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Ethics is a branch of social science. It deals with moral principles and social values. It
helps us to classifying, what is good and what is bad? It tells us to do good things and
avoid doing bad things.
So, ethics separate, good and bad, right and wrong, fair and unfair, moral and immoral
and proper and improper human action. In short, ethics means a code of conduct.
In short, business ethics means to conduct business with a human touch in order to give
welfare to the society.
So, the businessmen must give a regular supply of good quality goods and services at
reasonable prices to their consumers. They must avoid indulging in unfair trade practices
like adulteration, promoting misleading advertisements, cheating in weights and
measures, black marketing, etc. They must give fair wages and provide good working
conditions to their workers.
Business ethics is the study of business situations, activities, and decisions where issues
of right and wrong are addressed.
The ethics of business is the ethics of responsibility. The business man must promise
that he will not harm knowinfly.
Ethics is a branch of social science. It deals with moral principles and social values. It
helps us to classifying, what is good and what is bad? It tells us to do good things and
avoid doing bad things.
So, ethics separate, good and bad, right and wrong, fair and unfair, moral and immoral
and proper and improper human action. In short, ethics means a code of conduct.
In short, business ethics means to conduct business with a human touch in order to give
welfare to the society.
So, the businessmen must give a regular supply of good quality goods and services at
reasonable prices to their consumers. They must avoid indulging in unfair trade practices
like adulteration, promoting misleading advertisements, cheating in weights and
measures, black marketing, etc. They must give fair wages and provide good working
conditions to their workers.
Normative theories of ethics or moral theories are meant to help us figure out what
actions are right and wrong. Popular normative theories include utilitarianism, the
categorical imperative, Aristotelian virtue ethics, Stoic virtue ethics, and W. D. Rosss
intuitionism. I will discuss each of these theories and explain how to apply them in
various situations.
1. Consequentialist Theories:Those theories that determine the moral rightness or wrongness of an action based on the
actions consequences or results.
2. Nonconsequentialist Theories:Those that determine the moral rightness or wrongness of an action based on the actions
intrinsic features or character.
Consequentiality Theories is also further divided in to two types1.
Egoism:
The view that morality coincides with the self-interest of an individual or an organization.
Egoists: Those who determine the moral value of an action based on the principle of personal
advantage.
Personal egoists: Pursue their own self-interest but do not make the universal claim that all
individuals should do the same.
should motivate
Egoists do not necessarily care only about pursuing pleasure (hedonism) or behave dishonestly
and maliciously toward others.
Egoists can assist others if doing so promotes their own advantage.
Psychological egoism: The theory of ethical egoism is often justified on the ground that human
beings are essentially selfish.
Even acts of self-sacrifice are inherently self-regarding insofar as they are motivated by a
conscious or unconscious concern with ones own advantage.
Objections to egoism
(1)
The theory is not sound: The doctrine of psychological egoism is false not all human
acts are selfish by nature, and some are truly altruistic.
(2)
Egoism is not a moral theory at all: Egoism misses the whole point of morality, which
is to restrain our selfish desires for the sake of peaceful coexistence with others.
(3)
Egoism ignores blatant wrongs: All patently wrong actions are morally neutral unless
they conflict with ones advantage.
2. Utilitarianism
Definition: The moral theory that we should act in in ways that produce the most pleasure or
happiness for the greatest number of people affected by our actions.
Main representatives: The British philosophers Jeremy Bentham (17481832) and John Stuart
Mill (18061873).
The principle of utility: Actions are morally praiseworthy if they promote the greatest
human welfare, and blameworthy if they do not.
Provides a clear and straightforward standard for formulating and testing policies.
Offers an objective way for resolving conflicts of self-interest.
Suggests a flexible, result-oriented approach to moral decision making.
Criticisms of utilitarianism:
(1)
(2)
Some actions seem to be intrinsically immoral, though performing them can maximize
happiness.
(3)
Utilitarianism is concerned with the amount of happiness produced, not how the amount
is distributed, so the theory can run counter to principles of justice.
Nonconsequentialist Theories
Nonconsequentialist Theories it is also called Kantian theory.
Kants Ethics
Immanuel Kant (17241804): A German philosopher with a nonconsequentialist approach to
ethics.
Said the moral worth of an action is determined on the basis of its intrinsic features or character,
not results or consequences.
Believed in good will, that good actions proceed from right intentions, those inspired by a sense
of duty.
