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

concept of free enterprise is at the heart of debate on outsourcing. Companies, with an aim to improve competitiveness take up outsourcing to reduce costs while maintaining or improving the quality. Outsourcing need not always be cross border, but the real benefits are experienced only while dealing partners in developing countries marked with low cost labour and raw materials. Although it is a great economic advantage to business to save costs or to reach out to distant areas through outsourcing, it has become a very contentious ethical issue due to loss of jobs in the domestic market and perceived growth of the foreign economy at the expense of our own. It is believed that among other objectives of business is to create employment, therefore if it undertakes manufacturing outside the economy the business is not performing its duty effectively. To some extent it could be true, that local manufacturing creates demand as wages paid to domestic workers would be used as purchasing power, when the manufacturing happens outside there may not be any wages or purchasing power, therefore the company then may have to depend more on finding external markets for its products, as it is not creating local purchasing power. This further creates an ethical dilemma that the business is just contributing to its own profits, neither it is creating local jobs nor its products are being used in the home country. Another ethical concern is a more egalitarian view towards outsourcing is that of employing labour at unfair wages or under poor working conditions in third world outsourced countries. Many times social awareness groups have targeted MNCs for fuelling labour exploitation in third world countries. Other issues could be using child labour in foreign countries or infringement of human rights, in countries where their laws may not be as stringent in the home country of the MNC. Lastly Korean companies like Samsung were used by American manufactures like Whirlpool in the 1960s and 70s to outsource manufacturing at low cost in order to fight competition from Japanese manufacturers of white goods. In the process Samsung is said to have acquired immense knowledge in the manufacture of such products and later it built its own brand of appliances, today it offers major challenge to even American companies in the same segment. Outsourcing was a major topic of Presidential debate during the 2016 US election and Mr. Donald Trump raised voices about bringing manufacturing back to American soil and create jobs. 2. Workplace diversity and equal opportunity at risk Transnational companies move overseas either in search of markets or in search of low cost production. In any case they have come across the legal system on the 201 CU IDOL SELF LEARNING MATERIAL (SLM)

foreign countries, which usually are developing countries in Asia or Latin America. While in home countries they are under immense pressure of legislation or interest groups to ensure workplace diversity and provide equal opportunity, such awareness could be largely absent in the foreign countries. This may result in uneven distribution of wealth in host locations thus creating social tensions among the ethnic groups. Even if the MNC wants to implement such equal practices the local culture or laws may not support its efforts, at that time the company will be in an ethical dilemma to continue operations at the social cost of the host country and possible erode its image in the home country or take the challenge to counter the local culture and resistance to create a social difference. While first option is chosen many times the second one has not yielded favourable results to either of the parties. 3. Employment Laws and Ethics The employment laws in many of the third world countries may not be as developed as that of the home countries. Let’s call it an attraction for the MNCs to go and operate there, as the wages will be at minimal rates, probably a 12 hours shift, not so stringent employee welfare practices like paid maternity leaves, or insurance cover in hazardous industry. Another major considered above also, is that of child labour, for poor countries child labour a different definition, where poor families need an additional earning member and it may not be looked down as bad as in the developed world. Local needs may demand the employment of children to improve family earnings. Such cases are best solved by the MNCs taking up CSR efforts to provide free education and health care to the children involved in employment, make efforts to restrict them for participating in hazardous industries, another way could be to improve the wage rate for adults so the employment of children is not required to augment the family earnings. It is therefore suggested that MNCs should ensure similar norms with regard to wages and quality of products in any country that they operate in. This can be done by setting good examples and liaison with local governments to make amendments to their existing laws, while the only lag in this would that such actions of MNCs may be regarded as interference in the politics of the host country. 4. Human Rights Laws Another aspect of unethical practice related to human capital is with regard to human rights laws in the countries where the MNCs may want to operate. It is very sensitive issue that, does the operation of the MNCs supports regressive human rights violations or does it in anyway contributes to improvement in the situation. MNCs 202 CU IDOL SELF LEARNING MATERIAL (SLM)

have not yet been found to be very much interested in mitigating the human rights situation in third world countries where such violation are prevalent. It is an ethical duty not to enter any agreement with countries who indulge in such practices or to immediately withdraw operations once such instances come to light. While the first can be ethically self-imposed, the decision about the latter is sometimes restricted by the amount the investments already made in such countries and any abrupt exit may lead to all be wasted. Considering the power enjoyed by big corporations it is expected that they find any local regime allows them to observe human rights within their organization and their presence can reduce the human rights abuses, they should actively work to improve the local conditions. The United Nations Guiding Principles on Business and Human Rights has done some work in this regard to guide the interests of corporations in these troubled spots. It has recommended a three point strategy of Protect, Respect and Remedy as a voluntary framework to define and allocate the responsibilities with relation to human rights between the countries and corporations. Another significant contribution towards protection of Human Rights in third world countries has been taken up by the European Union Commissions in April 2020, when it introduced a legal framework for both due diligence and monitoring the behaviour of MNC operations. EU has obligated sharing of non-financial information of businesses operating in conflict zones and even in industries which finance conflicts, like timber and African diamonds. 5. Maintain similar quality in products Apart from differences in labour laws, relaxations may also be present in quality of products to be sold in the host country markets. With absence of stringent product testing there is possibility local laws may allow use substances that may be banned in home markets. Many pharmaceutical companies have been charged of initially not selling latest drugs to the poor countries on the excuse of their high production costs. This puts the lives of thousands in danger in such countries. Considering this possibility the World Health Organisation – WHO initiated the COVAX project to increase the production of Covid-19 vaccines so they are available to the citizens of third world countries also. Another ethical issue is once the drugs become obsolete or new versions are introduced the same pharma companies now dump the market of poor countries with these obsolete medicines. These old versions may now have been banned in developed countries, this practice is taken up just to clear their existing stocks or to keep the international production lines running. This is in complete disregard of the 203 CU IDOL SELF LEARNING MATERIAL (SLM)

possible harmful effects of the banned products that may happen to the people in these countries. 6. Environmental Pollution One major accusation levelled on the MNCs is that they do not care for environmental issues of the host countries. Cases of reckless mining in African countries by Australian companies, eroding fragile ecological balances by deep sea fishing by Japanese fishing companies are some of examples when MNCS demonstrate interest in just the extraction of the natural resources rather than showing any concern to local environment. Such ethical issues with respect to environmental pollution happened due to absence of regulations in the host country, they being be much inferior to those at home. Many regulations with regard to waste emission and pollution control, have been framed jointly by all the countries. However their enforcement may not be that strict in third world countries. It is important to note that the ecosystems in the poor countries provide mass employment to the indigenous population, unresponsive exploitation may lead to harming of the environment and also deprive the local population of their century’s old employment. When the MNCs leave the country, the will be denied of even their traditional practices and may experience mass unemployment and poverty. It is therefore expected by the MNCs to show similar concern to the host country environment as is expected as per laws of the home nations, secondly create awareness among the local population towards sustainability. 7. Corruption and bribery Foreign markets are the target of many MNCs, and at times from different countries also. Biggest example is the global arms market, estimated to be more than US$ 95 Billion. There is intense competition among nations at this level to secure lucrative defence contracts worth billions of dollars, which leads to a very dangerous practice of corruption at the government levels in both home and host countries. This has even seen change in governments on such accusations. Similarly there are also unethical practices present to secure business deals where corruption is prevalent at corporation of executive levels. Indulgence of bribery is also found at times to seek exemptions from regulations, or waive off legal charges with change of governments. At times corporations have even illegally tied up with anti- social and drug mafia to secure trading rights and in turn fund their anti—social activities. 204 CU IDOL SELF LEARNING MATERIAL (SLM)

