Business Ethics & Corporate Social Responsibility

Business Ethics

Business Ethics is an art or science of maintaining harmonious relationship with society, its various groups and institutions as well as reorganizing the moral responsibility for the rightness or wrongness of business conduct. -- Wheeler.

Features of Business Ethics:

Refers to code of conduct Based on moral and social values Provides protection to social groups Provides basic framework for business Needs willing acceptance Education and guidance required for introduction Not against profit making

Sources of Business Ethics

Religion

Culture

Legal System

Ethics

Need/Objectives for Ethics:

Checking business malpractices Improving consumer confidence Making businessmen conscious of social responsibilities Protecting consumer rights and social welfare Protecting social groups Developing cordial relations between business and society Creating good image of business

Managing Ethics

Top management Code of ethics Ethics committees Ethics Hot Lines Ethics training programme Ethics and law

Why Decision Making Difficult?

Ethical dilemmas confronting managers Difficulty in separating facts and values Good and evil exist simultaneously Limited knowledge about the consequence of an action Stand of critics and that of the company differs Ethical standards vary with the passage of time Ethical behaviour is moulded from the clay of human imperfection Huge organisations pose their own problems

Commonly used Unethical Business Practices in India:

Supplying inferior quality goods Adulteration and short weights & measurement Misbranding, hoarding and blackmarketing Supplying inadequate information Using unfair sales promotion techniques

Commonly used Unethical Business Practices in India:

Paying low wages, providing inferior quality welfare facilities and indecent treatment to employees Dishonouring labour laws and other rights of employees Exploitation of child labour and women workers Paying low rate of dividend to shareholders

Commonly used Unethical Business Practices in India:

Misuse of funds and mismanagement of the company Avoiding payment of taxes as per existing laws Over invoicing Formation of business combinations for avoiding competition and creating monopolies

Commonly used Unethical Business Practices in India:

Disregard to business laws, government policies and misuse of facilities and incentives offered by the government Giving bribes, gifts, donations, payment of kickback money to politicians and government officers for certain benefits

Commonly used Unethical Business Practices in India:

Creating inconveniences to local people due to growing industrial activities without due care to local community Inadequate measures in regard to pollution control

The Corporate Crimes

Suggestions for Ethical Decision Making

Choose one of three principles: moral idealism, intutionism and utilitarianism Consider decision tactics that illuminate moral choices Pros and cons in a balance sheet Ethical priorities before problems arise Make ones stand on ethics public Set good personal example to others Ethical perfection is illusory

Corporate Governance

Meaning
Corporate Governance may be defined as the set of rules, regulations, procedures and practices to be adopted by a firms management to manage its affairs in the best interest of its stakeholders.

Factors of Corporate Governance

The Commitment of the Board of Directors and Management towards Integrity and Transparency in business operations
The Legal and Administrative framework of the Government

The Objective of Corporate Governance

The enhancement of shareholder value, keeping in view the interests of other stakeholders

Aspects of Corporate Governance

The Corporate Governance code of each country has to be designed keeping in view the peculiarities of the country With the integration of India into the world market (WTO), companies will have to give greater disclosures, more transparent explanation for major decisions and better corporate value Corporate Governance extends beyond Corporate Law

Reasons for Growing Interest

The assertion of rights by the shareholders Growth opportunities resulting from Globalization Presence of Foreign Financial Investors Greater Accountability International standards of disclosures and practices

Reasons for Growing Interest

Strategic alliances with global players Need to comply with the statutory authorities such as SEBI in India Business Combinations (to protect the interest of concerned parties)

Board of Directors and Corporate Governance

Composition of the Board

Board shall have optimum combination of executive and non-executive directors with not less than 50% of the directors comprising of nonexecutive directors. The number of Independent Directors would depend upon whether the Chairman in executive or non-executive. In case of a non-executive chairman at least one-third of board Independent Directors In case of an executive chairman at least half of board Independent Directors

