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Ethical Issues in Business – A Case Study of Selected Firms

1. Dr. V.J.Rai profvjrai@gmail.com


Principal ,
Bhutta college of Engineering Technology
Ludhiana
2. Ms. Harinder Kaur Deo harinder.randhawa@gmail.com
Assistant Professor (Deptt of Management)
Bhutta college of Engineering Technology
Ludhiana
3. Mr. Vishal Vinayak
Assistant Professor (Deptt of Management)
Baba KhajanDas College of Management Technology
Ludhiana

Abstract
'Business Ethics' is a study of the policies of an organization that are related to corporate
governance and corporate social responsibility. It is moral responsibility of the businesses to
provide the true value of money to the public,stakeholders,customers and the government. Every
business must other inequitable malpractices for selfish interests. This paper examines the
unethical practices and lack of corporate governance in private business. In the current paper
effort has been made to understand the unethical practices undertaken by the companies under
study, Their impact on the organization, and the markets i.e the customers.
Keywords :Business,Morals,Ethics, Society,

Introduction
Every business is operating in society and as societies has moral values and code of conduct so
does the business has its ethics. The very basic moral principles which act as a guide for
the business to behave in the environment and guide the business throughout its operations is
ethics. All those principles that determine an individual”s actions also determine the business’s
behaviour. For any Business to act in an ethical way means first to differentiate between “right”
and “wrong” and then selection of the “right” choice. Business ethics are those specialized
functional ethics which determine the morally correct principles and practices to be followed in
the course of business and if any problem arises.
The ethics are applied to all types and spheres of business and are relevant to the conduct of
individuals and the entire organization. Ethics are about the right and the wrong. Meeting the
shared ethical standards of the society and being lawful makes any decision ethical. A major role
in fulfilling the organizational requirements is played by ethics. The ways either right or wrong
of fulfilling this requirement greatly influence the operations of the organization.
Ethics is a branch of Philosophy that deals only owith moral values. Business ethics are similar
to the moral principles which are considered right by the society and thus they should guide the
activities of a business. Every business in the world is governed and guided by profits and to put
a check on the greed of the entrepreneurs the thought of business ethics generally arises. They
are the social values that lay down the norms of behavior for any business. A businessman has to
do business keeping the welfare of the society and also follow certain ethics or moral principles

