Can Profitability and Morality Co-exist?

Business Ethics and Corporate Governance

INTRODUCTION TO BUSINESS ETHICS

What is Business??
Business is a legally recognized organizational entity existing within an economically free country designed to sell goods and/or services to consumers or other businesses, usually in an effort to generate profit. It is a commercial activity engaged in as a means of livelihood or profit, or an entity which engages in such activities.

What is Ethics?
Ethics are standards of conduct that indicate how one should behave based on moral duties and virtues. Ethics means character or manner Science of morals Recognized rules of conduct Moral principles

Objectives of Ethics
Studies human behaviour Establishes moral standards & norms of behaviour Makes judgement on human behaviour Prescribes moral behaviour Expresses an opinion

What is Business Ethics??

Business Ethics is simply- an application of ethics in business. When business people speak about business ethics they usually mean one of three things: (1) avoid breaking the criminal law in ones work-related activity; (2) avoid action that may result in civil law suits against the company; and (3) avoid actions that are bad for the company image. Page | 2

Businesses are especially concerned with these three things since they involve loss of money and company reputation. In theory, a business could address these three concerns by assigning corporate attorneys and public relations experts to escort employees on their daily activities. Anytime an employee might stray from the straight and narrow path of acceptable conduct, the experts would guide him back. Obviously this solution would be a financial disaster if carried out in practice since it would cost a business more in attorney and public relations fees than they would save from proper employee conduct. Perhaps reluctantly, businesses turn to philosophers to instruct employees on becoming moral. For over 2,000 years philosophers have systematically addressed the issue of right and wrong conduct. Presumably, then, philosophers can teach employees a basic understanding of morality will keep them out of trouble. Although being moral may save a company from some legal and public relations nightmares, morality in business is also costly. A morally responsible company must pay special attention to product safety, environmental impact, truthful advertising, scrupulous marketing, and humane working conditions. This may be more than a tight-budgeted business bargained for.

What is Morality?
Ethics is the study of morality and that a person begins to do ethics when he or she turns to look at the moral standards that have been absorbed from family, church, friends and society, and begin asking whether these standards are reasonable or unreasonable and what these standards imply for situations and issues. Morality refers to ethical issues principles of right and wrong conduct as well as instances of real behaviour the manner in which individuals comply more or less fully with such standards. To encourage moral conduct, early theological representations of sin and evil highlighted the body's capacity for suffering. In the medieval and early modern ages, morality referred to a religious framework; through diet and bodily maintenance, Page | 3

the individual was expected to defend himself against the temptation of the flesh. Codes of morality have evolved in keeping with larger cultural, historical, and economic currents. The only definition which can be given to morality is That which is selfish is immoral and that which is unselfish is moral. The natural tendency of every human being; taking everything from everywhere and heaping it around one centre, that centre being mans own individual self. When this tendency begins to break, then begins morality. This is fundamental basis of all morality. We find that as knowledge comes, man grows, morality is evolved and the ides of nonseparateness begins. Morality can be either cultivated or inherited. A smile from the air hostess is morality cultivated and a smile from a child is inherited.

What is Profit?
Profit is the reward of factors of production in accordance with the source of service. It is the excess of income over cost of production. For economists, Profit is the excess over the opportunity cost. For accountants, Profit is the difference between income and expenditure computed according to certain rules and regulations. Profit can be classified as Tangible and Intangible Profit. The objectives of a business determine the interpretation of profit. Profit acts as an incentive that attracts businessmen and potential investors to produce and to introduce new products and cost reduction measures.
Profitability is of two types: Tangible and Intangible (a) Tangible Return on Investment Cash flows Dividends (b) Intangible Trust of the consumers of the organization Evaluation of the Organizations profits Status of the people behind the organization

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Theories of Profit
1. Reward for taking riskThe theory attributes profit to the act of risk undertaken by the owners. It assumes that other factors remaining the same, higher the risk, higher the rate of return. 2. Compensation for Frictional FactorsSome economists associate profit with imperfections in the adjustment of the economy to dynamic changes in the modern world. Benefits due to some change in the dynamic forces will enable entrepreneurs to enjoy a higher return on investment for a while till the economy reaches new equilibrium. 3. Reward for InnovationAccording to this theory, profit is the reward for introducing innovations. Innovations change a stable economy to a dynamic one. Profits arise during the period of transition from one equilibrium to another.

For long-term profitability, apart from financial profits, firms also look for intangible profits which may help them to sustain in the long run. These intangible profit concepts include1. Goodwill of customers - A company may for example ignore the after sales service to show good results in the short run. But a company with a vision of a long term standing will sacrifice the short term profitability by giving after sales service, leading to customer loyalty. 2. Harmonious Labor Relations - these require expenditure to be incurred on labor welfare, imparting of skills to labor which may reduce short term profits but contribute significantly to the long term profitability of the firm.

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3. Goodwill in Society Maintaining the quality of products, keeping up the service level, undertaking corporate social responsibility, safeguarding the environment will amount to goodwill in the society. 4. Technological Advancement this requires allocation of resources for research and development. In the dynamic society, the long term existence of a firm depends on the innovative strength acquired by it. 5. Easier Access to Finance for long term profitability, capital should be kept intact. This will help the firm to undertake expansion through resources generated within the organization. This helps in reducing dependence on outside resources of finance. Also, if required, the sound policies and goodwill help the easier access of finance from outside resources. Thus the profit concept of the firm depends on the objectives of the business and the interpretation of profit. Profit must be fairly and justly earned & distinguished from some other kind of gains & it must be a reasonable profit.

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Can Ethics & Morality co-exist with Profit?

