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(BE&CG)-SEM-IV (GTU) Business Ethics & Corporate Governance

Module I!!!




Ethics is a set of standards or code or value system, worked out from

human reason & experience by which free human actions are determined as ultimately right or wrong, good or evil.

Business ethics means the application of ethics in business Definition of Business Ethics: Business Ethics is a specialized study of
moral right and wrong. It concentrates on moral standards as they apply particularly to business policies, institutions, and behavior.

Characteristics of business ethics

Differ with persons: ethical questions do not have a unique solution but a multitude of alternatives Ethical decisions are not limited to them, but affect a wide range of other situations as well. Ethical decisions involve a tradeoff between cost incurred and benefits received. Consequences are not clear Every person is individually responsible for the ethical or unethical decision and action that he or she takes Ethical actions are voluntary human actions

Why is ethics important in business?

Ethics corresponds to basic human needs Values create credibility with the public Values give mgmt credibility with employees Values help better decision making Ethics and profit Law cannot protect society, ethics can

Morality and ethics:

Morality is the std an individual or community keeps about what is right and wrong or good and evil. Moral norms deal with topics that either seriously harm or benefit human beings. Moral standards are not dependent on or changed by the decision of authoritative bodies. Moral demands enjoy a self-driven force. Expressed through the medium of special emotions. Ethics helps one to address questions such as what do moral principles mean in a given situation. Ethics offers certain moral standards to judge a particular human behavior or situation.

Law and ethics:

Law is universally accepted, published document Law says, what action should be taken against a person who violates the provisions of legal system whereas the consequences of unethical action is not clear Some laws have nothing to do with morality while some may even violate our moral standards.

Aims and Objectives

To give a basic understanding of the major theories of ethics - including deontology, utilitarianism and virtue theory - and their application in the relevant fields of business and information technology. One of the main course objectives is to encourage independent critical thought and develop an individual system of ethics. IMPORTANCE OF BUSINESS ETHICS: It is now recognized that it is good business to be ethical. An ethical image for accompany can build goodwill and loyalty among customers and clients. Ethical motivation: It protects or improves reputation of the organization by creating an efficient and productive work environment. At a time of mass corporate downsizing, one of the most effective ways to appeal to the fragile loyalty of insecure employees is to promote an ethical culture, which gives employees a greater sense of control and appreciation. Balance the needs and wishes of stakeholders: There is pressure on business to recognize its responsibilities to society. Business ethics requires businesses to think about the impact of its decisions on people or stakeholders who are directly or

indirectly affected by those decisions. Companies build their image by acting in accordance with their values, whatever they might be. Creating a positive public image comes from demonstrating appropriate values. Publicizing and following a companys values allows stakeholders to understand what the company stands for, that it takes its conduct as an organization seriously. Global challenges: Business must become aware of the ethical diversity of this world because of increasing globalization of the economy. It must learn the values of other cultures, how to apply them to its decisions, and how to combine them with its own values. In a world where transnational corporations and their affiliates account for two-thirds of the worlds trade in goods, and employ 73 million people, corporations cannot afford to ignore the reality of multicultural ethics. Ethical pay-off: They serve to protect the organization from significant risks, and to some degree help grow the business. Risks such as breaches of law, regulations or company standards, and damage to reputation were perceived to be significantly reduced. Employee Retention: One of the major costs in business is inappropriate turnover. The loss of valuable experience and development of new personnel is a cost companies can control. Seldom is pay the primary factor in losing an employee. What would a company give to retain valuable employees? With a successful program, the employees work with managers and supervisors in making decisions based on the companys values. A successful Business Ethics program establishes a culture that rewards making the right decision. Prevention and Reduction of Criminal Penalties: The United States Sentencing Commission Guidelines state that to receive a 40% reduction in federal penalties, a company must have "an effective program to detect and prevent violations of the law". Executives cannot always be aware of everything done in a companys name. Jeffrey Kaplan in his article The Sentencing Guidelines: The First Ten Years points out those recent cases also show that prosecutors are electing not to pursue some actions because the companies in question have sound programs in place. This is a tremendous asset to companies under regulatory scrutiny. Preventing civil lawsuits: Many times employees that experience issues in the workplace first try to resolve these issues internally. If their complaints are ignored, employees feel compelled to go to an outside advocate. That could be a private attorney, government regulator or news agency. Giving employees an internal outlet can solve problems without the event becoming public knowledge or an issue for the courts. Having the values permeate the company culture enhances the staffs trust in senior management. Why? Because with an effective program, the staff recognizes that management also operates within these appropriate values. Market Leadership: When a company fully integrates its values into its culture, quality rises due to the employees focus on values. Customers see that the employees care

about the customers concerns. Employees reflect appropriate values in their attitude and conduct. Try Ethical Business Practices points out those businesses demonstrating the highest ethical standards are also the most profitable and successful. Setting the Example: By setting the example in the community and market, the entire industry has a new standard that allows the community and the market to recognize the company as a leader. When the word gets out, competitors will have to answer questions about why they were not establishing similar values.

The History of Business Ethics

Business ethics has only existed as an academic field since the 1970s. During the 1960s, corporations found themselves increasingly under attack over unethical conduct. As a response to this, corporations - most notably in the US - developed social responsibility programmes which usually involved charitable donations and funding local community projects. This practice was mostly ad hoc and unorganized varying from industry to industry and company to company. Business schools in large universities began to incorporate social responsibility courses into their syllabi around this time but it was mostly focused on the law and management strategy. Social responsibility has been described as being a pyramid with four types of responsibility involved - economic (on the bottom level), then legal, ethical and finally philanthropic. Ethical issues were dealt with in social issues courses However, and were not considered in their own right until the 1970s when philosophers began to write on the subject of business ethics. Previous to this development, only management professionals, theologians and journalists had been highlighting problems of this nature on a regular basis. When philosophers became involved they brought ethical theory to bear on the relevant ethical issues and business ethics became a more institutionalized, organized and integral part of education in business. Thereafter annual conferences, case books, journals and text books were more regular and established.

This new aspect of business ethics differentiated it from social issues courses in three ways: 1) Business ethics provided an ethical framework for evaluating business and the corporate world. 2) It allowed critical analysis of business and development of new and different methods. (This also made business ethicists unpopular in certain circles.)

3) Business ethics fused personal and social responsibility together and gave it a theoretical foundation. In this way, business ethics had a somewhat broader remit than its predecessor (the social issues course) and was a good deal more systematic and constructive. Business ethics also recognized that the world of business raised new and unprecedented moral problems not covered by personal systems of morality. Common-sense morality is sufficient to govern judgments about stealing from your employer, cheating customers and tax fraud. It could not provide all the necessary tools for evaluating moral justification of affirmative action, the right to strike and whistle-blowing.

The Role of Business Ethics Today

Business and IT students spend the majority of their time at university learning about economics, business development, software engineering and computer programming. This is all valuable and necessary knowledge to prepare them for the demands of employment in the business/IT sector. However, running or working in a business will raise many difficulties that are completely unrelated to the skills or knowledge gained in university. How do you evaluate such problems as hiring the more qualified candidate for a job when she has a disability requiring costly adaptations to the work environment, outsourcing production materials from countries where child labour and sweatshops are prevalent etc.? In recent years there have been several business scandals that caused serious damage to the credibility of the companies involved, occasionally the entire industry in which they operate, and the numerous stakeholders of the business. One such example is the collapse of Barings Bank - the actions of one rogue trader incurred losses of almost US$1 billion. It has been discovered that many high profile people (at home and abroad) are involved in tax-evasion, insider trading and fraud, Charlie Haughey and Martha Stewart are two such examples of people with considerable wealth and public standing who have been involved in questionable business dealings. At this stage in your course, you are well equipped with knowledge of your subject, and this will be built on when you go into the workplace due to on-going training and other such practices. But it is fair to say that some of you may have never had the chance to think of the ethical issues entailed in business and IT. During this course on business ethics it is hoped that you will be given such an opportunity and attain a

working knowledge of the different theoretical frameworks that can be applied to business.

Basic Ethical Values for Business

Trust Honesty Fairness Dignity and Respect for Humanity Respect for Legitimate Law Respect for Property Autonomy and Freedom Impartiality/Objectivity Compassion

Customary vs. Normative Ethics

Customary Ethics The moral values, principles, norms, and methods used to evaluate individual conduct and social arrangements. Developed and fostered through socio-cultural practices and institutions Normative Ethics An attempt to identify, clarifies, explain, and justify the moral values, principles, norms, and methods used to evaluate individual conduct and social arrangements. Customary Ethics describes what social groups and individuals do value and what principles they do accept. Normative Ethics evaluates and attempts to justify certain values and principles apart from what is customarily accepted and practiced. [Normative] ethics requires us to abstract ourselves from what is normally or typically done and reflect upon whether or not what is done, should be done, and whether what is valued, should be valued. The difference between what is valued and what ought to be valued is the difference between [customary ethics] and [normative] ethics.

Why fostering Good Business Ethics is important

To gain the goodwill of the community To create an organization that operates consistently To produce good business To protect the organization and its employees from legal action To avoid unfavorable publicity




Ethics is a set of moral principles or values which is concerned with the righteousness or wrongness of human behavior and which guides your conduct in relation to others (for individuals and organizations).

Ethics is the activity of examining the moral standards of a society, and asking how these standards apply to our lives and whether these standards are reasonable or unreasonable, that is, whether they are supported by good reasons or poor ones.

The Nature of Ethics

When you are guided by ethics, you do not cheat on a test or lie to friends or family. Most businesses are guided by business ethics. Different cultures, businesses, and industries have different ethical standards Morality is the standards that an individual or a group has about what is right and wrong, good or evil. Moral standards are norms we have about the kinds of actions we believe are morally right and wrong as well as the values we place on the kinds of objects we believe are morally good and morally bad (Smith, 2003). From there, we can say that Ethics is a branch of philosophy (moral philosophy) that examines the moral standards of an individual or society, and asking how these standards apply to our lives and whether these are reasonable or unreasonable.

As part of the general nature of ethics, we uphold moral rights (Smith, 2003). The three important features of moral rights are: 1. MORAL RIGHTS are tightly correlated with duties. Duties are generally the other side of moral rights (Smith, 2003). For example, my right to work implies the government's duty to make jobs available to the people.

2. MORAL RIGHTS provide individuals with autonomy and equality in the free pursuit of their interests (Smith, 2003). For example, the right to worship as I choose implies that I am free to pursue this interest as I personally choose. No one can dictate to me how I ought to worship (Halle, 2000). 3. MORAL RIGHTS provide a basis for justifying one's actions and for invoking the protection or aid of others. My right to something is my justification for doing it. For example, why do I work? - Because it is my right to work! And no one can restrain me from working group, or an exchange (Smith, 2003). The better the quality of a person's contributed product, the more he or she should receive.

Morality and ethics:

Morality is the std an individual or community keeps about what is right and wrong or good and evil. Moral norms deal with topics that either seriously harm or benefit human beings. Moral standards are not dependent on or changed by the decision of authoritative bodies. Moral demands enjoy a self-driven force. Expressed through the medium of special emotions. Ethics helps one to address questions such as what do moral principles mean in a given situation. Ethics offers certain moral standards to judge a particular human behavior or situation.

Law and ethics:

Law is universally accepted, published document Law says, what action should be taken against a person who violates the provisions of legal system whereas the consequences of unethical action is not clear Some laws have nothing to do with morality while some may even violate our moral standards.

Stakeholders and Ethics

Stakeholders people and groups affected by the way a company and its managers behave supply a company with its productive resources and have a claim on its resources When the law does not specify how companies should behave, managers must decide what is the right or ethical way to behave toward the people and groups affected by their actions

The Ethical Decision-Making Process

1. 2. 3. 4. 5. Identify the ethical dilemma. Discover alternative actions. Decide who might be affected. List the probable effects of the alternatives. Select the best alternative.

