Corporate Governance & Business Ethics

Overview of Corporate Governance

Before we look at the definition of corporate governance, you need to understand the objective
behind having a corporate governance structure in an organization. The purpose of corporate
governance is to ensure effective management of an organization that will determine long-term
success of the company.

Corporate governance is a mechanism by which organizations are monitored, controlled and

directed. It is the board of directors that is responsible for the governance of the companies.
More importantly, a shareholder’s role is to appoint these directors and auditors and give them
the assurance that a definite corporate governance structure is in place.

In a governance structure, the board’s responsibilities are to set up the strategic goal of the
company, giving the organization the right leadership to steer the ship. Corporate governance is
therefore about what the board of a company does and how it sets the values of the company,
and it is to be distinguished from the day to day operational management of the company by
full-time executives.

Definition: Corporate governance is the system of rules, practices and processes by which a
company is directed and controlled. Corporate governance essentially involves balancing the
interests of a company's many stakeholders, such as shareholders, management, customers,
suppliers, financiers, government and the community.

Corporate Governance and Corporate Management

Prima-facie, corporate governance is all about protecting an organization while corporate
management is to grow it. Governance is all about the procedures and policies defined, to
ensure that the business operates within the law and delivers optimal benefit to all
stakeholders. Management is all about the tools and techniques that executives use to operate
the business and grow it.

Governance
Governance comes from the word “govern” which means to control the actions performed by a
group, so that it benefits everyone. In a business world, this is referred to as policies that direct
or stop people on how to act. For example – governance policies may prohibit board of
directors to offer contracts to companies that belong to family members of the board. An
accounting department will require two signatories on the cheque before it is issued to anyone.
Management
Management is defined as actions taken by executives to take the organization to a positive
direction. For example – management is all about defining budgets, directing staffs and making
strategic plans about new product development or sales and marketing. Once an organization
grows to a size which is not easily manageable by an individual (The Founder), then a
management team is put in place to effectively run the organization.

Corporate Governance Models

From the developed markets, there are three primary models of corporate governance that is
followed by enterprises across the world

Anglo-US Model
The characteristics of this model is determined by share ownership of individual and institutional
investors who are not affiliated with the corporation (known as outside shareholders or
outsiders).

The Anglo-US model is a well-defined legal framework that caters to the rights and
responsibilities of three key players
 Management
 Directors
 Shareholders

The model has a very simple and uncomplicated process of interaction between the
corporation and the shareholders, as well as among shareholders; either during the AGM of the
corporation or outside it.

The model governs companies located in the US, the UK, Australia, Canada, New Zealand and
few other countries.

Key Players

Players in Anglo US model includes management, directors, shareholders (particularly

institutional investors), government agencies, stock exchanges, self-regulatory organizations
and consulting firms, who advice and consult organizations on corporate governance.

Of all the players, the key are management, directors and shareholders which put together
form a “corporate governance triangle”

The Anglo-US model, developed within the context of the free market economy, assumes the
separation of ownership and control in most publicly-held corporations. This important legal
distinction serves a valuable business and social purpose: investors contribute capital and
maintain ownership in the enterprise, while generally avoiding legal liability for the acts of the
corporation.

The interests of shareholders are not always going to be in line with the management. There
are various ways to resolve this conflict and one way is where the board acts as “fiduciaries” for
shareholders’ interests.
Japanese Model
The primary characteristic of the Japanese model is defined by the high level of stock ownership
provided by affiliated banks and companies; a system that has strong linkage between banks and
corporations; a legal, public policy and industrial policy framework designed to support and
promote “keiretsu” (industrial groups linked by trading relationships as well as cross-
shareholdings of debt and equity).

Equity financing does play a vital role for Japanese corporations, but insiders and their affiliates
are the major shareholders in most Japanese businesses. These insiders play a crucial role in the
functioning of the corporation and the whole system.

Key Players
There are multiple faces to a Japanese governance model, but the nucleus of the model is a
bank and a financial/industrial network called keiretsu.

The main bank system and the keiretsu are two different, yet overlapping and complementary,
elements of the Japanese model.