There is one and only social responsibility of business and that is to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say engages in open and free competition without deception or fraud. The question is of whether, in defining the business and understanding it as a moral reality, we should focus primarily on its goal of producing goods and services or of generating profits. A single concept of profit is not by itself sufficient to define what we mean by business. Even goods and services have to be really goods and services from the view point of enhancing total human existence (P F Camenisch). While quoting the anti-social responsibility perspective of the business Evans reasons that since the society supplies the mandate and power to business, it must respond to social obligations while earning profits. This is no way means that ethics in business is a means to profit. Morality is an end, a justification in itself. The fundamental basis of trust is moral.

Business leaders, sincerely and with the best of intentions, sometimes state that the primary purpose of a corporation is not to make a profit, but to meet human needs, to serve the consumer, etc. While this may be true of some corporations, and while on some level it may be true of all corporations, the public in general finds such statements unpersuasive, even hypocritical and many stockholders may possibly see them as indicative of managerial malfeasance. It may well help clear the air if corporations would simply acknowledge that their primary purpose is to make a profit and then stood ready to show why and how that is a Page | 7

defensible, a necessary, even a good thing in the present system. But at the same time they should acknowledge- and this would seem to be what executives trying to cast an altruistic light on corporations are trying to say- that the purpose of business, or of the economic system of which the corporation is a part, is not to make profit making possible, but to fulfill human needs or to provide goods and services which sustain and enhance life. This identifies profits proper place within the corporation while acknowledging its subordination to larger societal purposes beyond the corporation. A business is considered to be ethical only if it tries to reach a trade-off between its economic objectives & its social obligation First, the purpose of business is to generate a profit. Neither carries any moral implications at the start. Then, how we conduct business does have moral and ethical weight. But business has an obligation to shareholders (or the owner) first and foremost to generate a profit within the bounds of what is legal, moral, and ethical. There is a symbiotic relation between ethics and business in which ethics naturally emerges from a profit-oriented business. There are both weak and strong versions of this approach. The weak version is often expressed in the dictum that good ethics results in good business, which simply means that moral businesses practices are profitable. For example, it is profitable to make safe products since this will reduce product liability lawsuits. Similarly, it may be in the best financial interests of businesses to respect employee privacy, since this will improve morale and thus improve work efficiency. The long-term best interests of businesses are served by seeking a trusting relation with the public. This weak version, however, has problems. First, many moral business practices will have an economic advantage only in the long run. This provides little incentive for businesses that are designed to exclusively to seek short-term profits. As more and more Page | 8

businesses compete for the same market, short-term profits will dictate the decisions of many companies simply as a matter of survival. Second, some moral business practices may not be economically viable even in the long run. For example, this might be the case with retaining older workers who are inefficient, as opposed to replacing them with younger and more efficient workers. Third, and most importantly, those moral business practices that are good for business depend upon what at that time will produce a profit. In a different market, the same practices might not be economically viable. Thus, any overlap that exists between morality and profit is both limited and incidental. The strong version of this profit approach takes a reverse strategy and maintains that, in a competitive and free market, the profit motive will in fact bring about a morally proper environment. That is, if customers demand safe products, or workers demand privacy, then they will buy from or work for only those businesses that meet their demands. Businesses that do not heed these demands will not survive. Since this view maintains that the drive for profit will create morality, the strong version can be expressed in the dictum that good business results in good ethics, which is the converse of the above dictum. Proponents of this view, such as Milton Friedman, argue that this would happen in the United States if the government would allow a truly competitive and free market. But this strong view also has problems, since it assumes that consumers or workers will demand the morally proper thing. In fact, consumers may opt for less safe products if they know they will be saving money. For example, consumers might prefer a cheaper car without air bags, even though doing so places their own lives and the lives of their passengers at greater risk, which is morally irresponsible. Similarly, workers may forego demands of privacy at work if they are compensated with high enough wages. In short, not every moral business practice will simply emerge from the profit principle as suggested by either the weak or strong views. In our culturally pluralistic society, the only business-related moral obligations that are majority-endorsed by our national social group are those obligations that are already contained in the law. These include a range of guidelines for honesty in advertising, product safety, safe working conditions, and fair hiring and firing practices. In fact, the Page | 9

unifying moral force of businesses within our diverse society is the law itself. Beyond the law we find that the moral obligations of businesses are contextually bound Five fairly broad moral principles suggested by philosophers are as follows: 1. Harm principle: businesses should avoid causing unwarranted harm. 2. Fairness principle: business should be fair in all of their practices. 3. Human rights principle: businesses should respect human rights. 4. Autonomy principle: businesses should not infringe on the rationally reflective choices of people. 5. Veracity principle: businesses should not be deceptive in their practices. 6. Stakeholder principle: businesses should consider all stakeholders' interests that are affected by a business practice. A stakeholder is any party affected by a business practice, including employees, suppliers, customers, creditors, competitors, governments, and communities. Accordingly, the stakeholder approach to business ethics emphasizes that we should map out of the various parties affected by a business practice Businesses are driven by the motive to make a profit. Stockholders demand a return on their investment, and this mandate transfers down through the management hierarchy. Part of making a profit is to reduce costs, and environmental responsibility is highly costly, with few immediate financial rewards. There may be a divergence between the existence of profit and social well-being. Firms guided by tangible financial profit exclusively, often ignore the welfare of the society. Some firms also tend to have a short-term view of profits. Firms which wish to survive in the long run may require sacrificing immediate gain to create a good image which will be useful in the long run. Profit is a dirty word said Jawaharlal Nehru in 1950s. During those days, private sector companies were looked down upon as exploiters of labour, and obsessed with profits. Page | 10

