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SP JAIN INSTITUTE OF MANAGEMENT AND RESEARCH

Corporate Governance and Ethics in Business

Business Ethics Assignment -1

Group No 28
Abhaya Mishra - PGP-10-093 Mansi Mahajan - PGP-10-130 Md Nasrullah Khan - PGP-10-133 Niharika Goel - PGP-10-140 Rohan Rambhia - PGP-10-155 Sachit Mohan - PGP-10-158

Corporate Governance and Ethics in Business

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To set aside ones prejudices, ones present needs, and ones own self-interest in making a decision as a director for a company is an intellectual exercise that takes constant practice. In short, intellectual honesty is a journey and not a destination. - Mervyn King (Chairman: King Report)

Introduction:
The world is increasingly witnessing a surge in the prominence of corporations in the functioning of the society. Corporations have become powerful and dominant institutions and have reached every corner of the globe in different sizes, capabilities and influences. Even the erstwhile non-businesses such as hospitals, universities and social works have started to function in a corporate style with a defined management structure and commercial goals focusing on sustainability and innovation. The advent of management thinking, as Peter Drucker states, made possible a new society: A society of Organizations. Thus, effective functioning of organizations or corporate reflects conspicuously on the effective functioning of the society. With the emergence of globalization and its capitalistic benefits, corporate are increasingly becoming multi-national. As a result, there is a greater deterritorialization and less of government control, which results in a greater need of accountability. Thus, the way in which corporate are governed has assumed great importance, with the stakes of a societys economic and social confidence dependent on the good governance of its corporate.

Stakeholders:
Corporate governance, in a simple manner, can be defined as a set of processes, policies and laws for controlling and directing an organization. It constitutes a set of rules that govern the relationship between management, shareholders and the several stakeholders, which include the society at large. The goal of corporate governance is to protect and enhance the interests of its diverse stakeholder groups. It also aims to preserve the reputation of a company and its business against any fraudulent acts committed by its directors and officers. The following illustration depicts a firms interaction with different possible stakeholders. [1]

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Shareholders

Government

Customers

FIRM
Board of Directors Suppliers

Employees

Society at Large

Values and Principles:

Thus, to protect and enhance the interests of each of the above stakeholders is what good corporate governance stands for. The important characteristics of good corporate governance include qualities like: Honesty Trust Integrity Fairness Transparency Striving for excellence Responsibility and accountability Mutual respect Commitment to the organization

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To stand up to the above values, the principles of corporate governance that are commonly accepted are [2]:

Rights and fair relationship with Shareholders: Corporate should appreciate the rights
of the shareholders and in fact, help them to exercise their rights by effectively communicating information that is clear and easy to obtain. Coming out with effective strategy to protect the enhance the shareholders value Functions and Duties of the board: The board should be skilled enough to tackle various business issues and be able to handle, monitor and challenge the performance of management. The size of the board should also be appropriate and it must be committed to fulfil its obligations and responsibilities. Typically, an appropriate mix of executive and nonexecutive directors is maintained to have a balance of an assortment of perspectives. Ethics: The importance of ethics cannot be overstated. A corporation is a creation of the society as well, and unless it provides the society with its profits and fair deal, its foundation itself becomes dubious and eventually leads it to fail. The company must not rely on the ethics of individuals but have a comprehensive compliance to values and ethics kind of program to avoid the firm becoming vulnerable to step outside legal and ethical boundaries Transparency and Communication: All the stakeholders must be regularly updated on the progress made by the company towards the corporate goals and particularly in fulfilling the specific interests of the stakeholders being addressed. It also needs to delineate how the responsibilities of the board and the management are being achieved to provide shareholders with a sense of accountability. Measures should be taken to enable fairness and clarity in the firms financial reporting. Stakeholders: The corporate must recognize that they have legal and other obligations to all the stakeholders.

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Models of Corporate Governance:

Let us look at a couple of oft-spoken models of corporate governance to understand the concept better: 1. Anglo US Corporate Governance System: The typical structure of an Anglo-US corporate governance model is as illustrated below.