The main bank is the major shareholder in the organization as it provides loans and other
financial services related to issuing of bonds, equity, settlement of accounts and other consulting
services.

Unlike the Japanese model, in the US one bank cannot hold a major stake and cannot provide an
array of services. It is usually done by multiple banks or financial institutions; commercial bank -
loans; investment bank - equity issues; specialized consulting firms - proxy voting and other
services.

To put it in a diagrammatic manner, the Japanese model is like an open hexagon as depicted
below

In Japanese model the four key players are

 Main Bank (a major inside shareholder)
 Affiliated company or a keiretsu (a major inside shareholder)
 Management
 Government
German Model
The German model is mainly followed among corporations in Germany and Austria. They are also
followed in companies in Netherlands and Scandinavia. Moreover, lately some companies in France
and Belgium have also incorporate this governance model.

Although there is some similarity of the German Model and the Japanese model, there is still a
significant difference between this and the Anglo US and Japanese Model.

Just like in Japan, banks in Germany hold a major share but for a longer duration. Moreover,
representatives of banks are elected to board of German corporations. Another differentiating factor
between Japan and Germany is that in Germany the appointment of bank representative to the
board is constant, but in Japan this is done only at the time of a financial distress.

The two key elements that distinguish the German model from other models are board composition
and shareholders’ rights.

First, the German model prescribes two boards with separate members. German corporations have
a two-tiered board structure consisting of a management board (composed entirely of insiders, that
is, executives of the corporation) and a supervisory board (composed of labor/employee
representatives and shareholder representatives). The two boards are completely distinct; no one
may serve simultaneously on a corporation’s management board and supervisory board. Second, the
size of the supervisory board is set by law and cannot be changed by shareholders.

Key Players

German banks, and to a lesser extent, corporate shareholders, are the key players in the German
corporate governance system. Similar to the Japanese system described above, banks usually play a
multi-faceted role as shareholder, lender, issuer of both equity and debt, depository (custodian
bank) and voting agent at AGMs. In 1990, the three largest German banks (Deutsche Bank AG,
Dresdner Bank AG and Commerzbank AG) held seats on the supervisory boards of 85 of the 100
largest German corporations.

In Germany one corporation or a company can be a shareholder of another corporation even if there
is no industrial or business affiliation between the two; and this can be held for a long duration.

The mandatory inclusion of labor/employee representatives on larger German supervisory boards

further distinguishes the German model from both the Anglo-US and Japanese models.
Corporate Governance in India
The Indian Companies Act 2013 inducted some progressive and transparent processes which are
beneficial to stakeholders, directors as well as management of companies. Investment advisory
services and proxy firms provide concise information to the shareholders about these newly
introduced processes and regulations, which aim to improve the corporate governance in India.

Some firms offer corporate advisory services to effectively management various activities of the
corporation and ensure growth and stability of the organization. They also ensure that the
reputation of the company is in-tact when it comes to customers and clients.

Corporate Governance in India was guided by Clause 49 of the Listing Agreement, before the
Companies Act 2013 was introduced into the system. As per the new provisions, SEBI has sanctioned
some of these amendments in the Listing Agreement to improve transparency in transactions of
companies listed in stock market. These amendments have been in effect from October 1, 2014

A Few New Provision for Directors and Shareholders

1 One or more women directors are recommended for certain classes of companies
2 Every company in India must have a resident directory
3 The maximum permissible directors cannot exceed 15 in a public limited company. If more
directors have to be appointed, it can be done only with approval of the shareholders after
passing a Special Resolution
4 The Independent Directors are a newly introduced concept under the Act. A code of conduct is
prescribed and so are other functions and duties
5 The Independent directors must attend at least one meeting a year
6 Every company must appoint an individual or firm as an auditor. The responsibility of the Audit
committee has increased
7 Filing and disclosures with the Registrar of Companies has increased
8 Top management recognizes the rights of the shareholders and ensures strong co-operation
between the company and the stakeholders
9 Every company has to make accurate disclosure of financial situations, performance, material
matter, ownership and governance

