CU-MBA-SEM-IV-Business Ethics and Corporate Governance-Second Draft

MASTER OF BUSINESS ADMINISTRATION SEMESTER-IV BUSINESS ETHICS AND CORPORATE GOVERNANCE

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning SLM Development Committee Prof. (Dr.) H.B. Raghvendra Vice- Chancellor, Chandigarh University, Gharuan, Punjab:Chairperson Prof. (Dr.) S.S. Sehgal Registrar Prof. (Dr.) B. Priestly Shan Dean of Academic Affairs Dr. Nitya Prakash Director – IDOL Dr. Gurpreet Singh Associate Director –IDOL Advisors& Members of CIQA –IDOL Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Editorial Committee Prof. (Dr) Nilesh Arora Dr. Ashita Chadha University School of Business University Institute of Liberal Arts Dr. Inderpreet Kaur Prof. Manish University Institute of Teacher Training & University Institute of Tourism & Hotel Management Research Dr. Manisha Malhotra Dr. Nitin Pathak University Institute of Computing University School of Business © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any formor by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS 2 CU IDOL SELF LEARNING MATERIAL (SLM)

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event, Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 3 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENT Unit - 1 Definition & Nature Business Ethic.......................................................................... 5 Unit - 2 Definition & Nature Corporate Governance ........................................................... 31 Unit - 3 Corporate Governance........................................................................................... 52 Unit - 4 Structure And Process Of Corporate Governance ................................................... 79 Unit - 5 Structure And Process Of Corporate Governance ................................................ 105 Unit - 6 Ethical Issues In International Business Practices ................................................ 130 Unit - 7 Ethical Issues In International Business Practices ................................................. 161 Unit - 8 Ethical Issues In International Business Practices ................................................ 198 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 1DEFINITION & NATURE BUSINESS ETHICS STRUCTURE 5 1.0 Learning Objectives 1.1 Introduction 1.2 Introduction to Ethics 1.2.1 Ethics Defined 1.2.2 Particular fields of application of Ethics 1.3 Business Ethics 1.3.1 Examples of Business Ethics 1.3.2 Why Is Business Ethics Important? 1.3.3 Characteristics of Business Ethics 1.4 Ethical Theories 1.4.1 Teleological Ethical Theories 1.4.2 Deontological Ethical Theories 1.4.3 Virtue Ethical Theories 1.4.4 System Development Ethical Theories 1.5 Causes of Unethical Behaviour 1.5.1 Recommendations to handle Unethical workplace behaviour 1.6 Work Ethics 1.6.1 What is Work Ethics? 1.6.2 Why is Work Ethics important? 1.6.3 Examples of Work Ethics 1.6.4 How to develop a strong Work Ethic 1.7 Code of Conduct 1.7.1 What is Code of Conduct in the Workplace? 1.7.2 Importance of Code of Conduct 1.7.3 Examples of Code of Conduct 1.7.4 What should be included in a code of conduct? 1.8 Summary CU IDOL SELF LEARNING MATERIAL (SLM)

1.9 Keywords 1.10 Learning Activity 1.11 Unit End Questions 1.12 Course References 1.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  State the meaning of Ethics  Explain the application of Ethics in business decision making  Discuss different theories on Ethics and their application to business situations  Identify the causes of Unethical behaviour at workplace and methods to overcome  Describe the components of an organisational Code of conduct 1.1 INTRODUCTION Modern day business is mark of competition and a desire to move ahead for expansion and dominance. Under such a scenario there are possibilities of business leaders and employees to indulge in activities which may deliver short term results but go a long way to destroy the culture of the organisation. The study of Business Ethics will guide the learners on its importance in decision making in business situations. Learners will also explore how long term image of business may improve with commitment to Ethical perspective that emanates right from the top management to the last employee. The course also attempts to explore different theories of Ethics from the perspective of human psychology. The detailed presentation of theories demonstrates different types of individuals who may respond uniquely to maybe same of different situations. Theories of Ethics may be purely theoretical, yet their understanding is vital to design further instruments that support Ethical environment. Among them is the development of a detailed Code of Conduct with the organisation. A detailed Code of Conduct is vital to the commitment of the top management towards all staff. While it is important to understand the role of Ethics in Business and work related conditions, it is also essential to identify the causes of unethical behaviour. Normal people get drifted away from their focus of work towards unethical behaviour either due to social or work related stress. Understanding of topics covered in this unit will allow the learner to explore this slightly theoretical yet thought-provoking field of study and how the learnings can be applied to normal business situationsfor survival and growth. 6 CU IDOL SELF LEARNING MATERIAL (SLM)

1.2 CORPORATE GOVERNANCE: MEANING, OBJECTIVES AND SIGNIFICANCE Introduction to Ethics Rupali Singh is a student of the famous Shining Stars International School in a metro city. Her parents, both Software engineers, were sure that they had made the correct choice for their daughter. The schools had received many accolades in the past six months, its dynamic principal was always to be seen in workshops to discuss progressive school education. They had even met some parentsto seek their experiences of the schools while firming up their decision for their daughter’s future. Reinforced by positive feedback and impressed by the social presence of the school name they had finally selected Shining Stars. At the time of admissions the school informed that the annual fee can be paid in two semesters and that there will be some other expenses when the session starts in April next year. They were also informed that the school will share the list of books and stationery a month before the session start date. In their excitement to complete all requirements for the new beginning, the parents went on to buy two sets of uniforms from the prescribed vendor. Everything was well planned, well what else would be expected from Software engineers. It was now March, and as promised they received a message on the school App that they need to visit the school to buy the books and uniform for the child. Assuming that since they had already bought the uniform they were under no such obligation and the only thing will buy would be the books. However their visit to the school truncated this belief where they were abruptly told that on recommendation of the ‘Uniform committee’ the school has decided to change the uniform and since this was a delayed decision it will be only available in the school. The charges mentioned were also way above the rates in open market. Their protests that they have already bought the same from the recommended vendor were very politely rejected on the ground that the vendor has been rejected from the approved suppliers due to poor quality as complained by the PTA itself. Having paid the full years fee in advance and now so close to the start of the academic year the parents had the only option to swipe the credit card at the sales counter, having been told that the uniforms will be ready on the first day of the school. This could be an imaginary story, yet many parents face similar situations with schools at the time of admission or during the course of the academic year. There are reports of schools hiding the expenses at the time of admissions and also a compulsion to buy books, stationery and uniforms from the school counter itself. Text books which are available in the open market on discounts are sold at MRP, while the set of notebooks printed with school logo also are sold well above the market rate for similar items. While these are all excepted by the parents as convenience of getting everything at one place rather than moving around at multiple shops, there is always a question of hidden truths and concealing information. This 7 CU IDOL SELF LEARNING MATERIAL (SLM)

brings us to the concept of Ethics. What is Ethics, why it is important for us, what has that got to do with our daily lives? 1.2.1 Ethics Defined Ethics or ‘moral philosophy’emanates asa branch of philosophy which involves identifying, organisingor recommendingactions and thoughts as either being right or wrong. The term ethics is derived from an Ancient Greek word ‘ethikos’, which is comes from another word ‘ethos’meaning customs, habits, character or disposition.Simply stated, ethics is a system of ‘moral principles’ that affects how people may make decisions and lead their lives.The study of Ethics concernsitself with ‘what is morally upright’ for individuals and society.Religion, ancient and modern philosophies and evolving cultures have contributed to the modern version of Ethics. As a branch of philosophy, theoreticallyethics attempts to answer the questions: “What may be the best way to live?” and “What actions can be termed as right and which one as wrong in?” \"How can one action be ethical now and unethical at some other time?\" While in practice, ethics answers questions related human morality, it definesdifferentiates concepts of right and wrong, good and evil, virtue and vice, justice and crime. While being considered a field of intellectual enquiry, Ethics is found to be related to moral psychology, descriptive ethics, and value theory. Moving further to our regular lives, ‘Ethics is an everyday activity’. Children are taught to be truthful right early by their mothers and fathers at homes and by teachers in schools, similarly at Annual General Meetings the Directors of corporations are also expected to be truthful to the shareholders. A group of friends do not like secretsbeing kept among themselves, similarly the masses do not expect the government to withhold information on mega deals like disinvestment of Public Sector enterprises to private sector.The rules of ethical thinking or moral philosophy donot change much, but the world is in a constant revolution, where Ethics keeps the expectations of the society alive. Ethics isnot something we just know; it is something that is proven through our actions, and confirmation through our reasoning confirms that it’s actually working. 1.2.2 Particular fields of application of Ethics With due course of time Ethics has also modified its scope and approach. Challenges of the evolving society have given new meanings to the concept of Ethics. Fuelled by growing awareness to the global environment Ethics has diversified into the following fields of application: 8 CU IDOL SELF LEARNING MATERIAL (SLM)

