Corporate Governance

Business Ethics and Corporate Governance
OJASWINI TRIPATHI
Windows User
Introduction
Corporate governance is basically maintaining the health and hygiene of the company as
observed in the Cadbury Committee, in order to achieve this there is a need to ensure that the
is no arbitrary actions taken by the company officials to ensure that none of the stakeholders
are left dissatisfied. To get to know the operations of the company, information is required.
The shareholders and the management have conflict of interest, There is an immense amount
of information necessary for a person to trust a company with their money. This information is
regarding to whether their earnings will be used with the view with which they were intended
to be used or not and whether there operations of the company are such that their returns from
the company is increasing or decreasing. The shareholders in a company have the opinion that
the management has no regard to their money in the company and they will act
Hypothesis:
The Business ethics form the basis of all the corporate governance and are indispensible to
the company for maintaining corporate governance standards in long run.
Research questions
1. Whether the business ethics play a pivotal role in the maintenance and the integrity of the
financial performance of the companies, which in turn increases the level of corporate
governance?
2. Whether the ethical independence is linked to the independence of the management of the
company?
3. Whether there is any lacuna in the present provisions that need improvement to improve
corporate governance?
Objectives:
1. To analyze the theoretical basis of business ethics, with regard to corporate governance.
2. To analyze the laws, rules and regulations implemented by management and stakeholders to
promulgate the principles of ethical corporate governance with specific reference marketing
Business Ethics and Corporate Governance Page 2

and finance.
4. To analyze the functioning of business ethics and corporate governance in the Indian
scenario and the regulations implemented in this regard.
5. To examine the judicial interpretation with regard to business ethics
Literature Review:
Is Business Ethics Necessary

DePaul Business & Commercial Law Journal , Vol. 4, Issue 1 (Fall 2005), pp. 55-86
Ehrlich, Craig
The article discusses ,Is business ethics necessary? In the "Responsibility Overview" on its
website, Altria, the parent company of the tobacco giant Philip Morris, pledges to follow the
law but it also undertakes a "responsibility effort" to its employees, the community, the
environment, and to make not only lawful business decisions but "responsible" ones as well.
The same is true of the ethics cases used in business schools.By using language imprecisely,
and calling law ethics, there is a chance that a business ethicist will be asked to answer a
question of law and do so incorrectly, or that a manager will not understand he must act in
such and such a way and that the choice is not wholly his to make.
Business Ethics: A Literary View

Social Responsibility: Business, Journalism, Law, Medicine, Vol. 16, pp. 5-13
Freeman,R.Edward
The purpose of this essay is to diagnose this recent interest and to suggest an alternative way
of understanding the place of ethics in business..Likewise business ethics scholars are trying to
give us their favorite metaphors for understanding business and managerial life. ...If we
conceptualize this article in literary terms we have a better chance to unravel the competing
claims in business ethics and to understand more fully how managers and scholars engage the
project of reinventing self, organization and community.
Business Ethics, Immoral or Illegal
American Business Law Journal, Vol. 11, Issue 1 (Spring 1973), pp. 78-82
Coogan, James H.

The article is the case commentary on . Four Seasons Franchise's non-collection of franchise
revenue was brought to the attention of Four Seasons America even though no audit was
conducted for Four Seasons America at December 31, 1969. Discussion on the cases like .
DuPont DeNemours & Company, Inc. v. Christopher, 431 F. 2d. 1012 (1970). Where The
terms like "Business Ethics," like a good political speech, means different things to different
people. To the theologist or moral philosopher, business conduct which is immoral or selfish,
or which is detrimental to mankind, is unethical though it be perfectly legal, are discussed.
Changing Concepts in Business Ethics

Business Lawyer (ABA), Vol. 30, Special Issue (March 1975), pp. 7-12
Garrett,RayJr.
The article provides insights to the changing times in terms of finanaces and investors..In
general, it was not a good day and a half for business or investors. Now what, if anything, does
all of this have to do with business ethics and business advisors Instead. business has a broader
and deeper problem even than fairness to investors, important though that clearly is. The
bigger problem is the widespread discontent with the way business is performing, combined
with abysmal ignorance not only profit motive.
Insider Trading and Business Ethics
Legal Studies Forum, Vol. 13, Issue 2 (1989), pp. 151-170
Tomasic, Roman
The article discusses ,Prevailing patterns of business ethics, as they have served to entrench
and perpetuate this system despite the fact that insider trading is described as fraudulent,
dishonest, or criminal, and that it is widely recognised as unfair to those who trade with the
insider trader; and despite the recognition by those who profess con cern for market efficiency
that insider trading has an especially damaging effect on the market's efficiency.
101 Annals of the American Academy of Political and Social Science (1922)
Simple Code of Business Ethics, A
The literature discusses a simple code of business ethics documents and the solicitation of
bribes. It provides that "trade custom" shall not be adritissible or constitute a defense. It is
rousing the better business sentiment of the country..Through the Commercial Standards

Council, the right consciousness for fair dealing, inherent in the average
American business man, has the opportunity for expression and for organized effort to
establish higher business ethics.
Natural Law and International Business Ethics
Social Responsibility: Business, Journalism, Law, Medicine, Vol. 22, pp. 5-23
Velasquez,Manuel
The article discusses How should ethics address corporate governance issues? , it further
discusses One Approach to Moral Diversity: Moral Absolutism One way of classifying
different approaches to ethics is to divide them into those that take an absolutist approach and
those that adopt a relativist approach.Most ethicists who have approached issues in
international business ethics have generally taken an absolutist approach to the issue.
Lawyer's Role in Business Ethics
Washington State Bar News, Vol. 45, Issue 6 (June 1991), pp. 11-16
Impert, John E. .
The article discusses the role of lawyer as Lawyers have a key role to play in preparing such
newer, more inspira-business valuations and economic analyses for business valuation
research. The standards of conduct of company, is in nine parts and include the following: An
overview of the business ethics program, requirements for training, and guidance on how to
resolve business ethics questions and concerns; Guidance on acceptable and unaccept- able
activities in marketing products and services to government and commercial customers, and
procedures regarding the disclosure and use of proprietary information; Guidelines about
offering business courtesies or gratuities to commercial customers and to federal, state, local,
and foreign government employees or representatives; Procedures to assist employees in
avoiding activities or personal interests that could influence their objectivity in performing
company responsibilities.
Community, Business Ethics, and Global Capitalism
American Business Law Journal, Vol. 38, Issue 2 (Winter 2001), pp. 215-260
Mayer, Don

This paper will comment on the work of Tom Dunfee, Tom Donaldson, and Tim Fort, scholars
who have made significant contributions to the field of business ethics, and who share an
interest in the concept of community as a key to understanding and fostering sound
corporate ethics.Dunfee claimed (among other things) that an individual business, a working
group within that business, or a wider consortium of businesses with shared interests could
form a community with "authentic" moral norms."Business ethics" and "corporate social
responsibility" are not entirely interchangeable terms. .Thus, the aspect of corporate social
responsibility that is distinctively ethical also tends to describe the field of business ethics.
Business Ethics in the Transition Countries
Zbornik Radova, Vol. 38, Issue 2-2 (2004), pp. 595-610
Stankovic, Fuada
This piece primarily explains historical roots of the contemporary notion of business ethics,
which might have been found in the utilitarian philosophy of Jeremy Bentham.It subsequently
shows how business ethics became an inevitable component part of the contemporary
management theory and a mandatory course at the studies of economy and management.
Along with the efficiency and effectiveness, ethics became one of the key goals of companies
and other organizations within a society. It is emphasized that a greater attention needs to be
dedicated to ethical issues within the transition economies and it is concluded
that ethics would gain in significance within these economies by strengthening of the real
market.
Scope of the Study:
The scope of the study is the analysis of the auditors and audit committees functioning in
Indian Corporate System and also how the working contributes to the corporate governance of
the companies as well.
Significance:
There is a lot on emphasis placed on the business ethics and their contribution to compliance
and to corporate governance. Business ethics are required to bridge the gap between the
management and the shareholders as well as the external environment to the company
consisting of various stakeholders like customers, government, Stock Exchanges, potential

investors, etc. Business ethics ensure that the faith of the stakeholders in the company is
maintained and the company sustains in the market.
Limitations of the Study:
The limitations of the study is that the researcher will focus on the Indian Legal scenario and
comparison to the UK and US legislations with regard to business ethics in relation to
corporate governance and not an in-depth analysis of the other countries scenario .
Research Methodology:
A doctrinal methodology of research will be followed by the researcher and will include
sources like research papers, new paper articles and will refer to various resources available
such as books, newspaper articles and also by various authors.
Contents
UNIT 1: ETHICAL THEORIES AND APPROACHES:
Modern Decision
Making………………………………………………………………………………..9
Ethical Models for Decision Making………………………………………………………………...

….9
UNIT 2: CORPORATE GOVERNANCE
Purpose…………………………………………………………………………………………….........1
1
Importance…………………………………………………………………………………………… .
11
Mechanism-
Benefits…………………………………………………………………………………...13
Theories…………………………………………………………………………………………………
15
Ethics and Values………………………………………………………………………………………

18
Evolution………………………………………………………………………………………………..2
0
Current Developments…………………………………………………………………………………

25
UNIT 3: MARKETING ETHICS:

Unfair Or Deceptive Marketing Practices......................................................................................35
Offensive Materials And Objectionable Marketing Practices........................................................36
Ethical Product And Distribution Practices...................................................................................37
Does Marketing Overfocus On Materialism?.................................................................................38
Special Ethical Issues In Marketing To Children...........................................................................39
Ethical Issues In Marketing To Minorities.....................................................................................39
Ethical Issues Surrounding The Portrayal Of Women In Marketing Efforts...............................40
Benefits of Advertising..............................................................................................................................43
Harms of Advertising................................................................................................................................43
Ethical Principles especially relevant to Advertising.................................................................................44
Advantages............................................................................................................................................59
1: Public Safety......................................................................................................................................59
2: Moral Responsibility..........................................................................................................................59
Disadvantage ........................................................................................................................................59
1: Retaliation.........................................................................................................................................59
2: Conflicts of Interest...........................................................................................................................60
JUDICIAL APPROACH……………………………………………………………………………………………………………………………..
UNIT 4 : BUSINESS ETHICS AND WHISTLE BLOWING
UNIT 5: BUSINESS ETHICS AND FINANCE

Ethical Violations.................................................................................................................................63
Ethical Codes.......................................................................................................................................64
Toward A Paradigm Shift...................................................................................................................66
Insider Trading...................................................................................................................................67
Legal insider trading..............................................................................................................................68
Illegal insider trading.............................................................................................................................69
Definition of "insider".......................................................................................................................69
Liability for insider trading................................................................................................................70
Misappropriation theory....................................................................................................................70
Proof of responsibility.......................................................................................................................71

Trading on information in general.....................................................................................................71
Tracking insider trades......................................................................................................................71
American insider trading law.................................................................................................................71
Common law.....................................................................................................................................72
SEC regulations.................................................................................................................................72
JUDICIAL APPROACH...................................................................................................................73
Insider trading by members of Congress...........................................................................................75
Security analysis and insider trading.....................................................................................................75
Arguments for legalizing insider trading................................................................................................76
Legal differences among jurisdictions....................................................................................................78

UNIT 1
Ethical theories and Approaches
Modern Decision Making – Ethical Models for Decision Making
Introduction
At all times, wise men and religions all over the world have considered “value centered
perfection” and not “material success” as the ultimate goal of every human being.
Unfortunately with passage of time, we started witnessing a degradation of values ethics
forgetting the wise teachings, associating material success and fame as highest achievement.
Ethics and Morals

The word ‘Ethics’ is derived from the ancient Greek word “ehikos” meaning character is the
essence of values and habits of a person or group. It covers the analysis and employment of
concepts such as right and wrong, good and evil, and acting with responsibility. It has many
definitions according one “ethics are the principles of conduct governing an individual or a
group” another describes “ethics as relating to what is good or bad, and having to do with
moral duty and obligation”.1
Let us draw a distinction between Ethics and Morals. The word “Moral” is defined as relating
to principles of right and wrong. Although both words are broadly defined in contemporary
English as having to do with right and wrong conduct, the rood word for ethics is the Greek
word “Ethos” meaning “Character”, while the root word of Moral is Latin “Mos” meaning
1
Steven Mintz, Defining Ethics, EthicsSage (Dec 21, 2010), https://www.ethicssage.com/2010/12/what-is-
ethics.html#targetText=The%20term%20ethics%20is%20derived,that%20which%20is%20%E2%80%9Cgood.
%E2%80%9D&targetText=There%20are%20various%20ways%20to,right%E2%80%9D%20and
%20%E2%80%9Cwrong.%E2%80%9D.

“custom”. 2
Ethics is a set of standards or a code or a value system worked out from human reason and
experience, by which free human actions are determined as ultimately right or wrong, good or
evil. Ethics may be defined as the science of the Highest Good. It is the science of the supreme
ideal of human life.3
Nature of Ethics
 Ethics refers to standards of behavior that tell us how human beings ought to act in the
many situations in which they find themselves in different roles.
 Ethics is not the same as feelings. Feelings provide important information for our
ethical choices.
 Ethics is not religion. Many people are not religious but ethics applies to everyone.
 Ethics is not following law. A good system of law does incorporate many ethical
standards.
 Ethics is not following culturally accepted norms.
 Ethics is not science. Social and natural science can provide important date to help us
make better ethical choices. But science alone does not tell us what we ought to do.
Y
Ethical Principles
The following are the Principles of Ethics:
1. Beneficence: the principle of beneficence guides the ethical theory to do what is good.
This priority to “do well” makes an ethical perspective and possible solution to an
ethical dilemma acceptable.
2. Least harm: it deals with situations in which neither choice is beneficial. In this a
person should choose to do the least harm possible and to do harm to the fewest people.
3. Respect for Autonomy: this principle states that an ethical theory should allow people
to reign over themselves and to be able to make decisions that apply to their lives. It
means people should have control over their lives.
2
Id.
3
Id.

Ethical approaches or Theories:
The theories (philosophies) are ideal moral perspectives that provide individuals with abstract
principles for guiding their social existence.
The following are the five approaches or theories of Ethics4
1. The Utilitarian Approach (Utilitarian approach): Jenny Bentham (1748 -1832)

considered as the founder of traditional Utilitarian Approach. “an action is right from
an ethical point of view is and only if the sum total of utilities produced by that act is
greater than the sum total of utilities produced by any other act the agent could have
performed in its place” i.e. the principle assumed that all the benefits & costs of an
action can be measured as a common numerical scale and then added or subtracted
from each other.
2. The rights & Duties approach (Deontological approach): other philosophers and
ethicists suggest that the ethical action is one that best protects and respects the moral
rights of those affected. This approach starts from the belief that humans have a dignity
based on their human nature per se or on their ability to choose freely what they do
with their lives. On the basis on such dignity, they have a right to treated as ends and
not merely as means to other ends.
3. The Fairness and Justice and Equality (Egalitarianism) approach: According to

the egalitarianism all benefits and burdens should be distributed by the following
formula “Every person should be given exactly equal share of societies or a group’s
benefits and burdens”. Today we use this idea to say that ethical actions treat all human
4
Ofurum, UgonnaAugustina, Gabriel Justin MgbechiOdinioha, Multidimensional Ethical Dilemmas of
Contemporary Organizations: A Literature Review, International Journal of Innovation and Economic Development
5, no.3 (2019): 7-21.

beings equally or unequally, then fairly based on some standard that is defensible.
4. The common good approach (Libertarianism): The life in community is good in

itself and our actions should contribute to that life. This approach suggests that the
interlocking relationships of society are the basis of ethical reasoning and that respect
and compassion for all others especially the vulnerable are requirements of such
reasoning. This approach also calls attention to the common conditions that are
important to the welfare of everyone,
5. The Virtue approach: A very ancient approach to ethics is that ethical actions ought
to be consistent with certain ideal virtues that provide for the full development of our
humanity. These virtues are dispositions and habits that enable us to act according to
the highest potential of our character and on behalf of values like truth and beauty,
honesty, courage, compassion, generosity, tolerance, love, fidelity, integrity, fairness,
selfcontrol, and prudence are all examples of virtues.
Business Ethics
Should a business entity be ethical? Experts often retort that business ethics is a contradiction
in terms because of the inherent inconsistency between ethics and the self interest motive of
profit. On the contrary it is now a well accepted fact that ethical behavior creates a positive
motive of profit.Business ethics5 is the study of what constitutes right or wrong in business.
Business ethics refers to the application of ethics to business. Business ethics then has to do
with the authenticity and integrity of an enterprise. To be ethical is to follow the business as
well as the cultural goals of the corporation, its owners, its employees and its customers.
Need for Business Ethics:

