Module 3:

Business Ethics and corporate governance

Business ethics and corporate governance are two significant factors that impact a company
and how it operates. Business ethics represent the values, principles or characteristics a
company follows when conducting business in the economy. Corporate Governance is the
internal framework a company designs and implements to govern and protect those
invested in to the company.

The relationship between business ethics and corporate governance comes from an
organisation’s owner or executive managers, who create the governance and decide which
ethical principles employees will follow. The companies have now begun to integrate ethics
into their corporate cultures and concentrate on putting appropriate corporate governance
mechanisms in place.

A corporate is characterised by its ethical culture, which remains paramount in the

corporate’s daily operations. Corporate governance empowers an effective role for the
independent directors to review and reorient the policies of the company. The institutional
directors would start working for the company as a whole instead of merely protecting their
investment interests. As a corollary, periodical performance appraisals, environmental and
energy audits and effective legal compliances would become part of corporate governance,
thereby providing an ethical base for business. Good corporate governance is an integral
part of business ethics.

When a company’s Board of directors adopts ethics and declares it to its management and
to its executives and employees, ethics would automatically pervade the organisation and
build fair amount goodwill for the business.

The success of every organisation highly depends upon its governance system. The rules and
regulations, law and order, policies and procedures, customs and duties followed by any
corporation or company for its smooth working is known as corporate governance. An
organisation can be controlled and directed appropriately only its governance system is
effective which is generally carried out by the Board of Directors (BOD’s)

According to Cadbury committee, “corporate governance is defined as the system by which

companies are directed and controlled”.

Important constituents of corporate governance

Auditors:
The role played by external auditors in corporate is very significant. Generally the stake
holders appoint the auditors. Since these auditors are known to the stakeholders, the
chances of misuse and misrepresentation of reports is minimised.

Stock market:

Stock market and the list of rules are essential to make the governance system of public and
listed companies. These rules not only mention the requirement for being one of the listed
companies but also govern the company in the stock market. Not only domestically, the
stock markets have become important worldwide as they help in developing governance
codes for the companies all over the world.

Shareholders/institutional investors:

Shareholders in the form of investors, stock holders, etc and their relation with the company
is also of the crucial elements of corporate governance. Earlier, in corporate Governance,
there was direct interaction between the shareholder and the company since all the shares
belonged to individual shareholders, but in modern corporate world, intermediaries have a
significant role in governance.

Government:

Laws and orders, rules and regulations passed by government have a great influence on the
governance system of the companies. Corporate governance turns out to be effective only if
the relation between the government and the company is healthy. The established laws
facilitate the companies to carry out their activities within the legal boundaries. Registering
the companies, keeping record of relevant corporate documents, revising various
Companies Acts etc, are some of the functions performed by the government to develop an
effective governance system.

Regulatory Authority:

In order to scrutinise the activities of the stock market and the compliance of governance
rules most of the companies have started appointing corporate regulators. These
supervisory bodies are responsible to ensure the obedience of governance codes set by the
company.

Contractual shareholders:

Stakeholders having contractual relation with the company are known as contractual
stakeholders. These stakeholders include employees, dealers, suppliers, contractors,
distributors, wholesalers, retailers, consumers etc,

Importance of corporate Governance:

The importance of corporate governance is listed below.

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. They also ask the
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 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, fraud, and corrupt practices have taken place. Exploitations and
misappropriation of public money are happening everyday 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. 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 need for corporate governance to protect all the stakeholders of
the company.

Globalisation:

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 governance, it is impossible to
enter, service, and succeed the global market.

Take overs and mergers:

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

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

Essentials of corporate governance

Good governance should address all issues that lead to a value addition for the organisation
and serve the interests of all stakeholders.

1) Transparency and disclosure: organisations should be transparent to those who rely

on them and trust them, especially the stakeholders. In organisational terms,
transparency means direct and clear relationship between the company and the
stakeholders. The policies of the company, the decisions taken by the management
and the activities carried out within the company should be openly discussed with
employees as well as investors.

While making disclosure, following points should be given due consideration

 Company’s economical and goals of the company

 Main objectives and goals of the company
 Major objectives and goals of the company
 Major shares owned by the shareholders and their voting rights
 Information about BOD and their salary packages
 Risks predicted that may affect company financially
 Structures, policies, terms and conditions followed during corporate
governance
The information provide to the shareholders should be of high quality, unbiased and
relevant.
The auditor must be appointed to audit the financial statements annually.

2) Fairness:
Organisations cam maintains the fairness by providing all relevant and accurate data
to the stakeholders that can be easily understood and accessed by them. Fairness on
the part of the organisation means prioritising the interest of the investors and
providing them with appropriate freedom to make their own decision. Most of the
corporate governance system believes that organisations considered as unbiased
only if the interest of its stake holders and employees is not harmed at any cost.

3) Responsibility and Answerability:

Both responsibility and answerability are an integral part of every organisation the
accountability of the organisations management is not limited to themselves or
promoters or shareholders only but also to the society outside its premises.
Organisations need to play the role of dutiful citizen and give equal consideration to
the interest of both the stakeholders as well as the society. Thus, the organisations
 must take effective measures to improvise their values and policies in the interest of
the people living in the society.