Additional Provisions

1 Related Party Transactions – A Related Party Transaction (RPT) is the transfer of resources or
facilities between a company and another specific party. The company devises policies which
must be disclosed on the website and in the annual report. All these transactions must be
approved by the shareholders by passing a Special Resolution as the Companies Act of 2013.
Promotors of the company cannot vote on a resolution for a related party transaction.
2 Changes in Clause 35B – The e-voting facility has to be provided to the shareholder for any
resolution is a legal binding for the company.
3 Corporate Social Responsibility – The company has the responsibility to promote social
development in order to return something that is beneficial for the society.
4 Whistle Blower Policy – This is a mandatory provision by SEBI which is a vigil mechanism to
report the wrong or unethical conduct of any director of the company.
Importance of Corporate Governance in India

Having a solid corporate governance structure indicates that the company is doing well and there is
a higher confidence amongst the shareholders, who are associated with the company. Active
directors influence the financial performance of the company by influencing share prices.

Corporate practices in India depict importance of functions like audit and finances which have moral,
ethical and legal implications for the business and its impact on the shareholders. The Indian
Companies Act of 2013 introduced innovative measures to appropriately balance legislative and
regulatory reforms for the growth of the enterprise and to increase foreign investment, keeping in
mind international practices.

These rules and regulations are checks to increase participation of shareholders in decision making
process and bring in more transparency in the overall corporate governance structure.

In India, corporate governance not only protects the management but also safeguards the interest of
shareholders

Corporate Governance - Board Structures and Styles

A typical corporate governance structure is shown in the diagram below

Shareholders

Board of
Directors

C Level
Team

Employees

Types of Directors

In a corporate governance structure, there are primarily three categories of directors

 Non-Executive Directors, but not independent

 Non-Executive Directors and Independent
 Executive Directors

The following diagram gives a brief about the directorial structure in a corporate governance
The other type of directors that are part of this structure are

 Nominee Directors
A nominee director is a director appointed to the board of a company to represent the
interests of his appointor on that board. He may be appointed by a shareholder, a creditor
or another stakeholder. This puts such a director on a collision course with the duties he
owes as a director to his company.
 Representative Directors
A representative director is a director with essentially the company's highest authority, with
the right to enter into business and legal contracts on behalf of the corporation.
 Alternate Directors
An alternate director is an individual who is appointed to attend a board meeting on behalf
of the director of a company where the principal director would be otherwise unable to
attend.
 Shadow Directors
A shadow director is a person in accordance with whose directions or instructions the
directors of a company are accustomed to act. Under this definition, it is possible that a
director, or the whole board, of a holding company, and the holding company itself, could be
treated as a shadow director of a subsidiary.
 Associate Directors
Associate directors and directors may work for the same business or organization, but they
have different responsibilities. Directors will be in charge of a division, region, or group of
campaigns, while associate directors will report to directors and have specific assignments
that may include supervising others. Below is a comparison of a specific type of associate
director and director, along with some important information about both
Types of Board Structure and styles

Composition and size of a board play a vital role in the effective functioning of the board. The
directors can be classified based on their association and relationship with the company. Depending
upon the combination of executive and non-executive directors present, the board can be classified
into four major categories

 All-Executive Board
 Majority Executive Board
This board structure comprises of most executive directors who are nominated by the
shareholders
 Majority Outside Board

 Two-Tier Supervisory Board

A corporate structure with two boards of directors. A management board oversees the
company and provides general direction, while a supervisory board must approve of major
business decisions. Half the supervisory board is elected by shareholders while the other half
represents employee interests.

Board Styles

Depending upon the functioning of the board, there are primarily four categories of board styles viz:

 Rubber Stamp
 Professional
 Representative
 Country Club
Roles and Responsibility of Board of Directors

There are numerous views about roles and responsibilities of Board of Directors. Even though some
are perceived, most of these views do share a common perception. To put it in a simplified way, the
board of directors is a group of individuals who are legally given the charge to control and govern
the organization. When we look at a for-profit organization, the board of directors is responsible to
the shareholders. In a non-profit organization, the board reports to the shareholders, especially the
local communities which is served the non-profit organization.