Review of Literature
Dr.Vijayalakshmi kanteti(2015) in his case titled ‘Saga of “noodle doodles”- an analysis of do’s
and don’ts during crisis communication with reference to nestle India’s maggi noodles’ tries to
analyze Nestle India’s Brand Maggi’s crisis communication pattern, how it could not connect
emotionally with the consumers through its crisis communication techniques and examined the
do’s and don’ts during a crisis, and if followed meticulously during a crisis can lessen the amount
of damage that is done to its brand reputation. Dr. Jaskaran Singh Dhillon at el. (2015) in their
paper titled “What’s at Stake”: The Maggi Noodles Story (A Case Study) reveals that the people
have diverse opinion about the Maggi controversy. Several people have straightaway supported
the ban on Maggi and while some have some have asked the question “Why only Maggi?”Many
outlets and institutions have banned Maggi but there is no common opinion about the Maggi ban
in different states of India. Dr. Rita, Anupreet Kaur, Kanupriya (2016) in their study titled “the
impact of controversy of “Nestlé’s maggi” on consumers and the company” showed that beside
the entire quarrel faced by Maggi, consumer’s opinion about their loved product didn’t change
much. They kept supporting and were eager for its comeback. Infect only 28% people witnessed
variation in their consumption while all this controversy had no impact over the consumption
pattern on rest of the population. Nitin J. Maniyal(2015) in his paper “Impact of maggi noodles
on the youth” concluded that Nestle will have to work hard to build up the faith among the
people, it may take a long time might be several years to up-bring its brand again. Most of the
youth have now starting consuming the competitor‘s products like Yippie Noodles and others. If
they get addicted to those brands, then the Brand Loyalty towards Maggi may be lost.Prof. John
W. Dunfee (2010) Satyam: brotherly demise the rise and fall of ramalinga raju, corporate
governance framework needs to be implemented in letter as well as spirit. The increasing rates of
white collar crimes demands stiff penalties and punishment. The small distortions created by few
immoral executives lad far reaching negative consequences. Dr. Madan Bhasin(2013) in his
paper ‘Corporate accounting scandal at satyam’ reveals that the Indian government, in Satyam
case, took very quick actions to protect the interest of the investors, safeguard the credibility of
India, and the nation’s image across the world. Moreover, Satyam fraud has forced the
government to re‐write CG rules and tightened the norms for auditors and accountants. It
elucidates how such scams in private companies also impacts the shareholders of the companies
concerned, apart from the scores of employees, customers and the general public. In light of the
case, the paper traces how the need of the hour has called for incorporation of corporate
governance in the private sector with scores of public investors’ interest indirectly vested in the
private sector market.
Purpose of the Study:
1. To understand the Unethical practices undertaken by the companies under Study.
2. To find out the impact of the unethical practices on the organization and markets.
Research Methodology:
The data for the current study is secondary data collected from the secondary sources such as
Newspaper, websites and Magazines.
The companies selected for this study faced crisis due to Unethical Practices followed by them.
Both the companies enjoyed the highest market share in their respective industries. Both the
companies enjoyed high brand image and still followed unfair trade practices.
The selected companies are:
1. Nestle- Maggi
2. Satyam Computers
The case of Nestle:
Nestle a well known brand produces Maggi the instant noodles, soups stocks, sauces
and seasoning. As factory jobs for women were created by the 19th century industrial revolution
in Switzerland thus they had very little time to prepare meals. Thus Swiss Public Welfare Society
asked Julius Maggi to create such a vegetable food product that would be as quick to prepare ans
as easy to digest as singing a song. This led to birth of the original company in 1872. Initially,
protein rich legume meals were brought to the market. Later on it was followed by readymade
soups. Interestingly the formula (tastemaker), which paved way for Maggi noodles, was
developed back in 1863 by Julius Maggi.
Maggie merged with Nestle family in 1947 and in 1982 was launched in India
1. 1982: Entry of Maggi noodle into the Indian market
2. May 21,2015: the Uttar Pradesh food safety body puts concerns over "dangerous levels"
of lead and MSG in Maggi, and asked Nestle to recall the batch collected for testing from
Barabanki
3. June 3: The retail chains like Big Bazaar took off Maggi from their shelves
4. June 3: Delhi government puts ban on Maggi for 15 days, other states order tests
5. June 3: A complaint filed with the National Consumer Disputes Redressal Commission
against Nestle India on Maggi by the Government.
6. June 4: The states asked by the Central Government to give reports on the Maggi
controversy
7. June 4: Nestle India releases the lab test results of Maggi samples on its websites
showing that the lead quantity is below FSSAI-prescribed levels
8. June 5: FSSAI orders Nestle to "withdraw and recall" all its nine Maggi noodle variants,
stop their production and also the exports, saying samples were found to be "unsafe and
hazardous" for human consumption.
9. June 10: Maggi samples tested for lead and arsenic levels in Bengaluru found within
permissible limits while there was no clarity on monosodium glutamate (MSG)
10. June 11: Nestle India moved to Bombay High Court for judicial review of FSSAI ban
11. June 12: Bombay High Court declines interim relief to Nestle,
12. June 14: Maggi sales unaffected as told by Pakistani Retaillers as consumers have not
reacted to reports of lead contamination in Indian manufactured noodles
13. Nestle India posted on its websites that a major part of contaminated Maggi stock worth
Rs 320 crores will be incinerated at 5 cement factories across India into fuel.
14. June 30: Nestle allowed by Bombay High Court to export all varieties of Maggi noodles
from India, though restrictions on domestic marketing continued.
15. July 1: Food Standards Authority of Britain claimed that Maggi noodles manufactured in
India and exported to Britain, were safe to consume and contained lead well within
permissible levels
16. July 3: Canadian food regulator said Maggi safe for human consumption.
17. Aug 1: Suresh Narayanan, takes charge as the new India chief Nestle and says that Maggi
will soon be back on retail shelves, even as the company will launch more instant snacks
and also focus on other areas of operations.
18. Aug 5: Goa Deputy Chief Minister Francis D'Souza favored lifting of ban on the Maggi
following the latest tests conducted at the central government lab in Karnataka finding it
safe for consumption.
19. Aug 11: Rs.640-crore class action suit filed by Indian government against Nestle alleging
unfair trade practices on Maggi noodles; hearing by National Consumer Disputes
Redressal Commission on Aug 14
20. Aug 13, 2015: Bombay High Court lifts ban on Maggi noodles. Orders fresh tests on new
samples.

The Market response to the Case-


Maggi commanded 63% of India’s $800 million noodle market before reports that the product
contained excess lead in 2015. Its sales suffered a huge drop due to the controversy. Maggi has
been a market leader for three decades since 2009.
It is very clear from the above graph that from 2009 Maagi enjoyed the highest market
share of noodles market in India.In the year 2014 before the controversy of May 2015
Maggi was the market leader with approximately 64% market share.

