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Ch- 2

Corporate Governance
Theories and Models

1. Agency Theory
Agency theory suggests that the firm can be viewed as a nexus of contracts (loosely
defined) between resource holders. An agency relationship arises whenever one or more
individuals, called principals, hire one or more other individuals, called agents, to
perform some service and then delegate decision-making authority to the agents
The separation of ownership and control

These relationships are not necessarily harmonious; indeed, agency theory is

concerned with so-called agency conflicts, or conflicts of interest between
agents and principals


Self-interested behaviour
A corporation's managers may have personal goals that compete with the owner's
goal of maximization of shareholder wealth. Since the shareholders authorize
managers to administer the firm's assets, a potential conflict of interest exists
between the two groups.
Agents have the ability to operate in their own self-interest rather than in the best
interests of the firm because of asymmetric information (e.g., managers know
better than shareholders whether they are capable of meeting the shareholders'
objectives) and uncertainty (e.g., myriad factors contribute to final outcomes, and it
may not be evident whether the agent directly caused a given outcome, positive or
Evidence of self-interested managerial behavior includes the consumption of some
corporate resources in the form of perquisites and the avoidance of optimal risk
positions, whereby risk-averse managers bypass profitable opportunities in which
the firm's shareholders would prefer they invest.

In the majority of large publicly traded corporations, agency conflicts are

potentially quite significant because the firm's managers generally own only a
small percentage of the common stock. Therefore, shareholder wealth
maximization could be subordinated to an assortment of other managerial
goals. For instance, managers may have a fundamental objective of
maximizing the size of the firm. By creating a large, rapidly growing firm,
executives increase their own status, create more opportunities for lower- and
middle-level managers and salaries, and enhance their job security because
an unfriendly takeover is less likely. As a result, incumbent management may
pursue diversification at the expense of the shareholders who can easily
diversify their individual portfolios simply by buying shares in other

Costs of share-holders
management conflict

When agency occurs it also tends to give rise to agency costs, which are expenses incurred in
order to sustain an effective agency relationship.
Agency costs - Agency costs are defined as those costs borne by shareholders to encourage
managers to maximize shareholder wealth rather than behave in their own self-interests
There are three major types of agency costs:
expenditures to monitor managerial activities, such as audit costs;
expenditures to structure the organization in a way that will limit undesirable managerial behavior,
such as appointing outside members to the board of directors or restructuring the company's business
units and management hierarchy;
Opportunity costs which are incurred when shareholder-imposed restrictions, such as requirements for
shareholder votes on specific issues, limit the ability of managers to take actions that advance
shareholder wealth.

In the absence of efforts by shareholders to alter managerial behavior, there will

typically be some loss of shareholder wealth due to inappropriate managerial actions.
On the other hand, agency costs would be excessive if shareholders attempted to
ensure that every managerial action conformed with shareholder interests. Therefore,
the optimal amount of agency costs to be borne by shareholders is determined in a
cost-benefit contextagency costs should be increased as long as each incremental
dollar spent results in at least a dollar increase in shareholder wealth.

Mechanism for dealing with

At one extreme, the firm's managers are compensated entirely on the basis of stock

price changes. In this case, agency costs will be low because managers have great
incentives to maximize shareholder wealth. It would be extremely difficult, however,
to hire talented managers under these contractual terms because the firm's
earnings would be affected by economic events that are not under managerial
control. At the other extreme, stockholders could monitor every managerial action,
but this would be extremely costly and inefficient. The optimal solution lies between
the extremes, where executive compensation is tied to performance, but some
monitoring is also undertaken.
An effectively structured board
Compensation contracts that encourage a shareholder orientation (Performance-based
incentive plans)
Concentrated ownership for Close monitoring & Direct intervention by shareholders,
The threat of firing

Agency theory thus advocates the managers have their self-interest &
should be controlled & closely monitored to avoid agency loss

2. The Stewardship Theory

Stewardship theory defines situations in which managers are not motivated by
individual goals, but rather are stewards whose motives are aligned with
objectives of their principals.
Given a choice between self-serving behaviour and pro- organizational
behaviour, a stewards behaviour will not depart from the interest of his/her
Because the steward perceives greater utility in cooperative behaviour and
behaves accordingly, his or her behaviour can be considered rational.
A steward protects & maximizes shareholders wealth through firms
performance, because by doing so, the stewards utility function is maximized.

