prescribe norms related
to corporate governance for listed companies.

These notes have been prepared by LJMBA


During the start of the year, SEBI had issued a consultative paper to review the corporate
governance norms in the country. The paper was aimed at realigning corporate governance
practices under Clause 49 of the listing agreement and, in some places, imposing even stringent
conditions than those in the Companies Act. Most of the proposals in the discussion paper are
likely to be accepted, sources said.

These new regulations will give minority shareholders a bigger say in certain decision-making
processes of listed companies. The discussion paper had proposed giving the power to minority
shareholders to appoint at least one independent director in a company. It also suggested related
party transactions by listed companies should obtain shareholders’ approval and that affirmative
rights can’t be given to private investors or financial institutions.

Some of the other path-breaking proposals included regulatory support to class action suits and
mandatory rotation of audit partner. Another proposal calls for greater participation of
institutional investors by asking them to have a clear policy on voting and managing conflict of
interest.

SEBI’S ROLE IN THE NEW ERA

In the changed environment of the Indian economy, when after more than four decades of heavy
regulation and anemic growth, with the government slowly opening the economy to market
forces, and promoting modification of financial institutions, SEBI has to play a proactive role as
a capital market regulator. SEBI’s performance has to be judged in the context of its efficiency in
this dynamic environment.

The SEBI has made progress in a number of areas:

o Abolition of capital issues control and retaining the sole authority for new capital
issues.
o Regulation and reform of the capital market by arming itself with necessary authority
and powers.
o Regulating stock exchanges under Securities Contracts Regulation Act.

SEBI’S ROLE IN PROMOTING CORPORATE GOVERNANCE

G. N. Bajpai, former Chairman, Securities and Exchange Board of India, claimed in an


international conference in 2003: ‘With the objective of improving market efficiency, enhancing
transparency, preventing unfair trade practices and bringing the Indian market up to international
standards, a package of reforms consisting of measures to liberalize, regulate and develop the
securities market was introduced in the 1990s. The practice of allocation of resources among
different competing entities as well as its terms by a central authority was discontinued. The

These notes have been prepared by LJMBA


issuers complying with the eligibility criteria now have freedom to issue the securities at market-
determined rates.

24. Define corporate governance. Also explain its importance & mechanism.

Definition:-The system of rules, practices and processes by which a company is directed and
controlled. Corporate governance essentially involves balancing the interests of the many
stakeholders in a company - these include its shareholders, management, customers, suppliers,
financiers, government and the community.

 The Importance of Effective Corporate Governance

Since 2009, chair of a Federal Reserve System group known as the Community Banking
Organization Management Group (CBOMG). This group was established a number of years
ago to promote consistent and effective implementation of supervision programs and policies
for community banking organizations. Members of the CBOMG include senior leaders with
responsibility for community bank supervision from each of the Reserve Banks and the
Board of Governors. The group meets regularly to share information about banking
conditions and emerging risks. It also provides a platform for promoting best practices and
enhancing communication and coordination within the Federal Reserve System, as well as
with our federal and state banking supervision partners.

As the senior vice president of the Supervision and Risk Management Division at the Federal
Reserve Bank of Kansas City and the current chair of the CBOMG, I have had a unique
opportunity to observe how the financial crisis affected community banks and gain an
appreciation for some of the causes of the crisis.

Simply stated, the recent financial crisis was fueled largely by the housing boom. Consumers,
small businesses, and financial institutions took on excessive leverage to finance this growth.
When economic conditions changed dramatically, many consumers and small businesses
defaulted on their loans, and the largest banks faced severe liquidity constraints and a loss of
market confidence, in large part due to their involvement in securitization and derivatives

These notes have been prepared by LJMBA


markets. Meanwhile, a number of community banks with large exposures in land and
construction lending suffered severe losses and failed. So what went wrong for these banking
organizations? In short, I would argue that the boards of directors of many of these banks were
not sufficiently engaged or informed to question the adequacy of capital and risk management
programs needed to enable their banks to weather a prolonged downturn.

The crisis therefore demonstrated that one consequence of a bank having weak corporate
governance — the framework of rules and practices set by the board to ensure that the bank
operates in a safe and sound manner — could be significant losses or even bank failure. The
board of directors not only helps lay out the bank's risk limits and strategic goals but provides
oversight as well. For that reason, I would like to spend the rest of this article talking about this
important topic

 Mechanism:-

Internal Mechanism
The foremost sets of controls for a corporation come from its internal mechanisms. These
controls monitor the progress and activities of the organization and take corrective actions when
the business goes off track. Maintaining the corporation's larger internal control fabric, they
serve the internal objectives of the corporation and its internal stakeholders, including
employees, managers and owners. These objectives include smooth operations, clearly defined
reporting lines and performance measurement systems. Internal mechanisms include oversight of
management, independent internal audits, structure of the board of directors into levels of
responsibility, segregation of control and policy development.

External Mechanism
External control mechanisms are controlled by those outside an organization and serve the
objectives of entities such as regulators, governments, trade unions and financial institutions.
These objectives include adequate debt management and legal compliance. External mechanisms
are often imposed on organizations by external stakeholders in the forms of union contracts or
regulatory guidelines. External organizations, such as industry associations, may suggest
guidelines for best practices, and businesses can choose to follow these guidelines or ignore

These notes have been prepared by LJMBA


them. Typically, companies report the status and compliance of external corporate governance
mechanisms to external stakeholders.

Q. 25. Explain role of SEBI in corporate governance.

Definition:-The system of rules, practices and processes by which a company is directed and
controlled. Corporate governance essentially involves balancing the interests of the many
stakeholders in a company - these include its shareholders, management, customers, suppliers,
financiers, government and the community.

The role of corporate governance:-Established in 1992, the Securities Exchange Board of


India is essential to corporate governance of India's securities market, as it serves as the central
body that ensures investors are protected and the securities market is regulated.

Governance Corporate governance is the manner in which companies or market systems


operate, including the rules, regulations, policies and standards for accountability, transparency
and general corporate integrity.

Origins
SEBI was formed after the Indian Parliament passed the Securities and Exchange Board of India
Act, 1992 in response to the Financial Services Assessment Programme, a program developed by
the World Bank and International Monetary Fund that observes and reports on global financial
systems. The Indian government wanted to establish a strong financial atmosphere and securities
market with a regulator promoting the latest in corporate governance standards

Q. 26. Briefly explain Kohlberg’s six stage of moral development.

Level 1. Pre-convention Morality

 Stage 1 - Obedience and Punishment

The earliest stage of moral development is especially common in young children, but
adults are also capable of expressing this type of reasoning. At this stage, children see
rules as fixed and absolute. Obeying the rules is important because it is a means to avoid
punishment.

 Stage 2 - Individualism and Exchange

At this stage of moral development, children account for individual points of view and
judge actions based on how they serve individual needs. In the Heinz dilemma, children
argued that the best course of action was the choice that best-served Heinz’s needs is
possible at this point in moral development, but only if it serves one's own interests.

Level 2. Conventional Morality

These notes have been prepared by LJMBA


 Stage 3 - Interpersonal Relationships

Often referred to as the "good boy-good girl" orientation, this stage of moral development
is focused on living up to social expectations and roles. There is an emphasis on being
"nice," and consideration of how choices influence relationships.

 Stage 4 - Maintaining Social Order

At this stage of moral development, people begin to consider society as a whole when
making judgments. The focus is on maintaining law and order by following the rules,
doing one’s duty and respecting authority.

Level 3. Post conventional Morality

 Stage 5 - Social Contract and Individual Rights

At this stage, people begin to account for the differing values, opinions, and beliefs of
other people. Rules of law are important for maintaining a society, but members of the
society should agree upon these standards.

 Stage 6 - Universal Principles

Kohlberg’s final level of moral reasoning is based upon universal ethical principles and
abstract reasoning. At this stage, people follow these internalized principles of justice,
even if they conflict with laws and rules.

Q. 27. Write a brief note on recommendation of Narayanmurthy committee


report on corporate governance.
N.R Narayan Murthy Committee
With the belief that the efforts to improve corporate governance standards in India must continue
because these standards themselves were evolving in keeping with the market dynamics, the
Securities and Exchange Board of India (SEBI) had constituted a Committee on Corporate
Governance in 2002 , in order to evaluate the adequacy of existing corporate governance
practices and further improve these practices. It was set up to review Clause 49, and suggest
measures to improve corporate governance standards.

The SEBI Committee was constituted under the Chairmanship of Shri N. R. Narayana Murthy,
Chairman and Chief Mentor of Infosys Technologies Limited. The Committee comprised
members from various walks of public and professional life. This included captains of industry,
academicians, public accountants and people from financial press and industry forums.

The terms of reference of the committee were to:

These notes have been prepared by LJMBA


 review the performance of corporate governance; and
 determine the role of companies in responding to rumor and other price sensitive
information circulating in the market, in order to enhance the transparency and integrity
of the market.

The issues discussed by the committee primarily related to audit committees, audit reports,
independent directors, related parties, risk management, directorships and director compensation,
codes of conduct and financial disclosures.

The committee's recommendations in the final report were selected based on parameters
including their relative importance, fairness, and accountability, and transparency, ease of
implementation, verifiability and enforceability.

The key mandatory recommendations focused on:

 strengthening the responsibilities of audit committees;


 improving the quality of financial disclosures, including those related to related party
transactions and proceeds from initial public offerings;
 requiring corporate executive boards to assess and disclose business risks in the annual
reports of companies;
 introducing responsibilities on boards to adopt formal codes of conduct; the position of
nominee directors; and
 stock holder approval and improved disclosures relating to compensation paid to non-
executive directors.

Non-mandatory recommendations included:

 moving to a regime where corporate financial statements are not qualified;


 instituting a system of training of board members; and
 Evaluation of performance of board members.

As per the committee, these recommendations codify certain standards of 'good governance' into
specific requirements, since certain corporate responsibilities are too important to be left to lose
concepts of fiduciary responsibility. Their implementation through SEBI's regulatory framework
will strengthen existing governance practices and also provide a strong incentive to avoid
corporate failures.

The Committee noted that the recommendations contained in their report can be implemented by
means of an amendment to the Listing Agreement, with changes made to the existing clause 49.

Q. 28. Silent feature of corporate governance practice in India.

Features are as follow:

These notes have been prepared by LJMBA


1. Transparency :

This means that the Board of Directors must release all relevant information to the
stakeholders. They must show all the necessary financial and operational data to the
stakeholders. They must not hide any important information or maintain any secrecy.

2. Protection of Shareholders' Rights :

The Board of Directors must protect the rights of the stakeholders. They must protect all
the stakeholders, especially the minority stakeholders.

3. More Powers to CEO :

The CEO must be given more powers so that he can approve the company’s plans and
strategies independently.

4. Accountability :

The CEO and the Board of Directors must be made accountable for their actions to the
stakeholders and to the entire society.

5. Based on Ethics :

Corporate governance is based on ethics, moral principles and values. So, the Board of
directors must avoid unfair practices, cheating, exploitation, etc.

6. Universal Application :

Corporate governance has universal application. That is, it is used by companies all over
the world. It is given a legal recognition in many countries. All companies must use
corporate governance voluntarily.

7. Systematic :

Corporate governance is very systematic. It is based on laws, procedures, practices,


rules, etc. All these laws are made to increase the wealth of the shareholders and to
protect the rights of all the stakeholders of the company.

Q. 29. Discusses the dimensions of ethical leadership.

Introduction: -

 Leaders can use power (as we discussed in topic) for good or ill, and the leader’s personal
values may be one of the most important determinants of how power is exercised or
constrained.

These notes have been prepared by LJMBA


 The mere possession of power, of any kind, leads inevitably to ethical questions about
how that power should and should not be used.

 The challenge of leadership becomes complex when we consider how individuals of


different backgrounds, cultures, and nationalities may hold quite different values yet be
thrown into increasingly closer interaction.

What is ethical leadership?

Ethical leadership is leadership that is directed by respect for ethical beliefs and values and for
the dignity and rights of others. It is thus related to concepts such as trust, honesty, consideration,
charisma and fairness.

Let’s start with some definitions. Ethics are the principles, values and beliefs that define what is
right and wrong behavior. Leadership is the process of influencing others to achieve goals. Thus,
we can define ethical leadership as the process of influencing people through principles, values
and beliefs that embrace what we have defined as right behavior.

For example:

Susan is the director of an organization that provides services to people who are homeless. One
day several boxes of stylish new sweaters are donated to the organization from a popular
clothing store. The staff is very excited and starts sorting through the clothes and trying on
different sweaters. An unethical leader will allow her and the staff to select what they want from
the boxes before making them available to clients. An ethical leader reminds everyone, including
her, that the donations were intended for clients and makes the sweaters immediately available to
the people they serve.

Ethical Leadership dimensions can be categorized in following ways: -

In this section, we present five principles that are believed to lead to the development of ethical
leadership. These are respect for others, service to others, justice for others, honesty toward
others, and building community with others.

Respect for Others

Ethical leaders treat others with dignity and respect. This means that they treat people as ends in
themselves rather than as means to their own ends. This form of respect recognizes that followers
have goals and ambitions and confirms followers as human beings who have worth and value to
the organization. In addition, it leads to empathy, active listening, and tolerance for conflicting
viewpoints.

Service to Others

These notes have been prepared by LJMBA


Ethical leaders serve others. They behave in an altruistic fashion as opposed to behaving in a
way that is based on ethical egoism. These leaders put followers first—their prime reason for
being is to support and nurture subordinates. Service to others is exemplified through behaviors
such as mentoring, building teams, and empowering (Kanungo & Mendonca, 1996).

Justice for Others

Ethical leaders ensure that justice and fairness are central parts of their decision making. This
means treating all subordinates in very similar ways, except when there is a very clear need for
differential treatment and there is transparency about why this need exists. In addition to being
transparent, the logic for differential treatment should be morally sound and reasonable.

Honesty toward Others

Ethical leadership requires honesty. Dishonesty destroys trust—a critical characteristic of any
leader–follower relationship. On the other hand, honesty increases trust and builds the leader–
follower relationship. Honesty means to be open with others by expressing our thinking and our
reality as fully as we can. This means balancing openness with disclosing only what is
appropriate in a given scenario.

Building Community with Others

Ethical leaders build community with others. This is crucial because leadership is about
influencing others to achieve a communal goal. This means that leaders develop organizational
or team goals that are appropriate for the leader and his or her followers. These goals need to
excite as many people as possible,
And ethical leaders achieve this by taking into account the goals of everyone in the team or
organization.

How Does Ethical Leadership Work?

We are hoping that this chapter will enable you to better understand yourself as you develop your
leadership skills, knowledge, and abilities. Use the thinking on ethical leadership in this chapter
as a guide in making your decisions. Remember that the relationship between you and your
followers is at the heart of ethical leadership and requires that you show sensitivity to others’
needs, treat others in a just manner, and have a caring attitude toward others. Being an ethical
leader will be easier if you entrench the following questions into your thinking

Is this the right and fair thing to do?

Is this what a good person would do?

Am I respectful to others?

Do I treat others generously?

These notes have been prepared by LJMBA


Am I honest toward others?

Am I serving the community?

Ethical leaders must be concerned with more than running their businesses. They must be
concerned with their employees, their customers, their suppliers, their communities, their
shareholders, and themselves. Leadership is influencing people to achieve communal goals;
ethical leadership is achieving those goals in a way that is fair and just to your employees, your
customers, your suppliers, your communities, your shareholders, and yourselves

Q. 30. Explains the rights and duties of share holders: -

Shareholders meaning:-

The shareholders of a company are its financial supporters; they provide finance to a company
by purchasing shares in it, and through this become shareholders. This gives them certain rights
as shareholders; they also have roles and duties to adhere to, which are set out in the Companies
Act 2006 (or Companies Act relevant to the date that the company was formed). As shareholders
of a company, they are protected from liabilities as the company is ‘limited’. Shareholders may
or may not be directors of the company also. Whilst directors are in charge of running the day to
day business of the company and making decisions, the shareholders have a few specific roles
and duties to ensure they ultimately have control over the company.

Roles of the Shareholders:-

Major decisions which would have an effect on the shareholders’ rights are usually required,
through the Companies Act 2006, to be approved by the shareholders at a general meeting called
by the directors of the company.

Only certain acts can be done by the shareholders such as; removing a director from office,
changing the name of the company, or authorising a service contract for a director which gives
him job security for more than two years. In general, shareholders have little power over the
directors and how they run the company, but their main role is to attend meeting and discuss
whatever is on the agenda to ensure the directors do not go beyond their powers.

General Meetings: -

To fulfil the role of being a shareholder, a shareholder may require a general meeting to be called
rather than simply have all decisions made through written resolutions. The directors will in fact
call a general meeting, despite not being able to vote at the meeting, as this duty is solely for the
shareholders. However, it is quite possible that directors will be shareholders as well and so will
vote in the board meetings for directors and in the general meetings for shareholders. The
directors may call a general meeting at any time for any reason and are entitled to attend and
speak as are the shareholders.

These notes have been prepared by LJMBA


Annual General Meetings

There is no longer a statutory requirement to hold an annual general meeting if the company is a
private company, however the shareholders may request that one is held or the directors may call
an annual general meeting if desired. Commonly the date of such a meeting will be fixed from
year to year.

Under s.336 of the Companies Act 2006 public companies must hold an annual general meeting
six months after its accounting reference date. In small companies, it is often appropriate to have
an annual general meeting where the shareholders are not all directors. It provides the
shareholders the opportunity to review the company accounts and confront any directors with
regard to any decisions they have made.

The chairman of the meeting

There is a presumption that the chairman of the general meeting will usually be the same as the
chairman of the board meeting. His task is to supervise the meeting and keep the general
structure of it in order. The chairman will declare whether a resolution has passed or failed after
voting has taken place.

Duties of Shareholders : -

The main duty of shareholders is to pass resolutions at general meetings by voting through their
shareholder capacity. This duty is particularly important as it allows the shareholders to exercise
their ultimate control over the company and how it is managed. Shareholders can vote in one of
two ways: on a show of hands or through a poll vote where each vote will be proportionate to the
amount of shares held by each shareholder. A show of hands is usually the preferred method of
voting that takes place at general meetings.

There are two resolutions that can be voted on at a meeting: an ordinary resolution, or a special
resolution.

Ordinary Resolution

An ordinary resolution is passed by the shareholders if a simple majority of the shareholders


present at the meeting vote in favour of the proposal. Therefore more than 50% of the votes cast
will have to be favour, usually displayed through a show of hands.

Special Resolution

For a special resolution to be passed, a 75% majority must vote in favour. A special resolution is
only required if it is stated in statute or it is in the company’s articles, which suggest a special
resolution would have to be used for a particular vote rather than an ordinary resolution. If there
is no specific mention of what type of resolution should be used, the presumption is that an
ordinary resolution would be required.

These notes have been prepared by LJMBA


The chairman’s casting vote

The chairman does not have a casting vote in addition to any other vote he may have. The
casting vote only operates if, without it, the number of votes for and against the resolution is
equal. Where no chairman has been appointed by the company, the idea is that if there is
deadlock at the voting stage, the negative will prevail and the proposed resolution will fail.

