Download - BECG - MBA (2011) Slides
-
8/7/2019 BECG - MBA (2011) Slides
1/107
Introduction to business ethicsEthics can be defined as the science of character of a person
expressed as right or wrong conduct of action.
Nature of Ethics Ethics is a subject that deals with human being. The question of ethicsarises, as human beings are associated with values and morals.
Experts were of the opinion that ethics is more of a science than an art
Ethics is normative science Ethics deals with human conduct that is voluntary and not forced
Objective of Ethics
Ethics deals with human behavior. It assesses any act or decision taken byan individual is moral or not To establish moral standards and norms of behavior
To judge human behavior based on these standards and norms
To asses a human behavior and express an opinion about it
To set standard / code for moral behavior and make recommendationsabout desired behavior
-
8/7/2019 BECG - MBA (2011) Slides
2/107
Business Ethics
Business can be defined as a primary economic institution throughwhich people in modern society carry on the task of producing,distributing good and services.While business ethics refers to the application of ethical judgment to
business activities.
Morality
We can define morality as the standards that an individual or agroup has about what is right and wrong, or good or evil.
Moral Standards The norms about the kind of actions believedto be morally right and wrong as well as values placed on the kind
of objects believed to be morally good and morally bad.Exam. Always tell the truth, It is wrong to kill innocent people
Moral Values can usually can be expressed as statementsdescribing objects or features that have worth such as Honesty isgood and Injustice is bad.
-
8/7/2019 BECG - MBA (2011) Slides
3/107
KPMGS 1999 Business Ethics Report (Representing 800top Indian Companies)
The report states that only 14% of Indian companies presently have anombudsman on their rolls, and merely 40% operate a grievance cell foremployees (compared to 30% and 65% respectively in the US). TheEthical violations that came up in the KPMG survey are as follows:
Areas Percentage of respondents
Misuse of confidentialinformation 71%
Poor quality of goodsandservices
rendered
55%
Insider Trading 48%
Receiving gifts or favors from suppliers 48%
Promoting conflicting self-business
interests
47%
-
8/7/2019 BECG - MBA (2011) Slides
4/107
Nature ofBusiness Ethics -Overtethical problems deals with bribery, theft, collusion etcCovertethical situations occur in corporate merger, acquisition,
marketing and personnel policies, capital investment etc.
Characteristics of ethical decisions in business
Business ethics and profits
Relationships between business and ethicsMoral structure
The Unitarian View of ethicsBusiness
Moral Ethics
The Separatist View of ethics(Adam Smith & Milton Friedman)
Business Ethics
Society
-
8/7/2019 BECG - MBA (2011) Slides
5/107
The Integration View of Ethics (Talcot Parsons)
Government Law
Business Morality & Ethics
Market Systems Business Ethics Society
Stages of ethical consciousness Stage 6 - Corp. Citizenship
in businessStage 5 - Stakeholder concept
Stage 4 - Profit maximizationin the long-term
Stage 3 - Profit maximizationin the short-term
Stage 2 - Anything for profit
Need for business ethics Stage 1 - Law of Jungle
-
8/7/2019 BECG - MBA (2011) Slides
6/107
Stakeholders and their expectations
Stakeholders Expectations
Primary Secondary
Owners Financial returns Added value Employees Pay Work satisfactions Customers Supply of goods Quality
and services
Creditors Credit worthiness Security
Suppliers Payment Long term relationships
Community Safety and security Contribution to the community
Government Compliance Improved competitiveness
Standards and Values Clutterbucks institutional and control oriented approach
Drummond and Carmichaels personalized developmentapproach
-
8/7/2019 BECG - MBA (2011) Slides
7/107
Clutterbucks approach
Set a clear example
Publish a code of ethics
Use reward and punishment mechanism
Include ethics in recruitment criteria Reinforce policies through training and development
Provide mechanism for negotiating concerns
Establish openness and transparency into decisionmaking processes
Provide feedback
-
8/7/2019 BECG - MBA (2011) Slides
8/107
Carmichael and Drummonds approach
Acknowledge the personal dimension to ethical behavior
Monitor symptoms of personal, ethic related stress
Analyze feelings about venture and its activities - link
analysis to diagnosis of problems
Draw up personal and corporate ethics checklist
Explain your ground - rules to others
Set up systems of justice and reinforce these throughcontract and ethics statements
Communicate ethics position
-
8/7/2019 BECG - MBA (2011) Slides
9/107
Importance of Ethics in BusinessEthical Theories
Ethics is the field of enquiry. Morality is the object of that enquiry, the code
or code of behavior acceptable within a particular group at a particular time.