Rules for Ethical Decision Making

ETHICAL Concepts Definitions



Society: Association of people organized under a system of rules Rules:

advance the good of members over time Morality A societies rules of conduct What people ought / ought not to do in various situations Ethics _ Rational examination of morality _ Evaluation of peoples behavior

Moral Systems
rules for guiding conduct principles for evaluating rules

public Rules are known to all members informal Not like formal laws in a legal system rational Based on logic accessible to all Impartial Does not favor any group or person

Derivation of Moral Systems

Morals are derived from societys system of values Intrinsic vs. Instrumental Values Intrinsic _ valued for its own sake _ happiness, health Instrumental _ serves some other end or good _ Money

Core vs. Non-Core Values

Core values _ Basic to thriving and survival of society _ life, happiness, autonomy _ Not necessarily moral Self-interest vs. impartiality

Moral vs. Non-Moral Values

Moral values are a subset of all values Moral values are _ public, _ Informal, _ Rational and _ Impartial Basic moral values are derived from core values using impartiality

Grounding Principles in a Moral System

Religion Law Philosophy

Grounding Moral Principles in a Religious System

Murder is wrong because it offends God punishment is assured, if only in the next life hard to apply in a pluralistic society

Grounding Moral Principles in a Legal System

Murder is wrong because it violates the law. Laws apply to all in a society Punishment can be applied in this life Laws are not uniform across political boundaries Some laws are morally wrong

Grounding Moral Principles in a Philosophical System of Ethics

Murder is wrong because it is wrong. Based on reason and criteria

An act is wrong inherently or because of social consequences Punishment has the form of social disapproval or ostracism Criteria found in ethical theories

The Goal of Ethical Theory

Generally: to provide a systematic answer to the question of how we should behave Our project: to survey a variety of theories as to what matters morally

Theory 1. Moral Objectivism

Moral Objectivism: What is morally right or wrong doesnt depend on what anyone
thinks is right or wrong. 'Moral facts' are like 'physical' facts in that what the facts are does not depend on what anyone thinks they are. They simply have to be discovered. E.g., Divine Command Theory whats right is what God commands; whats wrong is what God forbids

Theory 2. Moral Relativism

Moral Relativism: What is morally right or wrong depends on the prevailing view in
the society or culture we happen to be dealing with. Often presented as a tolerant view: if moral relativism is true, no one has a right to force his moral views on others. Increasingly popular in recent years Did this change with Sept. 11?

A Bad Argument for Moral Relativism

The 'Cultural Differences' Argument Claim: There are huge differences in moral beliefs from culture to culture and era to era. E.g., some cultures endorse the killing of elderly members of the tribe, we condemn such actions. Conclusion: There is no objective fact as to which of these beliefs is correct, morality is relative.

Why are the Cultural Differences Argument Weak?

I. Controversy regarding how much fundamental disagreement about morality there really is II. Differing opinions regarding an issue dont prove there is no fact of the matter about that issue Imagine relativism about the shape of the earth (e.g., in the 1400s)

Objectivist Theories
Suppose for the moments that objectivism is true. What are the objective facts of morality? Main Candidates: Consequentialism Deontological Theories Principilism

Theory 3: Consequentialism
Consequentialists maintain that whether an action is morally right or wrong depends on the action's consequences. In any situation, the morally right thing to do is whatever will have the best consequences. Consequentialist theories are sometimes called teleological theories. Note: not theological this is a misprint in the notes (6-5)

What Kind of Consequences?

Consequentialism isn't very informative unless it's combined with a theory about what the best consequences are. Utilitarianism is such a theory. Utilitarianism is the most influential variety of consequentialism


The Basis of Utilitarianism: ask what has intrinsic value and assess the
consequences of an action in terms of intrinsically valuable things. Instrumental Value - a thing has only instrumental value if it is only valuable for what it may get you

e.g., money i.e., youd value it even if it brought you nothing else

Intrinsic Value - a thing has intrinsic value if you value it for itself

What, if anything, has intrinsic value?

Only Happiness has Intrinsic Value

What Utilitarians Think is intrinsically valuable: happiness (or pleasure or satisfaction) "Actions are right in proportion as they tend to promote happiness, wrong as they tend to produce the reverse of happiness." (John Stuart Mill's Greatest Happiness Principle) In other words, judge an action by the total amount of happiness and unhappiness it creates

Theory 4: Deontology
'Duty Based' Ethics Deontologists deny that what ultimately matters is an action's consequences. They claim that what matters is the kind of action it is. What matters is doing our duty. There are many kinds of deontological theory e.g., The 'Golden Rule' - "Do unto others as you'd have them do unto you."

Kantian Deontology
Immanuel Kant (1724-1804) is the most influential deontologist. Rejecting Consequentialism: "A good will is good not because of what it effects or accomplishes." Even if by bad luck a good person never accomplishes anything much, the good will would "like a jewel, still shine by its own light as something which has its full value in itself."

Theory 5: Principilism

Principilism attempts to have it both ways

Popularized by Beauchamp and Childress Principles of Biomedical Ethics The Georgetown Mantra

Now the dominant theory in medical ethics

Four Principles
1. Autonomy 2. Beneficence 3. Non-maleficence 4. Justice 1 & 4 are deontological 2 & 3 are consequentialist

It is really possible to have it both ways?

Alternative Approaches
Virtue Ethics Ethics of Care

1 The extremes of ethical theories: relativism and absolutism
There are several ethical theories around. But, before we are going to discuss them, we first look at two extremes of the normative ethical theories. On one hand is normative relativism. It states that all moral points of view are relative. The morals of one person are not necessarily equal to the morals of another person. Next to this, it is also impossible to say that certain norms and values are better than other norms and values. The problem with this theory is that it is now impossible to discuss normative ethics: all norms and values are allowed. On the other hand is absolutism, also known as universalism. It states that there is a system of norms and values that is universally applicable to everyone, everywhere at every time. Absolutism makes no exceptions: a rule is a rule. However, there is no set of norms and values that never contradicts itself. So, absolutism in general doesnt work either. We know that both relativism and absolutism dont work. Any choice/judgment based on one of these theories is ethically suspected. But we do know something important now: more useful ethical theories need to be somewhere between relativism and absolutism.

2 Duty ethics and the Kantian theory

Ethics is all about choosing the right actions. An action is carried out by a certain actor with a certain intention. This action then leads to certain consequences. In ethical theories, we can focus on the action, the actor, the intention or the

consequences. If we mainly focus on the action itself, then we use deontological ethics (also known as deontology or duty ethics). In duty ethics, the point of departure is the norms. An action is morally right if it is in agreement with moral rules/norms. Some theories within duty ethics depart from one main principle/rule from which all moral norms are derived. This is the so-called monistic duty ethics. On the other hand, pluralistic theories are based on several principles that apply as norms. Immanuel Kant has developed the most well known system of duty ethics: the Kantian theory. A core notion here is autonomy. A man should place a moral norm upon him and obey it. This is his duty. He should then, on his own, be able to determine through reasoning what is morally correct. The Kantian theory is part of monistic duty ethics: there is one universal principle. This principle is called the categorical imperative. It is formulated in different ways. The first formulation is the universality principle: Act only on that maxim which you can at the same time will that it should become a universal law. The second formulation is the reciprocity principle: Act as to treat humanity, whether in your own person or in that of any other, in every case as an end, never as means only. There are several downsides to the Kantian theory. In Kants theory, rules cannot be bent. This reminds us of absolutism. So, the question arises whether all the moral laws form a consistent system of norms. Another downside is that Kantian theory prescribes to rigidly adhere to the rules, irrespective of the consequences. But in real life, following a rule can of course have very negative consequences. Kants theory does not deal with these exceptions.

3 Utilitarianism
We dont always have to focus on actions. We can also focus on consequences. If we do this, we wind up with consequentialism. One type of consequentialism is utilitarianism, founded by Jeremy Bentham. The name of utilitarianism is derived from the Latin utilis, meaning useful. In utilitarianism, The consequences of actions are measured against one value. This useful value can be something like happiness, welfare or pleasure. It should be maximized. Utilitarianism is based on the utility principle: we simply need to give the greatest happiness to the greatest number of people. (Do note that we have silently made the assumption that pleasure is the only goal in life, and that everything else is just a means to get pleasure. This idea/assumption is called hedonism.) An action is morally right if it results in pleasure, whereas it is wrong if it gives rise to pain. The freedom principle is also based on this. This principle states that you can do whatever you want, as long as you dont cause anyone any pain/harm.

There are several downsides to utilitarianism. Of course it is very hard to determine how much pleasure an action will actually give. Also, to find the total amount of pleasure, we need to consider all individuals that are involved and add up their pleasures. But how do we quantify pleasure? And has the pleasure of one person the same value as the pleasure of another? Also, how do we decide whether one action gives more pleasure than another? Answering these questions is difficult. Even the clever John Stuart Mill did not have an answer, although he did have an opinion. He stated that certain pleasures (like intellectual fulfillment) are by nature more valuable than other pleasures (like physical desires). Another downside is that utilitarianism doesnt always divide happiness in a fair way. For example, a Very talented entertainer can make a lot of people happy. But does this mean that he needs to spend every waking moment entertaining people, until he burns out? However, most utilitarian argue that this isnt a downside of the theory. In fact, they state that after a while, a small moment of spare time will give the entertainer more happiness than all the people he could have entertained in that time. Thus, utilitarianism automatically compensates for this flaw. In utilitarianism, an engineer could also be asked to bend or break a fundamental rule, because this will result in the greatest happiness for the greatest number of people. For example, the engineer has the opportunity to save 10 million Euros on a design. But he knows that this will later cause an accident killing 5 people. He argues that 10 million Euros can cause more happiness than 5 lives. To compensate for this, rule utilitarianism has been created. This kind of utilitarianism recognizes and uses moral rules. It is thus also similar to duty ethics.

4 Virtue ethics and care ethics

Virtue ethics focuses on the nature of the acting person. This actor should base his actions on the right virtues. So, the central theme in virtue ethics is shaping people into morally good and responsible creatures. Virtue ethics is rather similar to duty ethics. But, whereas duty ethics is based on certain rules/norms, virtue ethics is based on certain virtues. Virtue ethics is strongly influenced by Aristotle. He stated that every moral virtue is positioned somewhere between two extremes. In fact, the correct moral virtue equals the optimal balance between these two extremes. For example, to be courageous, you need to find an optimal balance between the two extremes of cowardice and recklessness. Sadly, there are downsides to this idea. The optimal balance often depends on the situation which a person is in. Also, moral virtues are subjective: you cannot generally say that the courageousness of one person is better than the courageousness of the other. Care ethics is a rather new ethical theory. It emphasizes that the development of morals is not caused by learning moral principles. Instead, people should learn norms

and values in specific contexts. Other people are of fundamental importance here. By contacting other people, and by placing yourself in their homes, you learn what is good or bad at a particular time. The solution of moral problems must always be focused on maintaining the relationships between people. So, the connectedness of people is the key.

5 Caveats of ethical theories

Some people believe that applying ethics is just a matter of applying ethical principles to situations. But this is not true. One reason for this is the fact that there is no generally accepted ethical theory. And, different ethical theories might very well result in different judgments. So what should we do if we run into a new case? Well, we can apply our ethical theories to it. But we should be open to the possibility that the new case might reveal a flaw in our theory. Therefore, you should never blindly apply an ethical theory and rely on the outcome. Now you may wonder what ethical theories are good for anyway. Ethical theories may function as instruments in discovering the ethical aspects of a problem/situation. (For example, applying consequentalism is a good way to explore the consequences of actions.) Similarly, ethical theories may suggest certain arguments/reasons that can play a role in moral judgments.

6. Divine Command Theory

Good actions: those aligned with Gods will Bad actions: those contrary to Gods will Holy books reveal Gods will. Use holy books as moral decision-making guides.

o o o We owe obedience to our Creator. God is all-good and all-knowing. God is the ultimate authority. Different holy books disagree Society is multicultural, secular Some moral problems not addressed in scripture The good 6= God (equivalence fallacy) Based on obedience, not reason

o o o o o

7. Cultural Relativism
What is right and wrong depends upon a societys actual Moral guidelines Guidelines vary in space and time

An action may be right in one society and wrong in another society or time

o o o Different contexts demand different guidelines It is arrogant for one society to judge another Morality is reflected in actual behavior Because two societies do have different moral views doesnt mean they ought to Doesnt explain how moral guidelines are determined Doesnt explain how guidelines evolve Provides no way out for cultures in conflict Because many practices are acceptable does not mean any cultural practice is (many/any fallacy) Societies do, in fact, share certain core values Only indirectly based on reason

o o o o o o o




Morals are a set of guiding principles or rules that help differentiate our behavioral choices between right and wrong or good and bad and are exhibited through our intentions, decisions, practices and actions.

Morals have a greater social element to values and tend to have a very broad acceptance. Morals are far more about good and bad than other values. We thus judge others more strongly on morals than values. A person can be described as immoral, yet there is no word for them not following values.


Values are ideals that we believe are important as individuals. They are subjective, and vary as a result of our culture, beliefs, and experiences.

Values are the rules by which we make decisions about right and wrong, should and shouldn't, good and bad. They also tell us which are more or less important, which is useful when we have to trade off meeting one value over another.

Values and morals are different from one person to the next because they are the essential building blocks that shape who we are, what we choose to

stand for and believe in, and influence the decisions we make. They not only give meaning to who we are but also who we want to be. Morals and values are a part of the behavioral aspect of a person. There is not much difference between morals and values but both are correlated to each other. Morals are formed from the inborn values. Moral is a system of beliefs that is taught for deciding good or bad whereas values are personal beliefs or something that comes from within. These are emotionally related for deciding right or wrong. Morals have more social value and acceptance than values, therefore a person is judged more for his moral character than the values. One is said to be immoral for a person without morals but no such term is there for the person without values. Another difference between the morals and values is that moral is a motivation or a key for leading a good life in right direction whereas value is imbibed within a person, it can be bad or good depending on the persons choice. It can also be called as intuition or the call of the heart. Morals do not determine the values but are formed because of the values. Morals contribute to the system of beliefs and are the values which we get from the society.