Industries were nationalized, restrictions on labour layoff, growth were discouraged and profit was unjustified. This resulted in deep rooted web of beauracracy and lethargy in the system, which fostered unethical practices like bribes. The political scenario then forced private sector companies to break rules to even survive. But today, corruption is so entrenched into the system that bribes and other unethical practices have become obvious and necessities. Do Moral Standards Apply to Corporations or Only to Individuals? Corporate organizations pose major problems for anyone who tries to apply moral standards to business activities; can we say that the acts of these organisations are moral or immoral in the same sense that the actions of human individuals are? Can we say that these organisations are morally responsible for their acts in the same sense that human individuals are? Or must we say that it makes no sense to apply moral terms to organization as a whole but only to the individuals who make up the organization? In a recent case, the justice department charged e. f. Hutton Corporation with operating an elaborate fraud in which employees wrote overdraft on bank accounts that allowed e. f. Hutton to derive interest earning that rightly belonged to the banks. Critics afterward claimed that the justice department should have charged the individual managers of e. f. Hutton, not the corporation, because corporations dont commit crimes, people do. Can moral notions like responsibility, wrong doing and obligation be applied to groups such as corporations, or are individual people the only real moral agent? Two views have emerged in response to this problem. at one extreme is the view of those who argue that, because the rules that tie organization together allow us to say that corporations act as individuals and have intended objectives for what they do, we can also say that they are morally responsible for their actions and that their actions are moral or immoral in exactly the same sense that a human beings are. The major problem with this view is that organizations do not seem to act or intend in the same sense that individual humans do, and organizations differ from human beings in morally important ways: organizations feel neither pain nor pleasure and they cannot act except Page | 11

through human beings. At the other extreme is the view of philosophers who hold that it makes no sense to hold business organization morally responsible or to say that they have moral duties. These philosophers argue that business organization are the same as machines whose members must blindly and undeviatingly conform to formal rules that have nothing to do with morality. Consequently, it makes no more sense to hold organization morally responsible for failing to follow moral standards than it makes to criticize a machine for failing to act morally. The major problem with this second view is that, unlike machines, at least some of the member of organization usually know what they are doing and are free to choose whether to follow the organizations rules or even to change these rules. When an organizations members collectively, but freely and knowingly, pursue immoral objectives, it ordinarily makes perfectly good sense to say that the actions they perform for the organization are immoral and that the organization is morally responsible for this immoral action. A corporation acts when properly qualified members of the corporation carry out their assigned duties within the scope of their assigned authority. Because corporate acts originate in the choices and actions of human individuals who must be seen as the primary bearers of moral duties and moral responsibility: human individuals are responsible for what the corporation does because corporate actions flow wholly out of their choices and behaviors. If a corporation acts wrongly, it is because of what some individuals in that corporation chose to do.

In a modern corporation responsibility for a corporate act is often distributed among a number of cooperating parties. Corporate acts normally are brought about by several actions or omissions of many different people all cooperating together so that their linked action and omissions jointly produce the corporate act. For example, one team of managers designs a car, another team tests it, and a third team builds it; one person orders, advises or encouragement; one group knowingly defrauds buyers and another group knowingly but silently enjoys the resulting profits; one person contributes the means and another person accomplishes the act; one group does the wrong and another group conceals it. Page | 12

Hence it is difficult to ascertain as to who is to be held morally responsible for such jointly produced acts. Traditional view advocates that those who knowingly and freely did what was necessary to produce the corporate act are each morally responsible. However there is a different school of thought that believes that when an organized group acts together, the corporate act may be described as the act of the group and consequently the corporate group and not only the individuals who make the group must be held responsible for the wrongdoing. People generally attribute the acts of a corporations managers to the corporation and not to managers as individuals. If we consider the case of a large scale organization the employees there follow bureaucratic rules that link their activities together to achieve corporate outcomes of which the employee may not even be aware. The engineers in one department may build a component with a certain weaknesses, not knowing that another department plans to use that component in a product which these weaknesses will render dangerous. Employees may feel pressured to conform to company rules with whose corporate outcomes they may not agree but which they feel they are not in a position to change. Therefore a person working under a bureaucratic set up is not necessarily morally responsible for every corporate act that he or she brings about. Sometimes it may also happen that employees in a corporation go along with a wrongful corporate act although they know to some extent that it is wrong and if intended can withdraw their cooperation. However they unwillingly go along because of pressures placed on them. In this case one must weigh the seriousness of the wrongful act against the uncertainty, difficulty, and degree of involvement that were present. The more seriously wrong a corporate act is the less is the employees responsibility mitigated by the uncertainty, pressures and minimal involvement. People say that in a case when a subordinate act on the orders of a legitimate superior the subordinate is absolved of his wrongdoing. Though the subordinate is the one who is to carry out the orders of his superior he is not to be culpable for his fallacies. There have Page | 13

been instances in the past when employees have been forced upon to obey the directives of their superiors and when the faux pass has been later discovered the managers argue that the wrongdoing should be attributable to the organization as a whole and not him alone. However it would be a mistaken belief to think that an employee who freely and knowingly does something wrong is absolved of all responsibilities under the guise of following orders. Also it must be known that an employee has no obligation to obey an order to do what is immoral. A superior can force him by putting significant economic pressures on an employee and such pressure does mitigate the employees responsibility but it does not totally eliminate it. Thus when a superior orders an employee to carry out an act that both of them know wrong, the employee along with the superior is morally responsible for the act if he or she carries it out.