The steward realises the trade-off between his personal & organizational objectives. &
belevies that by working towards organizational & collective ends, these personal
needs are met. Managers are viewed as loyal to the company and interested in
achieving high performance. The dominant motive, which directs managers to
accomplish their job, is their desire to perform excellently. Specifically, managers are
conceived as being motivated by a need to achieve, to gain intrinsic satisfaction
through successfully performing inherently challenging work, to exercise responsibility
and authority, and thereby to gain recognition from peers and bosses. Therefore, there
are non-financial motivators for managers.
If the executives motivations fit the model of man underlying stewardship theory,
empowering governance structures are appropriate. He or she can be trusted. In this
case the so called agency costs are diminished
So, why isnt there always a steward relationship, rather than an agency relationship?
The answer lies in the risks that principals are willing to assume. Within the
governance contract, owners must decide how much risk they are willing to assume
with their wealth. Implementing stewardship governance mechanisms for an agent
would be analogous to turning the hen house over to the fox

Agency v/s stewardship theory

Principal- Manager choice model

3.Stakeholders theory
Definition of Stakeholders those of group without whose support the organization
will cease to exist.
Stakeholder theory stresses that the firm is a system of stakeholders operating within
a larger system of the host society that provides the necessary legal & market
infrastructure for the firms activities
The purpose of the firm is to create wealth or value for its stakeholders
Corporations should not be regarded as bundle of assets that belong to shareholders
but rather as institutional arrangements for governing the relationships between all
of the parties that contribute firm-specific assets. This includes not only
shareholders, but also long-term employees who develop specialized skills of value to
the corporation & suppliers, customers & others who make specialized investments.
This approach to corporate governance strongly suggests that corporations are run
by loosely defined groups of people, each seeking something different from the

Stakeholders have different goals and seek different benefits from the firm. Workers seek job
security, the government wants its tax payments, investors want dividends, and the
community wants a solid economic base. The stakeholder theory holds that these different
interests do, in fact, control the firm in their own specific ways, and none has any better right
to have its voice heard than any other.
It mandates that a well organized firm will take all stakeholder groups into account in
formulating basic policies.
Stakeholder theory is a highly democratic and participatory concept of corporate governance.
Under this model, the firm is not merely a profit-making machine for elite investors and major
executives. Thousands of lives are potentially connected to and dependent upon the proper
workings of the firm.
Problems : The groups mentioned as possible or actual stakeholders are so varied and wide
that it is practically impossible that they speak with a common voice, let alone actually serve
in an oversight capacity. The stakeholder theory might be successful in identifying those who
have a vested interest in the firm, but whether these stakeholders can actually run; a firm is a
very different matter.

Be & cg
Topic 4 Cadbury committee report

Cadbury committee report on cg

The 'Cadbury Committee' was set up in May 1991 with a view to overcome the
huge problems of scams and failures occurring in the corporate sector worldwide
in the late 1980s and the early 1990s.
It was formed by the Financial Reporting Council, the London Stock of Exchange
and the accountancy profession, with the main aim of addressing the financial
aspects of Corporate Governance.
uplift the low level of confidence both in financial reporting and in the ability of auditors to
provide the safeguards which the users of company's reports sought and expected;
review the structure, rights and roles of board of directors, shareholders and auditors by
making them more effective and accountable;
address various aspects of accountancy profession and make appropriate
recommendations, wherever necessary;
raise the standard of corporate governance;

Cadbury committee report

The report was mainly divided into three parts: Reviewing the structure and responsibilities of Boards
of Directors and recommending a Code of Best Practice
Considering the role of Auditors and addressing a
number of recommendations to the Accountancy
Dealing with the Rights and Responsibilities of

i. Code of Best Practice

The boards of all listed companies should comply with
the Code of Best Practice.
All listed companies should make a statement about
their compliance with the Code in their report and
accounts as well as give reasons for any areas of noncompliance.
The Code of Best Practice is segregated into four
Board of Directors
Non-Executive Directors
Executive Directors