8. Interference in political affairs The attraction of operating in foreign is just so high that at times the MNCs even indulge to manipulate the political process in the host countries. The age old term of Banana Republic, was coined when some American fruit importers went to extent of owing cultivable lands in Central American countries of Guatemala and Honduras to grow and export bananas to US. The nexus became strong that maintained their army and went to the extent of overthrowing the elected government in Honduras. The countries became so dependent on these companies that they could not take any legal action on them and till today these countries are victim of exploitation by a different kinds of corporations, the drug cartel. Similar examples of direct involvement into host countries political affairs may not be prevalent now, but there are cases when MNCs openly support candidates in elections, or give donation in return to favours. Such practices are a demonstration of extreme unethical behaviour when it comes to international political relations. It is the responsibility of home country governments to rein in the MNCs from their arbitrary behaviour to meddle in the internal political affairs of foreign countries, the results of which can be catastrophic. 8.2.1 Examples of corrupt practices by MNCs in international business Following are some examples of large-scale corruption committed by MNCs in international business. Walmart in Mexico As per a report by the Mexican Employers Association, MNCs operating in Mexico spend more than 10 percent of their turnover on corrupt acts. The Walmart scandal which came to light in September 2005 was among the biggest, this resulted in the company’s share prices dropping by $4.5 billion. Internal and external investigations found rampant bribes were paid to facilitate construction of Walmart stores throughout the country which is a huge market for the company, to the extent one in every five Walmart stores are in Mexico. Investigations have implicated many Walmart senior level management staff of either complacency or awareness of this whole unethical act. GlaxoSmithKline in China China’s Xinhua news agency reported in September 2013, about a police investigation into bribes being paid by pharma manufacturer GlaxoSmithKline. Police alleged that the agreed for an internal audit process, which indicates their knowledge and acceptance of the this allegation. 205 CU IDOL SELF LEARNING MATERIAL (SLM)

Alcatel in Costa Rica The mobile manufacturer Alcatel agreed to accusations to have paid $2.5 million in bribes to get a contract to provide mobile phone services in Costa Rica. Later the company paid a penalty as social damages committed to the country. 8.2.2 Culture and Ethics as influence to International differences With business becoming more spread across nationalities, there are higher chances that employees will encounter superiors or subordinates from different cultures. Other cause of people coming in contact with other cultures could be immigration, which is the movement of people from their home country to other countries. Secondly many MNCs depend on expatriates to business in other locations. Expatriate are foreign employees who move and work in another country. Therefore it is important for MNCs to understand the challenges of multinational to prepare better to deal with such possibilities. The four dimensions of Culture presented by Geert Hofstede, a Dutch Psychologist explain its influence on business decisions; 1. Power Distance Within organisational hierarchies there is always a distance which is maintained. This is mark of differences in skills, responsibility, accountability, remuneration and above all power that is held at each level. Power Distance is therefore the tolerance level of difference in power between two levels of hierarchies. Different cultures have differing levels of tolerances between organisational levels. Traditional cultures are acceptable to high power differences, marked by closed door cabins of senior managers outlining the work place where junior staff are stationed in a large common area. This is a small yet, significant reflection of the power distance acceptance level of the organisation. While more open organisations believe in a low power distance, whose offices can be identified with open work centres partitioned by waist high walls and glass doored cabins and conference rooms. This in itself gives the identity to an open thinking process that is cherished in such organisations. Executives from high power difference organisation if placed in low power difference one will find himself the constant uncomforting situation of loss of privacy, while in a reverse case the executive from low power distance will find himself hard to breath in closed door cabin environment. Comfort not the only factor, there is marked difference in decisions being taken, ways in which information is shared, outlook towards external issues. Power distances are a mark trust displayed towards subordinates, virtue of equality in the organisation, perceived difference between levels and privileges held by staff of differing levels. 206 CU IDOL SELF LEARNING MATERIAL (SLM)

2. Individualism Vs Collectivism Cultures are marked by the relative importance being placed between the role of an individual and that of the group. Cultures which prefer individual contributions are working under Individualism, while those that have developed through centuries communities working together may prefer Collectivism. Smoothness in multinational operations may grind to a halt if the local preference for individualism is ignored by collectivism approach of the foreign partner. The local employees may feel that their individual contribution is being ignored, which in fact may not be true and the foreign management may be trying hard to create more a team work. Both may be correct in their understanding of organisational dynamics therefore MNC operations require a judicious mix of both, where individual performances are not ignored yet encouragement is provided to work as effective team and gather managerial synergies in the process. 3. Uncertainty Avoidance Conducting business beyond home soil adds to the risks and uncertainties that keep on changing in one location over time and across locations at one point of time. People with cultural differences perceive tolerance of uncertainty differently, this can also be identified with enterprise ability of a market. Not only shareholders will demonstrate response to uncertainty differently it is the employees, suppliers and even customers who will either too hyper to market fluctuations or be calm even in uncertain situations. Cultures marked by scarcities and low development will see heightened anxiety to even small movements in the market, to the extent people start storing essential supplies, as this is the way they have been programmed to deal with. Companies operating such markets may experience sudden spurts in demand and then a prolonged loss of demand once people have overstocked themselves. While in more mature markets and cultures with abundance, people have learnt to weather the effect of diminutive changes and have a vision for long term growth. Similar movements can also be noticed on stock markets of developing and developed countries. 4. Masculinity and Femininity Countries like Sweden, Norway, New Zealand, Denmark and Finland have very inclination of women occupying senior positions in corporates. Such may not be the case with many of Asian and African countries where male domination is still at a high, even the USA which proclaims itself of champion or equality the share of women at top C-Suite is less than 20%. Apart from the composition of sexes in the corporate hallways, it is the degree to which traditional masculine qualities are 207 CU IDOL SELF LEARNING MATERIAL (SLM)