Metaethics can be defined as the study of origin and meaning of ethicalconcepts
Metaethcis deals with
> Metaphysical issues, question existence of moral values in humans ortheir human conventions
> Psychological issues question the psychological basis of moral actions
> Linguistic issues deals with meaning of key moral terms we use
Normative ethics is that branch of ethics that guides human conduct
which must be> Prescriptive
> Universal
> Overriding
> Public
>P
ractical Applied Ethics DEALS WITH CONTROVERSIAL MORAL ISSUES
-
8/7/2019 BECG - MBA (2011) Slides
10/107
There are three set of normative ethics, each with own set of moral principles
Utilitarianism :Teleological Ethical Theory is also called ConsequentialistTheory
Teleological theories hold that *an action is considered morally correct ifthe consequences of that action are more favorable than unfavorable.
Draw back - GOOD, BAD, RIGHT & WRONG
Three definitions of good gives a different consequentialist moral theory
> Egoism *only to the individualperforming the action
> Utilitarianism * to everyone
>Altruism *to everyone except the individual
Universalism:Deontological Ethical Theory
> Duties to God, including honoring him and praying to him
> Duties to oneself includes preserving ones life and sharing happiness
> Duties to others, including family duties, social duties and political duties.
Virtue may be defined as any disposition of character one desires for self andalso for others.
Virtue ethics emphasizes character development rather than articulation of
abstract moral principles that guide actions
-
8/7/2019 BECG - MBA (2011) Slides
11/107
Universalism or Utilitarianism cannot be used to judge all moral actions under
all circumstances. Hence two modern ethical systems have been developed,
based more upon values than principles.
1) Distributive justice (John Rawls) is explicitly based upon the primacy ofsingle value: Justice.
Theory of Justice attempts to solve the problem of distributive justice byutilizing the device of the social contract.
2) Personal library is an ethical systems proposed by Robert Nozick is basedupon a single value, Liberty.
Liberty is thought to be the first requirement of society
Lockes Theory of Rights Rights can be defined as something towhich one has a just claim: as a
A - Power or privilege to which one is justly entitledB i) the interest that one has a piece of property often used as plural
ii) plural: the property interest possessed under law or custom andagreement in an intangible thing especially of a literary and artistic nature
iii) something one may claim as due.
-
8/7/2019 BECG - MBA (2011) Slides
12/107
Ethical organization An overview
Judging the ethical nature of an organization
Theory of corporate moral excellence> Espoused values
> Values in practice
Michael Hoffmans three types of corporate culture
- Basic values, attitudes and belief of the organization
- Organizational goals, policies, structure, strategies that areshaped by
the values, attitude and belief prevalent in the organization
- Organizational procedures and processes
Ethics and stakeholders theory
Ethics and corporate governance
COPORATE CODE
The development of corporate code
Implementation of corporate code
-
8/7/2019 BECG - MBA (2011) Slides
13/107
Law and Ethics Law can be defined as a consistent set of universal rulesthat are widely published, generally accepted, and usually enforced.
Characteristics are Consistent Universal Published Accepted Enforced
Relationships between the Law and Moral Standards
Formation of law Individual processesFormation of law Group processesFormation of law Social processesFormation of law Political processes
Value orientation of the firm
The important aspects that managers and entrepreneurs have to consider andwhich are core to their activities are: Ensuring proper systems of corporate ethics and values in enterprise Definite understanding of questions related to compliance Serving the community by looking into the needs of economically and socially
disadvantages
B
ringing products that are environmentally friendly
-
8/7/2019 BECG - MBA (2011) Slides
14/107
Framework of ethical decision making - Multiple Analysis
Economic Analysis - the underlying belief is that a market economy hasa limited number of resources and when consumers are supplied with highest
quality goods at the lowest costs, and then those resources are used
effectively and efficiently.
Legal Analysis - the underlying belief is that a democratic society canestablish its own rules. If people and organization follow these rules, then
members of the society will be treated as justly as possible.