Thus, The beggar is never happy We are all beggars. Whatever we do we want a return Ask nothing; want nothing in return. Give what you have to give; it will come back to you but do not think of that now Yet have the power to give: give, and there it ends. Learn that the whole of life is giving, that nature will force you to give. So give willingly Ask, therefore, nothing in return; but the more you give, the more will come to you. ..Vivekananda, Los Angeles (1990)

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Case Studies

TATA-PANTALOON STUDY
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CASE REGARDING MINORITY INVESTOR INTEREST AND INVESTOR CONFIDENCE IN THE COMPANY Tata Group and Pantaloon retail India limited (PRIL). Tata Group There are 98 companies under the Tata group (Tata sons and Tata industries). The major listed companies in the group are 1) Tata consultancy services 2) Tata motors 3) Tata steel 4) VSNL 5) Tata power The group approximately represents approximately 3.2 % of Indias GDP. it has a turnover of 28.8 bn $ and 2.8 bn $ profit for FY-07. GROUP HOLDING STRUCTURE

All the 98 companies are either held by these two promoter group and/or by cross holding by other group companies in each other. The promoter stake in majority of these

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companies is less than 33 % of overall shareholding. But still they are the majority shareholder as a large chunk is held by FII, FI and public. Now the problem with the way new companies are formed in the Tata group is that the minority shareholder of the other group companies who have been with the company like the promoter, dont benefit from the formation of new company as the new company is formed at the group level and not as a subsidiary of the existing companies. So the capital put by minority shareholder and their faith in management of the group is not paid by the group to them buy allotting them shares of the newly formed companies and benefit from it. Ex when they formed Infifti Retail (technical agreement with Woolworth for sourcing electronic/ white goods) .It is a 100 % subsidiary of Tata sons and not a subsidiary or as a part of Trent (Westside, landmark and star India bazaar) which would have been in the same line of business and benefited the minority shareholders of Trent which is a listed company. Pantaloon retail India limited (PRIL) There are 15 companies under the Pantaloon retail India limited (PRIL).The major Lines of business in the company are 1) Pantaloons 2) Central 3) Big bazaar 4) Fashion station 5) Food bazaar 6) Depot 7) Star and sitara 8) Gen M , M port and M bazaar

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9) E zone 10) Furniture bazaar 11) Home town The group has a turnover of 1 bn $ and 20 mn $ profit for FY-07. The Subsidiaries joint ventures of PRIL are given below. 73% HSRIL (Home) 74% FCH (Capital) 100% F/Media (OOH) 100% F/Bazaar (E-Tailing) 100% F/Logistics (SCM) 100% PFP (Sourcing) 100% Pantaloon Food Solutions (F&B) Joint Ventures 49% Planet Retail 51% Liberty 50% GiniJony 50% Blue Foods 50% Talwalkar 50% Manipal 50% Capital land (REIT & MM) 50% Alpha Group

Here PRIL is adding all the business lines under PRIL and the benefits of which of which are got by both majority and minority stake holder and the capital markets understands this and therefore gives, it gives a better PE ratio to Tata group (Trent). Page | 18

Particulars Trent PRIL

Sales (Cr) 455.78 3,393.47

Market cap (Cr) 1,295.86 12,378.95

Market Price 665 822

EPS 20 8.18

PE 33.2 100

Above data is as on 12/01/08.

As we all know PE ratio is dependent on investor confidence and investor confidence is because the minority investor knows that PRIL wont cheat them with future business opportunities and profits.

This shows that PRIL which did a morally right thing by having all its business under PRIL and have been rewarded by higher PE and vice versa for Trent.

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RELIANCE CASE STUDY

RELIANCE JAMNAGAR FACTORY -ACHIEVING DEVELOPMENT

WITHOUT THE CAUSING ANY ADVERSE EFFECT TO THE ENVIRONMENT At Reliance Jamnagar, clean environment for sustainable development is of prime concern, and is an important business objective, achieved by every employees contribution and responsibility towards environmental performance. Reliance Jamnagar has committed to the protection of environment. The design of state of the art effluent treatment plant, low NOX burners in Furnaces and zero liquid effluent discharge ensure the safety of the environment. Treated sewage, industrial effluent and stack emissions are extensively monitored to ensure no harm is done to the environment. Reliance is committed to transform the arid land in and around the complex into a lush green belt. Following are the major improvements achieved during 2000-2006. 1. Reduction in Emission of CO2 (Tons/Kilotons of Crude processed) to 10.25. 2. Planting of 4.0 million trees in and around the complex has already been done till March 2005 which includes planting of 51,000 Nos of additional Trees during 2004-05. Plantation of 35,000 trees in the direction of further enhancement of benefits of greening like CO2 absorption & improved microclimate etc during last year. 3. Reduction of plastic cup consumption from 5.1 Lakhs cup (In 2000) per month to 3.2 Lakh (2003) per month 4. Construction of landfill facility for the disposal of hazardous waste. 5. Incinerator plant is installed of 200Kg/Hr capacity for to incinerate the Hazardous Waste like Oily Rags, Oily sludge & other oily contaminated material. 6. Reverse Osmosis (RO) installed of cap. 110 m3/hr.

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7. Commitment to Safety is of paramount importance at Reliance. New work permit procedures developed with the help of M/S Shell expertsare being consistently followed in Jamnagar. The new procedure provide for more checks and responsibility according to the hazard potential of each activity. 8. Achieved 100% recycle of treated effluent in the industrial complex and residential township. The British Safety Council conducted a Safety and Health Management audit at Jamnagar and awarded the highest Five Star rating to the site in 2003. How Reliance took care of Environmental concerns during Construction phase The pipelines were laid on a trestle from land fall point to Jetty (4 kms distance) to avoid disturbance to inter-tidal mud flats. Labour colonies with sanitation facilities were provided for construction work force. STPs were provided and treated sewage was used for green belt development.