emphasised at the workplace. Masculine major societies are marked by importance to work, clear rules on gender differences, priority of work on other aspects of life. Such cultures also lay importance on earnings achievements and employee are ready to sacrifice even personal relations for these, when we say employees it means both men and women, as even women are believers in this concept. Companies in high masculinity societies count on work and result oriented employees. In contrast feminine societies have preference for creating interest at work and combining it with leisure. A work life balance is not frowned about here. This is a lesson for MNCs operating in such different destinations. While those in the former can motivate their employees through pure attraction of higher remuneration and security that in the latter type try with policies that provide free time and leisure as motivation. 8.2.3 Theoretical Framework of Business Ethics for International Business There are three models that may be used to consider whether a business action is ethical or is unethical, these models are: 1. Utilitarian model Utilitarian approach of Ethics focusses on the outcomes of actions. The theory holds it is the consequences of actions that determine its being ethical. Higher the benefit created to greater the number people, the action will be considered ethical. Such approaches are used to justify wars to end conflicts, it will be the victorious who will consider war as ethical while those vanquished will feel an unjust domination upon them. Similar thinking is also adopted in business as a moral reasoning to its actions when it comes mining in Australia by removing aboriginal communities, or clearing rain forests in Malaysia to plant palm trees to meet demands of kitchens around the world. This leads to the outcome that corporations in domestic or international operations should weigh the outcome of their polices and actions in terms of cost and benefit to different stakeholder, differently. So while the cost of removing local communities may be high for them, it will be comparatively low when considered by the value of the extraction to the mining firm and the difference it makes to profit margin as considered by the investors and shareholder of the company. While this maybe make sense to those who want it to be believed, the limitation of this belief is that outcomes of actions, good or bad are never a certainty. It is also considered to fail in terms universal justice, as it assumes benefits to the majority, while rights of those with lesser voices may be sacrificed in this effort. In relation to this school of thought, managers are made to answer the two important questions: 208 CU IDOL SELF LEARNING MATERIAL (SLM)

a. how to decide the relative importance of different stakeholders? b. how to measure the relative importance of costs and benefits for different stakeholders? 2. Moral Rights Model Decisions made while considering the rights of the people whose lives are affected by them are categorised under Moral Rights Model. The approach recognises that all human beings have inherent fundamental liberties and rights that should not be infringed upon by any decision made by anybody. Such decisions may be taken in their interests of maybe completely independent of their interests. A the effects of moral decisions will never harm anyone’s rights. Therefore if a foreign company has secured a contract for commercial fishing in Lake Tonle Sap in Cambodia, it should ensure that the local fishing communities, who have been dependent of this occupation for centuries and have maintained a sustainable environment, are not affected due to this modernisation. The problem of this model is how business will choose which the rights of which stakeholder has to be protected, if an action protects the right of one and hurts that of others. The approach assumes six fundamental rights to people in this process: a. Right of free consent: The right of every individual to show their consent on issues which may affect them, and their individual opinion to be treated fairly by those making decisions about them. b. The right to privacy: people can choose to do as they may please while being away from work and should have control over information about their private lives. c. The right of freedom of conscience: the right given to any individual to refrain from undertaking any or carrying out any order which may violate their norms as per either morality of religious beliefs. d. The right of free speech: individuals have a right to criticize actions of others, even if they are considered to be ethical at other places. e. The right to due process: the right to get an impartial hearing and for grievances and a fair treatment in the way towards justice. f. The right to life and safety: the basic right to live without any fear from any individual or organisation and prevent violation of health and safety. 3. The Justice Model The justice approaches propagatethose results of business decisions should ensure a fair and equitable distribution of benefits as well as costs among all stakeholders, big or small. The immediate impact of this is on HR policies which should ensure that similar work done by either local workers of by foreigners need to be remunerated equally, or if there are 209 CU IDOL SELF LEARNING MATERIAL (SLM)

differences in level of authority then also the differences should be according to the extent of authority and responsibility. So if dock worker working in Jebel Ali port Dubai are from multi nationalities, they all have to be provided with similar safety gear during their work, accommodation and above all similar wages for similar set of work being done by them. Such decisions should not be based on either race, gender or nationality. Similarly the cost of ecological conservation and water resource management in Serengeti National park area in Tanzania should be shared by all hotels as this would be a common benefit to boost tourism for the entire region. Each of the above three models represent a different yet complementary way of determining which action is ethical in a particular time or with respect to any particular community. Business decisions, especially in the international market are very much prone to conflicts among the cross cultural partners, therefore it is difficult to apply any one model to a situation. Decisions which may makes sense to a majority of people may be the cause of harm to others and fail as per the moral model, similarly doing justice to all may result is losing efficiencies in the international market. We have covered the topic international cultural differences in our previous module and this is not the time the same, yet its learnings have a profound effect in the conduct of multinational and multicultural environments. The problem of ethics in the international business environment gets more complex as values and judgements have differing connotations in diverse groups. Practice receiving and giving gifts is widely acceptable in India, especially on religious occasions like Diwali it is most common to distribute gifts to business partners, but something like this considered to be unethical by western culture. Influenced by the parent MNCs ideology today many Indian subsidiaries have put a ban on their Indian staff to either receive or give gifts. 8.2.4 Conclusion and Recommendations The hallmark of every business specially those dealing in countries across borders should be to conduct their operations in the utmost ethical manner. This is all the more important when there is movement of employees across borders. Any indication by the management in this regard will prompt them act individually without even the knowledge of the home office. In these times no corporation let alone their employees can deny the fact that unethical operations are looked down by the world community and may result in serious reprimand measures by law enforcement agencies in either of the countries. Such situation usually arise in countries where sufficient laws are not present or their enforcement is not as stringent as in the home countries. While there is other situation where the MNCs may want to create a difference yet the pressure of cultural differences or total apathy of local government may prevent any such initiative to be taken up. There is always the clash either of protecting the overseas investment by agreeing to be neutral to violations of human rights or workers mismanagement at the hands of local supervisors or to raise these issues seriously with the 210 CU IDOL SELF LEARNING MATERIAL (SLM)

authorities and risk the wrath of being identified as meddling in the internal affairs of the native country. A recommended course of action could be that before MNCs enter into a country they need to make through analysis of situation with respect to sensitive issues like human rights, corruption, or workers equality. In case any of such are present the company needs to take a stand that their will deal only with legitimate agencies and in their own domain will ensure that provisions are made to reduce the ill effects of these problems in the host countries. MNCs today have immense powers to motivate the governments in the home countries to raise such issues at international levels and forums. When MNCs start taking responsibility to better the culture of the places they operate in it will be give them an identity of being saviours of humanity and not just money monsters ready to exploit the resources of any country in their hunger and greed for profits and power. Some multinational companies have gone to the extent of creating Codes of Conduct to guide their executives to refrain unethical practices in foreign lands. They could be about setting minimum standards of behaviour or raising conscious attitudes towards local culture and sensitive issues. Such codes have either been made form learnings from previous mistakes or observations or to set good practices, while in some cases they are country specific to be followed under the local laws. In this case the importance of these codes is much more as compared to in-house corporate codes based on voluntary abstinences or guidelines, as in these case there is a legal sanctity attached to them. 8.3 CORPORATE GOVERNANCE REFORMS Before we move into the topic of reforms required in the domain of Corporate Governance, we will raise an important question. When companies, agencies, markets and even countries are aware of the importance of Corporate Governance, then why they do not adopt better measures voluntarily? The answer lies in one of the basic human behaviour to let things remain as they are till a major crisis happen to trigger the need for reforms. The analysis done thus far implies that there is no doubt to say that better corporate governance pays dividends for companies, stakeholders, existing markets and emerging markets of developing countries. The initial part of the new century saw many emerging markets beginning to reform their corporate governance systems. As expected many of these changes have occurred in the as a response to crises. Although some reforms have been quite major and resulted in introduction of fundamental changes in the capital market function and control the listed companies. As in India and Korea. At other places changes have been only partial and changed just a few specific aspects such as in Turkey. Many countries have also made voluntary adoption of corporate governance codes. In any case all reforms are quite useful for underlaying the importance of corporate governance in the industrial culture of their respective countries. 211 CU IDOL SELF LEARNING MATERIAL (SLM)

