Lec 1 & 2

We School – PGDM Trim 2

 PART 1 - To understand the basics of Ethics
& Corporate Governance and their
importance in all walks of life

 To understand the origin & evolution of

corporate governance

 PART 2 – To understand the need &

importance of corporate governance today
 Ethics comes from the Greek word “ethos”
meaning both an individual’s character & a
community’s culture
 General belief that ethics involves adhering
to legal or regulatory standards, keeping
promises & commitments, abiding by general
principles of fairness, truth, honesty &
respect
• The Institute of Global Ethics defines ethics
as “the obedience to the unenforceable”
•The epitome of Ethics-shows the moral values &
principles one holds even in the face of the gravest
threat to one’s life

•Morality, moral standards, moral responsibility lead

to ethical behavior

•Ethics is a ‘moral filter’ that protects the interests of

society

•Business Ethics - understanding moral standards &

their applications in the conduct of business processes
 • Our moral principles & values
1

• Reflect our feelings

2 • Our acts or responses to a situation

• Our behavior gives rise to feelings of

3 satisfaction/dissatisfaction
 Ethics are not the law unto itself, nor parallel to
the laws of the land
 Ethics do make for a complementary logic that
aids law in balancing equity, fairness & justice
 Most aspects of ethics & moral behavior arise
from the concept of rights, justice & fairness of
deals with respect to its various stakeholders

[Law regarding adoption by single/gay parents]

 To avoid expensive court cases is a powerful incentive
 To prevent damage to reputation & bad publicity due to
perceived irresponsibility
 Increased shareholder scrutiny puts companies under a
sharper spotlight
 Brands associated with ethical behavior have higher brand
values
 Employees prefer working for firms they perceive as
ethical
 Fund managers also look favorably on firms with an eye on
the Triple Bottom Line
 MNC’s now need to ensure their entire supply chains
across the globe live up to ethical standards.
 Technology

Drivers of
War for
Talent the New Globalization

Economy

Intangible
Assets
PHYSICAL CUSTOMER
•Land •Customers
•Buildings •Channels
•Equipment ORGANIZATION •Affiliates
•Inventory
Leadership Knowledge
Strategy Systems
Structure Processes
Culture Intellectual
FINANCIAL Brand property
•Cash Innovation
•Receivables EMPLOYEE &
•Debt SUPPLIER
•Investments •Employees
•Equity •Suppliers
•Partners

Source: Andersen
 Business models will be seen as groupings of assets or stakes

Businesses will need to be accountable to each asset owner (stakeholder) in

some kind of mutually agreed way

Hence leading to wider accountability and greater risk of ethical conflicts

This will result in managing reputation (a significant intangible asset)

 This move toward greater accountability
does not mean sound economic principles are
being jettisoned
 Making money/profits not relegated, just
repositioned
 Can be likened to our perception of
breathing: “Life is impossible without it but
we do not live to breathe”
 Leadership: Consistency between words and
actions
 Fairness
 Openness / Transparency
 Just Rewards
 Values-Driven

Rules and values are ethical allies

Moral & Ethical behaviors are not the purpose of
Corporate Governance,
but are necessary enablers to accomplish
strategic objectives & goals of business
 For whom does a corporation run?

 Is Corporate Governance a legal topic?

 Is it an economic one?

 Or does it just boil down to ethics?

 Ethics is an all pervasive subject of business

 It’s presence is most critically observed &

measured in matters of Corporate
Governance

 Aim of CG to ensure certain moral/ethical

standards are maintained while dealing with
internal systems, product policy & safety,
marketing, customer care, etc.
Governance is how society or groups within
society organize to make decisions…

As we unpack this statement, 3 big issues come

to the fore :
1 - Who has a voice in making decisions?
2 – How are decisions made?
3 – Who is accountable?
 Consensus – oriented
 Participatory
 Following rules of Law
 Effective & Efficient
 Accountable
 Transparent
 CG broadly refers to the mechanisms, processes & relations
by which corporations are controlled & directed

 CG is taking the responsible route to success

 Based on Gandhian Principle of Trusteeship & Directive

Principles of the Indian Constitution, SEBI has defined CG as
‘the acceptance by management of the inalienable rights of
shareholders as the true owners of the corporation & of
their role as trustees on behalf of the shareholders. It is
about commitment to values, ethical business conduct, and
about making a distinction between personal & corporate
funds in the management of the company’
 Promotes community confidence

 Leads to better decisions

Sometimes the best way to translate “reality” is
through fiction, and no genre resonates more
with people than cinema
A story about 2 corporate giants
who recklessly compete in order
to maximize their respective
profits. The 2 companies are
traditional rivals in the food
products business and the
movie showcases the power
games the two industrialists
play.
 A college drop-out gets a job as a broker in an
investment firm, which puts him on a fast track to
success. However, success clouds his judgment,
drawing him into a world of corruption & greed
A young & impatient stock
broker is willing to do anything
to get to the top
 The fall of Enron Corporation, arguably the most
shocking example of modern corporate corruption
Ram has an idea & starts a business…he is the business owner,
operator, chief bottle washer, all in one
Business Owner & Manager
hires staff as business grows
Business owner &
Manager
takes in an
investing partner or
two to grow the
business
 Board Chair & CEO

As business
grows, V.P.’s &
partners Senior Staff
decide to
incorporate
Managers
& Staff
Board authority is group authority

Yet we have Ram who formed the company & wants to remain in
charge/control

How is going to work when as CEO, he is accountable to a Board of

which he is a Chair?