Ethical Analysis - the underlying belief is that is all men and women in asociety acted on the same principles of either beneficial or consistency, then
members of that society would treated as fairly as possible.
-
8/7/2019 BECG - MBA (2011) Slides
15/107
Market system
The right to own and control private property
Freedom of choice in buying and selling of goods and services Accesses to quick, reliable and precise market information
Implication ofUnethical behavior in Market system
Behavior Impact on Decision Maker Likely result of behavior
Coercion Fear of harm Increased cost
Alter decision choice Reduce product or service quality
Deceptive False impression Reduce satisfaction
information After decision choice
Theft Lose resources Increased costs or eliminate
product or service
Bribery Unearned personal gain Increase cost
After decision choice Reduced product or service quality
-
8/7/2019 BECG - MBA (2011) Slides
16/107
Importance of trust in business> Dependability> Predictability
> Faith
Importance of unethical behavior on trust in businessrelations
Supplier relations Customer relations
Employee relations
Integrate Social Contract Theory Hypernorms are universal norms that apply equally to all individuals
Macro social contracts - provides global norms
Micro social contracts - are developed for a community
-
8/7/2019 BECG - MBA (2011) Slides
17/107
orporate Social Responsibility - A Historical Perspective
Keith Davis defined Social Responsibility as Social responsibilities refer tobusinessmans decisions and actions taken for reasons at least partially
beyond the firms direct economic or technical interest.- Socio- economic obligation
- Socio-human obligation
Historical Perspective
The Industrial Revolution 1700-1900
The first Industrial Revolution:Textiles and Steam: 1772-18301712: The Newcomen steam engine
1733: John Kay invents the flying shuttle
1764: James Hargreaves invents the spinning jenny.
1769: Richard Arkwright patents the water frames. James Watt patents aseries of improvements on Newcomen engine making it more efficient.
1779: Samuel Crompton perfects the spinning mule
1785: Edmond Cartwright patents a power loom
1793: Eli Whitney patents the cotton gin
1807: Robert Fulton begins steamboat service on the Hudson river
1830: George Stephenson begins rail service between Liverpool and LondonCont.
-
8/7/2019 BECG - MBA (2011) Slides
18/107
The spread of the industrial revolution: 1830 - 18751840: Samuel Cunard begins transatlantic steamship service1856: Henry Bessemer develops the Bessemer converter1859: The first commercial oil well is drilled in Pennsylvania1866: The Siemens brothers improved steel making by developing open hearth
furnace
The second industrial revolution: Electricity and Chemicals: 1875-19051836: Samuel F.B.Morse invents the telegraph
1866: Cyrus Field lays the first successful transatlantic cable
1876: Alexander Graham Bell invents the telephone
1879: Thomas Edison invents the incandescent light bulb.1892: Rudolf Diesel patents the diesel engine
1899: Guglielmo Marconi invents the wireless
1903: The Wright Brothers make the first successful airplane flight
Dark Satanic Mills - Change in British Economy late eighteenth to earlynineteenth century Technological innovation
Agricultural development
Improvement in communication
Growing trade
Rising population and consumer demand cont.
-
8/7/2019 BECG - MBA (2011) Slides
19/107
Shift from agrarian economy to industrial economy brought changes theeconomic life of people
Working conditions deteriorated
Locals were deprived of the enclosed common land share ( known as Enclosure)
New technology and Enclosure resulted into migration of labor
Migration lead to development of cities like Bradford, Cardiff and Manchester
Labor mobility, shifts of land ownership, population pressure reduced the sense ofresponsibility for others ( seen as characteristic feature of older and ruralcommunities)
Victorian capitalism came into existence Samuel Smiles popularized a feeling that saving, thrift, sobriety and self-restraintwill improve the community
Britain experienced a rapid growth of wealth in the early part of century comparedto Europe and Germany
Change in per capita GNP
The positive effects of redistribution of wealth and power were shadowed byincreasing unemployment and recession
A common belief prevailed that the concentration of power could threaten the stateand allocation of resources
The values that influenced the behavior of individuals and the ethics that were
followed in their businesses were under stake. Cont.
-
8/7/2019 BECG - MBA (2011) Slides
20/107
According to Lord Macaulay Our rulers will best promote the improvement of thenation by strictly confining themselves to their own legitimate duties, by leaving capitalto find its own most lucrative course, commodities their fair price, industry and
intelligence their natural reward , idleness and folly their natural punishment.