Some of the major roles and responsibilities of board of directors are:

1. Determine the Organization's Mission and Purpose
2. Select the Executive
3. Support the Executive and Review His or Her Performance
4. Ensure Effective Organizational Planning
5. Ensure Adequate Resources
6. Manage Resources Effectively
7. Determine and Monitor the Organization's Products, Services and Programs
8. Enhance the Organization's Public Image
9. Serve as a Court of Appeal
10. Assess Its Own Performance

Over and above the ten aforementioned roles and responsibilities, the board also has to perform
some duties which are listed below

1. Provide continuity for the organization by setting up a corporation or legal existence, and to
represent the organization's point of view through interpretation of its products and
services, and advocacy for them

2. Select and appoint a chief executive to whom responsibility for the administration of the
organization is delegated, including:

o to review and evaluate his/her performance regularly on the basis of a specific job
description, including executive relations with the board, leadership in the organization,
in product/service/program planning and implementation, and in management of the
organization and its personnel

o to offer administrative guidance and determine whether to retain or dismiss the

executive

3. Govern the organization by broad policies and objectives, formulated and agreed upon by
the chief executive and employees, including to assign priorities and ensure the
organization's capacity to carry out products/services/programs by continually reviewing its
work

4. Acquire sufficient resources for the organization's operations and to finance the
products/services/programs adequately
 5. Account to the stockholders (in the case of a for-profit) or public (in the case of a nonprofit)
for the products and services of the organization and expenditures of its funds, including:

o To provide for fiscal accountability, approve the budget, and formulate policies
related to contracts from public or private resources

o To accept responsibility for all conditions and policies attached to new, innovative,
or experimental products/services/programs.

Role of the Chairman

There is striking difference between the role of a Chairman and a CEO. The Chairman is the
torchbearer of the board and is responsible for creating conducive environment for members and
bring effectiveness to individual directors, both inside and outside the boardroom. It is also the
Chairman's role to ensure effective communication with the Association Members and to chair
General Meetings.

The Chairman is expected to be independent at the time of appointment and is expected to remain
independent throughout his tenure.

To promote and oversee the highest standards of corporate governance, within the Board and the
Company.

To lead the Board, and in particular, discussions on all proposals put forward by the executive team.

To set an agenda for the Board which is:

 focused on strategic matters;
 forward looking;
 evaluates and oversees current business.

To maintain a proper process to ensure compliance with Board policy on matters reserved to the
Board for consideration.

To ensure that Board members receive accurate, timely and clear information to enable them to
monitor performance, make sound decisions and give appropriate advice to promote the success of
the Company.

To manage Board meetings so that sufficient time is allowed for the discussion of complex or
contentious issues and that all members' contributions are encouraged and valued.

To chair, serve on or attend Committees of the Board.

To maintain an effective and balanced team, initiate change and, supported by the Nomination and
Governance Committee, plan non-executive director succession.

To encourage active engagement by all members of the Board.

To create the conditions for overall Board and individual director effectiveness including promotion
of an appropriate induction programme for new directors, creating the opportunity for maintenance
of the relevant skills and knowledge required to fulfil the director role on the Board and its
committees and ensuring the Board undertakes an annual evaluation of its own performance, that
of its committees and that of individual directors, including the Chairman.

To take the lead in identifying and meeting the development needs of individual directors and to
address the development needs of the Board as a whole with a view to enhancing its overall
effectiveness as a team.

To ensure effective communication with Association Members and ensure that members of the
Board develop an understanding of the views of Association Members.

To propose new candidates for Association Membership in conjunction with colleagues

To be a mentor to the Group CEO.

Role of a Group CEO

The Group CEO has full power to lead and manage the business.

The Group CEO proposes implements and reports on the strategic direction of the Group as well as
particular divisional and business strategies and initiatives.

The Group CEO annually brings forward to the Board both three year plans and annual operating
plans; once adopted they are responsible for their implementation and delivery and reports on
progress at frequent and regular intervals.

All members of the senior management team report directly to the Group CEO. They are responsible
for appraising the performance of each member of the team, encouraging their development and
further training, where necessary replacing them, recruiting replacements whether internally or
externally and formulating remuneration proposals for remuneration committee decision making.

