Corporate Governance and Business Ethics

Introduction
It is difficult to explain this kind of exact calculation which has no basis, formula or table and
mathematical logic.

Corporate Governance is highly related with ethical conduct of business. Business is a form of economic
activity, which is governed by the principal of input and output. Ethics on the other hand is concerned
with moral behavior of individual and clarifies what can be described as right of wrong behavior. Ever
the evaluation of the company from of business, in rapid industrialization era, the shareholder were
considered initially only stakeholders. The separation of ownership and control in corporate sector
enterprises frequently brings about the ‘agency’ problem, wherein management may take actions that
compromise the interests of its shareholders. Business, after all, was supposed to be run on their behalf
and for their benefit. Milton Friedman’s celebrated statement “Business of business is business”
typically represented this thinking. Therefore, some people believe that business has nothing to do with
ethics and vice-versa. Though, this view looks convenient and attractive, it does not carry sound logic.
Business is part and parcel of human life and business organization does not exist and function outside
the society. Therefore, business cannot alienate itself from the concept and norms of good and bad,
developed by human society.

Commitment to well-being and progress of all stakeholders is our age old mantra

Satyam Vada Dharmam Chara

- Taittariya Upanishad

Forever speak the truth and follow the dharma

Truth : Disclosure of Actual State of Affairs (Transparency in operations and transactions)

Dharma : “Dharma is for the stability of society, the maintenance of social order and the general well-
being and progress of humankind.”

Governance Concept in ‘Ramayana

To provide “the maximum happiness for the maximum number of people for the maximum period,
based on the principles of Dharma – righteousness and moral values.”

Corporate are also expected to use their

Capacity, Knowledge and Resources TOWARDS Dharma Maximisation of stakeholders’ value and
well-being and progress of humankind THROUGH Truth Transparency, accountability and truthful
disclosure of state of affairs, This is our own age old mantra of Good Governance
Corporate Governance is the application of best management practices, compliance of law in
letter and spirit and adherence to ethical standards for effective management and distribution of
wealth and discharge of social responsibility for sustainable development of all stakeholders”

By- ICSI

A Conceptual Framework
Corporate Governance refers to the way in which a particular company is governed. In the word of
Adrian Cabdury of U.K. Corporate Governance basically has to do with power and accountability, who
exercise power, on behalf of whom and how the exercise of power is control.

Corporate Governance is system of structural, procedural and cultural safeguard designed to ensure that
a corporation is run in the “best” long-term interests of its shareholders, as well as, other stakeholders.
Corporate Governance may be elaborate as under:

Corporate Governance is-

Business Ethic

Philosophy of Business

Culture of Organization

Corporate Social Responsibility

Shareholder Value Creation

Dynamic Leadership

Clean and Green World

Corporate Governance is not mealy about “ethical conduct of business” as the SEBI report on the
subject says. It is about leadership. For, Governance means leadership, especially top leadership at the
level of CEO & CFO and the board of the Directors. The manifesto of Corporate Governance must not be
merely a manual of procedure or a legal document or even an ethical code.

Corporate Governance is about maximizing shareholders value legally, ethically and on a sustainable
basis while ensuring fairness to every stakeholder-customer, employee , investor, vendor-partners, the
govt. of the land and community.

N.R. Narayana Murthy has mentioned corporate governance as a reflection of company’s culture
policies, how it deals with its stakeholders and its commitment to value.

In short, good Corporate Governance practices enhance companies’ value of stakeholders’ thrust
resulting into robust development of capital market, the economy and also help in the evaluation of a
vibrant and constructive shareholders’ activism.
Webster dictionary has given a more elaborate and comprehensive description of “Ethics”. It states that
ethics is the discipline dealing with what is good or bad, right or wrong or moral duty or obligation. It is a
group of moral principles or set of values. These principles govern the conduct or an individual or a
profession.

