Strategic Management

N. Chandrasekaran, Vice
President Currently, Take Solutions Ltd

P.S. Ananthanarayanan, Visiting

faculty at Bharathidasan Institute of
Management (BIM), Trichy

Oxford University Press 2011

Chapter 9

Ethics, Social Responsibility,

and Corporate Governance

Oxford University Press 2011

Ethics, Social Responsibility, and

Corporate Governance
Personal leadership is the process of keeping
your vision and values before you and aligning
your life to be congruent with them.
Stephen Covey

Oxford University Press 2011

Learning Objectives
To

understand the importance of ethics and

values in a firm

To

analyse the concept of corporate social

responsibility and its relevance to strategic
management

To

comprehend corporate governance and its

relevance to a firm

Oxford University Press 2011

BUSINESS ETHICS

Business ethics refers to the application of ethical principles and

moral values while conducting business

All stakeholders, be they employees, equity investors, creditors,

or the local community, are aware of their rights and
responsibilities, and it is important to ensure that they are
protected by the system

Standards of all internal functions are reasonably maintained in a

controlled environment, and are managed through policy,
procedures, and punishments

Oxford University Press 2011

Ethical issues in human resource management

Human resources management
ethics is all about an egalitarian
workplace and the dignity of the
workforce

Fudging bills and expenses

Favouring
selective
employees due to personal
bias

Misrepresenting facts to
claim jobs and promotions

Management discriminating
against the workforce on
employment and growth

Intervening intentionally in
representation of concerns,
unjust and discriminatory
practice, and disrespect for
freedom and expression of
opinions

Misusing official position for

personal favours

Engaging in corrupt practices

Harassing colleagues sexually

Not adhering to the contract

of employment

Ethical issues in Finance

Intended false reporting, creative accounting, fudging and/ or

misrepresentation of facts, earnings mismanagement, and
misleading financial analysis

Insider trading, securities fraud, and foreign exchange scams

Criminal activities such as bribery, kickbacks, and facilitating

payments for favors towards funding of projects, sanctioning
of loans, and soliciting equity comprise

Unfair executive compensation to top management either

directly or indirectly
Oxford University Press 2011

Contd

Enron, an energy company, was filed with the SEC as an

investment bank and received $1 billion in subsidized loans
from US government. It fleeced consumers by manipulating
the prices of electricity and gas. It even fleeced the investors
and its own staff

On 7 January 2009,B. Ramalinga Raju, founder chairman of

Satyam Computer Services, disclosed that he was compelled
to fudge the accounts to show high returns to boost investor
confidence. The disclosure pushed the fourth largest Indian IT
company into a crisis, exposing it to acquisitions and leaving
the future of 53,000 employees in balance.

Oxford University Press 2011

Ethical issues in Sales and Marketing

Anti-competitive practices including pricing

manipulation of loyalty and supply chains

tactics

and

Specific marketing strategies, including false discount sale

activities, inflated benefits, and disguised costs are common.

For example, offering products at low prices without providing

adequate post-sale service

Black marketing, encouragement of grey markets, and

infringement of copyrights and originality

Willful
misrepresentation,
wrong
and
objectionable
advertisement, and persuasive material of malign intent

Pricing tools through promotion and other techniques, which

are false by nature and design, are also used by companies.
Oxford University Press 2011

Ethics issues in Production

Defective, addictive or inherently dangerous products and services

or some other harmful input materials

Ethical relations between the company and its environment, For

instance discharge of polluting agents in air and water, Lack of
safety standards

Ethical problems arising out of new technologies

Ex. genetically modified food, mobile phone radiation etc

Product testing ethics, where animals and economically poor

people are subjected to tests without having any detailed
understanding about the implications

Use of supplier relationships to ones advantage and restricting

their earnings and economic benefits
Oxford University Press 2011

Ethics of Property, Property Rights, and

Intellectual Property Rights(IPR)

Patent infringement, copyright infringement, and trademark

infringement

Misuse of intellectual property systems to stifle competition

patent misuse, copyright misuse, Patent trolls, submarine
patents

Industrial espionage including spying, garnering intelligence on

critical business ideas and deals, and sharing them with
competitors

Managing human assets by way of attracting key employees

away from a competitor to take unfair advantage
Oxford University Press 2011

Ethics issues in International Business

Comparison of ethical business traditions in different countries.

Corruption rankings by rating agencies and institutions across the globe.

The search for universal values as a basis for international commercial behaviour

Comparison of ethical business traditions by interaction via business forums,

federations and confederations, and participation in business fairs and meetings.

Critically analyzing the laws of various lands and studying the pattern of legal
recourse and its effectiveness.

Understanding the way in which multinationals take advantage of international

differences

For instance outsourcing production (in clothes manufacture) and services (call
centres) to low-wage countries.
Oxford University Press 2011

CORPORATE SOCIAL
RESPONSIBILITY

Standards, norms, or expectations that reflect the concern of

major stakeholders

The way an organization achieves a balance between

economic, environmental, and social imperatives while
addressing the expectations of shareholders and
stakeholders

The obligation of businessmen to pursue those policies, to

make those decisions or to follow those lines of action which
are desirable in terms of objectives and values of society
Oxford University Press 2011

Contd

Oxford University Press 2011

Community

The corporate sector involves both the external and internal

community

Any business, while developing a project in a particular location,

is regulated by
-the laws of the land in regard to environment pollution
-fair compensation for the land taken over from the local
residents for the project
-compensation for use of natural resources of the
community, such as water, minerals, and vegetation