Morals can be related to ones religion, political system or a business society. Business morals include prompt service, excellence, quality and safety. One practices all the morals while running a business, but the values may not coincide with them. Therefore these morals do not come from within a person but are taught by the social group and has to be followed. On the other hand values are the standards to judge the right or wrong, good or bad, just or unjust. They are the fundamental principles that give guidance to a person to evaluate the merits and demerits of a thing. Values include courage, respect, patriotism, honesty, honor, compassion etc. All these are not mandatory by society but depend on individuals choice. Lastly the difference between the morals and values is that morals are like commandments set by the elders and to be followed by the descendants. They can be set by ones elders or religious teachers or leaders of society who want to lead people away from immoral thoughts. One always treasures the morals throughout his life and they never change with time or conditions. While on the other hand values are not set by the society or teachers, but are governed by an individual. Values do not mean that it is always right to do so. Whatever is valuable for one person may not be the same for the other. Hence it is personal aspect and changes according to different situations with time and needs.

Module II!!!


What is an ethical dilemma? It is a Conflict between...
ones personal and professional values two values/ethical principles two possible actions each with reasons strongly favorable and unfavorable two unsatisfactory alternatives ones values/principles and ones perceived role the need to act and the need to reflect


Can ethical dilemma be avoided?

You can avoid ethical dilemmas! But... You cannot completely avoid ethical dilemmas!

You can avoid ethical dilemmas! An Example

Your placement is in a school, you should give prior thought to how you would respond when a child reveals abuse or neglect. Find out how your field instructor wants you to handle these situations. What information does the school expect you will share with concerned teachers? The principal?

You cannot completely avoid ethical dilemmas!

It is best to prepare yourself for them by examining your own values from time to time and learning all you can about: How past ethical problems in your placement settings were resolved.

The priority ranking of ethical principles An approach for ordering social work values that might help you get off the horns of a dilemma.
Protection of life Equality Autonomy and freedom Least harm Quality of life Privacy and confidentiality Truthfulness and full disclosure

Criteria for Ethical Decision Making Utilitarian Approach

Moral behaviors produce the greatest good for the greatest number.

Individualism Approach
Acts are moral when they promote the individual's best long-term interests.

Moral-Rights Approach
Human beings have fundamental rights that cannot be taken away by an individual's decision.

1. Free consent 2. Privacy 3. Conscience 4. Free speech 5. Due process 6. Life and safety.

Justice Approach
Standards of equity, fairness, and impartiality. Distributive Justice Procedural Justice Compensatory Justice

How do MANAGERIAL & ethical dilemmas complicate the workplace?

An ethical dilemma occurs when choices, although having potential for personal and/or organizational benefit, may be considered unethical. Ethical dilemmas include: Discrimination Sexual harassment Conflicts of interest Customer confidence Organizational resources

Ethical behavior can be rationalized by convincing yourself that: Behavior is not really illegal. Behavior is really in everyones best interests. Nobody will ever find out. The organization will protect you.

Factors influencing ethical behavior include: The person Family influences, religious values, personal standards, and personal needs. The organization Supervisory behavior, peer group norms and behavior, and policy statements and written rules. The environment Government laws and regulations, societal norms and values, and competitive climate in an industry.


Ethics Defined



The rules and principles that define right and wrong conduct

Four Views of Ethics

1. Utilitarian view of ethics says that ethical decisions are made solely on the basis of their outcomes or consequences. Greatest good is provided for the greatest number -Encourages efficiency and productivity and is consistent with the goal of profit maximization 2. Rights view of ethics is concerned with respecting and protecting individual liberties and privileges such as the rights to privacy, free speech, and due process. Respecting and protecting individual liberties and privileges Seeks to protect individual rights of conscience, free speech, life and safety, and due process

3. Theory of justice view of ethics is where managers impose and enforce rules fairly and impartially and do so by following all legal rules and regulations. Organizational rules are enforced fairly and impartially and follow all legal rules and regulations Protects the interests of underrepresented stakeholders and the rights of employees

4. Integrative social contracts theory proposes that ethical decisions be based on existing ethical norms in industries and communities in determining what constitutes right and wrong. Ethical decisions should be based on existing ethical norms in industries and communities Based on integration of the general social contract and the specific contract between community members

Factors That Affect Ethical and Unethical Behavior

Factors That Affect Employee Ethics 1. Stages of moral development Stages of Moral Development

Lev el Principled

Description of Stage

6. Following self -chosen ethical principles ev en if they v iolate the law 5. Valuing rights of others and upholding absolute v alues and rights regardless of the majority s opinion Conv entional 4. Maintaining conv entional order by f ulf illing obligations to which y ou hav e agreed 3. Liv ing up to what is expected by people close to y ou Preconv entional 2. Following rules only when doing so is in y our immediate interest 1. Sticking to rules to av oid phy sical punishment

Stage of moral development interacts with: o o o o Individual characteristics The organizations structural design The organizations culture The intensity of the ethical issue

2. Individual characteristics
Values Basic convictions about what is right or wrong on a broad range of issues Ego strength A personality measure of the strength of a persons convictions

Locus of Control A personality attribute that measures the degree to which people believe they control their own life -Internal locus: the belief that you control your destiny -External locus: the belief that what happens to you is due to luck or Chance

3. Structural variables
Organizational characteristics and mechanisms that guide and influence individual ethics: Performance appraisal systems Reward allocation systems Behaviors (ethical) of managers An organizations culture Intensity of the ethical issue Good structural design minimizes ambiguity and uncertainty and fosters ethical behavior

4. Organizational culture

The organizations culture is another factor that influences ethical behaviour. a. An organizational culture most likely to encourage high ethical standards is one thats high in risk tolerance, control, and conflict tolerance. b. In addition, a strong culture will exert more influence on managers than a weak one.

c. However, in organizations with weak cultures, work groups and departmental standards will strongly influence ethical behavior.

5. Issue intensity
. Finally, the intensity of an issue can affect ethical decisions. There are six characteristics that determine issue intensity (see Below Figure). a. b. c. d. e. f. Greatness of harm Consensus of wrong Probability of harm Immediacy of consequences Proximity to victim Concentration of effect

How Managers Can Improve Ethical Behavior in an Organization

Hire individuals with high ethical standards. Establish codes of ethics and decision rules. Lead by example. Delineate job goals and performance appraisal mechanisms. Provide ethics training. Conduct independent social audits. Provide support for individuals facing ethical dilemmas.

Code of Ethics
A formal statement of an organizations primary values and the ethical rules it expects its employees to follow Be a dependable organizational citizen Dont do anything unlawful or improper that will harm the organization - Be good to customers

Effective Use of a Code of Ethics

Develop a code of ethics to guide decision making Communicate the code regularly Have all levels of management show commitment to the code Publicly reprimand and consistently discipline those who break the code

Ethical Leadership
Being ethical and honest at all times Telling the truth Admitting failure and not trying to cover it up Communicating shared ethical values to employees through symbols, stories, and slogans Rewarding employees who behave ethically and punishing those who do not Protecting employees (whistleblowers) who bring to light unethical behaviours or raise ethical issues




Creative accounting and earnings management are euphemisms referring to

accounting practices that may follow the letter of the rules of standard accounting practices, but certainly deviate from the spirit of those rules. They are characterized by excessive complication and the use of novel ways of characterizing income, assets, or liabilities and the intent to influence readers towards the interpretations desired by the authors. The terms "innovative" or "aggressive" are also sometimes used.

The term as generally understood refers to systematic misrepresentation of the true income and assets of corporations or other organizations. "Creative accounting" is at the root of a number of accounting scandals, and many proposals for accounting reform - usually centering on an updated analysis of capital and factors of production that would correctly reflect how value is added.

Newspaper and television journalists have hypothesized that the stock market downturn of 2002 was precipitated by reports of accounting irregularities at Enron, WorldCom, and other firms in the United States. One commonly accepted incentive for the systemic over-reporting of corporate income which came to light in 2002 was the granting of stock options as part of executive compensation packages. Since stock prices reflect earning reports, stock options could be most profitably exercised when income is exaggerated, and the stock can be sold at an inflated profit.

The motivations of creative accounting

Personal incentives Bonus-related pay Benefits from shares and share options Job security Personal satisfaction Cover-up Fraud Earnings management usually involves the artificial increase (or decrease) of revenues, profits, or earnings per share figures through aggressive accounting tactics. Aggressive earnings management is a form of fraud and differs from reporting error. Management wishing to show earnings at certain level or following a certain pattern seek loopholes in financial reporting standards that allow them to adjust the numbers as far as is practicable to achieve their desired aim or to satisfy projections by financial analysts. These adjustments amount to fraudulent financial reporting when they fall 'outside the bounds of acceptable accounting practice'. Drivers for such behavior include market expectations, personal realization of a bonus, and maintenance of position within a market sector. In most cases conformance to acceptable accounting practices is a matter of personal integrity. Aggressive earnings management becomes more probable when a company is affected by a downturn in business. Earnings management is seen as a pressing issue in current accounting practice. Part of the difficulty lies in the accepted recognition that there is no such thing as a single 'right' earnings figure and that it is possible for legitimate business practices to develop into unacceptable financial reporting. It is relatively easy for an auditor to detect error, but earnings management can involve sophisticated fraud that is covert. The requirement for management to assert that the accounts have been prepared properly offers no protection where those managers have already entered into conscious deceit and fraud. Auditors need to distinguish fraud from error by identifying the presence of intention.

The main forms of earnings management are as follows: Unsuitable revenue recognition Inappropriate accruals and estimates of liabilities Excessive provisions and generous reserve accounting

Intentional minor breaches of financial reporting requirements that aggregate to a material breach.


Ethical Leadership
Being ethical and honest at all times Telling the truth Admitting failure and not trying to cover it up Communicating shared ethical values to employees through symbols, stories, and slogans Rewarding employees who behave ethically and punishing those who do not Protecting employees (whistleblowers) who bring to light unethical behaviours or raise ethical issues

Trust Model
A Step-by-step process that enables you to break down situations to smaller & simpler segments. This enables you to analyze a situation more objectively.

T = Think about the situation objectively

* Clearly understand the situation. * Know the facts. *Identify the real issues.

R = Recognize and analyze motivations.

* If the situation troubles you, ask yourself why. * Consider the other partys motivations.

U = Understand applicable laws, rules, and policies

* Consider all options * Research the Standards of Business Conduct & other policies * Know whom and when to ask for help S = Satisfy the headline test * Ask yourself if you feel comfortable seeing your actions reported in the news * Consider the consequences of your decision: on APICS, customer, yourself T = Take responsibility for your actions * Make an appropriate choice & act accordingly * Remember, you are accountable for the outcome of your decisions.

Avoiding conflicts of interest

You are an active APICS member. You serve on the chapter board, attend PDMs, and teach certification courses. You are approached by a member company that has a need for on-site courses that you teach & ask if

these could be available. Youve been thinking about starting a consulting business on the side. This seems like it might be a good way to get started. You are considering making an offer.

Business amenities
A business partner suggests a business meeting with the chapter board this Friday at his familys vacation home, which happens to be on the ocean. Afterward, he has invited you & your family to spend the weekend there enjoying the house and the beach.

Values-based Decisions
Lets take another look at the trust model to see if we are using that process to make the best decisions. Remember there could be more than one correct answer depending on the situation We are looking for the best decision!


Corporate Social Responsibility is a concept whereby companies integrate social and environmental concerns into their business operations and in their interaction with their stakeholders (employees, customers, shareholders, investors, local communities, government), on a voluntary basis.

Corporate social responsibility (CSR) is:

An obligation, beyond that required by the law and economics, for a firm to pursue long term goals that are good for society The continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as that of the local community and society at large About how a company manages its business process to produce an overall positive impact on society

Corporate social responsibility means:

Conducting business in an ethical way and in the interests of the wider community Responding positively to emerging societal priorities and expectations A willingness to act ahead of regulatory confrontation Balancing shareholder interests against the interests of the wider community Being a good citizen in the community

CSR is about the organizations obligations to all stakeholders and not just shareholders.

There are four dimensions of corporate responsibility

Economic - responsibility to earn profit for owners Legal - responsibility to comply with the law (societys codification of right and wrong) Ethical - not acting just for profit but doing what is right, just and fair Voluntary and philanthropic - promoting human welfare and goodwill Being a good corporate citizen contributing to the community and the quality of life

Arguments for socially-responsible behavior

Consumers concerned about the ethical implications of their purchases; Shareholders seeking to integrate social and environmental risks into their investment decisions; Communities and civil society organizations demanding to know the value that companies contribute to society; Employees who want assurance that the company they work for is a good corporate citizen.