1 Bioethics: has emerged along with by advances in biology and medicine to answerquestions about biotechnology, medicine, life sciences, international law, politics, and philosophy. Human cloning, vaccine testing and profit margins of global pharma companies have been debatable topics. 2 Business Ethics: is a recent phenomenon form of or a division of professional ethics which examines ethical principles and moral issues that occur in business environment.Business Ethics applies to all aspects of business dealings relevant to individuals and organizations. This study material will deal with Business Ethics in detail in the following sections. 3 Machine Ethics: A very recent concept that owes its birth from the popularity of Artificial Intelligence and Robot technology. Designing machines to differentiate what’s Right from Wrong. How to program the language for machine or an artificial agent so it behaves with a sense of ethics. 4 Military Ethics: are concerned with developing and following code of conduct of war and application of force. Froe g. the Geneva Convention that lays rules for prisoners of war. 5 Political Ethics: also known as public ethics or political morality is the practice of political parties making moral judgements while in power or while sitting as responsible opposition. 6 Publication Ethics: notably among the academia and students involved in research activities. It is the set of principles that guide the writing and publishing of all professional research or academic work. Publication Ethics demands that authors should verify that theirpublished work is not subject to plagiarism or contain any bias. 7 Animal Ethics: is a term used to describe human-animal relationships and how animals ought to be treated while as pets, for economic use or for display. Animal Ethics includes aspects on animal welfare, animal rights, laws to protect animals, wildlife conservation and approach for justice. 1.3 BUSINESS ETHICS How often you have heard of terms like: nepotism, workplace harassment, financial frauds, and social media privacy. These terms have become synonymous to conduct of business. Not all of such reports may be true, yet we all have an expectation from the business. The general expectation is that any business will always be truthful to its customers, clients, and shareholders, and if that is not possible, then it should have good reasons to explain why it could not be truthful. It is expected that businesswill never defraud or mislead its business partners. While a legitimate business is pursuing its goal of profit making, it will not keep all the money that it makes. Instead, it will be shared with those who are important because they 9 CU IDOL SELF LEARNING MATERIAL (SLM)

are affected one way or another by the business, these are the employees, financers, shareholders, government, the society at large. These are the stakeholders of a business. Business ethics is can therefore be termed as the study of how a business should react when faced by operational and strategic dilemmas and or when subjected to controversial situations. This can include situations like: how a business is governed, trading of stocks, how business responds to social issues for e.g.: sanitation, women’s health, child education. Business ethics can be defined as the values which a corporate upholds during its operations. Organizations usually make commitments to specific ethical standards and moral practices based on the industry they operate in and the corporate the culture that they want to promote. Many businesses believe in Ethics not as a legal requirement but rather to maintain good relations with their stakeholders. While for the majority Business Ethics is a leverage to remain clean from a legal perspective and to boost their public image. It inculcates and ensures trust between consumers and other businesses that they deal with. The modern idea of business ethics is relatively new, yet ways to ethically conduct business havealways been considered since barter and trading first started. Aristotle proposed his own ideas about business ethics.The concept of modern business can be traced to the 1960s when corporations became aware of rising consumer awareness for social causes, environment and a new concept of corporate social responsibility became to rise. Interest in business ethics further grewwithin corporations and academic thinkers during the 1980s and 1990s. As its awareness gained momentum, governments around the world began creating legislations forcing businesses to abide by certain set of rules and regulations deemed to be ethical. Business ethics is a broad field of various topics that fall under its purview. It can be studied from different angles: either philosophically or scientifically or the legal perspective. However, the legal perspective has played the biggest role in promoting business ethics so far. Adam Smith believed, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices” (Wealth of Nations, Adam Smith 1776). Governments design laws and regulations to guide how a business should move in beneficial directions. Ethics implicitly regulates behaviour beyond the control of government and legislations. 1.3.1 Examples of Business Ethics Let’s consider some examples of business ethics being at work as corporations attempt to discharge their marketing and social responsibilities while seeking monetary profits. For example, Company XYZ sells shampoos with all-natural ingredients. The marketing department has decided to use the selling point of ‘Allnatural ingredients’, while this maybe a good sales pitch, it must meet the claims made for the product with respect to the laws which govern labelling of products. Competitors' advertisements talk about 100% natural 10 CU IDOL SELF LEARNING MATERIAL (SLM)

ingredients irrespective of any admissible proof. The shampoo company in question wants to gain more market share, but the marketing department cannot make such dubious claims on shampoo bottles without the risk of litigation and fines. Even though competitors having larger market shares in the personal care industry maybe usingincorrect labelling on their products, that doesn't mean that all other manufacturers should also engage in unethical behaviour. Another example, consider the matter of quality control for a company that manufactures components for major auto makers. These components need to be shippedas per schedule;else the component manufacturer will risk losing the lucrative contract. The quality-control department discovers a possible defect that requires every component in one shipment to be checked. While it is everyone’s knowledge that these checks may take too long during which the window for on-time shipping would pass, which could delay the customer's manufacturing plans. The quality-control department is faced by the dilemma to ship the parts without 100% checks, hoping that not all of them are defective, or delay the shipment and test everything. If the parts are defective, the company that buys the components might face consumer backlash, which may indirectly will lead the auto maker to seek a more reliable supplier. In this situation the law will happen if the auto maker drags the component manufacturer to a legal suit, but that may happen as the component manufacturer will not like this to happen, here comes the role of Business Ethics to share the information with the buyer and correct the errors before deliveries happen. 1.3.2 Why Is Business Ethics Important? Business ethics are important for a variety, presented as follows:  It keeps the business operations within the boundaries of law, ensuring that business is not acting against employees, customers, consumers or society  Businesses Ethics builds trust between itself and consumers. If consumers trust a business they will more likely choose it over competitors. Names like Hero Cycles, Tata trucks, State bank of India, Boroline ointment, Philips radio, Colgate toothpaste are based on generations of consumer trust  Some businesses choose to use certain aspects of business ethics as a marketing tool, by highlighting popular social issue. Like Dabur Amla’s claim to spend a part of earnings for girl child education. Leveraging wisely its commitment to ethical values a business can therefore increaseits brand equity.  Being an ethical business also appeals to the investors and shareholders and they will more likely invest into the company. 11 CU IDOL SELF LEARNING MATERIAL (SLM)

 Following business ethics can also be a beneficial HR policy, to attract top talent and reduce recruitment costs. Prospective employees not only appreciate a socially committed employer, but also perceive them as kind of business that will act in their best interest. This also results in a more dedicated workforce. 1.3.3 Characteristics of Business Ethics As we have seen previously Business ethics has an important role in raising profitability and productivity of business and improve its goodwill in the market. Characteristics of Business ethics are described as follows: 1. Business ethics Defines Code of Conduct as what is right or what is wrong for a business. It differentiates activitiesthat a business should do or those it should not do. Business Ethics define economic, legal, social and cultural limits for a business. 2. It protects Social Groupsthat are associated with a business. Ethics in business ensures that it operatesnot only for its growth but also considers the welfare of others viz:employees, customers, shareholders, creditors, government, other small businessmen etc. 3. Controls Business malpractices through monitoring and keeping a check on possible malpractices in business. It ensures all activities to be performed ethically without any unfair trade practices like adulteration, black marketing. Business Ethics helps control such malpractices and maintain the moral legality of business. 4. Related to Moral principles and Social values:It propagates that business should operate morally without exploiting others. While it focuses on profitability it should also consider betterment of its stakeholders. 5. Requires Willingness to Accept: Ethics are voluntary in nature and not enforceable by law. ThereforeBusiness Ethics must be adopted like self-discipline by own choice. 6. Creates a Good image: Ethics defines rules and regulation that business needs to adopt in its operations, maintain certain standards in code of conduct and use sustainable technology and resources. Providing quality products at reasonable prices, serving and satisfying customers enhances the goodwill of a business in the market. 7. Relative Term: It changes with the nature of business or industry or country. A particular Business ethic of being good or moral in one country may be treated as taboo in another country. 8. Requires Education and Guidance: Adoption of business ethics requires educating businessmen about its benefits. Businessmen should be motivated to implement these ethics by explaining them it’s advantages. Trade Associations and Chambers of Commerce are an effective medium to promote their acceptance 12 CU IDOL SELF LEARNING MATERIAL (SLM)

1.4 ETHICAL THEORIES Ethical theories are part of the decision making foundation because these theories characterize the viewpoints from which we seek guidance as we make decisions. Each theory emphasizes a different point of view, a different decisionmaking style or a decision rule; such as predicting the result and following one’s duties in respect to others in order to reach what the individual may consider an ethically correct decision. In order to understand ethical decision making, we need to realize that everyone does not makes decisions similarly. People may make different decisions even when they use the same information and employ the same decision making rules.Several philosophers have propounded different ethical theories listed below:  Teleological Ethical Theories  Deontological Ethical Theories  Virtue Ethical Theories  System Development Ethical Theories 1.4.1 Teleological Ethical Theories Teleological Ethical Theories study the consequences of actions made by humans.Meaning that the standards for our actions being morally right or wrong depend on the result which follows, as either good or bad. Types of Teleological Ethical Theories: 1. Ethical Egoism:suggests that an action is good if it produces or is likely to produce results that maximize the person’s self-interest as defined by him, even at the expense of others. It is based on the belief that it is moral to promote one’s own good, but at times avoiding the personal interest could be a moral action too. 2. Utilitarianism: holds that an action is good if it results in maximum satisfaction for a large number of people who are likely to get affected by the action. For e.g.: the HR department plans for an annual vacation schedule after taking feedback from all employees, then the HR would act in a way to maximize the pleasure of all employees 3. Eudaimonism: is the thought that perceives that an action will be good if it results in the fulfilment of goals and results in the welfare of the human beings. Actions are fruitful if they promote the fulfilment of goals which include human nature and happiness. For e.g.: the training manager plans for an employee training which results in happiness of all the staff. 13 CU IDOL SELF LEARNING MATERIAL (SLM)

1.4.2 Deontological Ethical Theories Deontological Ethical Theories suggest that actions are morally right and are independent of consequences which they may generate. Types of Deontological Ethical Theories 1. Negative and Positive Rights Theories:The negative rights theory has a suggestion that an action is considered to be right if it protects the individual from any harm or unjustifiable interference caused by other people or by the government. For e.g.: an individual has the right to use or sell his personal property, then others have a duty not to prevent him. The positive rights theory suggests that an action is right if it provides an individual with anything that he needs to exist. For e.g.: an individual has the right to proper health care services to survive, which means that the government or other health agencies havea duty to provide him with the necessary health care services. 2. Social Contract Theories:suggest that people develop contract with each other to abide by moral and political obligations towards the society in which they live. In absence of any law and order, people will have unlimited and undue freedom and will resort to misdeeds such as theft, rape, murder, etc. To prevent such situations people enter into un-worded agreement with each other to give up some of their freedom and accept the responsibility to respect and safeguard the rights of others. Thus, an individual has to fulfil his due obligations towards the society to gain civil rights and social benefits which he is entitled to. 3. Social Justice Theories:suggest that action will be considered right if it confirms to fairness in distributive, retributive and compensatory dimensions of cost and rewards.  Distributive dimension means perceived fairness in the distribution of social benefits and burden among the group members  Retributive dimension considers punishment proportionate to the extent of crime, while  Compensatory dimension is how people can be compensated due to possible injuries caused to them For example, if passive-smokers at work are hurt by the action of their smoker colleagues, then there needs to be a fair distribution of health risk burden and proportionate punishment should be imposed on those causing the damage to themselves and to others. Affected parties also should be compensated to the extent of injuries suffered by them. 14 CU IDOL SELF LEARNING MATERIAL (SLM)