Providing localized rural employment and livelihood

opportunities to empower rural communities

Growing commitment to raising the quality of life and social wellbeing by contributing to the basics of life in harmony with nature.
Oxford University Press 2011

Stakeholders

Main stakeholders in the corporate sector include

shareholders, employees, the surrounding community,
vendors, and consumers

It is important that every stakeholders interest be addressed

by the company

For instance firms responsibilities towards consumers and

vendors

Responsible procurement processes ensure that the vendor

understands corporate values and provides raw materials and
components of specifications that promote the quality of the
finished product
Oxford University Press 2011

Customers

Customers are the king of todays business

Firms like to ensure the right to safety with respect to physical

handling, usage and internal consumption

There must be a complete disclosure based on statutory needs

under various laws

Protection for damages in case of breach of promise and trust

There is a need to respect the consumers right to education

(about the functionality, limitation, and liability of the product and
business) and to privacy

For instance Companies such as Suzuki Motors in India, Toyoto

and many others have even gone for product recall and
replaced faulty components
Oxford University Press 2011

Production Processes

It is important for firms to be proactively engaged with

stakeholders, including the local community.

Social responsibility requires the company to periodically

monitor the impact of occupational hazards on employees,
proactively, to avoid any deleterious effects

Statutorily, the company has to provide safety equipments,

adopt safety procedures

CSR in relation to production processes can also be carried

out to reduce energy use, limit or alter material use, reduce
water use, save natural resources, efficiently manage
emissions, reduce waste, and recycle recoverable items
Oxford University Press 2011

Employee Relations

Respecting and ensuring employees freedom of association

The right to collective bargaining

Proactive declaration on abolition of child labour

Non-discrimination of resources on caste, creed and color

Respecting the time and comfort of employees

For instance in IT companies options to work from home,

sabbaticals for higher education or to attend to personal
needs, preferences for women employees during post
maternity to choose work options such as flexible hours etc
Oxford University Press 2011

CSR Implementation Process and

Benefits

Head of CSR, followed by the CEO of the company, is the chief

architect and the main person responsible for the
implementation of CSR initiatives across the organization

In public sector companies, HR departments and administrative

departments also get involved in the implementation of CSR
activities

CSR is the catalyst that brings about a positive social change in

business, government, and society at large.

Benefits include improved perception about the companys

brands, tax benefits, and compliance with statutory
requirements, positive and long-term relationship with
communities, improving productsupply management, and
contributing to the prosperity of the region/nation
Oxford University Press 2011

Challenges to CSR Initiatives in India

Lack of community participation

Narrow perception of CSR initiatives

Transparency issues

Need to build local capabilities

Lack of consensus on implementing CSR issues

Oxford University Press 2011

CORPORATE GOVERNANCE

(corporate governance) deals with laws, procedures, practices,

and implicit rules that determine a companys ability to take
managerial decisions vis-a-vis its claimantsin particular, its
shareholders, creditors, the state, and employees- (CII)

Good governance practices are based on the culture, mindset,

and shared values of the organization, especially its leaders

Corporate governance depends upon two factors.

1) Commitment of management towards the principle of
integrity and transparency in business operations
2) Legal and the administrative framework created by the
government of the country in which the business
operates

Oxford University Press 2011

Principles of Corporate Governance

Agency theory: shareholder interests require protection by

separation of incumbency of roles of board chair and CEO

Stewardship theory: shareholder interests are maximized by

shared incumbency of these roles

Core objectives of corporate governance:

Strategic focus

Predictability

Transparency

Participation

Accountability

Efficiency and effectiveness

Stakeholder satisfaction
Oxford University Press 2011

CG Committees& Groups
formulated in India
YEAR

NAME OF THE
GROUP/COMMITTEE

FOCUS AREA

1996

Working group on Companies Act

Companies act changes

1996

Initiative by Confederation of
Indian Industry

Corporate Governance
code

1999

SEBIs initiatives

Raise the standards of

corporate governance

2000

Birla Committee

Corporate Audit &

Governance

2003

Narayana murthy Committee

To review the
performance of corporate
governance

2005

JJ Irani Committee

Revision of companies
Act

2006

Naresh Chandra Committee

Report

Corporate Audit &

Governance

Oxford University Press 2011

Corporate Governance Models

AngloAmerican countries tend to give priority to the interests

of shareholders.(Liberal model of corporate governance )

In the US, a corporation is governed by a board of directors,

which has the power to choose an executive officer who could
be designated as chief executive officer (CEO)

The coordinated model is common in Continental Europe and

Japan and recognizes the interests of workers, managers,
suppliers, customers, and the community in the corporate
governance framework

Corporate governance principles and codes have been

developed in different countries. One of the most influential
guidelines has been the 1999 OECD (Organization for
Economic Cooperation and Development) principles of
corporate governance
Oxford University Press 2011

More Questions
1)

Detail the circumstances of a recent corporate fraud that

you have come to know about from open sources and
analyze the reasons for the same from your understanding
and how it has eroded corporate value

2)

What are the challenges in implementing CSR in India?

Explain briefly with an example you are familiar with.

3)

Using available information from open sources, choose a

company, group and leader who have done extraordinary
work on corporate social responsibility involving the society

4)

Choose an industry and select top three performers in it.

Analyze their corporate governance report submitted in the
annual report published by them. Prepare your learnings as
a report
Oxford University Press 2011