Top soil removed from plant area during leveling was used in green belt area to increase top soildepth. Large ponds were created to collect the storm water and use it for construction needs. Sea route was used to bring heavy plant and machinery thus avoiding traffic problems in the road Selection of Jetty and seawater intake locations based on satellite images for minimal impact on environment

The Jetty was located in a natural channel between two small islands where no sedimentation occurs periodical dredging was avoided

Greenery developed over 2000 acres, more than 3 times the statutory requirement and presently sequestering 60% of the CO2 liberated from the complex. Page | 21

MERCK CASE STUDY

A disease called River Blindness was spreading in countries of Africa and Latin America. In 1979 18 million impoverished people were suffering from this severe disease. This disease was passed by Black Fly which breeds in river water and transfer the disease by the bite of the black fly from person to person. The spreading of disease was also spoiling the fertile land which was present near the banks of the rivers, forcing the cultivation far away from the banks, reducing the productivity and the quality of the agricultural produce. There were only 2 alternates available for stopping the disease. 1. Spraying of pesticides: - This would probably kill the black flies but pollute the river water which people used to consume. Over a period of time this alternative became ineffective as the carrier of the parasite got immune to the pesticide spray. 2. Expensive medicines: - At that time market had some medicines that could probably cure the disease but it came along with severe side effects. The patient that could afford the medicine also had to be hospitalized for the treatment of side effects and pay huge hospital bills Mr. William Campbell, one of the researchers in the R&D department of Merck noticed that one of the best selling animal drugs Ivermectin if researched and clinically tested on humans could result in for cheap effective drug for River Blindness. He proposed the same to Chairman Dr. Roy Vagelos and mentioned that the medical research and clinical trials would cost around $100 million for development of the human version of Ivermectin. There was a lot of risk associated with development of the human version of Ivermectin as the human version would be cheaper than the animal version, it would be black Page | 22

marketed and used on animals. The whole thing would bring a bad name to the company and it could lose sale of $300 million of the animal version. Also at the same time profits were declining as a percentage of sales and the costs were rising due to heavy expenditure on research and development. United Stated Government were also passing the Drug regulation act in which no drugs which are used on animals can be used on humans and few other restrictions on development on new drug. There were cheap generic drugs which were available in the market for the same, so there was risk of selling the drug at a premium price. After several meeting with Dr. Vagelos, Mr. Campbell & his team was finally given the go ahead for development of human version of Ivermectin in 1980. Seven years of extensive research and clinical trials, human version of Ivermectin was finally developed. Single pill a year was the dosage of the drug which would prevent and cure the disease. When the drug was finally ready for distribution, no one came forward to support claims of the drug and helped in distribution of the same. World Health Organisation, United States Government and the Government of nations afflicted with disease also backed out. Merck did not have the distribution strength to go all out and hence was looking for some help from the organisations. Approximately 85 million people were at risk and therefore Merck decided to distribute the drug free of cost to all potential people at risk in association with private orgnisations and later was joined by The World Health Organisation. When asked in a press conference, Why so much of money was spent when the result of it was not well known, Chairman Dr Roy Vagelos said:- Once the company suspected that one of its animal drug might cure severe human disease that was ravaging people the only ethical choice was to develop it.

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Case Study: Bausch & Lomb's ReNu with MoistureLoc

Bausch & Lomb released ReNu with MoistureLoc as a new contact lens cleaning solution in November, 2004. ReNu with MoistureLoc was marketed as a "no-rub", one step disinfecting contact lens solution and was sold in the US, Europe, and Asia. Use of ReNu with MoistureLoc has been shown to cause Fusarium keratitis. Fusarium keratitis is an infection of the cornea caused by the Fusarium fungus. It is a serious infection that requires aggressive and timely treatment. If Fusarium is untreated, it can lead to permanent loss of vision. Symptoms of Fusarium keratitis may include: Eye pain Blurry vision Redness, burning, and itching in the eye Excessive eye discharge Increased sensitivity to light Health officials in Hong Kong began noticing an increase in Fusarium keratitis associated with ReNu with MoistureLoc usage in June, 2005. Within one month, Bausch & Lomb learned of six Fusarium keratitis cases in Hong Kong, but did not inform the Food & Drug Administration (FDA). By February, 2006, Bausch & Lomb had removed ReNu with MoistureLoc from Asian markets, yet still did not warn US consumers for 2 months. On March 3, 2006, Bausch & Lomb was first notified of 3 cases of Fusarium keratitis in the US. The FDA began investigating Bausch & Lomb's manufacturing plant for ReNu with MoistureLoc later that month. Bausch & Lomb finally recalled all unused bottles of ReNu with MoistureLoc in the US on April 13, 2006. On May 15, 2006, Bausch & Lomb issued a global recall of ReNu with MoistureLoc. At the same time, the FDA issued a report critical of Bausch & Lomb's handling of the recall and its failure to respond to a consumer health crisis. The Center for Disease Control (CDC) estimated that 30 of the 109 cases of Fusarium keratitis reported in all of 2005 and part of 2006 were traceable to Renu with MoistureLoc. By May 19, 2006, 130 cases of Fusarium keratitis were reported by contact

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lens wearers to the CDC reported using ReNu with MoistureLoc. By the time of Bausch & Lomb's recall, 2.3 million patients had used ReNu with MoistureLoc. May 17, 2006 FDA finds Bausch and Lomb didn't follow the rules. FDA says 35 cases were not reported properly. Bausch & Lomb denies the allegations and said it communicated promptly and directly with the FDA regarding reports the company received about fusarium infections. On Tuesday, the FDA released the findings of an inspection team that was at the Greenville plant from March 22 until May 15. In a report, the team faulted Bausch & Lomb in 20 procedural areas. Inspectors said Bausch & Lomb failed to: Do a complete design plan for the ReNu with MoistureLoc product. Follow procedures to prevent contamination of equipment and product. Properly define and document procedures for controlling environmental conditions. Implement procedures to control storage of product in storage areas and stock rooms. Conduct quality control audits. Implement procedures to prevent problems during handling of product. Ensure appropriate design, construction, placement, and installation of manufacturing equipment. Properly document maintenance activities. Still, the FDA said that while the team's observations at the plant may indicate deviations from current good manufacturing practice, they do not necessarily support a connection between ReNu with MoistureLoc and the fungal infections. Events according to the reverse chronological order: May 15, 2006 Bausch Lomb is permanently removing its Greenville-made ReNu with MoistureLoc Baush and Lomb contact lens solution from the worldwide market after concluding the product's formula may increase the risk of fungal eye infections in certain unusual circumstances. Problems with the solution were reported in the United States, Singapore, Page | 25