The demand for good corporate governance practices is growing in emerging and developing market countries to help improve performance of businesses and financial institutions. It has been generally realised that access to affordable national and international finance is linked to good corporate governance practices of companies. Demands to lower the cost of capital investments, broaden the goals of financial stability and overall economic growth have also been seen in the developing market. These are good signs to show that the expectations of stakeholders in developing markets are in harmony to those in more developed ones. Good governance of listed companies has impacts directly the development of capital markets and ensures investor protection. Similar views are held for financial institutions, irrespective of being state-owned or private institutions, here also good governance mechanism is crucial to the sustainability of the banking sector, special funds and insurance companies. When it comes management of microfinance institutions, Governance important to scale up their operations, while for medium and high growth companies it plays a critical role to align stakeholder confidence as these companies seek to access finance for capital investments and expansion projects. 8.3.1 World Bank – an Introduction The World Bank is an international organization setup in 1944 to provide finance, share advice, and undertake research for developing economies and to provide aid to their endeavour for economic advancement. The bank generally acts as an organization which attempts to fight poverty and offer developmental assistance to emerging middle and low income countries. The World Bank and International Monetary Fund - IMF were founded together as per the Bretton Woods Agreement. It is one of the world’s largest sources of funds and provides a pool of knowledge for developing countries. World Bank is composed of 189 member countries, having staff from more than 170 countries, and presence in more than 130 locations. The World Bank Group is a partnership of five unique global institutions who work to provide sustainable solutions to reduce poverty and create shared prosperity in developing countries. The World Bank’s five institutions are: 1. The International Bank for Reconstruction and Development 2. The International Development Association, IDA 3. The International Finance Corporation, IFC 4. The Multilateral Investment Guarantee Agency, MIGA 5. The International Centre for Settlement of Investment Disputes All the five share a commitment to reduce poverty, increase prosperity, and promote sustainable development. 212 CU IDOL SELF LEARNING MATERIAL (SLM)

Although named as a bank, the World Bank, is not actually a bank as seen in traditional meaning. The World Bank along with its subsidiary groups operate and develop their own financial assistance policies and aid programmes, with the common goal of serving capital needs of countries. The World Bank has set for itself two goals with an aim to achieve by 2030:  To end extreme poverty to below 3%; measured as people living on less than $1.90 a day.  To increase income growth in the bottom 40% of every country in the world thus increasing the overall prosperity of the world countries. 8.3.2 World Bank and Corporate Governance World bank has dedicated teams and groups to look into the efforts of governments globally to guide setup of good corporate governance policies. The major of the groups are as follows:  The Corporate Governance Team works as part of the Financial Markets Integrity Group to undertake policy development and provide advice on implementation of corporate governance practices related to the financial sector and capital markets.  The Financial Market Integrity - FMI group is part of the Finance and Markets Global Practice of the World Bank Group.  Corporate governance works as part of the FMI group. The CG group focuses to improve corporate governance practices in developing market countries. It provides technical assistance, intellectual leadership. It also supports the World Bank Group’s advisory service programs, operations related to lending and investment and through engagements with bodies who work setting standard such as the OECD (Organization for Economic Cooperation and Development), FSB (Financial Stability Board) , and the Basel Committee on Banking Supervision. 8.3.3 The Corporate Governance (CG) Group of World Bank The CG group has four focus areas in the process of carrying out its corporate governance agenda: i. the legal and regulatory foundations for corporate governance of listed and unlisted companies ii. improve the governance styles of banking institutions, particular government-owned banks iii. improve the governance of micro-finance institutions and financial cooperatives iv. improve the capacity of policy regulators and supervisors to better implement and enforce the enacted reforms 213 CU IDOL SELF LEARNING MATERIAL (SLM)

The group works closely in each of these areas with countries to in the following fields: i. find reasons for errors and provide plan for reform ii. support the implementation of reforms by strengthening the legal and regulatory frameworks iii. improving regulatory and supervisory capacities to monitor reforms iv. provide advisory services to member countries v. provide training to those engaged in drafting corporate governance policies in member countries and knowledge sharing vi. supporting policy level reforms at government level vii. supports in identification of corporate governance implementation and provide improvements at institution level The focus of the Corporate Governance team is two main areas: the financial sector and the capital markets. 8.3.4 Corporate Governance in the Financial Sector Unique aspects of Corporate Governance issues in financial sector:  Financial institutions are responsible to uphold the trust of common public and protect the interest of depositors  Balance sheets are less transparent and have a greater ability to hide problems  Good governance requires board members and senior executive to fulfil their legal responsibilities by providing effective strategic business direction and manage corporate risks while also assuring transparency and effectiveness in organization, risk assessment and mitigation, and availability of sufficient capital support  Good governance harmonizes the supervision of financial institutions, protects interests of depositors and other investors in commercial banks, builds and maintains public confidence in the financial sector, and ultimately contributes to its integrity and credibility.  Financial institutions are vulnerable in unique ways towards liquidity shocks which may result in institutional and financial instability. Good corporate governance supports intelligent supervision and regulation, to enhance the role and effectiveness of supervisors of financial institutions.  Many developing countries are interested to have wide-ranging corporate governance reforms of their government owned banks to improve their efficiency and transparency. Development banks now play more prominent roles in the economies of emerging markets, financial inclusion, development of SMEs, housing and agriculture 214 CU IDOL SELF LEARNING MATERIAL (SLM)

sectors and in arranging infrastructure finance. Good corporate governance helps these institutions to fulfil their objectives more effectively. The tools developed by Corporate Governance Group strengthen the corporate governance policies and practices of financial institutions, government-owned banks and for commercially-banks. a. Corporate Governance of Government-Owned banks The CG Group undertakes advisory services to countries who wish to improve the governance of their state owned banks while focusing on common corporate governance issues applicable at three different levels:  At Regulatory Level: Develop a corporate governance regulatory environment, for e.g. codes, laws, ownership policies, listing rules  At Government ownership level: Develop policies on director nomination, director remuneration and evaluation; creating framework for performance monitoring; preparation of dividend policies; support creation of specialized ownership entities; and define objectives and mandates of state-owned bank.  At Institution level: diagnose and implement corporate governance reforms for specific state banks based on the methodology of the International Finance Corporation. b. Review of Governance of Commercial Banks The CG group also conducts reviews of commercial banks in context of the World Bank’s Financial Sector Assessment Program. The review is undertaken to evaluate the aspects of legal and regulatory framework which are applicable to commercial banks and provide a detailed recommendations on reforms to be made at different levels to include topics related to legal and regulatory, supervisory and specific to the institutions. c. Governance of micro-finance institutions and financial cooperatives The CG Group has also developed a methodology to assess the corporate governance framework of micro-finance institutions and financial cooperatives. Reviews are carried out across the world in context of the World Bank’s Financial Sector Assessment Program (FSAP) and the technical assistance program. The program recommends reforms at different levels to include aspects of legal and regulatory, supervisory and specific to institutions. 8.3.5 Steps taken by the CG Group in the Financial Sector  Technical assistance has been provided through advisory programs for modernising corporate governance programs of government owned banks, completed in Tunisia, Algeria, Bangladesh. 215 CU IDOL SELF LEARNING MATERIAL (SLM)