Board of Directors
The board is the source and focus of proper accountability of management to shareholders. A small group of some 12 members (U.S. average) who are are mandated with review and oversight and are accountable to shareholders.

Managers
Responsible for the companys daily operations and daily affairs. Provides and updates conditions and incentives for the companys performance. A small, powerful group with access to information and control of daily affairs of the company. But - they must report to board and shareholders.

Shareholders
Powerful (in theory) because they elect board and vote at AGMs. In order to exert influence, they should be: committed knowledgeable long-term. In practice, A diverse and relatively powerless group with one common goal - they want to see good financial performance. But - they control capital and can exercise oversight by selecting accountable board members.

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2. Japanese corporate governance system: The Japanese system consists of a large board of directors (of as many as 50 members). It usually contains only insiders to the company. When a company's financial performance is poor, majority shareholders send representatives to the company's board of directors.

Government

minority shareholders independent directors - A Keiretsu is a group of closely-related Japanese companies: They own each others shares and bonds, and give each other preferential treatment as business partners. Each keiretsu is formed around a large bank. Similar to the anglo-US model Banks have a variety of functions in japanese model, it acts as : Lender Depository Voting Agent

Keiretsu

Management

Bank

Thus, essentially effective corporate governance is about having a formidable team of directors, managers and shareholders charting out and implementing efficient processes and steps which are sensitive to the ever changing challenges of the business landscape and reaping socio-economic benefits to all the stakeholders concerned. [3]

Elements of good corporate governance:

Some elements of good corporate governance are: The construction of the board and its committees are under continuous appraisal to raise the bar. An atmosphere of trust and human interaction is a provided to encourage the teams to perform to their potential. The relevance of the business model is continually better understood and fully implemented by making relevant changes whenever and wherever required. Emerging risks are effectively managed through discussions and timely action plans. Performance of individuals is tracked and incentives and remuneration policies are crafted to motivate the employees. Strategies are crafted and properly put into operation through a team of executives. Succession planning is in place to take care of sustainability of the business and of the board. A triple-bottom-line approach planet to people and people to profit is adopted. Audits are carefully done and findings are implemented to create an atmosphere of appropriate checks and balances.

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Mergers and Acquisitions:

The role of Corporate Governance becomes even more critical in case of mergers. Some deliberations on the issue are [4]: Shareholder:
The most pressing concern for the shareholder is the impact of the merger on the valuation of the equity capitalThe board of directors must ensure a synchronized merger by minimizing conflicts of interest between the acquiring and the acquired co.

Employees:
One of the biggest challenges in a merger is to give a fair treatment to its employees in terms of safeguarding their position in the company and coming out with fair policies that prevent favouritism towards a particular company in the merger. The successful policies employed in the HP-Compaq merger are a pertinent case in point to employee fairness in times of acquisitions.

Social Responsibility:
The acquired co. may have undertaken certain corporate social responsibility programmes. In the event of any alteration in these programs, the decision should be properly and timely communicated so that misrepresentation or misunderstandings do not happen. Arcelor Mittal coming out with a detailed manual on high standards and best practices in community engagement is a good example in point.

What are Business Ethics?

In business ethics everything evolves about knowing what is right and wrong and choosing the right thing to do. The study and examination of moral and social responsibility in relation to business practice and decision making in business is known as Business Ethics. Simply stated business ethics are nothing but understanding of dos and donts of the business and to ensure that donts are not the part of action. Professional Ethics define the principle code of conduct in business. It defines a set of moral principles and values which sets the good or bad code of conduct. Business Ethics applies to all aspects of business conduct and is relevant to the conduct of individuals and business organizations as a whole. Not only when we cheat, steal, lie or bribe but also enacting corruption, or distorting an information etc is also considered unethical behaviour in business.