The morality of an action depends on whether the maxim (or subjective principle) behind
it can be willed as a universal law without committing a logical contradiction.
His maxim can be expressed as: Ill make promises that Ill break whenever
keeping them no longer suits my purposes.
(2)
Humanity as an end, never as a means: We must always act in a way that respects
human rationality in others and in ourselves.
Kant in an organizational context:
(1)
The categorical imperative provides a solid standard for the formulation of rules
applicable to any business circumstances.
(2)
(3)
(1)
Kants ethics is too extreme insofar as it excludes emotion from moral decision making and
makes duty paramount.
(2)
Kant fails to distinguish between excepting oneself from a rule and qualifying a rule on the
basis of exceptions.
(3)
It is not always clear when people are treated as ends and merely as means.
Community based CSR: businesses work with other organizations to improve the
quality of life of the people in the local community.
Despite certain criticisms on the CSR activities, more and more companies in the world
are inclined towards corporate social responsibility
CSR can not only refer to the compliance of human right standards, labor and social
security arrangements, but also to the fight against climate change, sustainable
management of natural resources and consumer protection.
In the Developed nations, the basic needs of the population do not need so much support
as in the under-developed nations. The demographies, literacy rate, poverty ratio and
GDP of the country have significant role in determining the directions of CSR initiatives
of an organization
In the Asian context, CSR mostly involves activities like adopting villages for holistic
development, in which they provide medical and sanitation facilities, build school and
houses, and helping villages become self-reliant by teaching them vocational and
business skills.
So it is necessary for each businessman the impacts of CSR on the working population,
society and environment and therefore to elaborate the various frameworks for it with a
view towards developing its practice in an evolutionary way
The board of directors seldom appears on the management organization chart yet it is the
ultimate decision making body in a company. The role of management is to run the
enterprise while the role of the board is to see that it is being run well and in the right
direction
This model can be applied to the governance of any corporate entity, private or public,
profit oriented or service-based organization. The circle and triangle model mentioned
earlier is a powerful analytical tool.
Corporate governance systems vary around the world. Scholars tend to suggest three
broad versions: (i) the Anglo-American Model; (ii) the German Model; and (iii) the
Japanese Model.
THE ANGLO-AMERICAN MODEL
This is also known as unitary board model, as illustrated in Figure 14.1 in which all directors
participate in a single board comprising both executive and non-executive directors in varying
proportions. This approach to governance tends to be shareholder-oriented. It is also called the
AngloSaxon approach to corporate governance, being the basis of corporate governance in
America, Britain, Canada, Australia and other commonwealth countries including India.
The major features of the AngloSaxon or Anglo-American model of corporate governance are
as follows:
1. The ownership of companies is more or less equally divided between individual
shareholders and institutional shareholders.
2. Directors are rarely independent of management.
3. Companies are typically run by professional managers who have neligible ownership
stakes. There is a fairly clear separation of ownership and management.
4. Most institutional investors are reluctant activists. They view themselves as portfolio
investors interested in investing in a broadly diversified portfolio of liquid securities. If
they are not satisfied with a companys performance, they simply sell the securities in
the market and quit.
5 The disclosure norms are comprehensive.
GERMAN MODEL
In this model, also known as the two-tier board model, corporate governance is exercised
through two boards, in which the upper board supervises the executive board on behalf of
stakeholders. This approach to governance is typically more societal-oriented and is sometimes
called the Continental European approach, being the basis of corporate governance adopted in
Germany, Holland, and to an extent, France.
In this model although the shareholders own the company, they do not entirely dictate the
governance mechanism.
As shown in Figure 14.2, shareholders elect 50 per cent of members of supervisory board
and the other half is appointed by labour unions. This ensures that employees and
labourers also enjoy a share in the governance.
The supervisory board appoints and monitors the management board. There is a reporting
relationship between them, although the management board independently conducts the
day-to-day operations of the company.
This is the business network model, which reflects the cultural relationships seen in the Japanese
keiretsu network, in which boards tend to be large, predominantly executive and often
ritualistic.The reality of power in the enterprise lies in the relationships between top management
in the companies in the keiretsu network. The approach bears some comparison with
Korean chaebol.
In the Japanese model (Figure 14.3), the financial institution plays a crucial role in governance.
The shareholders and the main bank together appoint the board of directors and the president.
The distinctive features of the Japanese corporate governance mechanism are as follows:
The president who consults both the supervisory board and the executive management
is included.