1. To give fair and equitable treatment to the employees
2. To charge fair prices
3. To use fair weights for measurements
5
SyedaMayeshaTulJannat, Zoeb Ur Rahman, Dr. Rajendra Kumar,Critical investigation on how business ethics can
have a positive impact on employee retention in the Ready-Made Garments(RMG) sector of Bangladesh, Quest
Juornals (june 10, 2019), http://www.questjournals.org/jrbm/papers/vol7-issue4/A07040116.pdf

4. To pay taxes
5. To earn reasonable profit
Characteristics of Business Ethics:

1. It is important in all types of business
2. Its above law, it requires behavior which is socially desirable and legally binding
3. It is the systematic handling of values
4. By which the propriety of business activity may be judged
5. It concentrates on moral standard which apply to business strategies
Benefits of Business Ethics

1. Improved society
2. Easier change management
3. Strong team work and greater productivity
4. Enhanced employee growth
5. Ethics programs help guarantee that personnel policies are legal
6. It help to avoid criminal act of omission and can lower fines
7. It help to manage values associated with quality management ,
8. It helps to promote a strong public image.
Scope of Business Ethics

Business ethics covers all aspects of business as there is not business conduct which is totally
free from moral considerations. As a science of conduct, it is concerned with the ideal standard
to which business conduct should conform. Thus it enquires into the nature of springs of action
or impetus, the forces that impels business, nature of voluntary or involuntary actions. It lays
down the ideal of highest good and judges our conduct in the right of that ideal.
Scope of business ethics

Societal Level Stake holders Internal Personal policy
Concern for all Level policy level level
No discrimination
Concern of Employees
Environment Customers
6
Sources of Ethical StandardsShareholders
Conservation of :
Resources Financial Lending
Institutions
Ethical standards originate andGovernment
develop from the following sources:
1. Social Attitudes: decline in societies norms as reflected in greater emphasis on
permissiveness, decline in the influence of family and orientation towards quantity as
opposed to quality ten to lower ethical standards.
2. Competitive Pressures: the economic system is built on two fundamental concepts of
efforts and competition. The essence of these beliefs is that working hard and
outperforming others is achieving goals will be rewarded with high levels of success.
3. Legal environment: the legislative environment is confusing and full of loopholes.
Legal interpretations and entanglements often make it difficult for managers to know
exactly what course to take or what decisions to make. Even the law affects ethical
behavior.
4. Code of ethics: code of conduct serves as a guide to all members of the profession or
industry. A code of ethics requires and prohibits specific practices. It may not deter the
misbehaviors of intentional wrong doers but it reminds employees that the company is
fully committed to meeting its standards and asks them to incorporate these standards
into their daily activities.
Ethical issues in business

In India, the subject business ethics received little attention prior to the 1990s. However, it has
gained major importance in the last couple of years. A broad array of incidents, beginning
from the HarshadMehatha has created awareness about ethical issues in the country. There
have been issues of corruption, insider trading, cheating small investors and misappropriation
of accounts where even big name of the industry have been faced prominently
Van Wart, Montgomery. "The Sources of Ethical Decision Making for Individuals in the Public Sector." Public
6
Administration Review56, no. 6 (1996): 525-33. doi:10.2307/977251.

Some of the issues discussed in business are
 Concern about widespread corruption
 Financial scams
 Misleading advertisements
 Exploitation of labour
 Exploitation of child labour
 Exploitation of women at work
 Protection of the environment
 Safety and health in the workplace
Ethical Decision Making Process and Model

Ethical decision-making refers to the process of evaluating and choosing among alternatives in
a manner consistent with ethical principles. In making ethical decisions, it is necessary to
perceive and eliminate unethical options and select the best ethical alternative.7
The process of making ethical decisions requires:
 Commitment: The desire to do the right thing regardless of the cost

 Consciousness: The awareness to act consistently and apply moral convictions to daily
behavior
 Competency: The ability to collect and evaluate information, develop alternatives, and
foresee potential consequences and risks
Good decisions are both ethical and effective:
 Ethical decisions generate and sustain trust; demonstrate respect, responsibility,

fairness and caring; and are consistent with good citizenship. These behaviors provide
a foundation for making better decisions by setting the ground rules for our behavior.
 Effective decisions are effective if they accomplish what we want accomplished and if
they advance our purposes. A choice that produces unintended and undesirable results
7
Id.

is ineffective. The key to making effective decisions is to think about choices in terms
of their ability to accomplish our most important goals. This means we have to
understand the difference between immediate and short-term goals and longer-range
goals.
Steps in the Ethical Decision-Making Process

Here are a few key points regarding ethical decisions.
 Responsible practice requires that you:base your actions on informed, sound, and
responsible judgment
 consult with colleagues or seek supervision
 keep your knowledge and skills current
 engage in a continual process of self-examination remain open
 In making ethical decisions, as much as possible and when appropriate, include your
client in this ethical decision-making process.
 Clients need enough information about the therapeutic process to be able to make
informed choices.
 The informed consent process begins with the intake interview and continues for the
duration ofthe therapeutic relationship.
 The aim is to involve clients in a collaborative partnership.
 The key is to make ethical decisions with clients, not simply for them. Get clients
actively involvedin the process to the extent possible and appropriate. Respecting the
autonomy of your clients impliesthat you do not decide for clients, nor do you foster
dependent attitudes and behaviors.
Eight Steps in Making Ethical Decisions8

Ethical decision making should be a collaborative process between client and counselor, rather
than acounselor making decisions for the client. Below are the steps, with suggested questions,
to assist you inthinking through an ethical dilemma. This is one of several decision-making
8
Oluwatobi, Applying the "Eight Steps To Sound Ethical Decision Making" To A Real Or Possible Ethical
Situation, Homework Market (March 03, 2019), https://www.homeworkmarket.com/questions/applying-the-eight-
steps-to-sound-ethical-decision-making-to-a-real-or-possible-ethical-situation.

models which can beutilized. The steps taken may not always follow the same order shown
and steps may be repeated several times in the process.
1. Identify the problem or dilemma.

 Does a problem or dilemma actually exist?
 Is this an ethical, legal, moral, professional, or clinical problem?
 Is it a combination of more than one of these?
 How can you know the nature of the problem?
 Would you consult at this early stage as you are identifying the problem?
 How might you begin the process of consultation with your client about the nature of
the
problem?
2. Identify the potential issues involved.

 How might you best evaluate the rights, responsibilities, and welfare of all those
involved andthose who are affected by the decision, including your own welfare as a
practitioner?
 How can you best promote your client's independence and self-determination?
 What actions have the least chance of bringing harm to your client?
 What decision will best safeguard the client's welfare?
 How can you create a trusting and collaborative climate where your clients can find
their ownanswers?
 What principles can you use in prioritizing the potential issues involved in this
situation?
 Are there any ways to encourage the client to participate in identifying and
determining potentialethical issues?
3. Review the relevant ethical codes.

 What guidance can you find on the specific problem under review by consulting with

the
Professional codes?
 Are your values in agreement with the specific ethical code in question?
 How clear and specific are the codes on the specific area under consideration?
 Are the codes consistent with applicable state laws?
4. Know the applicable laws and regulations.

 Are there any laws or regulations that have a bearing on the situation under
consideration?
 What are the specific and relevant state and federal laws that apply to the ethical
dilemma?
 What are the rules, regulations, and policies of the agency or institution where you
work?
5. Obtain consultation.
 Do you know where to go to obtain consultation with professionals who are
knowledgeableabout ethical issues?
 Assuming that vou will consult with a colleague or a supervisor, what would you
expect fromthis consultation?
 What kinds of questions do you want to ask of those with whom you consult?
 With whom do you seek consultation? Do you consult only with those who share
yourorientation, or do you look for consultants with different perspectives?
 How can vou use the consultation process as an opportunity to test the justification of a
course ofaction you are inclined to take?
 What kinds of information do you document when you consult?
 When you do make use of a consultation process, do you inform your client about this?
Are thereany ways you might include the client in this consultation process?

6. Consider possible and probable courses of action.
 What are some ways that you can brainstorm many possible courses of action?
 Do you have a systematic method for analyzing ethical obligations and possible
courses ofaction?
 Are you willing to involve your client in the discussion of the various courses of
action?
 What might you document pertaining to discussions with your client about probable
courses ofaction?
7. Enumerate the consequences of various decisions.

 How can you best evaluate the potential consequences of each course of action, before
implementing a particular action plan?
 Are you willing to involve your client in the discussion of the implications of each
course ofaction for the client?
 What ethical principles can you use as a framework for evaluating the consequences of
a givencourse of action?
 Examine the consequences of various decisions for your client, for you as counselor,
and for theprofession in general.
8. Decide on what appears to be the best course of action.

 After carefully considering all the information you have gathered, how do you know
what seemsto be the best action to take?
 Do you solicit the input of your client in making this decision at this phase?
 Once you have formulated a plan of action, do you ask for feedback from a colleague
or
supervisor?
 Once the course of action has been implemented, what are some ways that you might
evaluate thecourse of action?
 Are you willing to follow up to determine the outcomes and see if further action is
necessary
Problems in Ethical Decision Making

1. Due to globalization , as companies deal with other countries where cross cultural
diversity arises mangers working in MNCs find it very difficult to standardize ethical
standards as they do change as society change
2. Sometimes the decision makers do not follow what they must follow as they have
conflict in individual values versus organizational goals.
3. Individual moral standards affect whole organization decisions f they a morally strong,
ethical decision would be the outcomes
4. Poor decisions without deep thinking of implications.
5. Ambiguous situations create problem which put the manager in dilemma as to which
decision they should make and follow.
It is clear, then that although local laws or government decrees, prevalent practices, levels of
development and cultural understandings all must be taken into account when evaluating the
ethics of business policies and actions in a foreign country, the local status quo cannot simply
be adopted without question by the multinational managers but must still be subjected to
ethical analysis.

PART II
Corporate Governance
Purpose – Importance – Mechanism- Benefits – Theories – Ethics and Values – Evolution -

current Developments
The concept of corporate governance is gaining momentum because of various factors as well
as the changing business environment. The EEC, GATT and WTO regulations have also
contributed to the rising awareness and are compelling us to think in terms of adhering to the
good governance practices. Corporate governance, by the very nature of the concept, cannot be
exactly defined. However, there can be no two opinions that “effective accountability to all
shareholders is the essence of corporate governance.” The following definition should help us
to understand the concept better. “Corporate governance is not just corporate management; it is
something much broader to include a fair, efficient and transparent administration to meet
certain well-defined objectives.9 It is a system of structuring, operating and controlling a
company with a view to achieve long term strategic goals to satisfy shareholders, creditors,
employees, customers and suppliers, and complying with the legal and regulatory
requirements, apart from meeting environmental and local community needs. When it is
9
RuchiKulkani and BalasundramManiam, Corporate Governance — Indian Perspective, IJTEF (2014),
http://www.ijtef.org/papers/399-A10004.pdf.

practiced under a well-laid out system, it leads to the building of a legal, commercial and
institutional framework and demarcates the boundaries within which these functions are
performed.”10
Corporate governance cannot disregard the diverse interests—shareholders, lenders,

employees, government, etc. It is believed that shareholders would increasingly assert their
rights, hitherto virtually unknown; similarly the lending institutions, having to justify their
performance in a market-driven environment, have no choice but to demand effective and
efficient corporate governance; besides FIIs with substantial foreign investment in India would
demand greater transparency and internationally recognized sound corporate practices. 11 The
new paradigm of governance to bring about quality corporate governance is not only a
necessity to serve the diverse corporate interests, but it is also a key requirement in the best
interests of the corporate themselves. Corporate practices in the matter of disclosure,
transparency, group accounting, role of directors, and degree of accountability to the
shareholders, lenders and overall public good are some of the critical issues which require a
fresh and closer look. A framework for addressing concerns public good, such as regard for
environment, overall conservation of resources, cost effective managerial input—all these
would, among other things form part of the core of corporate governance. Government can
play a catalytic role in creating the environment for quality governance through an appropriate
regulatory framework.
Corporate leadership and its mindset would also determine the sort of governance that would
ultimately evolve. In India, the question of corporate governance has come up mainly in the
wake of economic liberalization and deregulation of industry and business, as well as the
demand for a new corporate ethos and stricter compliance with the law of the land. 12 In the
context of the unique situation in India where the financial institutions hold substantial stakes
in companies, the accountability of the directors, including nonexecutive directors and
nominees, has come into sharp focus.”
10
Id.
11
BasiaHellwig, Know Your Shareholder Rights,Investopedia (May 30, 2019),
https://www.investopedia.com/investing/know-your-shareholder-rights/
12
Nwosu M. Eze , Eze-Nwosu P. Chiamaka, Corporate Governance And Leadership: Is There A Nexus?, IOSR-JBM
(Apr. 2016), http://iosrjournals.org/iosr-jbm/papers/Vol18-issue4/Version-1/A1804010108.pdf

Introduction:
A society cannot function without a set of values. A corporate is formed of one body with
many individuals. Corporate Governance (CG) is an ethical code of business of companies. It
is a system by which companies are directed and controlled. The Board of Directors is
responsible for the governance of their companies and to ensure that appropriate governance
structure is in place. The shareholders appoint the directors and the auditors. Governance in
relation to business organization is concerned with the intrinsic nature, purpose, integrity and
identity of the organization and focuses primarily on its relevance, continuity and fiduciary
aspects. It involves monitoring and overseeing strategic direction, socio economic and cultural
contexts, externalities and constituencies of the organization.
Definition:
The root of the word governance is from ‘gubernate’ which means to steer. Corporate
governance would mean to steer an organization in the desired direction. The responsibility to
steer lies with the board of directors/governing board. Corporate or corporation is derived from
Latin term “corpus” which means a “body”. Governance means administering the processes
and systems placed for satisfying stakeholder’s expectation. When combined Corporate
Governance means a set of systems procedures, polices, practices, standards put in place by a
corporate to ensure that relationship with various stakeholders is maintained in transparent and
honest manner.
There is no universal definition of corporate governance. Some good definitions are given
hereunder for better understanding:-
“Corporate governance is concerned with the way corporate entities are governed, as distinct
from the way businesses within those companies are managed. Corporate Governance address
the issues facing Board of directors such as the interaction with top management and
relationships with the owners and others interested in the affairs of the company” – Robert Ian
Tricker (who introduced the words corporate governance for the first time in his book in

1984).
“Corporate Governance is a field of economics that investigates how to secure/motivate

efficient management of corporations by the use of incentive mechanisms such as contracts,
organizational designs and legislations”.
Experts of Organization for Economic Cooperation and Development (OECD) defined “a

system by which business corporations are directed and controlled”. Corporate governance
structure specifies the distribution of rights and responsibilities among different participants in
the company such as board, management, share holders and other stakeholders; and spells out
the rules and procedures for corporate decision making. By doing this, it provides the structure
through which the company’s objectives are set along with the means of attaining these
objectives as well as for monitoring performance.13
The Cadbury committee has also defined the term “Corporate Governance” and according to
the committee, it means, “(It is) the system by which companies are directed and controlled.”
It may also be defined as a system of structuring, operating and controlling a company with the
following specific aims:-
(i) Fulfilling long-term strategic goals of owners;
(ii) Taking care of the interests of employees;
(iii) A consideration for the environment and local community;
(iv)Maintaining excellent relations with customers and suppliers;
(v) Proper compliance with all the applicable legal and regulatory requirements.
We may also note what the CII constituted committee has to say on the definition, “Corporate
governance deals with laws, procedures, practices and implicit rules that determine a
company’s ability to take informed managerial decisions vis-à-vis its claimants–in particular,
its shareholders, creditors, customers, the State and employees. There is global consensus
about the objective of ‘good corporate governance: maximizing long-term shareholder value.”
13
Caroline Banton, Shareholder vs. Stakeholder: What's the Difference?,Investopedia (Apr 14, 2019),
https://www.investopedia.com/ask/answers/08/difference-between-a-shareholder-and-a-
stakeholder.asp#targetText=Shareholders%20are%20always%20stakeholders%20in,than%20stock%20performance
%20or%20appreciation.