Corporations were suspected to threaten the freedom of citizen
Business entities had no conscience and were focusing on increasing power oftheir ownership
The new working class faced severe problem
Poverty grew as landlords moved tenants from the estates to maximize theirrevenue
No intervention from Government as citizens played important role to make Britaina powerful nation
Henry VIII and Elizabeth I introduced legislation against Enclosure
Adam Smith emphasized the importance of maintaining restrictions of trade,movement and minimum intervention, to enable every individual to pursue freely hisown interest in his own way, and to compete with his own capital and industry.
Improvements in manufacturing, commercial and economic skills form the Britishpower
Cont.
-
8/7/2019 BECG - MBA (2011) Slides
21/107
In 1788, Britain passed a Humanitarian legislation to protect the chimney sweepsfrom exploitation In 1802, focused on controlling the condition of pauper children
In 1803, protection of immigrants
In 1833, introduced the Factorys Act
In 1842, to channelize the condition of mines
In 1848, createdPublic Health Act.
Victorian PhilanthropyPrior to Victorias accession to throne, The Times commented The two great divisionof society there, are masters, who have reduced the wages, and the workmen, whocomplain their masters for having done so.
Support from British Intellectuals who were not benefited from Industrial Revolution
End of Eighteenth century saw the growth of Methodism, which formed a base for
those who identified the difference between equality before God and inequality beforeman
Different types of responses from individuals, entrepreneurial and corporate sectorstowards Government initiatives
Industrialists formed philosophical societies like Manchester Library
Civic Universities were started in Manchester, Liverpool, New Castle andBirmingham Cont.
-
8/7/2019 BECG - MBA (2011) Slides
22/107
The Nonconformist Challenge in Britain Religion played important role in influencing attitudes and actions
Variance in the practice of Christianity, especially between Catholicism and
Quakerism
Quakers like brewing families Whitbreads and Truman, bankers like Lloyds andBarclays, confectioners like Cadburys and Rowntrees, glass makerPilingtons, andmany of the cotton and tobacco families Wills and Players played important roles inshaping the entrepreneurial values.
British Parliamentary reform was in full swing throughout the century
Efforts to widen franchise, and direct invention to eradicate abuses in factories,mines and homes
The Utilitarian and the Nonconformist creates opportunities for self-employment andtried to bring changes in personal behavior.
As a result, Sunday schools, subscription libraries, mechanics institute, engineering
institutions, the new civic Universities and the Society for the diffusion of UsefulKnowledge started
As part of social responsibility poor were given guidelines to improve themselves
In the nineteenth century, the concept of self-help was replaced by a number ofmovement for political, economic and social reforms
The leaders from entrepreneurial class believed that corporate social responsibilitymeans a new form of corporation Cont.
-
8/7/2019 BECG - MBA (2011) Slides
23/107
Progressive movements motivated industrialist like Whitworth, Milenes,Bauwens and Bessy
Robert Owen and his colleagues experiences three problems1) Shortage of fund, tried to raise though donations but failed to get any
2) Artisan supporters lacked the education and trading skills necessary fordeveloping ventures.
3) The link between wealth creation, capital accumulation and wealth distribution
were not liked by many
Yet some of the ideas of Robert Owen reverberate in the history of corporateresponsibility
Progressives in North America Robert Owen ideas were adopted by entrepreneurs like Francis Lowell, the
designer of the first American Power Loom
Early nineteenth century saw the shortage of labor reflected the similarity in theorigin of freedom of movement
Different economic, political and social conditions signified that corporate
responsibility in North America varied from Europe Cont.
-
8/7/2019 BECG - MBA (2011) Slides
24/107
The perspective of individual, entrepreneurial and corporate responsibility inNorth America was centered on education
There was a close relationship between early entrepreneurs and educational
institutions
The great private Universities of Harvard, Yale, Cornell, Princeton, Duke,Dartmouth and Columbia benefited from their relation with emerging entrepreneurs
Responses in The Thirties
The World experienced a new economic order due to industrial revolution
Increase in output, population, concentration and power of motivated individuals,entrepreneurs and communities to understand and interrelationship
The growth of corporations dominated economic life
The businesses needed skilled operational talent and managers
The depression due to war, recession and political change in 1930s affected theexisting system
The decline of prices in New York Stock exchange
As a result of depression the government began to be viewed to be an importantagent of change in Britain and USA
F.D.Roosevelt believed in in government intervention to solve social and economicproblems Cont.