Most people believe that ethics and morality are relevant only to individual. However, one must
remember , that the norms of conduct which apply to common men, should also apply to businessmen.
Business is the part of society and as such ethics is also relevant in the context of business. The business
ethics, however , should be given special attention due to specific problems and opportunities faced by
the businessmen. The society, in general, is unlikely to fact such situations. Though the basic ethical
standards are universal, the differences lies in the application of ethical principles in business situations.

The increasing number of Corporate Scandals in the last few years have stained Corporate Governance
reputation and questioned the effectiveness of its current structure. In light of this, in the paper I would
like to discuss Corporate Governance as well as Business Ethics in the changing scenario as under:

Changing Scenario of CG in India

The rapid scientific technological advancements are reshaping the world. Developments in
information and communication technology have revolutionized every activity, be it scientific or business
and commerce or individual and personal. For business and commerce, they have facilitated
improvements in productivity and bottom-line of the business and commerce besides opportunities for
better customer service. The productivity improvements come out of the increased speed, accuracy and
ability to handle big volumes that technology offers. For the financial sector and banking, the
developments in information technology have spelt very special benefits.
In today’s globally competitive market, knowledge constantly makes itself obsolete with the result that
today’s advanced knowledge is tomorrow’s ignorance. One has to be on the learning curve and
continuously move up. All the knowledge workers have to leverage intellectual capital for growth—
creative destruction—keep on innovating— otherwise someone else will be at the top of the pecking
order. Companies function in a world of exponentially shortening product and service life cycles where
customer preferences and technologies change in a discontinuous and non-linear fashion and business
paradigms and rules become obsolete. The future winners will be those business organisations who
escape from the gravitational pull of the past on the fuel of innovation.

In the opinion of some experts the twenty first century competition is characterized by at least three
fundamental paradigms shifts, viz. -
(a) Ability of organizations and individuals to network globally and seamlessly;

(b) Ability to communicate, transmit, store and retrieve large amounts to information including voice,
data, video; and

(c) Mobility of capital to feed good projects around the world.

 With the battle for market share and mind-share deepening, companies are increasingly resorting to
non-traditional resources (like knowledge) and innovative means (like quick response) to create
sustainable competitive advantage.

DEVELOPMENTS IN BUSINESS SCENARIO

Good governance is a necessary condition for achieving excellence, not a sufficient one. Good
governance is a source of competitive advantage and critical to economic progress. Some of the
developments which have considerably changed the business scenario in our country which necessitated
new approach to governance are :

(a) The New Economic Policy (NEP) of 1991, announced by the Government of India. This is a
landmark year in the sphere of economic liberalization and trade related reforms. A number of
innovative changes have taken place in the business environment. Major areas of reforms
related to abolition of industrial licensing system except for a short list, opening up of Indian
economy to foreign investment, liberlisation of norms for foreign technology transfer, abolition of
Chapter III of the MRTP Act relating to concentration of economic power, intention of the
Government to adopt a new approach to Public Sector Undertakings including disinvestments
etc. With these policy re-orientation, the role of the Government, as the regulator has changed
from exercising control to one of providing help and guidance by making essential procedures
fully transparent and eliminating delays.

(b) Simplification and rationalization of both direct and indirect tax laws including lowering of tariff
barriers and removal of quantitative restrictions.

(c) Abolition of the office of the Controller of Capital Issues and the setting up of Securities and
Exchange Board of India (SEBI), as an autonomous body to promote, regulate and develop the
capital market on healthy lines and protection of investor’s interests in securities. A number of
Rules and Regulations have been issued by SEBI for regulating the activities of
intermediaries/others in the capital market.

(d) Replacement of Foreign Exchange Regulations Act, 1973 by Foreign Exchange Management
Act, 2000 including introduction of convertibility of rupees on current account.

(e) Liberalization of norms for Foreign Direct Investment (FDI) in Indian Industries and also portfolio
investment norms.