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HIgh standards of practice

Judicious behaviour

Reason of presence of Ethics

Evalutaing company vis-a -vis others

Professional Image and develpment

Model for respnosibilities

Diagram stating the reason as to why presence of ethics is justified

Responsibilities of a company:
If a company has to ensure to perform ethical practices it has to run its business activities in a responsible manner. Responsible behaviour in existing activities or innovative thinking which leads to change in business practice of company is essential towards maintaining ethical norms. Apart from this company should attempt on social welfare which includes giving chances to underprivileged persons like SC/STs and physically handicapped.

Responsibility towards Shareholders:

This is the vast group which should be taken care of while running a company. Following points are the most important measures of ensuring ethics towards Shareholders: Taking ample safe-guards: It is firms responsibility to ensure that shareholder feel secure after investing. It can be achieved by taking fare measures both financially and operationally. Transparency: It is required to disclose information and policies applied by firm. Decision making power: By taking measures such as voting or all investor-meeting, enable shareholders to participate in decision making. Example: Satyam neither took ample safeguards nor maintained transparencies which lead to loss of shareholders. It was considered as an unethical practice.

Responsibility towards Employees: Group which works for the company and lays the foundation of success is its employees and following measures can make it ethical while taking care of employees. Equitable Payment: It can be ensured by giving employees pay they deserve.

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Employee Satisfaction: By recognizing employees efforts and rewarding his/her efforts satisfaction can be established. It should promote and create avenues for welfare activities. Providing better work culture: It may incur cost but as a responsible company, it is responsibility of the company to provide better work conditions and fair work standards as per norms. Employee involvement: It is unethical for company not to give employee a chance to involve in decision making. It is employee who work and face the challenges hence setting up the grievance handling calls can help company to show its intent towards responsibility towards employees. Strengthening the employee: Preparing them for future and increase their skill-set is responsibility of the company. Hence regular training and awareness of work is what makes company more responsible towards its employee. Example: Most of the companies like Google, Microsoft etc are known for their responsibilities towards employee. These are the one of the most ethical companies towards employees.

Responsibility towards Consumers: It is the end consumer which buys the product and provides revenue and support to grow further. Providing value for money: It is ethical responsibility of the company to provide the products at reasonable prices which gives customer a value for money for firms products. Consistent satisfying customer requirement: As customer trust on company it is necessary to facilitate research and development to meet the customer requirements. Aware customer about the product: Company should provide sufficient and necessary information about the product to make customer aware and help him take decisions. Adequate service and distribution system: To provide adequate distribution system and pre-purchase and post purchase services to the customer to not only provide but also maintain services. Example: Nokia and HUL are the company well known for their ethics towards the consumers while TV advertisements now-a-days targeting children are considered to be unethical. Drug companies are always in purview of agencies as they have to ensure correct information.

Responsibility towards Community (Corporate Social Responsibility):

Company has to ensure that community in which it is working and resources of which it is utilizing should get equitable returns. In this purview corporate are exercising corporate social responsibility, known as CSR efforts. Some of them are as below:

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Preserving ecological balance: It is responsibility of corporate to maintain ecological balance in the society it works. It should work making it pollution free for not only human being but for every living creature. Preserve resources available: Corporate should use the resources with efficient system to ensure lesser wastage of resources. They should also work on developing alternative resources to prevent current resources as it is used extensively. Working towards a better society: There is a lot much scope especially in India where corporate can contribute towards improvement of standard of living of society. With help of R&D department they can work to make consistent innovations to improve it further. Social welfare efforts: Society needs a direct hand of corporate which should work as welfare activities. It can be in form of Teach India initiatives or supporting NGOs indirectly. These all are efforts to promote social welfare. Example: TATA is very well known for its innumerable initiatives towards society which carries its ethics flag. IBM with it smarter planet initiatives wants to increase its ethical vale.

Appendix:
1. 2. 3. 4. 5.

http://www.eurojournals.com/mefe_4_07.pdf http://en.wikipedia.org/wiki/Corporate_governance http://www.britannica.com/bps/additionalcontent/18/38215637/CORPORATEGOVERNANCE-MODELS http://www.attitudenaina.com/ http://nptel.iitm.ac.in/courses/IIT-MADRAS/Management_Science_I/Pdfs/2_1.pdf -Ethics