 Bank governance reviews conducted in more than 10 countries which has resulted in changes in supervisory approaches and legal and regulatory frameworks, like in Georgia, Moldova, and Sri Lanka.  Institution level work that included fining the level of corporate governance and preparation of action plans for government owned banks, as in Colombia.  Developing operational principles to assess performance and improve the governance of microfinance institutions  Strengthen the governance of municipal cooperatives as in Peru 8.3.6 Corporate Governance in Capital Markets Corporate governance has an important role to play in development of capital markets. Good Corporate governance can reduce vulnerabilities of emerging markets to financial crise, reduces costs of transaction and capital. Capital markets themselves ensure transparency in dealings and about the companies listed there. Capital markets have listings of private companies, state-owned enterprises, to access capital and also enhance their transparency. Good corporate governance encourages investor confidence and promotes outside investment. Role of CG Group in Corporate Governance in Capital Markets The CG Group uses different tools to identify the strengths and weaknesses of corporate governance framework present in both listed and unlisted companies. a. Corporate Governance Advisory Services The CG Group provides advisory services to countries who wish to improve corporate governance policies and practices which are applicable to listed and unlisted companies at separate levels:  Regulatory Level: Develop corporate governance regulatory environment. For e.g., laws, codes, listing rules  Supervisory level: Build capacity of regulators with by providing tools and training to Capital Market Authorities, Central Banks, and Government Owned Companies.  Market Level: Improve the corporate governance environment by building capacity of intermediaries of corporate governance like Directors Institutes, consultants and mediators, while jointly working with IFC. b. Corporate Governance ROSC 216 CU IDOL SELF LEARNING MATERIAL (SLM)

The CG Group conducts corporate governance country assessments under the Reports on the Observance of Standards and Codes (ROSC) initiative. Under ROSC initiative the World Bank provides assistance to member countries so they can strengthen their corporate governance frameworks. The goal of this initiative is to strengthen the policies practices of corporate governance in listed companies present in emerging economies. The ROSC assess:  the country’s legal and regulatory framework as well as practices and compliances done by its listed firms  the framework and practices with reference internationally accepted benchmarks  policy recommendations to strengthen corporate governance as in board practices, structures for control and audit, methods and degree of transparency and disclosure of information and protection of rights of shareholder  Offers an action plan for the country to set important steps, responsibilities, and timelines c. Steps taken by the CG Group in the Capital Market Sector  Corporate governance Reports on the Observance of Standards and Codes done for 60 countries, with as emphasis to implement ROSC recommendations to strengthen the power of regulators, develop codes of corporate governance and create of directors institutes.  Technical assistance programs completed in more than 10 countries: Guatemala, El Salvador, Peru, Colombia, Ghana, Kenya, Vietnam. 8.3.7 Role of The International Finance Corporation in Corporate Governance The IFC is a member of the World Bank Group, and is an international financial institution which offers services to promote private sector participation and development in developing countries in the fields of investment, advisory, and asset-management. IFC works with private companies to attract investments advices on measures to retain them through promotion and adoption of good corporate governance practices and standards. IFC and the World Bank work to deliver corporate governance support to increasing number of clients and stakeholders by:  IFC checks a company’s corporate governance practices and gives advice on means to improve them  It provides specialised advisory services on improving effectiveness of boards and for governance of family businesses 217 CU IDOL SELF LEARNING MATERIAL (SLM)

 It builds capacity of local partners, directors institutes, and institutions like media, education and training which work on corporate governance services and reporting  It works with governments and regulatory institutions for improving corporate governance laws, codes, regulations and requirements of listing companies  It works to raise awareness of corporate governance through conduct conferences, workshops and through of release of publications Promoting Corporate Governance Practices in Investment seekers IFC is the first development finance institution to make corporate governance analysis mandatory as part of its due diligence process for every investment transaction. This practice has been in effect since July 2011, while using its Corporate Governance Methodology in this analysis, which is a system to evaluate the corporate governance risks and opportunities present in client companies. This methodology helps to uncover risks and opportunities, while suggesting direction and solutions which address the issues and help in improvements. It focuses its commitment to promotion of good corporate governance practices, protection of shareholders’ rights, creating accountability among the board of directors, ensuring the control environment, stipulated disclosures and transparency. Overt the recent years IFC’s corporate governance programs have continued to meet its directive to improve governance practices of companies in key emerging economies. In addition to direct engagement with private companies, the program also works with partners and statutory regulators, meanwhile building the local infrastructure to encourage the broader benefits of good corporate governance. This program operates through focused interventions in selected countries. IFC takes help of tools such as inhouse publications and through guidance provided by its global knowledge management team. Working With Local Partners  IFC works to build capacity of its local partner intermediaries as a central belief of its program  In the year 2017 alone IFC signed agreements with more than 37 partner intermediaries to work with them to promote improved practices in their local markets  It conducted 67 workshops for its intermediary partners and trained 466 trainers in its methodology and tools, who take this methodology in their respective countries  In 2017-18 IFC partners with the support of IFC projects, tools and materials, themselves conducted 198 workshops, to reach more than 2000 companies and over 5000 participants Its partners generated sales revenue of over $2 million by providing such services, which indicates viability of their operations. By end of 2017-18, it is estimated that more than 80 of 218 CU IDOL SELF LEARNING MATERIAL (SLM)

its partners across the world have improved their capacities, while generating more than $6 million in sales revenue related to corporate governance with support of IFC. Working with Regulators An important section of work on corporate governance by IFC’s involves to help improve corporate governance’s regulatory environment. Moving ahead of its experience as an investor, while working closely with the World Bank, IFC endeavours to ensure that new regulations and codes of corporate governance in emerging economies are based on established international best practices. In 2017-18, IFC provided guidance to follow and implement laws which were newly adopted, codes, regulations and scorecards. For e.g., in the Philippines, its project team supported the country’s Securities and Exchange Commission to adopt a new corporate governance code, which came effective on January 1, 2017. The new code looks at board practices with an emphasis on fuller disclosure and reporting. Working with Private companies In 2017-18, IFC provided detailed advice on ways to improve corporate governance practices to 65 companies. Out of this, 25 of them implemented the changes which were recommended to them and reported positive impacts on their performance, to the extent:  Was able to collect financing of more than $900 million  improvements in productivity, accountability of directors, ease in operations, and loan terms or valuation. The rich experience of IFC in respect to working on Corporate governance has led other development banks and investors working in emerging economies to ask it for guidance on corporate governance strategies. It’s Framework of Corporate Governance Development has helped finance development institutions to adopt Methodology on Corporate Governance, which is a process to analyse governance structures and policies. While working in collaboration with the World Bank, IFC is working to improve the governance of Public Limited companies in various countries, like Colombia, Pakistan, Peru, Egypt, Serbia, Vietnam and Turkmenistan. IFC’s work of working on corporate governance has also extended to companies located in fragile and war affected countries, like Iraq, Lebanon, Bosnia and Herzegovina, Myanmar, Kosovo, Sierra Leone, Liberia and Yemen. In 2017-18 IFC announced a new initiative to improve appointments of females on boards and 219 CU IDOL SELF LEARNING MATERIAL (SLM)