(f) Issue of regulations by SEBI regarding SEBI (Prohibition of Insider Trading) Regulations, 1992,
SEBI (Prohibition of Fraudulent and Unfair Practices relating to Securities Market) Regulations,
1995 and SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997 as
amended from time to time.

(g) Setting up of World Trade Organisation (WTO) as an apex body at the international level, to
which India is a signatory, to regulate and develop international trade on healthy lines.

(h) Replacement of MRTP Act, 1969 by Competition Act of 2002.

The aforesaid changes and policy re-orientation have ushered in a new era of liberalized business
and legal environment. Self-regulation of corporate affairs is now the order of the day.

Another development which should not go un-noticed relates to the perceptible change taking place
in India in the profile of corporate ownership, capital market reforms, increasing inflow of foreign capital
both on account of Foreign Direct Investment (FDI) and portfolio investment, preferential allotment of
shares to the promoters of companies including foreign promoters, the policy of disinvestments being
hotly pursued by the Government of India in Public Sector Undertakings (PSUs) – these and other factors
are changing the very pattern of corporate ownership. SEBI (Substantial Acquisition of Shares &
Takeovers) Regulations, 1997 as amended from time to time and the permission given to the companies
to buy-back their shares in the market have also contributed to the changing pattern of corporate
ownership.
Globalisation of Indian economy and substantial reduction of tariff barriers-these are pointers to the
changing business environment. These factors have given rise to increasing competition in the market
place for the Indian products and services. There is an imperative need to manufacture and market high
quality products which can withstand the products of foreign manufacturers. The fast changing business
environment calls for a new approach to the management of corporate organisations.

OBJECTIVE OF GOOD GOVERNANCE

It is felt that the objective of corporate governance i.e., the overall objective of wealth generation and
competitiveness for the benefit of all can best be achieved through the twin components of :

— An “inclusive” approach to directors’ duties which requires directors to have regard to all the
relationships on which the company depends and to the long, as well as the short-term
implications of their actions, with a view to achieving company success for the benefit of
shareholders as a whole; and

— Wider public accountability: this is to be achieved principally through improved company

reporting, which for public and very large private companies will require the publication of a broad
operating and financial review which explains the company’s performance, strategy and
relationships (e.g. with employees, customer and suppliers as well as the wider community).

WHY EXCELLENCE IN CORPORATE GOVERNANCE?

Business excellence has several connotations. Excellence denotes outstanding performance,
superior quality and consistently extraordinary service especially in the face of severe hardships. The
word conveys a value-driven approach consisting of respect for humanity, compassion and a positive and
proactive attitude towards solving problems while achieving rapid growth.
The future has no shelf life. If today’s technology is yesterday’s magic, there is an imperative need to
be innovative and creative to bring more excellence in vision and mission and products and services.
This is a message for Indian corporates and the whole economy of the country, which is going through
the phase of churning where centuries old values, structures and practices are giving way to new
paradigms comprising new rules of the game. The scenario calls for bench marking of standards of
excellence in all spheres of corporate activities, as it has become sine qua non for growth and long-term
sustainability of companies.

The scenario also calls for excellence in performance which can be achieved only through adherence
to good corporate governance principles, such as accountability, transparency, probity, quality of
information and by fulfilling their obligations towards society, the nature and the human well being.

Our success in the future will be entirely dependent upon our ability to identify the opportunities,
synergies our strengths and skills successfully and turn the challenges into opportunities. This is more
important for corporate governance than for any other aspect of the economy. More so, when
corporatization is becoming a way of life with primary, secondary and tertiary sectors increasingly opting
for corporate paradigms.
Transparency and Ethics
A key to good corporate governance is transparency. Transparency expects a free exchange in
information. Well-informed employees are the sound pillars of good corporate governance. The
dissemination of right information to the right people (employees)not only builds up awareness among
them but also enhances their moral and productivity. Many of the wrong doings in the corporate
functioning are due to lack of information, wrong and inadequate information, misunderstood facts or
falsified information. Transparency requires enforcement of right to information-nature, timeliness, and
integrity of the information produced at each level of interface. In fact, transparency is measured by the
outsiders to assess true position of a company –availability of firm specific information to those outside
publicly traded firms.