1.4.3 Virtue Ethical Theories Virtue Ethical Theories suggest that ethical values of individualsare determined by their character. Character is a function of virtues, inclinations and intentions that provoke a person to either act ethically or else in a non-ethical behaviour. Types of Virtue Ethical Theories: 1. Individual Character Ethics: implies that the identification and development of virtuous human traits help in determining the intrinsic value of human ethical interactions. These virtuous traits are courage, gratitude, prudence, self-discipline, understanding, benevolence, wisdom, sincerityetc. 2. Work Character Ethics: The identification and development of certain traits as being reflective or being practitioner or being noble while at work.Similar work related traits such as civility, creativity, dependability, empathy, honesty, honour, loyalty, trustworthiness, shared work pride, etc. also determine to what extent the work life is ethical. For e.g.: A manager who under pressure of global competition, high productivity expectations requirethe support of an effective teamwork. To achieve this he needs to be a role model of work character behaviourfor the team. 3. Professional Character Ethics: suggest the ethical qualities needed by an individual for undertaking public service, like: impartial judgment, self-regulation, selflessness, truthfulness andloyalty. For e.g.: if a sales manager of a restaurant detects the double billing for someservices, then his ‘ethical professional behaviour’ will enforce him to inform about this to the cashier to get the problem solved. He does this because of his loyalty towards the professional code of ethics.Thus, the Virtue Ethical Theories are built on the belief that life is all about developing a sound character. It is believed that a person with a strong character and inherent emotional, intellectual, moral and social virtues to achieve the self-discipline will do the right thing or want what is actually good for him. While a person with weak character will make excuses for all his ill doings and continue doing improper actions, with desires harmful to him and the society at large. 1.4.4 System Development Ethical Theories System Development Ethical Theories state that an organisation’s ethical value of actions is determined by its ability to develop a work culture that supports ethical conduct. Types of System Development Ethical Theories: 15 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Personal Improvement Ethics: suggests that any action is good if itsobjective is to improve the individual’s personal responsibility or promote continuous learning or improvement in his self or moral excellence. For e.g.: employees of an organisation enrol in the company’s training programmes to improving themselves as well as the organization’s efficiency. 2. Organizational Ethics: hold that the action is right if it ensures development of the formal and informal organizational processes to enhances the ethical work culture and systematic justice. For e.g.: In absence of an employee complaints redressal system in an organization, it is the responsibility of the management to implement such a system and give an opportunity to employees to voice their concerns and feedback. 3. Extra organizational Ethics:maintains that an action will be considered right if it promotes a collaborative partnership among those present and shows respect to global and domestic interests.Such actions should that represent the varied economic, political, legal, sociophilanthropic and ecological concerns which affect a business. For e.g.: it is the social responsibility of the management to consider external factors; that can affect the organizational business operations and efficiencies. 1.5 CAUSES OF UNETHICAL BEHAVIOUR An unethical behaviour or Ethical misconduct is defined as one that is not morally acceptable or one that is prohibited by law. People act unethically for a number of reasons, unethical behaviour violates rules designed to maintain the fairness and morality of a situation. An example of unethical behaviourcould be a company representative taking commissions from a salesman of a vendor to clear a purchase order. As we have seen the importance of ethical behaviour, it is equally important to understand unethical behaviour, its causes and what could be its possible implications.Dedicated employees and honest employees, sometimes may behave in anunethical mannerdue to the following reasons:  that such actions will never be found out  they internally convince themselves that they are not behaving unethical  that this will not harm the interest of the organization, and  that being employees, the organization will protect them Although hard to measure, according to research, the costs of unethical behaviour can addmore than 20% to the operating cost of business. The costs will transform to resultant 16 CU IDOL SELF LEARNING MATERIAL (SLM)

lowerwages, possible unemployment and subsequent poverty. If top management wants to improve organizational performance, they need to firm up their belief in ethical methods and that, they are the only ways business should be done. Major causes that promote Ethical misconduct can be presented as follows: Absence of and established Code of Ethics: Employees are more likely to do wrong if they are not aware what’s right or wrong. In the absence of an established code of ethics, they may be more liable to be attracted to unethical practices. Developing a code of ethics is a proactive approach to address unethical behaviour. It establishes values of an organization and sets boundaries for adhering to those values, making everyone accountable. Fear of Reprisal People often blame the fear of reprisal, that they worry about the ramifications of reporting ethical misconduct. They don’t want to damage their career or displease the offender, especially if the person is their superior. Many times they let the flouting of rules because they don’t know how to report it or they feel that their report may be ignored. Impact of Peer Influence The most common self-belief is that since everyone is doing it, it may be right. Too often people find themselves lapsed into the bad behaviour of their co-workers. People behave unethically because they tend to perceive ethical misconduct displayed by people who are similar to them to be more acceptable than those displayed by people who they perceive as dissimilar. Behaviour to habit Unethical behaviour starts small, such as the exaggeration of a personal expense report. But if it goes unchecked, it gets worse. The initial unethical behaviour of submitting inflated expenses could grow and eventually may lead to a regular habit of claiming bigger forged expenses or a time may come when such a person may commit outright embezzlement at a later time. People faced with increasing unethical behavioural opportunities are more likely to develop it as a habit. Setting a Bad Example It is often the superiors whose unethical actions are emulated by those below them, as employees follow their leaders. Personal character is the most significant factor in ethical 17 CU IDOL SELF LEARNING MATERIAL (SLM)

leadership. If employees see the boss leaving early every day, they may follow the trend.Ethical misconduct may prove costly if allowed at the top. Identifying causes of ethical misconduct at the workplace prevents problems and minimize damages. Following situations could be a good example of possible unethical situations at workplace: 1. Taking Sides in an Employee Argument In any organisation conflicts do arise between employees in the workplace. In such a situation ethics demand that the management remains impartial. For e.g.:it is important for the superior to remain as neutral as possible if two his subordinates are in conflict. It will be an unethical behaviour when a manager, in his domain of decision making, gives preference to a favourite or senior employee or provides a solution that works in favour of only one party. The management must ensure that both employees are given an opportunity to voice their concerns and accordingly come to a solution that is mutually acceptable for both parties for the business itself. 2. Lying Under any circumstances, lying to its employees or customers is the biggest way that a company will break its trust with them. Trust with employees and customers leads to dedication and loyalty that any business can ever achieve. Trust broken is extremely difficult to get it back. For example, if a group of high-performing employeesapproach the management for a promotion, the management needs to be honest to them about whether they have such an opportunity or not. In case the management feels this is not the correct time for such a change, they need to be truthful to the employees and share the reasons. However, if the employees are told some lie that that there is currently no room in the budget for a promotion this year and a few months later, another employee receives a promotion, this will be considered unethical and may lead to lower performance of the original group of staff or may drive them away from the business. 3. False Communications Companies regularly share information with their stakeholders, this is either under a legal obligation or to build trust. For whatever reason sharing any false communication amounts to an unethical behaviour which leads to loss of trust and maybe penal action. False communications fall into various categories:  falsification of financial data or accounting reports or any other form of manipulation that does not tell the whole truth  cheating during filing of tax returns or reporting incorrect depreciation schedule and incorrect reporting of expenses 18 CU IDOL SELF LEARNING MATERIAL (SLM)

 sharing wrong report of the organization’s business performance is another common unethical practice. In 2001, Enron made public wrong information about their losses. Ken Lay, thethen CEO of the company, was advised report only $1.2 billion of the $7 billion in losses to avoid more damage to the falling stock price of the company. Similarly, companies engaged in production of hazardous goods or using such raw material may decide not to share the risks of such material to its staff or to the customers, an unethical practice that may lead to disastrous results in case of an accident or when the company comes under an enquiry. 4. Collusion Collusion (unethical arrangement), especially with competitors, to fix prices as in cartels, is an unfair business practice. This is considered duping its customers and stealing from them. Similar collusions can happen in the procurement of material to the company, where the purchase department may favour some supplier by issuing procurement requirements just to suit the supplier’s capabilities as compared to other competing vendors. 5. Conflict of Interest Conflict of interest occurs when the private interest of an employee interferes in any way with the interest of the organization. Following are examples of conflicts of interest: a. diverting one’s professional attention from the organization for personal benefit.When an employee is more interested in the conduct of his other personal business opportunity he will unintentionally ignore his professional duties b. using the organization‘s assets for personal benefit, a very common behaviour is to use the company car for personal excursions c. accepting any valuable thing from the organization‘s customers or suppliers, today many companies have an agreement with vendors that they will not approach any of their employees with gifts (such as Diwali gifts) and d. having a financial interest in an organization‘s competitor 6. Ignoring Conflicts of Interest While there could be possibilities of conflict of interest, there are times the management chooses not to highlight such happenings. Either the staff involved is on a senior level or his contributions are far too great to the company to be subject to a little reprimand due to such actions. However ignoring these may result in the 19 CU IDOL SELF LEARNING MATERIAL (SLM)

employee being more stubborn or may start a more dangerous precedent of other staff following in the same footsteps. 7. Discrimination and Harassment Discrimination meansnot providing equal opportunities to staff. It happens when decisions are not based upon equal opportunity in employment on basis of merit or related to demands of the job but being made on basis of race, sex, national origin, age, religion. Harassment at work may can be defined as a derogatory comment or an unwelcome sexual advance. 8. Misusing Company Time This is a common unethical practice that close to every businesses faces. Possible misuse happen as surfing internet during working hours, taking extended lunch breaks, altering attendance records, or any such action. It is an unethical practice as the employee is being paid for the time he did not commit to job. 9. Cultivating a Hostile Workplace It is natural to have workplace conflicts and no organisation can be fully immune to such a tendency. It is important for organisations to ensure a safe workplace for everyone. Many companies unintentionally promote hostilities and an undue competitive culture. For example, the sales department may encourage an unhealthily competitive environment among employees to meet monthly targets, which results in wrong or over promising in the market or even spreading lies about other salesmen. However, promoting this environment effects employee mental health, and may even encourage negativebehaviour. 1.5.1 Recommendations to handle Unethical workplace behaviour Once an employee notices an unethical behaviour prevalent in his organisation he may choose any of the three options: 1. Exit the organisation:rather than spending more time in the organisation and unintentionally become a part of unethical surroundings, it is recommended that if one likes this unethical behaviour, he should leave and find internal peace 2. The second response is to express your opinion and discomfort with the management 3. The third response is to demonstrate loyalty to the organisationby remaining in the system and trying to change it In order to restore and maintain a culture that upholds honest and ethical behaviour the organizational leaders must promote ethical environment, both verbally and also demonstrate 20 CU IDOL SELF LEARNING MATERIAL (SLM)