31. Discusses the concept of creative accounting with appropriate examples.

 Various Definition and meaning of “Creative Accounting”

 The term 'creative accounting' can be defined in a number of ways. Initially we will offer
this definition: 'a process whereby accountants use their knowledge of accounting rules to
manipulate the figures reported in the accounts of a business'.

 Accounting practices that follow required laws and regulations, but deviate from what
those standards intend to accomplish. Creative accounting capitalizes on loopholes in the
accounting standards to falsely portray a better image of the company. Although creative
accounting practices are legal, the loopholes they exploit are often reformed to prevent
such behaviors.
 Creative Accounting refers to the use of accounting knowledge to influence the reported
figures, while remaining within the jurisdiction of accounting rules and laws, so that
instead of showing the actual performance or position of the company, they reflect what
the management wants to tell the stakeholders.

 “Purposeful intervention in the external financial reporting process with the intent of
obtaining some exclusive gain”.
 “Creative accounting is the transformation of financial accounting figures from what they
actually are to what preparer desires by taking advantage of the existing rules and/or
ignoring some or all of them”.
 “Every company in the country is fiddling its profits. Every set of published accounts is
based on books which have been gently cooked or completely roasted. The figures which
are fed twice a year to the investing public have all been changed in order to protect the
guilty. It is the biggest Con trick since the Trojan horse. . . In fact this deception is all in
perfectly good taste. It is totally legitimate. It is creative accounting.”
 Many terms can be used to describe the practices of changing the facts in accounting,
e.g. cooking the books, aggressive accounting, massaging the numbers, window
dressing, earnings management, etc.

Unfortunately, all the above definitions imply a misuse of creative accounting techniques for
the purpose of deception or attaining dishonest ends. While this may be applicable to many
of the situations, I believe that it is not true of all the companies.

These notes have been prepared by LJMBA


 Creative Accounting Techniques: -

The basic model for recording transactions and events in the books of accounts, under the
double entry system, is as follows:

All the techniques of Creative Accounting revolve around the basic process of “debiting
and/or crediting an inappropriate account” when recording a transaction or an event. By
implication, the process also covers “not debiting and/or crediting” the correct account with
the correct amount.”

For Example:-

 A payment is made for repairing the factory wall. This is an expense item as this payment
does not improve the value of the factory buildings; it merely restores it to the previous
value. Now if this payment is debited to Factory Premises Account, it will result in an over-
statement of an asset and an understatement of an expense. In turn, this will lead to over-
statement of relevant year’s Net Profit and over-statement of assets in its balance sheet.

 The unsold inventory at the end of a year is over-valued. For the companies that do not
maintain integrated cost and financial ledgers, the entry made to bring the value of closing
inventory to ledger is Debit Inventory Account and Credit Cost of Goods Sold Account. If
the closing inventory is over-valued, it will result in over-statement of the assets in the

These notes have been prepared by LJMBA


balance sheet and under-statement of an expense (Cost of Goods Sold) in the Income
Statement. Conversely, if the unsold inventory at the end of the year is over-valued, it will
result in under-statement of the assets in the balance sheet and overstatement of an expense
(Cost of Goods Sold) in the Income Statement.

 Satyam Computer Services scandal : -

The Satyam Computer Services scandal was a corporate scandal that occurred in India in
2009 where Chairman Ramalinga Raju confessed that the company's accounts had been
falsified. The Global corporate community was shocked and scandalized when the chairman
of Satyam, Ramalinga Raju resigned on 7 January 2009 and confessed that he had
manipulated the accounts by US$1.47-Billion.

In February 2009, CBI took over the investigation and filed three charge sheets (on April 7,
2009, November 24, 2009 and January 7, 2010), which were later clubbed into one. The case
is still going on in the Indian court.

Role of Auditors: -

PricewaterhouseCoopers was the statutory auditor of Satyam Computer Services when the
report of scandal in the account books of Satyam Computer Services broke. The Indian arm
of PwC was fined $6 million by the SEC (US Securities and Exchange Commission) for not
following the code of conduct and auditing standards in the performance of its duties related
to the auditing of the accounts of Satyam Computer Services

Ramalingam Raju along with 2 other accused of the scandal, had been granted bail from
Supreme court on 4 November, 2011 as the investigation agency CBI failed to file the charge
sheet even after more than 33 months Raju being arrested.

Raju had appointed a task force to address the Maytas situation in the last few days before
revealing the news of the accounting fraud. After the scandal broke, the then-board members
elected Ram Mynampati to be Satyam's interim CEO. Mynampati's statement on Satyam's
website said:

"We are obviously shocked by the contents of the letter. The senior leaders of Satyam stand
united in their commitment to customers, associates, suppliers and all shareholders. We have
gathered together at Hyderabad to strategize the way forward in light of this startling
revelation."

On 10 January 2009, the Company Law Board decided to bar the current board of Satyam
from functioning and appoint 10 nominal directors. "The current board has failed to do what
they are supposed to do. The credibility of the IT industry should not be allowed to suffer."
said Corporate Affairs Minister Prem Chand Gupta. Chartered accountants regulator ICAI

These notes have been prepared by LJMBA


issued show-cause notice to Satyam's auditor PricewaterhouseCoopers (PwC) on the accounts
fudging. "We have asked PwC to reply within 21 days," ICAI President Ved Jain said.

On the same day, the Crime Investigation Department (CID) team picked up Vadlamani
Srinivas, Satyam's then-CFO, for questioning. He was arrested later and kept in judicial
custody.

On 11 January 2009, the government nominated noted banker Deepak Parekh, former
NASSCOM Chief Kiran Karnik and former SEBI member C Achuthan to Satyam's board.

Analysts in India have termed the Satyam scandal India's own Enron scandal. Some social
commentators see it more as a part of a broader problem relating to India's family-owned
corporate environment.

Immediately following the news, Merrill Lynch (now a part of Bank of America) and State
Farm Insurance terminated its engagement with the company. Also, Credit Suisse suspended
its coverage of Satyam.[citation needed]. It was also reported that Satyam's auditing firm
PricewaterhouseCoopers will be scrutinized for complicity in this scandal. SEBI, the stock
market regulator, also said that, if found guilty, its license to work in India may be
revoked.[5][6][7][8][9] Satyam was the 2008 winner of the coveted Golden Peacock Award
for Corporate Governance under Risk Management and Compliance Issues, which was
stripped from them in the aftermath of the scandal. The New York Stock Exchange has halted
trading in Satyam stock as of 7 January 2009. India's National Stock Exchange has announced
that it will remove Satyam from its S&P CNX Nifty 50-share index on 12 January. The
founder of Satyam was arrested two days after he admitted to falsifying the firm's accounts.
Ramalinga Raju is charged with several offences, including criminal conspiracy, breach of
trust, and forgery.

Satyam's shares fell to 11.50 rupees on 10 January 2009, their lowest level since March 1998,
compared to a high of 544 rupees in 2008. In New York Stock Exchange Satyam shares
peaked in 2008 at US$29.10; by March 2009 they were trading around US$1.80.

The Indian Government has stated that it may provide temporary direct or indirect liquidity
support to the company. However, whether employment will continue at pre-crisis levels,
particularly for new recruits, is questionable.

On 14 January 2009, Price Waterhouse, the Indian division of PricewaterhouseCoopers,


announced that its reliance on potentially false information provided by the management of
Satyam may have rendered its audit reports "inaccurate and unreliable".

On 22 January 2009, CID told in court that the actual number of employees is only 40,000 and
not 53,000 as reported earlier and that Mr. Raju had been allegedly withdrawing INR200
million (US$3 million) every month for paying these 13,000 non-existent employees.

These notes have been prepared by LJMBA


On 15th September 2014, the special CBI court hearing the case has asked the concerned
parties to appear before the court on 27th October. Date of judgment will be indicated later on
that day.

Q. 32. Discuss the provisions in clause 49 of SEBI guidelines on corporate governance.

Meaning: -

Corporate governance is concerned with holding the balance between economic and social goals
and between individual and communal goals. The governance framework is there to encourage
the efficient use of resources and equally to require accountability for the stewardship of those
resources. The aim is to align as nearly as possible the interests of individuals, corporations and
society.” - -Sir Adrian Cadbury, UK, Commission Report: Corporate Governance 1992

The basic criterion on which the whole Listing Agreement based is Corporate Governance.
Currently there are 54 Clauses in the Listing Agreement and all of them based on this very
concept. Further, there is a clause which specifically deals with Corporate Governance i.e.
Clause 49.

Listing means admission of securities to dealings on a recognized stock exchange. The securities
may be of any public limited company, Central or State Government, quasi governmental and
other financial institutions/corporations, municipalities, etc.

The objectives of listing are mainly to:

• provide liquidity to securities;

• mobilize savings for economic development;

• protect interest of investors by ensuring full disclosures.

A company, desirous of listing its securities on the Exchange, shall be required to file an
application, in the prescribed form, with the Exchange before issue of Prospectus by the
company, where the securities are issued by way of a prospectus or before issue of 'Offer for
Sale', where the securities are issued by way of an offer for sale.

The basic criterion on which the whole Listing Agreement based is Corporate Governance.
Currently there are 54 Clauses in the Listing Agreement and all of them based on this very
concept. Further, there is a clause which specifically deals with Corporate Governance i.e.
Clause 49. By way of Listing Agreement inter alia, Stock Exchange ensures on behalf of SEBI
that the Companies are following good Corporate Governance Practice.

As such, the Listing Agreement is of great importance and is executed under the common seal of
a company. Under the Listing Agreement, the Company is required to make certain disclosures
and perform certain acts, failing which the company may face disciplinary action, including

These notes have been prepared by LJMBA


suspension / delisting of securities. A Company undertakes, amongst other things, to provide
facilities for prompt transfer, registration, sub-division and consolidation of securities; to give
proper notice of closure of transfer books and record dates, to forward copies of Annual Reports,
Balance Sheets and Profit and Loss Accounts to Stock Exchange, to file shareholding patterns
and financial results on a quarterly basis; to intimate promptly to the Exchange the happenings
which are likely to materially affect the financial performance of the Company and its stock
prices, to comply with the conditions of Corporate Governance, etc. The Listing Department of
Stock Exchange monitors the compliance by the companies with the provisions of the Listing
Agreement, especially with regard to timely payment of annual listing fees, submission of
results, shareholding patterns and corporate governance reports on a quarterly basis.

Clause 49 of the Listing Agreement: -

Business history suggests that it often takes a scandal or two of unhealthy proportion to really
bring into sharp relief the role of ethics and governance in business.”

True to that, the Satyam debacle, India's Enron, has had a profound influence on the Indian
business environment and there was a redoubled effort on the part of both the government and
other corporations to ensure governance codes were tightened.

Clause 49 of the Listing Agreement, which deals with Corporate Governance norms that a listed
entity should follow, was first introduced in the financial year 2000-01 based on
recommendations of Kumar Mangalam Birla Committee. The report of the Committee was
considered and adopted by SEBI Board in its meeting held on January25, 2000. The
recommendations are to be implemented through the amendment to the listing agreement of the
stock exchanges. Internationally, listing agreement has been used in most markets to implement
corporate governance in the listed companies.

The initiatives taken by Government in 1991, aimed at economic liberalization and globalization
of the domestic economy, led India to initiate reform process in order to suitably respond to the
developments taking place world over. On accounts of interest generated by Cadbury Committee
Report, Confederation of Indian Industries (CII), the Associated chambers of Commerce and
Industry (ASSOCHAM) and, the Securities and Exchange Board of India (SEBI) constituted
committees to recommend initiatives in Corporate Governance. The recommendations of Kumar
Mangalam Birla Committee, constituted by SEBI, led to the addition of Clause 49 in the Listing
Agreement in February 2000. These recommendations, aimed at improving the standards of
corporate governance are divided into mandatory and non mandatory recommendations. The
recommendations have been made applicable to all listed companies, their Directors,
Management, Employees and Professionals associated with such companies. The ultimate
responsibility of putting the recommendations into practice lies directly with the Board of
Directors and the Management of the Company.

These notes have been prepared by LJMBA


After these recommendations were in place for about two years, SEBI, in order to evaluate the
adequacy of the existing practices and to further improve the existing practices set up a
committee under the Chairmanship of Mr. Narayana Murthy during 2002-03. The Murthy
committee, after holding three meetings, had submitted the draft recommendations on corporate
governance norms. After deliberations, SEBI accepted the recommendations in August 2003 and
asked the Stock Exchanges to revise Clause 49 of the Listing Agreement based on Murthy
committee recommendations. This led to widespread protests and representations from the
Industry thereby forcing the Murthy committee to meet again to consider the objections. The
committee, thereafter, considerably revised the earlier recommendations and the same was put up
on SEBI website on 15th December 2003 for public comments. It was only on 29th October
2004 that SEBI finally announced revised Clause 49, which will have to be implemented by the
end of financial year 2004-05. These revised recommendations have also considerably diluted
the original Murthy Committee recommendations. Areas where major changes include:

● Independence of Directors,

● Whistle Blower policy,

● Performance evaluation of non-executive directors,

● Mandatory training of non-executive directors, etc.

Q. 33. Define the term ‘Managerial Ethics’ and explain ‘Managerial mischief’ and

‘Moral Mazes’.

Managerial Ethics

Managerial ethics is a set of principles and rules dictated by upper management that
define what is right and wrong in an organization. It is the guideline that helps direct a
lower manager's decisions in the scope of his or her job when a conflict of values is
presented.

Ethics are the moral codes that govern behavior of a person or group of people regarding
what is right and wrong. These moral codes revolve around established values and
principles and may not be the same from culture to culture. Managerial ethics are a set of
standards that dictate the conduct of a manager operating within a workplace.

Management ethics is the ethical treatment of employees, stockholders, owners and the
public by a company. A company, while needing to make a profit, should have good
ethics. Employees should be treated well, whether they are employed here or overseas.
By being respectful of the environment in the community a company shows good ethics,
and good, honest records also show respect to stockholders and owners.

These notes have been prepared by LJMBA


Ethics and ethical behavior are the essential parts of healthy management. From a
management perspective, behaving ethically is an integral part of long-term career
success. Wide access to information and more business opportunities than in the past
makes ethics a need in modern business world.

Managerial mischief

Managerial mischief is a term that refers to intentional violations of ethics. It differs


from moral mazes in that there are no gray areas here. These are instances where people
in power simply do things that are clearly wrong.

Managerial mischief: Madsen and Shafritz, in their book “Essentials of Business Ethics”
(Penguin Books, 1990) explain that “managerial mischief” includes “illegal, unethical, or
questionable practices of individual managers or organizations, as well as the causes of
such behaviors and remedies to eradicate them.” There has been a great deal written
about managerial mischief, leading many to believe that business ethics is merely a
matter of preaching the basics of what is right and wrong. More often, though, business
ethics is a matter of dealing with dilemmas that have no clear indication of what is right
or wrong.

Moral mazes

The other broad area of business ethics is “moral mazes of management” and includes the
numerous ethical problems that managers must deal with on a daily basis, such as
potential conflicts of interest, wrongful use of resources, mismanagement of contracts
and agreements, etc.

Moral Mazes, named the "Most Outstanding Business and Management Book" of 1988
by the Association of American Publishers, is a 1988 book from sociologist Robert
Jackall that documents an investigation into the world of corporate managers in the
United States. In the introduction, Jackall writes that he "went into these organizations to
study how bureaucracy - the prevailing organizational form of our society - shapes moral
consciousness”. He finishes the introduction by writing that the book is "an interpretive
sociological account of how managers think the world works."

Based on several years of fieldwork conducting interviews with managers in several large
corporations in the early 1980s, Jackall describes the social construction of reality within
large corporations in America. Jackall argues that bureaucracy as implemented in the
large American corporations he investigated "regularizes people's experiences of time
and indeed reutilizes their lives by engaging them on a daily basis in rational, socially
approved, purposive action; it brings them into daily proximity with and subordination to
authority, creating in the process upward-looking stances that have decisive social and
psychological consequences; it places a premium on a functionally rational, pragmatic
habit of mind that seeks specific goals; and it creates subtle measures of prestige and an
elaborate status hierarchy that, in addition to fostering an intense competition for status,

These notes have been prepared by LJMBA


also makes the rules, procedures, social contexts, and protocol of an organization
paramount psychological and behavioral guides."

Jackall first starts with a history of American business specifically looking at changes in
organizational structure during the creation of large corporations in the 19th century with
the Industrial Revolution changing American industry. The changes in American industry
indicated a need for a professional management class which in turn began to change the
organizational culture of American business emphasizing rational decisions centered on
money based measures such as profit and loss (see also rational choice theory).

Next Jackall describes the results of his interviews of managers at various levels of the
organizations which allowed him to conduct his research. These organizations, not
named, are large and medium sized companies. The qualitative data collected by the
interviews covers approximately four years, beginning in 1980, documenting a number of
changes in management within the corporations, a number of business decisions made,
and the effect of those changes and decisions on the managers at various levels of the
companies.

Perhaps the most important finding is that successful managers are dexterous symbol
manipulators. Successful managers provide a public face and may be categorized as
providing emotional labor as one of their major activities. They must be able to work well
with others and to sublimate their emotional and psychological needs to the demands of
others. The very ambiguity of their work and its assessment leads to the feeling on the
part of the managers Jackall interviewed that "instead of ability, talent, and dedicated
service to an organization, politics, adroit talk, luck, connections, and self-promotion are
the real sorters of people into sheep and goats"

Q. 34. What is CSR? Is the CSR same as business ethics? Explain.

The voluntary compliance of social and ecological responsibility of companies is called


Corporate Social Responsibility (CSR).

Corporate social responsibility is basically a concept whereby companies decide voluntarily to


contribute to a better society and a cleaner environment. Corporate social responsibility is
represented by the contributions undertaken by companies to society through its business
activities and its social investment. This is also to connect the Concept of sustainable
development to the company’s level.

Over the last years an increasing number of companies worldwide started promoting their
Corporate Social Responsibility strategies because the customers, the public and the investors
expect them to act sustainable as well as responsible. In most cases CSR is a result of a variety of
social, environmental and economic pressures.

The Term Corporate Social Responsibility is imprecise and its application differs. CSR can not
only refer to the compliance of human right standards, labor and social security arrangements,
but also to the fight against climate change, sustainable management of natural resources and

These notes have been prepared by LJMBA


consumer protection. To guarantee the supply of responsible and ethical goods, it is especially
important to implement a nationwide system of CSR standards.

Is the CSR same as business ethics?

'Business ethics' and "corporate social responsibility" are two terms that are often used
interchangeably, but at the same time represent somewhat different lenses on business practice.
Ethics, of course, is always concerned with norms and values, and is basically about what is right
and wrong. CSR on the other hand may be about these things, but doesn't have to be - lots of
people take a purely economic or strategic approach to CSR without any real consideration of the
normative dimensions. CSR is also, as might be expected, a lot more business-friendly than
business ethics.