4) Trusteeship:
Most of the large companies aim at accomplishment of both social as well as
economical objectives. The concept of trusteeship involves the assurance of equity
among all the shareholders and protecting their rights without giving consideration
to whether the rights are small or large. Combination of interests of shareholders,
employees, bankers, creditors, investors, insurance agents etc is an important part of
corporate governance.

5) Empowerment:
It focuses on understanding the capabilities of its employees and increasing their
strength in order to make the organisation progressive. Empowerment along with
accountability not only results in better and effective performance but also increases
the shareholder value.

6) Control:
Here control implies providing freedom to the management but with a check over
their activities so that they do not misuse their power. Since any decision regarding
risk to be taken in order to accomplish organisational objectives is generaaly taken
BOD, thus it is the sole responsibility of board to develop and maintain highly
effective risk management and control system.

Monitoring by the Board of directors: Monitoring the executives by the board is a

way of getting relevant information required by them. Since appointment,
termination and compensation of top management is entirely in the hands of BOD,
they are solely responsible for protecting the capital invested by the people. Periodic
board meetings are good for organisation as upcoming problems identified can be
discussed timely and any sort of risk to the organisation can be avoided.
 As per the company’s act of 2013, a company may have a maximum of 15
directors.
 Only listed companies were required to appoint independent directors. The
number of independent directors on the board of a listed company was
required to be equal to one third of the board, where the chairman is a non
executive director. Or one half of the board where the chairman is an
executive director.
 Some of the committees constituted by BOD are Audit committee,
Nomination and Remuneration committee, stakeholder relationship
committee, corporate social responsible committee.
Benefits of Good corporate Governance:

 Good corporate governance ensures corporate success and economic

growth
 Strong corporate governance maintains investor’s confidence, as a
result of which, company can raise capital efficiently and effectively
 It lowers the capital cost
 There is a positive impact on the share price.
 It provides proper inducement to the owners as well as managers to
achieve objectives that are in interests of the shareholders and the
organisation.
 Good corporate governance minimises wastages, corruption, risks,
and mismanagement
 It helps in brand formation and development.
 It ensures organisations are managed in manner that fits the best
interests of all.

Issue/limitations of Corporate Governance

Distinguishing the role of board and management:

Since the Board of directors is directly answerable to the share holders, though the
management is accountable; the board in most cases broadly controls the management by
giving directions and guidelines, as well as by having checks and a feedback mechanism in
place. For this the Board appoints and delegates responsibilities to CEO. Who in turn
delegates it to senior managers?

Composition of Board and Related Issues:

As per the Kumarmangalam Birla committee, the board of the directors of a company shall
have an optimum combination of executive and non executive directors with not less than
50 percent of the board of directors to be nonexecutive directors. The number of
independent directors depends on whether the chairman is executive or nonexecutive.

Separation of the roles of the CEO and chairperson:

The chairperson is the leader of the board and as such has great influence over the directors
of the board, whose responsibility is to evaluate the CEO. On the other hand CEO is the
leader of managers. If the chair person is also the CEO, it creates a situation that the chair
person has the responsibility to evaluate himself As CEO, which leads to conflict of interest
and thus diminishes the efficiency of both jobs.

Should the Board have committees?

It is necessary that the board should have the committees like Audit Committee,
Remuneration committee, and nomination committee. thus reducing the workload o
BOD.thses committees consists of independent directors who have the relevant
professional expertise and experience and hence can perform these functions judiciously
and effectively.

Remuneration of Directors and Executives:

Remuneration of directors and executives is a debatable issue. What should be the

remuneration for the Board of Directors (BOD) are there any standard procedures for it.

Disclosure and Audit:

many reports like Cadbury committee, has made the obligation for BOD to provide the
shareholders with a lucid and fair assessment of the company’s financial status through
audited financial statements but however there are many questions to be considered, like
should the board establish audit committee, if yes, hoe it should be constituted etc

Protection of shareholders rights and fulfilment of their expectations:

some of the arguable questions under this aspect are should the company have one share
one vote method, should it be mandatory to have share holder approval for all major
transactions.

Dialogue with institutional shareholders:

Is it necessary for the company to have regular communication with the institutional
investors? In order to protect the interests of small investors the institutional investors may
have to have regular contacts with the company to know about its where about but how far
the company communicates with them is the question to be considered.

Excellence through corporate Governance :( note: Important question for II

internals)

Recognise that Good Governance is not just about compliance:

Compliance to law, rules and regulations is a factor contributory to increased costs and
hence lowered profitability. Hence the BOD needs to maintain a balance between
companies and performance, in that the board should frame policies and strategies such as
to enhance performance without compromising on compliance.

Clarify the Board’s Role in Strategy:

It should be clear whether the board will propose policies for management to consider and
approve or will the board decide upon the strategies and pass it on to the management for
implementation.
Monitor organisational performance:

The board has to monitor the performance of the company and has to monitor legal
compliance by the company. For these the board depends upon the reporting done by CEO,
or the respective managers appointed to get these functions implemented through junior
managers under them.

Understand that the Board employs The CEO:

CEO is the first point of contact between the board and management. The board appoints
the CEO, reviews his performance, and replaces him if his performance is not up to the
mark. CEO has to provide regular performance reports, useful feedback, and valuable
suggestions to improve the performance of the company.