it through day-to-day activities,making ethical behaviour part of the organization’s culture. Established codes of business through handbooks or display boards also go a long way to demonstrate the commitment of an organisation towards ethical behaviour. Perhaps the best way to ensure that your organization is committed to ethical behaviour is to hire people with good moral background.There can also be annual business ethics training for the employees and a mechanism to immediately report any occasion of unethical happenings. 1.6 WORK ETHICS 1.6.1 What is work ethics? Work ethics is an attitude that marks a determination and dedication toward one’s job. People with strong work ethics display moral principles which make them outstanding employees. Staff with strong work ethics believe in the importance of their job and feel that hard work is essential to maintain a strong character. Work ethics is a valuable attribute that employers look for in every industry. Possessing values associated with good work ethics improvesemployability and helps for better job opportunities. Employees with strong work ethics are considered by management for higher opportunities and important projects because they are considered to be reliable, dedicated and disciplined. 1.6.2 Why is work ethic important? Possessing and demonstrating strong work ethics helps you get accepted in the system and achieve your career goals quickly. These skills allow you to perform quality work, have strong relationships with colleagues and work towards achieving important tasks that add value to your organization. These achievements lead to a desirable review at work that generatesstrong references and recommendations. A reliable employee gets to be selected for higher responsibilities and opportunities.All of these factors can lead to better chances for an increment or promotion and accomplishment of major career goals. Display of strong work ethics can result in you being considered as a highly valuable employee. 1.6.3 Examples of work ethic skills: Employees with a strong work ethicsdisplaya higher set of values and behaviours. These characteristics make them stand out as highly recognised team members and praise-worthy employees. Cooperation: good work ethicsare spread to those around by cooperating willingly. Thisis a mark of good teamwork to readily assists others when needed. Dedication: Employees with dedication focus on tasks without being distracted. They make sure to work until they have finished their duties. They also stay with the same company for a longertime period. 21 CU IDOL SELF LEARNING MATERIAL (SLM)

Discipline: Employees with inherent discipline display determination and commitment to their job. They work hard to meet expectations and are interested in opportunities to learn new skills which will improve their performance. Integrity: Professional integrity denotes holding self to high moral principles. Strong work ethics are marked by attributes of integrity, honesty, politeness and fair behaviour with others. Productivity: Strong ethics at work place always lead tohigh productivity. Employees with higher productivity often have a higher output compared to their colleagues anddeliver more than the minimum requirement. Professionalism: Professionalismis a mark of established work ethics and such employees exhibit a professional attitude in their demeanour and carry themselves respectfully among others. Reliability: Employees having strong work ethic are considered to be reliable. They meet their expected deadlines and are committed to delivering a quality at work. A reliable co- workeris always preferred as a teammate because they contribute fairly to their duties. Responsibility:Those with strong ethical and responsibility alwaysconsider themselves accountable for their actions. They accept the blame for the errors possibly made by them to and proactively work to fix such issues. Work ethics is a set of moral values that employeesbelieves in and uses them in the conduct of their job. It identifies an employee’s attitude and behaviour towards his career and the workplace. These values mould an individual into a responsible and strong-minded employee. 1.6.4 How to developa strong Work Ethic Having strong work ethics is vital to being successful in career. With strong work ethics a person trainshimself so that doing hard work becomes a habit. Developing good habits such as: being focussed at job, being motivated, completing work on time, among others attributes, helpto create a good work ethics. Always be Punctual: Without doubt punctuality at work or appointments always makes a good impression. Persistent absenteeism or being late for work can send unwarted signal to employers that may affect your job. Be Professional: Being professional means more than wearing well-tailored suits, it includes a proper demeanour, positive attitude and well imbibed in moral values. Being cordial, positive and always refraining from gossip is a recommended way to develop good work 22 CU IDOL SELF LEARNING MATERIAL (SLM)

ethics. Professionalismis marked by being respectful of others, develop a reputation of being an honest and a hard worker. Finish tasks timely efficiently: Procrastination is enemy of progress; one should immediately get to work on their tasks. Good work ethics involve getting to tasks right away and doing things properly. Employers do not want to see disordered, chaotic work and may be doubt the work ethic of such employees. Focus and Persistence: Good work ethics allows to stay focused on work till it gets done. Developing a habit of persistence is necessary to train oneself to work harder and for longer periods of time. Focusing on work without distractions allows you to finish tasks more efficiently. Create a Work Life Balance:Along with your aim to impress the employer about your hard work, it is also important that you create a healthy work-life balance. Getting overwhelmed by continuous work may lead to getting unorganised and sometimes commit mistakes at work. Therefore it is very important to maintain health by getting sufficient sleep and taking time off to recharge and relax. 1.7 CODE OF CONDUCT The most common policy within an organization is a code of conduct is. It lays out the company’s standards, principles and moral and ethical expectations upon employees and third parties as they interact with the organization. A code of conduct is, at a later stage, considered an integral part of reference to provide documentation in case an employee or athird party may have violated company policy or conduct of and illegal activity. 1.7.1 What is Code of Conduct in the Workplace? A code of conduct is a company’s policy that mentions principles that its employees and any other third party acting on behalf are required to follow. A code of conduct follows the company’s mission and values and links it to standards of professional behaviour. Many companies consider codes of conduct as benchmarks of performance. Codes of conduct need to be clear and specific in terms of simple dos and don’ts, ambiguity in language may lead to confusion among the staff and possible breaches also. Code of conduct need not be confused withCode of ethics, while the former refers specifically to behaviour, whilst ethics provides guidance on the decision-making skills that employees need when they are working. 1.7.2 Importance of code of conduct Code of conducts serve as a set of internal guidelines for employees which need to be followed, and also as statements of corporate values and commitments for external 23 CU IDOL SELF LEARNING MATERIAL (SLM)

audience.Beyond ethical reasons, there are legal requirements for implementing a code of conduct as well. All public sector companies are required by law to have a code of conduct in place. Many private sector organizations have also followed suit and have implemented such codes as well.A proper code of conduct can:  Define the company culture and set standards and expectations for employees to follow  Allow customers and partners know company’s values, which makes them take a decision whether they want to work with the company. Therefore it helps create transparency for a healthy business relationship  Clarify an organisation's values and principles which links them with standards of professional conduct and behaviour of their employees. Codes of are benchmarks for staff of companies that need to be followed in true spirit.  Support employees in general decision making by giving them a structure to follow in terms of organisational behaviour. It allows them to be prepared to handle ethical dilemmas at workplace  Having a code of conduct provide employees a structure which they need to follow right from when they are recruited, this reduces the chances of problems coming in future.  In addition to setting rules to follow, the code of conduct can let employees know the process to report a violation of company policy and lets them know the consequences of spreading false information  Employees get a greater understanding of business rules by referring to code of conduct. This makes life a bit easier for all parties involved. This understanding improves the working of employee’sstaff and promotes good business values and may also attract customers to the organisation. By having a code of conduct employers can be assured that their staff know what's expected from them in terms of acceptable corporate. Such clarity in expectation from all make lives easier for everyone. Having well laid out rules to be followed gives employees a structure from, making the whole process much more unambiguous if trouble is caused. There should be no misunderstanding the objective of policiesas this can lead to manipulation of rules, which may contradict the existence codes of conduct. Externally, a code serves several important purposes:  Compliance: Legislation may require individuals who may be serving on boards and leaders of public companies to implement codes or clearly explain why they have not done it  Marketing: A code helps to highlight the commitment to high standards and right conduct and serves as a statement in public domain of what the company stands for. 24 CU IDOL SELF LEARNING MATERIAL (SLM)

 Risk Mitigation: Organizations can reduce financial risks for ethical misconduct by demonstrating they have standard code of conduct to prevent such unethical acts 1.7.3 Examples of Code of Conduct  Shortcuts are not allowed in work, do not just focus to get the job done quicker, this could lead to accidents and make it much longer.  Workplace discrimination is not tolerated, treating people disrespectfully due to their race, gender; social class or religion is prohibited.  Using business resources for personal use is dis-allowed, because \"borrowing\" money for personal use without authorisation is essentially stealing from the company Presence of rules,which have to be followed is not bad, but actually good for a business. Not only does it have a positive impact on the workforce, but the company’s brand image is enhanced, bringing in more customers and growth in business. 1.7.4 Contents of code of conduct There are a certain common elements that every code of conduct should feature. An ethical code of conduct should be forwarded by a letter from the CEO which reiterates the company’s values, and outline how violations will be handled.The letter should emphasize the organization’s commitment to these standards. The note from issued right from the top is an opportunity to express the leadership’s prioritization of compliance and ethics. How violations of code of conduct by internal staff will be handled and what punitive action may be taken against violators is a necessary inclusion within each code. Therefore each set of codes needs to have a sub section on how violations will be dealt with. There can be occasions when staff may have noticed violations of codes by superiors or colleagues, in absence of a proper reporting structure such violations may go unreported. Therefore a system of reporting any violation has to be made amid confidentiality of person who wants to report such misconduct. The spirit of every code of conduct reflects the nature business it represents. Since there isn't one common set of code of conduct that can be used by every company, there is a need to tailor it to unique business requirements. However, there are certain common characteristics that all code of conductshould include:  Written for the reader: It's prepared keeping the reader under consideration, it should be easy to understand and include an explanation of any technical/legal jargon 25 CU IDOL SELF LEARNING MATERIAL (SLM)