Further the Kumar Mangalam Birla committee constituted by SEBI has observed that, “Strong
corporate governance is indispensable financial reporting structure.”
According to ICSI, “We may define ‘corporate governance as a blend of rules, regulations,
laws and voluntary practices that enable companies to attract financial and human capital,
perform efficiently and thereby maximize long term value for the shareholders besides
respecting the aspirations of multiple stakeholders including that of the society.”
ICSI Principles of Corporate governance14:

 Sustainable development of all Stakeholders: Ensure growth of all individuals
associated with or affected by the enterprise on sustainable basis.
 Effective management and distribution of wealth: ensure that enterprise creates
maximum wealth and judiciously uses the wealth so created for providing maximum
benefits to all stakeholders and enhancing its wealth creation capabilities to maintain
sustainability.
 Discharge of social responsibility: ensure that enterprise is acceptable to the society in
which it is functioning
 Application of best management practices: ensure excellence in functioning of
enterprise and optimum creation of wealth on sustainable basis
 Compliance of law in letter and spirit: ensure value enhancement for all stakeholders
guaranteed by the law for maintaining socio economic balance.
 Adherence to ethical standards: ensure integrity, transparency, independence and
accountability in dealings with all stakeholders.
Need for Corporate Governance15:

Corporate Governance is needed to create a corporate culture of transparency, accountability
14
Institute of Company Secretaries of India, Ethics Governance and Sustainability, ISCI (Feb 2, 2016),
https://www.icsi.edu/media/webmodules/PP-EGAS-2016%20-%20Full%20Book%20(2)%2002feb2016.pdf.
15
Gaurav Akrani, Importance of Corporate Governance - Need & Significance,Kalyna City Life (Aug 10. 2011),
https://kalyan-city.blogspot.com/2011/10/importance-of-corporate-governance-need.html.

and disclosure. It refers to compliance with all the moral & ethical values, legal framework
and voluntary adopted practices. This enhances customer satisfaction, shareholder value and
wealth.
Corporate Performance:improved governance structures and processes help ensure quality

decision making, encourage effective succession planning for senior management and enhance
the long term prosperity of companies, independent of the type of company and its sources of
finance. This can be linked with improved corporate performance either in terms of share price
or profitability.
Enhanced Investor Trust: investors consider corporate governance as important as financial

performance when evaluating companies for investment. Investors who are provided with high
levels of disclosure & transparency are likely to invest openly in those companies.
Better access to global Market:Good corporate governance systems attract investment from
global investors, which subsequently leads to greater efficiencies in the financial sector.
Combating Corruption: Companies that are transparent, and have sound system that provide
full disclosure of accounting and auditing procedures, allow transparency in all business
transactions, provide environment where corruption will certainly fade out. Corporate
governance enables a corporation to compete more efficiently and prevent fraud and
malpractices within the organization.
Easy Finance from Institutions:Several structural changes like increased role of financial
intermediaries and institutional investors, size of the enterprises, investment choices available
to investors, increases competition, and increased risk exposure have made monitoring the use
of capital more complex thereby increasing the need of good corporate governance.
Enhancing Enterprise Valuation: improved management accountability and operational

transparency fulfill investor’s expectations and confidence on management and corporations
and return increase the value of corporations.

Reduced risk of corporate crisis and scandals:Effective corporate governance ensures
efficient risk mitigation system in place. The transparent and accountable system that
corporate governance makes the board of a company aware of all the risks involved in
particular strategy, thereby placing various control systems to monitor the related issues.
Accountability: Investor relations are essential part of good corporate governance. Investors
have directly/ indirectly entrusted management of the company for the creating enhanced value
for their investment. The company is hence obliged to make timely disclosures on regular
basis to all its share holders in order to maintain good investor’s relation. Good corporate
governance practices create the environment where boards cannot ignore their accountability
to these stake holders.
Principles /Pillars of Corporate Governance:

Corporate Governance is managing, monitoring and overseeing various corporate systems in
such a manner that corporate reliability, reputation are not put at stake. Corporate Governance
Pillars on transparency and fairness in action satisfying accountability and responsibility
towards the stake holders.16
Fair
nes
s
Corporate Transparency
Responsibility Governance
Acco
unta
bility
Dimensions:
Dimensions
16
Id.

Promoters Directors Auditors Corporate
Elements of good corporate Governance17:

Some of the important elements of good corporate governance are discussed as under:
1. Role and Powers of Board: Good governance is decisively the manifestation of

personal beliefs and values which configure the organizational values, beliefs and
actions of its board. The board as a main functionary is primary responsible to ensure
value creation for its stakeholders. The absence of clearly designated role and powers
of board weakens accountability mechanism and threatens the achievement of
organizational goals. Therefore, the foremost requirement of good governance is the
clear identification of powers, roles, responsibilities and accountability of the board,
CEO and the chairman of the board. The role of the board should be clearly
documented in a board charter.
2. Legislation:clear and unambiguous legislation and regulations are fundamental to

effective corporate governance. Legislation that requires continuing legal
interpretations or is difficult to interpret on a day to day basis can be subject to
deliberate manipulation or inadvertent misinterpretation.
3. Management Environment:management environment includes setting up of clear

objectives and appropriate ethical framework, establishing due processes, providing for
transparency and clear enunciation of responsibility and accountability, implementing
sound business planning, encouraging business risk assessment, having right people
17
Id.

and right skill for the jobs, establishing clear boundaries for acceptable behavior,
establishing performance evaluation measures and evaluating performance and
sufficiently recognizing individual and group contribution.
4. Board Skills: to be able to undertake its functions efficiently and effectively, the board
must possess the necessary blend of qualities, skills, knowledge and experience. Each
of the directors should make quality contribution. A board should have a mix of the
following skills, knowledge and experience:
 Operations or technical expertise, commitment to establish leadership
 Financial skills
 Legal skills
 Knowledge of government and regulatory requirement
5. Board appointments: To ensure that the most competent people are appointed in the
board, the board positions should be filled through the process of extensive search. A
well defined and open procedure must be in place for reappointments as well as for
appointment of new directors. Appointment mechanism should satisfy all statutory and
administrative requirements. High on the priority should be an understanding of skill
requirements of the board particularly at the time f making a choice for appointing a
new director. All new directors should be provided with a letter of appointment setting
out in detail their duties and responsibilities.
6. Board induction and training: directors must have a broad understanding of the area
of operation of the company’s business, corporate strategy and challenges being faced
by the board. Attendance at continuing education and professional development
programmes is essential to ensure that directors remain abreast of all developments,
which are or may impact on their corporate governance and other related duties.
7. Board independence:independent board is essential for sound corporate governance.

This goal may be achieved by associating sufficient number of independent directors
with the board. Independence of directors would ensure that there are no actual or

perceived conflicts of interest. It also ensures that the board is effective in supervising
and where necessary challenging the activities of management. The board needs to be
capable of assessing the performance of managers with an objective perspective.
Accordingly, the majority of board members should be independent of both the
management team and any commercial dealings with the company.
8. Board Meetings:directors must devote sufficient time and give due attention to meet
their obligations. Attending board meetings regularly and preparing thoroughly before
entering the boardroom increases the quality of interaction at board meetings. Board
meetings are the forums for board decision making. These meetings of board meetings
are dependent on carefully planned agendas and providing relevant papers and
materials to directors sufficiently prior to board meetings.
9. Code of Conduct:it is essential that organizations explicitly prescribed norms of

practices and code of conduct are communicated to all stakeholders and are understood
and followed by each member of the organization. Systems should place to periodically
measure, evaluate and if possible recognize the adherence to code of conduct.
10. Strategy Setting:the objectives of the company must be clearly documented in a long
term corporate strategy including an annual business plan together with achievable and
measurable performance targets and milestones.

PART –III
Marketing Ethics
Marketing Ethics – advertising ethics
Marketing ethics is the systematic study of how moral standards are applied to marketing
decisions, behaviors,and institutions. Because marketing is a process inherent to most
organizations, marketing ethics should be viewed as a subset of business ethics; thus, much of
what is written about business ethics applies to marketingethics as well.18 At the outset, it is
also useful to distinguish between positive and nonnative marketing ethics. Positive marketing
ethics looks at marketing practices from the standpoint of "what is." For example, specifying
the percentage of organizations that have codes of ethical marketing practice or tracking
thenumber of violations that deal with deceptive advertising would be examples of positive
marketing ethics. Incontrast, normative marketing ethics deals with how marketing ought to
operate according to some moralstandard or theory. 19 The sort of moral standards (or theories)
applied to marketing situations involve the usualmoral frameworks commonly applied when
evaluating business ethics (e.g., utilitarianism, duty-based theories,virtue ethics). When the
words "marketing ethics" appear in the general media or business press, the reports typically
describe a marketing strategy, tactic, or policy that some constituency feels is "unfair" or
"exploitive" or "deceptive." Often, the subsequent discussion Tums to how marketing practices
might become more consumer-friendly, socially compatible, or put in philosophical terms,
18
Caner &Banu, An Overview and Analysis of Marketing Ethics, HrMars (November 2014),
http://hrmars.com/hrmars_papers/An_Overview_and_Analysis_of_Marketing_Ethics.pdf.
19
Id.

how marketing might be normativelyimproved.20
Normative marketing practices might be defined asthose that emphasize transparent,

trustworthy, andresponsible personal and/or organizational marketingpolicies and actions, and
exhibit integrity as well asfairness to consumers and other stakeholders. In thetrue spirit of
normative ethical standards, this definitionprovides certain virtues and values (e.g., trust,
fairness)to which marketing practitioners ought to aspire.However, the definition also raises
myriad questions.What do we mean by transparent? Does that mean notrade secrets are ever
allowed? What is the essentialnature of integrity? Does it insole involve keepingorganizational
promises to customers or is it broaderthan that? What is the nature of fairness, and whodecides
what standard of fairness is to be applied?Should it be consumers, the company at focus,
regulatoryagencies, or a broader cross-section of society?What stakeholder interests should be
taken into consideration,and how should they be weighted? As one cansee from these
questions, the area of normative marketingethics is likely to generate considerable
controversybecause there are differing views among various partiesabout what constitutes
"proper" behavior in marketing.21
Marketing practice
At the heart of marketing ethics are decisions that marketing practitioners make about ethical
questions. Ethical questions most often arise in marketing when a stakeholder group or some
segment of the public feelsthat the actions taken by some (or many) marketers might be judged
to be morally inappropriate. Currently,for instance, many consumers feel that spam advertising
over the Internet is far too prevalent and/or that product rebates have too often been
intentionally made to be difficult to redeem. Similarly, other ethical questions occur when
marketing managers believe that they might be compromising their own personal values in the
quest for increased organizational profit. Insuch situations, marketers are often evaluating
whether they should take business actions that they feel ought not to be done from the
standpoint of personal ethics that they hold-the essence of an ethical dilemma. 22
20
Id.
21
Id.
22
Jacob Darbonne, The Ethics Of Marketing And Advertising, Bartleby Research (Aug 26, 2105),
https://www.bartleby.com/essay/The-Ethics-Of-Marketing-And-Advertising-P3RUJ4LJF9LX.

Most managers cannot avoid facing such tough issues because the majority of marketing
professionals report confronting such ethical questions at some point in their careers.23 These
"ethical" branch points can pertain to a host of marketing issues such as selling cigarettes to
teenagers, the promotion of violence-oriented video games, pricing products at a level that
exploits unsuspecting consumers, bluffing in negotiations with long-time suppliers, writing
intentionally misleading ad copy, and so on.24If the marketing actions that are taken happen to
be in violation of the law, these are also typically characterized as unethical. However, our
focus in this entry is particularly on actions that are not illegal but that are criticized as
"improper" according to some ethical value or norm. Therefore, marketing ethics is mostly
focused on marketing behaviors that are not prohibited by the law but perhaps should not be
indulged due to certain moral considerations. And thus, marketing ethics is often concerned
with actions that are currently legal but still might be judged improper according to some
invoked moral standard.
Most generic areas of marketing practice provoke substantial ethical comment and discussion.
These areas include marketing segmentation, marketing research, product development,
pricing, distribution, personal selling, and advertising. In the paragraphs below, a sampling of
marketing issues, often suggesting ethical questions from these areas of marketing practice is
briefly reviewed to illustrate both the nature and the scope of marketing ethics in the conduct
of business operations.25
Market Segmentation
One of the basic strategies of marketing campaigns involves the division of the mass market
into "segments" followed by the development of specific offerings to appeal to the selected
"target market."Ethical questions especially surround the target marketing of segments that
include potentially vulnerable populations such as children, the elderly, the impoverished, and
marketing illiterates. The "ethical issue" at focus here centers on whether marketers have too
much "power" over certain groups who are not prepared to independently participate in the
marketplace.
23
Id.
24
Id.
25
Id.

Marketing Research
Since marketing decisions are often data driven, market research techniques and outputs are
frequently used by marketing practitioners. Market researchers themselves often have
considerable training in methodological and statistical techniques, and one might surmise that
because of their greater education, they exhibit a higher degree of ethical professionalism than
other marketing practitioners. Certainly, it is true that various professional organizations
related to the practiceof marketing research such as the Council forSurvey Research, the
Market Research Society and theEuropean Society of Marketing and Opinion Researchhave
developed detailed codes of ethics addressingcommon conflicts that occur in the execution
ofmarketing research.
Additional ethical issues arise owing to the fact thatmarketing research often involves contact
with thegeneral public, usually through the use of surveys thatare increasingly being conducted
online. Because marketingresearch activity relies heavily on publicly submittedinformation,
some of which is personallysensitive, marketing research is ripe for ethical abuseor misuse. As
survey research has become digitized,researchers have gathered substantial records
aboutconsumer product and service usage as well as theirsatisfaction. As a result, the issue of
consumer privacyis at the forefront of marketing research ethics. It ishoped that the coming
decade will yield definitiveanswers about the extent of privacy protection thatconsumers can
expect when shopping online. Second,most marketing research is conducted by for-
profitorganizations to aid decision making within corporations.
As a result, the profit motive may causeresearchers or their clients to compromise the
objectivityand precision of the research that is undertaken.Researchers inherently want to
provide support for theoutcomes their sponsors hope to find. Clients basicallywant the research
they conduct to tell the best possiblestory about their company and their products. It shouldnot
be surprising then that marketers sometimes fall tothe temptation of misusing market research
informationby manipulating or exaggerating the results.
UNFAIR OR DECEPTIVE MARKETING PRACTICES26

Marketing practices are deceptive if customers believe they will get more value from a product
or service than they actually receive. Deception, which can take the form of a
misrepresentation, omission, or misleading practice, can occur when working with any element
of the marketing mix. Because consumers are exposed to great quantities of information about
products and firms, they often become skeptical of marketing claims and selling messages and
act to protect themselves from being deceived. Thus, when a product or service does not
provide expected value, customers will often seek a different source.
Deceptive pricing practices cause customers to believe that the price they pay for some unit of
value in a product or service is lower than it really is. The deception might take the form of
making false price comparisons, providing misleading suggested selling prices, omitting
important conditions of the sale, or making very low price offers available only when other
items are purchased as well. Promotion practices are deceptive when the seller intentionally
misstates how a product is constructed or performs, fails to disclose information regarding
pyramid sales (a sales technique in which a person is recruited into a plan and then expects to
make money by recruiting other people), or employs bait-and-switch selling techniques (a
technique in which a business offers to sell a product or service, often at a lower price, in order
to attract customers who are then encouraged to purchase a more expensive item)27. False or
greatly exaggerated product or service claims are also deceptive. When packages are
intentionally mislabeled as to contents, size, weight, or use information, that constitutes
deceptive packaging. Selling hazardous or defective products without disclosing the dangers,
failing to perform promised services, and not honoring warranty obligations are also
considered deception.28
OFFENSIVE MATERIALS AND OBJECTIONABLE MARKETING PRACTICES

Marketers control what they say to customers as well as and how and where they say it. When
events, television or radio programming, or publications sponsored by a marketer, in addition
to products or promotional materials, are perceived as offensive, they often create strong
26
Jean Vincent ,Marketing, Consumerism, Materialism and Ethics: the Modern Marketing Conundrum, Studymode
Research (October 19, 2010), https://www.studymode.com/essays/Marketing-Consumerism-Materialism-And-
Ethics-The-443883.html
27
Id.
28
Id.

negative reactions. For example, some people find advertising for all products promoting
sexual potency to be offensive. Others may be offended when a promotion employs
stereotypical images or uses sex as an appeal. This is particularly true when a product is being
marketed in other countries, where words and images may carry different meanings than they
do in the host country.29
When people feel that products or appeals are offensive, they may pressure vendors to stop
carrying the product. Thus, all promotional messages must be carefully screened and tested,
and communication media, programming, and editorial content selected to match the tastes and
interests of targeted customers30. Beyond the target audience, however, marketers should
understand that there are others who are not customers who might receive their appeals and see
their images and be offended.
Direct marketing is also undergoing closer examination. Objectionable practices range from
minor irritants, such as the timing and frequency of sales letters or commercials, to those that
are offensive or even illegal. Among examples of practices that may raise ethical questions are
persistent and high-pressure selling, annoying telemarketing calls, and television commercials
that are too long or run too frequently. Marketing appeals created to take advantage of young
or inexperienced consumers or senior citizens including advertisements, sales appeals
disguised as contests, junk mail (including electronic mail), and the use and exchange of
mailing list say also pose ethical questions. In addition to being subject to consumer-protection
laws and regulations, the Direct Marketing Association provides a list of voluntary ethical
guidelines for companies engaged in direct marketing.
ETHICAL PRODUCT AND DISTRIBUTION PRACTICES

Several product-related issues raise questions about ethics in marketing, most often concerning
the quality of products and services provided. Among the most frequently voiced complaints
are ones about products that are unsafe, that are of poor quality in construction or content, that
do not contain what is promoted, or that go out of style or become obsolete before they
actually need replacing. An organization that markets poor-quality or unsafe products is taking
29
Id.
30
Id.

the chance that it will develop a reputation for poor products or service. In addition, it may be
putting itself in jeopardy for product claims or legal action. Sometimes, however, frequent
changes in product features or performance, such as those that often occur in the computer
industry, make previous models of products obsolete. Such changes can be misinterpreted as
planned obsolescence.31
Ethical questions may also arise in the distribution process. Because sales performance is the
most common way in which marketing representatives and sales personnel are evaluated,
performance pressures exist that may lead to ethical dilemmas. For example, pressuring
vendors to buy more than they need and pushing items that will result in higher commissions
are temptations. Exerting influence to cause vendors to reduce display space for competitors'
products, promising shipment when knowing delivery is not possible by the promised date, or
paying vendors to carry a firm's product rather than one of its competitors are also unethical.32
Research is another area in which ethical issues may arise. Information gathered from research
can be important to the successful marketing of products or services. Consumers, however,
may view organizations' efforts to gather data from them as invading their privacy. 33 They are
resistant to give out personal information that might cause them to become a marketing target
or to receive product or sales information. When data about products or consumers are
exaggerated to make a selling point, or research questions are written to obtain a specific
result, consumers are misled. Without self-imposed ethical standards in the research process,
management will likely make decisions based on inaccurate information.
DOES MARKETING OVERFOCUS ON MATERIALISM?