1. Board of Directors
The board should meet regularly, retain full and effective control over the
company and monitor the executive management.
There should be a clearly accepted division of responsibilities at the head
of a company, which will ensure a balance of power and authority, such
that no one individual has unfettered powers of decision.
Ideally the role of chairman & chief executive should be separated, if not,
it is essential that there should be a strong and independent element on
the board, with a recognized senior member.
Besides, all directors should have access to the advice and services of
the company secretary, who is responsible to the Board for ensuring that
board procedures are followed and that applicable rules and regulations
are complied with.

2. Non-Executive Directors
The non-executive directors should bring an
independent judgment to bear on issues of strategy,
performance, resources, including key appointments,
and standards of conduct.
The majority of non-executive directors should be
independent of management and free from any
business or other relationship which could materially
interfere with the exercise of their independent
judgment, apart from their fees and shareholding.
Non-executive directors should be appointed by a
formal process. Appointments should be for specified

3. Executive Directors
Directors service contract should not exceed 3 year
without shareholders approval
There should be full and clear disclosure of directors
total emoluments and those of the chairman and
highest-paid directors, including pension contributions
and stock options, in the company's annual report,
including separate figures for salary and performancerelated pay.

4. Financial Reporting
and Controls
It is the duty of the board to present a balanced and
understandable assessment of their companys
position, in reporting of financial statements, for
providing true and fair picture of financial reporting.
The directors should report that the business is a going
concern, with supporting assumptions or qualifications
as necessary.
The board should ensure that an objective and
professional relationship is maintained with the

Ii role of Auditors
The annual audit is one of the cornerstones of corporate governance. It provides an
external and objective check on the way in which the financial statements have been
prepared and presented by the directors of the company.
The Cadbury Committee recommended that a professional and objective relationship
between the board of directors and auditors should be maintained, so as to provide to all
a true and fair view of company's financial statements.
Auditors' role is to design audit in such a manner so that it provide a reasonable
assurance that the financial statements are free of material misstatements
Further, there is a need to develop more effective accounting standards, which provide
important reference points against which auditors exercise their professional judgement.
Every listed company should form an audit committee which gives the auditors direct
access to the non-executive members of the board.
The Committee further recommended for a regular rotation of audit partners to prevent
unhealthy relationship between auditors and the management.
It also recommended for disclosure of payments to the auditors for non-audit services to
the company.
The Accountancy Profession, in conjunction with representatives of preparers of accounts,
should take the lead in:- (i) developing a set of criteria for assessing effectiveness; (ii)
developing guidance for companies on the form in which directors should report; and (iii)
developing guidance for auditors on relevant audit procedures and the form in which
auditors should report. However, it should continue to improve its standards and

III Rights and Responsibilities

of Shareholders
The shareholders, as owners of the company, elect the
directors to run the business on their behalf and hold them
accountable for its progress.
They appoint the auditors to provide an external check on
the directors financial statements.
The Committee's report places particular emphasis on the
need for fair and accurate reporting of a company's progress
to its shareholders, which is the responsibility of the board.
It is encouraged that the institutional investors/shareholders
to make greater use of their voting rights and take positive
interest in the board functioning.
Both shareholders and boards of directors should consider
how the effectiveness of general meetings could be
increased as well as how to strengthen the accountability of
boards of directors to shareholders.

Be & cg
Topic 5 Sarbanes Oxley Act (2002)

Sarbanes Oxley Act (2002)

The Sarbanes Oxley Act was enacted in the year 2002 with a view to protect
investors by improving the accuracy and reliability of corporate disclosures made
pursuant to the securities laws and for other purposes.
Some of the main provisions of the Act are:1. The Act called for establishment of the Public Company Accounting Oversight
Board, whose duties are to: register and regulate all public accounting firms that prepare audit reports;
establish or adopt, or both, by rule, auditing, quality control, ethics,
independence, and other standards relating to the preparation of audit reports;
conduct inspections of registered public accounting firms;
conduct investigations and disciplinary proceedings concerning, registered
public accounting firms and associated persons of such firms;
perform such other duties or functions to promote high professional standards
among, and improve the quality of audit services offered by, registered public
accounting firms and associated persons in order to protect investors, or to
further the public interest;
enforce compliance with professional standards, and the securities laws relating
to the preparation and issuance of audit reports and the obligations and