-
8/7/2019 BECG - MBA (2011) Slides
25/107
This belief showed developments at various part of the World.
Scottish Council for development and industry reflected the changedresponsibilities. The aims were
> To streamline existing resources that support industrial developmentand job creation in Scotland
> To encourage firms to locate in Scotland
> To support government and other remedial action
> To create a climate for growth and prosperity
> To remove myths and misinformation about Scotland and its economicprospects
In Europe and North America employees depended on philanthropic employers
Post-war statism
The end of World War II necessitated a re-examination of the relationship betweenindustry, the state and the community
The US economy experienced strong economic growth in post-war period
The nations GNP rose to more than $ 500 thousand million in 1960
-
8/7/2019 BECG - MBA (2011) Slides
26/107
Current CSR practices of the firms in India and abroadIn 2002, Pricewaterhouse Coopers surveyed 1200
Business Leaders found that 70% of CEO agree that CSR is
vital to the profitability of any company.
Among leading Indian companies, those taking initiative inCSR are- LEAD INDIA by Bennett Colman- TATA- ITC- BIRLA
Even small companies at Adityapur in the state of
Jharkhand has shown the impact of CSR in that region.
However, Indian PMs recent address in annual meeting ofCII, stressed the need of corporate India to pay greater heedto CSR has stimulated deeper thinking among corporate
heads about their social responsibilities.
-
8/7/2019 BECG - MBA (2011) Slides
27/107
The Nature of Ethics in Management
Ethical problems as Managerial dilemmas> A conflict between an organizations economic performance(measured by revenues, costs and profits) and its social performance( stated in terms of obligations to persons both inside and outside theorganization)
An ethical dilemma in environmental protection
An ethical dilemma in foreign bribery
Characteristics of ethical problems in management
> Most ethical decisions have extended consequences> Most ethical decisions have multiple alternatives
> Most ethical decisions have mixed outcomes
> Most ethical decisions have uncertain consequences
> Most ethical decisions have personal implications
-
8/7/2019 BECG - MBA (2011) Slides
28/107
Examples of ethical problems in management Pricing level Advertising
Product promotions Working conditions Consumer service Workforce reduction Environmental pollution
Community relations Supplier relations
Ethical Issues in Strategic Management / Top Management
Developing vision statement
> Leadership and senior managers remuneration> Implementing strategic changes
> Changes in organization ownershipExchange offersShare repurchase
Going privateLeveraged buy-outs Cont.
-
8/7/2019 BECG - MBA (2011) Slides
29/107
Merger and acquisitionRestructuringCorporate raidersP
oison pills
Global strategic operations
Ethical Decision Making Model
Step 1 Step 2 Step 3 Step 4
Evaluate decision Evaluate decision Establish moral Engage in ethicalfrom ethical from ethical intent behavior
standpoint standpoint in the
Identity affected context of moralstakeholders principles
Are rights ofstakeholdersviolated?
-
8/7/2019 BECG - MBA (2011) Slides
30/107
Principles underlying an ethical approach to strategic management> Stakeholders theory, strategy and ethics> Loyalty and psychological contract> Cultural relativism
Ethical issues in Marketing Management
Empirical evidence (Burke, Maddock & Rose) - The Study titledattitude of business ethics with 498 senior managers & 165 junior managers in US, focused on
- Conduct of business
- Employee relations
- Social responsibility- Environmental concern
Ethical Issues in Marketing Strategy
Ethical issues in Marketing mix - Mc Carthys 4 Ps
> Product
> Price
> Place
> Promotion &
Three service aspects of marketing mix
> People, physical evidence and process
-
8/7/2019 BECG - MBA (2011) Slides
31/107
Marketing research> The right to be informed of critical research results
- Using market research guise to sell products
- Use of research to obtain information for sales leads or as anopportunity to pitch a sales information
- Telephones or personal interviews mail surveys used to generatesales leads or to solicit sales
> Issues involving the rights of the researcher
>Protection against improper solicitation of proposals
>Misrepresentations of findings
>Excessive requests
> Reneging on promises
> Availability of funds
> Right to expect ethical subject behavior
-
8/7/2019 BECG - MBA (2011) Slides
32/107
Ethical issues in Operation management
Role of Operations Manager
PRODUCTION
Job responsibilities> Receiving raw materials
> Storing them in safe and secure environment
> Supervising the movement of materials in the in the whole plant
> Ensuring that the employees produce the right quality
> Scheduling errors
> Maintaining and established quality standards
> Negotiating with suppliers and customers
> Packaging the products
> Distributing the products> Ensuring proper health and safety for the workers in work environment
> Assessing the standard time values used in the manufacturing processes
> Initiating employee suggestion schemes
> Taking decisions on operational and quality issues
Cont.