Importance of the lending bank is highlighted.
Improving the quality of financial disclosures, including those related to related party
transactions.
Companies raising money through an IPO should disclose to the Audit Committee the
uses / applications of funds by major category like capital expenditure, sales and
marketing, working capital, etc.
Requiring corporate executive boards to assess and disclose business risks in the
annual reports of companies.
Board of a company to lay down the code of conduct for all Board members and senior
management of a company.
Implementation issue
A primary issue that arises with implementation is whether the recommendations should
be made applicable to all companies immediately or in a phased manner, since the
costs of compliance may be large for certain companies.
In early 1999, Securities and Exchange Board of India (SEBI) had set up a
committee under Shri Kumar Mangalam Birla, member SEBI Board, to
promote and raise the standards of good corporate governance. The report
submitted by the committee is the first formal and comprehensive attempt to
evolve a Code of Corporate Governance
The primary objective of the committee was to view corporate governance
from the perspective of the investors and shareholders and to prepare a
Code' to suit the Indian corporate environment.
The committee had identified the Shareholders, the Board of Directors and
the Management as the three key constituents of corporate governance and
attempted to identify , their roles and responsibilities as also their rights in
the context of good corporate governance.
Corporate governance has several claimants shareholders and other
stakeholders - which include suppliers, customers, creditors, and the bankers,
the employees of the company, the government and the society at large.
The Report had been prepared by the committee, keeping in view primarily
the interests of a particular class of stakeholders, namely, the shareholders.
Mandatory and non-mandatory recommendations
The committee divided the recommendations into two categories, namely,
mandatory and non- mandatory.
A. Mandatory Recommendations:
Applies To Listed Companies With Paid Up Capital Of Rs. 3 Crore And Above
Composition Of Board Of Directors Optimum Combination Of Executive &
NonExecutive Directors
Audit Committee With 3 Independent Directors With One Having Financial
And Accounting Knowledge.
Remuneration Committee
At least 4 Meetings of the Board in a Year with Maximum Gap of 4 Months
between 2 Meetings
Information Sharing With Shareholders
B. Non-Mandatory Recommendations:
Role Of Chairman
Remuneration Committee Of Board
Corporate Restructuring
Further Issue Of Capital
Venturing Into New Businesses
Establishing property right systems that clearly and easily identify true owners even
if the state is the owner.
Protecting and enforcing minority shareholders rights.
Finding active owners and skilled managers amid diffuse ownership structures.
The system must be strong enough and flexible enough to move with the changing society.
The primary responsibility of management is to reduce conflict areasfor sharing benefits of
business and to bring harmony of interest among diverse stakeholder groups.
The SarbanesOxley Act (SOX Act), 2002 is a sincere attempt to address all the issues
associated with corporate failures to achieve quality governance
The Act was formulated to protect investors by improving the accuracy and reliability of
corporate disclosures
The Act contains a number of provisions that dramatically change the obligations of
public companies, the directors and officers.
Important provisions contained in SOX Act are briefly given below:
Establishment of Public Company Accounting Oversight Board (PCAOB):
The SOX Act creates a new board consisting of five members of whom two will
be certified public accountants.
All accounting firms will have to register themselves with this Board and submit
among other details, particulars of fees received from public company clients for
audit and non-audit services, financial information about the firm, list of firms
staff who participate in audits, quality control policies, information on civil,
criminal and disciplinary proceedings against the firm or any of the staff.
The Board will conduct annual inspections of firms, which audit more than 100
public companies, and once in three years in other cases.
The board will establish rules governing audit quality control, ethics,
independence and other standards.
The Board reports to the SEC. The Board is required to send its report to the SEC
annually, which will then be forwarded by the SEC to the Congress.
Audit committee:
The SOX Act provides for a new improved audit committee. The members of
the committee are drawn from among the directors of the board of the company
but all are independent directors as defined in the Act.
The audit committee is responsible for appointment, fixing fees and oversight of
the work of independent auditors. The committee is also responsible for
establishing and reviewing the procedures for the receipt, treatment of accounts,
internal control and audit complaints received by the company from the interested
or affected parties.
The SOX Act requires that registered public accounting firms should report
directly to the audit committee on all critical accounting policies and practices and
other related matters.
Audit partner rotation: The SOX Act provides for mandatory rotation of the
lead auditor, co-ordinating partner and the partner reviewing audit once every five
years.