Business Ethics vs Social Responsibility

Businesses aim to gain maximum profits for their owners and shareholders. However, this does
not mean they can do whatever it takes to get that maximum profitability. They can’t do crooked
things just to get their desired profit. This is where business ethics and social responsibility
comes into the picture. There is much confusion between these two terms and they tend to get
used interchangeably. Social responsibility is easy to understand, but the word ‘ethics’ causes
much confusion. A company policy must be followed to benefit the community. This is coined
as the corporate social responsibility. However, when one talks about business ethics, it becomes
a very different thing, because ethics is based on conscience.

There is a significant difference between social responsibility and business ethics; and the best
way to differentiate the two is by defining both of them.

Before defining business ethics, it is best to understand the meaning of ethics first. Ethics means
moral character and comes from the Greek word ethos. Ethical behavior is an aspect concerning
the good and right. Ethics is focused on the good and bad, the right and wrong. Using it in
business means the company must follow the right behavior to benefit the good of everybody,
including the shareholders, stakeholders, and even the community. Even though making a profit
is the most important thing in business, if making money is the only concern of a certain
business, then it is capitalism in its worst. Businesses should have good business ethics to benefit
the entire community or society. This is the main goal of business ethics. That the business
activities should not harm the people. Instead, it should benefit them. Businesses that do not have
good business ethics are penalized by the law, however, these sanctions are nothing compared to

If businesses are more concerned on making profits for the company, it should still have a social
responsibility towards its community. This is the main meaning of social responsibility. It is
more of an obligation or a duty towards the people that the business affects. One of the main
examples for this is, reducing the pollution in the company, especially if that certain business is
the one creating all the pollution.

These notes have been prepared by LJMBA


 There are good things for society that are not good for business and this is where social
responsibility comes in. There are also good things in business that are not good for
society and this is where business ethics comes in.

 Social responsibility is more of a policy or an obligation to the community, while


business ethics is more of a conscience.

 Business is focused on profits but with social responsibility. It is still obliged to perform
beneficial activities for society, while business ethics should make a positive move for
society.

 Without social responsibility, the community will not benefit, however, without business
ethics, business is capitalism at its worst.

Public Company Accounting Oversight Board (PCAOB)

The Public Company Accounting Oversight Board (also known as the PCAOB) is a private-
sector, nonprofit corporation created by the Sarbanes-Oxley Act of 2002 to oversee accounting
professionals who provide independent audit reports for publicly traded companies. The
PCAOB's responsibilities include the following:

 registering public accounting firms;


 establishing auditing, quality control, ethics, independence, and other standards relating
to public company audits;
 conducting inspections, investigations, and disciplinary proceedings of registered
accounting firms; and
 Enforcing compliance with Sarbanes-Oxley.

Auditor independence:

Auditors are the lead actors in the auditing process and provide independent oversight to the
facial reporting by companies. Modern day corporations are huge and their operations are
complex. While accounting standards and norms is specie by the regulators for proper disclosure.
Yet preparation of proper facial reports requires an evaluation of the judgments and assumptions
made by the management, along with their rustication of teal choice among several alternative
accounting principles. Consistency. Of applications in preparing accounts and coverage of all
relevant financicial aspects are required. Auditors scrutinize and verify the accounts, as well as
certify that tenancies statements are prepared in accordance to the prescribed principles and that
the accounts are free from material misstatements. It is therefore expected for the law in all
countries to have put enormous responsibility on the auditors to ensure that the accounts give a
true and fair view of the operations of the company. In the US, the SOX Act has put great
emphasis on auditor independence. Following the Act, the US Securities and Exchange
Commission (SEC)9has made specie rules top utter provisions of the Act into operation At home
in India assimilator has been made by the NCC, which has given a series of recommendations

These notes have been prepared by LJMBA


that have been incorporated in the Companies Bill(2009) and are awaiting parliamentary
approval. The rules and regulations regarding auditors independence framed by regulators are
predicated on some fundamental principles. The NCC lists two fundamental principles behind
auditor's independence namely,

(I)independence of mind- which permits riving gateman formed and reasoned opinion without
being acted by factors that compromise integrity, professional skepticism and objectivity of
judgment and

(ii)independence in appearance- which requires avoiding facts, circumstances and instances


where, an informed third party could reasonably conclude that integrity, objectivity and
professionalism has, or may have, been compromised(NCC,2004; pp 36). As the NCC rightly
points out \for the public to have condensed in the quality of audit, it is essential that auditors
should always be - and be seen to be - independent of the companies that they are
auditing."Thus, when situations of potential con its arise, the law in general has taken a skeptical
view and erred on the side of caution by putting the interest of the general public before the
interest of the auditor. Similar principles are enshrined in the Code of Ethics for Professional
Accountants, prescribed by the International Federation of Accountants (IFAC)

Which identiesvety pesfpotential threats to auditor's independence: Self-interest threat which


occur when an auditing.

Independent Oversight of the Auditors:

The remuneration received and, more importantly, pay for damages to the company or to any
other persons for loss arising out of incorrect or misleading statements in the audit report.

Independent Oversight of the Auditors


The SOX Act has set up the Public Companies Accounting Oversight Board (PCAOB) to
oversee the audit of listed companies in order to protect investors' and public interest in matters
relating to the preparation of audited facial statements." The SOX Act empowers the PCAOB to
register all audit rms, establish auditing rules, conduct periodic inspection of audit rams, carry
out investigation and disciplinary proceedings against errant rams and ensure compliance with all
the accounting and auditing rules specie under the SOX Act and the SEC rules. The NCC
reviewed the necessity of establishing a Public Oversight Board in line with the PCAOB, but
ultimately did not recommend its establishment largely keeping in view that its establishment
requires the consolidation of powers which are now distributed among the various regulatory
authorities like the Department of Company A airs (DCA), the SEBI, the Reserve Bank of India
(RBI) and the like into a single regulatory body which is impractical. Instead, the NCC provided
for the establishment of independent Quality Review Boards (QRBs), \to periodically examines
and reviews the quality of audit, secretarial and cost accounting rams, and passes judgment and
comments on the quality and saliency of systems, infrastructure and practices." The main
objective behind the recommendations was to speed up the investigation and adjudication
process, of complaints received against errant member rams, while keeping the process out of
con it with the provisions of the existing Acts. To this extent, the committee detailed outran

These notes have been prepared by LJMBA


elaborate institutional structure consisting of a Prosecution Directorate" Disciplinary Committee"
and an appellate body which were responsible for timely disposal resolution of the various stages
of a disciplinary process. It is hoped that the QRBs will further strengthen the integrity of the
financial reporting process by requiring auditors to be more vigilant in the discharge.

(Q) Bring out briefly scam cases of Satyam and 2 g spectrum.

(1)Satyam:

 Satyam stand united in their commitment to customers, associates, suppliers and all
shareholders. We have gathered together at Hyderabad to strategize the way forward in
light of this startling revelation."
 On 10 January 2009, the Company Law Board The Satyam Computer Services scandal
was a corporate scandal that occurred in India in 2009 where chairman Ramalinga Raju
confessed that the company's accounts had been falsified. The Global corporate
community was shocked and scandalized when the chairman of Satyam, Ramalinga Raju
resigned on 7 January 2009 and confessed that he had manipulated the accounts by
US$1.47-Billion.
 In February 2009, CBI took over the investigation and filed three charge sheets (on April
7, 2009, November 24, 2009 and January 7, 2010), which were later clubbed into one.
The case is still going on in the Indian court.
 Ram lingam Raju along with 2 other accused of the scandal, had been granted bail from
Supreme Court on 4 November, 2011 as the investigation agency CBI failed to file the
charge sheet even after more than 33 months Raju being arrested.
 Raju had appointed a task force to address the Maytas situation in the last few days
before revealing the news of the accounting fraud. After the scandal broke, the then-
board members elected Ram Mynampati to be Sat yam’s interim CEO. My nameplate’s
statement on Sat yam’s website said:
 "We are obviously shocked by the contents of the letter. The senior leaders of decided to
bar the current board of Satyam from functioning and appoint 10 nominal directors. "The
current board has failed to do what they are supposed to do.
 The credibility of the IT industry should not be allowed to suffer." said Corporate Affairs
Minister Prem Chan Gupta. Chartered accountants regulator ICAI issued show-cause
notice to Sat yam’s auditor PricewaterhouseCoopers (PwC) on the accounts fudging. "We
have asked PwC to reply within 21 days," ICAI President Ved Jain said.
 On the same day, the Crime Investigation Department (CID) team picked up Vadlamani
Srinivas, Sat yam’s then-CFO, for questioning. He was arrested later and kept in judicial
custody.
 On 11 January 2009, the government nominated noted banker Deepak Parekh, former
NASSCOM chief Kiran Karmic and former SEBI member C Achuthan to Sat yam’s
board.
 Analysts in India have termed the Satyam scandal India's own Enron scandal.[3] Some
social commentators see it more as a part of a broader problem relating to India's family-
owned corporate environment.[4]

These notes have been prepared by LJMBA


 Immediately following the news, Merrill Lynch (now a part of Bank of America) and
State Farm Insurance terminated its engagement with the company. Also, Credit Suisse
suspended its coverage of Satyam.
 It was also reported that Sat yam’s auditing firm PricewaterhouseCoopers will be
scrutinized for complicity in this scandal. SEBI, the stock market regulator, also said that,
if found guilty, its license to work in India may be revoked.
 Satyam was the 2008 winner of the coveted Golden Peacock Award for Corporate
Governance under Risk Management and Compliance Issues,[10] which was stripped from
them in the aftermath of the scandal.
 The New York Stock Exchange has halted trading in Satyam stock as of 7 January 2009
 India's National Stock Exchange has announced that it will remove Satyam from its S&P
CNX Nifty 50-share index on 12 January.
 The founder of Satyam was arrested two days after he admitted to falsifying the firm's
accounts. Ramalinga Raju is charged with several offences, including criminal
conspiracy, breach of trust, and forgery.
 Sat yam’s shares fell to 11.50 rupees on 10 January 2009, their lowest level since March
1998, compared to a high of 544 rupees in 2008.
 In New York Stock Exchange Satyam shares peaked in 2008 at US$29.10; by March
2009 they were trading around US$1.80.
 The Indian Government has stated that it may provide temporary direct or indirect
liquidity support to the company. However, whether employment will continue at pre-
crisis levels, particularly for new recruits, is questionable. On 14 January 2009, Price
Waterhouse, the Indian division of Price water house Coopers, announced that its reliance
on potentially false information provided by the management of Satyam may have
rendered its audit reports "inaccurate and unreliable".
 On 22 January 2009, CID told in court that the actual number of employees is only
40,000 and not 53,000 as reported earlier and that Mr. Raju had been allegedly
withdrawing 200 million (US$3 million) every month for paying these 13,000 non-
existent employees.
 On 15th September 2014, the special CBI court hearing the case has asked the concerned
parties to appear before the court on 27th October. Date of judgment will be indicated
later on that day.

(2) 2g spectrum:

 The 2G spectrum scam was an Indian telecommunications scam and political scandal in
which politicians and government officials undercharged mobile telephone companies for
frequency allocation licenses, which they then used to create 2G spectrum subscriptions
for cell phones.
 The difference between the money collected and that mandated to be collected was
estimated by the Comptroller and Auditor General of India at 1766.45 billion
(US$28 billion), based on 2010 3G and BWA spectrum-auction prices.[1] In a charge
sheet filed on 2 April 2011 by the Central Bureau of Investigation (CBI, the investigating
agency), the loss was pegged at 309845.5 million (US$4.9 billion).[2] In a 19 August
2011 reply to the CBI, the Telecom Regulatory Authority of India (TRAI) said that the
government had gained over 30 billion (US$470 million) by selling 2G spectrum.

These notes have been prepared by LJMBA


 Minister of Communications & IT Kapil Sibal said in a 2011 press conference that "zero
loss" was incurred by distributing 2G licenses on a first-come-first-served basis.
 On 2 February 2012, the Supreme Court of India ruled on related to the 2G spectrum
scam. The court declared the allotment of spectrum "unconstitutional and arbitrary",
cancelling the 122 licenses issued in 2008 under A. Raja (Minister of Communications &
IT from 2007 to 2009), the primary official accused.
 According to the court, Raja "wanted to favor some companies at the cost of the public
exchequer" and "virtually gifted away important national asset[s]."[5] The zero-loss theory
was discredited[6] on 3 August 2012 when, after a Supreme Court directive, the
government of India revised the base price for 5-MHz 2G spectrum auctions to 140
billion (US$2.2 billion), raising its value to about 28 billion (US$440 million) per MHz
(near the Comptroller and Auditor General estimate of 33.5 billion (US$530 million)
per MHz .
 Although the policy for awarding licenses was first-come, first-served, Raja changed the
rules so it applied to compliance with conditions instead of the application itself.[9] On 10
January 2008, companies were given only a few hours to supply Letters of Intent and
payments; some executives were allegedly tipped off by Raja, and they (and the minister)
were imprisoned.
 In 2011 Time ranked the scam second on their "Top 10 Abuses of Power" list, behind the
scandal. India is divided into 22 telecommunications zones, with 281 zonal licenses.[13] In
2008, 122 new second-generation 2G Unified Access Service (UAS) licenses were
granted to telecom companies on a first-come, first-served basis at the 2001 price.
According to the CBI charge sheet, several laws were violated and bribes paid to favor
certain firms in granting 2G spectrum licenses.
 According to a CAG audit, licenses were granted to ineligible corporations, those with no
experience in the telecom sector (such as Unhitch and Swan Telecom)[14] and those who
had concealed relevant information.[15] Although former Prime Minister Manmohan
Singh advised Raja to allot 2G spectrum transparently and revise the license fee in a
November 2007 letter,
 Raja rejected many of Singh's recommendations.[16] In another letter that month, the
Ministry of Finance expressed procedural concerns to the DOT; these were ignored, and
the cut-off date was moved forward from 1 October 2007 to 25 September. On 25
September, the DOT announced on its website that applicants filing between 3:30 and
4:30 pm that day would be granted licenses.
 Although the corporation was ineligible, Swan Telecom was granted a license for 15.37
billion (US$240 million) and sold a 45-percent share to the UAE-based Etisalat for 42
billion (US$660 million). Unhitch Wireless (a subsidiary of the Unhitch Group) obtained
a license for 16.61 billion (US$260 million), selling a 60-percent share for 62 billion
(US$970 million) to Norway-based Telenor.
 This is a list of companies who received 2G licenses during Raja's term as telecom
minister the licenses were later cancelled by the Supreme Court:

These notes have been prepared by LJMBA


Q. 35. Discuss levels of development of moral understanding.

Traditionally, psychology has avoided studying anything that is loaded with value
judgments. There is a degree of difficulty involved in trying to be unbiased about things that
involve terms like "good" and "bad!" So, one of the most significant aspects of human life -
morality - has had to wait quite a while before anyone in psychology dared to touch it! But
Lawrence Kohlberg wanted to study morality, and did so using a most interesting (if
controversial) technique. Basically, he would ask children and adults to try to solve moral
dilemmas contained in little stories, and to do so out loud so he could follow their reasoning. It
wasn't the specific answers to the dilemmas that interested him, but rather how the person got to
his or her answer.

One of the most famous of these stories concerned a man named Heinz. His wife was dying of a
disease that could be cured if he could get a certain medicine. When he asked the pharmacist, he
was told that he could get the medicine, but only at a very high price - one that Heinz could not
possibly afford. So the next evening, Heinz broke into the pharmacy and stole the drug to save
his wife's life. Was Heinz right or wrong to steal the drug?

There are simple reasons why Heinz should or should not have stolen the drug, and there are
very sophisticated reasons, and reasons in between. After looking at hundreds of interviews
using this and several other stories, Kohlberg outlined three broad levels and six more specific
stages of moral development.

Level 1: Pre-conventional morality.

While infants are essentially amoral, very young children are moral in a rather primitive way, as
described by the two preconvention stages.

Stage1. Obedience and Punishment

We can call this the reward and punishment stage. Good or bad depends on the physical
consequences: Does the action lead to punishment or reward? This stage is based simply on
one's own pain and pleasure, and doesn't take others into account.

Stage2. Conventional Morality

This we can call the exchange stage. In this stage, there is increased recognition that others
have their own interests and should be taken into account. Those interests are still understood in
a very concrete fashion, and the child deals with others in terms of simple exchange or
reciprocity: "I'll scratch your back if you scratch mine." Children in this stage are very
concerned with what's "fair" (one of their favorite words), but are not concerned with real justice.

Level2: Conventional morality.

By the time children enter elementary school, they are usually capable of conventional morality,
although they may often slip back into preconvention morality on occasion. But this level is

These notes have been prepared by LJMBA


called conventional for a very good reason: It is also the level that most adults find themselves
in most of the time!

Stage3. Interpersonal Relationships

This stage is often called the good boy/good girl stage. The child tries to live up to the
expectations of others, and to seek their approval. Now they become interested motives or
intentions, and concepts such as loyalty, trust, and gratitude are understood. Children in this
stage often adhere to a concrete version of the Golden Rule, although it is limited to the people
they actually deal with on a day-to-day basis.

Stage4. Maintaining Social Order

This is called the law-and-order stage. Children now take the point of view that includes the
social system as a whole. The rules of the society are the bases for right and wrong, and doing
one's duty and showing respect for authority are important.

Level3: Post-conventional morality.

Some adolescents and adults go a step further and rise above moralities based on authority to
ones based on reason.

Stage5. Social Contract and Individual Rights

The social contract stage means being aware of the degree to which much of so-called morality
is relative to the individual and to the social group they belong to, and that only a very few
fundamental values are universal. The person at this level sees morality as a matter of entering
into a rational contract with one's fellow human beings to be kind to each other, respect
authority, and follow laws to the extent that they respect and promote those universal values.
Social contract morality often involves a utilitarian approach, where the relative value of an act is
determined by "the greatest good for the greatest number."

Stage6. Universal Principles

This stage is referred to as the stage of universal principles. At this point, the person makes a
personal commitment to universal principles of equal rights and respect, and social contract takes
a clear back-seat: If there is a conflict between a social law or custom and universal principles,
the universal principles take precedence.

Kohlberg's original work was done with boys. When the research began to include girls, they
found the girls to be less morally "developed" than the boys! Psychologist Carol Gilligan,
involved in that research, began to notice that it wasn't so easy to distinguish "good boy/good
girl" from "universal principles", especially in the girls. Since then, psychologists have

These notes have been prepared by LJMBA


readjusted their work to take into account for the fact that girls often express their morality in
terms that emphasize personal caring more than abstract principles.

36. Bring out the distinction between morals and ethics.

Ethics and morals relate to “right” and “wrong” conduct. While they are sometimes used
interchangeably, they are different: ethics refer to rules provided by an external source, e.g.,
codes of conduct in workplaces or principles in religions. Morals refer to an individual’s own
principles regarding right and wrong.