The above graph depicts the quarterly records of Maggi from June 2010 to May 2015.As seen by
the graph the monetary figures followed a cycle of rise and fall and then after June 2012
continued to rise.A major fall is seen after March 2015.By May 2015 due to the crisis Maggi
noddles suffered a loss.The Graph shows the negative growth after march 2015.Thus this
unethical practice followed by Nestle India affected the brand image and position adversely as
reflected in the graph. Maggi which was a king earlier in the market share was set back to
negative growth.
The above graph compares the sales of three brands of noodles namely Maggi,Top Ramen and
Yippee in the year 2015.The affect of the controversy of excessive levels of lead in Maggi
dropped in sales immediately. In the month of April magi was the leader but as the crisis rocked
the sales started to come down immediately. By July,2015 they were at zero level. This benefited
other brands but not too much.

The above figure shows the stock price of Nestle India Of March 2015. The stock price
fluctuated amid the crisis and by the end of month the stock was at record low.
From the above graph it is clear that on Bombay stock exchange in the week from May 28 to
June 4 2015, Nestle India’s share dropped by 15% and the Sensex fell by 2.52%. In these seven
days period the market cap dropped to Rs57,953.56 crore on June 04 which was at Rs68,116.26
crore on May 27,2015. This drop caused a serious damage to Nestle’s valuation based on the
market price of its stock & total number of shares or its market capitalisation
In the seven days between May 27, 2015 to June 4, 2015 the market cap erased Rs10,162.7
crore.

The ban period, however, has clearly taken its toll on the erstwhile category leader-by-a-mile;
January, 2016 data from Nielsen shows its share of the Rs 2,000 crore instant noodles market
dropped to 42%, down from a commanding 77% in January 2015.
The company’s Response to the case
Nestlé response
To regain the trust of the public it was vital for Maggi to assure better quality.
Nestle focused on its strengths and came up with more confidence. Nestle India knew that the
people of India are of short memory, they will forget things easily and again accept the brand.
So Maggi again introduced itself in market with improved packing to build the perception in
public that the company has come up with improved product and improved quality
The very first response of the FMCG giant was that it rejected the accusation that the noodles
were unsafe. Their website displayed that there were no orders to recall the product. They were
very confident about the quality of their product.
A statement displayed on their website said that “The quality and safety of our products are the
top priorities for our Company. We have in place strict food safety and quality controls at out
Maggi factories… We do not add MSG to Maggi Noodles, and glutamate, if present, may come
from naturally occurring sources. We are surprised with the content supposedly found in the
sample as we monitor the lead content regularly as a part of the regulatory requirements.”
But due to governmental ban and public rage the company Nestle withdrew Maggi noodles.
Although Nestle repeatedly claimed that the noodles were safe but the truth lies on the other side.
At least six states banned Maggi noodles.
Nestle repeatedly claimed that for the brand the trust consumers and the safety of Maggi is their
first priority.
Nestle continuously claimed that the consumers are misunderstanding the company
Maggi noodles sales in India represent a minute fraction of Nestle's company-wide revenue of
almost 92 billion Swiss francs ($98.6 billion).
As a response to this crisis the company-Nestle developed a great strategy. They defended their
product on all social media channels and rejected all claims that its noodles were unsafe for
consumption. They showcased the best use of social media to connect the masses with them.
Earlier they were using the websites for promotion of the product and for maintaining its image.
The company made an impressive effort through Maggi India Twitter account by responding to
every tweet from customers on this issue
They explained in their tweets that lead occurs naturally in soil and water.
Nestle also tried to explain the science behind the reason for the ban in simple terms so
customers could easily understand. They did so to regain the trust of the customers.
Through the strategy of using smart use of social media during the crisis, the brand limited
further damage by reassuring and informing customers about the quality of the noodles. Through
this means only they encouraged the public to continue buying the noodles in the future.
Nestle make it sure to continuously keep its customers up to date regarding the investigation into
the safety of Maggi noodles in India.
The company again and again re-assured the customers that the noodles are safe.They left no
chance to prove that they are a transparent company working closely with the Indian authorities
to resolve the issue.
Nestle also launches a FAQ page on the official website.
After a severe drop in the Percent market share after the july 2015 crisis Maggi steadly increased
their market share from 10% in October 2015 to 62% in June 2017 and projected to reach 64%
by September 2017. They regained their position of market leaders and again Maggi enjoys the
crown.
A case of Satyam Computers
The case-Introduction
Satyam Computer’s scandal is India’s Enron . It is an “unethical creative accounting culture”
scandal. This is a type of ‘creative’ accounting leading to fraud and investigations
But why did a leading company in one of India’s most successful industries of recent years
inflated its profits?
The revenues driven by the exports of India’s IT industry have grown at a very high compound
annual rate of almost 30 per cent since 2000. Satyam Computers were once the crown jewel of
Indian IT industry, however, the debacle of Satyam raised a debate about the role of its CEO in
driving a company to the heights of success and its relation with the board members and core
committees.
Timeline of the case
1987 : Ramalinga Raju established Satyam Computer Services Ltd.