Remuneration of Directors

The Remuneration of non-executive directors shall be decided by the Board. Disclosures of remuneration in Corporate Governance Report: All elements of remuneration package salary, benefits, bonuses, pensions etc. Fixed and performance linked incentives with criteria Service contracts, notice period, separation fees etc. Stock option details

Board procedure

At least four meetings with maximum time gap of four months The director of a company shall not be a member in more than 10 committees or act as chairman of more than 5 committees across all companies. Mandatory to inform about positions For limits only Public Ltd companies and three committees Audit, Shareholders Grievance and Remuneration Committee

Role of the Board Areas of Monitoring

Strategic Planning Capital Allocation Manpower Planning Performance Appraisal

Information to Shareholders

Appointment of New Director or Reappointment Brief resume Nature of his expertise in specific functional areas Name of companies in which he holds directorship and the membership of committees of the board

Information to Shareholders

Quarterly results, presentation made by companies to analysts should be put on companys web-site or should be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own web-site Formation of Shareholders/Investors Grievance Committee under the Chairmanship of non-executive director

Tests of Corporate Governance

Whether the funds of the company have been deployed for pursuing the main objects of the company as enshrined in the Memorandum Whether the funds raised form financial institutions and the capital market have been utilized for the purpose for which they were intended. Whether the company has the core competence to effectively manage its diversifications

Tests of Corporate Governance

Whether there has been diversion of funds by way of loans and advances or investments to subsidiary or investment companies Whether the personal property of the directors have been let out at exorbitant rent to the company Whether the provisions of the Companies Act, FEMA, the Factories Act and other statues are complied with in letter and spirit

Tests of Corporate Governance

Whether the funds of the company have been diverted to the promoters through shell companies to permit the promoters to shore up their stake in the company for private gains of the promoters Whether the practices adopted by the company and its management towards its shareholders, customers, suppliers, employees and the public at large are ethical and fair

Tests of Corporate Governance

Whether the directors are provided with information on the working of the company and whether the institutional and non-executive directors play an active role in the functioning of the companies Whether the internal controls in place are effective Whether there is transparent financial reporting and audit practices and the accounting practices adopted by the company are in accordance with ICAI accounting standards

Corporate Governance Report (Under Clause 49 of Listing Agreement)

A brief statement on company's philosophy on code of governance Board of Directors: Composition and category promoter, executive, independent, nominee etc. Attendance of each director ( BOD meetings and last AGM) Member of other Boards and committees

Corporate Governance Report (Under Clause 49 of Listing Agreement)

Audit Committee: Brief description of terms of reference (role) Composition, name of members and Chairperson Meetings and attendance during the year

Corporate Governance Report (Under Clause 49 of Listing Agreement)

Remuneration Committee Brief description of terms of reference Composition, name of members and chairperson Attendance during the year Remuneration policy Details of remuneration to all the directors

Corporate Governance Report (Under Clause 49 of Listing Agreement)

Shareholders Committee Name and non-executive director heading the committee Name and designation of compliance officer Number of shareholders complaints received so far Number not solved to the satisfaction of shareholders Number of pending share transfers

Corporate Governance Report (Under Clause 49 of Listing Agreement)

General Body Meetings Location and time, where last three AGMs were held Whether special resolutions were put through postal ballot last year, details of voting pattern Procedure for postal ballot

Corporate Governance Report (Under Clause 49 of Listing Agreement)

Disclosures Disclosures on materially significant related party transactions Details of non-compliance by the company, penalties, strictures imposed on company by SEBI, stock exchange or any other authority or any matter related to capital market during the last three years

Corporate Governance Report (Under Clause 49 of Listing Agreement)

Means of Communication Half-yearly report sent to each household shareholders Quarterly results Newspapers Website The presentations made to institutional investors and/or the analysts

Corporate Governance Report (Under Clause 49 of Listing Agreement)