Consumers develop an identity in the market place that is shaped both by who they are and by
what they see themselves as becoming. There is evidence that the way consumers view
themselves influences their purchasing behavior. This identity is often reflected in the brands
or products they consume or the way in which they lead their lives.34
31
JeenaHennington, Eight Principles Of Advertising Ethics, MDG (April 12, 2011),
https://www.mdgadvertising.com/marketing-insights/eight-principles-of-advertising-ethics.
32
Id.
33
Id.

The proliferation of information about products and services complicates decision making.
Sometimes consumer desires to achieve or maintain a certain lifestyle or image results in their
purchasing more than they need or can afford. Does marketing create these wants? Clearly,
appeals exist that are designed to cause people to purchase more than they need or can afford.
Unsolicited offers of credit cards with high limits or high interest rates, advertising appeals
touting the psychological benefits of conspicuous consumption, and promotions that seek to
stimulate unrecognized needs are often cited as examples of these excesses.35
SPECIAL ETHICAL ISSUES IN MARKETING TO CHILDREN

Children are an important marketing target for certain products. Because their knowledge
about products, the media, and selling strategies is usually not as well developed as that of
adults, children are likely to be more vulnerable to psychological appeals and strong images. 36
Thus, ethical questions sometimes arise when they are exposed to questionable marketing
tactics and messages. For example, studies linking relationships between tobacco and alcohol
marketing with youth consumption resulted in increased public pressure directly leading to the
regulation of marketing for those products.37
The proliferation of direct marketing and use of the Internet to market to children also raises
ethical issues. Sometimes a few unscrupulous marketers design sites so that children are able
to bypass adult supervision or control; sometimes they present objectionable materials to
underage consumers or pressure them to buy items or provide credit card numbers. When this
happens, it is likely that social pressure and subsequent regulation will result. Likewise,
programming for children and youth in the mass media has been under scrutiny for many
years.38
34
Yves Evrard&Luiz Henrique Boff, Materialism and Attitudes Toward Marketing, ACR (1998),
http://acrwebsite.org/volumes/8152/volumes/v25/NA-25
35
Id.
36
Michael Brenner, The Ethics of Marketing to Children and Teens, Marketing Insider Group (November 27, 2017),
https://marketinginsidergroup.com/content-marketing/ethics-marketing-children-teens.
37
Id.
38
Id.

In the United States, marketing to children is closely controlled. Federal regulations place
limits on the types of marketing that can be directed to children, and marketing activities are
monitored by the Better Business Bureau, the Federal Trade Commission, consumer and
parental groups, and the broadcast networks. These guidelines provide clear direction to
marketers.39
ETHICAL ISSUES IN MARKETING TO MINORITIES

The United States is a society of ever-increasing diversity. Markets are broken into segments
in which people share some similar characteristics. Ethical issues arise when marketing tactics
are designed specifically to exploit or manipulate a minority market segment. Offensive
practices may take the form of negative or stereotypical representations of minorities,
associating the consumption of harmful or questionable products with a particular minority
segment, and demeaning portrayals of a race or group.40 Ethical questions may also arise when
high-pressure selling is directed at a group, when higher prices are charged for products sold to
minorities, or even when stores provide poorer service in neighborhoods with a high
population of minority customers. Such practices will likely result in a bad public image and
lost sales for the marketer.41
Unlike the legal protections in place to protect children from harmful practices, there have
been few efforts to protect minority customers. When targeting minorities, firms must evaluate
whether the targeted population is susceptible to appeals because of their minority status. The
firm must assess marketing efforts to determine whether ethical behavior would cause them to
change their marketing practices.42
ETHICAL ISSUES SURROUNDING THE PORTRAYAL OF WOMEN IN

MARKETING EFFORTS
As society changes, so do the images of and roles assumed by people, regardless of race, sex,
or occupation. Women have been portrayed in a variety of ways over the years. When
39
Id.
40
Hal Conick, The Ethics of Targeting Minorities with Dark Ads, AMA (March 21, 2019),
https://www.ama.org/marketing-news/the-ethics-of-targeting-minorities-with-dark-ads/
41
Id.
42
Id.

marketers present those images as overly conventional, formulaic, or oversimplified, people
may view them as stereotypical and offensive.Examples of demeaning stereotypes include
those in which women are presented as less intelligent, submissive to or obsessed with men,
unable to assume leadership roles or make decisions, or skimpily dressed in order to appeal to
the sexual interests of males. Harmful stereotypes include those portraying women as obsessed
with their appearance or conforming to some ideal of size, weight, or beauty. When images are
considered demeaning or harmful, they will work to the detriment of the organization.
Advertisements, in particular, should be evaluated to be sure that the images projected are not
offensive.43
Ethical Values in Marketing44:
Honesty45—to be truthful and forthright in our dealings with customers and stakeholders.
 We will tell the truth in all situations and at all times.
 We will offer products of value that do what we claim in our communications.
 We will stand behind our products if they fail to deliver their claimed benefits.
 We will honor our explicit and implicit commitments and promises.
Responsibility46—to accept the consequences of our marketing decisions and strategies.

 We will make strenuous efforts to serve the needs of our customers.
 We will avoid using coercion with all stakeholders.
 We will acknowledge the social obligations to stakeholders that come with increased
marketing and economic power.
 We will recognize our special commitments to economically vulnerable segments of
the market such as children, the elderly and others who may be substantially
disadvantaged.
43
Harjoth Kaur, Ethical Issues in Marketing to Different Demographic, Blogspot (September 3, 2010),
http://drharjothkaur.blogspot.com/2010/09/ethical-issues-in-marketing-to.html
44
Sumeet Jain, Ethical Norms and Values for Marketers, IIT (October 24, 2011),
https://ethics.iit.edu/ecodes/node/3038#main-content.
45
Id.
46
Id.

Fairness47—to try to balance justly the needs of the buyer with the interests of the seller.
 We will represent our products in a clear way in selling, advertising, and other forms
of communication; this includes the avoidance of false, misleading, and deceptive
promotion.
 We will reject manipulations and sales tactics that harm customer trust.
 We will not engage in price fixing, predatory pricing, price gouging, or “bait-and-
switch” tactics.
 We will not knowingly participate in material conflicts of interest.
Respect48—to acknowledge the basic human dignity of all stakeholders.

 We will value individual differences even as we avoid stereotyping customers or
depicting demographic groups (e.g., gender, race, sexual orientation) in a negative or
dehumanizing way in our promotions.
 We will listen to the needs of our customers and make all reasonable efforts to monitor
and improve their satisfaction on an ongoing basis.
 We will make a special effort to understand suppliers, intermediaries, and distributors
from other cultures.
 We will appropriately acknowledge the contributions of others, such as consultants,
employees and coworkers, to our marketing endeavors.
Openness49—to create transparency in our marketing operations.

 We will strive to communicate clearly with all our constituencies.
 We will accept constructive criticism from our customers and other stakeholders.
 We will explain significant product or service risks, component substitutions or other
foreseeable eventualities that could affect customers or their perception of the purchase
decision.
 We will fully disclose list prices and terms of financing as well as available price deals
47
Id.
48
Id.
49
Id.

and adjustments.
Citizenship50—to fulfill the economic, legal, philanthropic and societal responsibilities that
serve stakeholders in a strategic manner.
 We will strive to protect the natural environment in the execution of marketing
campaigns.
 We will give back to the community through volunteerism and charitable donations.
 We will work to contribute to the overall betterment of marketing and its reputation.
We will encourage supply chain members to ensure that trade is fair for all participants,
including producers in developing countries.
TheEthics of Advertising
Walter Thomson “advertising is anon moral force, like electricity which not only illuminates
but electrocutes, it’s worth to civilization depends upon how it its used”.Commercial
advertising is defined as a form of “information” which means providing information to
consumers.Thus ethics in advertising means a set of well defined principles which govern the
ways of communication taking place between the seller and the buyer. Ethics is the most
important feature of the advertising industry. Though there are many benefits of advertising
but then there are some points which don’t match the ethical norms of advertising.An ethical
ad is the one which doesn’t lie, doesn’t make fake or false claims and is in the limit of
decency.51
Benefits of Advertising52
 Economic: useful tool for sustaining honest and ethically responsible competition by
informing people of the availability of rationally desirable new products and services
and improvements in existing ones
 Political: helps counteract tendencies toward the monopolization of power by
informing people of the ideas and policy proposals of parties and candidates
50
Id.
51
William M. O’Barr, Ethics and Advertising, Project Muse (Oct 9, 2007), https://muse.jhu.edu/article/221968.
52
Id.

 Cultural: can exert a positive influence on decisions about media content; contribute
the betterment of society by uplifting and inspiring people and motivating them to act
in ways that benefit themselves and others. Importance of witty, tasteful and
entertaining advertising, even to the point of becoming art.1
 Moral and Religious: communicate messages of faith, patriotism, tolerance,
compassion and neighborly service, charity, health, education
Harms of Advertising53
 Economic: misrepresent and without relevant facts; subvert the media by pressure not
to treat of questions that are embarrassing and inconvenient; tout harmful or useless
goods; move people based on non-rational decisions; become a tool of "consumerism";
particularly harmful in economically less developed countries
 Political: costs of advertising can limit political competition to wealthy candidates or to
those willing to compromise their integrity; distorts the views and records of opponents
 Cultural: corrupt culture and cultural values by contradicting sound traditional values;
can create superficiality, tawdriness, and moral squalor; ignore educational and social
needs of certain segments of the audience; contributes to stereotyping of particular
groups
 Moral and religious harms: deliberate appeals to motives of envy, status seeking, and
lust creates vulgar and morally degrading advertising; treat of religion in obnoxious
and offensive manners; can promote morally suspect or perverse products and practices
Ethical Principles especially relevant to Advertising

General54
o Principles of the moral order must be applied to the domain of media
o Human freedom has a purpose: making an authentic moral response. All attempts to
inform and persuade must respect the purposes of human freedom if they are to be
moral.
o Morally good advertising therefore is that advertising that seeks to move people to
53
Id.
54
Id.

choose and act rationally in morally good ways; morally evil advertising seeks to move
people to do evil deeds that are self-destructive and destructive of authentic community
o Means and techniques of advertising must also be considered: manipulative,
exploitative, corrupt and corrupting methods of persuasion and motivation
Unethical advertising55
Advertisement is considered unethical in the following situations;
 When it has degraded or underestimated the substitute or rival's product.
 When it gives false or misleading information on the value of the product.
 When it fails to give useful information on the possible reaction or side effects of the
product.
 Ambiguity
 Exaggeration
 Concealed Facts
 Psychological appeal
 False Advertising
 Harmful Products
 Degradation of women
Ways of misleading the consumers56

 Many a time, traders entice the customers into their stores by advertising goods at a
very low price, but they stock only a handful of such sale items in the store. When the
advertised goods are sold out, consumers are steered towards the higher-priced stock or
lower quality goods.
 Retailers must ensure that reasonable supply of products is available during the sales,
and retailers should not purposely avoid it. Retailers should make it clear in the
advertisement that how many items on sale are available or when the sale ends.
 Sale offer should be for a limited period. Advertisement should declare that sale offer
is for a limited time period. The period of the offer should be made clear in the
55
Id.
56
Id.

advertisement only when the advertised goods are available for a limited period or
stocks are limited.
 Traders often offer insignificant price reduction. To illustrate, a trader may advertise
that the price of product is reduced to Rs.99.95, when the normal selling price is
Rs.100.. The trader must include the normal selling price and discounted price in his
offer .The trader sale offer is misleading if the trader claims the product is below cost ,
when the price is not below cost after discounts, rebates and other allowances it is
misleading if the trader simply shows a fictitious higher price as normal selling price in
the advertisement.
 Advertisement must clearly indicate the total price of goods or services. All price
comparison must be truthful and must not intentionally or unintentionally mislead the
consumers. Under the Fair Trade Practices Act, retailers have an obligation to ensure
that they do not mislead or make false representations to customers with respect to
price of the goods. The consumers who shop around and compare the prices of various
products are less likely to be deceived by misleading claims consumers should also be
aware of what is a reasonable price of goods and not take any advertised discounts at
face value.
 While many sales are legitimate or genuine, the consumers should not get attracted to
such sales offers i.e., "Hurry...very few days remain for sale''. The consumers should be
aware of what to expect when retailers place items on sale and how to avoid being
misled by discount advertisements. A marketer should take care to ensure that when
goods or services are advertised to be available at a discount or as being on sale, it is a
genuine discount or sale.
Remedies to overcome deceptive advertisements57

 Cease-and- Desist Orders
The cease-and-desist orders, which prohibit the respondent from engaging any more in
deceptive practice, are actually the only formal procedure established by the Federal
Trade Commission Act for enforcing the prohibition of ' deceptive acts and practices.''
57
Orson Swindle, Combating Deceptive Advertising - The Role of Advertisers, the Media, and the FTC, FTC (April
28, 2003), https://www.ftc.gov/public-statements/2003/04/combating-deceptive-advertising-role-advertisers-media-
and-ftc.

 Restitution
Restitution means the consumer is compensated for any damage caused to him by the
product that had advertised claims not adequately substantiated. Restitution is rarely
considered because of its severity.
 Affirmative Disclosures
If an advertisement has provided insufficient information to the consumers, an
affirmative disclosure might be issued Affirmative disclosure require 'clear and
conspicuous disclosure' of omitted information. Often the involved information relates
to the deficiency or limitations of the product or service possibly relating to matters of
health or safety.
 Corrective Advertising
Corrective Advertising requires the advertisers to verify past deception by making
suitable amendment in any of its future commercial.
Self-Regulation in Advertising58
It is our responsibility to regulate our operations. And we must do it ourselves. Self-regulation

is not a quick-fix solution; it will be completely ineffective without commitment from and the
integrity of one and all. Self-Regulation may require the following;
 The development of a self-regulatory code of conduct covering all forms of media that
is sensitive to ethics, legalities, decency and truthfulness in advertising.
 Provision for monitoring and accountability, including a policy allowing for the
removal of ads that violate the code.
 Greater participation of advertising professionals in the regulatory process.
 The inclusion of non-industry players in the process
 Consumer awareness of the self regulation system.
Mariane,
58
How self-regulation works and why, Adstandards (August 29, 2016),
https://adstandards.com.au/blog/how-self-regulation-works-and-why.