Sarbanes Oxley Act (2002)

2. It prohibits any public accounting firm from providing non-audit services while
auditing firm. These services include: bookkeeping or other services related to the accounting records or financial
statements of the audit client;
financial information systems design and implementation;
appraisal or valuation services, fairness opinions, or contribution-in-kind reports;
actuarial services;
internal audit outsourcing services;
management functions or human resources;
broker or dealer, investment adviser, or investment banking services;
legal services and expert services unrelated to the audit; and
any other service that the Board determines, by regulation, is impermissible.

Sarbanes Oxley Act (2002)

3. The lead audit and reviewing partner must rotate off the audit
every 5 years.
4. The Act calls for the formation of an independent and competent
audit committee, which is directly responsible for the appointment,
compensation, and oversight of the work of any registered public
accounting firm and of auditor's activities.
5. Each registered public accounting firm that performs for any issuer
any audit shall timely report to the audit committee of the issuer:(i) all critical accounting policies and practices to be used;
(ii) all alternative treatments of financial information within generally
accepted accounting principles that have been discussed with
management officials of the issuer, ramifications of the use of such
alternative disclosures and treatments, and the treatment preferred
by the registered public accounting firm; and

Sarbanes Oxley Act (2002)

6. Each audit committee shall establish procedures for: (i) the receipt, retention and treatment of complaints received by the issuer regarding
accounting, internal accounting controls, or auditing matters; and
(ii) the confidential, anonymous submission by employees of the issuer of concerns regarding
questionable accounting or auditing matters.

7. The Act requires that the principal executive officer or officers and the principal
financial officer or officers, or persons performing similar functions, to certify that the
financial statements accurately and fairly represent the financial condition and results
of operations of the company, in each annual or quarterly report filed or submitted.
8. The Act requires rapid disclosure of material changes in the financial conditions or
operations of the firm, which may include trend and qualitative information and
graphic presentations, as necessary or useful for the protection of investors and in
the public interest.

Sarbanes Oxley Act (2002)

9. It prohibits loans to any of the firms directors or
10. It requires that each annual report contain an internal
control report.
This report shall state
the responsibility of management for establishing and implementing
adequate procedures for financial reporting,
as well as contain an assessment of effectiveness of internal control
structure and procedures,
any code of ethics and contents of that code.

Be & cg
Topic 6 Legal & ORGANIZATIONAL Framework FOR
c.g. & committee reports

Legal framework
An effective regulatory and legal framework is indispensable for the
proper and sustained growth of the company.
The important legislations for regulating the entire corporate
structure and for dealing with various aspects of governance in
companies are Companies Act, 1956 and Companies Bill, 2004.
These laws have been introduced and amended, from time to time,
to bring more transparency and accountability in the provisions of
corporate governance.
Secondly, the Securities Contracts (Regulation) Act, 1956, Securities
and Exchange Board of India Act, 1992 and Depositories Act, 1996
have been introduced by SEBI

The companies Act, 1956

The Companies Act, 1956 is the central legislation in India that
empowers the Central Government to regulate the formation, financing,
functioning and winding up of companies.
It applies to whole of India and to all types of companies, whether
registered under this Act or an earlier Act.
It provides for the powers and responsibilities of the directors and
managers, raising of capital, holding of company meetings,
maintenance and audit of company accounts, powers of inspection, etc.
It empowers the Central Government to inspect the books of accounts
of a company, to direct special audit, to order investigation into the
affairs of a company and to launch prosecution for violation of the Act.

The companies Act, 1956

The main objectives with which this Act has been introduced are to: (i) help in the development of companies on healthy lines;
(ii) maintain a minimum standard of good behaviour and business
honesty in company promotion and management;
(iii) protect the interests of the shareholders as well as the creditors;
(iv) ensure fair and true disclosure of the affairs of companies in their
annual published balance sheet and profit and loss accounts;
(v) ensure proper standard of accounting and auditing;
(vi) provide fair remuneration to management and Board of Directors
as well as to company's employees; etc.