The Group CEO, as does the Chairman, represents the Company with all external audiences both in
the UK and in relevant overseas territories. The Group CEO takes lead responsibility for the
maintenance and development of Bupa's reputation and relationships with the media, regulators,
governments, local communities, supplier, customer, trade bodies and other stakeholders.
Committees of the Board

A board committee is a small working group identified by the board, consisting of board members,
for the purpose of supporting the board’s work. Committees are generally formed to perform some
expertise work. Members of the committee are expected to have expertise in the specified field.
Committees are usually formed as a means of improving board effectiveness and efficiency, in areas
where more focused, specialized and technical discussions are required. However, the Board of
Directors are ultimately responsible for the acts of the committee. Board is responsible for defining
the committee role and structure

Here we will look at three committees which are part of governance structure and form the board.

1. Nomination and Remuneration Committee

This committee is expected to ensure among other things that remuneration arrangements support
the strategic goals of the business and more importantly to conduct performance evaluation of
every director.

2. Corporate Social Responsibility Committee

This would formulate the Corporate Social Responsibility policy of the company, recommend the
expenditure that can be incurred for this purpose and monitor such policy of the company from time
to time.

3. Stakeholders Relationship Committee

This committee helps in resolving grievances of the security holders of the company

4. Audit Committee
Audit Committee is one of the main pillars of the corporate governance mechanism in any company.
Charged with the principal oversight of financial reporting and disclosure, the Audit Committee aims
to enhance the confidence in the integrity of the company’s financial reporting, the internal control
processes and procedures and the risk management systems

Composition of the Audit Committee

The Audit Committee shall consist of a minimum of three directors with independent directors
forming a majority. The majority of members of Audit Committee including its Chairperson shall be
persons with ability to read and understand the financial statement.

Functions of the Committee

Section 177(4) of the Act provides that every Audit Committee shall act in accordance with the terms
of reference specified in writing by the Board. Terms of reference as prescribed by the board shall
inter alia, include, –
 The recommendation for appointment, remuneration and terms of appointment of auditors
of the company;
 Review and monitor the auditor’s independence and performance, and effectiveness of
audit process;
 Examination of the financial statement and the auditors’ report thereon;
 Approval or any subsequent modification of transactions of the company with related
parties;
 Scrutiny of inter-corporate loans and investments;
 Valuation of undertakings or assets of the company, wherever it is necessary;
 Evaluation of internal financial controls and risk management systems;
 Monitoring the end use of funds raised through public offers and related matters.
Role of the Audit committee includes:
1. Oversight of the company’s financial reporting process and the disclosure of its financial
information to ensure that the financial statement is correct, sufficient and credible;
2. Recommendation for appointment, remuneration and terms of appointment of auditors of
the company;
3. Approval of payment to statutory auditors for any other services rendered by the statutory
auditors;
4. Reviewing, with the management, the annual financial statements and auditor’s report
thereon before submission to the board for approval, with particular reference to:
o matters required to be included in the Director’s Responsibility Statement to be
included in the Board’s report in terms of clause (c) of sub-section 3 of section 134
of the Companies Act, 2013
o changes, if any, in accounting policies and practices and reasons for the same
o major accounting entries involving estimates based on the exercise of judgment by
management
o significant adjustments made in the financial statements arising out of audit findings
o compliance with listing and other legal requirements relating to financial statements
o disclosure of any related party transactions
o qualifications in the draft audit report
5. Reviewing, with the management, the quarterly financial statements before submission to
the board for approval;
6. Reviewing, with the management, the statement of uses / application of funds raised
through an issue (public issue, rights issue, preferential issue, etc.), the statement of funds
utilized for purposes other than those stated in the offer document / prospectus / notice
and the report submitted by the monitoring agency monitoring the utilisation of proceeds of
a public or rights issue, and making appropriate recommendations to the Board to take up
steps in this matter;
7. Review and monitor the auditor’s independence and performance, and effectiveness of
audit process;
8. Approval or any subsequent modification of transactions of the company with related
parties;
9. Scrutiny of inter-corporate loans and investments;
10. Valuation of undertakings or assets of the company, wherever it is necessary;
11. Evaluation of internal financial controls and risk management systems;
12. Reviewing, with the management, performance of statutory and internal auditors, adequacy
of the internal control systems;
13. Reviewing the adequacy of internal audit function, if any, including the structure of the
internal audit department, staffing and seniority of the official heading the department,
reporting structure coverage and frequency of internal audit;
14. Discussion with internal auditors of any significant findings and follow up there on;
15. Reviewing the findings of any internal investigations by the internal auditors into matters
where there is suspected fraud or irregularity or a failure of internal control systems of a
material nature and reporting the matter to the board;
16. Discussion with statutory auditors before the audit commences, about the nature and scope
of audit as well as post-audit discussion to ascertain any area of concern;
17. To look into the reasons for substantial defaults in the payment to the depositors, debenture
holders, shareholders (in case of non-payment of declared dividends) and creditors;
18. To review the functioning of the Whistle Blower mechanism;
19. Approval of appointment of CFO (i.e., the whole-time Finance Director or any other person
heading the finance function or discharging that function) after assessing the qualifications,
experience and background, etc. of the candidate;
20. Carrying out any other function as is mentioned in the terms of reference of the Audit
Committee.
Business Ethics
What are Business Ethics?
Business ethics are moral principles that guide the way a business behaves. The same principles that
determine an individual’s actions also apply to business.