It is the ethical thing to do It improves the firm public image It is necessary in order to avoid excessive regulation Socially responsible actions can be profitable Improved social environment will be beneficial to the firm It will be attractive to some investors It can increase employee motivation It helps to corrects social problems caused by busines

CSR behavior can benefit the firm in several ways

It aids the attraction and retention of staff It attracts green and ethical investment It attracts ethically conscious customers It can lead to a reduction in costs through re-cycling It differentiates the firm from its competitor and can be a source of competitive advantage It can lead to increased profitability in the long run

How companies benefit from the CSR concept

No matter the size of an organization or the level of its involvement with CSR, every contribution is important and provides a number of benefits to both the community and business. Contributing to and supporting CSR does not have to be costly or time consuming and more and more businesses active in their local communities are seeing significant benefits from their involvement: Reduced costs Increased business leads Increased reputation Increased staff morale and skills development Improved relationships with the local community, partners and clients Innovation in processes, products and services Managing the risks a company faces

Approaches to Social Responsibility

Obstructionist approach Companies choose not to behave in a social responsible way and
behave unethically and illegality

Defensive approach companies and managers stay within the law and abide strictly with
legal requirements but make no attempt to exercise social responsibility

Accommodative approach Companies behave legally and ethically and try to balance the
interests of different stakeholders against one another so that the claims of stockholders are seen in relation to the claims of other stakeholders

Proactive approach Companies actively embrace socially responsible behavior, going out of
their way to learn about the needs of different stakeholder groups and utilizing organizational resources to promote the interests of all stakeholders

Arguments Supporting Businesses Being Socially Responsible

Public expectations Long-run profits Ethical obligation Public image Better environment Discouragement of further government regulation Balance of responsibility and power Shareholder interests Possession of resources Superiority of prevention over cures

Arguments Against Businesses Being Socially Responsible

Violation of profit maximization Dilution of purpose Costs Too much power Lack of skills Lack of accountability Lack of broad public support

Lack of corporate strategic philosophy and vision Lack of understanding about Community Engagement Frameworks Not enough sharing of best practices Insufficient database of good NGO partners Branding issues

Poor Corporate social responsibility

No employment No concern for indirect effect (land, water, air) Destruction of agricultural land Not willing to listen to other stakeholders Appropriate of land not being compensated Non compliance of rule of land

Good Corporate social responsibility

Taking care of workers Low dependence on non renewable resources High awareness about CSR initiatives Land compensation Increased monitoring system Environment responsibility

Social Reporting

As a contribution to facilitating and documenting events (of communities)

Social reporting describes performance: Where you are, where you have been and where you are going Social reporting involves measurement: To describe progress, the report must indicate where you are, where you have been and where you hope to go Social reporting is a recurring process: Over time, the story emerges by reporting regularly against consistent indicators

What is Social Reporting

Social reporting is the use of social media to report collectively and live from events, like workshops, and conferences. It allows sharing in real time photos, videos, power point presentations, and summaries / comments. You can for example set up a blog for an event, feed in your photo stream from Flicker as well as your bookmarks from delicious, videos on Blip TV, Video or YouTube, or twitter feeds. You can blog about the different session, and include short interviews in video, podcast or written format. You can invite participants to be part of the social reporting team by contributing with blog posts, photos, and videos. SR adds to the "official" documentation a rich mix of stories and conversations. It means a

contribution to both facilitation and documenting. And it has human voice and a philosophy of inclusion and empowerment.

Social reporting from events varies from traditional "post event" reporting in two ways.

Interactive: It happens both during and after the event to allow people who cannot be

at the F2F to have at the minimum a "line of sight" to the event and possibly even a way to interact with people at the event by commenting on material produce from the event. 2. Collaborative: It is done not by one person, but by a team that can either be a dedicated reporting team, or if your event participants have some social media experience, ANYONE can contribute by uploading and tagging photos, taking notes and blogging them from sessions, or participating in a podcast. A benefit of social reporting is that you get the results of an event out to constituents faster. And after all, who really reads the long report? The term social reporter was launched recently by David Wilcox and Bev Trayner. A few of the phrases they use to define social reporter: ...someone (...) to find external resources, spot stories of interest to participants, look for common interests in profiles and make introductions, post items an help others to so, shoot video ... and so on. I think it's a mix of facilitation and journalism. (Someone) to develop conversations for collaboration. Focused on challenging disempowering cultures, rather than re-enforcing them. My starting point is the stories, or snippets of stories, that some people on the inside of the community want to catch about themselves - and then looking for ways to support and extend the ways they represent and talk about those stories. (....) it's the little incremental steps and modeling that changes a community's practice.

Preparing the report

Some of the common challenges seen in the preparation process were: Building cross-functional support for the report and reporting process Collecting data efficiently while ensuring accuracy and consistency Balancing time spent on reporting with time spent on project management

Where is the value in reporting?

The key elements of a report are that it: Describes performance Requires measurement Tracks the evolution of corporate citizenship over time

Purposes of Social Reporting

Keeping a shared memory of what happened through more than one people doing it, often in quite random ways, and brought together by tags; Using different types of media for reporting, each media type being accessible to different types of people with different purposes for reading the (social) report; Extending the conversation beyond any one mode (such as face-to-face mode, telephone conference mode, lecture mode) making sure you include people who were not there. Putting reporting in the hands of more and different types of people with access to different tools, technologies and approaches. Modeling different ways of helping people to make sense of an occasion. Shining a spotlight on periphery voices by looking out for and recording what they say. Advocacy - raising awareness, highlighting good practice, having an impact in ways that incorporate a wider type of audience than just those who will plow their way through traditional written text.




Introduction Definition: disclosure of illegal, immoral, or illegitimate practices that are under employer
control by either former or current organization members to persons or organizations that be able to effect action (Near & Micelle, 1995). Whistle blowing happens in all types of professions, including nursing. Internal vs. external whistle-blowing

Whistle blowing is a term used to describe the disclosure of information that one
reasonably believes to be evidence of contravention of any laws or regulation or information that involves mismanagement, corruption or abuse of authority. raising a concern about wrongdoing within an organisation or through an independent structure associated with it.

- The UK Committee on Standards in Public Life

Code of Corporate Governance

Issues given rise to the need for whistle blowing provisions in the law were identified and addressed in the context of auditors in the Report by the Finance Committee on Corporate Governance.

Considerations for Whistle-blowing

Grave injustice or wrongdoing that has not been resolved despite using appropriate channels Morally justifies course of action by appeals to ethical theories, principles, or other components of ethics as well as relevant facts of the incident Should have thoroughly investigated the incident and is confident the facts are well understood Should understand that loyalty is to the client, unless compelling moral reasons override this loyalty Should ascertain that doing this will cause more good than harm to clients, and clients will not be retaliated against Should understand the seriousness of actions and assume responsibility for them

Duty to Blow the Whistle

Whistle-blowing should not be considered the first avenue, but the last, after all else has failed.

When to blow:
Knowledge of inappropriateness Making proprietary software available to public Back door/booby-trap in code Embezzlement or redirection of funds Bad claims Unrealistic date projection Advertising hype Knowledge of impending doom Serious and considerable harm to the public is involved Have reported to immediate supervisor already Have exhausted all channels available for correcting the issue within the organization There is documented evidence with the ability to convince an impartial party There is good reason to think going public will result in changes

How to Blow the Whistle

Do it anonymously let the evidence speak for itself and protect yourself if possible

Do it in a group Charges have more weight and wont seem like a personal vendetta. Present just the evidence Leave interpretation of facts to others. Work through internal channels start with your immediate supervisor or follow the standard reporting procedure Work through external channels go public (biggest risk)

Statistics on Whistle-blowing 2002 in the America

90% of whistleblowers lost their jobs or were demoted, regardless of the industry 27% faced lawsuits 26% had psychiatric or medical referrals 17% lost their homes 8% went bankrupt ALL as a result of whistle-blowing!

Improving Whistle-blowing Outcomes

Create an organizational culture that embraces change in a non-punitive manner Value and protect anonymity Creation of a collegial ethics committee to provide checks and balances to the organizational ethics committees already established A no-tolerance policy related to passivity Have specific language from the ANA and laws in place to protect nurses who come forward Encourage education and open discussion that supports and rewards the people who speak up

Module III!!!


Corporate Governance
Corporate governance is the function of a companys compliance with regulatory requirements and, to the extent that it is not required by law, its adherence to standards that

define relationships between a companys management, its board, shareholders and other stakeholders provide a structure through which the companys objectives are set, and how they are achieved and monitored recognize the value of business ethics and corporate awareness of society interests to reputation and long-term success

Contemporary corporate governance started in 1992 with the Cadbury report in the UK Cadbury was the result of several high profile company collapses is concerned primarily with protecting weak and widely dispersed shareholders against self-interested Directors and managers

Corporate Governance Parties

Shareholders those that own the company Directors Guardians of the Companys assets for the Shareholders Managers who use the Companys assets

Four Pillars of Corporate Governance

Accountability Fairness Transparency Independence

Ensure that management is accountable to the Board Ensure that the Board is accountable to shareholders

Protect Shareholders rights Treat all shareholders including minorities, equitably Provide effective redress for violations

Ensure timely, accurate disclosure on all material matters, including the financial situation, performance, ownership and corporate governance

Procedures and structures are in place so as to minimize, or avoid completely conflicts of interest Independent Directors and Advisers i.e. free from the influence of others

Elements of Corporate Governance 1. Good Board practices

Clearly defined roles and authorities Duties and responsibilities of Directors understood Board is well structured Appropriate composition and mix of skills

2. Control Environment

Internal control procedures Risk management framework present Disaster recovery systems in place Media management techniques in use Business continuity procedures in place Independent external auditor conducts audits Independent audit committee established Internal Audit Function Management Information systems established Compliance Function established

3. TRANSPARENT disclosure
Financial Information disclosed Non-Financial Information disclosed Financials prepared according to International Financial Reporting Standards (IFRS) Companies Registry filings up to date High-Quality annual report published Web-based disclosure

4. WELL-defined shareholder rights

Minority shareholder rights formalized Well-organized shareholder meetings conducted Policy on related party transactions Policy on extraordinary transactions Clearly defined and explicit dividend policy

5. BOARD commitment
The Board discusses corporate governance issues and has created a corporate governance committee The company has a corporate governance champion A corporate governance improvement plan has been created Appropriate resources are committed to corporate governance initiatives Policies and procedures have been formalized and distributed to relevant staff A corporate governance code has been developed A code of ethics has been developed The company is recognized as a corporate governance leader

Why Corporate Governance?

Better access to external finance Lower costs of capital interest rates on loans Improved company performance sustainability Higher firm valuation and share performance Reduced risk of corporate crisis and scandals

Global Landmarks in the Emergence of Corporate Governance

There were several frauds and scams in the corporate history of the world. It was felt that the system for regulation is not satisfactory and it was felt that it needed substantial external regulations. These regulations should penalize the wrong doers while those who abide by rules and regulations, should be rewarded by the market forces. There were several changes brought out by governments, shareholder activism, insistence of mutual funds and large institutional investors, that corporate they invested in adopt better governance practices and in formation of several committees to study the issues in depth and make recommendations, codes and guidelines on Corporate Governance that are to be put in practice. All these measures have brought about a metamorphosis in corporate that realized that investors and society are serious about corporate governance.

Developments in USA
Corporate Governance gained importance with the occurrence of the Watergate scandal in United States. Thereafter, as a result of subsequent investigations, US regulatory and legislative bodies were able to highlight control failures that had allowed several major corporations to make illegal political contributions and to bribe government officials. This led to the development of the Foreign and Corrupt Practices Act of 1977 that contained specific provisions regarding the establishment, maintenance and review of systems of internal control.

This was followed in 1979 by Securities and Exchange Commissions proposals for mandatory reporting on internal financial controls. In 1985, following a series of high profile business failures in the US, the most notable one of which being the savings and loan collapse, the Tradway Commission was formed to identify the main cause of misrepresentation in financial reports and to recommend ways of reducing incidence thereof. The tradway Report published in 1987 highlighted the need for a proper control environment, independent audit committees and an objective internal audit function and called for published reports on the effectiveness of internal control The commission also requested the sponsoring organizations to develop an integrated set of internal control criteria to enable companies to improve their control.

Developments in UK
In England, the seeds of modern corporate governance were sown by the Bank of Credit and Commerce International (BCCI) Scandal. The Barings Bank was another landmark. It heightened peoples awareness and sensitivity on the issue and resolve that something ought to be done to stem the rot of corporate misdeeds. These couple of examples of corporate failures indicated absence of proper structure and objectives of top management. Corporate Governance assumed more importance in light of these corporate failures, which was affecting the shareholders and other interested parties. As a result of these corporate failures and lack of regulatory measurers from authorities as an adequate response to check them in future, the Committee of Sponsoring Organizations (COSO) was born. The report produced in 1992 suggested a control framework and was endorsed a refined in four subsequent UK reports: Cadbury, Ruthman, Hampel and Turbull. There were several other corporate failures in the companies like Polly Peck, British & Commonwealth and Robert Maxwells Mirror Group News International were all victims of the boom-to-bust decade of the 1980s. Several companies, which saw explosive growth in earnings, ended the decade in a memorably disastrous manner. Such spectacular corporate failures arose primarily out of poorly managed business practices. The publication of a serious of reports consolidated into the Combined Code on Corporate Governance (The Hampel Report) in 1998 resulted in major changes in the area of corporate governance in United Kingdom. The corporate governance committees of last decade have analyzed the problems and crises besetting the corporate sector and the markets and have sought to provide guidelines for corporate management. Studying the subject matter of the corporate codes and the reports produced by various committees highlighted the key practical problem and concerns driving the development of corporate governance over the last decade

World Bank on Corporate Governance

The World Bank, involved in sustainable development was one of the earliest economic organization o study the issue of corporate governance and suggest certain guidelines. The World Bank report on corporate governance recognizes the complexity of the concept and

focuses on the principles such as transparency, accountability, fairness and responsibility that are universal in their applications. Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible, the interests of individuals, organizations and society. The foundation of any corporate governance is disclosure. Openness is the basis of public confidence in the corporate system and funds will flow to those centers of economic activity, which inspire trust. This report points the way to establishment of trust and the encouragement of enterprise. It marks an important milestone in the development of corporate governance.