MEANING OF ETHICS:

Ethics (also moral philosophy) is the branch of philosophy that involves systematizing,
defending, and recommending concepts of right and wrong conduct. The term ethics derives
from the Ancient Greek word ethikos, which is derived from the word ethos (habit, “custom”).
The branch of philosophy axiology comprises the sub-branches of Ethics and aesthetics, each
concerned with concepts of value.

As a branch of philosophy, ethics investigates the questions “What is the best way for people to
live?” and “What actions are right or wrong in particular circumstances?” In practice, ethics
seeks to resolve questions of human morality, by defining concepts such as good and evil, right
and wrong, virtue and vice, justice and crime. As a field of intellectual enquiry, moral
philosophy also is related to the fields of minter Concerned with the principles of right and
wrong behaviour: the moral dimensions of medical emotion a moral judgment.

MEANING OF MORAL:

Moral psychology is a field of study in both philosophy and psychology. Some use the term
"moral psychology" relatively narrowly to refer to the study of moral development. However,
others tend to use the term more broadly to include any topics at the intersection of ethics,
psychology, and philosophy of mind. Some of the main topics of the field are moral judgment,
moral reasoning, moral sensitivity, moral responsibility, moral motivation, moral identity, moral
action, moral development, moral diversity, moral character (especially as related to virtue
ethics), altruism, psychological egoism, moral luck, and moral disagreement.

Moral psychology is a novel branch within the field of psychology. The study of moral identity
development is one aspect of psychology that shows the most potential for growth due to the
numerous sections within the field regarding its structure, mechanisms, and dynamics. A moral
act is a type of behavior that refers to an act that has either a moral or immoral consequence.
Moral Psychology can be applied across a broad range of studies, including philosophy and
psychology. However it is implemented in different ways depending on culture. In many
cultures, a moral act refers to an act that entails free will, purity, liberty, honesty, and meaning.
An immoral act refers to an act that entails corruption and fraudulence and usually leads to
negative consequences. Some of the main topics of the field are: moral judgment, moral
reasoning, moral responsibility, moral development, moral character, altruism, psychological

These notes have been prepared by LJMBA


egoism, moral luck, moral disagreement, moral psychology, moral action, moral forecasting,
moral emotion, and affective forecasting.

Comparison chart

Ethics Morals
Principles or habits with respect to
The rules of conduct recognized in respect right or wrong conduct. While morals
What are they? to a particular class of human actions or a also prescribe dos and don'ts,
particular group or culture. morality is ultimately a personal
compass of right and wrong.
Where do they
Social system - External Individual - Internal
come from?
Because society says it is the right thing to Because we believe in something
Why we do it?
do. being right or wrong.
Ethics are dependent on others for
Usually consistent, although can
definition. They tend to be consistent
Flexibility change if an individual’s beliefs
within a certain context, but can vary
change.
between contexts.
A person strictly following Ethical A Moral Person although perhaps
Principles may not have any Morals at all. bound by a higher covenant, may
The "Gray" Likewise, one could violate Ethical choose to follow a code of ethics as it
Principles within a given system of rules would apply to a system. "Make it
in order to maintain Moral integrity. fit"
A person strictly following Ethical A Moral Person although perhaps
Principles may not have any Morals at all. bound by a higher covenant, may
The "Gray" Likewise, one could violate Ethical choose to follow a code of ethics as it
Principles within a given system of rules would apply to a system. "Make it
in order to maintain Moral integrity. fit"
Origin Greek word "ethos" meaning “character" Latin word "moss" meaning "custom"
Ethics are governed by professional and
Acceptability legal guidelines within a particular time Morality transcends cultural norms
and place

Q. 37. Discuss ethical issue in business arises from a business purpose and operation.

One of the most fundamental business ethical issues is trust between a company and its
customers. In the complex global business environment of the 21st century; companies of every
size face a multitude of ethical issues. Businesses have the responsibility to develop codes of
conduct and ethics that every member of the organization must abide by and put into action.
Fundamental ethical issues include concepts such and integrity and trust, but more complex
issues include accommodating diversity, decision-making, compliance and governance.

These notes have been prepared by LJMBA


Fundamental Issues

The most fundamental or essential ethical issues that businesses must face are integrity and trust.
A basic understanding of integrity includes the idea of conducting your business affairs with
honesty and a commitment to treating every customer fairly. When customers perceive that a
company is exhibiting an unwavering commitment to ethical business practices, a high level of
trust can develop between the business and the people it seeks to serve. A relationship of trust
between you and your customers may be a key determinate to your company's success.

Diversity Issues

According to the HSBC Group, "the world is a rich and diverse place full of interesting cultures
and people, who should be treated with respect and from whom there is a great deal to learn." An
ethical response to diversity begins with recruiting a diverse workforce, enforces equal
opportunity in all training programs and is fulfilled when every employee is able to enjoy a
respectful workplace environment that values their contributions. Maximizing the value of each
employee’s contribution is a key element in your business's success.

Decision-Making Issues

According to Santa Clara University, the following framework for ethical decision-making is a
useful method for exploring ethical dilemmas and identifying ethical courses of action:
"recognizes an ethical issue, gets the facts, evaluates alternative actions, makes a decision and
tests it and reflects on the outcome." Ethical decision-making processes should center on
protecting employee and customer rights, making sure all business operations are fair and just,
protecting the common good and making sure individual values and beliefs of workers are
protected.

Compliance and Governance Issues

Businesses are expected to fully comply with environmental laws, federal and state safety
regulations, fiscal and monetary reporting statutes and all applicable civil rights laws. The
Aluminum Company of America's approach to compliance issues states, "no one may ask any
employee to break the law, or go against company values, policies and procedures." ALCOA's
commitment to compliance is underpinned by the company's approach to corporate governance;
"we expect all directors, officers and other Alcoans to conduct business in compliance with our
Business Conduct Policies."

Q. 41. Justify the statement “ethics stand as the moral guard against what is unjust and unfair”.

"Ethics has to do with what my feelings tell me is right or wrong."These replies might be typical
of our own. The meaning of "ethics" is hard to pin down, and the views many people have about
ethics are shaky.

These notes have been prepared by LJMBA


Like Baumhart's first respondent, many people tend to equate ethics with their feelings. But
being ethical is clearly not a matter of following one's feelings. A person following his or her
feelings may recoil from doing what is right. In fact, feelings frequently deviate from what is
ethical.

Nor should one identify ethics with religion. Most religions, of course, advocate high ethical
standards. Yet if ethics were confined to religion, then ethics would apply only to religious
people. But ethics applies as much to the behavior of the atheist as to that of the devout religious
person. Religion can set high ethical standards and can provide intense motivations for ethical
behavior. Ethics, however, cannot be confined to religion nor is it the same as religion.

Being ethical is also not the same as following the law. The law often incorporates ethical
standards to which most citizens subscribe. But laws, like feelings, can deviate from what is
ethical. Our own pre-Civil War slavery laws and the old apartheid laws of present-day South
Africa are grotesquely obvious examples of laws that deviate from what is ethical.

Finally, being ethical is not the same as doing "whatever society accepts." In any society, most
people accept standards that are, in fact, ethical. But standards of behavior in society can deviate
from what is ethical. An entire society can become ethically corrupt. Nazi Germany is a good
example of a morally corrupt society.

Moreover, if being ethical were doing "whatever society accepts," then to find out what is
ethical, one would have to find out what society accepts. To decide what I should think about
abortion, for example, I would have to take a survey of American society and then conform my
beliefs to whatever society accepts. But no one ever tries to decide an ethical issue by doing a
survey. Further, the lack of social consensus on many issues makes it impossible to equate ethics
with whatever society accepts. Some people accept abortion but many others do not. If being
ethical were doing whatever society accepts, one would have to find an agreement on issues
which does not, in fact, exist.

ethics refers to well-founded standards of right and wrong that prescribe what humans ought to
do, usually in terms of rights, obligations, benefits to society, fairness, or specific virtues. Ethics,
for example, refers to those standards that impose the reasonable obligations to refrain from rape,
stealing, murder, assault, slander, and fraud. Ethical standards also include those that enjoin
virtues of honesty, compassion, and loyalty. And, ethical standards include standards relating to
rights, such as the right to life, the right to freedom from injury, and the right to privacy. Such
standards are adequate standards of ethics because they are supported by consistent and well-
founded reasons.

Secondly, ethics refers to the study and development of one's ethical standards. As mentioned
above, feelings, laws, and social norms can deviate from what is ethical. So it is necessary to
constantly examine one's standards to ensure that they are reasonable and well-founded. Ethics
also means, then, the continuous effort of studying our own moral beliefs and our moral conduct,
and striving to ensure that we, and the institutions we help to shape, live up to standards that are
reasonable and solidly-based.

These notes have been prepared by LJMBA


Q. 38. Explain the feature of angle American model of corporate governance.

Anglo-American model: This model is also called an ‘Anglo-Saxon model’ and is used as basis
of corporate governance in U.S.A, U.K, Canada, Australia, and some common wealth countries.
The shareholders appoint directors who in turn appoint the managers to manage the business.
Thus there is separation of ownership and control. The board usually consists of executive
directors and few independent directors. The board often has limited ownership stakes in the
company. Moreover, a single individual holds both the position of CEO and chairman of the
board. This system (model) relies on effective communication between shareholders, board and
management with all important decisions taken after getting approval of shareholders.

Corporate governance has also been more narrowly defined as "a system of law and sound
approaches by which corporations are directed and controlled focusing on the internal and
external corporate structures with the intention of monitoring the actions of management and
directors and thereby, mitigating agency risks which may stem from the misdeeds of corporate
officers."
One source defines corporate governance as "the set of conditions that shapes the ex
post bargaining over the quasi-rents generated by a firm. The firm itself is modeled as a
governance structure acting through the mechanisms of contract Here corporate governance may
include its relation to corporate finance
Contemporary discussions of corporate governance tend to refer to principles raised in three
documents released since 1990: The Cadbury Report (UK, 1992), the Principles of Corporate
Governance (OECD, 1998 and 2004), the Sarbanes-Oxley Act of 2002 (US, 2002). The Cadbury
and Organization for Economic Co-operation and Development (OECD) reports present general
principles around which businesses are expected to operate to assure proper governance. The
Sarbanes-Oxley Act, informally referred to as Sarbance oxley Act or Sox, is an attempt by the
federal government in the United States to legislate several of the principles recommended in the
Cadbury and OECD reports.

 Rights and equitable treatment of shareholders: Organizations should respect the rights of
shareholders and help shareholders to exercise those rights. They can help shareholders
exercise their rights by openly and effectively communicating information and by
encouraging shareholders to participate in general meetings.
 Interests of other stakeholders-Organizations should recognize that they have legal,
contractual, social, and market driven obligations to non-shareholder stakeholders, including
employees, investors, creditors, suppliers, local communities, customers, and policy makers.
 Role and responsibilities of the board:-The board needs sufficient relevant skills and
understanding to review and challenge management performance. It also needs adequate size
and appropriate levels of independence and commitment.

These notes have been prepared by LJMBA


 Integrity and ethical behavior-Integrity should be a fundamental requirement in choosing
corporate officers and board members. Organizations should develop a code of conduct for
their directors and executives that promotes ethical and responsible decision making.
 Disclosure and transparency-Organizations should clarify and make publicly known the
roles and responsibilities of board and management to provide stakeholders with a level of
accountability. They should also implement procedures to independently verify and
safeguard the integrity of the company's financial reporting. Disclosure of material matters
concerning the organization should be timely and balanced to ensure that all investors have
access to clear, factual information.

Q. 39. Describe the ICRA’S methodology for CG rating.

ICRA’s Corporate Governance Rating (CGR) seeks to evaluate a company’s business conduct
and practices and the quality of its disclosure standards in terms of fairness and transparency
from the perspective of its financial stakeholders. The corporate governance practices prevalent
in an organization reflect the distribution of rights and responsibilities among its different
participants—such as the Board, management, shareholders and other financial stakeholders—
and the rules and procedures laid down and followed for making decisions on corporate affairs.
The emphasis of ICRA’s CGR is on substance over form. ICRA assigns CGRs on a six-point
scale of CGR1 through to CGR6. The rating of CGR1 implies that in ICRA’s current opinion,
the rated company has adopted and follows such practices, conventions and codes as would
provide its financial stakeholders the highest assurance on the quality of corporate governance.
ICRA’s opinion, however, is not a certificate of statutory compliance or a comment on the rated
company’s future financial performance, credit rating or stock price.

CARE undertakes perusal of various documents like agenda papers and Minutes of Board and
Board committees, Minutes of the Annual General Meeting and Extraordinary General Meeting,
Annual Return and other documents filed by the company with ROC, SEBI, stock exchanges
(domestic and international) and all other regulatory bodies, prospectus (if applicable) and offer
documents. CARE’s team will interact with the Chairman, MD/CEO and independent directors,
key officials of the company, Statutory Auditors, Internal Auditors, Lenders and
Institutional/major shareholders.
CARE, under the CGR exercise, assesses seven key parameters which are identified as under:

Board composition & functioning;


Ownership structure;
Organization structure and Management Information System;
Shareholder relationship;

These notes have been prepared by LJMBA


Disclosure & transparency;
Financial prudence; and,
Statutory and regulatory compliance.

Good Corporate governance also helps ensuring that corporations take into consideration the
interests of a wide range of constituencies, as well as of the communities within which they
operate. Good corporate governance aims at value creation for its stake holders. Evaluation of
the extent of value creation and balanced distribution of wealth is undertaken by CARE under its
CGV rating exercise. The exercise involves assessment of wealth creation and distribution
parameters in addition to the parameters evaluated under CGR. The composite rating is called as
“Corporate Governance and Value Creation Rating“. Wealth creation by a company based on
sound business strategy and practices adopted by its management as also maintaining financial
and operational discipline would promote enhancing stakeholder value. The quality of
management and its capabilities under stress, corporate strategy & philosophy and succession
planning would be examined by CARE to assess wealth management practices. Creation and
distribution of wealth to the stakeholders would be evaluated with reference to, inter-alia,
Shareholder;
Employees;
Lenders/ Creditors;
Suppliers;
Customers; and
Society.
The emphasis will be to assess sustainable value creation and distribution and hence the analysis
will not only examine the past but evaluate the future as well
40. Explain Indian model of corporate governance in details.
‘Corporate governance is concerned with ways of bringing the interests of investors and manager
into line and ensuring that firms are run for the benefit of investors’. Corporate governance
includes ‘the structures, processes, cultures and systems that engender the successful operation of
organizations’

Although India has been rather slow in establishing corporate governance principles over the last
two decades, 2012 was a positive year for progression in the Indian corporate governance arena.
The Companies Bill 2012, passed by LokSabha (the lower house) on 18 December 2012,
includes a number of new provisions aimed at improving the governance of public companies.

Interestingly, despite the structure of Indian businesses differing significantly from those in the
UK, the foundations of the new Indian corporate governance model are drawn from the Anglo-

These notes have been prepared by LJMBA


Saxon governance model. The investor base in the Indian corporate market, for instance, largely
consists of the company founders, their respective family members and the government. In
contrast, shareholders in UK companies are less concentrated towards a certain group of people,
are geographically dispersed and largely held by professional investors. However, despite
significant differences in the corporate structure in the two markets, the corporate governance
proposals recently published in India are similar to those adopted in the UK. The question
therefore arises as to whether it is appropriate for a closed market to base its corporate
governance model on practices developed for and in a market fundamentally different from its
own.

The Indian market regulator, the Securities and Exchange Board of India (SEBI), recently issued
a consultative paper on the "Review of Corporate Governance" encouraging a wider debate on
governance. The paper calls for, inter alia, the splitting of the roles of chairman and chief
executive, disclosure of the reasons for an independent director's resignation from office, a limit
on the term of appointment of independent directors and greater involvement of institutional
investors. SEBI goes on to propose making radical changes which seek to ensure that these
corporate governance proposals are implemented in a market which is generally viewed as weak
in the implementation of rules and regulations. These changes include:

 the appointment of independent directors by minority shareholders,


 independent directors to receive compulsory training and pass examinations; and
 the adoption of a principle-based approach for certain principles.

Although it is clear that the proposals stem from the Anglo-Saxon corporate model, in some
instances they go further and introduce new initiatives which recognize the need for certain
obligatory requirements and the need for training in a market that has for centuries been based on
a closed board structure and investor base.

There has been a clear move in India to develop the corporate market to attract foreign
investment. Foreign investment is slowly increasing shareholder diversity in some companies.
This in turn pushes the agenda for the introduction of a regulated and universal corporate
governance model. It appears from the recent SEBI proposals that the adoption of a corporate
governance model based on the Anglo-Saxon model will be a useful starting point but the
adoption of certain UK-based concepts such as 'comply or explain' should be adopted cautiously
given the radical nature of certain proposals and significant effects they will have on the
structure of Indian businesses. New regulatory institutions may need to be created, existing
institutions strengthened and hybrid approaches adopted but, on the whole, the Anglo-Saxon
model may well be a useful foundation.

The content of this article is intended to provide a general guide to the subject matter. Specialist
advice should be sought about your specific circumstances.

Although India has been rather slow in establishing corporate governance principles over the last
two decades, 2012 was a positive year for progression in the Indian corporate governance arena.
The Companies Bill 2012, passed by LokSabha (the lower house) on 18 December 2012,
includes a number of new provisions aimed at improving the governance of public companies.

These notes have been prepared by LJMBA


Interestingly, despite the structure of Indian businesses differing significantly from those in the
UK, the foundations of the new Indian corporate governance model are drawn from the Anglo-
Saxon governance model. The investor base in the Indian corporate market, for instance, largely
consists of the company founders, their respective family members and the government. In
contrast, shareholders in UK companies are less concentrated towards a certain group of people,
are geographically dispersed and largely held by professional investors. However, despite
significant differences in the corporate structure in the two markets, the corporate governance
proposals recently published in India are similar to those adopted in the UK. The question
therefore arises as to whether it is appropriate for a closed market to base its corporate
governance model on practices developed for and in a market fundamentally different from its
own.

The Indian market regulator, the Securities and Exchange Board of India (SEBI), recently issued
a consultative paper on the "Review of Corporate Governance" encouraging a wider debate on
governance. The paper calls for, inter alia, the splitting of the roles of chairman and chief
executive, disclosure of the reasons for an independent director's resignation from office, a limit
on the term of appointment of independent directors and greater involvement of institutional
investors. SEBI goes on to propose making radical changes which seek to ensure that these
corporate governance proposals are implemented in a market which is generally viewed as weak
in the implementation of rules and regulations. These changes include:

 the appointment of independent directors by minority shareholders,


 independent directors to receive compulsory training and pass examinations; and
 The adoption of a principle-based approach for certain principles.

Although it is clear that the proposals stem from the Anglo-Saxon corporate model, in some
instances they go further and introduce new initiatives which recognize the need for certain
obligatory requirements and the need for training in a market that has for centuries been based on
a closed board structure and investor base.