Acting in an ethical way involves distinguishing between “right” and “wrong” and then making the
“right” choice. It is relatively easy to identify unethical business practices. For example, companies
should not use child labour. They should not unlawfully use copyrighted materials and processes.
They should not engage in bribery.

However, it is not always easy to create similar hard-and-fast definitions of good ethical practice. A
company must make a competitive return for its shareholders and treat its employees fairly. A
company also has wider responsibilities. It should minimise any harm to the environment and work
in ways that do not damage the communities in which it operates. This is known as corporate social
responsibility.

Characteristics of an Ethical Business

Though it sounds noble, it involves lot of commitment to strive to be ethical in business. Most
businesses are financially driven, and it is possible to be both ethical and successful. But there is a
fine line between making choices for financial gain and making choices that will not adversely affect
others. The ethical business knows the difference. Some of the traits of an ethical business are

 Leadership
The culture of an ethical business is defined starting from the very top of the organizational
chart. For a business to be ethical, its leaders must demonstrate ethical practices in any
situation. The true test of this leadership is in the decision-making process when there is a
choice between what is ethically responsible and what will result in profit or gain.
 Values
An ethical business has a core value statement that describes its mission. Any business can
create a value statement, but an ethical business lives by it. It communicates this mission to
every employee within the structure and ensures that it is followed.
 Integrity
Integrity is an all-encompassing characteristic of an ethical business. The ethical business
adheres to laws and regulations at the local, state and federal levels. It treats its employees
fairly, communicating with them honestly and openly.
 Respect
Ethics and respect go hand in hand. An ethical business demonstrates respect for its
employees by valuing opinions and treating each employee as an equal. The business shows
respect for its customers by listening to feedback and assessing needs. An ethical business
respects its vendors, paying on time and utilizing fair buying practices
 Loyalty
Solid relationships are a cornerstone of an ethical business. Loyal relationships are mutually
beneficial and both parties reap benefits. Employees who work for a loyal employer want to
maintain the relationship and will work harder toward that end. Vendors and customers will
remain loyal to a business that is reliable and dependable in all situations
  Concern
An ethical business has concern for anyone and anything impacted by the business. This
includes customers, employees, vendors and the public. Every decision made by the
business is based on the effect it may have on any one of these groups of people, or the
environment surrounding it.

Management of Ethics
It is very important to learn how to manage issues that are related to governance and ethics in an
organization. This can be done by understanding various aspects like conflicts of interest, codes of
conduct and regulatory compliance.