The Sarbanes-Oxley Act (SOX) is a sincere attempt to address all the issues associated with corporate failure to achieve quality governance and to restore investors confidence. The Act was formulated to protect investors by improving the accuracy and reliability of corporate disclosures, made precious to the securities laws and for other purposes. The act contains a number of provisions that dramatically change the reporting and corporate directors governance obligations of public companies, the directors and officers. The important provisions in the SOX Act are briefly given below. I) Establishment of Public Company Accounting Oversight Board (PCAOB): SOX creates a new board consisting of five members of whom two will be certified public accountants. All accounting firms have to get registered with the board. The board will make regular inspection of firms. The board will report to SEC. The report will be ultimately forwarded to Congress. ii) Audit Committee: The SOX provides for new improved audit committee. The committee is responsible for appointment, fixing fees and oversight of the work of independent auditors. The registered public accounting firms should report directly to audit committee on all critical accounting policies. iii) Conflict of Interest: The public accounting firms should not perform any audit services for a publically traded company. iv) Audit Partner Rotation: The act provides for mandatory rotation of lead audit or cocoordinating partner and the partner reviewing audit once every 5 years.

v) Improper influence on conduct of Audits: According to act, it is unlawful for any executive or director of the firm to take any action to fraudulently influence, coerce or manipulate an audit. vi) Prohibition of non-audit services: Under SOX act, auditors are prohibited from providing non-audit services concurrently with audit financial review services. vii) CEOs and CFOs are required to affirm the financials: CEOs and CFOs are required to certify the reports filed with the Securities and Exchange Commission (SEC). viii) Loans to Directors: The act prohibits US and foreign companies with Securities traded within US from making or arranging from third parties any type of personal loan to directors. ix) Attorneys : The attorneys dealing with publicly traded companies are required to report evidence of material violation of securities law or breach of fiduciary duty or similar violations by the company or any agent of the company to Chief Counsel or CEO and if CEO does not Respond then to the audit committee or the Board of Directors. x) Securities Analysts: The SOX has provision under which brokers and dealers of securities should not retaliate or threaten to retaliate an analyst employed by broker or dealer for any adverse, negative or unfavorable research report on a public company. The act further provides for disclosure of conflict of interest by the securities analysts and brokers or dealers. xi) Penalties: The penalties are also prescribed under SOX act for any wrong doing. The penalties are very stiff. The Act also provides for studies to be conducted by Securities and Exchange Commission or the Government Accounting Office in the following area: i) Auditors Rotation ii) Off balance Sheet Transactions iii) Consolidation of Accounting firms & its impact on industry iv) Role of Credit Rating Industry v) Role of Investment Bank and Financial Advisers. The most important aspect of SOX is that it makes it clear that companys senior Officers are accountable and responsible for the corporate culture they create and must be faithful to the same rules they set out for other employees. The CEO for example, Must be responsible for the companys disclosure,controls and financial reporting.


SOX was signed into law July 30, 2002 to protect investors by improving the
reliability and accuracy of disclosures made pursuant to the securities laws.

SOX provisions include, but are not limited to, the following issues: Public Company Accounting Oversight Board Auditor Independence Corporate Responsibility/Governance Enhanced Financial Disclosures Enhanced Penalty Provisions

To Whom Does SOX Apply?

SOX is generally applicable to all companies, regardless of size, who are required to file reports with the SEC under the 1934 Act or that have a registration statement on file under the 1933 Act. Certain SOX provisions apply only to companies listed on a national securities exchange. Small business issuers that file reports on Form 10-QSB and Form 10-KSB are generally subject to SOX in the same way as larger companies.

SOX established the creation of the PCAOB to oversee the audit of public
companies that are subject to the securities laws.

PCAOB is charged with several duties including: Registering public accounting firms that prepare audit reports; Establishing auditing, quality control, ethics, Independence, and other standards relating to the preparation of audit reports; and Conducting inspections of registered public accounting firms and conducting investigations and disciplinary proceedings, where justified, concerning registered public accounting firms

What Sarbanes-Oxley Brings Major Provisions of Sarbanes-Oxley

The Act has 11 titles can be summarized within; Foundation of Public Company Accounting Oversight Board Auditor independence provisions, A range of corporate governance measures, Expanded financial disclosure requirements, Analyst`s potential conflict of interest, Increase in SEC funding & enforcement power and direction of various studies and reports,

Criminal penalties & fraud. Title I and II, regulates; Foundation of PCAOB-empowered to set auditing quality, control and ethic standards, inspects registered accountants, take disciplinary actions, Funding of FASB changed by providing full financial independence from the accounting industry, Auditor independence from corporate management supported by creating more separation between auditing and consulting function, Title III and IV brought enclosed provisions about responsibility of public company officers and lawyers for the quality and accuracy of financial reporting, and some related disclosure requirements, provided in detail in Chapter III. Title IV cited provisions aiming to enhance financial disclosure;

-Off-balance sheet transactions- Sec. 401-As a direct response use of Enron SPEs to keep liabilities off balance-sheet, SOA directs SEC to prepare regulations requiring companies to disclose in their periodic reports all material off balance-sheet information (including contingent obligations), -Pro Forma Disclosure- Requires SEC to adopt rules requiring the companies to publish Pro Forma data with reconciliation to comparable data calculated according to GAAP. -Required SEC prepare a study on SPEs, -Enhanced SEC Review of Disclosure- Sec. 408.-SEC must systemically review corporate filings at least once a three year. (Selection criterias e.g. stock price volatility, large market capitalization) -Rapid Disclosure of Financial Change-Sec. 409-Disclosure of additional information concerning material changes in financial conditions or operations on a rapid and current basis.

Title V seeks to limit and expose to public possible conflict of interest effecting securities analysts, in that respect; Sec. 501 of the Act obliged, SEC or on the SECs direction exchanges, designed regulations; -Restricting the pre-publication clearance of research or recommendation by other staff, -Limiting supervision and compensation of analysts to one other than investment banking, -Protects analysts from retaliation or threats.

Title VI is related to SECs resources and authority and Title VII requires some studies and reports to be conducted;

- Increased SEC funding; -Codified SECs authority to censure and deny temporarily or permanently preparing and practicing before, -To reduce the migration of fraud, SEC was authorized to bar securities industry employees barred from other financial sectors, Title VI is related to SECs resources and authority and Title VII requires some studies and reports to be conducted; -Required special studies; -Sec. 701-Consolidation of public accounting firms (Comptroller General) -Sec. 702-Role of credit rating agency in the operation of securities markets (SEC) -Sec. 705-Role of investment bankers and financial advisers in assisting public companies manipulation of their earnings (GAO) SOA imposes new criminal penalties for fraud and other wrongful act; -Creates a new federal criminal violation, called securities fraud, violation of this statue will be punishable by fine and imprisonment up to 25 years, -Strengthens the existing penalties of mail and wire fraud, -Direct respond to Arthur Andersen`s shredding event, creates new document destruction crime, -Contains federal protection for whistle blowers when act lawfully to disclose information, -Increases statute of limitation in private lawsuits,

Critics of Sarbanes-Oxley
An election year is not proper to overhaul a complicated area like securities regulation. Simply follows headlines from Enron and others with little appreciation for systemic problems The efforts of SEC and other SROs are not taken into account by Congress. Little appreciation for markets` response to the scandals.

Many provisions are simply delegations of authority to the SEC to adopt rules, some of them involve the SEC or the other SROs had already undertaken rulemaking initiatives. May cause long-term systemic harm to the competitiveness of US capital markets.

Regulations of Sarbanes-Oxley Affecting Corporate Responsibility and Its Disclosure

TITLE I PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD Creation of the Public Company Oversight Board (the Board) Created as a non-profit organization, the Board will oversee audits of public companies; it is under the authority of the SEC but above other professional accounting organizations such as the AICPA The Board is comprised of 5 members (appointees), with a maximum of two CPAs Among its duties are registering existing public accounting firms which prepare audits for publicly traded companies (issuers), reviewing registered public accounting firms (auditing the auditors), establishing and amending rules and standards (in cooperation with other standard setters), and in the event of non-compliance by registered public accounting firms, to try such firms (and/or any related associate(s)) and penalize

TITLE II AUDITOR INDEPENDENCE Prohibits registered public accounting firms (RPAFs) who audit an issuer from performing specific non-audit services for that issuer, including but not limited to: bookkeeping, financial information systems design, appraisal services, actuarial services, internal audit outsourcing services, management/human resource functions, broker/dealer, legal/expert services outside the scope of the audit In addition to these limitations, audit functions and all other non-audit functions provided to the audit client must be pre-approved by the Board (such as tax services) Audit Partner rotation Lead partner on 5 years, off 5 years; other partners on 7 years, off 2 RPAFs performing audits to issuers must report to issuers audit committees about: (1) critical accounting policies to be used in the audit, (2) any written communication with management, and (3) any deviations from GAAP in financial reporting

A conflict of interest arises and an RPAF may not perform audit services for any issuer employing in the capacity of CEO, controller, CFO or any other equivalent title A former audit engagement team member there is a cooling-off period for one year i.e., an employee of an RPAF who works on an audit of an issuer may not turn around and directly go to work for that issuer they must wait one year

Currently under investigation is the possibility of mandatory rotations of audit clients among registered public accounting firms

TITLE III CORPORATE RESPONSIBILITY Audit Committee (committees est. by the board of a company for the purpose of overseeing financial reporting) Independence Establishes minimum independence standards for audit committees Independence of the audit committee crucial in that it must (1) oversee and compensate RPAF to perform audit, and (2) establish procedures for addressing complaints by the issuer regarding accounting, internal control, etc. (this lays the foundation for anonymous whistle blowing)

CEOs and CFOs must certify in any periodic report the truthfulness and accurateness of that report creates liability Under certain conditions of re-statement of financial due to material non-compliance, CEOs and CFOs will be required to forfeit certain bonuses and profits paid to them as a result of material mix-information

TITLE IV ENHANCED FINANCIAL DISCLOSURES Issuers must disclose off-balance sheet transactions in periodic reports No issuer shall make, extend, modify or renew any personal loan to CEOs, CFOs (limited exceptions include company credit cards) Annual reports will contain internal control reports which state the responsibility of management for establishing such controls and their assessment of the effectiveness of such controls which must be attested to by the auditor In periodic reports filed, the issuer must disclose its code of ethics for senior financial officers, and if the issuer has not adopted such a policy, must disclose why not

Issuer must disclose whether or not its audit committee is comprised of at least one financial expert, and if not, why Member considered financial expert if they have an understanding of GAAP, experience in preparing/auditing financials, experience with internal controls, and an understanding of audit committee functions SEC must review disclosures (in financials) made by any issuer at least once every three years (similar to Board review of registered public accounting firms) Issuers must disclose in real time any additional information concerning material changes in the financial condition or operations of the issuer

TITLE V ANALYST CONFLICTS OF INTEREST National Securities Exchanges and registered securities associations must adopt rules designed to address conflicts of interest that can arise when securities analysts recommend securities in research reports To improve objectivity of research and provide investors with useful and reliable information

TITLE VI COMMISSION RESOURCES AND AUTHORITY Increase 2003 appropriations for the SEC to $780 million, $98 million to be used to hire an additional 200 employees for enhanced oversight of auditors and audit services SEC will establish rules setting minimum standards for profession conduct for attorneys practicing before it SEC to conduct investigations of any security professional who has violated a security law May censure, temporarily bar or deny right to practice

TITLE VII STUDIES AND REPORTS The Comptroller General of the US shall conduct a study regarding the consolidation of public accounting firms (e.g. Coopers & Lybrand/Price Waterhouse combine to become PriceWaterhouseCoopers; Touch Ross/DeloitteHaskins merge to become Deloitte & Touch) since 1989, analyze the past, present and future impact of the consolidations, and create solutions to problems discovered caused by such consolidations The Comptroller General and/or SEC will also explore such issues as

(1) the role and function of credit rating agencies in the operation of the securities market,