Recognise that the Governance of risk is a Board Responsibility:

Managing risk is the Board responsibility. So the board should have proper strategies, tools
and the techniques to minimise the risks in the company.

Ensure the Board have the information they need:

The CEO and the management of the company should provide the quality and necessary
information to the board as and when required so that the board can develop suitable
policies and strategies.

Appoint a competent Chair person:

Appointing a chair person to lead the board gas been found to be effective in managing the
activities of the board. The role played by the chair person is very effective in preventing
governance lapses and corporate misconduct.The chair person facilitates interaction
between the board and the CEO. The chair person presides over board meetings and helps
arrive at a consensus on issues discussed in the meetings.

Have versatility on the board:

Ideally, the board should be comprised of directors who possess different skills, expertise,
knowledge and experience. Some directors may have been in the organisation since its
inception and hence know the organisational structure and culture very well. There may be
some who may be experts in their professional domain, and there may be some who
possess excellent communication and relationship building skills. Such versatility on the
board helps improve quality of governance.

Evaluate board and director performance and pursue opportunities for improvement:

For achieving effective governance, the board should throw spotlight on itself, i.e. evaluate
itself and determine its strengths and weaknesses. Processes can be improved by diagnosing
the problem during board meetings and coming up with action plans, which should be
diligently followed up by the concrete action. Director development programmes are helpful
in enhancing individual director competencies.

Ethical Issues in Human Resource Management

Introduction:

There is a strong connection between ethics and HRM. The Human resource policies of an
organization are significant factors that shape an employee’s attitude towards his work and towards
the organization. Ethics in HRM can be said to deal with the domain of the rights and obligations an
employee and employer owe to each other. The equation between the employer and employee
should be such that maximum benefits for all parties concerned can be attained.

There is usually little mention of HRM in discussions concerning the role of ethics in corporations
when, in fact, it should be the primary topic under consideration in such discussions. Ethics form a
big part of decisions related to managing human resources. The HR department of an organization
can play a pivotal role in ensuring that the organization operates fairly and justly. Conversely, if the
HR policies of an organization do not promote justice and fairness, the organization itself will have
great difficulty in functioning in an ethical way. Several crucial issues related to ethics arise in the
various jobs the HRM of an organization performs.

Ethical Hiring:
Hiring means to find prospective employees for unoccupied positions in an organization so as to
ensure that organization can continue to operate smoothly.

The Principles of Ethical Hiring: Discrimination and Equality of Opportunity.

The most important step in hiring is selecting the person who should be hired. Whatever the
purpose of the business, the right principle of selection would be to hire that individual who is
perceived as having the ability to contribute most to the long term owner value. Ethical selection is
all about acting in a way that is honest, fair, non-coercive and legal. An ethical personnel officer
evaluates the candidates for a given post based on the same criteria. He ensures that all the
requirements and benefits of a job are clearly conveyed to the applicants. When the principle of
ethical selection is not followed, a wrong candidate may be hired for a job. This breeds
dissatisfaction among employees. The most important principles in ethical hiring are;

1. Discrimination:

The first step towards ethical selection is to prevent discrimination. However, when the nature
of the job demands that the business practice discrimination, adequate care should be taken to
see that this discrimination is based on the relevant criteria. i.e., maximizing long-term owner
value. Discrimination based on any other criteria is immoral. What are the relevant criteria for
ethical selection? The right answer would be the functional qualities or abilities that are required
to do the job – e.g., the ability to teach for a teacher, the ability to act for an actor, ability to
 paint for a painter, etc. Sometimes the character of a person plays an important role in the
process of selection for a job (purchase officer, policemen, etc.,) that demands a high level of
honesty and integrity. Her again, judging person’s functional abilities or qualities on the basis of
age, gender, religion, nationality or social background is considered discriminatory. I a business
use such irrelevant criteria for hiring a candidate; it unknowingly limits the pool of talent from
which it can select a candidate who can contribute towards maximizing the long-term owner
value.

Some businesses depend on referrals for hiring employees. Although this referral network is
extremely beneficial to business, depending solely on this network for recruitment. It’s unethical
as good candidates who have no access to this referral network are denied employment. Other
criteria used in selection that are considered to be discriminatory are – over qualification,
ageism, etc.

2. Equality of Opportunity:

An important principal of ethical selection is that every applicant must be given equal
opportunity. Equal Employment opportunity (EEO) refers to the approach of the employers
to ensure the practice of being fair and impartial in the employment process. Equal
opportunity means treating people equally and fairly irrespective of their race, religion, sex,
age, disability etc., This means having workplace rules, policies, practices and behaviour that
are fair and don’t disadvantage people. IN this environment, people are valued and
respected and have opportunities to develop their full potential and pursue a career path of
their choice. EEO principles help to realize and respect the actual worth of the individual on
the basis of his knowledge, skills, abilities and merit. And the policy should cover all the
employees of an organization whether permanent or temporary, contractual etc.

Objectives of EEO (Equal Employment Opportunity)

Objectives of EEO are as follows:

1. to ensure equality of opportunity to every applicant, a business must ensure that rules apply
equally to all prospects under consideration for hiring or promotion
2. No prospective applicant is prevented from subjecting to rules using coercive means
3. No applicant is rejected for reason other than those laid down by the rules for hiring.