General Shareholder Information AGM: Date, time and venue Financial Calendar Dividend payment date Listing on Stock Exchanges Stock Code Number Market Price Data: High, Low during each month in the year

Corporate Governance Report (Under Clause 49 of Listing Agreement)

General Shareholder Information Performance in comparison to broadbased indices such as BSE, Sensex etc. Registrar and Transfer Agents Share Transfer System Distribution of Shareholding Outstanding GDRs/ADRs/Warrants Plant locations Address for correspondence

Concept in Nut Shell

Transparency in disclosure of information and decision making Accountability, which follows transparency because responsibilities could be fixed easily for actions taken or not taken Equity of treatment to all shareholders, whether large or small

INTERFACE BETWEEN BUSINESS AND SOCIETY

 Why

Do Good?

Its like Health Care

 LOOK

BETTER

Potential Customers, Investors, Financial Analysts, Business Colleagues, Annual Reports, Press and even Parliament

 FEEL

BETTER

Employees, Current Customers, Stock Holders and Board Members

 DO

BETTER

Brand, Bottom Line and Community

 LIVE

LONGER

Strong Reputation

Why CSR is Becoming Important?

Large size of the modern day corporations Rolling back of the state Recognition of benefits of CSR Increasing Pressures from different Stake Holders

Theoretical Positions

Milton Friedman
Nobel Laureate 1976 Economics The only social responsibility of business is to maximize profits staying within the realms of law. -- Business of Business is Business.

Andrew Carnegie ( legendary steel tycoon) -- Advocates benevolent, paternalistic leadership -- Charity principle -- Stewardship principle

Keith Davis
--Enlightened self interest: It is in an organizations interest to act in ways that society considers responsible. -- Iron law of responsibility: Those who do not exercise power and responsibility will tend to loose it.

 Tom

Cannon

CEO of a Scottish firm and Director of Manchester Business School

Business provides
- Products & Services - direct & Indirect Employment - Income generation

Society provides
- Means of exchange - Trained Manpower - Legal and banking system - Social and physical infrastructure

With the advent of the Joint Stock Company, society or state provides to business, two special rights
-- Potential Immortality

-- Limited Liability

Business does have Social Responsibility to fulfill in return for these privileges

Developments in India

First Phase: Merchant Charity Second Phase: Trusteeship Third Phase: Declaration of Social Responsibilities of Business Fourth Phase: Managerial Trusteeship Fifth Phase: Corporate Citizenship

International Developments

Philanthropy as old as recorded history Initially directed towards the poor and infirm Later towards research, education etc. Role of Andrew Carnegie & Rockfeller Donating both time and money Professionalisation establishment of foundations

Difference between Old and New Concepts

Old Concept Based on the philosophy of the founder Donation of resources and money

New Concept Considered decision of the board part of strategy Direct involvement Explicit realisation of interdependence of business and society

Generations of CSR

The First Generation of CSR Corporate Philanthropy The Second Generation of CSR Long Term Business Strategy The Third Generation CSR Significant Contribution towards the Society (mostly a vision)

Responsibilities of Enterprises towards the Society

Protecting and improving the welfare Beyond legal and social responsibility Commitment of social, economic and environmental good Accountable for their actions Obligations towards all stakeholders Commitment to local community

The Social

Responsibility Debate

Views for CSR

Profits lost are recovered in long run Optimum profit and not maximum profit Cost gets recovered Averts penalty Mere production is not the sole aim Involves all stakeholders Sustained growth Problems originating due to business Business uses the resources of the society Business posses the expertise to solve problems Preventing is better than curing

The Counter Argument

Profits and responsibility are sequentially related Difficult to estimate positive impact Compliance of law is sufficient Society must safeguard its interest Complex ethical issues Social policy is the jurisdiction of government Business lacks training in social issues

The Counter Arguments

Another excuse to let big business increase its power It may lead to business failure Not easy to make choice between responsible and selfish action Divided support in the business community