 Comprehensive: should cover all areas that impact the daily lives of employees and answer any questions that arise  Supported by top leadership: to be available with the backing of senior management team. A foreword letter from the CEO or President will do the job  Accessible: It should be readily available to all employees and investors Code of Conduct will more likely achieve a complete implementation and integration within the organization when more stakeholders are actively involved in its creation. Involving employee creates ownership which is the soul of an organization's implementation of a Code of Conduct.It is an internal commitment to a standard of beliefs and behaviour and a public declaration of the organization's position on a set of standards, values, principles, and beliefs. 1.8 SUMMARY  Ethics, also known as ‘moral philosophy’ refers to a branch of philosophy which deals with organising, defending, and recommending actions as being either right or wrong. Study of Ethics recommends with what is morally righteous for either individuals or society.  Business ethics deals with how business should consider to react when facing operational or strategic decisions or with controversial situations. Business ethics can be defined as the values which a corporate or a business upholds throughout its operations.  Important characteristics of Business ethics can be summarised as: definingcode of conduct; protection ofsocial groups; control over business misconduct; has a relationshipwith moral and social values; seeks voluntary willingness in acceptance; ensures good image; its implementation requires educating the staff of its values.  Ethical theories represent our viewpoints when we seek guidance while makingbusiness or personal decisions. Different theories of Ethics underscore different opinions. Ethical decision making requires an understanding that, people make different decisions under similar situations.  The major Ethical theories are: i. Teleological Theories: which deal with explaining the consequences of actions. It explains that our actions can lead to good or bad results, which makes them morally right or wrong. ii. Deontological Theories: postulate any of our actions are right and they need not be dependent on their respective consequences. iii. Virtue Theories: they suggest that the individual character of a person determines his inherent ethical values. Character is moulded by the mix of 26 CU IDOL SELF LEARNING MATERIAL (SLM)

virtues, inclinations and intentions that jointly encourage a person to act ethically. iv. System Development Theories: state that organisations develop a work culture that supports ethical values which leads to subsequent ethical actions by its staff.  Unethical behaviour or Ethical misconduct may not be prohibited by law, but it is morally unhonourable. People may act unethically for a various reasons. Unethical behaviourgoes against rules designed to ensure fairness and morality.  Work ethics is a set of moral values employeesneed to develop in the course of delivering the duties of their job. It reflects an employee’s attitude and behaviour towards his or her career or the workplace.  A code of conduct is a set of formal rules created to ensure an expected behaviour for employees to be followed within an organisation. It acts as a standard that employees are expected to meet to contribute towards a more efficient business.  Often mixed up, code of conduct is different to Ethics. While the former refers to set of guidelines for behaviour, ethics provides guidance on decision-making in personal and professional lives. 1.9 KEYWORDS  Ethics: a set of concepts and principles which guide us in determining good or bad behaviour.  Code: a systematic statement or component that of greater law especially : that is supported by statutory force  Behaviour: The way in which a person one acts or conducts himself, especially while dealing with others.  Misconduct:a form of behaviour that is unacceptable to norms set by someone in a position of authority or responsibility  Unethical: a behaviour marked by lackof moral principles, an unwillingness to follow proper rules of conduct. Something that does not conforms to high moral standards : not ethical 1.10 LEARNING ACTIVITY 1. Comment how Business Ethics contributes to raising profitability and productivity of business and improve its goodwill in the market, answer by taking any two examples of Characteristics of Business Ethics. ___________________________________________________________________________ ___________________________________________________________________________ 27 CU IDOL SELF LEARNING MATERIAL (SLM)

2. How does the establishment of Code of Conduct improve the chances better Ethics in an organisation? ___________________________________________________________________________ ___________________________________________________________________________ 1.11UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Ethics 2. What are the fields in which Ethics has diversified? 3. Why is being ethical more voluntary rather being enforceable by law? 4. Identify major causes of Unethical behaviour at workplace 5. Differentiate Code of Conduct to Code of Ethics Long Questions 1. How will ‘ethical decision making’ help a business attract best talent as prospective employees? 2. Why it is important to be ethical, even when it is not legally binding? 3. How do standards of behaviour determine personal Ethics? 4. How does an ethical demeanour helps a business maintain strong public image? 5. Why should business be truthful even if it may spoil immediate relations with its stakeholders, explain with at least two examples. 6. How can an established Code of Conduct help counter third party misconduct? 7. How can the learnings of Social Contract Theories help draft secure Code of Conduct for companies? 8. Highlight the importance of Virtue Ethical Theories, to motivate employees for adherence to ethical behaviour 9. How can a strong management intervention correct Ethical misconduct? 10. How can organisations remove the fear of reporting unethical behaviour among staff? B. Multiple Choice Questions 1. Ethics attempts to answer the questions: “What actions are right or wrong in particular ________?” 28 CU IDOL SELF LEARNING MATERIAL (SLM)

a. jobs b. circumstances c. environment d. responsibilities 2. Business ethics is the study of how a business should react to operational and strategic ___________ a. situations b. decisions c. dilemmas d. problems 3. ________________ Theories are concerned with the consequences of actions a. Teleological Ethical b. Deontological Ethical Theories c. Virtue Ethical Theories d. Development Ethical Theories 4. ________________Theories state that an organisations ethical value of actions is determined by its ability to develop a work culture that supports ethical conduct. a. Teleological Ethical b. Deontological Ethical Theories c. Virtue Ethical Theories d. System Development Ethical Theories 5. Employees are more likely to do wrong if they are _________________________ a. afraid of superiors b. paid low wages c. want to change job d. not aware what’s right or wrong 29 CU IDOL SELF LEARNING MATERIAL (SLM)

Answers 1-b, 2-b, 3-b, 4-d, 5-d 1.12REFERENCES Text Books:  S.A. Sherlekar, Ethics in Management, Himalaya Publishing House  William B. Werther and David B. Chandler, Strategic corporate social responsibility, Sage Publications Inc  Robert A.G. Monks and Nell Minow, Corporate governance, John Wiley and Sons Reference Books:  W.H. Shaw, Business Ethics, Cengage Learning  Beeslory, Michel and Evens, Corporate Social Responsibility, Taylor and Francis  Philip Kotler and Nancy Lee, Corporate social responsibility: doing the most good for company and your cause, Wiley  Subhabrata Bobby Banerjee, Corporate social responsibility: the good, the bad and the ugly, Edward Elgar Publishing  Satheesh Kumar, Corporate governance, Oxford University, Press 30 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT - 2 DEFINITION & NATURE CORPORATE GOVERNANCE STRUCTURE 2.0 Learning Objectives 2.1 Introduction 2.2 Corporate Governance: Meaning, objectives, significance 2.2.1 towards understanding Corporate Governance 2.2.2 A Historical perspective of Corporate Governance 2.2.3 Benefits of Corporate Governance 2.3 The Structure of Corporate Governance 2.4 Objectives of Corporate Governance 2.5 Significance of Corporate Governance 2.5.1 Example of Corporate Governance 2.5.2 Instances of bad governance practices 2.6 Corporate Governance and Business Ethics 2.7 Summary 2.8 Keywords 2.9 Learning Activity 2.10 Unit End Questions 2.11References 2.0 LEARNING OBJECTIVES After studying this unit, you will be able to:  State the meaning of Corporate Governance  Explain the role of Corporate Governance in business decision making and operations  Appreciate the growth of modern version of Corporate Governance  Discuss the how Corporate Governance helps to create a reputation of business  Describe the structure of organisation to implement effective Corporate Governance  Identify how Ethics is the foundation of Corporate Governance 31 CU IDOL SELF LEARNING MATERIAL (SLM)

2.1 INTRODUCTION This section deals with the role of Corporate Governance in creating responsible and world class corporations which deliver economic growth and common social benefits. It also explores the relationship between ethical principles and how business needs to govern itself. Good and responsible practices have always been expected from business. It is a fact that businesses exploit common resources for their economic objectives, therefore their use needs to create social good. Modern day Corporate Governance is a structured way of doing business correctly and ethically to ensue long term economic growth and also create social benefits. Corporate governance is about accountability, transparency, fairness and responsibility. Often viewed as a statutory requirement the true nature of Corporate Governance emanates from the heart of management, as laws merely do not ensure ethical behaviour of business. It aims to create a commitment among the Board of Directors and top management to operate under transparency to maximise shareholders capital and build long term value for the company. It ensures that people are aware of their roles and responsibilities to streamline the organisational operations. Good corporate behaviour, individually by companies and jointly among industry has a direct or sometimes an indirect bearing on economic development. Ethics and Corporate Governance go together, as the former is the guiding principle on which the structure of rules and policies are created. It is the awareness of ethical behaviour towards the society which makes the corporations to be committed towards the principles of good governance. Business needs to be fair towards all stakeholders through ethical principles and good governance. 2.2 CORPORATE GOVERNANCE: MEANING, OBJECTIVES, SIGNIFICANCE 2.2.1 Understanding towards Corporate Governance We all are aware that companies or modern corporations are complex organisations. As a company grows in size and operations there is an inherent need to create policies that control its operations. As more and more employees find their place at the workplace there is a requirement to build a mechanism to guide their work, measure their performance against the laid objectives. As the scale of operations becomes more complex, there are ever more people whose interests get aligned to the functioning of the business, as we have come across in the previous module, these are stakeholders. Each group of stakeholders, be it internal or external, have conflicting demands and the success of a business is to manage and even drive 32 CU IDOL SELF LEARNING MATERIAL (SLM)

their interests towards common benefit and growth of the business. Hence there is a need to build a system of rules, practices and processes by which the operations and working of a corporation will be directed and controlled. Simply stated governance is a system through which any entity operates or is controlled, be it a school or a business or even a country. It keeps actions of employees under accountability. It is a balancing act to keep the interests of all stakeholders aligned to the greater interest of the organisation. Governance with respect to the functioning of business is defined as Corporate Governance. Corporate Governance involves building a framework to achieve the greater objective of a business while dealing with every aspect of management, this may include developing action plans, devise controls for internal processes, design means of performance measurement of employees and machines and even means on how to disclose information to external parties. Its time now to put a formal definition to Corporate Governance:  The Centre of European Policy Studies (CEPS) defines corporate governance as the ‘whole system of rights, processes and controls established internally and externally over the management of the business entity with the objective of protecting the interests of the stakeholders’  The Organization for Economic Corporation and Development (OECD) defines as ‘Corporate Governance is the system by which business corporations are directed and controlled’  The second CII Task Force on Corporate Governance (2009) defines as: ‘Good corporate governance involves a commitment of a company to run its businesses in a legal, ethical and transparent manner, a dedication that must come from the very top and permeate throughout the organisation’ Corporate governance signifies the heart of how a business is operated, directed or controlled. It comprises how the board members are constituted, how they perform their roles and how they are accountable to the stakeholders. It is important to note that the board of Directors are not untouchable to criticism of their actions or audit and inspection of their decisions made, after all it is the money of the shareholders that they manage, it is the money of the customers which they receive as revenue for the company. Corporate Governance is also how the board empowers the organisational team towards managing the business activities throughout the geographical and functional spread of the organisation. The essence of corporate governance flows from the intention of the top management, the board of directors who may want a set of rules, policies or control mechanism to direct corporate behaviour. The role of other stakeholders, advisors and consultants to the 33 CU IDOL SELF LEARNING MATERIAL (SLM)