1991 : Satyam got listed on the Bombay Stock Exchange, IPO over subscriber 17 times.

2006: Revenues cross '$1 billion.' Raju became Nasscom Chairman.

2007: Raju was named Ernst & Young Entrepreneur of the Year.

2008
September 23: Satyam was awarded with Golden Peacock Award for Corporate Governance and
Compliance.

December 16: Satyam Chairman Ramalinga Raju announced plan to buy Maytas Infra and
Maytas Properties owned by his sons for $1.6 billion.

December 23: Satyam barred from business with the World Bank for 8 years for alleged
malpractices in securing contracts. Shares fall to lowest in 4 years.

December 25 - Satyam asked World Bank to apologize.

December 26 - Board member Mangalam Srinivasan resigned followed by exits of members


Vinod Dham, Krishna Palepu.

December 30 - One of Satyam's largest investors said that it will sell its stake. More suitors join
in the fray to acquire Satyam.

2009

January 2: Satyam founder's stake fell by a third to 5.13%.

January 6: Satyam employees received letter from M Ramalinga Raju admitting fraud

January 7: Ramalinga Raju resigned, disclosed a Rs 7000-crore accounting fraud in balance


sheets about the cash which never existed in the company.

January 8: Satyam's bank Citibank freezed its 30 accounts.


January 9: Ramalinga Raju and his younger brother B Rama Raju arrested by the Police.
Central Govt disbanded Satyam board and appointed its own 10 directors.

January 10: Satyam's largest investor Lazard seeked a nomination board. SEBI grilled Raju.

January 23: CID arrested the 2 PwC auditors

April 6: CBI filed chargesheet against Satyam founder Raju and 8 others

2010, August 18: Former Satyam chief Ramalinga Raju granted bail

2011

October 29: SC issues notices to Satyam fraud accused to cancel bail

2012
March 21: Tech Mahindra, Satyam announced merger to form Indias 5th largest IT exports
company

2013

September 17: US court ordered fresh proceedings into claims against Satyam
2014
July 16: Sebi baned Satyam's Ramalinga Raju for 14 years from the market.
March 09: Final judgement date in Ramalinga Raju case deferred to April 9
April 09: All accused guilty of fraud including then chairman Ramalinga Raju in an accounting
scam worth Rs7,000 crore ($1.1 billion) & sentenced to 7 years of jail.
The case
With cheap skilled labour having shored up profits that were lightly taxed when compared with
the norm, net profits must have been substantial and rising too. The scam brought to the light the
role of corporate governance (CG) in shaping the protocols related to the working of audit
committees and duties of board members. This accounting fraud committed by the founders of
Satyam in 2009 is a mockery at auditing system. This scam has justified that the conduct of
business is marked by human greed, ambition, and hunger for power, money, fame and glory.
Scandals in the accounting practices have proved that strong corporate governance, ethics and
accounting & auditing standards are the need of the hour. The Satyam scandal puts pressure on
the importance of securities laws and CG in emerging markets. This major financial reporting
fraud is studied for ‘lessons-learned’ and ‘strategies-to-follow’ to reduce the incidents of such
frauds in the future.

source https://www.linkedin.com/pulse/why-i-wont-board-director-prabhakar-mundkur
Unethical fraud culture at satyam
1. Maintaining Records: Mr. Raju maintained thorough details of the Satyam’s accounts and
minutes of meetings, since 2002. He stored records of accounts for the latest year (2008-
09) in a computer server called “My Home Hub.” Details of accounts from 2002 till
January 7, 2009 – the day Mr. Raju came out with his dramatic (5-page confession) were
stored in two separate Internet Protocol (IP) addresses.
From this figure it is clear that the account were inflated to befool the investors & the markets.
2. Fake Invoices and Bills: Fake invoices and bills were created using the software applications,
such as “Ontime” that was used for calculating hours put in by an employee.

source :

bizblock.wordpress.com
3. Web of Companies: A web of 356 investment companies was used to allegedly divert
funds from Satyam Computers Limited. All these 356 companies made several
transactions in the form of inter-corporate investments, advances and loans within and
among them only.
One such company which was founded with a paid-up capital of Rs. 5 lakh, had made an
investment of Rs. 90.25 crore, and received unsecured loans of Rs. 600 crore. Amazing!!