 Simplification of the complaint process against ads.
 Transparency throughout the entire system.
These reforms will achieve three goals. They will make the industry accountable for its
actions. They will make regulators and critics think twice before attacking the industry and
finally they will lead the public to trust ads, advertisers and agencies.
JUDICIAL APPROACH
Reckitt & Colman of India vs M.P. Ramachandran59
One of the earliest cases of trademark and intellectual property infringement, this landmark
case from 1999 laid down the principles that allowed comparative advertising in India under
certain rules. Ramachandran’s Jyothy Laboratories released a television ad that claimed its
new Ujala fabric whitener was better than other blue whiteners because the latter would leave
blue patches on white clothes.
Reckitt had claimed that while the ad only said “neel", it clearly disparaged their product
Robin Blue which was the market leader in blue whiteners. Also, Jyothi Labs had used Robin
Blue’s packaging and its price of Rs10 to refer to the generic “neel" in its ad, leaving no
ambiguity. In 1999, the Calcutta high court upheld Reckitt’s plea and ordered that Jyothi Labs
to stop airing the offending ads. The judgment laid out the five principles of comparative
advertising, which allowed hyperbole and even lies in claims that one’s product was the best,
as long as the ad did not “defame" or lie about the competition.
PepsiCo Inc. and Others vs Hindustan Coca-Cola Ltd60
59
CS No. 31 of 1996
60
2003(27)PTC 305 Del

Coca-Cola India-owned Thums Up ran an ad in 2003 that took a dig at rival Pepsi, with a
bottle labelled “Pappi" and a logo similar to Pepsi’s trademark. The ad urged customers not to
pick Pepsi because it was sweet and therefore meant for children, while Thums Up was a
“strong" drink. The ad also parodied PepsiCo India’s famous “Yeh Dil Maange More" tagline
and the Pepsi roller-coaster ad that the company made famous globally.
In 2003, justice Usha Mehra of Delhi high court upheld part of PepsiCo’s plea and restrained
ads by Thums Up that referred to PepsiCo’s trademark, name and logo, and the roller-coaster
visual associated with its global ad. This judgment also established the three principles by
which to ascertain whether an ad was disparaging—intent, manner and story line of the
commercial. This became a key part of many similar cases later.
Dabur India Ltd vs Emami Ltd
This case bears striking similarity to the one HUL and GCMMF are now fighting in Bombay
high court. Emami Ltd, makers of Sona-Chandi Amritprash, ran television ads that claimed
that chyawanprash would harm consumers during summers. Emami’s new product claimed
Amritprash was the better choice in the summer.
Dabur accused Emami of disparaging its chyawanprash, saying it was irrelevant that the ad
mentioned only chyawanprash—a generic class of products—since Dabur commanded 63% of
the total market. In 2004, Delhi high court’s justices U. Mehra and O. Dwivedi ruled that by
asking people not to eat chyawanprash, Emami’s ads were also asking people not to buy Dabur
Chyawanprash. The ads were ruled disparaging and were stopped on Dabur’s plea.

Dabur India vs Colortek Meghalaya and Godrej Sara Lee61
In another case similar to the HUL vs GCMMF one, makers of the Odomos mosquito repellent
cream accused Godrej Sara Lee, maker of Good Knight Naturals cream, of disparaging its
product by advertising that certain repellent creams could cause rashes while Good Knight
Naturals would not, because it contained lavender, tulsi and milk protein.
Dabur argued that the ad did not need to mention Odomos by name to disparage it because the
brand commanded 80% of the repellent cream market. Justices Madan Lokur and Mukta Gupta
said the ad simply promoted Good Knight Natural’s benefits that addressed reasonable
concerns of using any repellent cream—rashes—that Odomos may or may not cause. If this
was disparagement, the justices argued, then no mosquito repellent maker could advertise its
products without denigrating Odomos, which had a market monopoly. The court denied
Dabur’s appeal and allowed Godrej’s ads to continue.
Reckitt Benckiser (India) Ltd vs Hindustan Unilever Ltd62
An advertisement for Vim Liquid run by HUL implied Dettol’s Healthy Kitchen was a “harsh
antiseptic", similar to the flagship Dettol liquid, misleading consumers that the Dettol washing
liquid was unsafe for kitchen use. In 2013, justice M.L. Mehta ruled that HUL’s Vim ad did
disparage Dettol Healthy Kitchen by misusing the ordinary public’s association of “harsh
antiseptic" with Dettol. The ad was removed.
61
2004(29)PTC 1 (Del).
62
FAO(OS)(COMM) 62/2018

Unit – IV
Business Ethics and Whistle Blowing
Whistle blowing is reporting the company you work for, or someone above you in the
company hierarchy, for doing something unethical or illegal. there have been laws passed to
protect people who report such behavior, because in the past, they have been subject to
sanctions, such as losing their jobs or being demoted for reporting things that are in the public
interest to be reported.
Whistle-blowing takes place when a government employee, company employee or
independent contractor goes public with claims of illegal or unethical business practices or
activities within his company. Many times, the whistle-blower has attempted to communicate

the problem internally and has received no response from management. 63
Making disclosures of serious wrongdoing is colloquially known as “whistle-

blowing”.Employees who have inside knowledge (which is not usually available to those
outside the organization) are often reluctant to disclose serious wrongdoing for fear of
retaliation bytheir employer.64
WHISTLE-BLOWING PROCEDURE65
STAGE 1
 An employee who has concerns of malpractice within the Institute should write to their
Line Manager in a sealed envelope marked Confidential, to be opened by the
addressee, detailing the alleged malpractice.
 In the event that the concerns involve the individual’s Line Manager or the Principal,
the employee should write to the Registrar or another appropriate senior manager.
STAGE 2
 On receiving the document, an appropriate body will be appointed to investigate the
allegation. Dependent on the nature of the concern, internal or external audit may be
the appropriate body toconduct an investigation.
 The issues raised may be considered as gross misconduct and a decision may be made
to suspend all or some of those staff who are under investigation on full pay.
 Should the allegation be made against the Principal, then the Chair of the Corporation
will take the above action.
3. Investigation Procedure66
63
Leo Martin, How to cultivate a whistleblowing culture, EthicalCorp (May 04, 2017),
http://www.ethicalcorp.com/content/how-cultivate-whistleblowing-culture.
64
Id.
65
Henry Shaw, What is Whistleblowing in Whistle Blowing Policy in Business, HR Helpboard (September 2016),
https://www.hrhelpboard.com/hr-policies/whistle-blower-policy.htm#targetText=The%20Whistle%20blowing
%20policy%20and,given%20in%20the%20Corporate%20Policy.

Due to the various different types of concern that may arise, it is not possible to establish a set
procedure with identified timescales. The following principles will apply:-
a) The investigation will be carried out as rapidly as possible;
b) All investigati0ns will be carried 0ut in strict c0nfidence;
c) Any c0mmunicati0n with the empl0yee raising the c0ncern will be t0 their h0me address;
d) Any pers0n (pe0ple) alleged t0 be inv0lved sh0uld be inf0rmed 0f the br0ad nature 0f the
c0ncern, that at this stage it is an investigati 0n (alth0ugh dependent 0n the 0utc0me 0f the
investigati0n, disciplinary acti0n may be taken) and their right t0 be acc0mpanied by a w0rk
c0lleague 0r trade uni0nrepresentative;
e) At any investigat0ry meeting, the individual(s) may be acc0mpanied by a n0te-taker;
f) All the n0tes 0f the investigati0n and the final rep0rt will be passed t0 the Line Manager (0r
0thers as stipulated ab0ve) with a statement saying whether the investigati0n sh0ws that the
c0mplaint sh0uld be upheld. The Line Manager will decide what acti 0n is required and inf0rm
the pers0n (pe0ple) being investigated.
Sh0uld the allegati0ns be made against the Principal, then the Chair 0f the C0rp0rati0n will
receive the inf0rmati0n and take the appr0priate acti0n.
STAGE 3
 Any disciplinary acti0n deemed necessary against th0se accused 0f malpractice will be
instigated immediately in acc0rdance with the Disciplinary Pr0cedure.
 The empl0yee wh0 raised the c0ncern will be inf0rmed 0f the 0utc0me 0f the
investigati0n.
 Where the investigati0n sh0ws that the empl0yee raised c0ncerns f0r pers0nal gain 0r
f0r pers0nal m0tives, disciplinary acti0n will be taken against the empl0yee.
4. Review
This pr0cedure will remain in f0rce until amended 0r withdrawn after c0nsultati0n with staff.
WHAT SHOULD THE PROCEDURE CONTAIN?67
The purp0se 0f the pr0cedure is t0 identify the pr0cess f0r receiving and dealing
66
Id.
67
Id.

withdiscl0sures 0f seri0us wr0ngd0ing. It sh0uld 0bvi0usly be tail0red t0 the individual needs
0fthe 0rganizati0n. H0wever it is sensible f0r the pr0cedure t0 mirr0r the phil0s0phy
andpr0tecti0ns in the Act.
The f0ll0wing issues sh0uld be c0nsidered when preparing a pr0cedure.
Wh0 can make a pr0tected discl0sure?68

The pr0cedure needs t0 identify th0se wh0 can use it. F0r the reas0ns discussed ab0vethe
pr0cedure sh0uld be wide en0ugh t0 c0ver all individuals wh0 may be in a p0siti0n t0disc0ver
seri0us wr0ngd0ing. Under the Act “empl 0yees” wh0 are pr0tected include f0rmerempl0yees,
h0me w0rkers, sec0nded individuals, independent c0ntract0rs and individualsresp0nsible f0r
the management 0f an 0rganizati0n (f0r example direct0rs).
When sh0uld the pr0cedure be used?69

0bvi0usly n0t all “discl0sures” that an empl0yee may wish t0 make will warrant
pr0tecti0n.F0r example the pr0cedure will n0t be intended t0 deal with management/staffing
issues. Itsh0uld be limited t0 the specific purp0se 0f actual whistle-bl0wing in terms 0f the
Act.It is theref0re imp0rtant t0 identify the elements that must be present bef 0re a
discl0surewill be pr0tected. Assistance with this can be gained fr0m the Act which
pr0tectsdiscl0sures where:
· there is suspected seri0us wr0ngd0ing in 0r by an 0rganizati0n; and
· the empl0yee reas0nably believes that the inf0rmati0n is true 0r likely t0 be true; and
· the empl0yee wishes t0 discl0se the inf0rmati0n s0 that the wr0ngd0ing can
beinvestigated; and
· The empl0yee wishes the discl0sure t0 be protected.
Serious Wrongdoing70
The pr0cedure sh0uld identify the definiti0n 0f “seri0us wr0ngd0ing”. Under the Act
68
69
Id.
70
Id.

seri0uswr0ngd0ing includes:
 unlawful, c0rrupt, 0r irregular use 0f public funds 0r res0urces;
 an act, 0missi0n, 0r c0urse 0f c0nduct:
 that p0ses a seri0us risk t0 public health 0r safety, 0r the envir0nment; 0r
 that p0ses a seri0us risk t0 the maintenance 0f the law, including the preventi0n,
 investigati0n and detecti0n 0f 0ffences and the right t0 a fair trial; 0r
 that c0nstitutes an 0ffence; 0rby public 0fficials that is gr0ssly impr0per.
Pr0tecti0n71
The pr0cedure sh0uld rec0rd the pr0tecti0n that will be given t0 empl0yees wh0 make a
discl0sure. Examples include pr0tecti0n against:
· retaliat0ry acti0n by the empl0yer;
· discriminati0n/victimizati0n under the Human Rights Act 1993; and
· Criminal 0r civil liability arising fr0m the discl0sure (unless the whistlebl0wer was
pers0nally inv0lved in the seri0us wr0ngd0ing).
C0nfidentiality72
C0nfidentiality needs t0 be specifically addressed. Generally the pers 0n receiving the
discl0sure w0uld be expected t0 use their best endeav 0rs t0 keep the whistlebl0wer’s identity
secret. H0wever there will be s0me circumstances in which it will be appr 0priate t0 identify
the whistlebl0wer. Under the Act these are:
 the whistlebl0wer pr0vides written c0nsent
 the pers0n receiving the discl0sure believes that discl0sure 0f identifying inf0rmati0n
is essential:
 t0 the investigati0n 0f the discl0sure;
 t0 prevent seri0us risk t0 public health 0r safety 0r the envir0nment; 0r having regard
t0 the principles 0f natural justice.
71
Id.
72
Id.

Internal discl0sures73
The pr0cedure sh0uld clearly explain h0w an empl0yee sh0uld make a pr0tected discl0sure.
This will c0ver the manner in which discl0sures are t0 be made, f0r example by teleph0ne t0 a
specific number, 0r in writing t0 a n0minated pers0n. Pr0visi0n t0 make the discl0sure t0
an0ther named pers0n must be included where the first named pers0n is believed t0 be
inv0lved in the wr0ngd0ing. The pr0cedure will need t0 0utline the steps that the pers0n
receiving the discl0sure must take. Issues t0 c0nsider addressing include:
· ackn0wledgement 0f receipt 0f the discl0sure;
· pers0ns t0 be n0tified 0f the discl0sure;
· pr0cess f0r investigating the discl0sure;
· inv0lvement 0f insurers;
· wh0 the 0utc0me 0f investigati0n will be c0mmunicated t0; and
· time frames.
Discl0sures 0utside the 0rganizati0n74
The pr0cedure sh0uld rec0rd that empl0yees are expected t0 exhaust the internal
whistlebl0wing pr0cedure bef0re g0ing 0utside the 0rganizati0n with their discl0sures. S0me
0rganizati0ns may wish t0 specifically list the external “appr0priate auth0rities” t0 wh0m
discl0sures may be made 0nce the internal pr0cedure has been exhausted.
The appr0priate auth0rities named in the Act, t0 wh0 pr0tected discl0sures may be madeare
the:
· C0mmissi0ner 0f P0lice;
· C0ntr0ller and Audit0r-General;
· Direct0r 0f the Seri0us Fraud 0ffice;
· Inspect0r-General 0f Intelligence and Security;
· 0mbudsmen;
73
74

· Parliamentary C0mmissi0ner f0r the Envir0nment;
· P0lice C0mplaints Auth0rity;
· Solicitor-General;
· State Services Commissioner; and
· Health and Disability Commissioner.
The organization may wish to clarify that an appropriate authority to make a protected
disclosure to does not include;
· A Minister of the Crown;
· A member of Parliament; or
· The media.
OTHER
When preparing a procedure you should have regard to the following matters:
· Disclosures of serious wrongdoing must be taken seriously;
· A whistle-blowing procedure must comply with the requirements of natural justice;
· Information about the existence of the internal procedure must be published widely
within the organization;
· The procedure should be regularly reviewed to ensure that it is effective.
There are many advantages to having a whistle-blowing procedure. Public disclosure of

serious wrongdoing is very damaging for an organization. No organization wants to find out
for the first time about alleged serious wrongdoing in the public arena. An effective procedure
acts as a risk management tool by helping to ensure that no legitimate disclosures are made
without the organization’s knowledge.
An internal whistle-blowing procedure will also act as a deterrent to serious wrongdoers. It
sends a message that the organization will support genuine whistleblowers. Individuals who
have knowledge of serious wrongdoing will know how to raise their concerns internally. A
procedure will reassure whistle blowers that they will not put their job at risk by speaking out.
A procedure also provides an organization with an appropriate and effective means of dealing
with disclosures of serious wrongdoing. It means that the organization will not be caught off
balance and is unlikely to inadvertently make mistakes in dealing with the disclosure. An

effective procedure increases the likelihood that matters can be dealt with internally, which
may avoid damage to the organization’s reputation.
There is the added benefit that if an organization has knowledge of the disclosure it can take
steps to control potentially serious matters. If the disclosure subsequently becomes public, the
organization will be in a better position to deal with adverse publicity if it has already
investigated the matter internally and is aware of the issues involved.
Why is Whistle blowing important?75

The Council is committed to high quality services and being open, fair and honest. Managers
have a duty to prevent dangerous or illegal actions at work. All staff, including those who
work for a contractor or agency, has an important part to play. Often it is only through whistle
blowing that information comes to light.
Why does the Council need a Whistle blowing procedure?76

This procedure:
 Supports the Public Interest Disclosure Act.
 Gives you a way of raising concerns in a structured and supportive environment within
the Council.
 Means that you can feel confident to bring up genuinely held concerns without fear of
recrimination.
 Shows the Council’s commitment to investigating and taking firm management action
where wrongdoing may be proven.
 Encourages and enables you to raise concerns within RBK rather than overlooking
problems or "blowing the whistle" outside the Council.
Who can use the Council’s whistle blowing procedure?77

 All staff, whether full time or part time, permanent or temporary councilors;
75
Lauren Hockley, Why is Whistleblowing Important?, Delta Net (Sep. 19, 2018), https://www.delta-
net.com/compliance/whistleblowing/faqs/why-is-whistleblowing-important.
76
77
Id.