to increase the number of women at leadership positions in corporate. All the measures have ultimately helped strengthen the private sector in emerging economies. From the perspective of overall results and impact made, the company level advice provided by IFC’s CG Group has helped companies secure financing of more than $7.6 billion, which includes $1.7 billion from IFC. Integrating issues of related Environment, Social and Governance Corporate governance has come to be a paramount consideration in decision making among investors. In addition the international investors increasingly pay equal attention to ways companies behave on other viewpoints like commitment to environmental concerns and social indicators. Investors perceive the way businesses manage environmental and social issues as similar to how they will handle all other strategic and operational challenges. It is therefore essential to evaluate environmental, social and governance practices in an integrated manner. In 2017-18, IFC has developed a comprehensive market guidance and practical tools to conduct this assessment for emerging economies. 8.4 CORPORATE GOVERNANCE REFORMS AND SEBI The Stock Exchange Board of India formed a Committee on corporate governance on June 02, 2017 by Mr. Uday Kotak (the executive vice chairman and managing director of Kotak Mahindra Bank). The committee also had different stakeholders representing Government, industry, stock exchanges, academicians, proxy advisors, professional bodies, lawyers etc. It was set with the aim to improve corporate governance standards of listed companies in India. The Committee comprised of twenty five members had to submit its report within four months. The Committee was supposed to provide its report comprising recommendations with the objective to improve Corporate Governance standards of listed Indian companies on the following issues: 1. Ensure independent spirit of Independent Directors look for their active participation in company functioning 2. Improvement in safeguards and disclosures concerning to Related Party Transactions 3. Accounting and auditing practice Issues of listed Indian companies 4. Ways to Improve Board Evaluation practice effectiveness 5. Address various issues faced by investors regard to voting and their participation in annual general meetings 6. Issues related Disclosure and transparency, if any 220 CU IDOL SELF LEARNING MATERIAL (SLM)

7. Inclusion of any other subject matter, as the deemed fit by the Committee related to corporate governance in India The Committee made excellent progress of meetings twelve times over a period of four months after which the it submitted its detailed report including many pathbreaking recommendations on October 05, 2017. The Report suggested amendments to some existing provisions and recommended the creation of certain new provisions which it felt maybe required to implement all of its other recommendations. The Committee received letters that included comments and recommendation from the Ministry of Corporate Affairs and the Ministry of Finance. Initially the report was not favourably received by MCA, especially in concerning the extension of jurisdiction of unlisted companies and proposals to amend other core company law principles. Similar comments were also provided by the MoF. The report along with these letters of comments and recommendations of MCA and MoF was later submitted to SEBI for its final consideration. The Committee report was also placed on the SEBI website to attract public comments. With receipt of overwhelming response from different stakeholders like; government, industry, institutional investors, global associations, lawyers etc. Considering the analysis of comments received from comments and under consultation with the Ministries, SEBI considered the recommendations of the Committee. SEBI accepted 40 proposals without any modifications, out of a total of 81 recommendations made by the Committee. It accepted 15 with few modifications, while it rejected 18 and referred 8 for considerations to other regulatory bodies. Some of the important recommendations of the Committee, their acceptance or rejection by SEBI and their impact on Corporate Governance of listed companies in India are listed here below. I. Composition of Board of Directors and their Role The Committee felt that the board of directors as a whole are responsible to all stakeholders to meet the required standards of corporate governance in a company. Based on that premises, the Committee aimed address the issues related to the strength of the board, maintaining its diversity, address issues related to independent directors and disclosures about of skills or expertise of members of the board.  Number of Directors on a Board As per the Companies Act, 2013 and other relevant rules, minimum 3 directors are required on board of a public limited company whereas the SEBI Listing Obligations and Disclosure Requirements (LODR) Regulations have no such requirements. Considering the need of 221 CU IDOL SELF LEARNING MATERIAL (SLM)

sufficient number of directors having diverse backgrounds and bringing skill sets on the boards of listed companies to fulfil their functions and obligations, the committee recommended a minimum of 6 directors on the board. SEBI accepted this recommendation with modifications and added a new clause which requires the top 1000 listed companies measured by market capitalization (with effect from April 01, 2019) and the top 2000 listed companies (with effect from April 1, 2020) should have a minimum of 6 directors. This SEBI’s decision to limit the minimum number directors of larger companies to be based on market capitalization came as a relief to mid-sized and other smaller listed companies to do away the burden of unnecessary compliance.  Gender Diversity on the Board Previously The Companies Act, 2013 and the SEBI LODR Regulations require at least only one woman director on the company board of directors of all listed companies. The Committee recommended having at least one independent woman director on the board of each listed company. SEBI accept this recommendation over a phased manner having at least one independent woman director for the top 500 listed companies measured by market capitalization by April 01, 2019 and for the top 1,000 listed companies, by April 1, 2020. The existing requirement of having at least one woman director was considered to bring about better gender diversity on the board.  Quorum Currently, the Companies Act, 2013 requires to maintain a quorum of one-third of the total strength of board of directors or at least two directors, whichever number come to be higher, for the conduct of every board meeting. While SEBI LODR Regulations did not prescribe any such quorum for board meetings. The Committee came to an opinion that with increased obligations of the boards of listed companies, they should be maintain a higher quorum. Further, the Committee with a view to protect rights of minority, required presence of at least one independent director as a mandatory requirement. SEBI LODR Regulations made amendments by inserting a new clause to make quorum for every board meeting of the top 1,000 listed companies measured by market capitalization from April 1, 2019 and of the top 2,000 listed companies from April 1, 2020 to be one third the size of the board or minimum of 3 members, whichever would be a higher number, while it stipulated to include at least one independent director. 222 CU IDOL SELF LEARNING MATERIAL (SLM)