The following table gives you an indication of how ethics benefits to an individual within an
organization and the organization as a whole

For Individuals For Organizations

 Understand the implications of ethics and
values for all stakeholders
 Learn the role in the management of ethics
and values
 Understand the different types of ethics
from personal to legal
 Learn to understand and manage conflicts of
interest
 Understand ethical decision making
 Learn the role of codes of conduct
 Create an organizational culture of
ethical integrity
 Integrate ethics and values in overall
organizational strategy
 Foster trust among stakeholders
 Introduce a framework for ethical
decision making
 Establish sound codes of conduct for the
organization

Ethics in practice
It has been observed that when businesses indulge in unethical practices, it not only captures the
crooks but also the good people who lead a very decent and exemplary life. According to Kenneth R.
Andrews, contributor in HBR, there are three aspects to problems with corporate ethics

 Development of the executive as a moral person;

 Influence of the corporation as a moral environment; and
 Actions needed to map a high road to economic and ethical performance, and to mount
guardrails to keep corporate wayfarers on track.
Ethics are tested in business almost every day and in a wide range of business activities. Some of the
common areas where ethics are tested in business are

 Advertising
 Personal Selling
 Suppliers
 Contracts
 Pricing

Let us study this with a simple example mentioned in the above list. For example, let us take the case
of suppliers.

A business cannot claim to be ethical firm if it ignores unethical practices by its suppliers – e.g.

 Use of child labour and forced labour

 Production in sweatshops
 Violation of the basic rights of workers
 Ignoring health, safety and environmental standards

An ethical business has to be concerned with the behaviour of all businesses that operate in the
supply chain – which includes

 Suppliers
 Contractors
 Distributors
 Sales agents

Pressure for businesses to act ethically

Businesses and industries increasingly find themselves facing external pressure to improve their
ethical track record. An interesting feature of the rise of consumer activism online has been
increased scrutiny of business activities. Pressure groups are a good example of this. Pressure groups
are external stakeholders they

 Tend to focus on activities & ethical practice of multinationals or industries with ethical
issues
 Combine direct and indirect action can damage the target business or industry

Direct consumer action is another way in which business ethics can be challenged. Consumers may
take action against:

 Businesses they consider to be unethical in some ways (e.g. animal furs)

 Business acting irresponsibly
 Businesses that use business practices they find unacceptable

Consumer action can also be positive – supporting businesses with a strong ethical stance & record.

Is ethical behaviour good or bad for business?

Surely acting ethically makes good business. However, there are two sides to every argument:
The advantages of ethical behaviour include:

 Higher revenues – demand from positive consumer support

 Improved brand and business awareness and recognition
 Better employee motivation and recruitment
 New sources of finance – e.g. from ethical investors

The disadvantages claimed for ethical business include:

 Higher costs – e.g. sourcing from Fairtrade suppliers rather than lowest price
 Higher overheads – e.g. training & communication of ethical policy
 A danger of building up false expectations

Code of ethics
Definition
A code of ethics is a guide of principles designed to help professionals conduct business honestly and
with integrity. A code of ethics document may outline the mission and values of the business or
organization, how professionals are supposed to approach problems, the ethical principles based on
the organization's core values and the standards to which the professional is held.

Every organization, be it a trade company or a business unit, has some of code of ethics and there
are prima facie, two types of code of ethics

Compliance based

For all businesses, laws regulate issues such as hiring and safety standards. Compliance-based codes
of ethics usually not only set out guidelines for conduct, but also lay out penalties for violations.

In some industries, including banking, specific laws govern business conduct. These industries tend
to formulate compliance-based codes of ethics to ensure that legalities are being followed.
Employees usually undergo formal training to learn the rules of conduct. Because noncompliance
can create legal issues for the company as a whole and individual workers within a firm may face
penalties for failing to follow guidelines.

To ensure that the aims and principles of the code of ethics are followed, some companies appoint
a compliance officer. This individual is tasked with keeping up to date on changes in regulation codes
and monitoring employee conduct to encourage conformity.