Equality of opportunity specifies how rules for hiring should be applied but it does not
determine the results of applying the rules. Thus it is concerned with screening every applicant
by the same criteria.

Aspects for Ethical Hiring:

Both employers and candidates should take care about adhering to code of ethics during the hiring
and selection processes. This is to avoid any legal entanglements in the future and to save on costs.
Following are some ethical aspects that hiring managers as well as candidates need to consider:

1. Legality:
It is worth taking note of that some ethical standards of the hiring and employment
processes are intertwine with some legal aspects. Laws that prevent discrimination also
apply in the workplace. Asking about an applicant’s age, marital status, sexual orientation
and religion may seem innocent but they may prove to be unfair or even illegal.
2. Company Ethics:
Some company ethics may not fall into the legal guidelines, but moral ones. For Example: a
potential candidate has a relative that sits in the interview panel; he may be prevented from
participating as his connection with the applicant may impede him from asking objective
questions and making proper decision.
Another example is when job description is explained to the candidate for a particular
project, it is imperative that he knows where the project is at so that clear expectations are
set.
3. Employee Responsibility:
On the side of the candidate, he must also take responsibility for whatever he puts in his
resume and what he tells the hiring manager. Making false statement about his skills and
expertise is definitely unethical.
Aside from that, applicant who participates in the hiring process just to get experience but
with no real intention of accepting a job offer in anticipation of a more lucrative proposal
from a different company is also very unethical as it is a waste of time and resources of the
company.

Worker Safety:
On a daily basis, employers will consider the trade-off between costs and safety. As a business
decision, workplace safety has implications of expenses and time. Managers must understand the
importance of work safety and not view it as a sunk cost, but as an investment for a business.

Business that develop a workplace safety priority will produce ethical outcomes such as justice, open
communication, sensitivity towards others, organisational support, and management credibility.
These principles of business culture will drive an organization toward profitability and sustainability.

Managers must lead a culture that values a safe behaviour for the sake of ethics and not for the
purpose of regulatory compliance. Various agencies and government departments have
responsibility for the administration and enforcement of the laws enacted to protect the safety and
health of workers. such as occupational safety and Health Administration, Directorate General of
Mines Safety. Etc.,
Any violations may bring serious consequences, such as fines and penalties and even loss of a
business license. Ethical principles demand that employers do more to protect its workers, and go
beyond required legal rules.

It has been argued that managerial decisions can result in either harm or benefit to others, thus
managers are ethically obliged to use their authority to create benefit rather than cause harm. But
proper attention to workplace safety can result in improved morale, increased job satisfaction and
greater health for the organization as whole.

Need of Worker Safety:

1. Loss of Human Lives:

Without doubt, life is precious for everyone and certainly, it becomes the non-delegable
right of the employment to protect the lives of the employees at all cost.
2. Financial Cost of the Disability and Death of Employees:
When the organization loses the services of its employees due to an industrial accident, it
costs the organization directly in the form of financial compensation as well as indirectly in
the form of production disturbances and the hiring and training cost of new employees, who
would substitute the injured or deceased ones.
3. Corporate Social Responsibility (CSR):
Prevention of accidents and caring for the safety and health of the employee is one of the
foremost social responsibilities of the organization. This is because each employee is a
member of society.
4. Insurance Premium Costs:
Insurance premiums payable by an organization are usually decided on the basis of the past
insurance claims made by it for the injury or death of the employees. It is therefore,
necessary for the organization to keep the organization free of accidents.
5. Fine or Imprisonment for Safety Lapses:
The factories Act, 1948 provides for the imposition of fine or imprisonment or both for the
employers who provide inadequate safety measures in the occupational environment, which
result in serious industrial accidents. Once an industrial accident is reported, the
appropriate authorities like the chief inspector for factories can issue orders for prosecuting
the management for gross negligence if the initial enquiries point to lapses on the part of
the management in safety aspects.

Importance of Worker Safety:

1. Accident Avoidance: Employee safety reduces the possibility of industrial accidents by

installing the necessary safety devices properly and educating the employees about the
safety aspects.

2. Cost Prevention: It reduces and then prevents direct and indirect costs incurred by the
organization due to serious industrial accidents. The amount payable to the employees
 in the form of compensation for disability or death constitutes the direct cost of accident
while the cost incurred towards hospitalization and treatment forms the indirect cost

3. Improved Employee Satisfaction and Commitment: Employee safety promotes an

occupational environment that provides adequate employee satisfaction and
motivation. In general, employees have the expectation that their employers would
offer them a safety environment for doing their jobs. The fulfilment of these
expectations often provides the employees with job satisfaction and motivation.

4. Legal Compliance: Employee safety complies with all the laws governing the safety and
d health of the employees at the workplace. Organizations undertake employee safety
measures not only to provide employee satisfaction and HR cost reduction but also to
fulfil statutory requirements. For Example: Employers adopt safety measures to fulfil the
safety requirements specified in the provisions of different employment laws like the
factories act, 1948, Apprentices Act, 1961, Employee State Insurance Act, 1948, and the
Industrial Disputes Act, 1947.