corporation add flavour to the set of rules, however the prime ownership of corporate governance is the prerogative of the top management. Any business that acts abruptly in the absence of rules and regulations will not be able to sustain attention of its existing or attract attention of possible investors. As such abrupt actions may flow from the pure personal thinking of the promoter, investors may consider this to be a risk to the long-term growth of their money. They will always prefer their investments under safe hands which are guided by a proper set of rules. Companies with good corporate governance always are a step ahead to secure the trust of investors in particular and the community at large. It’s not just enough to secure good policies and rules as a mark of corporate governance but it is also important to showcase this strength to the stakeholders. We can also say that: ‘Corporate Governance is what keeps the company in news headlines, good or bad’ Keeping a company in good headlines comes from what is known as ‘Good Corporate Governance’. It requires the board to manage operations in a transparent manner, secure trust of investors and maximise the value of the company for its shareholders and partners over a long period of time. It seeks to integrate the interests of all participants involved, build accountability in actions, right from the CEO to the last employee. As you may easily search the website of any company, there is always a section that provides details of its board of directors, a message from each one will always mirror their commitment to rules and regulations. There are even some companies that make some of their policies available on the open webspace to create awareness and trust. Companies aim to achieve a have a high level of corporate governance within organisations that would be sign of their commitment to good values. Shareholders also consider good values through corporate governance an additional virtue over and above the need for higher returns on their capital. Companies wish to demonstrate good corporate citizenship through policies which reflect environmental awareness, ethical behaviour and sound corporate governance practices. Good corporate governance contributes to creation of transparent rules and accountability towards directors and executives, something which is always preferred by shareholders. No business or its employee is considered to be above the polices and principles laid down. While there is a prime need to maximise shareholder wealth, Corporate Governance also seeks to ensure that interest of other stakeholders are not foregone or surrendered. In this endeavour a general environment of trust and confidence is created among parties that may have conflicting interest towards business. Like there should not be any undue removal of 34 CU IDOL SELF LEARNING MATERIAL (SLM)

staff to secure higher profits, there needs to be concern towards the environmental sustainability even if it may involve spending additional amounts as a care towards immediate surroundings. 2.2.2 A Historical perspective of Corporate Governance: The need for Corporate Governance has always been there since the very start of organised business. Government departments ensure statutory requirements concerning company affairs that require disclosure norms for listed companies to protect rights of investors and minority shareholders. The need for a structured requirement of Corporate Governance was not felt until the companies were ready to share information to the needs of the investors and shareholders. The need for an organised Corporate Governance was felt as late as in 1990s when CEOs of some notable American companies were fired for unethical behaviour under pressure from investors and other stakeholders, even though they enjoyed comfortable relations with the board of directors. This was followed by the East Asian financial crises in 1997, which saw the crumbling of economies in South Korea, Philippines, Malaysia, Indonesia and Thailand. Many people voiced their concern over lack of strong governance in these economies. It further gained importance after the busting of the ‘dotcom bubble’ in 2001. This was when hundreds of start-ups in online sales industry collapsed due to mismanagement of affairs of these companies. Such companies were started by eager enthusiasts with ideas to make money quickly over the new found internet marketplace. Investors were excited to fund such start-ups on promise of overnight success, however the sheer absence of business acumen and experience of these newbies led to mis-management of funds and collapse of the entire structure. The dotcom bubble debacle resulted in a global economic turmoil. Since then, the idea has gained popularity to have a mechanism to disclose financial information, share performance indicators, make public the details of ownership of businesses and how relations are maintained with shareholders. There is now also an interest on how an organisation is committed to ethics and values. With emerging globalisation and competition it is not just enough to manage the shareholder expectations. There is a need for strong regulatory mechanism to ensure proper use of investor funds and adding value to the business. 2.2.3 Benefits of Corporate Governance Corporate governance ensures a system to direct and control the functioning of corporations. The responsibility of how to direct and control the operations of a company falls on the board of directors. They must also ensure presence of internal controls to protect company assets. 35 CU IDOL SELF LEARNING MATERIAL (SLM)

A good corporate governance system is a vital starting point to ensure the following values to the business organisation: Enhanced reputation Good governance along with transparency in internal policies of a company, clarity in control mechanisms and how the management handles relationships with its partners signify improved reputation of the company in the society. Ability for better decision making Clear demarcation of roles among promoters, directors, management and employees ensures proper processes are followed. Such a clarity about roles and accountabilities leads to better decision making. Lower Risks Avoiding current and possible risks is a hallmark of good governance. Perseverance of governance policies is an insurance to avoid expected risks and also to build hedge against unforeseen ones. Reduction and absence of risks builds trust among the internal and external stakeholders. Regular capital flow A strong financial management approach towards ethical practices in the use of funds and also transparency in transactions leads to wider access to sources of capital. Clarity of operations and fund utilisation promotes trust within the investor community. Compliance to regulations Good corporate governance is a mark of commitment to follow local laws and regulations and effective risk management. This prevents possibilities of penal action by the government for not meeting statutory requirements. Retaining Staff Possibly the most important benefit of good corporate governance is that staff feels part of a well governed company. This leads to lower employee turnover which is a mark of improved productivity and lower costs. Other benefits of good corporate governance practice can be summarised as follows:  Provides guidance to the board and managers about goals of the business  Ensures that the best interests of all stakeholders are considered by the management  It promises long-term success of businesses which jointly contribute to national economic growth  Helps to create and maintain good relations with investors which allows the company to raise capital easily, when required 36 CU IDOL SELF LEARNING MATERIAL (SLM)

 Creates a favourable impact on share prices through the trust that develops while following good practices.  Higher transparency in planning and usage of scarce company resources helps ensure lesser wastage, it also avoids instance of favouritism and corruption in their allocation  Allows for proper sharing of information and also maintain security of confidential data  Good governance helps promote and build a stronger brand. Strong brands deliver higher market share, drive sales and improve customer loyalty  Improves the perception of people about the business and its:  products or services  practices of good governance  workplace environment and practices  commitment towards Social Responsibility  gives a fair picture about the leadership at the helm of affairs  Following well laid out polies and rules makes the business more resilient to crisis and mitigate business risks like natural calamities or operational disruptions. Planning for higher resilience is the responsibility of the board to ensure manging risks more evenly and grow in an unfriendly environment  It also ensures business continuity and improves its ability to adapt to changing situations and exploit new opportunities 2.3 THE STRUCTURE OF CORPORATE GOVERNANCE As we have learnt that following corporate governance is the prime ownership of the top management. For this work, the structure of the board in particular and that of the complete organisation in general should be properly structured and be capable enough to undertake independent and objective decisions. The composition of the board that is capable to drive Corporate Governance has to be balanced enough to accommodate different and varied interests groups. While working on to develop procedures and practices to take care of concerns of stakeholders, the board needs to maintain transparency and share the drafts with concerned partners for reviews and recommendations. It also keeps them informed of proceedings that may tend to impact the functioning and objectives of the company with the implementation of the designed policies and procedures. Beyond being a policy making body the board also has some other roles, like to regularly monitor the management as against the implementation of Corporate governance and raise objections in case any significant divergence are observed. The major objective of the board is to maximize long term value and maximise shareholder’s investment. Objectives of Corporate Governance 37 CU IDOL SELF LEARNING MATERIAL (SLM)

The prime objectives of Corporate Governance are to deliver an efficient management structure which aspires to strengthen the trust and confidence of all the stakeholders and ensure that the business moves on to the path of growth. Other objectives can be listed here as follows: 1. The most important objective of corporate governance is creating transparency in operations and procedures with respect to relevant stakeholders. This may not imply sharing information irrespective of any restrictions, rather as per the privacy policy relevant information has to be shared to those involved in decision making. 2. Good corporate governance aims to develop efficiency in the management of businesses. Since modern business uses many resources including the element of time, it is important that the resources are put to the best possible use. Scarcity of resources demands their allocation to such activities that have the potential to deliver the best results. Any lesser than efficient use of time, human and monetary capital may lead to cost increase or non- availability of resources for better uses. 3. Using scarce resource and putting to best possible use is ensured with developing criteria for task completion. At times projects have activities that are sequenced in separate yet connected tasks. Like in a construction project, the flooring work cannot start till underground wiring work is done. Therefore to avoid delays in subsequent activities each task needs to have a begin and end criteria 4. As we have seen that along with the objective to maximise returns to shareholders, it is important to ensure that interests of other stakeholders are not compromised. Therefore a corporation needs to be sensitive to the demands of the society while in the pursuit of its economic goals. 5. The management is required to operate in the most legitimate and ethical manner in its pursuit of economic goals. This is a self-control by the top management to demonstrate to the society of its wider objectives. 6. Unethical transactions in business emanate from either favouritism or involve backdoor payments from vendors. This leads to supply of sub-standard or dangerous material, it may also lead to damage the name of the company due to actions of a few corrupt employees. Good governance aims to lay down strict policies for any business transaction that may happen with suppliers or customers. 7. Companies like Tata Steel work with a very large vision to improve the livelihood, surroundings and the society of those who are affected by its functioning. Good governance is not just about putting appropriate policies but it also seeks to correct the wrongs that may have happened in the past due to action of the business. 8. Corporate governance aims for a democratic form of functioning by encouraging all employees to contribute to share ideas in their capacity. This is done both during the design stage and anytime during the implementation of operations and governance policies. 38 CU IDOL SELF LEARNING MATERIAL (SLM)