The cash raised in such a manner was used to purchase several thousands acres of land, across
Andhra Pradesh, to relish the slice of the ever flourishing realty market.
4. The Modus Operandi of Accounting Fraud: Satyam’s top management simply cooked
the company’s books by overstating its revenues, profit margins, and profits for
everysingle quarter over aperiod of 5-years, from 2003 to 2008. False and fabricated
invoices were generated for inflating sales and the amounts shown as receivables in
the books of accounts, thereby inflating the revenues of the company.
Fabricated accounts of Satyam Computers

5. Riding a Tiger: Raju was forced to admit his fraud following an failed attempt to have
Satyam invest $1.6 billion in Maytas Properties and Maytas Infrastructure (“Maytas” is
Satyam spelled backwards)—two firms promoted and controlled by his family members.
Notwithstanding Raju’s confession, the Satyam episode has brought into sharp relief the role and
efficacy of independent directors. SEBI requires all the Indian publicly held companies to ensure
that independent directors make up at least half their board strength.
The market response
The Satyam scam was a jolt to the market, especially to the stockholders of Satyam. Companies
were forced to pare their technology budgets dur to the Rs7,136 crore accounting scandal at
Satyam Computer Services Ltd. The scandal casted a cloud over corporate governance standards
in India but still the damage was limited to Satyam Computers.
Indian companies faced higher levels of scrutiny and audits and the verification processes.
Although the Indian IT companies relied on their strong value proposition which ensured
continued work flow to India.
After the Scandal the shares of Satyam suffered a huge setback and the price declines to less than
Rs 50 per share.
Such accounting frauds are in connivance with auditors and chartered accountants. The role of
the external third party auditors, who were tasked to ensure that no financial bungling is
undertaken to carry out promoters’ interest or hide facts, have also been brought to question
because of such scams.
Conclusion
Ethical behavior for any organization is a set of those practices & processes by which the
operations of a company are directed and controlled. It involves balancing the interests of the
stakeholders like shareholders, customers, employees, suppliers, financiers, governments and the
community. Ethics strengthens and safeguards our culture of business integrity and responsible
business practices. Unethical practices followed by organizations often leads to downfall of the
business. The image of the brands in the minds of people suffers a setback.

References
1. Dr.Vijayalakshmi kanteti (2015),‘Saga of “noodle doodles”- an analysis of do’s and
don’ts during crisis communication with reference to nestle India’s Maggi’, Vol. 2,
Issue.11, International Journal of Business and Administration Research Review, ISSN
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2. Dhillon Jaskaran Singh, (2015), ‘Whats’ at stake: The Maggi Noodles Story’, Volume 4,
No. 10, International Journal of Management and Social Sciences Research (IJMSSR),
ISSN: 2319-4421.
3. Rita, Anupreet Kaur, Kanupriya (2010), ‘The Impact of Controversy of “Nestles’ Maggi
on Consumers and the Company’, Orbit-Biz-Dictum, Volume 1, Issue 1, pp 56-71
4. Maniyal J Nitin. et al (2015), ‘Impact of Maggi Nudles on the Youth’, PEZZOTTAITE
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1811-1814
5. Dunfee John W. (2010), ‘Satyam: Brotherly Demise The Rise And Fall Of Ramalinga
Raju, The George Washington University, pp 1-7
6. Bhasin Madan (2013), ‘Corporate Accounting Scandal At Satyam: A Case Study Of
India’s Enron’ , European Journal of Business and Social Sciences, Vol. 1, No. 12, ISSN:
2235 -767X, pp 25-47.
7. https://www.researchgate.net/publication/305210546_Unethical_Creative_Accounting_C
ulture_at_Satyam_Computers_Limited_A_Case_Study_of_India's_Enron
8. Indianexpress.com › Explained
9. Bombay Stock Exchange;
10. Security and Exchange Board of India, available at www.sebi.gov.in)
11. economictimes.indiatimes.com
12. Mookerji, Nivedita & Pinto , Viveat Susan. (2015, 5th June ) . Now, food safety regulator
turns to Kellogg and Heinz. Business Standard.
13. http://wap.business-standard.com/article/companies/now-food-safety-regulator-turns-to-
kellogg-andheinz-115060500020_1.html [2]

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