5. Better Industrial Relations: Employee safety brings cordiality and harmony in the
labour-management relations. Employers provide safety measures to create a healthy
and accident-free work environment for the employees to work, and this, in turn,
facilitates the development of positive feelings among the employees for the
organization. In the long run, the absences of serious accidents can help organizations
achieve harmonious industrial relationship in the organization.

6. Formalizing the Safety Process and Program: the introduction of employee safety
educates the employees to accept safety as a system and culture through a sustained
awareness programme.

7. Increases Productivity: Safety plants are efficient plants. To a large extent, safety
promotes productivity. Employees in safe plants can devote more time to improving the
quality and quantity of their output and spend less worrying about their safety and well-
being.

8. Raises Employee Morale: Safety is important on humane grounds too. Manager must
undertake accident prevention measures to minimize the pain and suffering the injured
worker and his/her family are often exposed to as a result of the accident. An employee
is a worker in the factory and the bread-winner for his/her family. The happiness of
his/her family depends upon the health and well-being of the worker.

Techniques for Maintaining Safety Work Environment:

Employees expect management to act responsibly and to put employee’s health and safety first, far
above and well beyond any other concern of the business. In order to create a safe environment,
employers can use the following techniques:

1. Setup a safety incentive programme to motivate workers to comply with workplace safety
guidelines.

2. Adopt a zero-tolerance policy on workplace violence and safety violations.

 3. Strive to create a safety-first culture. Embrace the fact that nothing is more important than
keeping your workers safe.

4. Make safety a top management directive. Make sure all the leaders and supervisors of
company understand their role in promoting safety.

5. Strive to create a clean worker safety record.

6. Invest fully in worker safety programmes. Train employees on the injury prevention
techniques, test them to make sure they acquire the information, and then provide
refresher training.

7. Learn as much as you can about creating a comprehensive safety program. If this is beyond
the scope, then hire a Human Resources or Employee Health and Safety (EHS) professional
to manage the day-to-day details.

8. Finally, view your investment in worker safety as a moral / ethical issue not as a balance
sheet issue.

Ethics and Remuneration:

Remuneration is the act of rewarding employees in proportional to their contributions to maximizing
long-term owner value. This remuneration is considered ethical when it is just and equitable. An
ethical business does not reward anything other than results. Employee’s needs, his efforts, seniority
and loyalty is of a no importance in deciding his remuneration, unless they play a role in achieving
results.

Principle of Ethical Remuneration:

According to the principle of ethical remuneration:

1. A person with pressing needs do not automatically qualify for greater remuneration;
(Remuneration is not driven by employee’s need)
2. Mere possession of superior skills and abilities don’t determine the remuneration.
(Remuneration depends solely on results)
3. Employee who works hard to perform a task need not be rewarded more than those who do
it effortlessly.
4. A person, who works hard but fails to achieve results, deserves no reward but sympathy.
5. Seniority of a person n an organization may result in useful experience, but it may not
always result in expertise. Sometimes a junior with expertise may be more productive than
his senior who has many years of experience. In this case, according to the principle of
ethical remuneration the junior deserves a better reward than his senior.
Managing Remuneration Ethically:

Remuneration is generally one of the most sensitive issues in the workplace. This warrants that
remuneration is managed ethically, in line with all applicable legislation and company’s policies and
values, and the necessary structures and processes are put in place to ensure this.
1. Remuneration Committee: In most medium to large organizations remuneration, and
specifically the remuneration policy, would be the responsibility of the remuneration
committee. A Remuneration committee is generally a board committee established by the
organization’s board of directors that serves to monitor and strengthen the objectivity and
credibility of the organizations remuneration and bonus system and thereby keep it ethical.

At an operation level, remuneration also includes the HR or payroll department. They would
provide recommendations to the remuneration committee as would senior management.

The main purpose of the remuneration committee is to ensure the adoption of

remuneration policies that aim to attract, retain and motivate top talent and senior
executives, are aligned with and support the company’s strategy, drive performance in the
long and the short term and comply with relevant legislation and corporate governance best
practice.

The remuneration committee would normally have the responsibility for settling
remuneration for the chairman, all executive directors and senior management. In some
cases, this extends to all employees. The committee’s responsibilities and duties would
typically include the review of the remuneration policy relative to applicable employees, the
regular review of current industry practices, and the review of fringe benefits and retirement
and termination payments as well as making recommendations to the board about these
matters.

2. Remuneration Policy: A remuneration policy is a prerequisite for the strategic management

of pay and benefits. An organization remuneration policy and practices, by rewarding
desired results can reinforce employee behaviour that realizes its strategic business
objectives. Remuneration policy is specified by the organization with focus on creating a
flexible, competitive and performance oriented remuneration environment that allows the
organization to recruit and manage employees in the face of future challenges.

Objectives of Remuneration Policy:

1. To set the guiding principles and reward philosophies of the organization

2. To provide the guidelines upon which strategies and the design of reward processes will be
based.
3. To address issues such as how the organization ensures internal pay and benefit equity,
deals with market pressures, attracts staff, retains staff and pays for individual contribution.
Many of these aspects have now been addressed through the implementation of the agreed
reward strategy.