(2) the number of securities professionals (public accountants, investment bankers, attorneys) who have been found to have aided and abetted a violation of securities law and who have not been disciplined,

(3) all enforcement actions by the SEC regarding re-statements, violations of reporting requirements, etc., for the five year period prior to the date the Act is passed, and

(4) whether investment banks and financial advisers assisted public companies in manipulating their earnings (specifically Enron and WorldCom)

TITLE VIII CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY To knowingly destroy, create, manipulate documents and/or impede or obstruct federal investigations is considered felony, and violators will be subject to fines or up to 20 years imprisonment, or both All audit report or related work papers must be kept by the auditor for at least 5 years Whistleblower protection employees of either public companies or public accounting firms are protected from employers taking actions against them, and are granted certain fees and awards (such as Attorney fees)

TITLE IX WHITE-COLLAR CRIME PENALTY ENHANCEMENTS Financial statements filed with the SEC by any public company must be certified by CEOs and CFOs; all financials must fairly present the true condition of the issuer and comply with SEC regulations Violations will result in fines less than or equal to $5 million and /or a maximum of 20 years imprisonment

Mail fraud/wire fraud convictions carry 20 year sentences (previously 5 year sentences) Anyone convicted of securities fraud may be banned by SEC from holding officer/director positions in public companies

TITLE X CORPORATE TAX RETURNS Federal income tax returns must be signed by the CEO of an issuer

TITLE XI CORPORATE FRAUD ACCOUNTABILITY Destroying or altering a document or record with the intent to impair the objects integrity for the intended use in a securities violation proceeding, or otherwise obstructing that proceeding, will be subject to a fine and/or up to 20 years imprisonment The SEC has the authority to freeze payments to any individual involved in an investigation of a possible security violation Any retaliatory act against whistleblowers or other informants is subject to fine and/or 10 year imprisonment


1. Narayanmurthy The terms of reference of the committee were to: review the performance of corporate governance; and Determine the role of companies in responding to rumour and other price sensitive information circulating in the market, in order to enhance the transparency and integrity of the market.

The issues discussed by the committee primarily related to audit committees, audit reports, independent directors, related parties, risk management, directorships and director compensation, codes of conduct and financial disclosures. The committee's recommendations in the final report were selected based on parameters including their relative importance, fairness, accountability, transparency, ease of implementation, verifiability and enforceability. The key mandatory recommendations focused on: strengthening the responsibilities of audit committees; improving the quality of financial disclosures, including those related to related party transactions and proceeds from initial public offerings; requiring corporate executive boards to assess and disclose business risks in the annual reports of companies;

introducing responsibilities on boards to adopt formal codes of conduct; the position of nominee directors; and Stock holder approval and improved disclosures relating to compensation paid to nonexecutive directors.

Non-mandatory recommendations included: moving to a regime where corporate financial statements are not qualified; instituting a system of training of board members; and Evaluation of performance of board members.

As per the committee, these recommendations codify certain standards of 'good governance' into specific requirements, since certain corporate responsibilities are too important to be left to lose concepts of fiduciary responsibility. Their implementation through SEBI's regulatory framework will strengthen existing governance practices and also provide a strong incentive to avoid corporate failures. The Committee noted that the recommendations contained in their report can be implemented by means of an amendment to the Listing Agreement, with changes made to the existing clause 49.

2. Ganguly Committees Recommendations To introduce corporate governance practices in the banking sector the recommendations of the working group of directors of Banks Financial Institutions, known as the Ganguly Group, will be of interest.

Composition of Boards:

Boards should be more contemporarily professional by inducting technical and specially qualified personnel. There should be a blend of historical skill set and new skill set, i.e. skills such as marketing, technology and systems, risk management, strategic planning, treasury operations, credit recovery, etc.

Directors should fulfill certain fit and proper norms. , viz., formal qualification, experience and track record. To ensure this, companies could call upon the candidates for directorship to furnish necessary information by way of self- declaration, verification reports from market, etc. Certain criteria adopted for public sector banks such as the age of director being between 35

and 65, that he/she should not be a member of parliament! state legislatures, etc. may be adopted for private sector banks also.

Selection of directors could be done by a nomination committee of the board. The Reserve Bank of India (RBI) also might compile a list of eligible candidates.

The banks may enter into a Deed of Covenant with every non-executive director, delineating his/her responsibilities and making him/her abides by them.

Need-based training should be imparted to the directors to equip them govern the banks properly.

The Ganguly Committee has suggested the formation of the following committees of the board, in addition to the Nomination Committee: Audit Committee, Shareholders: Redressal Committee, Supervisory Committee and Risk Management Committee. The job of the first two committees is well known in all big corporates in India.

Incidentally, the Reserve Bank has prescribed that the audit committee should be presided over by a Chartered Accountant Director, but Ganguly Committee opined that it could be done by any non-executive director 3. Naresh Chandra

The thrust of this report, therefore, is to suggest certain voluntary recommendations for industry to adopt. The report is structured according to the different elements of corporate governance: The Board of Directors Non-executive and independent directors Committees of the board Significant related party transactions Auditors Independence of Auditors Rotation of Audit Partners

Regulatory Agencies Legal and regulatory standards Effective and credible enforcement

External Institutions Institutional investors The Press

Recommendation 1: Nomination Committee The Task Force believes that having a well functioning Nomination Committee will play a significant role in giving investors substantial comfort about the process of Board-level appointments. It, therefore, recommends that listed companies should have a Nomination Committee, comprising a majority of independent directors, including its chairman. This Committees task should be to: Search for, evaluate, shortlist and recommend appropriate independent directors and NEDs, subject to the broad directions of the full Board; and Design processes for evaluating the effectiveness of individual directors as well as the Board as a whole. The Nomination Committee should also be the body that evaluates and recommends the appointment of executive directors. A separate section in the chapter on corporate governance in the annual reports of listed companies could outline the work done by the Nomination Committee during the year under consideration. Recommendation 2: Letter of Appointment to Directors The Task Force recommends that listed companies should issue formal letters of appointment to NEDs and independent directors - just as it does in appointing employees and executive directors. The letter should: Specify the expectation of the Board from the appointed director; The Board-level committee(s) in which the director is expected to serve and its tasks; The fiduciary duties that come with such an appointment;

The term of the appointment; The Code of Business Ethics that the company expects its directors and employees to follow; The list of actions that a director cannot do in the company; The liabilities that accompany such a fiduciary position, including whether the concerned director is covered by any Directors and Officers (D&O) insurance; and The remuneration, including sitting fees and stock options, if any Recommendation 3: Fixed Contractual Remuneration The Task Force recommends that the Companies Act, 1956, be amended so that companies have the option of giving a fixed contractual remuneration to NEDs and independent directors, which is not linked to the net profit or lack of it. Therefore, companies should be given the option to choose between: a. Paying a fixed contractual remuneration to its NEDs and IDs, subject to an appropriate ceiling depending on the size of the company; or b. Continuing with the existing practice of paying out upto 1% (or 3%) of the net profits of the standalone entity as defined in the Companies Act, 1956. For any company, the choice should be uniform for all NEDs and independent directors, i.e. some cannot be paid a commission of profits while others are paid a fixed amount. If the option chosen is (a) above, then the NEDs and independent directors will not be eligible for any commission on profits. The current limits and constraints on sitting fees and stock options or restricted stock may remain unchanged. If stock options are granted as a form of payment to NEDs and independent directors, then these must be held by the concerned director until one year of his exit from the Board. Recommendation 4: Structure of Compensation to NEDs The Task Force recommends that listed companies use the following template in structuring their remuneration to NEDs and independent directors Fixed component: This should be relatively low, so as to align NEDs and independent directors to a greater share of variable pay. Typically, these are not more than 30% of the total cash remuneration package. Variable Component: Based on attendance of Board and Committee meetings (at least 70% of all meetings should be an eligibility pre-condition)

Additional payment for being the chairman of the Board, especially if he/she is a non executive chairman Additional payment for being the chairman of the Audit Committee Additional payment for being the chairman of other committees of the Board Additional payment for being members of Board committees: Audit, Shareholder Grievance, Remuneration, Nomination, etc.

Recommendation 5: Remuneration Committee The Task Force recommends that listed companies should have a Remuneration Committee of the Board. The Remuneration Committee should comprise at least three members, majority of whom should be independent directors. It should have delegated responsibility for setting the remuneration for all executive directors and the executive chairman, including any compensation payments, such as retiral benefits or stock options. It should also recommend and monitor the level and structure of pay for senior management, i.e. one level below the Board. The Remuneration Committee should make available its terms of reference, its role, the authority delegated to it by the Board, and what it has done for the year under review to the shareholders in a separate section of the chapter on corporate governance in the annual report. Recommendation 6: Audit Committee Constitution Listed companies should have at least a three-member Audit Committee comprising entirely of non-executive directors with independent directors constituting the majority.

Recommendation 7: Separation of Offices of Chairman & Chief Executive Officer The Task Force recognized the ground realities of India. Keeping these in mind, it has recommended, wherever possible, to separate the office of the Chairman from that of the CEO.

Recommendation 8: Board Meetings through Tele-conferencing If a director cannot be physically present but wants to participate in the proceedings of the board and its committees, then a minuted and signed proceeding of a teleconference or video conference should constitute proof of his or her participation. Accordingly, this should be treated as presence in the meeting(s). However, minutes of all such meetings or the decisions taken thereat, recorded as circular resolutions, should be signed and confirmed by the director/s who has/have attended the meeting through video conferencing. Recommendation 9: Executive Sessions To empower independent directors to serve as a more effective check on management, the independent directors could meet at regularly scheduled executive sessions without management and before the Board or Committee meetings discuss the agenda. The Task Force also recommends separate executive sessions of the Audit Committee with both internal and external Auditors as well as the Management. Recommendation 10: Related Party Transactions Audit Committee, being an independent Committee, should pre-approve all related party transactions which are not in the ordinary course of business or not on arms length basis or any amendment of such related party transactions. All other related party transactions should be placed before the Committee for its reference.

Recommendation 11: Auditors Revenues from the Audit Client No more than 10% of the revenues of an audit firm singly or taken together with its subsidiaries, associates or affiliated entities should come from a single corporate client or group with whom there is also an audit engagement. Recommendation 12: Certificate of Independence Every company must obtain a certificate from the auditor certifying the firms independence and arms length relationship with the client company. The Certificate of Independence should certify that the firm, together with its consulting and specialized services affiliates, subsidiaries and associated companies or network or group entities have not / has not undertaken any prohibited non-audit assignments for the company and are independent vis-vis the client company, by reason of revenues earned and the independence test are observed. Recommendation 13: Rotation of Audit Partners The partners handling the audit assignment of a listed company should be rotated after every six years. The partners and at least 50% of the audit engagement team responsible for the

audit should be rotated every six years, but this should be staggered so that on any given day there isnt a change in partner and engagement manager. A cooling off period of 3 years should elapse before a partner can resume the same audit assignment. Recommendation 14: Auditors Liability The firm, as a statutory auditor or internal auditor, has to confidentially disclose its networth to the listed company appointing it. Each member of the audit firm is liable to an unlimited extent unless they have formed a limited liability partnership firm or company for professional services as permitted to be incorporated by the relevant professional disciplinary body (ICAI). Even in the case of a limited liability firm undertaking audit in the future, under the new law, the individual auditor responsible for dereliction of duty shall have unlimited liability and the firm and its partners shall have liability limited to the extent of their paid-in capital and free or undistributed reserves. Recommendation 15: Appointment of Auditors The Audit Committee of the board of directors shall be the first point of reference regarding the appointment of auditors. The Audit Committee should have regard to the entire profile of the audit firm, its responsible audit partner, his or her previous experience of handling audit for similar sized companies and the firm and the audit partners assurance that the audit clerks and / or understudy chartered accountants or paralegals appointed for discharge of the task for the listed company shall have done a minimum number of years of study of Accounting Principles and have minimum prior experience as audit clerks. To discharge the Audit Committees duty, the Audit Committee shall: discuss the annual work programmed and the depth and detailing of the audit plan to be undertaken by the auditor, with the auditor; examine and review the documentation and the certificate for proof of independence of the audit firm, and Recommend to the board, with reasons, either the appointment/re-appointment or removal of the statutory auditor, along with the annual audit remuneration. Recommendation 16: Qualifications in Auditors Report ICAI should appoint a committee to standardise the language of disclaimers or qualifications permissible to audit firms. Anything beyond the scope of such permitted language should require the auditor to provide sufficient explanation. Recommendation 17: Institution of Mechanism for Whistle Blowing

The Task Force recommends institution of a mechanism for employees to report concerns about unethical behavior, actual or suspected fraud, or violation of the companys code of conduct or ethics policy. It should also provide for adequate safeguards against victimization of employees who avail of the mechanism, and also allows direct access to the Chairperson of the audit committee in exceptional cases. Recommendation 18: Risk Management The Board, its audit committee and its executive management must collectively identify the risks impacting the companys business and document their process of risk identification, risk minimization, risk optimization as a part of a risk management policy or strategy. The Board should also affirm that it has put in place critical risk management framework across the company, which is overseen once every six months by the Board. Recommendation 19: Harmonization of Corporate Governance Standards The Task Force suggests that the Government and the SEBI as a market Regulator must concur in the corporate governance standards deemed desirable for listed companies to ensure good corporate governance. Recommendation 20: Audit Oversight Mechanism In the interest of investors, the general public and the auditors, the Task Force recommends that the Government intervenes to strengthen the ICAI Quality Review Board and facilitate its functioning of ensuring the quality of the audit process through an oversight mechanism on the lines of Public Company Accounting Oversight Board (PCAOB) in the United States. Recommendation 21: Effective & Credible Enforcement The Task Force recommends that instances of investigations of serious corporate fraud must be coordinated and jointly investigated. Joint investigations / interrogation by the regulators for example, the SFIO and the CBI should be conducted in tandem. On the lines of the recommendations of the Naresh Chandra Committee Report on Corporate Audit and Governance, a Task Force should be constituted for each case under a designated team leader and in the interest of adequate control and efficiency, a Committee each, headed by the Cabinet Secretary should directly oversee the appointments to, and functioning of this office, and coordinate the work of concerned department and agencies. Civil recovery for acts of misfeasance, malfeasance, nonfeasance and recovery from the wrongdoers and criminal offences and penalties and punishments should be adjudicated appropriately, without conflicting reports and opinions, and disposed off between 6 to 12 months.