-
8/7/2019 BECG - MBA (2011) Slides
33/107
SERVICE
Job responsibilities
> Receiving incoming calls and mails
> Storing the documents in relevance
> Prioritizing the jobs according to their importance
> Motivating quality performers among staff and giving directions to the staff
> Negotiating with suppliers
> Dealing with inquiries
> Taking decisions on the policies that have to be implemented
> Ensuring the health and safety of the workers
> Maintaining computers and office equipment
> Taking decisions on operational issues
> Ensuring quality management
Other activities of operation managers include
Total quality management
Forecasting
Improving technology
-
8/7/2019 BECG - MBA (2011) Slides
34/107
Ethical issues at the workplace Drug and alcohol Employee thefts Conflicts of interest
Quality control Discrimination Misuse of propriety information Fiddling of expense accounts Plant closure and lay-off Misuse of company assets Environmental pollution
Misuse of other information Industrial espionage Inaccuracies in documents and records Receiving excess gifts and entertainment False or misleading advertisements Receiving back handers
Insider trading Relations with local communities Antitrust issues Bribery Political contribution and activities Improper relationship with local government personnel Improper relationship with national government personnel
Inaccurate charging to government bodies
-
8/7/2019 BECG - MBA (2011) Slides
35/107
Quality control - ethical dilemmas- Managerial roles in Quality Control
An analytical framework for ethical problems in Operation Management, like
decisions on
Employing a person from a competitor
Bidding for a contract with competitors to fix prices
Six factors involve ethical decision making. If more than one factorsaffects the dilemmas then the ethical intensity increases. Ethical intensity isthe degree of importance given to an ethical issue. The six factors involvedin decision making are
Magnitude of consequence
Probability of the effect
Social agreement
Time interval
Proximity
Concentration of effect
Analysis of ethical issues at workplace
-
8/7/2019 BECG - MBA (2011) Slides
36/107
Ethical issues in Purchase Management
Role ofPurchase Manager
Role of purchasing departments
To ensure the availability of proper quantity and quality of materials for smoothfunctioning of the production department.
To procure materials at reasonably low cost ( without compromising on quality) forthe company.
To ensure supply of quality materials. To be aware of various substitute materials available in the market, their prices andutility to the organization.
To pass on information regarding purchasing to other departments of the companysuch as design, production, sales, finance etc.
To study possible substitutes for raw materials. To ensure continuity of suppliers of raw materials.
To identify and develop new vendors and maintain good relationship with existingvendors
To develop good procedures and systems for purchase departments
To coordinate with other functional departments, to achieve continuity of information
flow and integration between different departments to the extent possible
-
8/7/2019 BECG - MBA (2011) Slides
37/107
Ethical issues in purchasing
Research conducted by Browning and Zabriskie (1983) showed thatpurchasing personnel adopt high ethical standards. Another studyconducted by Farker and Janson (1990) also corroborated this view.
The conclusions drawn from the studies found that
Purchasing personnel are ethical wile dealing with sales people
Actions of buyers are more ethical than their beliefs, and
Young buyers were more ethical than their older counter-parts
In another study conducted by Rudelius and Buchholz (1979)revealed that most purchase managers were concerned aboutaccepting gifts. Therefore, wanted guidance from top management.
However, most purchasing managers counter the following unethical.
Accepting free gifts
Deceiving suppliers
Showing favoritism to suppliers
Revealing confidential information
-
8/7/2019 BECG - MBA (2011) Slides
38/107
Principles and standards of purchasing practice
The followings are the principals and standards of purchasing practice asestablished by National Association ofPurchasing Management
Avoid the intent and appearance of unethical or compromising practices inrelationships, actions and communications.