Ethics in Retrenchment and Firing:

Retrenchment can be defined as the termination of service due to surplus labour. According to
Industrial dispute act, retrenchment as the termination by the employer of the service of a
workman for any reason whatsoever, other than as a punishment, but does not include
voluntary retirement, retirement and termination on the ground of ill health. As per the latest
amendment, non-renewal of contract is not to be considered as retrenchment. This it can be
concluded that every retrenchment is termination of services, but all service terminations
cannot be called retrenchment.

Many industries faced the heat of recessionary trends in the world economy. This has compelled
many businesses to retrench or lay off people. Many businesses did not have the expertise to
handle the issue of retrenchment and ended up in sullying their corporate image.

At times of recession it has become common for business to reduce their size and overhead
costs by discharging some of the employees, and creating a lean and mean style of
management.

Employees get more deeply hurt due to the ethical issue of retrenchment and layoffs than any
other ethical issue. Apart from creating financial worries, the retrenchment and layoffs issue
may also create psychological and social problems for the concerned employee. Retrenchment
deeply impacts employee morale. Therefore, the organization has the ethical duty of minimizing
the adverse effects of retrenchment if it cannot be avoided.

Retrenchment or termination may be applied to two categories of employees – one temporary

and other permanent. Ethics of dealing with employees and employee – related issues apply to
both categories. The difference between the two is that the temporary staffs is psychologically
prepared to leave as per the terms of their recruitment but permanent employees expect to
work for long under the guidance, care and training from the employer. The organization has the
responsibility to make adequate efforts to train, guide and develop a permanent employees
failing which the question of retrenchment arises. The organization is not legally bound but
ethically expected to train and develop employees into permanent workforce.

Firing: Firing to be ethical should be honest, fair, legal and without coercion or physical violence.
Firing is a critical decision which affects the reputation of the business. It creates an atmosphere
of fear and uncertainty. It is unethical as it depletes the trust which is essential for business to
survive and make profits.

Employers at times include an “at-will” clause in the employment contract that enables them to
fire their employees “at-will” or for a “cause”. Firing may have a devastating effect on employee
morale, but it is considered ethical when the dismissal is aimed at maximizing long term owner-
value. Firing to be ethical, should be honest, fair, legal and without coercion or physical violence.
In fact, firing is a critical decision which affects the reputation of the business.

Many organizations follow arbitrary firing practices and reputation of such organization will
suffer if word gets out that the organization is discriminatory, unfair or vindictive in its hiring and
firing practices. Arbitrary firing practices like firing “at will” or for unjust reasons are considered
to be unethical, as it will lower the morale of the remaining employees, and result in decreased
long-term owner value.
Whistle Blowing: reveals wrong doing or improper conduct within an organisation to those
in authorities or to the public. To blow the whistle on someone is to alert a third party that
person has done, or is doing something wrong. Thus it means one makes a noise to alert
others misconduct.

This policy will encourage employees to disclose any malpractice or misconduct of which
they become aware and importantly to provide protection for employees who report
allegations of such malpractice or misconduct.

Procedure of whistle blowing:

Reporting:

Employees who believe that inappropriate business conduct is occurring should raise the
issue with his/her manager or if this is considered inappropriate the issue should be raised
with his/her senior manager. If the employee is not comfortable in reporting to his/her
manager/senior manager the conduct or activity should be reported to a designated
Executive.

The designated executive has to be reported to the company secretary who has to report
the occurrence to the chief Executive or chairman and the audit committee group.

Investigation:

Once the malpractice or misconduct is reported, senior manager or designated executive

will respond to the whistle blower within 10 working days setting out the intended
investigation plan. An investigation includes internal reviews, by the external auditors or
lawyers or some other external body.

Once the investigation is complete, the appropriate company representative will inform the
whistle blower of the results of the investigation as well as any corrective steps that are
taken.

Employees who believe they are being penalised in any way for whistle blowing or who
believe that there has been cover up of the action disclosed or who do not consider that
they have had a satisfactory response to their disclosure should write to the chairman of the
Audit committee with the facts.

Protection:

If requested by the whistle blower all reasonable steps will be taken to protect the
anonymity of the whistle blower.

Disciplinary action: if the claim of malpractice or misconduct is substantiated appropriate

disciplinary action will be taken against the responsible individual up to and including
termination of employment.
Ethical guidelines for whistle blowing:

1) Magnitude of the Consequence: An individual considering whistle blowing must ask

him, how much harm has been done or might be done to victims. If only one person
is getting affected, it is normally not a situation to blow the whistle.
2) It must be demonstrated that every complaint will be investigated as transparently
and fairly as possible. Regardless of whom the complaint is against, if the person is
found guilty then he should be punished.
3) The whistle blower must be protected against harassment and undue pressure.

Ethical Dilemmas at workplace:

Ethical Dilemma as situations with conflict between two or more ethical principles and
each solution may contain unpleasant outcomes for one or more involved parties.

Thus ethical dilemma is a situation that requires an individual, group, or organisations to

choose among several wrong or unethical actions at work place.

Causes of ethical dilemmas at work place:

The basic causes of ethical dilemma are the clash of two situations where one may be right
and the other may be wrong, both may be wrong, or both may be right. A dilemma is the
outcome of a mental perception about a critical situation involving choice.