Transparency is an important value and values are cultivated through awakening, convincing and
persuading and shared meaning of the concept. It is more in the form of a learning process rather than
fixation and imposition of certain rules through coercion. However values once developed and cultivated
also require development of a system of checks and balances. Because human being are susceptible to
voice. Good governance require a system of checks, balances, evaluations and introspections.

Disclosure and Ethics

As we know that better governance emphasized on transparency and communication, dissemination of
relevant information to interested parties is very important in this respect. Corporate disclosure implies
the disclosure of relevant information to entities that are affected by the information. The different
stakeholders have different aspect of the company.

The different information which the company should provided to different stakeholders as part of
corporate disclosure is as followed:

1. The customers should be informed about product quality, product-ingredient, product features,
precautions and safety measures, etc. This type of product information is interesting and useful to
the customers as it has a direct/indirect bearing upon the customers’ benefits.
2. The employee should be informed about their duties and responsibilities, nature of work, wages for
the work, rules and regulations relating to performance and behavior, leave policy, rules regarding
transfer and promotion, grievances redressal machinery, monetary and non-monetary benefit to
employees, employees’ right, welfare schemes, rules regarding termination of the services of
employees.
3. The shareholder should be informed about the company’s profitability, safety of their capital future
prospectus and growth plans, financial position of company, its assets and liabilities, its income and
expenditure, state of business affairs and value of investment of shareholders, etc.
4. The government should be informed about the financial results of the company, its tax-liability and
tax payment, compliance of various laws, methods of operations, safety measures, working
conditions, employee satisfaction, environmental protection, product safety, faire prices and faire
trade practices.
 5. The general public should be informed about waste disposal management and environmental
protection, employment policy of company, nature of company’s business and its operations,
financial soundness of the company, its products and services.

suggestion for Value-Based Governance

Nowadays much is talked about value-based governance, a concept which has ethical flavor. It is similar
to management by values. Value base governance involve creation and establishment of appropriate
values to direct the corporate-functioning and observing these values while exercising using and control
the corporate power and resource for performing those functions. Value based governance requires
value-creation in respect of employees, customers, investors and society. Corporate Governance does
no mean more and more regulations; its main focus should be on creating an environment where
respectability matters. Following are some suggestions for creation of such value based governance
environment:

1. Better balance of power between the management and the board.

2. There should be a peer evaluation for each member of the board.
3. Shareholders must actively stop us as owner and engage directors on corporate issues.
4. Changes to mindset of manager and worker for implementation of business ethics.
5. Corporation must integrate their value systems into their recruitment programmes.
6. Every employee has to appreciate that the future of corporation is safe only he/she does the
right thing in every transaction.
7. Corporation have to create systems, structures and incentives to promote transparency, since
transparency bring accountability.
8. Corporate leaders believe in the value of company. They are power full role modules.
9. Border market reforms to create incentives for good governance.
10. Acceptance of IAS-IFRS by all national will make it easy to compare the performance of
corporation in an industry across the countries, in a global environment.
11. Senior management remuneration must be based on the principle of fairness, transparency and
accountability.

Conclusion
In India, we need to develop a robust model of CG as a fundamental ingredient for strengthening
economies and developing capital market. No doubt, there are minimum slandered that must be
observed by all corporations as enshrined in the country’s laws or the rules of self-regulatory
organization, the demand of good governance can vary from industry to industry, firm to firm and even
circumstances to circumstances. The notion of having “one size fits all” is not only inappropriate but
undesirable too. Jamshed Irani, Director, Tata Sons Ltd has rightly pointed out that CG is not something,
which can be mandated. Infect, it is a culture which has to be built up gradually with strong link between
the board and the management of company.