There has been a clear move in India to develop the corporate market to attract foreign
investment. Foreign investment is slowly increasing shareholder diversity in some companies.
This in turn pushes the agenda for the introduction of a regulated and universal corporate
governance model. It appears from the recent SEBI proposals that the adoption of a corporate
governance model based on the Anglo-Saxon model will be a useful starting point but the
adoption of certain UK-based concepts such as 'comply or explain' should be adopted cautiously
given the radical nature of certain proposals and significant effects they will have on the
structure of Indian businesses. New regulatory institutions may need to be created, existing
institutions strengthened and hybrid approaches adopted but, on the whole, the Anglo-Saxon
model may well be a useful foundation.

The content of this article is intended to provide a general guide to the subject matter. Specialist
advice should be sought about your specific circumstances.

These notes have been prepared by LJMBA


Q.41. What are the social responsibilities of business toward various stake holders?

Whether or not a business bears social responsibility to its stakeholders and society in general is
a matter of strenuous debate. While some economists and businessmen claim a company's only
obligation is an increase in profits, others insist that companies bear not only a responsibility
toward its balance sheet but to customer and societal happiness as well.

Company stakeholders are not merely investors in a company -- stakeholders typically have
voting power that can influence the social and financial impact of a company. With this voting
power comes a social responsibility to the employees and customers. Stakeholders must consider
more than just the company's bottom line when using their influence to shape company goals.

Company stakeholders have a social responsibility to act for the good of the entire company, not
just their own self-interests. The policies for which stakeholders push must not be based purely
on financial gain. For example, stakeholders may have the opportunity to increase their own
wealth if they push to merge the company's subsidiaries into the parent company. This merger,
however, could limit the company's ability to serve multiple markets, hinder its product
diversification or create other problems. Stakeholders must push for a strategy that focuses on
long-term gain and growth for their company.

The fate of employee pay, safety, health quality and job security might sometimes rest in the
hands of stakeholders. It is the social responsibility of the stakeholder to ensure that the
employees of the company work under the best possible conditions. A company could potentially
increase its profits by working employees harder for less pay, but the effects on the employees
would be negative. Stakeholders must push for profits and employee satisfaction,
simultaneously.

Increase the Profit


Nobel prizewinning economist Milton Friedman wrote in 1970 that the "one and only one social
responsibility of business" is "to increase its profits," assuming an honest and open marketplace.
Friedman opined that those who disagreed with this assertion were "preaching pure and
adulterated socialism." Friedman's opinions boiled down to a simple idea: Companies should
focus on honestly earning as much money as possible for their stakeholders. Beyond this,
according to Friedman, companies do not bear any additional responsibility toward society.

Put the Customer First


Not everyone agrees with this hard-line view. Reason.com invited John Mackey, the founder and
CEO of Whole Foods to write about this topic. Mackey believes that while profits are indeed the
core element of running a business, the modern company must "create value for all of its
constituencies." Mackey noted that the successful companies typically "put the customer first."
Putting the customer first may not guarantee the most in profits, Mackey told Reason.com, but it
does ensure that "customer happiness is an end in itself," which may lead to greater customer
loyalty.

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The Case for Shared Value
The "shared value" model doesn't redistribute wealth; instead, shared value refers to business and
society working together to increase profits and improve society at the same time, according to
January 2011 Business-Ethics.com article. In this new model, the business achieves economic
success because it addresses society's "needs and challenges." Although the framework for the
shared value business model isn't yet clear, ideally the betterment of society would be at the core
of the business's beliefs. It would expand or open markets to serve new needs in an efficient way,
while also profitably serving its investors.

Shareholders vs. Society


Despite these emerging business models, many companies still feel the best way to be socially
responsible is by earning as much profit as they possibly can, because the profits earned are
invested back into the business. In theory, when this occurs, the business creates new jobs, goods
or services, causing the company to grow. When the company grows, the stakeholders -- who are
funding the operation -- should earn a greater return on their investment. Much a like a shark, a
company must move forward. If it doesn't, it dies -- taking employees and stakeholders along
with it.

Q. 42. Explain importance of business ethics as a significant tool in developing a good


business reputation? Give examples five areas of business operations where ethical
practices play dominant roles in the success of business.

Factors highlighting the importance of business ethics

In the second decade of the third millennium, we can cite four major factors which highlight the
importance of business ethics (we define business ethics here):

1. Long-term growth: sustainability comes from an ethical long-term vision which takes
into account all stakeholders. Smaller but sustainable profits long-term must be better
than higher but riskier short-lived profits.
2. Cost and risk reduction: companies which recognize the importance of business ethics
will need to spend less protecting themselves from internal and external behavioral risks,
especially when supported by sound governance systems and independent
3. Anti-capitalist sentiment: the financial crisis marked another blow for the credibility of
capitalism, with resentment towards bank bailouts at the cost of fundamental rights such
as education and healthcare.

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4. Limited resources: the planet has finite resources but a growing population; without
ethics, those resources are replete for purely individual gain at huge cost both to current
and future generations.

1. Long-term growth

Large profits are always attractive, potentially allowing faster achievement of strategic
goals, a greater provision against risk and a greater sense of success and stability.
However, there are countless examples in corporate history of dramatic boom and bust
cycles (both on a micro, corporation level and macro-economic level).
Now, more than ever, we need to re-evaluate our endless search for bigger and bigger
profits with the bigger and bigger risks that entails. The financial crisis which began in
2008 is painful evidence of that. Whole countries have gone to the brink of bankruptcy as
a result of an unwillingness or inability to plan long-term.
More and more organizations are recognizing what most owner-run businesses have
always known: that stable profits are a better bet in the long run than large profits now
and an uncertain future. It is on the long term which we must focus to avoid the blindness
which leads to such huge corporate collapses as Lehman Brothers (2008) and such huge
risks and balance sheet holes as Morgan Stanley (as late as 2012). Even the largest
remaining investment banks like Goldman Sachs are having to recognize this (if only to
try and fend off more aggressive regulation) and attempting to make their bonus
allocations more dependent on longer term value than the current year’s performance.
One can only hope that the heads of such organizations recognize the importance of
business ethics and the resulting need to change to a more sustainable model of growth.

2. Cost and risk reduction

A precedent which argues the case made above is the Quality Management industry. In the West,
this sprung up in the early 1980s, when products began to be inspected before leaving the factory
in an attempt to reduce the amount of costly customer complaints. Now, most products come
with at least a one-year warranty and in the case of some car manufacturers, up to five years.
What started off as a self-interested need to reduce costs has led to more reliable products?

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Meanwhile, we offer another analogy from wider society. Just as widespread bribery and
corruption in society are recognized as being inimical to the development of a healthy economy,
similarly the lack of a high standard of ethical behavior in a company is inimical to trust and
loyalty, which in turn has a detrimental effect on the health of the company over the longer term.
It may be argued that an owner can run a business in whichever way he or she wishes, and at first
glance there would appear to be a case for this so long as no other shareholders are involved, and
only his or her money is at risk, and of course with the acquiescence of the employees and
trading partners. However, in many years of observing different standards of behavior in
different business circumstances, one recognizes the relationship between the perception of
ethics which permeates an organization and the degree of trust and loyalty present among
employees and between staff and management. The conclusion one reaches is that loyalty and
trust have a significant value in terms of the efficiency and effectiveness with which a business
can be run, and the concomitant cost of control systems needed.

In other words, a highly ethical operation is likely to spend much less on protecting itself against
fraud and will probably have to spend much less on industrial relations to maintain morale and
common purpose. This should be motivation in itself to recognize the importance of business
ethics and instill good corporate governance in any organization.

Importance of Business Ethics: Pressures on Long-Term Growth

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3. Anti-capitalist sentiment

The eye-watering profits of some of the world’s largest corporations attract a lot of negative
sentiment from those outside the world of business and finance. While clearly a result of the
scale of these organizations, there is always a suspicion that these profits have been achieved
through not entirely ethical means - and in some cases downright unethical means, often
resulting in major public failures, most recently in Japan, where the senior management of
Nomura resigned en masse after an insider trading scandal.

Banks in particular receive a lot of bad publicity over profits and executive pay (especially
bonuses), and while not always justified, the fact is, an industry at the centre of the credit crunch
and resulting economic and financial crisis continued to produce hefty profits and bonuses even
while making large numbers redundant. This is, of course, a huge generalization and
simplification of the issue (this is not place for such details) but it is the natural reaction of the
general public, who lack such detailed information and understanding. Public sentiment cannot
be ignored. This situation makes the importance of business ethics all the more pressing in the
21st century.

4. Limited resources

One irrefutable fact is that this planet has limited resources. Probably the biggest failure in
human development over the last three hundred years has been in recognizing that and
attempting to minimize use and maximize re-use and recycling. While there are now global
initiatives to try and reverse this trend, and much progress has been made, there is still a long
way to go. In the major developing economies, especially, history is repeating itself on a massive
scale. With notable exceptions, this applies not only to specific environmental and sustainability
issues but to corporate governance generally and the importance of business ethics to the new
high growth regions and corporations.

This is another example of short-termism prevailing over long-term vision and preservation of
limited resources for future generations - and in some cases the same generation, as in
deforestation driving native peoples and animal species to the point of extinction. Just as basic

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financial management requires planning to ensure capital reserves and so solvency, the same
principles should clearly apply to the extraction and usage of natural resources.

There are some notable exceptions, of course, with the likes of Sir Richard Branson (founder of
the Virgin empire) taking a keen interest in environmental affairs (as well as entrepreneurship).
On a governmental level, the 2012 London Olympics are the "greenest" ever, with 40%
reduction in water usage (despite the record amount of parks and planting) and 98% waste
recycling. Let’s see how Brazil picks up the baton in the quest for a carbon neutral Olympics.
And how the private sector accepts the importance of business ethics in the rapid development
they are experiencing.

Ethics Affect Everyone


To understand the importance of ethics in business, you'll want to understand how business
ethics affect those involved. The ethics of a business collectively and of those involved, have the
power to help or harm people. Business ethics are important because if an enterprise lacks ethics,
the employees, the customers, and everyone else involved with the company can be harmed.

The Effects of Unethical Business Practices


When the CEO of a company accepts a raise or does not take a pay-cut when several people are
being laid off, this is considered unethical by many. The CEO has a responsibility to do what's
best for the corporation. It is almost never best to lay off loyal and hard-working employees.
Employees are the life-blood of every organization and without them, the beauty of industry
would not exist. The ultimate affects of such a practice are potentially devastating. The company
could suffer significant profit losses due to under-staffing. Former employees could end up
homeless and the general public, if and when they find out, will have a negative view of such an
organization; thus, the company's reputation will be damaged.

The Effects of Ethical Practices


On a more positive note, an establishment that gives its surplus to a charity donation each year is
practicing ethical behavior. While this practice benefits the company by allowing them to bypass
additional taxes, it also sends out a positive message. This can bring in more customers, increase
or enhance positive business relationships, and even allow the firm to add new employees.

These notes have been prepared by LJMBA


Business Ethics are Ultimately Personal Ethics

Business ethics and personal ethics go hand in hand. The ethics learned at a young age are
usually the ones maintained through adulthood and put into practice in daily lives. The
employees must share the same ethics as the company or at least practice them while employed.
Some businesses give their prospective employees informational materials that contain a mission
statement, policies, and other ethical responsibilities that all employees must abide by. While
these efforts are noteworthy, it does nothing if the employee refuses to respect the organization
by following the guidelines laid out for them.

Understanding the importance of ethics in business is the key to success. Customers,


management, and employees all appreciate honest and ethical practices. Business ethics are
important because they help maintain a clean reputation and they ultimately benefit everyone
involved.

Examples

In many organizations ethical business practices have been embedded through the introduction of
comprehensive programmers and/or documentation. Any company that plans to implement,
review or refine their ethical business practices needs to do so in a tailored fashion as each has
different needs, resources, and issues. However, the following guidance will assist in
determining what must be considered when putting ethical practices together.

Of the opinions sought for this research the most commonly cited organizational ethics practice
was the use of Codes of Ethics or Codes of Conduct. Brand and Maguire (2002) note that there is
a difference between a Code of Ethics and a Code of Conduct. A Code of Ethics "is generally a
more blanket statement of values and beliefs that defines the organization or group. (it) Usually
has two key elements: inspirational ideals outlined in the beginning, followed by rules or
principles that members of the organization are to follow. There are often different sections
regarding specific relationships with employees, customers, shareholders, suppliers, and
competitors, as well as society in general". Brandl and Maguire identify a Code of Conduct as
being a document that "addresses the values of the group or company and how the values reflect
those of society as a whole". The Ethics Resource Center in America, views a Code of Conduct

These notes have been prepared by LJMBA


as a document that outlines a fundamental set of principles and that it helps explain why behavior
is directed in a certain way, and why certain actions are required or prohibited.

Brandl and Maguire summaries the differences between the two, stating "Codes of Ethics are
general guides to operational values and decisions, while Codes of Conduct are more specific or
formal statements of the values and practices of a business. Codes of Conduct often contain
examples of appropriate behavior and specific prohibitions and may begin with a mission
statement".

Deborah Hope (2002) who wrote on corporate behavior for The Journal for Quality and
Participation states that "To be successful, Codes of Ethics need to be specific, but not
overwhelmingly detailed. They need to be understandable and aimed at helping individuals at all
points of the organization make good decisions. Understanding isn't build through longer
documents but through discussion, education and training, leaders' demonstration and employees'
guided practice". Hope notes that there are 6 primary areas that are addressed in the Codes of
Ethics in most organizations:

 Conflict of interest

 Records, funds and assets

 Information

 Outside relationships

 Employment practices

 Other practices e.g. employee health and safety, political activities, the environment.

43. Meaning of whistle blowing :

‘Whistle blowing is the term use to define an individual’s decision to disclose the
information regarding unethical, immoral or illegal actions to an authority. It entails
revealing wrong doing or improper conduct within an organization to those in authorities

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or to the public. To below the whistle on someone is to alert a third party that a person
has done, or is doing, something wrong. So literally, “whistle blowing” means that one
makes a noise to alert others to misconduct.

Relating ethics to whistle blowing:

Talking about ethics and maintaining ethical practices in organization is not always an
easy task. One has seen the various factors that govern ethical behavior in an
organization. One interesting phenomenon that is found to happen in this context is
known as whistle blowing. The whistle blower is someone who is willing to stand-up for
what is ethically and morally right, and willing to point out organizational waste, fraud,
or wrong doing. It is often found that the whistle blower faces stiff opposition and even
animosity for the act of whistle blowing, though this is done by the individual with a high
moral conscience, and a keenness to protect the organization and its goodwill. The issue
of whistle blowing is often found to be a highly complex one and it becomes difficult to
tackle the act and its aftermath.

Whistle blowing goes against the boundary of loyalty towards the company one is
working for, and it involves a sort of ethical dilemma – on the one hand, there is an
implicit loyalty and on the other, there is something which is going against the moral
fiber or culture of the potential whistle blower.

Features of the whistle blower:

1. It occurs, when an employee discloses an employer’s illegal, immoral or illegitimate


practices to person or organizations that may be able to take corrective action.
2. It can result in effective solution, but can also disrupt the organization’s operations.
Thus, may lead to good or bad result.
3. It is risky because managers and other employees sometime deal harshly with the
whistle blower. Although, whistle blower often has altruistic motives, they may be
shunned, harassed and even fired for their efforts.
4. Dealing with whistle blowing involves balancing employee’s right to free speech
employer’s right to prevent employees from disregarding managers authority or
disclosing sensitive information to outsiders.
44. Process of ethical decision making:
1. Recognizing an issue as an ethical one :

While the ethical thing to do is often also the legal, economic, or political. There may
be no rule at all, or the application of the rule may be unclear. Recognizing the ethical
dimension of such situation is important, but may not occur because of :
i. The level of our social or cognitive development.
ii. Our unawareness that other people are involved.

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iii. Our distance from the affected people.
iv. The deliberate minimizing of an act’s impacts on potential victims.

2. Making the ethical judgment :


Ethical dilemmas require ethical responses. While generally agreeing that the
process of formulating a response is a cognitive one, experts disagree about its
nature and, in particular, about the role of reason is this process. Some believe
that moral judgments are reached by a deliberate and conscious reasoning process,
and that the reasons one uses to make ethical decisions evolve as he develops and
becomes mature.

3. Resolving to do the ethical thing:


Once we determine an ethical response, we must take the next step, and accord it
the highest priority among all alternative courses of action. Doing so successfully
depends on how we perceive ourselves and the importance we attach to ethical
values.

4. Actually acting ethically :


To be ethical, our intention to do the ethical thing must be followed by our really
doing it. Thus, individuals who, despite the negative pull exerted by rules, have
recognized an ethical issue, decided on an ethical response, and resolved to act on
it, still need to contend with pressures and other obstacles that interfere with
actually implementing their decision.

Two-tier system

Under the two-tier system, the board of directors and the supervisory board exist side by side.
The board of directors conducts the day-to-day management of the company, while the
supervisory board conducts supervisory functions. The board of directors exercises its rights and
performs its duties as an independent body. The board of directors must comprise at least three
members and no more than 11; it will elect its chairman from among its members. The deed of
foundation may provide that the chairman of the board will be appointed directly by the
shareholders' meeting. The board exercises its rights and performs its tasks as a body in
connection with all management issues of the company, whereas all board members may
represent the company personally.

In general, Hungarian corporate law sets forth a list of issues that fall within the exclusive
competence of the supreme body of the company, although this list may be supplemented by the
company's deed of foundation. All issues not falling within the exclusive competence of the
supreme body by virtue of law or by provision of the deed of foundation will fall under the
competence of the management body.

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The Companies Act further lists issues for which boards of public companies limited by shares
are specifically responsible if the company's shares are listed on the Budapest Stock Exchange.
The board will prepare an annual responsible governance report that must be approved by the
shareholders' meeting and published on the company's website. Further, the board must comply
with the regular and extraordinary information obligations under the Capital Market Act.

For the purpose of monitoring the company's management, the members of the company are
obliged to elect a supervisory board. The supervisory board also acts as an independent body and
its members may not be instructed in this capacity by shareholders or by the employer. The
supervisory board may:

 inspect company documents;


 request statements and explanations from members of the board of directors or employees;
and
 inspect the state of the company's assets.

The supervisory board must comprise at least three members and no more than 15.
45. Give an overview of nine theories of ethics that rule the world

Nine theories of ethics that rule the world

1. Consequentialism
Maintains that the majority of an action depends on the non-moral consequences
the action brings about.
Morality of an action consists of the ratio of good to evil that the action produces. We
should perform right and only right action in terms of good and evil, as each individual
defines good and evil, and right and wrong. There is no objective right and wrong or
good and evil. The person defines these.
You bump into a car at the mall. You could leave a note, but since there were no
witnesses and the owner is not around, you decide not to because you recognize that the
damage is low (probably only a couple of hundred dollars). The car owner probably has
insurance, and it would be such a hassle for the owner to contact you and your insurance
company. You may have to end up paying higher premium, the owner may think ill of
you—all of which are non-moral reasons that may be unpleasant for you.