Recommendation 22: Cancellation of Fraudulent Securities A provision of confiscation and cancellation of securities of a person who perpetrates a securities fraud on the company or security holders ought to be prescribed for the protection of capital markets. Recommendation 23: Liability of Directors & Employees Personal penalties should be imposed on directors and employees who seek unjust enrichment and commit offence with such intentions. Such punishments should be commensurate with the wrongful act and be imposed in addition to disgorgement of wrongful gains. Further, nonexecutive directors cannot be made to undergo the ordeal of a trial for offence of noncompliance with a statutory provision unless it can be established prima facie that they were liable for the failure on part of the company. Recommendation 24: Shareholder Activism Long term institutional investors, pension funds or infrastructure funds can help to develop a vibrant state of shareholder activism in the country. The oversight by such investors of corporate conduct can be facilitated through internal participation of their nominees as directors or external proceedings for preventing mis-management. Such institutional investors should establish model codes for proper exercise of their votes in the interest of the company and its minority shareholders, at general meetings, analyze and review corporate actions intended in their investee companies proactively and assume responsible roles in monitoring corporate governance and promoting good management of companies in which they invest. Recommendation 25: Media as a stakeholder The Task Force recommends that media, especially in the financial analytics and reporting business should invest more in analytical, financial and legal rigor and enhance their capacity for analytical and investigative reporting.

RECOMMENDATION OF NARESH CHANDRA COMMITTEE: recommended a list of disqualifications for audit assignments like direct relationship with company, any business relationship with client, personal relationship with director audit firms not to provide services such as accounting, internal audit assignments etc. to audit clients auditor to disclose contingent liabilities & highlight significant accounting policies audit committee to be first point of reference for appointment of auditors

ceo & cfo of listed company to certify on fairness, correctness of annual audited accounts redefinition of independent directors does not have any material, pecuniary relationship or transaction with the company composition of board of directors statutory limit on the sitting fee to non-executive directors to be reviewed

Organization for Economic Co-operation and Development (OECD) was one of the earliest nongovernmental organizations to work on and spell out principles and practices that should govern corporate in their goal to attain long-term shareholder value. The OECD was trend setters as the Code of Best practices are associated with Cadbury report. The OECD principles in summary include the following elements. I) the rights of shareholders ii) Equitable treatment of shareholders iii) Role of stakeholders in corporate governance iv) Disclosure and Transparency v) Responsibilities of the board The OECD guidelines are somewhat general and both the Anglo-American system and Continental European (or German) system would be quite consistent with it. The recommendations in brief are as under:

1. Appointment of Independent Director a. Nomination Committee 2. Duties, liabilities and remuneration of independent directors a. Letter of Appointment to Directors b. Fixed Contractual Remuneration c. Structure of Compensation to NEDs 3. Remuneration Committee of Board

4. Audit Committee of Board 5. Separation of the offices of the Chairman and the Chief Executive Officer 6. Attending Board and Committee Meetings through Tele-conferencing and video conferencing 7. Executive Sessions of Independent Director 8. Role of board in shareholders and related party transactions 9. Auditor Company Relationship 10. Independence to Auditors 11. Certificate of Independence 12. Auditor Partner Rotation 13. Auditor Liability 14. Appointment of Auditors 15. Qualifications of Auditors Report 16. Whistle Blowing Policy 17. Risk Management Framework 18. The legal and regulatory standards 19. Capability of Regulatory Agencies - Ensuring Quality in Audit Process 20. Effective and Credible Enforcement 21. Confiscation of Shares 22. Personal Liability 23. Liability of Directors and Employees 24. Institutional Activism 25. Media as a stakeholder

Module IV!!!



Two models of Corporate Governance 1. Outsider (shareholders) model 2. Insider (stakeholders) model The outsider model A priority to market regulation the owners of firms tend to have a transitory interest in the firm The absence of close relationships between shareholders and management the existence of an active `market for corporate control - takeovers, particularly hostile ones the primacy of shareholder rights over those of other organisational groups

The insider model The priority to stakeholders control The owners of firms tend to have an enduring interest in the company They often hold positions on the board of directors or other senior managerial positions The relationships between management and shareholders are close and stable There is little by way of a market for corporate control the existence of formal rights for employees to influence key managerial decisions

Corporate governance models around the world There are many different models of corporate governance around the world. These differ according to the variety of capitalism in which they are embedded. The Anglo-American "model" tends to emphasize the interests of shareholders. The coordinated or multistakeholder model associated with Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community.

Continental Europe Some continental European countries, including Germany and the Netherlands, require a twotiered Board of Directors as a means of improving corporate governance. In the two-tiered board, the Executive Board, made up of company executives, generally runs day-to-day operations while the supervisory board, made up entirely of non-executive directors who represent shareholders and employees, hires and fires the members of the executive board, determines their compensation, and reviews major business decisions. India India's SEBI Committee on Corporate Governance defines corporate governance as the "acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal & corporate funds in the management of a company." It has been suggested that the Indian approach is drawn from the Gandhi an principle of trusteeship and the Directive Principles of the Indian Constitution, but this conceptualization of corporate objectives is also prevalent in Anglo-American and most other jurisdictions. The United States and the UK The so-called "Anglo-American model" (also known as "the unitary system") emphasizes a single-tiered Board of Directors composed of a mixture of executives from the company and non-executive directors, all of whom are elected by shareholders. Non-executive directors are expected to outnumber executive directors and hold key posts, including audit and compensation committees. The United States and the United Kingdom differ in one critical respect with regard to corporate governance: In the United Kingdom, the CEO generally does not also serve as Chairman of the Board, whereas in the US having the dual role is the norm, despite major misgivings regarding the impact on corporate governance. In the United States, corporations are directly governed by state laws, while the exchange (offering and trading) of securities in corporations (including shares) is governed by federal legislation. Many U.S. states have adopted the Model Business Corporation Act, but the dominant state law for publicly-traded corporations is Delaware, which continues to be the place of incorporation for the majority of publicly-traded corporations. Individual rules for corporations are based upon the corporate charter and, less authoritatively, the corporate bylaws.[26] Shareholders cannot initiate changes in the corporate charter although they can initiate changes to the corporate bylaws.



Purpose, Authority and Responsibility of the Board of Directors

The primary responsibility of the board of directors is to protect the shareholders' assets and ensure they receive a decent return on their investment. In some European countries, the sentiment is much different; many directors there feel that it is their primary responsibility to protect the employees of a company first, the shareholders second. In these social and political climates, corporate profitability takes a back seat the needs of workers. The board of directors is the highest governing authority within the management structure at any publicly traded company. It is the board's job to select, evaluate, and approve appropriate compensation for the company's chief executive officer (CEO), evaluate the attractiveness of and pay dividends, recommend stock splits, oversee share repurchase programs, approve the company's financial statements, and recommend or strongly discourage acquisitions and mergers. Roles and responsibilities of boards of directors are to:

(1) Represent shareholders and create shareholder value. (2) Align the interests of management with those of shareholders while protecting the interests of other stakeholders (customers, creditors, suppliers). (3) Define the companys mission and goals. (4) Establish or approve strategic plans and decisions to achieve these goals. (5) Appoint senior executives to manage the company in accordance with the established strategies, plans, policies, and procedures. (6) Oversee the companys performance by setting objectives, establishing short-term and long-term strategies to achieve these objectives, and assessing the performance of senior executives in fulfilling their responsibilities without micromanaging. (7) Approve major business transactions and corporate plans, decisions, and actions according to the bylaws. (8) Develop and approve executive compensation, pension, post-retirement benefits plan, and other long-term benefits, including stock ownership and stock options.

(9) Review financial reports, including audited annual financial statements, quarterly reviewed financial statements, and other important financial disclosures such as management discussion and analysis (MD&A) earnings releases and reports filed with regulators (SEC) or disseminated to the public. (10) Review managements report on the effectiveness of internal control over financial reporting. (11) Provide counsel to the companys senior executives, especially the CEO, on material strategic decisions and risk management. (12) Ensure the companys compliance with applicable laws, rules, and regulations. (13) Approve the companys major operating, investing, and financial activities. (14) Set the tone at the top by promoting legal and ethical conduct throughout the company. (15) Evaluate the performance of the board, its committees (e.g., audit, compensation, and nominating), and the members of each committee. (16) Hold the board, its committees, and directors accountable for the fulfillment of the assigned fiduciary duties and oversight functions. (17) Approve dividends, financing, capital changes, and other extraordinary corporate matters. (18) Oversee the sustainability of the company in creating long-term shareholder value and protecting interests of other stakeholders. Board Models

One-Tier Board Model - consists of both inside (executive) directors and outside (nonexecutive) directors. Inside directors are perceived as the decision managers and outside directors are assumed to have the power and duty to monitor those decisions. Two-Tier Board Model - The two-tier board system, consisting of a supervisory board and a management board, better known as the German board model, establishes different authorities and responsibilities for members of each board. Modern Board Model - the structure of the modern board based on the two components of strategic board and oversight board is the natural offshoot of the emerging corporate governance reforms.

Board Characteristics

Board Leadership The effectiveness of board meetings depends largely on the leadership ability of the chairperson to set an agenda and direct discussions. The board agenda is usually prepared by chairperson in collaboration with the CEO.

CEO Duality implies that the companys CEO holds both the position of chief executive and the chair of the board of directors. They are pros and cons of that model, but investors usually prefer to separate the positions. If they dont, then it is preferable that the companys board consists of a substantial majority of independent directors.

Lead Director demand for Lead Director increased because of the presence of CEO duality, resulting from growing concern that duality places too much power in the hands of CEO, which may impede board independence. Board Composition in terms of ratio of inside and outside directors, and the number of directors influence the effectiveness of the board. A board size of nine to fifteen is considered to be adequately tailored to the number of board standing committees. Board Authority is granted trough shareholder elections. SOX substantially expanded the authority of directors, particularly audit committee members, as being directly responsible for hiring, firing, compensating, and overseeing the work of the companies independent auditors. Responsibilities the primary responsibility of the board of directors that the companies assets are safeguarded and that managerial decisions and actions are made in a manner of maximizing shareholders wealth while protecting the interests of other shareholders. Resources board of directors should have adequate resources to effectively fulfill its oversight functions. Resources available to the board consist of legal, financial, and information resources. Board Independence implies that, to be independent director shouldnt have any relationship with the company other than his or her directorship that my compromise the directors objectivity and loyalty to the companys shareholders. Director compensation best practices suggest that increases in stock ownership, reduction in cash payments, and charges in compensation should be aligned with shareholders long-term interest determined by board, approved by shareholders, and fully disclosed in public reporting.

Fiduciary Duties of Board of Directors

Fiduciary duty means that, as shareholders guardians, directors must be trustworthy, acting in the best interest of shareholders, and investors in turn have confidence in the directors actions. MANDATED BY LAW AND SPECIFIED IN COMPANIES CHARTERS AND BYLAWS The corporate governance literature presents the following fiduciary duties of boards of directors: Duty of due care Duty of loyalty Duty of Good Faith Duty to Promote Success Duty to Exercise Diligence, Independent Judgment, and Skill Duty to Avoid Conflict of Interests Fiduciary Duties and Business Judgment Rules.

Duty of Due Care - determines the manner in which directors should carry out their responsibilities. Failure to uphold the set stipulations may constitute a breach of the fiduciary duty of care of expected directors.

Duty of loyalty - requires directors to refrain from pursuing their own interests over the interests of the company. Breach of loyalty can occur even in the absence of conflicts of interest if directors consciously disregard their duties to the company and its shareowners.