 Dilemma may occur Due Organisational goals and social standards

 Dilemma may occur due to clash between personal values and the organisational
values
 Dilemma due to clash between organisational practices and personal belief
 Pressure from Organisation may also cause ethical dilemma.

Managing ethical dilemmas:

 Utility approach
 Justice approach
 Humanity approach

Ethics in Global Business:

Reasons for ethical differences in global business:

 Language
 Communication
 Body language
 Perceptual problems
 Religion
  Values and attitudes
 Customs and manners.

Ethical issues in Global Business:

Sexual and racial discrimination:

Though majority of the countries have the laws which prohibit the businesses from
discriminating on the basis of sex, race, religion in hiring, firing or promotion decisions, but
still sexual and racial discrimination is commonly seen across the world.

Human Rights:

Child labour, payment of low wages and abuses in foreign factories have been commonly
observed across the world. Multinational companies like Walmart, Nike have faced ethical
criticism for child abusement.

Bribery:

Companies that do business internationally should be aware that bribes are an ethical issue
and that practice is more prevalent in some countries than in others. Ex: US prohibits its
companies from offering or providing payments to officials of foreign governments for the
purpose of obtaining or retaining business abroad.

Harmful products:

Majority of the companies sell the harmful products to the other countries because selling
of the same would have been banned in their home countries thus causing ethical issue. Ex:
selling of tobacco products in less developed countries as developed countries have strict
regulations on selling products in their country.

Pollution

Not all foreign countries have environmental legislation that makes it illegal to pollute.
Companies may discharge harmful materials into the environment and avoid costly anti-
pollution measures. An ethical approach to the expansion into such markets is to limit the
environmental footprint beyond what is required by local laws. An ethically operating
company ensures its operations don't have harmful effects on the surrounding population.
Since the company has the knowledge and expertise to operate within U.S. environmental
regulations, it is ethical to apply similar standards in the new locations

Corporate Social Responsibility (CSR)

According to Cannon: Corporate social responsibility means devising corporate strategies
and building a business with the society’s needs in mind”.
Need of CSR :

 Societal approach is very important to business organisations, which demand that

they should be responsive to the social problems of society.
 To establish good corporate image, business organisations include social
responsibility as a corporate objective
 Social welfare terms are included in the collaborative agreements which require the
company to take up the social responsibility of business.
 Legal provisions like pollution and environment laws also direct a company to take
up social problems.
 Donations to approved NGOs are also exempted from the income tax
 Commitment to social responsibility by an organisation also enhances its images,
resulting in better business environment
 Companies undertaking social responsibility can position their products better and
increase their market share
 In case a situation demands due to natural calamities or accidents, a company has to
compensate the victims or provide medical treatment to the affected people.
 In some organisations the culture is so strong that they take up the social
responsibility as their moral responsibility.

Arguments in favour of CSR

 Improved Business environment

 Enhanced Reputation
 Avoidance or minimisation of government regulations
 Business have the resources: money, manpower, managerial and other skills.
 Moral responsibility

Arguments against CSR

 Profit is the sole motive of business

 Society bears the cost if business does CSR
 Managers have professional skills to manage business but they don’t have social
skills to solve societal problems

Responsibilities of Business:
1. Responsibilities towards Shareholders (or Owners):

In case of joint stock companies, the shareholders as one unit are the owners of a company. There
are thousands of shareholders of a large company, who appoint individuals as directors on the Board
of Directors, which constitutes the Management of the company. The Management is responsible
for protecting the rights of the shareholders have made in the company with an attitude of trust.
These responsibilities can be categorized as follows;

I. Reasonable Dividend:
The interests of shareholders lie in a good dividend and handsome appreciation in the value
of the share they hold in the company. A Responsible company takes care of these interests;
on the other hand, there are fraudulent companies that misappropriate the money of the
shareholders.
II. Soundness:
A responsible management sees to it that its financial status is sound and it has a promising
growth record.
III. Information:
A Responsible management keeps its shareholders informed about appointment of new
directors, CEO., etc., any changes in policy, acquisition, change of auditors or solicitors, new
projects, and any other facts relevant to the shareholders. Withholding relevant information
from being disseminated to shareholders constitutes irresponsible behaviour.
IV. Protection of Assets:
The management of a company is responsible to protect the assets of the company, which
constitutes responsible behaviours towards shareholders; as the assets are purchased using
the moneys invested by the shareholders in the company

2. Responsibilities towards Workers / Employees:

Employees are the human resources of a company and as such deserve a humane attitude on the
part of the management of a company.
Following are the responsibilities of businesses towards their employees:

I. Pay Fair Wages:

A company should regularly pay reasonable wages to its employees and revise the same
from time to time as inflation rises. This enables employees to enjoy a satisfactory standard
of life.
II. Provide Good Working Conditions:
A responsible management provides good working conditions for its employees. This is a
basic right, as well as a necessity to maintain the sound physical and mental health.
III. Provide Adequate Service Benefits:
Service benefits include adequate house rent and medical allowances; adequate insurance;
and retirement benefits. These are essentials for leading a life with a feeling of security.
IV. Extend and Gain Cooperation:
A responsible management cooperates with and gains the cooperation of its employees. An
atmosphere of mutual cooperation gets the best possible results in terms of profitability for
the company, which means more funds at the disposal of the management that can be used
 for employee welfare activities, apart from the fact that the management is in a better
position to pay higher wages to its employees.
V. Recognise Employees Rights:
A responsible management recognizes and protects the rights of its employees – the right to
fair wages, the right to basic facilities like paid leave, the right to form unions etc.,
VI. Provide Opportunities for Growth:
The management should provide to its employees ample opportunities for growth by
providing or sponsoring training allowing leave to enhance qualifications and by holding
continuous learning programmes.