Hong Kong, and Malaysia -- all markets served by the Greenville plant. The U.S. Food and Drug Administration dispatched a team of investigators to the plant March 22, and on April 10, Bausch Lomb said it had stopped shipments of ReNu with MoistureLoc from the plant. The company and the FDA said they believe they've solved the mystery and that it lies in the chemical properties of ReNu with MoistureLoc in the manufacturing process at the Greenville plant. Exhaustive testing revealed that ReNu with MoistureLoc, under certain conditions, such as if the bottle cap is left open, allows a polymer film to form, and the Fusarium fungus, found just about everywhere, can survive on the film, insulated from alexidine, the disinfectant in ReNu with MoistureLoc. The fungal infections appear to be related to the design of this particular solution and don't stem from a problem with the manufacturing and the way in which the product leaves the facility. April 20, 2006 Bausch Lomb class action lawsuits likely in multiple states. In Miami, an attorney is seeking class action status for a lawsuit against Bausch & Lomb for ReNu eye infections. The lawsuit alleges that plaintiffs have suffered painful eye fungus injections. These infections permanently scarred the cornea of the Bausch Lomb class action plaintiff, a woman who used its contact lens solution. The lawsuit follows a similar Bausch & Lomb class action suit filed in New York that also alleges the company failed to remove the fungus from the Renu with MoistureLoc eye solution and/or caused the fungus to grow in the manufacturing process. April 15, 2006 The company asks retail stores to take ReNu with MoistureLoc Bausch and Lomb contact lens solution made in the Greenville plant off the shelves temporarily but did not request that the solution be returned to the company. CEO Ron Zarrella said neither the company nor the FDA had discovered contamination at the plant after nearly three weeks of testing. The company's request that retailer pull its product did not apply to other Bausch & Lomb products or ReNu with MoistureLoc made outside the United States. The request came as several U.S. retailers led by Wal-Mart., Walgreen, and CVS Corp., were pulling the ReNu Bausch and Lomb contact lens solution with MoistureLoc solution off their shelves on their own.

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The company stopped shipments of MoistureLoc in the United States when the CDC said it was scrutinizing 109 reports of fungal keratitis infections in patients in 17 states over the past 10 months. April 12, 2006 Bausch & Lomb said that neither the company nor any of the five federal inspectors had found any evidence that contact lens solution made at its Greenville plant is connected to eye fungus infections after nearly three weeks of testing. The company also doesn't have any plans to furlough or lay off any of the approximately 450 workers at the Pelham Road facility, even though it halted shipments of solution made there. CEO Ron Zarrella said that tests have been conducted on samples of solution made at the plant, solution from store shelves, and solution used by victims who became infected and none have revealed evidence of the fungus. He said test results of swabs taken in non sterile areas of the plant aren't back from labs, but it won't be surprising if they are positive because the Fusariam fungus is found just about everywhere. Zarrella told analysts the company is ramping up production of another contact lens solution now that some retailers are pulling ReNu with MoistureLoc from their shelves but it wasn't immediately clear how that might affect the Greenville plant. April 12, 2006 Singapore: 36 more cases of fusarium keratitis reported since the last update in late February (then 39 cases). In total, 75 cases of fungal corneal infection with a history of contact lens use have been reported. April 10, 2006 Bausch & Lomb stopped shipping product to U.S. stores but said stores could continue to sell existing product until supplies ran out. "There's no indication there is a formula problem here," CEO Zarrella said. March 31, 2006 Bausch and Lomb is collaborating in a surveillance program and scientific investigation to track and investigate the incidence of the infection with health authorities and leading experts around the world including the United States. March 22, 2006 Page | 27

FDA begins inspection of Bausch & Lomb, Greenville, S.C. plant.

March 18, 2006 Eight victims required corneal transplants to avert blindness. Only 30 cases investigated thus far. Of those 30 cases, 28 wore soft contacts and all but two used ReNu products. Five of the 26 who used ReNu also used other solutions. March 8, 2006 A New Jersey ophthalmologist reports three cases of rare fungal infection, fusarium keratitis to the CDC within the last three months. The U.S. investigation begins. February 20, 2006 Bausch Lomb voluntarily suspends sales in Singapore, Malaysia, and Hong Kong after 29 cases of fungal keratitis are found in Asia since November 2005. December 2005 Bausch & Lomb mentions but downplays the Hong Kong incident to the FDA. November 2005 Hong Kong health officials tell Bausch & Lomb about the noted increase in hospital admissions due to contact-lens-related keratitis from June to September 2005. June 15, 2005 First reported fusarium case reported in the United States

Subprime Crisis case study

The question of morality or Moral hazards occurs when parties who are mostly insulated from risk behave differently from the way they would normally behave if they were fully exposed to the risk. Or put another way, moral hazards often result in sub-par behaviour stemming from not having enough skin in the game. The sub prime mortgage crisis has led to investment portfolio losses in great companies like Citibank and other public companies like Money Gram. Stock prices fall and individual investors take a hit when these companies are forced to write down the value of their investment portfolios.