Duty of Good Faith Its an important of directors fiduciary obligations, and any irresponsible, reckless, irrational or disingenuous behaviors or conduct can breach that fiduciary duty.

Duty to promote success directors should act in a good faith and promote the success of the company to benefit of its shareholders and other stakeholders. Includes: approving the establishment of strategic goals, objectives and policies that promote enduring shareholders value as well as protect existing value.

Duty to exercise due diligence, independent judgment, and skill - directors should be knowledgeable about the companies business and affairs, continuously update their understanding of the company activities and performance, and use reasonable diligence and independent judgment in making decisions.

Duty to avoid conflicts of interests - potential conflict of interest may occur when director: receives a gift from a third party he is doing business with, either directly or indirectly enters into a transaction or arrangement with that company, obtains substantial loans from the company, or engages in backdated stock options.

Fiduciary Duties and Business Judgment Rules - directors operate under a legal doctrine called business judgment rules. Under that law directors that make decisions in good faith, based on rational reasoning, and an informed manner can be protected from liability to the companys shareholders in the ground that they appropriately fulfilled their fiduciary duty of care. Structure and Makeup of the Board of Directors

The board is made up of individual men and women (the "directors") who are elected by the shareholders for multiple-year terms. Many companies operate on a rotating system so that only a fraction of the directors are up for election each year; this makes it much more difficult for a complete board change to take place due to a hostile takeover. In most cases, Directors either, 1.) Have a vested interest in the company, 2.) Work in the upper management of the company, or 3.) Are independent from the company but are known for their business abilities. The number of directors can vary substantially between companies. Walt Disney, for example, has sixteen directors, each of whom are elected at the same time for one year terms. Tiffany & Company, on the other hand, has only eight directors on its board. In the United States, at least fifty percent of the directors must meet the requirements of "independence", meaning they are not associated with or employed by the company. In theory, independent directors will not be subject to pressure, and therefore are more likely to act in the shareholders' interests when those interests run counter to those of entrenched management.

Committees on the Board of Directors

The board of directors responsibilities includes the establishment of the audit and compensation committees. The audit committee is responsible for ensuring that the company's financial statements and reports are accurate and use fair and reasonable estimates. The board members select, hire, and work with an outside auditing firm. The firm is the entity that actually does the auditing. The compensation committee sets base compensation, stock option awards, and incentive bonuses for the company's executives, including the CEO. In recent years, many board of directors have come under fire for allowing executives salaries to reach unjustifiably absurd levels. In exchange for providing their services, corporate directors are paid a yearly salary, additional compensation for each meeting they attend, stock options, and various other benefits. The total amount of directorship fees various from company to company. Tiffany & Company, for example, pays directors an annual retainer of $46,500, an additional annual retainer of $2,500 if the director is also a chairperson of a committee, a per-meetingattended fee of $2,000 for meetings attended in person, a $500 fee for each meeting attended via telephone, stock options, and retirement benefits. When you consider that many executives sit on multiple boards, it's easy to understanding how their directorship fees can reach into the hundreds of thousands of dollars per year. Ownership Structure and Its Impact on the Board of Directors

The particular ownership structure of a corporation has a huge impact on the effectiveness of the board of directors to govern. In a company where a large, single shareholder exists, that entity or individual investor can effectively control the corporation. If the director has a problem, he or she can appeal to the controlling shareholder. In a company where no controlling shareholder exists, the directors should act as if one did exist and attempt to protect this imaginary entity at all times (even if it means firing the CEO, making changes to the structure that are unpopular with management, or turning down acquisitions because they are too pricey). In a relatively few number of companies, the controlling shareholder also serves as the CEO and / or Chairman of the Board. In this case, a director is completely at the will of the owner and has no effective way to override his or her decisions.



RIGHTS of shareholders

Buying & Selling Shares Shareholders can sell the shares but only if the sale does not breach the Constitution. It is a Replaceable Rule that directors can refuse to register a proposed share transfer if the shares are not fully paid or if the Company has a lien over the shares. In some cases, it is necessary to evidence the sale by a share sale agreement that takes into account the parties rights, obligations and liabilities, and taxation. Behan Legal can advise, assist, and prepare the necessary share sale agreements. Funding Company Operations Shareholders can fund the Company's operations by lending it money, or by taking up other shares in the Company. Unless it is raising funds from its employees or shareholders, a Company cannot engage in any fundraising activity that requires disclosure to investors (for example, advertising in a newspaper inviting investment in the Company). The Company can borrow money from banks and other financial organisations. Anyone who lends money, or

provides credit to the Company can require a mortgage or charge over the Company's assets to secure the loan or debt. Behan Legal can advise, assist, and prepare the necessary agreements. Shareholder Returns Shareholders can take money out of the Company in a number of ways, but only if the Company complies with the Constitution, Corporations Act and all relevant laws. If the Company pays out money to shareholders in a way that results in it being unable to pay its debts as they fall due, the directors are liable to pay compensation and for criminal and civil penalties. Dividends Dividends are payments to shareholders out of the Company's after tax profits. It is a Replaceable Rule that the directors decide whether the Company should pay a dividend. Share Buy-Back A Company can buy back shares from shareholders. Distribution of Surplus Assets If the Company is wound up and there are assets remaining after paying all debts, the surplus is available for distribution to shareholders according to their share rights.


Overseeing strategy and monitoring execution Board leadership and composition Executive succession and development Senior executive compensation issues

Monitoring the quality of products and services Performance and financial viability Risk management, controls, and transparency Tone at the top, ethics, and compliance Stakeholder issues, including business sustainability in light of climate, energy, environmental, and other concerns.

Two important responsibilities: 1. Voting in corporate elections; and 2. Keeping current records with the Shareholder Relations Department. Voting CIRI shareholders are responsible for ensuring the long-term strength of the corporation by electing a board of directors. In addition to providing guidance and leadership, the board establishes policies for achieving CIRI's corporate mission and strategic goals. Shareholders can vote in person at the annual meeting or by a proxy vote. Voting Information

Keeping Information Current Shareholders cannot receive informational materials from CIRI, such as annual reports, newsletters, proxies, or dividends, if their address is not kept current. It is the shareholder's responsibility to maintain complete and accurate shareholder records by promptly advising CIRI of: Address Changes; Name Changes; Stock Will Changes; and Direct Deposit Changes. Shareholder Ability to Change the Board Shareholders who are dissatisfied with how the directors are running the corporation may remove the directors or refuse to re-elect them. In practice, this may be a difficult course to take, particularly where the shares of the corporation are widely held.






Who are Independent Directors

As per Clause 49 of the Listing Agreements an independent director shall mean non-executive director of the company who a. apart from receiving directors remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies; b. is not related to promoters or management at the board level or at one level below the board; c. has not been an executive of the company in the immediately preceding three financial years; d. is not a partner or an executive of the statutory audit firm or the internal audit firm that is associated with the company, and has not been a partner or an executive of any such firm for the last three years. This will also apply to legal firm(s) and consulting firm(s) that have a material association with the entity. e. is not a supplier, service provider or customer of the company? This should include lessor-lessee type relationships also; and f. is not a substantial shareholder of the company, i.e. owning two percent or more of the block of voting shares. Other Definitions Higgs definition: that a non-executive director is considered independent when the board determines that the director is independent in character and judgement and there are no relationships or circumstances which could affect, or appear to affect, the director's judgment. Such relationships are enumerated NYSE definition: Director or immediate family member not to be an executive of the company receiving $100000 Not to affiliated in professional capacity Not to be one who or whose immediate family members work on another company where the executives of the company serve on the compensation committee. A director or his immediate family member is an executive officer, of a company that makes payments to, or receives payments from, the listed company for property or services in an amount which, in any single fiscal year, exceeds the greater of $1 million, or 2% of such other units three years company's consolidated gross revenues, would not be independent Family defined to include person's spouse, parents, children, siblings, mothers- and fathers-in-law, sons- and daughters-in-law, brothers- and sisters-in-law, and anyone (other than domestic employees) who shares such person's home. To state simply the expression Independent Directors has been defined to mean directors who apart from receiving directors remuneration, do not have any other material pecuniary relation or transactions with the company, its promoters, its management or its subsidiaries, which in the judgment of the board may affect independence of judgment of directors.

Selection of Independent Director The selection and appointment of independent directors should be transparent and on certain valued basis. Therefore, the companies should have an entirely independent nomination committee which should determine the qualifications for Board membership and should identify and evaluate candidates for nomination to the Board. It would be more appropriate that the code of Corporate Governance of a company should specifically include the qualifications and attributes that the company seeks of an independent director. A critical element of a director being independent is his independence to the management both in fact and perception by the public. In considering the independence, it is necessary to focus not only on whether a director's background and current activities qualify him as independent but also whether he can act independently of the management. In other words, the independent directors must not only be independent according to the legislative and stock exchange listing standards but also independent in thought and action i.e. qualitatively independent. Such qualitative independence will ensure that directors think and act independently without regard to management's influence.

Roles & Responsibilities The role and responsibility of an individual director, of course, would depend upon the nature of his directorship. Broadly, there are three types of directors. Full time, executive director who is normally a paid employee of a company having some functional responsibility. Non executive but non independent director who is normally a promoter of the company or having high stakes in the company. And finally independent directors who are not full time directors. There is another class of directors known as nominee directors representing some interests like lending institutions etc. An executive director, by very nature has much more responsibilities than non executive directors. In law it is their responsibility to ensure compliance with provisions of law failing with they could be held liable as officers in default. As far as independent directors are concerned, the position of law is nebulous.

Role of Independent Directors

Independent directors broadly fit into the overall structure of corporate governance, and are necessary to ensure effective, balanced boards The board is the most significant instrument of corporate governance

Role Of Independent Directors The non-executive directors should:

* Contribute to and constructively challenge development of company strategy. * Scrutinize management performance. * Satisfy them that financial information is accurate and ensure that robust risk management is in place. * Meet at least once a year without the chairman or executive directors - and there should be a statement in the annual report saying whether such meetings have taken place. * Be prepared to attend AGMs and discuss issues relating to their roles (especially chairmen of committees). * Have a greater exposure to major shareholders (particularly the senior independent director). Effectiveness of the board as the oversight body to oversee what the management does Is there a better way to do it, in view of Recent scandals of disclosures and audits Size and scope of present day enterprise Complexity of operations

Responsibilities of Independent Directors Independent Director shall however periodically review legal compliance reports prepared by the company as well as steps taken by the company to cure any taint. In the event of any proceedings against an independent director in connection with the affairs of the company, defense shall not be permitted on the ground that the independent director was unaware of this responsibility. To function to properly according to the spirit of corporate governance as o director on the board and as Member/Chairman across various committees viz. the Audit Committee, the Shareholders Grievance Committee and the Remuneration Committee of the company. A director shall not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he is a director. Furthermore it should be a mandatory annual requirement for every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place. At least one independent director on the Board of Directors of the holding company shall be a director on the Board of Directors of the subsidiary company.

Independent Directors under Listing Agreement in India Composition of the Board: Not less than 50% of the board to be non-executive directors Independent Directors: If the chairman executive: At least half of the board should comprise of independent directors If Chairman non-executive: At least one- third of the board should comprise of independent directors

Non-executive directors remuneration to be approved by shareholders Board meetings to meet at least 4 times, with gap not exceeding 3 months. Minimum information for board meetings laid down Committees of Directors Audit Committee: requirements other than those u/s 292A shall have minimum 3 members all of them being non-executive and majority of them being independent Chairman of the committee shall be an independent director To meet at least thrice a year Company Secretary to act as secretary to the committee

Remuneration Committee Shareholders/Investors Grievance Committee

Limits on committee memberships and chairmanships



Corporate Governance involves all structures, systems and processes that will lead to the optimum performance of the corporation

Corporate Governance Rating is an objective and independent measure of a companys level of Corporate Governance Practices Mission: Provide a measure of a companys Corporate Governance Practices for the benefit of shareholders & other stakeholders Improve practical aspects of corporate governance Enhance the attractiveness of the Malaysian Capital Markets

Vision: Build world-class companies Build world-class capital market

Current Situation:
Compliance Mentality Ad-hoc application Form over substance attitude Box-ticking practice Haphazard standards actually practiced Statement of Corporate Governance Statement of Internal Control Audit Committee Report

Superficial Understanding Need:

To shift mindset: Compliance Issue Business Strategy Issue To shift approach: Cost-Based Application Competitive Advantage Tool To shift implementation: Vague Theoretical Concept Practical Tools: Structures Systems Processes

E.G. OF WORLDWIDE CG RATING REFERENCES Standard & Poors McKinsey ICRA PriceWaterHouseCoopers Credit Lyonnais Securities (CLSA) Institutional Shareholders Services (ISS) Oxfam Governance Metrics International (GMI) Corporate Governance Authority (CGA) DWS Investment and Deminor Rating Fortune CRISIL (India) Governance & Value Creation Rating Thai Rating & Information Services (TRIS) Pillsbury Winthrop OECD ASX Corporate Governance Horvath (Australia) Sarbanes Oxley

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