2. Values Clarification (Philosophical Relativism)


Teaches that the most important aspect is not what one believes, but being aware
one’s own feelings, beliefs, and values systems. People thus consider alternative
models of thinking and acting. By acting thusly and making one’s own choices, one
develops one’s own values.

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In this setting, a value is what a person likes to do. It is NOT an ought-to-do, but rather a
want-to-do. Values clarification puts a heavy emphasis on feelings—so much so that it
virtually equates values with feelings. It also reflects a philosophical relativism— the
belief that there are no moral or ethical absolutes—everything is relative. Concluding
what is right or wrong is basically anybody’s guess. Proponents of these systems say that
they use the Socratic Method—every ethical question is a question of either this or that
choice. Unfortunately, Socrates and Plato had distinct beliefs about truth and ethics which
the proponents of this methodology do not possess.

3. Utilitarianism
States that the moral standard should be promotion the best long term interests of
everyone concerned. Much utilitarianism says that which is intrinsically good is
pleasure and happiness (known as the hedonistic calculus). Others say there are
other things which are intrinsically good such as beauty, power, knowledge, etc.

Act Utilitarianism states that the right utilitarian act is the one that produces the greatest
ratio of good to evil for all concerned. Rule utilitarianism teaches us that certain actions
almost always have a great utilitarian value and thus general rules are formulated to help
us see that we follow these rules of action.
A few doctors decide that a number of experiments on a few people, even if most of
them died, would be worth it if they could find a cure for a disease that would relieve the
suffering of millions of people. Utilitarianism would give the approval for such because it
produces the greatest good for the greatest number of people.

4. Legalistic Moralism (Moral Absolutism)


States there are pluralities of absolutes (or norms) with each one covering an area of
human experience. These absolutes never conflict with each other. An action that is
evil under one absolute is evil under every other absolute and could never be seen as
good under any absolute.

Some call this the ethic of absolute ends because we do what is right and trust God or fate
or destiny or the forces of good to work things out. There is no personal responsibility for
the consequences of morally right acts. We do them, not because they bring us pleasure,
but because they are “right”…this is called the “categorical imperative”.

5. Situation Ethics shows that since legalistic Moralism is encumbered with a bundle of
predetermined rules and regulations and while antinomianism says that there are
no absolutes, then decision making must be based on a “middle ground”. That
middle ground then says the guidelines for decision-making must be 1) absolute love
(agape) 2) general guidelines of helpfulness (sophia) 3) particular moment (kairos).

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Love and justice are the same. If love is the end result, then the ends justify the means.
This is not a selfish love, but a love that desires the neighbor’s best good at all times.
There are four working principles involved—a) Pragmatism (love gives concrete
practical, workable answers) b) Relativism (everything is relative to love) c) Emotivism
(each person desires his or her own values) and d) Personalize (persons are the ultimate
value).

A man finds himself in an unfulfilled marriage, looking for a person with whom he can
deeply connect. A woman is trapped in a marriage that is abusive and filled with pain.
They find each other and after a while one things lead to another until they are in love.
Love being the ultimate goal, they being consenting adults, then they are morally right in
having an affair.

6. Ethical Realism (as espoused by Reinhold Neibuhr)(the lesser of two evils)


States that when absolute norms come into conflict (as they will eventually do) one
must decide which to follow. Each solution offers limited alternatives, so the solution
which produces the less of two evils is the one to be chosen.

Unavoidable moral dilemmas occur because our world is not perfect. Niebuhr’s theory,
The Origin of Moral Dilemma, comes from a Christian perspective stating that we live in
a “fallen” world since sin entered it. Thus there is an excusable and pardonable sin
because people did not cause that dilemma by their own acts. Every decision will have
some sinful consequence of which God will forgive. Thus people must make the choice
that is the lesser sin and then ask God’s forgiveness.
Niebuhr talked of a world. War. The Soviet Union was an evil and brutish dictatorship
over millions of people, forcing them into horrific, hellish conditions. Yet to oppose them
in an outright war would bring massive destruction through nuclear weapons. Instead of
direct opposition, we chose indirect opposition (the cold war) through economics and
alternative means.

7. Ethical Hierarcicalism (Graded Absolutism)


Is the view that there are many universal norms, but they are not all intrinsically
equal? Thus when a conflict takes place, we must obey the “higher” norm…we
choose the greater of the two goods.

Geisler Hierarchical Calculus is: ·


Persons are more valuable than things
· God is more valuable than an incomplete person
· A complete person is more valuable than an incomplete person

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· An actual person is more valuable than a potential person
· Potential persons are more valuable than actual things (fetus vsappendage)
· Man persons are more valuable than a few persons
· Personal acts which promote personhood are better than those which don’t Why should
a person be held responsible for committing a crime if the crime was a lesser norm? Is it
wrong for a man to steal money to purchase a life-saving machine for his child who is
dying? Perhaps the system is at fault and not the person.

8. Principle Ethics states that principles are merely value states or guidelines to actions
(as opposed to rules or laws). Thus when principles encounter each other in conflict
it is not a conflict of norms, but rather an exercise in reasoning and logic.

Principle ethics is the most difficult to study because it demands the area test study and
the most incisive analysis of principles and cases with the goal of determining which
principles apply to which case. The decision that is made is based upon test of logic,
reasoning, and rationale.

9. Cognitive Moral Development (as espoused by Lawrence Kohlberg)


States that ethics education is possible. Just as people develop mentally, physically,
and emotionally, they develop a moral cognizance. Using critical thinking tactics
such as the Socratic Method, people can solve their ethical dilemmas.

Kohlberg taught that there were six stages of ethical thinking, each stage being of greater
maturity than the previous one. By delineating these levels, we are allowed to know and
test each our own thinking. This helps us know ourselves better and challenges us to
move on to a higher level of thinking. This assumes a sort of natural goodness and
integrity in the child whereby he or she will always want to do the right thing—if only
they had the time to reason things out. This is the idea that people suffer from a character
defect if they are void of logical thinking.

46. Discuss the corporate ethical leadership and corporate social responsibilities.

Leadership has influencing ethics of organizations because they must have a clear understanding
of the direction of the organizations vision. Goals (to include immediate and long term strategic
plans) and values. Good leaders strive to create better and more ethical organizations. Restoring
an ethical climate in organization is critical, as it is a key component I solving the many other
organizational development and ethic behavior issue facing the organization.

Following are the basic ways in which corporate ethical leadership affects in an
organization.

 It is the leadership that sets the tone for organizational impression management.

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 Leadership directly influences the organizational symbolism.
 Leadership must have the ability to recognize the needs of its members specially, the very
basics of person’s desire to belong and fit into the organization.
 Leadership has to not only place aside each of their individual (or personal) ambitions in
order to present the goals of the organization but they have to also have the stakeholders
engaged for the benefits of the organization.

Habits of strong corporate ethical leader:-


1. Ethical Leaders Have Strong Personal Character.
2. Ethical Leaders Have a Passion to Do Right.
3. Ethical Leaders Are Proactive.
4. Ethical Leaders Consider Stakeholders’ Interests.
5. Ethical Leaders Are Role Models for the Organization’s Values.
6. Ethical Leaders Are Transparent and Actively Involved in Organizational Decision
Making.
7. Ethical Leaders Are Competent Managers Who Take a Holistic View of the Firm’s
Ethical Culture.

CORPORATE SOCIAL RESPONSBLITIES:-

Meaning:

Corporate social responsibility of a business is an ethical concept involving notions of human


welfare and improving the quality of society.

Social responsibility of managers particularly in business organizations has, of late, been


one of the most talked about widely supported subjects. Business depends on the society for the
needed inputs like money, man and skills. Business depends on the society for market where
products may be sold to their buyers. Thus, business depends on society existence, sustenance
and encouragement.

Definition:-

“Corporate social responsibilities mean devising corporate strategies and building a business for
society’s needs in mind.

Scope of CSR:-

 Net income contribution.


 Public Contribution.
 Human Resource Contribution.
 Environmental Contribution.
 Product or Service Contribution.

These notes have been prepared by LJMBA


47. Explain the importance of Ethics.

Importance of Ethics is as follows:-

1) Regulating Human Behavior :-

Ethics serves as the regulating force for the conduct of mankind. These stop people from
taking hasty and irrational decisions.

2) Benefiting Long Term :-

Decision based on Ethics are balanced and well considered. Those ultimately benefit
the business in the long run.

3) Corresponds to basic human needs :-

Ethics corresponds to human needs. Most people wants to be the ethical not only their
private lives but also in their business affairs.

4) Better Decision making :-

Ethics helps in better decision making. Ethical decisions made by the company will
always be in the interest of the shareholders, others stakeholders, public and their
employees.

5) Inhibits Knowledge:-
First and foremost, ethical norms help in gaining knowledge, analyzing the truth and
avoiding any chances of errors while examining any given circumstances or situation.

6) Enhances co-operation :-

Working in any organization over workplace demands great deal of cooperation and
coordination amongst people at different levels and different fields.

7) Assist in dealings :-

The right sense of thinking can help us deal with people on a daily basis in the right and
positive manner.
8) Promotes moral and social values :-

These notes have been prepared by LJMBA


Ethics are considered to be of utmost importance simply because they assist in
promoting other significant moral and social values.

48. Distinguish between ethics and morality.

 The difference between ethics and morals can seem somewhat arbitrary to many, but
there is a basic, albeit subtle, difference. Morals define personal character, while ethics
stress a social system in which those morals are applied. In other words, ethics point to
standards or codes of behavior expected by the group to which the individual belongs.
This could be national ethics, social ethics, company ethics, professional ethics, or even
family ethics. So while a person’s moral code is usually unchanging, the ethics he or she
practices can be other-dependent.

 When considering the difference between ethics and morals, it may be helpful to consider
a criminal defense lawyer. Though the lawyer’s personal moral code likely finds murder
immoral and reprehensible, ethics demand the accused client be defended as vigorously
as possible, even when the lawyer knows the party is guilty and that a freed defendant
would potentially lead to more crime. Legal ethics must override personal morals for the
greater good of upholding a justice system in which the accused are given a fair trial and
the prosecution must prove guilt beyond a reasonable doubt.

 Another area in which ethics and morals can clash is at the workplace where company
ethics can play against personal morality. Corporate greed that blurs its own ethical lines
coupled with unreasonable demands on time can lead to having to choose between a
stressful, demanding and consuming work ethic, and family obligations seen as moral
obligations to spouse and children. Conversely, people lose jobs every day because of
poor personal morals, employee theft being a common reason for dismissal

 In society, we are all faced with the butting heads of ethics and morals. Abortion is legal
and therefore medically ethical, while many people find it personally immoral.
Fundamentalists, extremists, and even mainstream theists all have different ideas about
morality that impact each of our lives, even if indirectly through social pressures or
legal discrimination.

 In the case of homosexuality, many believe it is morally wrong, yet some of the same
people also believe it is unethical to discriminate legally against a group of people by
disallowing them the same rights afforded heterosexuals. This is a plain example of ethics
and morals at battle. Ethics and morals are central issues as the world strives to overcome
current challenges and international crossroads. Hopefully, in the coming years, a
growing understanding will lead to peaceful and productive solutions.

These notes have been prepared by LJMBA


49. Analyze the ethics of marketing publius using utilitarianism, rights, justice, caring. In
your judgment is it ethical to market publius? Explain (Case GTU paper /18th May,2013)

Answer. 1) Although many people believe that the World Wide Web is anonymous and secure
from censorship, the reality is very different. Governments, law courts and other official who
want to censor, or trace a file of materials on the web need merely go to the server where they
think the file is store.

Technology in every aspect can be misused by wrong people. Inventors or people can
come up with an innovative invention to benefit people; however there are also people who
would who would use this invention to do wrong things. Publius is a new technology that
guarantees individuals the freedom of speech and to express their thoughts and not be victimized
for what they say. Publius offer safety to certain levels that hackers or government entity cannot
just read your file. In my opinion it is ethical to market Publius because it creates of open the
door for people to speak out about the different malpractices that happen in their country and
couldn’t speak about it
When we talk about the ethics of marketing publius using utilitarianism, rights, justice,
caring my point of view is as per follows:
As a result anyone wanting to examine or censor the file or wanting to trace the original
transaction that produced the file would find it impossible because they would have to examine
contains of doesn’t of different server all over the world.
2) Are the creators of publius in any way morally responsible for any criminal acts
that criminals are able to carry out and keep secret by relying on publius? Is AT & T in
any way morally responsible for this? Explain your answer.

Answer Personally I believe Publius is a great technology because it makes it impossible


for people to edit and alter ones documents. I honestly believe that AT & T is in no way
responsible for any misuse of their technology because any technology or inventions can be
misused if it gets into the wrong hands. There is always a positive and negative side to
everything in life. We can use the invention of a car for example it takes you for one place to the
next in little time when compare to horses in the old days but the negative side to it is air
pollution, technical errors and human errors that cause the death of many people yearly but we
can blame the scientist who created the cars. However systems must be put in place to avoid of
catch people that are using the technology to do wrong.

These notes have been prepared by LJMBA


In these question we can say that on behalf of AT & T is morally responsible for these,
because AT & T labs announce the creation of publius, a software programmed that enables web
user to encrypt( translate in to secret code) there files – texts, picture, or music break them up
like pieces of jigsaw puzzles

A person authorized to retrieve the file, however, good look though directory of his files
posted on a publius – affiliated web site, and the publius network would reassemble the file upon
request, researcher published a description of publius their site.

3).In your judgment, should the U.S. government allow the implementation of
publius? Why or why not?

Answer. as per my judgment U.S. government don’t allow the implementation of


pubilus, because U.S. is a democratic country means it is encompassing freedom of speech
freedom of life etc. and publius can misused by foes of U.S.

Although many people welcome the way that the new software would enhance freedom
of speech on the web, many others were dismayed. Bruce Taylor, an anti pornography activist
for the national Law Center for children and families, stated: “It’s nice to be anonymous that
criminals, terrorists, child molesters, child pornographers, hackers and e-mail virus punks.

Aviel Rubin and Lorrie cranor, the creators of publius hoped, however, that their program
would help people in countries where freedom of speech was repressed and individuals were
punished for speaking out. The ideal user of publius they stated was “a person in China
observing abuses of human rights on day-to-day basis.”

50. What is code of conduct? Which factors must be kept in mind while framing the code?
Explain

A code of conduct, also called a code of ethics or ethical code, sets out the company's values,
ethics, objective and responsibilities. A well-written code of conduct should also give guidance
to employees on how to deal with certain ethical situations. Every code of conduct is different
and should reflect the company's ethos, values and business style. Some codes are short, setting
out only general guidelines, and others are large manuals, encompassing a huge variety of
situations.

These notes have been prepared by LJMBA


Code of Conduct and Ethics (the "Code of Conduct") sets out basic guiding principles.
Employees who are unsure whether their conduct or the conduct of their coworkers complies
with the Code of Conduct should contact their manager or the Legal Department.

Codes of ethics in the professions serve numerous purposes. At the level of the profession itself,
codes document the standards according to which the profession can be held accountable for the
conduct of its members. Further, because society relegates control for many of the professions to
the professional organizations themselves, the professions have developed codes to provide the
basis of self-regulation

I. Compliance with Laws, Rules and Regulations

Employees must follow applicable laws, rules and regulations at all times. Employees with
questions about the applicability or interpretation of any law, rule or regulation, should contact
the Legal Department.

II. Conflicts of Interest

A "conflict of interest" exists when an employee's personal interest interferes with the best
interests of company. For example, a conflict of interest may occur when an employee or a
family member receives a personal benefit as a result of the employee's position with
organization . A conflict of interest may also arise from an employee's business or personal
relationship with a customer, supplier, competitor, business partner, or other employee, if that
relationship impairs the employee's objective business judgment.

Because an employee's receipt of gifts or services could create a conflict of interest, the Legal
Department will develop and maintain guidelines for disclosure of gifts or services received from
customers, suppliers, competitors or business partners.

Employees should attempt to avoid conflicts of interest and employees who believe a conflict of
interest may exist should promptly notify the Legal Department. The Legal Department will
consider the facts and circumstances of the situation to decide whether corrective or mitigating
action is appropriate.

III. Insider Trading Policy


IV. Discrimination and Harassment

Organization should provide equal opportunity in all aspects of employment and will not tolerate
any illegal discrimination or harassment of any kind.

V. Health and Safety

Firm should provide a clean, safe and healthy work environment. Each employee has
responsibility for maintaining a safe and healthy workplace by following safety and health rules
and practices and reporting accidents, injuries and unsafe conditions, procedures, or behaviors.

These notes have been prepared by LJMBA


Violence and threatening behavior are not permitted. Employees must report to work in a
condition to perform their duties, free from the influence of illegal drugs or alcohol.

VI.. Bribery; Payments to Government Personnel

Employees may not bribe anyone for any reason, whether in dealings with governments or the
private sector. The U.S. Foreign Corrupt Practices Act, and similar laws in other countries,
prohibits offering or giving anything of value, directly or indirectly, to government officials in
order to obtain or retain business. Employees may not make illegal payments to government
officials themselves or through a third party. Employees who are conducting business with the
government officials of any country must contact the Legal Department for guidance on the law
governing payments and gifts to governmental officials.

VII. Recordkeeping, Reporting, and Financial Integrity

Companies records, accounts and financial statements must be maintained in appropriate detail
must properly reflect the Company's transactions and must conform both to applicable law and to
the Company's system of internal controls. Further, public financial reports must contain full,
fair, accurate, timely and understandable disclosure as required by law. The Company's financial,
accounting and legal groups are responsible for procedures designed to assure proper internal
and disclosure controls, and all employees should cooperate with these procedures.

VIII. Questions; Reporting Violations

Employees should speak with anyone in their management chain or the Legal Department when
they have a question about the application of the Code of Conduct or when in doubt about how to
properly act in a particular situation.

Firms Legal Department has developed and maintains reporting guidelines for employees who
wish to report violations of the Code of Conduct. These guidelines include information on
making reports to the Legal Department and to an independent third party.

56. “Religious Morality “

Most Americans describe themselves as “religious” and say their beliefs are important to the way
they live their, yet many religious business executives blatantly ignore the moral expectations
intrinsic to their religion.

First let’s be clear. Religion isn’t only about worship and ritual. Within the holy books of every
major religion are bedrock moral precepts and principles prescribing how true believers are to
live their lives? Thus, you will find references to honesty, justice, fidelity, compassion, and
charity that leave no doubt about the role ethics and personal virtue should play in our daily lives
at home and at work.

These notes have been prepared by LJMBA


The ancient truths and enduring values embodied in traditional religions are more than guidelines
or suggestions about how to behave. To those who profess religious belief, moral and ethical
behavior isn’t an option, it’s a mandate.

The moral obligations intrinsic to one’s beliefs apply to every decision an executives,
entrepreneurs or salesperson makes. There is no dispensation to mislead, to be disrespectful,
unfair or uncaring just because such behavior may seem like a business norm or because it seems
necessary to achieve a business objective. If religion is important to you, so is ethics – no
excuses, rationalizations or exemption.