 All staff working in schools (including volunteers and students);
 Contractors working for the Council on Council premises e.g. agency workers, builders
or drivers; and
 The Council’s external contractors and those providing services under a contract with
the Council in their own premises e.g. care homes.
When should I raise a concern?78

If you find out about activities that harm clients of the Council, colleagues working for the
Council, or the Council itself. These may include:
 Illegal activities
 Miscarriages of justice
 Risks to health and safety
 Damage to the environment
 Misuse of public funds
 Fraud and corruption
 Abuse of clients
 Other wrongdoing, (including attempts to cover up wrongdoing)
For example, you could raise a serious concern about service provision, the actions of officers,
or the actions of others acting on behalf of the Council, which:
 Fall below the Council’s standards of practice, including the Council’s Code of
Conduct for Employees
 Are against the Council’s Standing Orders and policies
 Amount to improper conduct
Advantages79
1: Public Safety: One of the principle reasons to blow the whistle on illegal or unethical
activities is to protect the public, colleagues or others from risk. The more immediate and the
more significant the risk, the more important to take action efficiently. When companies
78
Id.
79

engage in activities that could cause physical or mental harm to people, or environmental
damage, many believe it is your duty to make those activities known.
2: Moral Responsibility: Blowing the whistle out of a sense of moral obligation is generally
regarded as the best reason to do so. In his Denver Business Journal article "`Blowing the
Whistle' Requires Courage," Marshall Colt explains that "What motivates you?" is a key
question you should ask before whistle-blowing. If you are attempting to protect the public or
fulfill a sense of moral duty, you are likely justified. If revenge against your organization is the
motive, you may not have a good motivation for action.
Disadvantage 80
1: Retaliation: One of the primary disadvantages of blowing the whistle is the potential
retaliation you face from management and colleagues. Some federal protections are in place to
encourage whistle-blowing, but those offer little support when you show up at the office each
day to a sense of resentment and hate from your co-workers. Colt encourages whistle-blowers
to have a physical and mental escape plan should things turn ugly at the office.
2: Conflicts of Interest: For many potential whistle-blowers, the conflict of interest between
serving one's company, co-workers and friends and protecting the public is very real and
challenging. You must weigh the possible damage to your working relationships and your
career against the merits of blowing the whistle in a given situation. Many people feel a sense
of loyalty to their company that prohibits whistle-blowing. Others simply are too burdened by
the thought of making bold accusations against an employer.81
The purpose of the whistle blowing policy is to encourage employees to disclose any
malpractice or misconduct of which they become aware and importantly to provide protection
for employees who report allegations of such malpractices or misconduct. The policy applies
to all employees, suppliers, agents, contractors and customers of the group. A potential
whistleblower should have good documentation of the evidence of the evidence of wrongdoing
before disclosing it to others. The whistleblower should also be prepared to deal with employer
80
Mike Bothwell, Pros and Cons of Whistleblowing in the Workplace, Whistle Blower Law (Aug 14, 2017),
https://whistleblowerlaw.com/whistleblowing-in-the-workplace/.
81
Id.

retaliation and have a contingency plan.82
UnitV
Ethics in Finance
Ethics in Finance
Ethics in general is concerned with human behavior that is acceptable or "right" and that is not
acceptable or "wrong" based on conventional morality. General ethical norms encompass
truthfulness, honesty, integrity, respect for others, fairness, and justice. They relate to all
aspects of life, including business and finance. Financial ethics is, therefore, a subset of
general ethics.
Ethical norms are essential for maintaining stability and harmony in social life, where people
interact with one another. Recognition of others' needs and aspirations, fairness, and
82

cooperative efforts to deal with common issues are, for example, aspects of social behavior
that contribute to social stability. In the process of social evolution, we have developed not
only an instinct to care for ourselves but also a conscience to care for others. There may arise
situations in which the need to care for ourselves runs into conflict with the need to care for
others. In such situations, ethical norms are needed to guide our behavior. As Demsey (1999)
puts it: "Ethics represents the attempt to resolve the conflict between selfishness and
selflessness; between our material needs and our conscience."
Ethical dilemmas and ethical violations in finance can be attributed to an inconsistency in the
conceptual framework of modern financial-economic theory and the widespread use of a
principal-agent model of relationship in financial transactions.83 The financial-economic theory
that underlies the modern capitalist system is based on the rational-maximizer paradigm,
which holds that individuals are self-seeking (egoistic) and that they behave rationally when
they seek to maximize their own interests. 84The principal-agent model of relationships refers
to an arrangement whereby one party, acting as an agent for another, carries out certain
functions on behalf of that other. Such arrangements are an integral part of the modern
economic and financial system, and it is difficult to imagine it functioning without them.85
The behavioral assumption of the modern financial-economic theory runs counter to the ideas
of trustworthiness, loyalty, fidelity, stewardship, and concern for others that underlie the
traditional principal-agent relationship. The traditional concept of agency is based on moral
values. But if human beings are rational maximizers, then agency on behalf of others in the
traditional sense is impossible. As Duskaexplains it: "To do something for another in a system
geared to maximize self-interest is foolish. Such an answer, though, points out an
inconsistency at the heart of the system, for a system that has rules requiring agents to look out
for others while encouraging individuals to look out only for themselves, destroys the practice
of looking out for others"86
83
Anand G. Shetty, Ethics in Finance, Encyclopedia (Sep. 17, 2019), https://www.encyclopedia.com/finance/finance-
and-accounting-magazines/ethics-finance.
84
Id.
85
Id.
86
Norman Bowie & Ronald Duska, Business Ethics, Phil Papers (1992), https://philpapers.org/rec/BOWBE-2.

The ethical dilemma presented by the problem of conflicting interests has been addressed in
some areas of finance, such as corporate governance, by converting the agency relationship
into a purely contractual relationship that uses a carrot-and-stick approach to ensure ethical
behavior by agents.87 In corporate governance, the problem of conflict between management
(agent) and stockholders (principal) is described as an agency problem.88 Economists have
developed an agency theory to deal with this problem. 89 The agency theory assumes that both
the agent and the principal are self-interested and aim to maximize their gain in their
relationship.90 A simple example would be the case of a store manager acting as an agent for
the owner of the store. The store manager wants as much pay as possible for as little work as
possible, and the store owner wants as much work from the manager for as little pay as
possible. This theory is value-free because it does not pass judgment on whether the
maximization behavior is good or bad and is not concerned with what a just pay for the
manager might be.91 It drops the ideas of honesty and loyalty from the agency relationship
because of their incompatibility with the fundamental assumption of rational maximization.
"The job of agency theory is to help devise techniques for describing the conflict inherent in
the principal-agent relationship and controlling the situations so that the agent, acting from
self-interest, does as little harm as possible to the principal's interest" (DeGeorge, 1992). The
agency theory turns the traditional concept of agency relationship into a structured
(contractual) relationship in which the principal can influence the actions of agents through
incentives, motivations, and punishment schemes. The principal essentially uses monetary
rewards, punishments, and the agency laws to command loyalty from the agent.92
Most of our needs for financial services management of retirement savings, stock and bond
87
PairotePathranarakul, Conflict of Interest: An Ethical Issue in Public and Private Management, OECD (Sep 28,
2005),http://www.oecd.org/site/adboecdanti-corruptioninitiative/regionalseminars/35592747.pdf.
88
Id.
89
Jack Ryan, What Is the Role of Agency Theory in Corporate Governance?, Investopedia (Jan. 14, 2019),
https://www.investopedia.com/ask/answers/031815/what-role-agency-theory-corporate-
governance.asp#targetText=What%20Is%20the%20Role%20of%20Agency%20Theory%20in%20Corporate
%20Governance%3F&targetText=Agency%20theory%20is%20used%20to,without%20regard%20for%20self
%2Dinterest.
90
Id.
91
Id.
92
Id.

investing, and protection against unforeseen events, to name a fewer such that they are better
entrusted to others because we have neither the ability nor the time to carry them out
effectively. The corporate device of contractualisation of the agency relationship is, however,
too difficult to apply to the multitude of financial dealings between individuals and institutions
that take place in the financial market every day. Individuals are not as well organized as
stockholders, and they are often unaware of the agency problem. Lack of information also
limits their ability to monitor an agent's behavior. Therefore, what we have in our complex
modern economic system is a paradoxical situation: the ever-increasing need for getting things
done by others on the one hand, and the description of human nature that emphasizes selfish
behavior on the other. This paradoxical situation, or the inconsistency in the foundation of the
modern capitalist system, can explain most of the ethical problems and declining morality in
the modern business and finance arena.
ETHICAL VIOLATIONS
The most frequently occurring ethical violations in finance relate to insider trading,
stakeholder interest versus stockholder interest, investment management, and campaign
financing.93 Businesses in general and financial markets in particular are replete with examples
of violations of trust and loyalty in both public and private dealings. Fraudulent financial
dealings, influence peddling and corruption in governments, brokers not maintaining proper
records of customer trading, cheating customers of their trading profits, unauthorized
transactions, insider trading, misuse of customer funds for personal gain, mispricing customer
trades, and corruption and larceny in banking have become common occurrences.94
Insider trading is perhaps one of the most publicized unethical behaviors by traders. Insider
trading refers to trading in the securities of a company to take advantage of material "inside"
information about the company that is not available to the public. 95 Such a trade is motivated
by the possibility of generating extraordinary gain with the help of nonpublic information
(information not yet made public). It gives the trader an unfair advantage over other traders in
93
Brian Beers, Ethics in Finance: How It Affects Professionals, Investopedia (May 21, 2018),
investopedia.com/articles/financialcareers/09/professional-standards-ethics.asp.
94
Id.
95
Id.

the same security. Insider trading was legal in some European countries until recently. In the
United States, the 1984 Trading Sanctions Act made it illegal to trade in a security while in the
possession of material nonpublic information. The law applies to both the insiders, who have
access to nonpublic information, and the people with whom they share such information.
Campaign financing in the United States has been a major source of concern to the public
because it raises the issue of conflict of interest for elected officials in relation to the people or
lobbying groups that have financed their campaigns. The United States has a long history of
campaign finance reform. The Federal Election Commission (FEC) administers and enforces
the federal campaign finance statutes enacted by the Congress from time to time. Many states
have also passed lobbying and campaign finance laws and established ethics commissions to
enforce these statutes.
ETHICAL CODES
Approaches to dealing with ethical problems in finance range from establishing ethical codes
for financial professionals to efforts to replace the rational-maximizer (egoistic) paradigm that
underlies the modern capitalist system by one in which individuals are assumed to be altruistic,
honest, and basically virtuous.96 It is not uncommon to find established ethical codes and
ethical offices in American corporations and in financial markets. Ethical codes for financial
markets are established by the official regulatory agencies and self-regulating organizations to
ensure ethically responsible behavior on the part of the operatives in the financial markets.97
One of the most important and powerful official regulatory agencies for the securities industry
in the United States is the Securities and Exchange Commission (SEC). 98 It is in charge of
implementing federal securities laws, and, as such, it sets up rules and regulations for the
proper conduct of professionals operating within its regulatory jurisdiction. Many
professionals play a role within the securities industry, among the most important of which are
accountants, broker-dealers, investment advisers, and investment companies.99 Any improper
96
Citi CFO, Code of Ethics for Financial Professionals, Citi Group (Oct. 2, 2018),
https://www.citigroup.com/citi/investor/data/codeofethics.pdf
97
Id.
98
James Chen, Securities and Exchange Commission (SEC), Investopedia (May 14, 2019),
https://www.investopedia.com/terms/s/sec.asp

or unethical conduct on the part of these professionals is of great concern to the SEC, whose
primary responsibility is to protect investor interests and maintain the integrity of the securities
market. The SEC can censure, suspend, or bar professionals who practice within its regulatory
domain for lack of requisite qualifications or unethical and improper conduct. The SEC also
oversees self-regulatory organizations (SROs), which include stock exchanges, the National
Association of Security Dealers (NASD), the Municipal Securities Rulemaking Board
(MSRB), clearing agencies, transfer agents, and securities information processors. 100 An SRO
is a membership organization that makes and enforces rules for its members based on the
federal securities laws. The SEC has the responsibility of reviewing and approving the rules
made by SROs.
Other rule-making agencies include the Federal Reserve System, the Federal Deposit
Insurance Corporation (FDIC), and state finance authorities. Congress has entrusted to the
Federal Reserve Board the responsibility of implementing laws pertaining to a wide range of
banking and financial activities, a task that it carries out through its regulations. One such
regulation has to do with unfair or deceptive acts or practices. The FDIC has its own rules and
regulations for the banking industry, and it also draws its power to regulate from various
banking laws passed by Congress.
In addition to federal and state regulatory agencies, various professional associations set their
own rules of good conduct for their members. The American Institute of Certified Public
Accountants (AICPA), the American Institute of Certified Planners (AICP), the Investment
Company Institute (ICI), the American Society of Chartered Life Underwriters (ASCLU), the
Institute of Chartered Financial Analysts (ICFA), the National Association of Bank Loan and
Credit Officers (also known as Robert Morris Associates), and the Association for Investment
Management and Research (AIMR) are some of the professional associations that have well-
publicized codes of ethics.
TOWARD A PARADIGM SHIFT
There has been an effort to address the ethical problems in business and finance by
99
Id.
100
Id.

reexamining the conceptual foundation of the modern capitalist system and changing it to one
that is consistent with the traditional model of agency relationship. The proponents of a
paradigm shift question the rational-maximizer assumption that underlies the modern
financial-economic theory and reject the idea that all human actions are motivated by self-
interest. They embrace an alternative assumption that human beings are to some degree ethical
and altruistic and emphasize the role of the traditional principal-agent relationship based on
honesty, loyalty, and trust. Duskaargues: "Clearly, there is an extent to which [Adam] Smith
and the economists are right. Human beings are self-interested and will not always look out for
the interest of others. But there are times they will set aside their interests to act on behalf of
others. Agency situations were presumably set up to guarantee those times."101
The idea that human beings can be honest and altruistic is an empirically valid assumption; it
is not hard to find examples of honesty and altruism in both private and public dealings. 102
There is no reason this idea should not be embraced and nurtured. If the financial-economic
theory accepts the fact that behavioral motivations other than that of wealth maximization are
both realistic and desirable, then the agency problem that economists try to deal with will be a
nonproblem. For Dobson, the true role of ethics in finance is to be found in the acceptance of
"internal good" ("good" in the sense of "right" rather than in the sense of "physical product"),
which, he adds, is what classical philosophers describe as "virtue that is, the internal good
toward which all human endeavor should strive. He contends: "If the attainment of internal
goods were to become generally accepted as the ultimate objective of all human endeavors,
both personal and professional, then financial markets would become truly ethical"
Insider trading
Insider trading is the trading of a corporation's stock or other securities (such as bonds or stock
options) by individuals with access to non-public information about the company. In most
countries, trading by corporate insiders such as officers, key employees, directors, and large
shareholders may be legal, if this trading is done in a way that does not take advantage of non-
101
Norman Bowie & Ronald Duska, Business Ethics, Phil Papers (1992), https://philpapers.org/rec/BOWBE-2.
102
Steve Tylor, Why Do Human Beings Do Good Things? The Puzzle of Altruism, Psychology Today (Oct. 18, 2013),
https://www.psychologytoday.com/us/blog/out-the-darkness/201310/why-do-human-beings-do-good-things-the-
puzzle-altruism

public information.103
However, the term is frequently used to refer to a practice in which an insider or a related party
trades based on material non-public information obtained during the performance of the
insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of
trust and confidence or where the non-public information was misappropriated from the
company.104
In the United States and several other jurisdictions, trading conducted by corporate officers,
key employees, directors, or significant shareholders (in the US, defined as beneficial owners
of 10% or more of the firm's equity securities) must be reported to the regulator or publicly
disclosed, usually within a few business days of the trade. 105 Many investors follow the
summaries of these insider trades in the hope that mimicking these trades will be profitable.
While "legal" insider trading cannot be based on material non-public information, some
investors believe corporate insiders nonetheless may have better insights into the health of a
corporation (broadly speaking) and that their trades otherwise convey important information
(such as about the pending retirement of an important officer selling shares, greater
commitment to the corporation by officers purchasing shares).106
The authors of one study claim that illegal insider trading raises the cost of capital for
securities issuers, thus decreasing overall economic growth. However, economists cannot be
confident of this conclusion because data on illegal insider trading is not available; the nature
of the activity renders it impossible to gather data.Insiders can easily profit using "open market
repurchases." Such transactions are legal and generally encouraged by regulators through safe
harbors against insider trading liability.107
Legal insider trading

103
Fabio C. Bagliano, Insider Trading, Traded Volume and Returns, Ideas (2011),
https://ideas.repec.org/p/tur/wpaper/26.html.
104
Id.
105
Id.
106
Elvis Picardo, How The SEC Tracks Insider Trading, Investopedia (Jun. 25, 2019),
https://www.investopedia.com/articles/investing/021815/how-sec-tracks-insider-trading.asp.
107
Id.