Demonstrate loyalty to the employer by diligently following the lawful instructionsof the employer, using reasonable care only and the authority granted.
Refrain from any private business or professional activity that would create aconflict between personal interests and the interest of the employer.
Refrain from soliciting or accepting money, loans, credits, or prejudicial discounts,and from accepting gifts, entertainment, favors or services, from present or potentialsuppliers that might influence, or appear to influence, purchasing decisions.
Handle confidential or proprietary information belonging to employers or suppliers
with due care and proper consideration of ethical and legal ramifications andgovernmental regulations
Promote positive suppliers relationships through courtesy and impartiality in allphases of purchasing cycle.
Refrain from reciprocal agreement that restrain competition.
Cont.
-
8/7/2019 BECG - MBA (2011) Slides
39/107
Know and obey the letter and spirit of the law governing the purchasing function andremain alert to the legal ramifications of purchasing decisions.
Encourage all segments of society to participate by demonstrating support for small,small disadvantaged, women-owned, and disabled veteran-owned businesses.
Discourage purchasing involvement in employer-sponsored programs of personalpurchases that are business-related.
Enhance the proficiency and stature of the purchasing profession by acquiring andmaintaining current technical knowledge and the highest standard of ethical behavior.
Conduct International purchasing in accordance with the laws, customs and
practices of foreign countries, consistent with US laws, your organization policies andthese ethical standards and guidelines.
Empirical evidence for the ethical issues in Global Buyer - SuppliersRelationships
The research objectives were
The factors that impact the level unethical activities
Whether buyers and their foreign suppliers follow the same code of ethics for judgingbusiness transactions.
Impact of that the level of unethical activities has on effectiveness of the buyer-suppliers relationships
Cont.
-
8/7/2019 BECG - MBA (2011) Slides
40/107
-
8/7/2019 BECG - MBA (2011) Slides
41/107
Ethical issues in Human Resource ManagementNature of employment contract
Hiring / Recruitment - The principle of ethical selection
Discrimination> Ageism
> Credentials
> Testing
Working condition
Remuneration Ethical remuneration - Need, Effort and Ability
> A person with pressing needs do not automatically qualify togreater remuneration
> Mere possession of superior skills and abilities do not
determine the remuneration.
> Employees who work hard to perform a task need not berewarded more than those who do it effortlessly.
> A person who works hard but fails to achieve results, deservesno reward but sympathy
-
8/7/2019 BECG - MBA (2011) Slides
42/107
Ethical Remuneration - Seniority and Loyalty
Ethics in retrenchment Firing
Downsizing of workforceEthical issues in Finance
Importance of financial statements> Determining the key elements of the business like the objectives of
the firm and see how they are defined and measured.
> Making sure that the funds are allocated to different activities on thebasis of their importance.
> Frame rules that have a positive effect on business activities. It isimportant to ensure that each project or department is allotted its fair share offunds and that projected earning of the project or department are in accordance
with the funds allocated to it. Ethical issues in mergers and acquisitions
> Hostile takeovers - POISON PILLS
GREENMAIL
GOLDEN PARACHUTEP
EOP
LEP
ILLSAND BAG
M b
-
8/7/2019 BECG - MBA (2011) Slides
43/107
> Management buyouts
Ethical issues at Top Management Insider trading
Money laundering
Ethics in Financial markets and investors protection
Ethical responsibility towards competitors and business partners
Ethical issues in accounting and other functions
The importance of financial statements
> Fictitious revenues
> Fraudulent timing differences
> Concealed liabilities and expenses
> Important or fraudulent disclosures or omissions
> Fraudulent asset valuations Types of financial accounts
> Financial accounts
> Internal management accounts
Importance of transparency in disclosure of accounts
R l f t t
-
8/7/2019 BECG - MBA (2011) Slides
44/107
Role of accountants
> Accountants employed by an organization
- Financial accountant
- Management accountant> Accountants in professional practice
- The auditor
- Related services
> The rules regulating the professional conduct of accountants
- The ethical audit> Ethical issues in information technology
- The information technology act
> The importance of software audit
Ethical dilemmas at workplace- Power, trust and authority
- Secrecy, confidentiality and loyalty
> Resolving dilemmas
- Manager
- Employees
-
8/7/2019 BECG - MBA (2011) Slides
45/107
Complexity of Ethical Issues
Managerial ethics and individual decisions
Ethical analysis and a bribery case
Ethical analysis and ethical dilemmas
> Pricing of checking accounting practices
> Exaggerated or misleading claims in Advertising
> Misuse of Frequent Flyer discounts and trips
> Working conditions in a Manufacturing plant
> Customer service and declining product quality
> Workforce reduction
> Property tax reduction
> Environmental pollution
Solving ethical dilemmas
-
8/7/2019 BECG - MBA (2011) Slides
46/107
L d hi t l th t t lt
-
8/7/2019 BECG - MBA (2011) Slides
47/107
Leadership styles that get result
Basis Coercive Authoritative Affiliative Democratic Pacesetting Coaching
Theleaders Demands Mobilizes Creates harmony Forges Set high standards Develops
modus immediate people toward and builds consensus forperformance people foroperandi compliance a vision emotional bonds through the future
Thestylein Do what Come with People come What do you Do as I do now Try thisaphrase I tell you me first think?