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In the case of sub-prime lending, a moral hazard occurred precisely because the players within it all profited by making imprudent loans, without bearing the burden of making good on the loans if they went bad. From mortgage brokers who loaned money that was not theirs, to banks who sought to sell the investment risk on to others in the form of high-yielding mortgage-backed securities, prudent mortgage standards were shirked in exchange for profit as the risk was passed on The financial collapse of Wall Street is the fiscal consequence of the economic philosophy that now governs America-that markets are always good and government is always bad. But it is also the moral consequence of greed, where private profit prevails over the concept of the common good. Another example of greed of Americans is the American dream of having house outside the city. That led to purchase of huge houses by them. And, alas, many Americans, feeling richer because their houses had a higher market value, took out home equity loans and spent the money. Some mortgage loan originators and real estate agents encouraged new homeowners to take on larger mortgages than they could afford. Worse, to disguise the costs of these mortgages, many pushed adjustable rate mortgages to unsuspecting consumers. When interest rates rise, the new homeowners find they can't afford their mortgage. This has contributed greatly to an economic mess that might well lead to an American recession. The moral hazard in this is that the loan originators and the real estate salesmen make their commissions and can usually walk away regardless of what happens down the road. These mortgages are bundled together and sold to investors as mortgage-backed securities. There was little incentive for those selling the loans to seriously evaluate whether or not the consumer could pay the loan in the long run. In the worst cases of fraud, those selling the loans knew the consumers had little chance of meeting their payments but misled the consumers into believing the housing market would always rise and the loan could always be refinanced. If each loan originator and real estate agent in these transactions had been forced to keep their wealth invested in the mortgages they sold, it's unlikely we'd have a sub prime mortgage crisis today The whole system of credit checking broke down because breaking the system served the interests of too many who could profit from a broken system. Many single-family homes were not owned by a family who planned to live there, but were owned by a wanna-be real-estate mogul looking to sell it quickly. These Page | 29

properties were often highly leveraged Some investors will point fingers at the executives. Many of the executives at these large companies point their fingers at the debt rating system. It seems these professional investors should have seen the dangers inherent in over-investing in mortgage-backed securities. We know that banks are a great investment, because they're in the business of selling money for more than it's worth. We also know that the near impossibility of the average investor evaluating the quality of the loans the bank is making. This means what is fundamentally a sound business creates a risk for retail investors who don't have a full view into the operations of the bank. The employee at one of the troubled bank confessed that we were encouraged to use sub-prime loans rather than FHA or the FANNIE A- because we made more on subprime. Our portfolio of A- was fine, but we couldn't package it for what they did the subprime loans. Then we could just keep getting lower and lower quality loans approved. The recent one harming the morality is related to micro lending. There was an article "The Ugly Side of Micro lending: How big Mexican banks profit as many poor borrowers get trapped in a maze of debt." It posed the question: Were some of these lenders more interested in getting loan shark rates of interest than making a social difference? At what interest rate does offering loans cease helping and become loan sharking? If micro lending moves from social entrepreneurship into for-profit entrepreneurship, that changes the dynamic. Social entrepreneurs use business methods to bring about positive social change. Rather than people risking a small amount, they might start looking at micro lending as a way to earn a high return. Then, the profit motive moves in and pushes out the initial motivation for making these loans in the first place. Suddenly, we'll have micro loan moguls, bundled goat loans, and every poor person from Tanzania to Haiti will seek shack-improvement loans. The "service providers" and loan originators will run amuck seeking more and more transaction fees. The evaluation of the loan and its reasonableness will go out the window. More loans would mean more transaction fees. This will destroy the credibility of the micro lending process. What started as a legitimate service can be destroyed by greed.

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The case study: Infosys, the business in ethical way In the event of what happened to IT giant Satyam in recent time, the question of can profitability and morality co-exist has raised its importance. Its not about just a company, but an entire business community of the country that comes under suspicious thoughts. To be on optimistic front, we would like to quote an example from the same IT industry which will enable to strengthen the Indian Business image with its sustainable performance over the years in different parameters of the business. We are talking about the second largest Indian IT company that is Infosys technologies ltd. A ten thousand rupees initiative started by a visionary person with the support of seven members in year 1981 in a small flat in pune; 28 years down the line we are talking about more than 4billion dollar revenue of a corporate giant. What caused such a transformation?? Its not just profits or sustainable growth. There are few significant things which they have done differently as compared to their peers. Yes, we are talking about a moral side of business, and no discussion of moral in business is complete without mentioning the name Infosys. So what makes it different from others? Lets look at some points. Vision and Mission: A vision which is formed by a visionary itself Mr. Narayan Murthy to become a largest IT company in India with a sustainable excellence and to be known as an organization which is powered by intellect and driven by values This mission and vision is divided into set of measurable parameters which can be deployed in top down approach to achieve the desired results. CLife base work culture: C stands for customer delight L stands for leadership by example I stand for integrity F stands for Fairness And E stands for excellence Page | 31

Such as the work culture of an organization which helps it to achieve those objectives mentioned in vision and mission. It is really an ideal role model in way in which they have employed these principles. It was the first company to start with Global delivery model i.e. to develop a software solution at clients location (overseas) to enhance customer satisfaction and repeat business. To enhance transparency in reporting mechanism, they started presenting their statements in US GAAP format. It was the first company to show Economic value added calculation in the annual reports which presents the view of actual value added to shareholders wealth. They have always maintained excellence is the only parameters whiling recruiting talent. As Mr. Murthy said, Human Resource is our most valued asset. Infosys started with Campus connect program accommodating near about 5000 engineering colleges across the country to help the students gain practical knowledge in order to enhance their employability. The thing worth mentioning here is the social side of their business that is Infosys foundation trust. They started with this initiative in year 2000 under the guidance of Ms. Sudha Murthy. It has contributed towards development of underprivileged people especially from rural area. It generously contributed towards national cause such as natural calamities. Now one may ask question what a corporation of Infosyss stature can gain out of such activities. A brief explanation. An investor values an organization based on its share price. It is an ultimate measure to gauge the performance of a company. It is not all about business income and profitability. It takes into account an investors confidence, which is expressed in terms of P/E ratio. And as archives say it all Infosys has always obtained higher P/E than Satyam, Which is a basis for overall valuation. Thus Infosys presents a classic case in this competitive environment that how a profitability and morality can coexist. They have certainly enhanced their present value by securing sustainable future.