The companies Act, 1956

Some important provisions are:
Every company shall in each year, hold in addition to
any other meetings, a general meeting as its annual
general meeting and shall specify the meeting as such
in the notices calling it;
Not more than fifteen months shall elapse between the
date of one annual general meeting of a company and
that of the next.
At each annual general meeting, every company shall
appoint an auditor or auditors to hold office from the

The companies Act, 1956

Some important provisions are:
Every auditor of a company shall have a right of access at all times to the
books and accounts and vouchers of the company, whether kept at the head
office of the company or elsewhere,
Auditor shall be entitled to require from the officers of the company such
information and explanations as the auditor may think necessary for the
performance of his duties as auditor.
The auditor shall inquire: (i) whether loans and advances made by the company on the basis of security have
been properly secured and whether the terms on which they have been made are not
prejudicial to the interests of the company or its members;
(ii) whether transactions of the company which are represented merely by book
entries are not prejudicial to the interests of the company; etc.

The companies Act,

Some important provisions are:
In the case of every company, a meeting of its Board of directors shall be held
at least once in every three months and at least four such meetings shall be
held in every year.
Every public company having paid-up capital of not less than five crores of
rupees shall constitute a committee of the Board knows as 'Audit Committee
'Audit Committee' which shall consist of not less than three directors and such
number of other directors as the Board may determine of which two thirds of
the total number of members shall be directors, other than managing or
whole-time directors.
The Audit Committee should have discussions with the auditors periodically
about internal control systems, the scope of audit including the observations of
the auditors and review the half-yearly and annual financial statements before
submission to the Board and also ensure compliance of internal control
The recommendations of the Audit Committee on any matter relating to
financial management, including the audit report, shall be binding on the
Board. If the Board does not accept the recommendations of the Audit
Committee, it shall record the reasons thereof and communicate such reasons
to the shareholders.

Companies Bill, 2004

Mainly aimed at:(i) laying down the process of appointment and qualification of auditors,
(ii) prohibiting non-audit services by the auditors;
(iii)prescribing compulsory rotation, at least of the Audit Partner;
(iv)requiring certification of annual audited accounts by both CEO and CFO; etc.
(v)For reforming the boards, the bill included that remuneration of nonexecutive directors can be fixed only by shareholders and must be disclosed.
A limit on the amount which can be paid would also be laid down.
(vi) It is also envisaged that the directors should be imparted suitable training.

Sebi acts
Securities Contracts (Regulation) Act, 1956
Securities and Exchange Board of India Act, 1992
Depositories Act, 1996

The organizational framework for corporate governance initiatives in India consists of
the Ministry of of Corporate Affairs (MCA) and
the Securities and Exchange Board of India (SEBI).

The first formal regulatory framework for listed companies specifically for corporate
governance was established by the SEBI in February 2000, following the
recommendations of Kumarmangalam Birla Committee Report.
The Ministry of of Corporate Affairs had also appointed a Naresh Chandra Committee
on Corporate Audit and Governance in 2002 in order to examine various corporate
governance issues.
It had also set up a National Foundation for Corporate Governance (NFCG) in
association with the CII, ICAI and ICSI as a not-for-profit trust to provide a platform to
deliberate on issues relating to good corporate governance

Kumar manglam birla committee

SEBI formed this committee in 1999 to promote & raise the standard of corporate
governance in listed companies in India
Mr. Kumar Mangalam Birla headed this committee
The report consisted of some mandatory & non-mandatory recommendations
The committees report discusses corporate governance under the following main

Board of Directors
Audit committee
Remuneration of Directors
Board procedures
Report on Corporate Governance

Kumar manglam birla committee

Board of Directors
Not less than 50% of the board would comprise non-executive
The no. of independent directors will depend upon whether the
chairman is executive or non-executive
Incase of non-executive, at least 1/3 rd of the board should comprise of
independent directors
Incase of executive, atleast one half of the board should comprise of
independent directors
All pecuniary relationships or transactions of non-executive directors
with the company should be disclosed in the annual report