The moral theory that is based on the claim that morality comes from religion is called Religious
Authoritarianism or Divine Command Theory. It means that religion is the authority on moral
matters. As you might already suspect, religious authoritarianism has some of the exact same
problems as cultural relativism. The problem that is most similar to cultural relativism is that not
everyone shares the same religion, so different people would come up with different answers to
the same moral questions.

51. Discuss the OECD principle for corporate governance

The organization for Economic cooperation and development was one of the earliest non-
governmental organizations to work and spell out principals and practice that should govern
corporate in their goals to attain long term shareholder value because of ubiquitous approval; the
OECD principals are as much trend setters as the codes of best practices associated to the
Cadbury report. A useful first step is creating or reforming by corporate governance the OECD
principals have most influential internationally and define corporate governance as involving a
set of relationship.

The frame work of principles was endorsed by the World Bank MF and Asian
development bank. The principles were the most influential global corporate governance
guidelines and were designed to acceptable work.

Corporate governance is the process and structure used to direct and manage the business
and affairs of the company towards enhancing business prosperity and corporate accountability
with the ultimate objective of realizing long-term shareholder value, whilst taking into account
the interest of other stakeholders.

Corporate Governance refers to the manner in which the power of a corporation is


exercised in the stewardship of the corporation's total portfolio of assets and resources with the
objective of maintaining and increasing shareholder value and satisfaction of other stakeholders
in the context of its corporate mission. It is concerned with creating a balance between economic
and social goals and between individual and communal goals while encouraging efficient use of
resources, accountability in the use of power and stewardship and as far as possible to align the
interests of individuals, corporations and society

These notes have been prepared by LJMBA


"Good governance is not simply about corporate excellence. It is the key to economic and
social transformation. The corporation of today is no longer sheer economic entities. These are
the engines of economic and social transformation."

The Importance of Good Governance

If a country does not have a reputation for strong corporate governance practices, capital
will flow elsewhere. If investors are not confident with the level of disclosure, capital will flow
elsewhere. If a country opts for lax accounting and reporting standards, capital will flow
elsewhere. All enterprises in that country — regardless of how steadfast a particular company's
practices may be —suffer the consequences.

Elements of OECD principals

1. Rights of shareholder
2. Equitable treatment of shareholders
3. Role of stake holder in corporate governance
4. Disclosure and transparency
5. Responsibility of the board

Issues in Corporate Governance

o Distinguishing the roles of the board and the management


o Composition of the board and related issues
o Separation of the roles of the CEO and the chairperson
o Should the board have committees
o Appointments to the board and directors’ re-election
o Directors’ and executives’ remuneration
o Disclosure and audit
o protection of shareholder rights and their expectations
o Dialogue with institutional shareholders
o Should investors have a say in making a company socially responsible corporate
citizen

52. Briefly explain the evolution of corporate governance in India

Since over a decade, the concept of CG has become a passion with industry analysts in
India It had developed with lot of studies & in- depth research being done by several committees
There has been a phenomenal growth both in quality & number of corporations in India Another
perspective to the issue of Indian CG was observed in Government of India’s Award for
Excellence in Corporate Governance, wherein 63 companies were shortlisted.

The list was prepared on the basis of CG criteria's such as:

These notes have been prepared by LJMBA


 Governance structure (Composition of board & committees)
 Disclosures in annual report (Statutory & non Statutory)
 Timeliness & content of information to investors & public
 Enhancement of shareholder value (on the basis of share prices & return on net
worth)
 The list represents that there are a sizeable number of corporations in the country
that make serious efforts to adopt better CG standards

The evolution of corporate governance in the country like India is full of mount and
valley one may find so many changes in the policies and procedures of corporate governance
following are the few Indian committees and guide lines on the basis of which one can easily
understand the evolution of corporate governance in India.

o Working Group on the Companies Act, 1956.


o The government accordingly set up a Working Group in August
o 1996 for this purpose.
o The Working Group on the Companies Act has recommended number of changes
and also prepared a working draft of Companies Bill 1997. The Bill was
introduced in the RajyaSabha on 14 August 1997, containing the following
recommendations.
o Financial Disclosures Recommended by the Working Group on the Companies
Act etc.

SEBI’s Initiatives are also part of development of corporate governance in India such as

• The Securities and Exchange Board of India (SEBI) appointed a committee on corporate
governance on May 7, 1999, with eighteen members under the Chairmanship of Kumar
Mangalam Birla to promoting and raising the standards of corporate governance.

53. Define corporate governance. Explain the important concept in corporate governance.

The term corporate governance is not precisely defined anywhere. Corporate governance
is the set of processes customs, policies, laws etc. According to Cadbury committee: The
corporate government is defined as the system by which companies are directed and controlled.

The important concept in corporate governance:-

Changing Ownership Structure: In recent years, the ownership structure of companies has
changed a lot. Public financial institutions, mutual funds, etc. are the single largest shareholder in
most of the large companies. So, they have effective control on the management of the
companies. They force the management to use corporate governance. That is, they put pressure
on the management to become more efficient, transparent, accountable, etc. The also ask the

These notes have been prepared by LJMBA


management to make consumer-friendly policies, to protect all social groups and to protect the
environment. So, the changing ownership structure has resulted in corporate governance.

Importance of Social Responsibility: Today, social responsibility is given a lot of


importance. The Board of Directors has to protect the rights of the customers, employees,
shareholders, suppliers, local communities, etc. This is possible only if they use corporate
governance.

Growing Number of Scams: In recent years, many scams, frauds and corrupt practices
have taken place. Misuse and misappropriation of public money are happening every day in
India and worldwide. It is happening in the stock market, banks, financial institutions, companies
and government offices. In order to avoid these scams and financial irregularities, many
companies have started corporate governance.

Indifference on the part of Shareholders: In general, shareholders are inactive in the


management of their companies. They only attend the Annual general meeting. Postal ballot is
still absent in India. Proxies are not allowed to speak in the meetings. Shareholders associations
are not strong. Therefore, directors misuse their power for their own benefits. So, there is a need
for corporate governance to protect all the stakeholders of the company.

Globalization: Today most big companies are selling their goods in the global market. So,
they have to attract foreign investor and foreign customers. They also have to follow foreign
rules and regulations. All this requires corporate governance. Without Corporate governance, it
is impossible to enter, survive and succeed the global market.

Takeovers and Mergers: Today, there are many takeovers and mergers in the business
world. Corporate governance is required to protect the interest of all the parties during takeovers
and mergers.

SEBI: SEBI has made corporate governance compulsory for certain companies. This is
done to protect the interest of the investors and other stakeholders.

60. Describe the recommendations of Narayana Murthy Committee.

This committee was set up as a sequel to Kumar Mangalama Birla Committee. SEBI
constitute this committee under the chairmanship of N.R. Narayana Murthy. Charmain and
mentor of Infosys technologies limited, and mandated the committee to review the performance
of corporate governance in India and make appropriate recommendations. The committee
submitted its report in Feb 2003.

The committee noted that the recommendations contained in their report can be
implemented by means of an amendment to the listing agreement with change made to existing
CLAUSE 49

These notes have been prepared by LJMBA


The terms of references of the committee where ;

1. To review the performance of corporate governance, and


2. To determine the role of companies responding to rumor and other price sensitive
information circulating market.
Major recommendations:-

 Audit Committees
Audit committees of publically listed companies should be required to review the
following mandatory information’s.
i. Financial statement and draft audit report
ii. Management discussion and analysis of financial condition
iii. Report relating to compliance with laws

 Audit reports and audit qualification.


In case a company had followed a treatment different from that prescribed in an
accounting standard management should justify why they believe such alternative
 Related party transaction.
A statement of all transaction with related parties including their bases
should be placed before the independent audit committee for formal approval

 Whistle Blower Policies.


Personnel who observe unethical or improper practice should be able to
approach the audit committee without necessarily informing their supervisors.
Companies shall take measures to ensure that this right of access is communicated
to all employees through means of internal circularity.

Following are the other recommendation of Narayan Murthy committee:


 Risk Management
 Proceed from initial public offerings (“IPO”)
 Code of conduct.
 Nominee directors
 Non- Executives directors compensation
 Independent directors.

 Subsidiary Companies
 Real time disclosers.
 Evolutions of board performance.

These notes have been prepared by LJMBA


54. Why would you consider the study of ethical importance for today’s business
practices? Give examples five areas of business operations where ethical practices play
dominant roles in the success of business.

Factors highlighting the importance of business ethics

In the second decade of the third millennium, we can cite four major factors which highlight the
importance of business ethics (we define business ethics here):

5. Long-term growth: sustainability comes from an ethical long-term vision which takes
into account all stakeholders. Smaller but sustainable profits long-term must be better
than higher but riskier short-lived profits.
6. Cost and risk reduction: companies which recognize the importance of business ethics
will need to spend less protecting themselves from internal and external behavioral risks,
especially when supported by sound governance systems and independent
7. Anti-capitalist sentiment: the financial crisis marked another blow for the credibility of
capitalism, with resentment towards bank bailouts at the cost of fundamental rights such
as education and healthcare.
8. Limited resources: the planet has finite resources but a growing population; without
ethics, those resources are related for purely individual gain at huge cost both to current
and future generations.

1. Long-term growth

Large profits are always attractive, potentially allowing faster achievement of strategic goals, a
greater provision against risk and a greater sense of success and stability. However, there are
countless examples in corporate history of dramatic boom and bust cycles (both on a micro,
corporation level and macro-economic level). Now, more than ever, we need to re-evaluate our
endless search for bigger and bigger profits with the bigger and bigger risks that entails. The
financial crisis which began in 2008 is painful evidence of that. Whole countries have gone to
the brink of bankruptcy as a result of an unwillingness or inability to plan long-term.

These notes have been prepared by LJMBA


More and more organizations are recognizing what most owner-run businesses have always
known: that stable profits are a better bet in the long run than large profits now and an uncertain
future. It is on the long term which we must focus to avoid the blindness which leads to such
huge corporate collapses as Lehman Brothers (2008) and such huge risks and balance sheet holes
as Morgan Stanley (as late as 2012). Even the largest remaining investment banks like Goldman
Sachs are having to recognize this (if only to try and fend off more aggressive regulation) and
attempting to make their bonus allocations more dependent on longer term value than the current
year’s performance. One can only hope that the heads of such organizations recognize the
importance of business ethics and the resulting need to change to a more sustainable model of
growth.

Certainly the only way to change the huge, unwieldy vessel that is global business is to focus on
the business benefits. While it may seem contradictory and hypocritical to place self-interest at
the heart of change for the better, it is the only conclusion that seems to offer hope.
Fundamentally the importance of business ethics is driven by personal ethics and morality and
most people are fundamentally self-interested. But, if it is in people’s best interest to be ethical,
this has the potential to drive real change. It is already happening in several consumer markets
where demand is shifting to ethical products and social networks are instrumental in spreading
stories about unethical practices. (Sadly, very rarely is positive action rewarded with the same
degree of enthusiasm but with some good - but earnest - marketing, it can be given a kick start
and be highly successful long term.)

2. Cost and risk reduction

A precedent which argues the case made above is the Quality Management industry. In the West,
this sprung up in the early 1980s, when products began to be inspected before leaving the factory
in an attempt to reduce the amount of costly customer complaints. Now, most products come
with at least a one-year warranty and in the case of some car manufacturers, up to five years.
What started off as a self-interested need to reduce costs has led to more reliable products? )

Meanwhile, we offer another analogy from wider society. Just as widespread bribery and
corruption in society are recognized as being inimical to the development of a healthy economy,

These notes have been prepared by LJMBA


similarly the lack of a high standard of ethical behavior in a company is inimical to trust and
loyalty, which in turn has a detrimental effect on the health of the company over the longer term.
It may be argued that an owner can run a business in whichever way he or she wishes, and at first
glance there would appear to be a case for this so long as no other shareholders are involved, and
only his or her money is at risk, and of course with the acquiescence of the employees and
trading partners. However, in many years of observing different standards of behavior in
different business circumstances, one recognizes the relationship between the perception of
ethics which permeates an organization and the degree of trust and loyalty present among
employees and between staff and management. The conclusion one reaches is that loyalty and
trust have a significant value in terms of the efficiency and effectiveness with which a business
can be run, and the concomitant cost of control systems needed.

In other words, a highly ethical operation is likely to spend much less on protecting itself against
fraud and will probably have to spend much less on industrial relations to maintain morale and
common purpose. This should be motivation in itself to recognize the importance of business
ethics and instill good corporate governance in any organization.

Importance of Business Ethics: Pressures on Long-Term Growth

3. Anti-capitalist sentiment

These notes have been prepared by LJMBA


The eye-watering profits of some of the world’s largest corporations attract a lot of negative
sentiment from those outside the world of business and finance. While clearly a result of the
scale of these organizations, there is always a suspicion that these profits have been achieved
through not entirely ethical means - and in some cases downright unethical means, often
resulting in major public failures, most recently in Japan, where the senior management of
Nomura resigned en masse after an insider trading scandal.

Banks in particular receive a lot of bad publicity over profits and executive pay (especially
bonuses), and while not always justified, the fact is, an industry at the centre of the credit crunch
and resulting economic and financial crisis continued to produce hefty profits and bonuses even
while making large numbers redundant. This is, of course, a huge generalization and
simplification of the issue (this is not place for such details) but it is the natural reaction of the
general public, who lack such detailed information and understanding. Public sentiment cannot
be ignored. This situation makes the importance of business ethics all the more pressing in the
21st century.

4. Limited resources

One irrefutable fact is that this planet has limited resources. Probably the biggest failure in
human development over the last three hundred years has been in recognizing that and
attempting to minimize use and maximize re-use and recycling. While there are now global
initiatives to try and reverse this trend, and much progress has been made, there is still a long
way to go. In the major developing economies, especially, history is repeating itself on a massive
scale. With notable exceptions, this applies not only to specific environmental and sustainability
regions issues but to corporate governance generally and the importance of business ethics to the
new high growth and corporations.

This is another example of short-termism prevailing over long-term vision and preservation of
limited resources for future generations - and in some cases the same generation, as in
deforestation driving native peoples and animal species to the point of extinction. Just as basic
financial management requires planning to ensure capital reserves and so solvency, the same
principles should clearly apply to the extraction and usage of natural resources.

These notes have been prepared by LJMBA


There are some notable exceptions, of course, with the likes of Sir Richard Branson (founder of
the Virgin Empire) taking a keen interest in environmental affairs (as well as entrepreneurship).
On a governmental level, the 2012 London Olympics are the "greenest" ever, with 40%
reduction in water usage (despite the record amount of parks and planting) and 98% waste
recycling. Let’s see how Brazil picks up the baton in the quest for a carbon neutral Olympics.
And how the private sector accepts the importance of business ethics in the rapid development
they are experiencing.

Ethics Affect Everyone


To understand the importance of ethics in business, you'll want to understand how business
ethics affect those involved. The ethics of a business collectively and of those involved, have the
power to help or harm people. Business ethics are important because if an enterprise lacks ethics,
the employees, the customers, and everyone else involved with the company can be harmed.

The Effects of Unethical Business Practices


When the CEO of a company accepts a raise or does not take a pay-cut when several people are
being laid off, this is considered unethical by many. The CEO has a responsibility to do what's
best for the corporation. It is almost never best to lay off loyal and hard-working employees.
Employees are the life-blood of every organization and without them, the beauty of industry
would not exist. The ultimate affects of such a practice are potentially devastating. The company
could suffer significant profit losses due to under-staffing. Former employees could end up
homeless and the general public, if and when they find out, will have a negative view of such an
organization; thus, the company's reputation will be damaged.

The Effects of Ethical Practices


On a more positive note, an establishment that gives it's surplus to a charity donation each year is
practicing ethical behavior. While this practice benefits the company by allowing them to bypass
additional taxes, it also sends out a positive message. This can bring in more customers, increase
or enhance positive business relationships, and even allow the firm to add new employees.

These notes have been prepared by LJMBA


Business Ethics are Ultimately Personal Ethics

Business ethics and personal ethics go hand in hand. The ethics learned at a young age are
usually the ones maintained through adulthood and put into practice in daily lives. The
employees must share the same ethics as the company or at least practice them while employed.
Some businesses give their prospective employees informational materials that contain a mission
statement, policies, and other ethical responsibilities that all employees must abide by. While
these efforts are noteworthy, it does nothing if the employee refuses to respect the organization
by following the guidelines laid out for them.

Understanding the importance of ethics in business is the key to success. Customers,


management, and employees all appreciate honest and ethical practices. Business ethics are
important because they help maintain a clean reputation and they ultimately benefit everyone
involved.

Examples

In many organizations ethical business practices have been embedded through the introduction of
comprehensive programmes and/or documentation. Any company that plans to implement,
review or refine their ethical business practices needs to do so in a tailored fashion as each has
different needs, resources, and issues. However, the following guidance will assist in
determining what must be considered when putting ethical practices together.

Of the opinions sought for this research the most commonly cited organizational ethics practice
was the use of Codes of Ethics or Codes of Conduct. Brandl and Maguire (2002) note that there
is a difference between a Code of Ethics and a Code of Conduct. A Code of Ethics "is generally
a more blanket statement of values and beliefs that defines the organization or group. (it) Usually
has two key elements: aspiration ideals outlined in the beginning, followed by rules or principles
that members of the organization are to follow. There are often different sections regarding
specific relationships with employees, customers, shareholders, suppliers, and competitors, as
well as society in general". Brandl and Maguire identify a Code of Conduct as being a document
that "addresses the values of the group or company and how the values reflect those of society as
a whole". The Ethics Resource Center in America, views a Code of Conduct as a document that

These notes have been prepared by LJMBA


outlines a fundamental set of principles and that it helps explain why behavior is directed in a
certain way, and why certain actions are required or prohibited.

Brandl and Maguire summarize the differences between the two, stating "Codes of Ethics are
general guides to operational values and decisions, while Codes of Conduct are more specific or
formal statements of the values and practices of a business. Codes of Conduct often contain
examples of appropriate behavior and specific prohibitions and may begin with a mission
statement".

Deborah Hopen (2002) who wrote on corporate behavior for The Journal for Quality and
Participation states that "To be successful, Codes of Ethics need to be specific, but not
overwhelmingly detailed. They need to be understandable and aimed at helping individuals at all
points of the organization make good decisions. Understanding isn't build through longer
documents but through discussion, education and training, leaders' demonstration and employees'
guided practice". Hopen notes that there are 6 primary areas that are addressed in the Codes of
Ethics in most organizations:

 Conflict of interest

 Records, funds and assets

 Information

 Outside relationships

 Employment practices

 Other practices e.g. employee health and safety, political activities, the environment.