Limiting the aforesaid quorum requirements to only larger listed companies will save those of smaller and mid-sized from compliance burden.  Separation of Key Positions The Companies Act, 2013 currently requires that any individual will not be appointed or to be reappointed as chairperson of a company as well as its Managing Director or the Chief Executive Officer at the same time, with the exception that the articles of such companies provide for this dual appointment or the company does not function in multiple businesses. SEBI LODR Regulations have mandate for separation of posts of a listed companies. As per recommendations of the Committee, all listed companies having more than 40% public shareholding need to have separate appointment for chairperson and MD or CEO with effect from April 1, 2020. SEBI felt that it may also examine to extend the requirement to all listed companies with effect from April 1, 2022. SEBI accepted the Committee recommendation with minor modification with effect from April 1, 2020, the top 500 listed companies measured by market capitalization will have the board chairperson to be (i) be a non-executive director (ii) will not be related the MD or CEO as per definition of the Act. SEBI accepted recommendations in relation to the composition and role of board of directions with several recommendations:  reduction in the maximum number directors for listed companies from 10 to 8 by April 01, 2019 and to further 7, by April 1, 2020  expand the eligibility criteria for independent directors  disclosure of skills and expertise of directors in the annual reports of all listed companies by March 31, 2020 II. Appointment of Independent Directors The appointment of independent directors is considered to be a good corporate governance practice as Independent Directors are expected to bring objectivity in the functioning of board activities. It is also felt that they will improve effectiveness of the board. The Act defines an independent director to be a director other than a MD or a full-time director or a nominee director. An Independent Director of the board should be a person of high integrity and possess relevant skills, expertise and experience and should not be related to the promoters or the other directors of the company, or even its other holding, subsidiary or associate companies. The appointment of Independent directors is also beneficial the protection of 223 CU IDOL SELF LEARNING MATERIAL (SLM)

rights of minorities. This balances the conflicting interest of different stakeholders and brings an objective view in performance evaluation of the board and the management. Among the most significant Committee recommendations in relation to appointment of independent directors was the expansion of their eligibility criteria. The Companies Act, 2013 and SEBI LODR Regulations require certain objective criteria for selection of independent director. Each Independent director has to submit a declaration that he or she meet the criteria of independence. This declaration has to be submitted at the first meeting of the board in which he or she has to participate as an independent director. After the first meeting of the board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director6. The Committee was of the view that the definition of independence of an independent director should be considered through objective and subjective assessments and these assessments should be both regular and as well as genuine. The following eligibility criteria were recommended by the Committee to be included in addition to the existing provisions: 1. Exclude appointment of those who represent the promoter of a listed company. 2. Requirement to submit an undertaking from the independent director that he or she is not aware of any situation that exists or may be exist in future, which could restrict or impact his or her ability to perform his or her duties with objective and independent judgements and without coming under any external influence. 3. The board of the listed company will take into record the said undertaking after performing due assessment of the authenticity of such an undertaking. The Committee recommendations with respect to improve the eligibility criteria for independent directors were accepted by SEBI without any further modifications. III. BOARD COMMITTEES Delegation of responsibilities to board committees is considered to be necessary for effective governance of listed companies, such committees have the broad range of roles and responsibilities given by the board. The Committee's recommendations addressed issues related to composition of the board committees, it set the minimum number of meetings to be conducted and the quorum to be maintained by each such committee and increased the number and nature of these board committees.  Minimum Number of Committee Meetings 224 CU IDOL SELF LEARNING MATERIAL (SLM)

The original SEBI LODR Regulations required that four meetings of the Audit Committee would be conducted each year, while it did not prescribe the minimumnumber of meetings of other committees. With a view to allow audit committees the required time and opportunity to address matters in addition to the quarterly reporting, the Committee recommended the minimum number of Audit Committee meeting increased to 5 every year. The Committee alsorecommended that all other mandatory board committees should meet at least once annually. SEBI did not accept the recommendations to increase the minimum number of meetings of the Audit Committee, while it accepted recommendations with respect to the minimum number of meetings to be conducted by the Nomination and Remuneration Committee, the Stakeholders Relationship Committee and the Risk Management Committee.  Enhance the Role of Special Committees The Committee observed that the audit committee should additionally review the utilization of funds of the holding company. The suggestion was accepted by SEBI although with a minor modification, through amendment in the SEBI LODR Regulations. The Committee observed that the role of the Nomination and Remuneration Committee included identifying persons who may be appointed in senior management in accordance with the criteria laid down principles. Its role also included recommending their appointment and, or removal from the board of directors. The Committee was of the view that the definition of senior management to be amended as follows: \"senior management\" will mean all officers or staff of the listed companies who are members of its core management team this will exclude the board of directors. This will comprise all members of the management which will be a level below the CEO or the MD or full time director and will also include the company secretary and the chief financial officer. Administrative staff will not be included in the definition of senior management. The Committee’s recommendation were accepted by way of a new sub- clause. The Stakeholders Relationship Committee’s role was amended to include the following:  To resolve grievances of shareholders of listed companies  To include register complaints related to transfer or transmission of shares, or with reference to non-receipt of annual reports or declared dividends, issue of new or duplicate share certificates and conduct of general meetings.  To review measures taken to exercise voting rights of shareholders. 225 CU IDOL SELF LEARNING MATERIAL (SLM)

 To review the adherence to the different service standards adopted by the listed company in respect of different services rendered by the Registrar & Share Transfer Agent.  To review the different measures and initiatives taken by the listed company to reduce the amount of unclaimed dividends and ensure timely receipt of dividends warrants and annual reports or statutory notices by shareholders of the company. The role of the Risk Management Committee was also enhanced to also cover issues related to cyber security.  Composition of Stakeholders Relationship Committee and the Nomination and Remuneration Committee The Committee recommended that at least two third members of the Nomination and Remuneration Committee should be of independent directors, however SEBI accepted only 50% of the members as independent directors. The recommendation on quorum requirements of the Nomination and Remuneration Committee have also been accepted. With respect to the Stakeholders Relationship Committee, the new Regulation states that at least three directors, one being an independent director, will be members of the Committee. The recommendations of the Committee on Board Committees have also been accepted by SEBI with regards to the increased and meaningful participation of independent directors in the affairs of listed companies. IV. Enhanced Monitoring of Group Entities  Obligation on Board of Listed Companies with Respect to Subsidiaries The Committee observed that overseas subsidiaries need to be treated at par with Indian subsidiaries. The Committee gave opinion that an appropriate level of review is required of the board of the listed company on the role of its unlisted subsidiaries for to protect the interests of public shareholders. It made recommendations in relation to responsibility of the board of a listed company with respect to its subsidiaries. These recommendations were accepted by SEBI without any further modifications.  Secretarial Audit 226 CU IDOL SELF LEARNING MATERIAL (SLM)

A Secretarial Audit was recommended as compulsory for all listed companies and their also their unlisted subsidiaries. SEBI LODR Regulations now require that every listed company along with its unlisted subsidiaries should undertake a secretarial audit and attach annex with this the auditor’s report. V. Transactions by Related Party As per Committee recommendations SEBI LODR Regulations were amended and a new provisos was added after the definition and before the existing provisos that any person or entity which belongs to the promoter or the promoter group of the listed company and holds 20% or more of the shares in the listed company will be deemed to be a related party. VI. Participation of Investor in Meetings of Listed Companies The Committee also observed that an increased and better participation by investors will improve good corporate governance. It proposed to remove boundaries of physical meetings and adopt the use of technology for virtual meetings. A new sub-regulation requires the top 100 listed companies measured by market capitalization to hold their annual general meetings within a period of 5 months from August 31st every year. In addition a new sub-regulation requires the top 100 listed companies to provide one-way live webcast of the AGMs. The top 100 listed companies to be determined based on their market capitalization, determined at the end of the immediate previous financial year. VII. Referrals to Other Agencies Certain recommendations of the Committee were rejected or have been referred to other agencies as suggested recommendations were found to infringe on the jurisdiction of other regulators. Like, the proposed strengthening of Institute of Chartered Accountants of India was referred to the Central Government. SEBI also rejected the proposal to remove voting rights on treasury stocks. It also did not take decisions with respect to governance aspects of public sector enterprises. Important recommendations in this regard were independence of public sector enterprises from ministries and consolidation of government holdings. VIII. Conclusion 227 CU IDOL SELF LEARNING MATERIAL (SLM)