Kumar manglam birla committee

Audit Committee
It will consist of minimum 3 non-executive directors & majority of
them will be independent.
The chairman of the committee shall be an independent director. He
will attend AGM to answer shareholders queries
The audit committee will meet at least thrice a year
Role of audit committee will include

Appointment/removal of external auditors

Oversight of financial reporting system
Review of financial statements
Discussion with internal auditors, etc

Kumar manglam birla committee

Remuneration of the Directors
In annual reports corporate governance section the
following disclosures on details of the directors
remuneration will be made:
Remuneration packages of all the directors
Fixed portion of the remuneration & performance linked
Service contracts, notice period & severance fees
Stock options, if any

Kumar manglam birla committee

Board Procedures
Board meeting will be held at least 4 times in a year
with a maximum gap of four months between ant 2
A director shall not be a member of more than 10 or act
as a chairman of more than 5 committees across all the
companies in which he is a director

Kumar manglam birla committee


A management Discussion & analysis report should form a part of the annual report to the
The report will include the following points, within limits set by companys competitive position

Industry structure & development

Opportunities & threats
Segment wise or product wise performance
Risks & concerns
Internal control systems & adequacy
Financial performance with respect to operational matters
Risks & concerns
Internal control system & adequacy
Financial performance with respect to operational matters
Material developments in human resource industrial relations front including number of persons employed

Kumar manglam
birla committee
Shareholders/investors grievance committee to be formed
Report on Corporate Governance
In annual report of the company a separate section on Corporate Governance.
Non compliance with any mandatory requirement will be highlighted there
Statutory Auditors shall give a compliance certificate regarding condition of
corporate governance
This certificate will be sent along with annual returns to the stock exchange

Kumar manglam birla committee

Non Mandatory Requirements
All companies should set up a remuneration committee
of Board of Directors
The half yearly declarations of financial performance
should be sent to each of the household of
To make corporate democracy real, shareholders who
are unable to attend general meetings should be able
to vote by postal ballot so far as key decisions are

Preeta Mam

Business Ethics
The standards of conduct and moral values governing actions and decisions in
the work environment.
Social responsibility.
Balance between whats right and whats profitable.
Often no clear-cut choices.
Often shaped by the organizations ethical climate.

Importance and Need for

Business Ethics :
A business organization competes in the global
market on its own internal strength, in
particular, on the strength of its human resource
and on the goodwill of its stakeholders.
The value-based management and ethics that an
organization uses in its governance enables it to
relationship with its external customers.
Real type situations (Tata Steel and Infosys)
show that use of ethical practices in business
creates high returns for companies.

Values are a general term referring to those things which people
regard as good, bad, right, wrong, desirable, justifiable et c
Values describe what is important in a persons life while ethics
and morals what is appropriate in or is not considered in ones
Values are potent source of conflict as well as of co-operation,
control and self-control.
Values are collective representations of what constitutes a good
Values are potent sources of conflict as well as of co-operation,
control and self-control. Through values, business can and does
create value in the form of goods, service, employment etc.
However in extreme cases business and whole industries can
cease to function because their continued existence is
inconsistent with certain powerful values.

Values are many types.
1. Cultural norms (represent the expectations of
employee, suppliers and the public)
2. Moral values-These are deep-seated ideas and
feelings that manifest themselves as behavior or
conduct. These values are not so easy to measure or
express in words.

TATA Steel
The five core Tata values are:

Norms are expectations of proper behavior, not
requirements for that behaviors. Each individual within
the society has a set of norms, belief and values that
together form his or her moral standard.
Norms are the ways an individual expects all people to
act, when faced with a given situation.
Eg: Asian students normally bend slightly while addressing
professors of the other university.
Lower level employees address the higher level employee as

The belief in an ethical code are standards of thought.
These are the ways that the senior executives in an
organisation want others to think. The intention is to
encourage ways of thinking and patterns of attitudes
that will pave way towards the wanted behaviour.It is
expressed in a positive form in an ethical code.