Value based

A value-based code of ethics deals with a company's core value system. It may discuss standards of
responsible conduct as they relate to the larger public good and the environment. Value-based
ethical codes may require a greater degree of self-regulation than compliance-based codes.
Some codes of conduct contain language that addresses both compliance and values. For example, a
grocery store chain might create a code of conduct that discusses the company's commitment to
strict adherence to health and safety regulations above financial gain. The chain might also include a
statement about refusing to contract with suppliers that feed hormones to livestock or raise animals
in inhumane living conditions.

Cost of ethics in corporate ethics evaluation.

When an organization decides to operate in an ethical way, there is an additional cost that it has to
incur, as compared to the counterparts who don’t follow ethical practices. For example, when an
organization does an audit as part of its ethical practice, it hires external auditors and pays a price to
them. Then there are costs associated with signing up ethical partners.

Transparency in business

Transparency is an important part of this process. Transparency means the business is open to
people seeing how it manages its relationships with suppliers. In turn, suppliers‖ practices also need
to be transparent. The alternative would be for an organization to ignore ethical behaviour.
However, this would rapidly lead to a decline in brand reputation and consumers could move to
purchasing from competing retailers behaving more ethically. Operating in the 'right way' is
therefore not just appropriate for ethical reasons, but is also a good business practice.
 Social Responsibility of Business
Social Responsibility
Social responsibility is the idea that businesses should balance profit-making activities with activities
that benefit society; it involves developing businesses with a positive relationship to the society in
which they operate.

Social responsibility means that individuals and companies have a duty to act in the best interests of
their environments and society as a whole. Social responsibility, as it applies to business, is known
as corporate social responsibility (CSR).

Additionally, some investors use a company's social responsibility, or lack thereof, as an investment
criterion. As such, a dedication to social responsibility can actually turn into profits, as the idea
inspires investors to invest and consumers to purchase goods and services from the company. Put
simply, social responsibility helps companies develop a good reputation

Social Responsibility in Practice

Social responsibility takes on different meanings within industries and companies. For example,
Starbucks Corporation and Ben & Jerry's Homemade Holdings Inc. have blended social responsibility
into the core of their operations. Both companies purchase Fair Trade Certified ingredients to
manufacture their products and actively support sustainable farming in the regions where they
source ingredients. Conversely, big-box retailer Target Corporation, also well known for its social
responsibility programs, has donated more than $1 billion in grants to the communities in which the
stores operate, including education grants, since 2010.

Social Responsibility Concerns

Not everyone believes that business should have a social conscience. Economist Milton
Friedman stated the "social responsibilities of business are notable for their analytical looseness and
lack of rigor." Friedman believed only individuals can have a sense of social responsibility.
Businesses, by their very nature, cannot. Some experts believe that social responsibility defies the
very point of being in business: profit above all else.
Role of Bhagvat Geeta In Business Ethics
The word ‘ethics’ comes from the Greek word ‘ethikos’. It refers to one’s moral character and the
way in which society expects people to behave in accordance with accepted principles. Business
ethics is the code of good conduct that a business adheres to in its daily dealings both with other
businesses and with customers.

Business ethics has become a major topic of discussion over the past few years, particularly with the
recent cases of business scandals and revelation of unethical practices followed by large
corporations. This has not been just limited to India, but across the globe.

There are perhaps hundreds of research chapters written on business ethics in the Indian context
and there is also an increasing number of literature on the Indian philosophy, business leadership
and management.

The Bhagavad-Gita (a part of Mahabharata) has also been explored and researched by many of the
above-mentioned scholars. However, hardly any chapters are found exclusively on business ethics
from the Bhagavad-Gita. Therefore, in this chapter, the author attempts to explore and incorporate
the ethical principles found in the Bhagavad-Gita to fill the literature gap in the wisdom literature in
the Indian business leadership context. The chapter outlines some of the ethical guidelines that
should be manifested in an Indian business leader such as being trustful and honest, with high level
of integrity. This chapter is likely to provide insights into Indian business ethics for Western business
leaders, enabling them to work more effectively with Indian leaders in India, Middle East, Southeast
Asia, Western Europe and North America where there are significant Indian population. It also has
some implications for leaders in the Indian context and employees who have to deal with ethical
dilemmas (dharma sankatam) in making their daily business decision (Muniapan 2014).