9. Under the scope of policies developed, all staff get equal and fair judgement under matters of conflict. Corporate governance ensures that there should be no undue advantage given to any party on the basis of position or proximity to the top management while dealing with work place conflicts. The aim is to develop an equable work environment. 10. All stakeholders, more important the employees, customers and investors prefer companies with proven track record of good governance. Past performance of strong brands, preferred products, proven record of dividends paid on time, employee centric policies, all make an organisation to be of repute to the society at large. 11. It is important to design policies to support corporate governance, while it is another to ensure their enforcement. Therefore an important objective is also to design a regular monitor and control mechanism that covers all levels of management and employees. 2.4 KEY TAKEAWAY a. Corporate governance signifies a set of rules, policies and processes created to direct and manage an organisation. b. The board of directors are the primary force which influence, drive and also own the implementation of corporate governance in a company c. Companies marked by bad corporate governance are under doubt to conduct profitable operations or deliver profits at the prices of other social factors. Such corporations fail to attract investor capital and loose reputation among the society. d. Corporate governance also includes awareness about environmental concerns, promote ethical behaviour among the staff and other partners of business, plan for compensation to those affected by the expansion or operations of business and reduce risk. e. The main pillars of corporate governance are accountability of decisions and actions, transparency in operations, fairness in behaviour and monetary dealings and clarity about individual responsibility. 2.5 SIGNIFICANCE OF CORPORATE GOVERNANCE As we seen previously corporate governance refers to how a business governs itself. It comprises laws, principles and policies that direct and control a company. Corporate governance ensures that people understand their roles and responsibilities. This makes it quite significant to ensure proper operations and build a positive image of the business with the stakeholders and the society. The most important objective of a business is to fulfil its economic and social goals. However in practice economic goals mostly take priority over its social fulfilment. That leaves us with the question of, do we need to make business accountable for its actions and decisions. For 39 CU IDOL SELF LEARNING MATERIAL (SLM)

e.g. hundreds of people lose their livelihood when banks default due to an over enthusiasm to shell out unsecured loans to companies with dubious distinctions. The case of banks loosing thousands of cores as non-performing assets (NPAs) to Kingfisher created a crisis and led to the closure of the company. Hundreds of its staff lost their jobs and till today the banks are yet to salvage their money lent out to the company. Another example is when Punjab National Bank issued fraudulent guarantees to Nirav Modi to the amount of more than thousand crore. Such instance occurs when banks compromise on regular procedures of vetting proposals and financial performance of company before approving loans. Such financial debacles are common and more so in advanced countries, but do we relay hold the management and the directors accountable for such misappropriation of process and losses, the answer to this surely not very positive. Arguably corporations act within limits of law, however as a converse, in absence of compliance the same companies engage in unethical and at times criminal activities, when there is no fear of being prosecuted or punishment. Such behaviour emanates as the economic benefits of greater than the costs committing felony and typically they are borne by others. Once such frauds are reported it is first the shareholders who are affected and lose money as the market punishes the stocks. Secondly the common depositors pay for the losses incurred by the banks due to NPAs of big businesses and the taxpayer pays for the court cases by government on the businesses. While the companies pay fines and legal fees due to such frauds and many people lose their employment either due to shut down or forced closure by the government, the top management involved rarely feel economic hardships. To overcome the repetition of such scenario there is a need to have a good corporate governance structure in place to ensure ethical functioning, economic growth, just distribution of wealth and social prosperity. It is necessary to establish a thorough system of checks to prevent financial crisis and to make corporations responsible and accountable to their actions. While such initiatives have been taken by respective governments there is an additional need to create a standardized structure to prevent culprits to move freely between countries. Following reasons can be attributed to the significance of corporate governance for every business: 1. Improved Accountability It is vital to ensures that each and every employee of an organisation is aware of their individual roles and responsibilities. This is important to make them accountable of their decisions and actions. In absence of such a clarity it is easier for the higher management to pass on the blame on their subordinates, while the subordinates will not make operational level decisions or take ownership of their actions if they are not clear of their responsibilities. Proper accountability allows for implementation of a recognition and reward system to benefit those who have performed on laid down expectations or at 40 CU IDOL SELF LEARNING MATERIAL (SLM)

higher levels. Accountability also helps to identify staff who may need to be removed from their duties due to lower continuous low performance or due to possible negligence in the discharge of their work. 2. Lowering incidence of risks Presence of proper rules, principles and clear accountabilities help mitigate day-to-day risks. Occurrences of frauds, criminal activities, scandals are minimised or avoided through strict implementation of rules with well down policies and rules. With each employee aware of their own responsibility and that they will be accountable for decisions and actions, there will be very low probability of illegal actions or to pass on the responsibility through and effort to create a blame on any other staff. With lesser efforts to be committed to handle petty issues, the management will find it easier to focus and commit itself to bigger and more strategic issues. The stakeholders and investors will also prefer to invest in growth oriented companies which are not stuck up in regular small and irrelevant issues. 3. Creates Public acceptance Many businesses which are either closely held or engaged in unethical practices are reluctant to share information about ownership, funding and dealings with other partners. Such closely held and secretive business are always subject to distrust among the community. Off late maintaining certain amount of transparency has been mandated through government interventions which makes it mandatory for companies to share financial and ownership information whenever required. Public acceptance is built upon sharing of required information at various levels in and outside the companies, this is a hallmark of them being guided by proper corporate governance. 4. Increase in donations For non for profit companies working on social issues towards uplifting the cause of downtrodden groups it is very important that they continue to receive regular inputs of donations. Such organisations need to be open about the sources and the usage of their funds. Donors are more likely to continue their contributions to such companies who keep them well informed of how their money has been utilised. Government is also interested to know the source of such donations. Proper corporate governance helps to efficiently utilise funds and keep information readily available to enhance donors’ confidence and improve chances of securing continuous and further funding inputs. Besides the above major reasons that give vital significance to the concept, there are other explanations which can also be given to highlight the importance of Corporate Governance which are not too direct in their effects, yet they have a far-reaching positive impact on the working and image of a business: 41 CU IDOL SELF LEARNING MATERIAL (SLM)

5. Builds Positive Corporate Culture Commitment to good governance by the management helps to promotes a culture of excellence among the employees. Rather than being tied to deal with small and insignificant blames being levied among fellow employees, with a strong and positive corporate culture the entire organisation works hand-in-hand to achieve greater heights. 6. Enhances Reputation Good product and service experiences come from good ideas at the management level which contribute to build a strong and good reputation for the company in the market. It helps build brand power, higher negotiation power with external partners and even privilege to work on prestigious projects with the government. 7. Develop Clarity Organisations are regularly marred by issues and problems. An organisation marked with good governance can identify such issues easily and pre-empt their effect on its operations. This reduces the negative impact mitigate the risk internally. 8. Promotes Financial sustainability With reduced threats concerning safety of investments, absence of any legal issues, higher performance, a corporation looks forward to promote financial sustainability for its investors, shareholders, customers, directors, staff, suppliers and even whole community. 2.5.1 Example of Corporate Governance While it is rare for companies to make the headlines for initiatives towards good corporate governance, we very often come across examples of companies facing problems and issues due to mismanagement and dishonest practices. This is probably because good governance is taken for granted and therefore does not make headlines. PepsiCo is one company that has been consistent in the practice of good corporate governance and continues to update its polies in this regard. A very good example is observed while the company was engaged in the design of proxy statement for 2020. During this exercise the company made sure to take inputs from its investors on areas like:  the composition of the board, how to maintain its diversity to include members from diverse backgrounds  Long-term strategy, corporate purpose, and sustainability issues  Good governance practices and ethical corporate culture  Human capital management  Compensation discussion and analysis  Shareholder and stakeholder engagement 42 CU IDOL SELF LEARNING MATERIAL (SLM)

2.5.2 Instances of bad governance practices  Companies do not cooperate during the process of financial audit process or go to the extent of selecting auditors with dubious distinction, their joint connivance lead to publication of irregular or noncompliant financial documents  Remuneration packages designed with bias or not on merit lead to dissatisfaction among staff who perceive this as favouritism  Board of Directors appointed without consideration for equal representation interests of stakeholders 2.6 CORPORATE GOVERNANCE AND BUSINESS ETHICS Ethics is the right way to do a thing or the right way to act in a particular circumstance, it is being truthful to others and not to indulge in any action that may be detrimental to the interest of any individual or group. Corporate Governance is how a business is run, how its affairs are conducted vis a vis the expectations of its stakeholders and other interest groups. How both these are interrelated, makes for an interesting journey that we will explore here. Ethics are the guidelines that are essential in the design and implementation of corporate governance and at board level decisions and in actions. It’s how ethical a choice the board makes in strategic planning, signifies the strength of corporate governance policies which direct the business activities and how the business wants to achieve its objectives. It evolves itself and works under three significant frameworks of Value, Ethics and Morality to ensure the shareholders’ capital is not subject any illegal, unethical or hazardous commitments. It maybe unjust to say that both concepts are similar as one is the guiding force for better governance while the other is the fundamental thought on which such policies or principles are built. An organization committed to ethical practices will also undertake some superlative corporate governance practices as well. As we have seen in the previous chapter that Business Ethics involves how general principle of ethics are applied to deal with business decision making. At times Ethics grow beyond laws, that something that is considered correct is not yet defined in a law. While at times some laws may not be ethical to other societies. Ethics is the awareness of ‘what is right or what is wrong’. This is what guides the principles of corporate governance for the running of business activities. Organizations must apply the moral guidelines provided by Ethics in decision making and operations. Ethics applied to business is ‘business ethics’, it is not something different to the theory of ethics, instead, it is how ethics are applied to business situations. 43 CU IDOL SELF LEARNING MATERIAL (SLM)