Legal trades by insiders are common, as employees of publicly traded corporations often have
stock or stock options. These trades are made public in the United States through Securities
and Exchange Commission filings, mainly Form 4. Prior to 2001, U.S. law restricted trading
such that insiders mainly traded during windows when their inside information was public,
such as soon after earnings releases.108
SEC Rule 10b5-1 clarified that the prohibition against insider trading does not require proof
that an insider actually used material nonpublic information when conducting a trade;
possession of such information alone is sufficient to violate the provision, and the SEC would
infer that an insider in possession of material nonpublic information used this information
when conducting a trade. However, SEC Rule 10b5-1 also created for insiders an affirmative
defense if the insider can demonstrate that the trades conducted on behalf of the insider were
conducted as part of a pre-existing contract or written binding plan for trading in the future.109
For example, if an insider expects to retire after a specific period of time and, as part of
retirement planning, the insider has adopted a written binding plan to sell a specific amount of
the company's stock every month for two years and later comes into possession of material
nonpublic information about the company, trades based on the original plan might not
constitute prohibited insider trading.
Illegal insider trading

Rules against insider trading on material non-public information exist in most jurisdictions
around the world, but the details and the efforts to enforce them vary considerably. Sections
16(b) and 10(b) of the Securities Exchange Act of 1934 directly and indirectly address insider
trading. Congress enacted this act after the stock market crash of 1929. The United States is
generally viewed as having the strictest laws against illegal insider trading, and makes the
most serious efforts to enforce them.110
108
Hassan Elhais, Insider Trading: Legal or Illegal?,Lexology (April 14 2019),
https://www.lexology.com/library/detail.aspx?g=dc278b96-a04f-4c23-8479-e4a4b56858c7.
109
Id.
110
Id.

Definition of "insider"
In the United States and Germany, for mandatory reporting purposes, corporate insiders are
defined as a company's officers, directors and any beneficial owners of more than 10% of a
class of the company's equity securities.111 Trades made by these types of insiders in the
company's own stock, based on material non-public information, are considered to be
fraudulent since the insiders are violating the fiduciary duty that they owe to the shareholders.
The corporate insider, simply by accepting employment, has undertaken a legal obligation to
the shareholders to put the shareholders' interests before their own, in matters related to the
corporation. When the insider buys or sells based upon company owned information, he is
violating his obligation to the shareholders.112
For example, illegal insider trading would occur if the chief executive officer of Company A
learned (prior to a public announcement) that Company A will be taken over and then bought
shares in Company A while knowing that the share price would likely rise.In the United States
and many other jurisdictions, however, "insiders" are not just limited to corporate officials and
major shareholders where illegal insider trading is concerned but can include any individual
who trades shares based on material non-public information in violation of some duty of
trust.113 This duty may be imputed; for example, in many jurisdictions, in cases of where a
corporate insider "tips" a friend about non-public information likely to have an effect on the
company's share price, the duty the corporate insider owes the company is now imputed to the
friend and the friend violates a duty to the company if the corporate insider trades on the basis
of this information.
Liability for insider trading

Liability for inside trading violations cannot be avoided by passing on the information in an "I
scratch your back; you scratch mine" or quid pro quo arrangement as long as the person
receiving the information knew or should have known that the information was company
property. It should be noted that when allegations of a potential inside deal occur, all parties
111
Mark J. Astarita, Insider Trading – The Legal and Illegal, Sec Law (Oct 21, 2019),
https://www.seclaw.com/insider-trading/#targetText=Legal%20Insider%20Trading&targetText=The%20legal
%20version%20is%20when,their%20trades%20to%20the%20SEC.
112
Id.
113
Id.

that may have been involved are at risk of being found guilty.
For example, if Company A's CEO did not trade on the undisclosed takeover news, but instead
passed the information on to his brother-in-law who traded on it, illegal insider trading would
still have occurred (albeit by proxy by passing it on to a "non-insider" so Company A's CEO
wouldn't get his hands dirty).
Misappropriation theory114
A newer view of insider trading, the misappropriation theory, is now part of US law. It states
that anyone who misappropriates (steals) information from their employer and trades on that
information in any stock (either the employer's stock or the company's competitor stocks) is
guilty of insider trading.For example, if a journalist who worked for Company B learned about
the takeover of Company A while performing his work duties and bought stock in Company
A, illegal insider trading might still have occurred. Even though the journalist did not violate a
fiduciary duty to Company A's shareholders, he might have violated a fiduciary duty to
Company B's shareholders (assuming the newspaper had a policy of not allowing reporters to
trade on stories they were covering).
Proof of responsibility
Proving that someone has been responsible for a trade can be difficult because traders may try
to hide behind nominees, offshore companies, and other proxies. Nevertheless, the Securities
and Exchange Commission prosecutes over 50 cases each year, with many being settled
administratively out of court. The SEC and several stock exchanges actively monitor trading,
looking for suspicious activity.
Trading on information in general

Not all trading on information is illegal insider trading, however. For example, if while dining
at a restaurant, one hears the CEO of Company A at the next table telling the CFO that the
company's profits will be higher than expected and then buys the stock, one is not guilty of
insider trading unless there was some closer connection between you, the company, or the
company officers.115 However, information about a tender offer (usually regarding a merger or
114
Will Kenton, Misappropriation Theory, Investopedia (Oct. 21, 2019),
https://www.investopedia.com/terms/m/misappropriation_theory.asp

acquisition) is held to a higher standard. If this type of information is obtained (directly or
indirectly) and there is reason to believe it is nonpublic, there is a duty to disclose it or abstain
from trading.
Tracking insider trades

Since insiders are required to report their trades, others often track these traders, and there is a
school of investing which follows the lead of insiders.116 This is, of course, subject to the risk
that an insider is making a buy specifically to increase investor confidence or making a sell for
reasons unrelated to the health of the company (such as a desire to diversify or pay a personal
expense).
American insider trading law

The United States has been the leading country in prohibiting insider trading made on the basis
of material non-public information. Thomas Newkirk and Melissa Robertson of the U.S.
Securities and Exchange Commission (SEC) summarize the development of US insider trading
laws.117 Insider trading has a base offense level of 8, which puts it in Zone A under the U.S.
Sentencing Guidelines. This means that first-time offenders are eligible to receive probation
rather than incarceration.Members of the US Congress are not exempt from the laws that ban
insider trading, but as they generally do not have a confidential or fiduciary relationship with
the source of the information they receive and accordingly, they do not meet the definition of
an "insider."
Common law
US insider trading prohibitions are based on English and American common law prohibitions
against fraud. In 1909, well before the Securities Exchange Act was passed, the United States
Supreme Court ruled that a corporate director, who bought that company's stock when he knew
it was about to jump up in price, committed fraud by buying but not disclosing his inside
information.118Section 15 of the Securities Act of 1933contained prohibitions of fraud in the
115
Elvis Picardo, How The SEC Tracks Insider Trading, Investopedia (Jun. 25, 2019),
https://www.investopedia.com/articles/investing/021815/how-sec-tracks-insider-trading.asp.
116
Id.
117
Id.

sale of securities which were greatly strengthened by the Securities Exchange Act of
1934.Section 16(b) of the Securities Exchange Act of 1934 prohibits short-swing profits (from
any purchases and sales within any six-month period) made by corporate directors, officers, or
stockholders owning more than 10% of a firm's shares. Under Section 10(b) of the 1934 Act,
SEC Rule 10b-5, prohibits fraud related to securities trading.The Insider Trading Sanctions
Act of 1984 and the Insider Trading and Securities Fraud Enforcement Act of 1988 provide for
penalties for illegal insider trading to be as high as three times the profit gained or the loss
avoided from the illegal trading.119
SEC regulations
SEC regulation FD ("Fair Disclosure") requires that if a company intentionally discloses
material non-public information to one person, it must simultaneously disclose that
information to the public at large.120 In the case of an unintentional disclosure of material non-
public information to one person, the company must make a public disclosure promptly.Insider
trading, or similar practices, are also regulated by the SEC under its rules on takeovers and
tender offers under the Williams Act.
JUDICIAL APPROACH
Much of the development of insider trading law has resulted from court decisions.In SEC v.
Texas Gulf Sulphur Co. (1966)121, a federal circuit court stated that anyone in possession of
inside information must either disclose the information or refrain from trading.In 1909, the
Supreme Court of the United States ruled in Strong v. Repide122that a director upon whose
action the value of the shares depends cannot avail of his knowledge of what his own action
will be to acquire shares from those whom he intentionally keeps in ignorance of his expected
action and the resulting value of the shares. Even though in general, ordinary relations between
directors and shareholders in a business corporation are not of such a fiduciary nature as to
118
A Banoff, The Regulation of Insider Trading in the United States, United Kingdom and Japan, Repository (1988),
https://repository.law.umich.edu/cgi/viewcontent.cgi?article=1754&context=mjil.
119
Id
120
Id.
121
2 A.L.R. Fed. 190
122
213 U.S. 419 (1909)

make it the duty of a director to disclose to a shareholder the general knowledge which he may
possess regarding the value of the shares of the company before he purchases any from a
shareholder, yet there are cases where, by reason of the special facts, such duty exists.
In 1984, the Supreme Court of the United States ruled in the case of Dirks v. SEC123that
tippees (receivers of second-hand information) are liable if they had reason to believe that the
tipper had breached a fiduciary duty in disclosing confidential information and the tipper
received any personal benefit from the disclosure. (Since Dirks disclosed the information in
order to expose a fraud, rather than for personal gain, nobody was liable for insider trading
violations in his case.)The Dirks case also defined the concept of "constructive insiders," who
are lawyers, investment bankers and others who receive confidential information from a
corporation while providing services to the corporation. Constructive insiders are also liable
for insider trading violations if the corporation expects the information to remain confidential,
since they acquire the fiduciary duties of the true insider.
In United States v. Carpenter (1986)124the US Supreme Court cited an earlier ruling while
unanimously upholding mail and wire fraud convictions for a defendant who received his
information from a journalist rather than from the company itself. The journalist R. Foster
Winans was also convicted, on the grounds that he had misappropriated information belonging
to his employer, the Wall Street Journal. In that widely publicized case, Winans traded in
advance of "Heard on the Street" columns appearing in the Journal.The court ruled in
Carpenter: "It is well established, as a general proposition, that a person who acquires special
knowledge or information by virtue of a confidential or fiduciary relationship with another is
not free to exploit that knowledge or information for his own personal benefit but must
account to his principal for any profits derived therefrom."However, in upholding the
securities fraud (insider trading) convictions, the justices were evenly split.
In 1997, the U.S. Supreme Court adopted the misappropriation theory of insider trading in
UnitedStates v. O'Hagan125. O'Hagan was a partner in a law firm representing Grand
123
463 U.S. 646 (1983)
124
484 U.S. 19 (1987)
125
521 U.S. 642, 655 (1997)

Metropolitan, while it was considering a tender offer for Pillsbury Company. O'Hagan used
this inside information by buying call options on Pillsbury stock, resulting in profits of over $4
million. O'Hagan claimed that neither he nor his firm owed a fiduciary duty to Pillsbury, so he
did not commit fraud by purchasing Pillsbury options.The Court rejected O'Hagan's arguments
and upheld his conviction.The "misappropriation theory" holds that a person commits fraud "in
connection with" a securities transaction and thereby violates 10(b) and Rule 10b-5, when he
misappropriates confidential information for securities trading purposes, in breach of a duty
owed to the source of the information. Under this theory, a fiduciary's undisclosed, self-
serving use of a principal's information to purchase or sell securities, in breach of a duty of
loyalty and confidentiality, defrauds the principal of the exclusive use of the information. In
lieu of premising liability on a fiduciary relationship between company insider and purchaser
or seller of the company's stock, the misappropriation theory premises liability on a fiduciary-
turned-trader's deception of those who entrusted him with access to confidential information.
The Court specifically recognized that a corporation's information is its property: "A
company's confidential information... qualifies as property to which the company has a right of
exclusive use. The undisclosed misappropriation of such information in violation of a fiduciary
duty...constitutes fraud akin to embezzlement – the fraudulent appropriation to one's own use
of the money or goods entrusted to one's care by another."In 2000, the SEC enacted SEC Rule
10b5-1, which defined trading "on the basis of" inside information as any time a person trades
while aware of material nonpublic information. It is no longer a defense for one to say that one
would have made the trade anyway. The rule also created an affirmative defense for pre-
planned trades.
Insider trading by members of Congress126

Members of Congress are exempted from insider trading laws and thus can act on information
they are bound to gain in the course of their congressional activities, although house rulesmay
consider it unethical. A 2004 study found that stock sales and purchases by Senators
outperformed the market by 12.3% per yearPeter Schweizer points out several examples of
insider trading by members of Congress, including action taken by Spencer Bachus following
126
Editorial Board, The Congressional Guide to Insider Trading, Bloomberg (August 10, 2018),
https://www.bloomberg.com/opinion/articles/2018-08-10/congress-s-guide-to-insider-trading-and-corruption

a private, behind-the-doors meeting on the evening of September 18, 2008 when Hank Paulson
and Ben Bernanke informed members of Congress about the imminent financial crisis, Bachus
then shorted stocks the next morning and cashed in his profits within a week. Also attending
the same meeting were Senator Dick Durbin and John Boehner; the same day (trade effective
the next day), Durbin sold mutual-fund shares worth $42,696, and reinvested it all with
Warren Buffett. Also the same day (trade effective the next day), Congressman Boehner
cashed out of an equity mutual fund.127
Security analysis and insider trading

Security analysts gather and compile information, talk to corporate officers and other insiders,
and issue recommendations to traders.128 Thus their activities may easily cross legal lines if
they are not especially careful. The CFA Institute in its code of ethics states that analysts
should make every effort to make all reports available to all the broker's clients on a timely
basis. Analysts should never report material nonpublic information, except in an effort to make
that information available to the general public. Nevertheless, analysts' reports may contain a
variety of information that is "pieced together" without violating insider trading laws, under
the Mosaic theory. This information may include non-material nonpublic information as well
as material public information, which may increase in value when properly compiled and
documented.129In May 2007, a bill entitled the "Stop Trading on Congressional Knowledge
Act, or STOCK Act" was introduced that would hold congressional and federal employees
liable for stock trades they made using information they gained through their jobs and also
regulate analysts or "Political Intelligence" firms that research government activities.The bill
has not passed.130
Arguments for legalizing insider trading

Some economists and legal scholars (such as Henry Manne, Milton Friedman, Thomas Sowell,
Daniel Fischel, and Frank H. Easterbrook) argue that laws making insider trading illegal
127
Id.
128
Lisa K. Meulbroek, An Empirical Analysis of Illegal Insider Trading, JSTOR (Dec. 1992),
https://www.jstor.org/stable/2328992?seq=1#page_scan_tab_contents.
129
Id.
130
Jason Fernando, The Stock Act, Investopedia (Oct. 9, 2019), https://www.investopedia.com/terms/s/stop-
trading-on-congressional-knowledge-act.asp.

should be revoked. They claim that insider trading based on material nonpublic information
benefits investors, in general, by more quickly introducing new information into the market.131
Friedman, laureate of the Nobel Memorial Prize in Economics, said: "You want more insider
trading, not less. You want to give the people most likely to have knowledge about
deficiencies of the company an incentive to make the public aware of that." Friedman did not
believe that the trader should be required to make his trade known to the public, because the
buying or selling pressure itself is information for the market.
Other critics argue that insider trading is a victimless act: a willing buyer and a willing seller
agree to trade property which the seller rightfully owns, with no prior contract (according to
this view) having been made between the parties to refrain from trading if there is asymmetric
information.132 The Atlantic has described the process as "arguably the closest thing that
modern finance has to a victimless crime".
Legalization advocates also question why "trading" where one party has more information than
the other is legal in other markets, such as real estate, but not in the stock market. For example,
if a geologist knows there is a high likelihood of the discovery of petroleum under Farmer
Smith's land, he may be entitled to make Smith an offer for the land, and buy it, without first
telling Farmer Smith of the geological data. Nevertheless, circumstances can occur when the
geologist would be committing fraud if, because he owes a duty to the farmer, he did not
disclose the information; for example, if he had been hired by Farmer Smith to assess the
geology of the farm.133
Advocates of legalization make free speech arguments. Punishment for communicating about a
development pertinent to the next day's stock price might seem to be an act of censorship. If
the information being conveyed is proprietary information and the corporate insider has
contracted to not expose it, he has no more right to communicate it than he would to tell others
131
Carol Roth, It's time to legalize insider trading, CNBC (Jun. 17, 2014), https://www.cnbc.com/2014/06/17/its-
time-to-legalize-insider-tradingwall-streetcommentary.html
132
Id.
133
Id.

about the company's confidential new product designs, formulas, or bank account passwords.
There are very limited laws against "insider trading" in the commodities markets if, for no
other reason than that the concept of an "insider" is not immediately analogous to commodities
themselves (corn, wheat, steel, etc.). However, analogous activities such as front running are
illegal under US commodity and futures trading laws. For example, a commodity broker can
be charged with fraud by receiving a large purchase order from a client (one likely to affect the
price of that commodity) and then purchasing that commodity before executing the client's
order to benefit from the anticipated price increase.134
Legal differences among jurisdictions