Relations between a business firm and its primary stakeholders

Employees (Unions)
Wholesalers (Retailers)
Distribute products Sell labor

Stockholders
Invest capital Lend money

Buy products

Business firm (Managers)

Sell materials

Creditors

Customers

Suppliers

Relations between a business firm and some of its other (secondary) stakeholders
The General Public
Local Communities
Positive, negative opinion Advice, research Image, publicity

Business Support Groups

Jobs, environment Regulation, taxes Business

Central/State and Local Governments

Firm (Managers)
Social demands Friendly, hostile

Governments

Media

Social Activist Groups

Measuring Corporate Social Responsibility

Measuring CSR initiatives is important to ensure effective implementation of planned strategy and to determine future action plans. Each company can design measuring strategies based on their selected CSR focus areas.

Basic indicators to measure CSR

Community CSR Initiatives Workplace CSR Initiatives Environment CSR Initiatives Marketplace CSR Initiatives

Measurement of Community Initiatives

Cash value of community support as a percentage of pre-tax profit Impact evaluation improved education attainment, number of jobs created, professional support for community organizations Project progress and achievement measures Perception measures of the company as a Good Corporate Positive and negative media comment on community activities

Measurement of Community Initiatives

Individual value of staff time, gifts in kind and management costs Frequency of formal and informal dialogue between the stakeholders Measuring impact on the beneficiaries

Measurement of Workplace Initiatives

Workplace profile (race, gender, disability, age etc.) Staff absenteeism Number of non-compliance (on health and safety, equal opportunities and other legislation) Number of staff grievances Upheld cases of corrupt or unprofessional behaviour

Measurement of Workplace Initiatives

Staff turnover Training and development provided to staff Pay and conditions compared against local equivalent averages Workforce profile compared to the community profile Evaluating impact as a result of downsizing Perception measures of the company ( equal opportunity, work-life balance)

Measurement of Environment Initiatives

Overall energy consumption Water usage Quantity of solid waste produced (measured by weight/volume) Upheld cases of prosecution for environmental offences CO2/Greenhouse gas emissions Use of recycle material

Measurement of Environment Initiatives

Positive and negative media comment for environment activities Environment impact over the supply chain Level of waste that is recyclable

Measurement of Market place Initiatives

Number of products complaints regarding products and services Advertising complaints upheld Complaints about late payments of bills Upheld cases of anti-corruptive behaviour Customer satisfaction levels Customer retention Provision for customers with special needs

Measurement of Marketplace Initiatives

Average time to pay bills to suppliers Extra sales gained attributable to social policy/cause related marketing Customer loyalty measures Recognizing and catering for diversity in advertising and product labeling Perception of a company as a desirable commercial partner Social impact, costs or benefits of core products/services

Emerging Areas of CSR

Social Responsibility Environmental Responsibility Business Responsibility Stakeholder Involvement (Source: European Commission, 2001)

Areas of Social Responsibility

Respect fro human rights Socio-economic development Employee welfare Consumer protection Respect for National Sovereignty and local communities Resource sharing Participating academic research Community investments Investors to invest in companies which follow responsible business Share expertise and knowledge

Areas of Environmental Responsibility

Respect for environment Environment friendly technologies Use, conserve and discharge: energy, material and water in an eco-friendly manner Adopt preventive and precautionary measures for environment pollution control Educate employees and community for the same

Areas of Environmental Responsibility

Rectify environmental damage at source: Treat waste before disposing it Bio-diversity preservation Promote and implement an environmental policy for sustainable energy and sustainable environment

Areas of Business Responsibility

Compliance with Tax Laws and other regulations Corporate Governance: Transparent Financial Reporting; Auditing/verification and Accountability; addressing customer redressals an grievances Invest in developing science and technology

Areas of Business Responsibility

Foster ethical trade practices Regulate suppliers CSR practices and distributors CSR practices, e.g. stop working with suppliers and distributors who do not follow responsible business practices Transparent financial reporting: publish financial reports in newspapers for public information