Corporate governance aims to run company operations such that they are ethical to its investors, employees, customers and the entire society. It will look to justify the interest of not just its shareholders but all the other stakeholders. Needless to repeat, the commitment to corporate governance comes from within and there is no need for it to be regulated. Yet in recent times governments around the world have laid requirements for companies to define some minimum governance policies with the objective to avoid exploitations, mis deeds and also as a yardstick in times of arguments. The three pillars of corporate governance: Transparency, Accountability and Protection of stakeholders interest basically emanate from commitment to ethics. These have developed from the age old practices of using proper weights, not to commit to adulteration or cheat the customers. Ancient societies laid strict penalties to merchants for acts of cheating or frauds in their dealings. Such is the beginning of corporate governance from the foundation of ‘Rule of Law’. It is concerned with the ownership, control and accountability of corporations and how they pursue their economic objectives under wider societal and ethical considerations. Corporate governance is how best management practices are inculcated while meeting possible legal requirements under the umbrella of ethical standards. There are a number of reasons for businesses to act ethically. A mutual effort to ensure corporate ethics at different levels in business hierarchy begins with a clear understanding of core values, individually with employees as well as by their joint cooperation with management. Generally issues of corporate governance are common across organizations, but each company requires a unique approach to develop and implement principles that are unique to the requirements of the particular organisation. Good governance is, ultimately, the absolutely necessary for continued growth and fortune. Some ethical standards that guide the design and commitment to Corporate Governance are: 1. Transparency in operations, accountability to decisions and actions and integrity towards employees and customers 2. Provide appropriate representation to women and other vulnerable groups at higher posts and decision making levels and also to provide opportunity for them to voice their concerns. 3. Build mutual trust between government, company and employee 4. Promote ideas which lead to the overall welfare of all stakeholders and society at large instead of interests of only the company. Application of Ethical principles to corporate governance will ensure: 44 CU IDOL SELF LEARNING MATERIAL (SLM)

1. Improved understanding and sensitivity among owners / management and employees. With ethical principles in corporate governance, employees feel motivated and commit hard work. 2. Motivation and better understanding lead to higher economic growth for the company. 3. Better understand of business requirements by the government and similarly better understand of government policies by the business. Such mutual awareness leads to design of favourable policy development between government and business. 4. Increase the Confidence of minority shareholder. 5. Better opportunities to weaker section to voice their concerns. 6. Identification of the company as a responsible entity and give it a leadership role in the industry. 7. Ethical principle help in the growth of a company's economic as well as social welfare. In recent years owing to abuse of power in the upper levels of corporate structure the value of corporate governance has highly increased. Unethical behaviour to the extent of criminal activities by some corporate leaders, like declaring company insolvency while maintaining personal wealth, manipulating share prices at the stock market, diverting funds to unscrupulous accounts have all increased the focus of better commitment to ethics and strict rules to maintain corporate governance. The most severe example was the lack of suitable governance and omission by many financial organizations which led to the 2008 global financial crisis. It’s clear that ethical business practices add to the reputation of not only the company, but also of its brand, its employees, investors, governments, and consumers; but can also impact the entire industry as well. The term \"sustainable success\" is used to highlight the current situation of owners focussing more on short-term success, rather than building strong foundation of long term productivity. A sustainable and healthy business must be based on ethical business practices. Promoters may achieve success in the short term through unethical practices, but such unscrupulous methods eventually catch attention of the society, media or the government. Eventually, such businesses lose their reputation and right to conduct business. Proper adherence to corporate governance ensures that appropriate management structure is in place to establish and drive long term strategic objectives and plans. A wide variety of risk and issues face business owners. Risk is in integral part of a business but managing risk through ethical business practices gives a competitive edge to the company. Consistence over a longer period of time in performing right actions builds reputation and also leads to attracting quality people and achieve the ultimate goal of business performance and business success. 45 CU IDOL SELF LEARNING MATERIAL (SLM)

In India the codes of corporate governance emphasize the need for actively managing ethical performance of companies. While the levels of detail these codes deal will differ drastically, they all recommend that the board of directors should ensure a ‘code of ethics’ to be developed and endorsed. Most codes provide some guidance in how to develop a ‘code of ethics’ either by highlighting the issues that should be addressed in the code or they outline a process that can be followed for designing a code or its review. Conclusion Corporate Governance and Ethics have their individual virtues. While Ethics are moral standards, corporate governance are guidelines for companies to function. Their combination within corporates improves the outlook of the business towards the stakeholders and gives it a strong and positive image. It builds its strength as compared to competition both within and outside the society. Their being together is the need of today’s business. Finally it is recommended organization who want to improve their value or productivity, should adopt business ethics and corporate governance practices in their organizations culture. Good corporate governance is said to be beyond legal requirements, rules and regulations that have been put up by the government. It is has a flavour of ethics and the values to help drive business. It signifies the trust established between corporations and their various stakeholders over a period of time. Good corporate governance practices ensure corporate success. But their absence will surely lead to wrong and unacceptable practices and corporate failures. A synergy between vision and mission statements, the core values of the business and its code of conduct is the perfect ingredient for making ethics workable and confer benefits to business. 2.7 SUMMARY  Corporate governance presents the moral, ethical frameworks and value frameworks under which decisions are taken in an organization.  Corporate governance ensures that long term strategic objectives and action plans of a business are designed well and a proper management structure exists between business ethics and day-to-day functioning of the organisation.  Good Corporate Governance results in higher profits and builds reputation of the corporation.  It strengthens relations among stakeholders and contributes to determine and control the strategic direction and performance of companies.  Accountability is a major element of Corporate governance it offers a transparent medium for governing critical activities, and procedures.  Good corporate governance starts is not legally bound but with own internal practices and policies of an organisation. 46 CU IDOL SELF LEARNING MATERIAL (SLM)

 The major objectives of Corporate Governance are: a. creating transparency in operations and procedures b. develop efficiency in the management of businesses c. putting to best possible use to scarce resources d. pursue economic goal and maximise returns to shareholders e. management operates in the most legitimate and ethical manner in its pursuit of economic goals f. undertake ethical transactions in business g. seek to correct the wrongs happened in the past due h. aim for a democratic form of functioning i. all staff to get equal and fair judgement under matters of conflict j. add reputation to the brand and the company k. ensure the enforcement of corporate governance through setup of monitor and control mechanism to cover all levels of management and employees  Although the issues regarding corporate governance are common across companies, each organization needs unique governance principles.  Benefits of Corporate Governance l. Improves reputation of the organisation m. Allows for better decision making n. Lower the Risks of operations o. Ensures Regular flow of capital p. Improves Compliance to regulations q. Helps in Retaining of Staff r. Provides guidance about goals of the business s. Ensures best interests of all stakeholders are considered by the management t. Create and maintains good relations with investors u. Creates a favourable impact on share prices  There are a variety of reasons that need organizations to act ethically. Since behaviour differs as per the priority of values in an organisation, a mutual effort to deal with corporate ethics starts at all levels, both for organization as a whole and for employees individually. 2.8 KEYWORDS  Governance: It is the act of monitoring, control or providing direction to something, through a medium of better transparency, accountability and rule of law.  Corporate Governance: A system by which business is controlled and its actions are directed through a combination of rules-regulations, processes and practices. It is the 47 CU IDOL SELF LEARNING MATERIAL (SLM)

duty of the board to conduct the affairs of the business to best suit the interest of all stakeholders and deliver strategic objectives of the organisation.  Transparency: The ease at which information can be retrieved from an organisation, both voluntary and under statutory compliance.  Reputation: The opinion or belief that are held about some person, event or an entity. Something which defines the character and overall quality as seen or judged by people.  Accountability: The instance of keeping a person or entity responsible for their actions and making them face the consequences on such actions, good or bad. 2.9 LEARNING ACTIVITY 1. What are the benefits which occur to an organisation by following good corporate governance system? ___________________________________________________________________________ ___________________________________________________________________________ 2. Common the prime objectives of Corporate Governance to deliver efficient management structure to strengthen the trust and confidence of stakeholders and ensure business growth. Give at least two examples other objective of Corporate Governance ___________________________________________________________________________ ___________________________________________________________________________ 2.10 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Governance 2. Define Corporate Governance 3. Why it is said that Corporate Governance comes from heart? 4. Why is accountability an important characteristic of Corporate Governance 5. How does a principle of Ethics shape the Corporate Governance policies of a company? Long Questions 1. Why do you think that a business needs to manage well in order to achieve its economic goals and objectives? 2. Why it is difficult for the promoters and board to plan and implement Corporate Governance within the organisation? 48 CU IDOL SELF LEARNING MATERIAL (SLM)

3. How a business will be successful to satisfy the needs of all stakeholders with proper implementation of corporate governance policies and also manager their conflicting interests? 4. Justify that the Directors and promoters of a business should be subject to similar accountability standards as other lower-level employees? 5. What are some of the steps that companies undertaken to ensure that the society is aware of their good governance? How does this help in their endeavour for growth? 6. Give two examples from Indian and International perspectives to support the growth of Corporate Governance in recent times. 7. Mention the benefits of corporations working under well-defined governance policies and rules. Give detailed explanation with examples for any two of them. 8. Is it correct to say that Transparency and Accountability are the two major pillars to implement good ethical governance in a company? Support your claim with relevant examples. 9. Why do you feel that investors will pay attention to non-economic factors also before making decision to invest in a company? 10. How does application of ethical principles help a company in achieving economic and social objectives through good corporate governance? B. Multiple Choice Questions 1. governance is a system through which any entity ____________ a. grows and prospers b. operates or is controlled c. functions d. is penalized 2. It is the intention of the ___________________ to design and implement set of rules, policies or control mechanism to direct corporate behaviour. a. Government agencies b. Investors and shareholders c. top management and board d. members of society 3. The most important objective of corporate governance is creating _____________ in operations and procedures with respect to relevant stakeholder. 49 CU IDOL SELF LEARNING MATERIAL (SLM)

a. Authority b. Accountability c. Responsibility d. Profitability 4. Companies marked by bad corporate governance fail to attract _________ a. Investors’ attention b. Government regulations c. Societal concerns d. Penal action 5. The aim of corporate governance is to run company operations which are __________ to its investors, employees, customers and the entire society. a. profitable b. relevant c. beneficial d. ethical Answers 1-b, 2-c,3-b, 4-a, 5-d 2.11REFERENCES Text Books:  S.A. Sherlekar, Ethics in Management, Himalaya Publishing House  William B. Werther and David B. Chandler, Strategic corporate social responsibility, Sage Publications Inc  Robert A.G. Monks and Nell Minow, Corporate governance, John Wiley and Sons Reference Books:  W.H. Shaw, Business Ethics, Cengage Learning  Beeslory, Michel and Evens, Corporate Social Responsibility, Taylor and Francis 50 CU IDOL SELF LEARNING MATERIAL (SLM)