The US and the UK vary in the way the law is interpreted and applied with regard to insider
trading.In the UK, the relevant laws are the Criminal Justice Act 1993, Part V, Schedule 1, and
the Financial Services and Markets Act 2000, which defines an offence of Market Abuse. It is
also illegal to fail to trade based on inside information (whereas without the inside information
the trade would have taken place).135 The principle is that it is illegal to trade on the basis of
market-sensitive information that is not generally known. No relationship to the issuer of the
security is required; all that is required is that the guilty party traded (or caused trading) whilst
having inside information.Japan enacted its first law against insider trading in 1988. Roderick
Seeman said, "Even today many Japanese do not understand why this is illegal. Indeed,
previously it was regarded as common sense to make a profit from your knowledge."
In accordance with EU Directives, Malta enacted the Financial Markets Abuse Act in 2002,
which effectively replaced the Insider Dealing and Market Abuse Act of 1994.The "Objectives
and Principles of Securities Regulation" published by the International Organization of
Securities Commissions (IOSCO) in 1998 and updated in 2003 states that the three objectives
134
Id.
135
Financial Services and Markets Act 2000, Gov. UK (Jun. 15, 2000),
http://www.legislation.gov.uk/ukpga/2000/8/pdfs/ukpga_20000008_en.pdf

of good securities market regulation are136:
1. Investor protection,
2. Insuring that markets are fair, efficient and transparent, and
3. Reducing systemic risk.
The discussion of these "Core Principles" state that "investor protection" in this context means
"Investors should be protected from misleading, manipulative or fraudulent practices,
including insider trading, front running or trading ahead of customers and the misuse of client
assets." More than 85 percent of the world's securities and commodities market regulators are
members of IOSCO and have signed on to these Core Principles.
The World Bank and International Monetary Fund now use the IOSCO Core Principles in
reviewing the financial health of different country's regulatory systems as part of these
organizations’s financial sector assessment program, so laws against insider trading based on
non-public information are now expected by the international community. 137 Enforcement of
insider trading laws varies widely from country to country, but the vast majority of
jurisdictions now outlaw the practice, at least in principle. Larry Harris claims that differences
in the effectiveness with which countries restrict insider trading help to explain the differences
in executive compensation among those countries. The US, for example, has much higher
CEO salaries than do Japan or Germany, where insider trading is less effectively restrained.138
Ethical Investment
Ethical investment combines the social or environmental considerations of the investor with
their financial objectives. It can be found throughout the industry, in the form of Unit Trusts,
Investment Trusts, pensions and savings schemes, and is growing at an impressive rate.
Traditional ethical funds are involved with a positive and negative selection process, where
money is invested in companies that make a positive contribution to the world and withheld
from companies that do not. This strict screening method has perhaps fuelled the idea that
136
Prevention of Financial Markets Abuse Act - Laws of Malta, Justice Services (Apr 1, 2005),
https://www.google.com/search?
q=Malta+enacted+the+Financial+Markets+Abuse+Act+in+2002&oq=Malta+enacted+the+Financial+Markets+Abuse
+Act+in+2002&aqs=chrome..69i57.878j0j4&sourceid=chrome&ie=UTF-8
137
Iosco, Objectives and Principles of Securities Regulation, FSB (31 May 2017),
http://fsb.org/2017/05/cos_100601/
138
Id.

ethical funds have been unable to compete with their non-ethical counterparts in terms of
performance, but it is not true to say that following your conscience will mean poor
performance and ultimately poor returns on your investment.
The first ethical fund was launched in 1984 and there are now around 50 retail ethical funds in
the UK. Further interest in the sector can be seen in the Ethical Investment Research Service
(EIRIS) figures, which state that the ethical funds industry totalled £4 billion in August 2001.
Along with the obvious growth of ethical investment products in the market, the Government
has also started to pay serious attention to the ethical issue by the recent introduction of new
pension regulation. The developments in the ethical sector suggests that we are changing the
way in which we make our investment decisions, thinking more about our influence as
shareholders. Ethical investing begins with your ideas and principles; what issues you believe
to be important. Just as different people have different views on the definition of ethical, not
all funds have the same objective.
Ethical Screening
Companies that are included in the portfolio of an ethical fund are at first 'screened', aprocess
that determines whether the company matches the fund's investment standards and ethical
policy.The investment objective of a fund may have a combination of negative and
positivecriteria, in other words actively avoid those companies, for example, that are known to
harm the environment and invest in companies involved in socially progressive business. Each
fund should clearly state their ethical criteria and provide you with information on the
companies they invest in.According to EIRIS, examples of negative criteria include: animal
testing, gambling, human rights abuses, military production and sale, pornography, alcohol,
genetic engineering, pollution and Third World concerns.
The areas of positive criteria include equal opportunities, environmental programs,
conservation of energy, fair trade, education and training and support of community projects.
Ethical or Socially Responsible Investment139:

The origins of modern ethical investment can be traced back to the beginning of the 1900's.
The Methodist Church decided to invest in the stockmarket, purposely avoiding those
139
James Chen, What Is a Socially Responsible Investment (SRI)?,Investopedia (Sep 30, 2019),
https://www.investopedia.com/terms/s/sri.asp.

companies involved in alcohol and gambling. The church was also behind the proposal for the
first ethical trust in the UK in 1973, but it failed to win approval. The first ethical fund was
finally launched in 1984, by Friends Provident.As the ethical investment market has
developed, so too have its terms and policies. If you have ever considered investing ethically
you may have come across the term of Socially Responsible Investment (SRI). Some believe
SRI is interchangeable with the more common term of ethical, while others believe there is a
140
clear distinction between the two. Those that think there is a difference describe ethical
investment as simply avoiding companies through negative screening and SRI as a process that
considers all companies for investment with the aim of encouraging change. This
inconsistency highlights that ethical investment can mean so many different things to different
people. Whatever the opinion the basic concept should be the same: investment with
environmental, social and ethical consideration.141
Tax Planning and Ethical Tax planning and taxation:

Tax planning involves an intelligent application of the various provisions of the direct tax laws
to practical situations in such a manner as to reduce the tax impact on the assessee to the
minimum. A thorough understanding of the principles, practices and procedures of tax laws
and the ability to apply such knowledge to various practical situations is expected at the final
level.142
Tax planning is the formulation of a system which in its implementation is designed to achieve
a specific result. Economic planning is the privilege of the state tax planning is that of the
subject. Men material and money are the resources available at the disposable of a nation and
to conserve the same the state resorts to economic planning. Tax planning aims to reduce the
outflow of cash resources made available to the government by way of taxes so that the same
may be effectively utilized for the benefit of the individual or the business as the case may be.
Just as sound economic planning is indispensable for a welfare state, a sound tax planning is
equally indispensable for the welfare of the citizen.143
140
Id.
141
Id.
142
Melissa Horton, What are some ways to minimize tax liability?, Investopedia (Mar 14, 2019),
https://www.investopedia.com/ask/answers/040715/what-are-some-ways-minimize-tax-liability.asp
143
Id.

Tax planning may be defined as an arrangement of one’s financial affairs in such a way that,
without violating in any way the legal provisions, full advantage is taken of all tax exemptions,
deductions, concessions, rebates, allowances and other reliefs or benefits permitted under the
act so that the burden of taxation on the assesse is reduced to the minimum. It involves
arranging ones financial affairs by intelligently anticipating the effects which the tax laws will
have on the arrangements now being adopted. As such it is very stimulating intellectual
exercise.144
Tax Planning and Tax avoidance:

Reduction of taxes by legitimate means may take 2 forms – tax planning and tax avoidance.
‘Tax planning’ is wider range. At this stage, the distinction between ‘tax avoidance’ and ‘tax
evasion may be noted. The dividing line between tax evasion and tax avoidance is very thin 145.
The direct taxes enquiry committee (Wanchoo Committee) has tried to draw a distinction
between the two items in the following words. “The distinction between evasion and
avoidance, therefore, is largely dependent on the difference in methods of escape resorted to.
Some are instances of merely availing, strictly in accordance with law, the tax exemptions or
tax privileges offered by the government. Others are maneuvers involving an element of
deceit, misrepresentation of facts, and falsification of accounting calculations or downright
fraud. The first represents what is truly tax planning and the latter tax evasion.
Ethical principles to be compiled by tax practitioner146:

Certain fundamental principles have to be adhered to by practicing the profession to ensure
compliance with tax laws and effective tax management. The fundamental principles to be
observed when developing ethical requirements relating to tax practice include all the
fundamental principles by which a members if governed in the conduct of his professional
relations with others. The principles are:
a. Integrity: a professional accountant should be straightforward and honest in performing
144
Id.
145
Id.
146
Rex L. Marshall, Robert W. Armstrong and Malcolm Smith, The Ethical Environment of Tax Practitioners: Western
Australian Evidence, JSTOR (Sep., 1998), https://www.jstor.org/stable/25073960?seq=1/subjects.

professional services.
b. Objectivity: a professional accountant should be fair and should not allow prejudice or
bias, conflict of interest or influence of others to override objectivity.
c. Professional competence and due care: a professional accountant should perform
professional services with due care, competence and diligence and has a continuing
duty to maintain professional knowledge and skill at a level required to ensure that a
client or employer receives the advantage of competent professional service based on
up to date developments in practice, legislation and techniques.
d. Confidentiality: a professional accountant should respect the confidentiality of
information acquired during the course of performing professional services and should
not use or disclose any such information without proper and specific authority unless
there is a legal or professional right or duty to disclose.
e. Professional behavior: a professional accountant should act in a manner consistent with
the good reputation of the profession and refrain from any conduct which might bring
discredit to the profession.
Role of judiciary in enforcing ethical compliance by tax payers: tax payers also tent to distort
ethics by resorting to unfair accounting and business practices like
a. Claiming personal expenditure as business expenditure
b. Claiming capital expenditure as revenue expenditure
c. Treating revenue receipts as capital receipt
d. Accounting for amount paid as salaries as business expenditure by classifying the same
under different account heads like conveyance, tour and travel, employee welfare.
e. Altering the form of transaction
f. Breaking up of large value contracts into smaller contracts to avoid attracting TDS
Provisions.
g. Transferring their income/property to avoid tax.etc.
h. Misclassifying goods and services to avoid excise duty, customs duty and service tax
The tax system in India is generally perceived to be complex and difficult to understand.
Often, these complexities force the assesses to adopt unethical means for avoiding taxes. This

may be done with the intention of evading tax or merely to escape the tiresome, difficult and
exhaustive process of computing correct tax liability.147 This issue has been a cause of great
concern for the government in the last few years.The ethics of levy of taxes by the government
can be measured by the relationship between outlays and the quality of outcomes.
Combating Fraud148
A fraud is an intentional deception made for personal gain or to damage other individual the
related adjective is fraudulent. The specific legal definition varies by legal jurisdiction. Fraud
is a crime and also a civil law violation. Defrauding people or entities of money or valuables is
a common purpose of fraud, but there have also been fraudulent ‘discoveries’.
A ‘corrupt practice’ is the offering, giving, receiving or solicitation directly or indirectly of

anything of value to influence improperly the actions of another party.A ‘fraudulent’ practice;
is any act or omission, including a misrepresentation, that knowingly or recklessness misleads
or attempts to mislead a party to obtain a financial or other benefit or to avoid an obligation.149
Corruption is among the greatest obstacles to economic and social development. The harmful
effects of corruption are especially severe on the poor, who are hardest hit by economic
decline, most reliant on the provision of public services, and least capable of paying the extra
costs associated with bribery, fraud, and the misappropriation of economic privileges.
Corruption also represents a significant additional cost of doing business in many developing
countries. It undermines development by distorting the rule of law and weakening the
institutional foundation upon which economic growth depends.

Corruption damages policies and programs that aim to reduce poverty, so attacking corruption
is critical to the achievement of IFC's overarching mission of poverty reduction. Countering
corruption is therefore aligned with IFC’s overarching mission to promote sustainable private
sector investment in developing countries, to help reduce poverty and improve people's
147
Iknowledge, Tax Structure in India, Explained, Aegonlife (Aug 20, 2018), https://www.aegonlife.com/insurance-
investment-knowledge/tax-structure-in-india-explained.
148
Barry Robinson&David Carson, Your 10-point plan on how to combat fraud and corruption in your organization,
Delloite (Oct. 21, 2019), https://www2.deloitte.com/ie/en/pages/finance/articles/how-to-combat-fraud.html.
149
Id.

lives.150
IFC has always expected its staff and clients to maintain the highest standards of ethical
behavior and compliance with the law and is at the forefront of the market and of development
institutions in guarding against fraud and corruption in its work. This approach complements
and supports IFC's determination to act as a leader on sustainability. Avoiding fraud and
corruption is necessary to ensure that IFC's investments are successful, that its resources are
being used effectively, and that its development objectives are met.151
IFC’sSanctions Process sets clear standards and procedures if there are allegations against
clients or partners. These standards have gained broader acceptance. Multilateral Development
Banks (MDBs) have stepped up their fight against corruption with the signing on April 9,
2010, of a joint Sanction Accord with Cross Debarment as a new enforcement tool, greatly
increasing potential penalties for firms engaging in fraud and corruption, and adding a strong
deterrent.152
The World Bank Group is committed to improving governance and fighting corruption in
member countries through the Governance Anti-Corruption framework, which has three main
pillars153:
 Helping countries build capable, transparent, and accountable institutions

 Expanding partnerships with multilateral and bilateral development institutions, civil
society, the private sector, and other actors in joint initiatives to address corruption
 Minimizing corruption in World Bank-funded projects by assessing corruption risk in
projects upstream, actively investigating allegations of fraud and corruption, and
strengthening project oversight and supervision
150
OECD, Fighting Corruption and Promoting Integrity in Public Procurement, Google Books (2005),
https://books.google.co.in/books?id=VzM6eMySpp8C&pg=PA241&lpg=PA241&dq=IFC
%E2%80%99s+Sanctions+Process&source=bl&ots=gxAiHDBQ6d&sig=ACfU3U39gOxoGMAEeLJcDvpPVbj82G2FhA&
hl=en&sa=X&ved=2ahUKEwjK0qa49a3lAhVTYysKHREeBkEQ6AEwCXoECAgQAQ#v=onepage&q&f=false
151
Id.
152
World Bank group, Combating Corruption, World Bank Org. (Oct 4, 2018),
https://www.worldbank.org/en/topic/governance/brief/anti-corruption
153
Id.


Corporate Governance

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Business Ethics and Corporate Governance

Business Ethics and Corporate Governance Page 2

5. To examine the judicial interpretation with regard to business ethics

Is Business Ethics Necessary

Business Ethics: A Literary View

Business Ethics and Corporate Governance Page 3

Changing Concepts in Business Ethics

Business Ethics and Corporate Governance Page 4

Impert, John E. .

Business Ethics and Corporate Governance Page 5

Business Ethics and Corporate Governance Page 6

Limitations of the Study:

Ethical Models for Decision Making………………………………………………………………...

UNIT 2: CORPORATE GOVERNANCE

Ethics and Values………………………………………………………………………………………

Business Ethics and Corporate Governance Page 7

UNIT 3: MARKETING ETHICS:

UNIT 4 : BUSINESS ETHICS AND WHISTLE BLOWING

UNIT 5: BUSINESS ETHICS AND FINANCE

Business Ethics and Corporate Governance Page 8

Business Ethics and Corporate Governance Page 9

Ethical theories and Approaches

Modern Decision Making – Ethical Models for Decision Making

Ethics and Morals

Business Ethics and Corporate Governance Page 10

Business Ethics and Corporate Governance Page 11

The following are the five approaches or theories of Ethics4

1. The Utilitarian Approach (Utilitarian approach): Jenny Bentham (1748 -1832)

3. The Fairness and Justice and Equality (Egalitarianism) approach: According to

Business Ethics and Corporate Governance Page 12

4. The common good approach (Libertarianism): The life in community is good in

Need for Business Ethics:

Business Ethics and Corporate Governance Page 13

Characteristics of Business Ethics:

Benefits of Business Ethics

Scope of Business Ethics

Scope of business ethics

Business Ethics and Corporate Governance Page 14

Ethical issues in business

Administration Review56, no. 6 (1996): 525-33. doi:10.2307/977251.

Business Ethics and Corporate Governance Page 15

Ethical Decision Making Process and Model

The process of making ethical decisions requires:

 Commitment: The desire to do the right thing regardless of the cost

Good decisions are both ethical and effective:

 Ethical decisions generate and sustain trust; demonstrate respect, responsibility,

Business Ethics and Corporate Governance Page 16

Steps in the Ethical Decision-Making Process

Eight Steps in Making Ethical Decisions8

Business Ethics and Corporate Governance Page 17

1. Identify the problem or dilemma.

2. Identify the potential issues involved.

3. Review the relevant ethical codes.

Business Ethics and Corporate Governance Page 18

4. Know the applicable laws and regulations.

Business Ethics and Corporate Governance Page 19

7. Enumerate the consequences of various decisions.

8. Decide on what appears to be the best course of action.

Problems in Ethical Decision Making

Business Ethics and Corporate Governance Page 21

Purpose – Importance – Mechanism- Benefits – Theories – Ethics and Values – Evolution -

Business Ethics and Corporate Governance Page 22

Corporate governance cannot disregard the diverse interests—shareholders, lenders,