Moral standard, belief and their role

Law is a dynamic entity since the rules prevalent now will change after some
period. Several changes have already occurred regarding employment,
pollution etc. Consequently, the law governing these have changed.
Eg. Actions found legal 20 yrs ago such as racial and sexual discrimination in
hiring , discharge of chemical wastes into lakes, rivers etc. are now illegal.
All these changes in the law, is due to the changes in the moral standards of a
majority of the population trough social and political process.


Ethics is study of morality or morality is the subject matter which
investigates ethics.
Morality is the standards that an individual or a group has about
what is right and wrong or good or evil
Each individual within the society has a set of norms, beliefs and
values that together form his or her moral standard.
Moral standards include the norms ( expectation of proper
behavior, not requirements for that behavior) we have about the
kinds of actions we believe are morally right and wrong, as well as
the values we place on what we believe is morally good or morally
Eg: believed it was wrong to lie and to endanger the lives of others,
and believed also that integrity is good and dishonesty is bad.

Morality can be defined as the standards that an individual or a group has











How to distinguish moral standards from standards that are not moral?
Ethicists suggested five characteristics to identify moral standards.
Moral standards deal with matters which people think can seriously
injure or seriously benefit human beings.


Moral standards are not established or changed by political or legal

authoritative bodies. The validity of moral standards rests on the
adequacy of the reasons.


Moral standards are preferred to other standards including even selfinterest when choice is there.


Moral standards are impartial. They are based on impartial reasons that
an impartial observer would accept.


Moral standards are associated with special emotions. When people act
in violation of a moral standard, they feel guilty, ashamed and

Moral norms can usually be expressed as general rules

about our actions, such as :
Always tell the truth,
Its wrong to kill innocent people
Actions are right to the extent that they produce happiness.

Moral values can usually be expressed with

statements about objects or features of objects that
have worth, such as
Honesty is good,
Injustice is bad.


Six stages grouped into three levels

Level 1: Preconvention Morality

Orientation At this stage, the demands of authority
figures or the pleasant or painful consequences of an
act define right and wrong. The childs reason for
doing the right thing is to avoid punishment or defer
to the power of authorities. Theres little awareness
that others have needs and desires like ones own.
Orientation At this stage, right actions become those
through which the child satisfies his own needs. The
child is now aware that others have needs and desires
like he does and uses this knowledge to get what he
wants. The child behaves in the right way toward
others, so others later will do the same toward him.


Concordance Orientation
Good behavior at this early conventional
stage is living up to the expectations of
those for whom the person feels loyalty,
affection, and trust, such as family and
friends. Right action is conforming to
whats expected in ones role as a good
son, good daughter, good friend, and so
on. At this stage, the young person wants
to be liked and thought well of.

Stage Four: Law and Order Orientation Right and

wrong at this more mature conventional stage are
based on loyalty to ones nation or society. The laws and
norms of society should be followed so society will
continue to function well. The person can see other
people as parts of a larger social system that defines
individual roles and obligations, and he can distinguish
these obligations from what his personal relationships


At these next two stages, the person no longer simply
accepts the values and norms of her group. Instead, the
person tries to see right and wrong from an impartial point of
view. that takes everyones interests into account. The
person can question the laws and values of her society and
judge them in terms of moral principles that she believes can
be justified to any reasonable person. When an adult at this
stage is asked why something is right or wrong, the person
can respond in terms of whats fair for everyone or in terms
of justice, or human rights, or societys wellbeing.

Stage Five: Social Contract Orientation

At this first post conventional stage, the person
becomes aware that people have conflicting moral
views, but believes there are fair ways of reaching
consensus about them. The person believes that all
moral values and moral norms are relative and that,
apart from a democratic consensus, all moral views
should be tolerated.

Stage Six: Universal Moral Principles Orientation

At this second post conventional stage, right action
comes to be defined in terms of moral principles chosen
because of their reasonableness, universality, and
consistency. These are general moral principles that deal,
for example, with justice, social welfare, human rights,
respect for human dignity, or treating people as ends in
themselves. The person sees these principles as the
criteria for evaluating all socially accepted norms and