The Kotak Committee took important and notable efforts addressed many core issues with respect to corporate governance in India. These recommendations were given while considering international best practices. The amendments made to the SEBI LODR Regulations have come as a step forward to achieving transparency and improve credibility to the Indian corporate environment. 8.5 SUMMARY  Managers operating in transnational corporations are faced with ethical challenges due to differences in customs and practices and how business operations are conducted in international markets.  Differences in international business occur due to varied moral and cultural values across geographical boundaries, absence of local laws, conventions to define behaviour of differences in rules for punitive action from home country  Ethical challenges in social life define people what is right or what is wrong. Wrong behaviour may be considered differently unethical and immoral in different cultures. Therefore perception about dishonest business practice is variable.  Differences in beliefs may cause variances in HR practices across countries as well.  The major ethical challenges that effect business operating in international markets are: outsourcing of manufacturing, Workplace diversity and equal opportunity at risk, differences in Employment Laws and Ethics, disparity in Human Rights Laws, Maintaining similar quality in products, Environmental Pollution, Corruption and bribery, Interference in political affairs by MNCs  There are four dimensions of Culture and Ethics which effect International differences: Power Distance, Individualism Vs Collectivism, Uncertainty Avoidance, Masculinity and Femininity  The three models which are be used to consider whether a business action is ethical or is unethical are: Utilitarian model, Moral Rights Model and The Justice Model  Companies, agencies, markets and even countries are generally aware of the importance of Corporate Governance, even then they do not adopt better measures voluntarily.  When it comes to the need of corporate governance reforms, they are delayed to let things remain as they are till a major crisis happen.  The demand for good corporate governance practices is growing due to the realisation that access to affordable national and international finance is linked to good corporate governance practices of companies. 228 CU IDOL SELF LEARNING MATERIAL (SLM)

 World bank has dedicated teams and groups to look into the efforts of governments globally to guide setup of good corporate governance policies.  The Corporate Governance (CG) Group of World Bank is primarily assigned the task to drive the importance of Corporate Governance in countries and companies around the world.  The CG committee works on two major aspects: reforms in the Financial Markets and Reforms in the Capital Markets.  The International Finance Corporation a member of the World Bank Group is an international financial institution offering services to promote private sector participation and development in developing countries.  IFC works with private companies to attract investments advices offers advice in promotion and adoption of good corporate governance practices and standards. IFC and the World Bank work to deliver corporate governance support to number of clients and stakeholders around the world.  The Stock Exchange Board of India formed a Committee on corporate governance on June 02, 2017 by Mr. Uday Kotak  Of the recommendations made by the Kotak Committee, SEBI accepted some proposals without any modifications, some were with few modifications, while it rejected and referred some for considerations to other regulatory bodies. 8.6 KEYWORDS  Ethical challenges: the challenge which emanate due to differences in the beliefs of people due to customs, traditions or religious backgrounds.  International business opportunities: differences in cost of production, larger and growing markets, or benefits given by foreign governments to attract international investments.  Home Country: The country that is the origin of MNC  Host country: The country in which the MNC operates in addition to its home country  Rights violation: A determined effort by an individual or a group of people to deny basic human rights of existence, the people may have been segregated based on ethnicity or region or any other aspect. 8.7 LEARNING ACTIVITY 229 CU IDOL SELF LEARNING MATERIAL (SLM)

1. What are the major ethical challenges which effect a business operating in international markets? Explain by giving examples. ___________________________________________________________________________ ___________________________________________________________________________ 2. Comment on the work done by the CG Committee of the World Bank for promoting Corporate Governance in global industry. ___________________________________________________________________________ ___________________________________________________________________________ 8.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Mention two ethical challenges that mangers are faced when operating in international markets. 2. What are some of different HR practices present in varied international markets? 3. Define the term Work place Diversity. 4. What are the five main partner organisation of the World Bank? 5. List five major recommendation made by the Kotak Committee in terms of ensuring better corporate governance in Indian companies. Long Questions 1. Explain the concept of Individualism Vs Collectivism, by giving examples from the internal business. 2. Is it ethical to exploit the Outsourcing opportunity by MNCs to purely meet economic objectives? Support your answer with at least two examples. 3. How can MNCs work to reduce disparity in Human Rights, Environmental degradation in the host countries? 4. Of the three models of ethical behaviour, which one you feel is most suitable to answer the ethical dilemma of companies functioning in different countries? 5. How can MNCs manage situation of political involvement in their functioning and also remain unbiased to political pressures in their endeavour to create a social difference in host countries? 6. Comment on the effectiveness of steps taken by the World Bank Corporate Governance group in terms of reforms in the Financial markets, answer with reference to Indian business climate. 230 CU IDOL SELF LEARNING MATERIAL (SLM)

7. Outline the major work done by The International Finance Corporation in regard to creating awareness about corporate governance in companies across the globe. 8. Why do you think that inclusion of women in board of directors will add value to their functioning and promote better corporate governance? 9. Is it correct to say that even though Companies and even countries are aware of the importance of Corporate Governance they do not adopt measures voluntarily but delay them till a major crisis happens. Comment how the new measures taken by SEBI will prevent such happenings, support with example from at least two policies. 10. Consider your major learnings about the importance of corporate governance from the study of this module. How would you advise a family owned business to ensure good corporate governance practices in their organisation? Add the benefits that they will experience from such an exercise. B. Multiple Choice questions 1. Which one of the four dimensions of Culture and Ethics deals with managerial hierarchies: a. Power Distance b. Individualism Vs Collectivism c. Uncertainty Avoidance d. Masculinity and Femininity 2. Which is not a model used to consider whether a business action is ethical or is unethical a. Utilitarian model b. Political action c. Moral Rights Model d. The Justice Model 3. An effort to ensure that all sections of population are present in the staff of an organisation is known as __________________ a. Multi culture b. Multi skilled c. Workplace diversity d. Cultural diversity 4. The effort by MNCs to share some part of manufacturing to other countries is called ______ a. Work-sharing b. Work-sourcing c. Out-sharing 231 CU IDOL SELF LEARNING MATERIAL (SLM)

d. Out-sourcing 5. The two groups that the CG group deals with are _______________ and _________ a. Financial markets and Commercial Banks b. Commercial banks and Central banks c. Financial markets and Capital markets d. Commercial banks & Capital Markets Answers 1-a, 2-b, 3-c, 4-d, 5-c 8.9REFERENCES 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 232 CU IDOL SELF LEARNING MATERIAL (SLM)