Are other Board members merely providing an advisory or

supporting role?

Does a CEO have extra powers?

Have we forgotten any group in the picture…
Shareholders – Owners!

Board Chair & CEO

V.P.’s &
Senior Staff

Managers
& Staff
 The true head Legal/moral
honcho is the ownership
legal ownership A E
C
group or the C
M
shareholders P
O Board of Directors O
U W
 The Board of N E
Directors must T R
ensure that the A
C.E.O. M
long term B E
interests of the I N
shareholders are L T
I
effectively T Staff
executed Y
Moral/Legal Ownership

Board

CEO

CEO

Staff

Clients/Customers
 Engage in dialogue with legal/moral
ownership

 Translate expectations into written, concise

yet comprehensive policy

 Monitor policy compliance

 CG structures & principles identify the :

i) Distribution of rights & responsibilities among

the different participants in the corporation
ii) Includes the rules & procedures for making
decisions in corporate affairs
iii) Processes through which the corporations
objectives are set & pursued in the context of
the social, regulatory & market environment
 If management is about running the business,
corporate governance is about seeing that it is run
properly.
All companies need managing & governing.
 Corporate Governance is really about
accountability to the shareholders and to
the others that corporations impact
Minority
Groups
 Better access to external finance
 Lower costs of capital – interest rates on
loans & better access to capital
 Improved company performance –
sustainability
 Higher firm valuation & share performance
 Reduced risks of corporate crises & scandals
https://www.youtube.com/watch?v=m_4KKEj
NKoU
 Lays down framework for creating long-term
trust

 Improves Strategic thinking

 Rationalizes management

 Provides long – term reputation effects

 Ensure that management is accountable to
the Board

 Ensure that the Board is accountable to the

shareholders
•Protect Shareholders rights

•Treat all shareholders including minorities,

equitably

•Provide effective redress for violations

 Ensure timely, accurate disclosure on all
material matters, including the financial
situation, performance, ownership and
corporate governance
 Procedures & structures are in place so as to
minimize, or avoid completely, conflicts of
interest

 Independent Directors & Advisers…i.e. free

from the influence of others
Advertising Standards Council of India
(ASCI) upheld complaints against 109 out
of 155 advertisements spanning across
food & beverages, consumer durables,
and e-commerce sectors in May 2016
 Titan Raga Woman of Today: Her Life, Her
Choices
Link: https://www.youtube.com/watch?v=zXRobOjVI9
s

 Raymond : The Complete Man

Link: https://www.youtube.com/watch?v=7yrgkP3zn9Y
CavinKare Pvt Ltd (Chik Egg White Protein Shampoo) were
pulled up for their advertisement claims “Isska Egg White
Protein damage baalon ko jad se sire tak nourish karke hair
fall kam kare”. According to complaint, the ad was not
substantiated with data specific to Egg White Protein. In
view of the above, the claim of “Perfect Solution” against
hair fall was also found misleading. In addition, the
supers/disclaimers in the TVC were not legible.
Suppliers, employees, customers,creditors, community
 Promoter / Share holders

Direction of Policy Matters Senior Level Appointments

Board Directors
& Business Strategy & Delegation

Managing Committee / Top Management Ethics Counselor /

Committee

Key Employees / Executives With Responsibility & Accountability

Ethical Filters: Honesty, Integrity, Values, Trust, Transparencies, Commitment
& Ethical conducts

Execution, monitoring & measurement for improvements by Ethics Counselor /

Committee or the top management throughout the Organization

Receivers of benefits: Investors, Shareholders, Employees, Customers, Vendors, Nation,

Society & Local Bodies
 Duties of directors
 Compensation & balance of the Board
 Remuneration & reward
 Reliability of financial reporting & external
auditors
 Shareholders rights & responsibilities
 Corporate social responsibility
Chanakya in 3rd century B.C.
– four fold duties of a King / CEO

 Raksha : protecting shareholders wealth

 Vriddhi : enhance wealth by proper utilization
of assets
 Palana : maintenance of wealth through
profitable ventures
 Yogakshema : safeguard interests of
shareholders
 Recent U.S. Business Failures

 Inconsistent Billing
 Revenue Recognition Issues and Practices and Revenue
Shareholder Deception Recognition Issues  Collapsed Business Model
 Fraud

 Collapsed Business Model

 Fraud: Expense Recognition Failure

 Fraud: Shareholder Deception

 Questionable Accelerated Revenue Recognition  Fraud: Revenue Recognition Failure

 Revenue Recognition Confusion

…resulting in passing of Sarbanes-Oxley Act, 2002