3. Responsibility towards customers:

A company stands with its head held high because of a large number of satisfied customers; after all,
the company gets its profits by sale of its goods or services. For being satisfied, a customer needs the
best possible quality at the lowest possible price. On the other hand, a customer does to remain
loyal to a company that is ethically not sound; not delivering quality as assured, cheating in
measurement; inadequate servicing facilities; discourteous behaviour are examples of ethically
unsound behaviour.

It is the responsibility of the management to pay adequate attention to the following aspects:

I. Need Satisfaction:
Are the goods of the company made to cater to the needs of the customers, or does the
company manufacture goods for its profits and then coax people into buying these goods in
spite of the fact that they do not need these goods? A responsible company manufactures
good to satisfy customer’s needs. It also keeps in mind the purchasing capacity of its
customers.
II. Regular Flow of Goods:
The management should ensure regular supply of quality goods at affordable prices.
Disruption in supply of goods may cause hoarding and spiralling up of prices, which is not in
interest of the customers.
III. Courteous Service:
Courteous behaviour while selling i.e. courteous salesmanship; and courteous and effective
after –sales service are the two vital factors at the heart of customer-friendly behaviour
IV. Precise Information:
The management should provide precise information to its customers, be it on
advertisements, product information brochures, or packages. A company that does not put
this into practice is not trusted by customers.
V. Fair Trade Practices:
There are guidelines laid down regarding fair trade practices. Hoarding, misleading by
providing false information, adulteration, etc., are unfair trade practices, which a responsible
company should shun.
4. Responsibilities towards Suppliers:
Suppliers supply materials as raw materials input or as component input to manufacturers and
traders, mostly on credit terms. A company that buys these from suppliers has the responsibility to
pay the agreed amount within the agreed time period and behave courteously with them. Breach
with regard to any of these behaviours on the part of the company makes it untrustworthy of its
suppliers. Following are the responsibilities of businesses towards their suppliers:

I. Being precise about the specification of goods ordered.

II. Contracting with the suppliers on fair terms and conditions
III. Informing about changes in specifications fairly in advance
IV. Paying the agreed amount within the agreed time period
V. Keeping the suppliers informed about the future plans

5. Responsibility towards Creditors:

Apart from suppliers, a company has other creditors like banks and financing organisations that have
provided loans to it. The company has the following responsibilities towards such creditors:

I. A company should furnish accurate information about its financial status, including its assets
and liabilities; about other loans a availed of; its suppliers; its major customers; etc.,
II. A company should repay loans promptly and in any case never after the due date. For
delayed return of the loan it should pay interest at the agreed or reasonable rate
III. Even after receiving the loan amount, the company that has received the loan should not
behave arrogantly but should understand that advancement of loan and receiving of loan
are mutually cooperative acts that satisfy needs of both parties.

6. Responsibility towards Government:

Apart from those laws of a country that are commonly applicable to one and all, there are laws that
are specifically applicable to certain sectors of business. It is the responsibility of every business
house to act in conformity with both these categories of laws.

In general, all businesses should fulfil the following responsibilities towards the government:

I. To obey the laws of the countries in which they operate

II. To honestly pay all government taxes within the stipulated time.
III. To shun all corrupt practices while dealing with the government
IV. To avoid aggrandisement of wealth and monopolization
V. To act in conformity with fair trade practices.

7. Responsibilities towards Society / Community:

Following are the responsibilities of businesses towards society:

I. Socioeconomic Objectives: A society’s socioeconomic objectives broadly include social

welfare and economic welfare of its underprivileged individuals. It is the responsibility of
 every company or firm to use its resources to meet socioeconomic objectives of the society
in which it operates. It is also required of every company to not indulge in, and to
discourage, antisocial and unfair behaviour.
II. Improvement of Local Environment: Responsible management should ensure that.
a. It operation donot poluute the environment
b. It helps create a health –promoting environment
c. It develops gardens, recreational facilities, play grounds etc. to enhance the quality
of life of its staff and the general public
III. Employment Opportunities: Creating employment opportunities is one of the essential social
responsibilities of all businesses. It helps reduce unemployment and crime.
IV. Efficient Use of Resources: Apart from improvement of environment, the resources of
businesses should be used for general beneficial initiatives like free or subsidized medical
consultancy facilities, free medical check-up facilities, legal assistance, community halls for
weddings, cooperative stores selling goods at fair prices.
V. Ethical Behaviour: it is the social responsibility of every business to ensure that the ethical
canvas of the society in which it operates is not blemished due to its activities. It should
strictly ensure that everyone associated with it adopts ethical and sociable behaviour –
business related or otherwise.