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CASE ON EMPLOYEES
Employees: A significant class of stakeholders Business ethics can be examined from various perspectives, including the perspective of the employee, the commercial enterprise, and society as a whole. Very often, situations arise in which there is conflict or compromise between one and more of the parties, such that serving the interest of one party is a detriment to the others. Uncompromising business ethics are an integral part of a morally strong company and of their way of doing business. While each organization should establish its own ethical framework, two cornerstones must be in place in order to build an ethical organization: mutual trust and respect. In personal interviews conducted with 100 Human Resource practitioners across the United States in 1999 and 2000, these two characteristics surfaced time and again as critical components of ethical organizations. In an organization in which respect is a demonstrated value, employees and managers treat each other with dignity and make it known that they care about the work they perform. Individual differences and perspectives are appreciated and promoted. All employees, regardless of their position, are recognized and rewarded for their contributions. In an organization where trust is prevalent, information is accurate, timely, and complete. Coworkers share their ideas and concerns. People at all levels accept suggestions for ways to improve the work. Alternatives are discussed freely, and clear and concrete goals are developed and shared across the organization.

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A compliance code can impact employee behaviors in only a limited way if genuine change in organizational culture is absent. Such change can come about in a valuesdriven organization that identifies values and invests considerable resources to make those values permeate all aspects of operations. Then, we will find employees opting to make decisions consistent with those values, even when short-term payoffs are not apparent. Ethical business practice positively affects company performance. For example, if employees are being treated well, it is likely that workplace productivity will increase. Ethical business practices help in increasing job safety, employee relations as well as result in a healthy balance between work and non-work aspects of employees' life. It can also make it easier to recruit employees and make them stay longer, thereby reducing the costs and disruption of recruitment and retraining. In the presence of strong business ethics common errors such as the following are avoided

Scapegoating When customer complaints occur, perhaps employees blame everyone else, or every other department. When goals aren't achieved, there may always seem to be someone's else's doorstep on which the lay the fault. In the presence of strong ethics and values embedded in the organization employees refrain from such activities. Overpromising "This company is the best place to work in the county!" "The promotion path here is extremely fast." "We'll be going public within the year!" Are managers using these kinds of statements frequently without knowing whether they're really true? If the norm is making brash, optimistic (possibly untrue) statements to achieve a short-term result, it would result in a bad image and poor ethical behavior on the part of the organization.

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Turf "Guarding" In today's rapidly changing marketplace, companies must be highly flexible to meet customer demands. The result is that employees must be prepared to shift gears and learn new skills or serve on various work teams to complete projects. If an organization has employees that hoard information and jealously guard their turf for any reason, productivity may suffer and resentment can build. This kind of behavior indicates that people don't trust their knowledge or expertise in someone else's hands. Underachieving Are employees allowed to barely "get by" and still be rewarded with a paycheck and even promotions? Is mediocrity accepted because it's too difficult to fire people who aren't really competent? If an organization takes the easy way out and tolerates employees who are negative and only partially productive, long-term success is jeopardized. Considering the case of Enron, Enrons downfall is the greatest tragedy in corporate history. Its decline, bankruptcy, and trials have made the name Enron iconic of corporate hubris and unethical business practices. It caused a great degree of harm to employees and the community at large. The efficacy of corporate governance in monitoring managerial performance; the utility of stock options in aligning managerial and shareholder interests, and the value of employee ownership as both an incentive device as well as a retirement planning tool are all important indicators of the companys moral behavior. The fraudulent and disloyal behavior in Enron impacted large numbers of working and middle-class employees.

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CONCLUSION
Most of the companies believe that they exist to make profits only. They justify their focus on profits through following arguments: 1) Businesses are economic units and not social units. As long as I make profits, pay my employees, deliver value to my shareholders, I am my existence is justified. I dont exist to do charity. My work is only to make profits, and government is responsible for social development. A counter to this argument is businesses have license to make profits. But do they have license to make profit at any cost? 2) Market (consumers) is king. They are the final authority to decide what should sell, how much and at what price. So let market decide what should be sold. Make it completely free and market driven economy. A counter to this argument is, is it practical to let everything be decided by consumers or market? 3) Morality is a subjective phenomenon. What is immoral for you, is not for me. Like paying bribe and getting work done might be immoral for you, but it is practical for me. A counter to this argument is, is this a linguistic issue or there has to be a common definition of ethics, there has to be some line drawn to by which everybody complies, and by which the definition remains same for everybody. 4) Businesses are socially responsible people, as they provide employment to so many people, pay taxes to government, improve quality of life of consumers etc. so if we focus on profits for it, we should be allowed to do that, since we also do social responsibilities. A counter to this argument is: do companies have right to do anything to make profit behind the mask of social responsibility. Page | 36

But till what extent can you push the line of ethics, or till what extent can companies bend the rules. 1) Till they are caught-like they say cheating is an art till you are not caught. But once you are caught, you pay a heavy price. Like in case of colas, they never informed consumers about pesticides content, but when they were exposed, they paid a heavy price for it. 2) Till there is no option- consumers or employees will bear with the company as long as they dont have any other option. But they will immediately move when they get a more transparent option. So you cannot buy loyalty. 3) Till the value you provide is much more than costs we pay for your immorality. Its like till Reliance provides much more value to shareholders and consumers, they will not point out finger at Reliances immorality. But the day people feel Reliances values is not worth the cost they pay for the rules it breaks, they will ask questions and justifications. 4) Till you make more people happy than sad. Till there are more people on your side, than the other side, you will not be questioned. So its not that being unethical or immoral only increases profits. Immorality does have cost attached to it. Infact you pay a bigger price than benefit earned when you are caught. You might get caught sooner or later. You might even be lucky enough to not get caught in your existence, but you are only bargaining with time. Instead we can bargain with profit, by letting some profit go. This means that in such cases, there would be lower profits but sustainable profits. But from long term point of view it is best for a company. So profitability and morality could be a tradeoff. But they can definitely coexist.

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