55. Critically Discuss Role & Scope of ethics in business

Role of business ethics

The primary role of business ethics is to hold a company and its employees accountable for their
actions as they affect others. This includes both internal and external behavior. It keeps

These notes have been prepared by LJMBA


businesses and professionals mindful of the consequences of their actions so that they can pursue
success responsibly. Business ethics can apply to every aspect of business and thus they typically
have a dramatic impact on the structure of a company.
One important role of business ethics is to manage behavior that cannot be covered by
governmental laws. There are many actions which, while they are legal, are also detrimental to
certain groups such as employees, members of the community, and groups that are affected by
the actions of a company. By having a code of conduct, a business can self-regulate its behavior
and ensure that it is acting appropriately.

The standards for what is acceptable in the professional environment are constantly changing.
Another role of business ethics is to demonstrate behavior that is the current norm. Actions that
were acceptable in the past can become inappropriate in later years and vice versa.

In addition to ensuring a company acts with sensitivity, another function of business ethics is to
keep the business honest. While many unethical behaviors are not illegal, they can often lead to
unlawful acts. Having a code of ethics can encourage employees to stay honest and steer clear of
potentially illegal behavior.

Maintaining strong business ethics can also have an effect on the success of a company. By
acting with sensitivity to others, a business can improve its profile in the community and
industry. Ethical companies often inspire trust and loyalty in others and by extension their
products or services.

Another role of business ethics is to ensure that the power wielded by large corporations is used
to good effect. As a business expands, often opportunities for corruption also grow. In some
cases this expansion can obscure or destroy valuable elements in a community. With a good code
of conduct, a company can work to repair possible damage caused by its success and even work
proactively to help others.
Business ethics can also apply to the shareholders of a company. When making decisions, an
ethical company will consider how its behavior will affect all individuals who have a stake in the
business. The theory is that while it is legal for a company to act in its own best long-term
interests, it is moral to also consider the needs of those who support it.

These notes have been prepared by LJMBA


Scope of Business Ethics

1. Code of conduct: Business ethics is a code of conduct. It tells what to do and what not to do
for the welfare of the society. All businessmen must follow this code of conduct.
2. Based on moral and social values: Business ethics is based on moral and social values. It
contains moral and social principles (rules) for doing business. This includes self-control,
consumer protection and welfare, service to society, fair treatment to social groups, not to
exploit others, etc.
3. Gives protection to social groups: Business ethics give protection to different social groups
such as consumers, employees, small businessmen, government, shareholders, creditors, etc.
4. Provides basic framework: Business ethics provide a basic framework for doing business. It
gives the social cultural, economic, legal and other limits of business. Business must be
conducted within these limits.
5. Voluntary: Business ethics must be voluntary. The businessmen must accept business ethics
on their own. Business ethics must be like self-discipline. It must not be enforced by law.
6. Requires education and guidance: Businessmen must be given proper education and
guidance before introducing business ethics. The businessmen must be motivated to use
business ethics. They must be informed about the advantages of using business ethics. Trade
Associations and Chambers of Commerce must also play an active role in this matter.
7. Relative Term: Business ethics is a relative term. That is, it changes from one business to
another. It also changes from one country to another. What is considered as good in one
country may be taboo in another country.
8. New concept: Business ethics is a newer concept. It is strictly followed only in developed
countries. It is not followed properly in poor and developing countries.

56. Rights and responsibilities of investor & shareholders?

Rights:=

 To receive the share certificates, on allotment or transfer (if opted for transaction in
physical mode) as the case may be, in due time. Now in IPO, investors will be allotted
shares in dematerialized mode only and subsequently they can rematerialize the allotted
shares.

These notes have been prepared by LJMBA


 To receive copies of the Annual Report containing the Balance Sheet, the Profit & Loss
account and the Auditor’s Report. ƒ To participate and vote in general meetings either
personally or through proxy. ƒ To receive dividends in due time once approved in
general meetings. ƒ

 To inspect the statutory registers at the registered office of the company. ƒ

 To receive corporate benefits like rights, bonus, etc. once approved.

 To apply to Company Law Board (CLB) to call or direct the Annual General Meeting
with requisite number of shareholders. ƒ

 To inspect the minute books of the general meetings and to receive copies thereof. ƒ To
proceed against the company by way of civil or criminal proceedings. ƒ

 To apply for the winding up of the company with requisite number of shareholders.

 To receive the residual proceeds in case of winding up. ƒ

 To receive offer to subscribe to rights shares in case of further issues of shares.

 To receive offer in case of takeover or buyback under SEBI Regulations.

 Besides the above rights, which you enjoy as an individual shareholder, you also enjoy
the following rights as a group: ƒ To requisite an Extra-ordinary General meeting. ƒ

 To demand a poll on any resolution. ƒ

 To apply to CLB to investigate the affairs of the company. ƒ

 To apply to CLB for relief in cases of oppression and/or mismanagement.

RESPONSIBILITIES:=

ƒ While you may be happy to note that you have so many rights as a stakeholder in the company
that should not lead you to complacency; because you have also certain responsibilities to
discharge. However, these are not statutory liabilities: ƒ

 To be specific. ƒ
 To remain informed. ƒ
 To be vigilant. ƒ

These notes have been prepared by LJMBA


 To participate and vote in general meetings. ƒ
 To exercise your rights on your own or as a group.

57. Critically discuss the role and usefulness of the “UTILITARIAN THEORY” in assuring
ethics and morality in the society?

Introduction

Over the course of the next two lectures we will be looking at two of the most politically and
philosophically significant theories of modern times (1500- present), the consequentialist theory
of Utilitarianism and the deontological theory devised by Immanuel Kant (often referred to as
Kantianism). Today’s session will focus on utilitarianism and the next (on Tuesday, 4th October)
will look at deontology. Utilitarianism is a normative ethical theory. It is the most well-known
and prevalent forms of consequentialism. Consequentialism is an umbrella term for a range of
moral theories that state the rightness or wrongness of an action should be based solely on the
results produced by that action. There have been many different forms of theory of a
consequentialist nature throughout history. When modern utilitarianism’s most influential
exponent, Jeremy Bentham, set out his moral theory in 1789, it was not an unfamiliar concept.

Jeremy Bentham

Jeremy Bentham (1748-1832) was born in the 18th Century in London, into a family of
prominent attorneys. At that time, England was experiencing a great deal of economic, political
and social change. Many of the ideas/practices that had been considered the norm were no longer
relevant. Although Bentham studied law, following the family tradition, he never practiced
preferring instead to study legal, social and moral institutions and write papers with proposals for
reform. He published relatively few of the numerous manuscripts he wrote during his lifetime.
His most important theoretical work was Introduction to the Principles of Morals and
Legislation, which set out most of his moral theory. Bentham regularly attacked the main
political parties in government but it was through his contacts in political life that many of his
ideas for reform became a reality (e.g. the Reform Bill of 1832, and the secret ballot). It appears
that he had at least an indirect effect on British political life during his lifetime. When Bentham
died in 1832, he left countless pages (tens of thousands) of his writings and a large estate which
funded the newly-founded University College, London (for non-conformists, Catholics, Jews and
others who could not get into the established universities). He requested that his embalmed
corpse be embalmed and placed in a glass cabinet in the university, and that is where he remains
to this day.

Psychological Hedonism and Psychological Egoism

Much of Bentham’s moral theory of utility is based on his concept of human nature. Central to
this concept was his understanding of human behavior as solely motivated by the pursuit of
pleasure and the avoidance of pain. Hedonism is a philosophical theory that views pleasure as the

These notes have been prepared by LJMBA


supreme good (or value) and pain as the ultimate evil. Psychological hedonism refers to the
notion that human beings are naturally motivated by a desire for pleasure and an aversion to
pain. Early in Introduction to the Principles of Morals and Legislation, Bentham states that
“[n]nature has placed mankind under the governance of two sovereign masters, pain and
pleasure. It is from them alone to point out what we ought to do, as well as what we shall do”
(emphasis added). Using the word ‘ought’ here indicates that pleasure and pain are not merely
motives for action but also define what is morally good and bad (pleasure being good and pain
being bad). Bentham also viewed human beings as essentially self-interested individuals. In fact,
he believed that concepts such as ‘community’ and ‘social relations’ were useful social
conventions but fundamentally meaningless. The individual is the only unit of society and no one
individual is more or less important/valuable than another. Psychological egoism is the theory
that one always acts in one’s own best interests - even if one acts altruistically. When acting
altruistically, psychological egoists believe that we are promoting our own happiness whether
directly or indirectly. These two core concepts of human nature had a profound influence on the
development of Bentham’s theory of utility, as will become clear in the next section.

Theory of Utility

Bentham’s theory of utility is based on three central features: 1. The greatest happiness principle
(or utility principle) 2. Egoism 3. Artificial identification of one’s own interests with those of
others the principle of utility states that what is right is that which promotes the greatest
happiness. Utility here is not simply referring to the usefulness of actions but the extent to which
an action promotes the good (happiness). Bentham’s psychological hedonism accounts for his
definition of good/happiness as that which is most pleasurable. Hedonistic utilitarianism
interprets a variety of experiences as ‘pleasure’ and some more contemporary utilitarian are
described as pluralists because they identify other intrinsic values besides ‘pleasure’ such as
courage, honesty, friendship and knowledge. The greatest happiness principle applies to every
single action - an action which involves heroic sacrifice but fails to increase the general
happiness is morally wrong.

Types of Utilitarianism

In recent times utilitarianism has been sub-divided into a number of variant forms. Among these
are act, rule, and negative and preference utilitarianism.

Act Utilitarianism

Act utilitarianism is one of the simpler and more straight-forward types. Act utilitarianism
advises us to judge each individual action on its outcome/results alone. If it is a choice between
two courses of action we are morally obliged to take the one which yields the most happiness for
the most people. The problem with this is that it could permit some intuitively wrong acts, such
as employing 25 child laborers in China to make cheaper products for a jeans company in

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England, the profits for the thousands of shareholders in the company would be massively
increased.

Rule Utilitarianism

Rule utilitarianism attempts to resolve the moral ‘loop hole’ (illustrated above) in act
utilitarianism. Rule utilitarianism is not concerned with assessing individual acts but the utility of
a rule for action. This means that we should judge an act like so: if everyone were to obey this
rule, would the general happiness be maximized? In the case of the child laborers we can see
that, as a general rule, it would not increase the general good if every manufacturer were to
employ child laborers in order to increase profits. The same applies in reverse: sometimes more
people would experience increased happiness/pleasure if I were to give my money to charity
rather than pay my taxes but if everyone were to do this the general good would suffer - there
would be no money for roads, schools and social welfare. This form of utilitarianism has been
criticized because it advocates following general rules which often decreases happiness for the
people directly involved, thus failing to meet the basic requirement of utilitarianism.

Negative Utilitarianism

While most forms of utilitarianism tend to be fixed on promoting the greatest good for the
greatest number, negative utilitarianism is focused on promoting the least amount of evil (or
harm) for the greatest number. Some view this as a more effective ethical theory because there
are more ways to do harm than good and the greatest harms have more serious consequences
than the greatest goods. The main objection to this ethical formula is that taken to its logical
conclusion, it requires employing all our knowledge to discover the quickest and least painful
method of killing the entire human population. This is because every human being experiences
pain throughout their life and the only way to be sure of effectively minimizing their pain would
be to end their life.

Preference Utilitarianism

This type of utilitarianism defines the good to be maximized as the fulfillment of people’s
preferences. The right action remains that which produces the best consequences but the best
consequences are those that satisfy personal preferences and can be a variety of goods/values
besides pleasure. This is not pluralist utilitarianism, which recognizes several important values.
The main problem with this is that it allows for people to have seemingly unethical preferences,
e.g. paedophilia, oppression of women/homosexuals/ immigrants. Subjective preferences can
only be allowed if they meet a criterion of acceptability - such a restriction may be inconsistent
with the idea of preference satisfaction and very difficult to formulate.

Criticisms of Utilitarianism

These notes have been prepared by LJMBA


We have looked at Bentham’s theory of utility and how it was developed. The sections
describing newer variants of the ethical theory also included the flaws of those particular strains
of utilitarianism. Here we will look at the more general objections and difficulties associated
with this theory.

ONE: There is a problem with distinguishing types and degrees of happiness/pleasure. Is long-
term contentment a lesser, equal or greater type of happiness than short-term euphoria or
ecstasy? Bentham’s principle of utility requires a method of calculating/measuring happiness,
what we would call a ‘felicific calculus’, but no such method has ever been developed and some
would suggest that happiness is immeasurable.

TWO: In utilitarianism, pleasure is neutral - the pleasure of a sadist is equal to the pleasure of
the altruist. Although a utilitarian could easily argue that sadist acts often result in greater harm
and altruist acts in greater happiness, which would require the utilitarian to condemn sadism and
condone altruism.

THREE: The greatest happiness of the greatest number leaves minorities in any society at a
distinct disadvantage. Utilitarianism in the strictest form would allow slavery and torture of a
few if it increased the happiness of the population as a whole. A utilitarian would argue that a
breach of human rights on such a level would lead to tension and mistrust amongst the general
population so that slavery would be found to be morally wrong and prohibited. It is necessary to
ask if this is a good enough reason for banning slavery?

FOUR: Utilitarianism often requires action that is contrary to our ‘common sense’ or intuition,
especially with regard to sacrificing human beings for the happiness of other human beings. It is
argued that human beings have an intrinsic value and should never be used as a means to an end
or viewed as expendable.

FIVE: Bentham’s utility theory gives significance to pleasure (happiness) as the highest value
but only suggests that the reason for this is because human beings naturally desire it. Naturally
desiring something does not always mean it should be desired. Would the world be a better place
if we were all happy and fulfilled all of the time? How would this affect the human experience?

SIX: The focus on consequences and results, which is central to consequentialist theories,
neglects motives and intention. It dismisses their significance for determining the
rightness/wrongness of an action. To the utilitarian all that matters is what actually happens - the
act is judged alone.

Moral Dilemma

Today’s moral dilemma is TRIAGE. In the A&E departments of hospitals all around the world
there is a practice of triage - prioritization of patients in greater need of medical attention over
others. As such it means that someone who has a sprained ankle won’t get to see the doctor

These notes have been prepared by LJMBA


before the person with a gunshot wound in the chest simply because she has been waiting longer.
This seems like common sense. However, it is not always as straight-forward as this.

Joseph is a triage nurse in DevelopingWorldLand Hospital. Every day he has to make tough
decisions about medical care for the people who come to the A&E department. The hospital is in
a deprived part of town and is way underfunded. There is only one doctor and limited medical
supplies. At about 2pm three different serious-case patients arrive together, all requiring
immediate attention from a doctor. Joseph must make the decision to send one knowing the
others will certainly die even if he is to do what is within his nursing capabilities.

Patient 1 - Sister Catherine is a missionary nun from Ireland who looked after Joseph in the
orphanage where he grew up. She has looked after and taught many generations of local children
in her 40 years in DevelopingWorldLand and is like a mother to Joseph.

Patient 2 - Jacob is a local man who has been educated abroad and come back to DWL to use his
knowledge and skills to help regenerate the national economy and raise his country out of
poverty and debt. He has been awarded the Nobel Prize for Economics as well as several
international humanitarian awards for the grassroots work he is doing in DWL.

Patient 3 - Marion is the single mother of thirteen dependent children. Her husband has recently
died of AIDS and if she dies, her children will struggle to feed and clothe them. The local
orphanage will not be able to take them all due to government restrictions and some will become
homeless - their vulnerable position will make them likely targets for local slave-traders.

Divided into groups, the class should discuss the following: 1. what decision you think a
utilitarian nurse would make in this situation 2. Whether you would find the utilitarian decision
to be the most ethical given the circumstances.

58. Explain the meaning and objectives of corporate social reporting? How does a help in
improving governance of companies?

Meaning: Social reporting is part of process that helps corporate operate in a way that reflects
society’s expectations.
Objective of corporate social reporting:
 To support management in integration a wide range of social consideration into
decision-making.
 To provide methodologically sound a comprehensive information on the social
impacts of business activities.
 To permit the monitoring, evolution, and when necessary control of corporate
social behavior by stakeholders.

These notes have been prepared by LJMBA


 To enable a meaningful communication with organization’s stakeholders, this
enhances the trust and relationship, and help in demonstrating performance and
plan for future improvement.
 To improve organization’s reputation, by demonstrating its concern about
environment and social issue, and fostering transparency and accountability.
 To improving company’s environmental and social risk management by
identification of risks, their origin, this could facilitate better management.
 To identify opportunities of reduction in resources and operating cost, by virtue of
a thorough analysis of the key performance indicators undertaken during the
preparation of the report.
 To help in determining whether a firm’s activities are consistent with the widely
shared social priorities.
 To make available relevant information on a firm’s goal, policies, programmes,
performance, and contribution to social goals.

Social Reporting is help in improving Governance of companies:

As a result of pressure from public interest groups, mandatory social disclosure


requirements and management’s motivation to improve the firm’s image more and more
corporations of developed countries are disclosing social information in some form or another.
This trend has also started in developing countries like India. Will social information be
disclosed regularly by all firms? An answer to this question will either depend upon the
mandatory requirements or upon the demand for social information by investors and other
financial statement users. Until disclosure of social information becomes mandatory, firms
would be encouraged to disclose this information only if the users of annual statements demand
this information and management is convinced that such a disclosure would be in their best
interest.
59. Define whistle blowing under what condition is whistle blowing justified? Discuss
whistle blowing and its effect on trust in an organizational context?
Meaning of Whistle blowing:“Whistle blowing is organization’s decision to disclose the
information regarding unethical, immoral or illegal action to an authority.”
Whistle blowing justified:

These notes have been prepared by LJMBA


1. When the firm through a policy or product will commit serious and substantial harm to
the public (as consumers or bystanders), the employee should report the firm.
2. When the employee identifies a serious threat to those who may be harmed, he or she
should report it and state his or her moral concern.
3. When the employee’s direct supervisor does not act, the employee should use the internal
procedures and chain of command up to the board of directors.
4. The employee must have documented evidence that is convincing to a reasonable,
impartial observer that his or her view of the situation is accurate and that the firms’
practice, product, or policy seriously threatens and puts in danger the public and/or
product user.
5. The employee must have valid reasons to believe that revealing the wrongdoing to the
public will result in the necessary changes to remedy the situation. The chance of
succeeding must be equal to the risk and danger the employee takes to blow the whistle.

Guidelines for organization:

1. Process should be transparent: it must be demonstrated that every complaint will be


investigated as transparently and fairly as possible. Regardless of who the complaint is
against, if the person is found guilty then sanctions and punishment.
2. Protect the confidentiality of the whistle blower: the whistle blower must be protected
against harassment and undue pressure. This can be best done by respecting the
confidentiality of the complaint even if the charge be later proved to be false.
3. Companies should not fear crank calls: in the name of cutting-out crank calls, many
companies refuse to entertain anonymous complaints. If whistle blowing is respected as a
reliable way of catching fraud in time, then all complaint should be look into. More and
more whistle blowers are emboldened to put down their names.
4. Make known the procedures: the whistle blower should be told of the timeframe and the
procedure for investigating the charge.
5. Ombudsman must enjoy high credibility: there has to be someone to whom whistle
blowers can go for whistle blowing to be effective, it has to be institutionalized.

These notes have been prepared by LJMBA