Underlying Drive to Self-confidence Empathy Collaboration, Conscientiousness Developingemotional achieve, empathy, change building team leadership drive to achieve others
and initiative, catalyst relationship communication initiative empathyintelligenceself-control self-awarenesscompeten-cies
When the In a crisis When changes To heal riftsin To build buy-in To get quick To helpanstyle works to kick-start requirea new a team or to or consensus, or results from a employee
best a turnaround vision, or when motivatepeople to get input highly motivated improveor problem a cleardirection during stressful from valuable and competent performanceemployees is needed circumstances employees team ordevelop
long -termstrength
Overall Negative Most strongly Positive Positive Negative PositiveImpact on Positive
climate
-
8/7/2019 BECG - MBA (2011) Slides
48/107
Understanding team work and Leadership - The use of teamin organizations has increased because team performs betterthan traditional work groups
The use of teams have resulted
Improved organizational performance
Employee benefits
Reduced costs Organizational enhancement
The leader acts as facilitator and coach, who helps team
members make effective decisions.
How culture constraints or enhances leadership
Superleadership
Transformational leadership
-
8/7/2019 BECG - MBA (2011) Slides
49/107
Essential leadership skills> Problem solving> Decision making
Visionary Leaders
Jack Welch - Ex chairman & CEO, GEAkio Morita - Founder - Chairman Sony Corp
Ted Turner - TurnerBroadcasting Systems
Micheal Dell - Dell Computers
Narayan Murthy - Chairman, Infosys
Corporate Governance (CG)
-
8/7/2019 BECG - MBA (2011) Slides
50/107
Corporate Governance (CG)- History of corporate forms and models> An integral part of capitalism is the business corporation which was
developed from the sixteenth century joint stock company and acquired its
current characteristics during nineteenth century.> It is known as corporation in USA and public limited company in India.> The corporation / company consists of shareholders who contributecapital and own the corporation but whose liability for the act is limited totheir contribution to the share capital of the company
> The law allows anyone the privilege of forming a company, public orprivate for any purpose
Company Form of organization conducive to efficiency> The law enables the organization of economic activity, be it production,
trade or provision of services with limited liability through the establishment
of a company> It has the same rights to buy and sell and make contracts as a personwould have> This is an improvement over the propriety and partnership form ofbusiness organization
> If the firm has wider participation it enjoys the benefit of access toca ital market
-
8/7/2019 BECG - MBA (2011) Slides
51/107
CG An overviewIssues in corporate Governance
- Ethical issues
- Efficiency issues- Accountability issues
The growing scale of corporation and their style of functioning
have raised many issues that must be addressed by corporategovernance. Some of these are:
The growth of private companies
The magnitude and complexity of corporate groups
Importance of institutional investors
Rise in hostile activities of predators (take over) Insider trading
Litigation against directors
Needs for restructuring of board
Changes in auditing practice
-
8/7/2019 BECG - MBA (2011) Slides
52/107
Definition of corporate governance- Corporate governance is the system by which business
corporations are directed and controlled
Difference between corporation and corporate governance
CORPORATE GOVERNANCE CORPORATE MANAGEMENT
1.External focus 1. Internal focus
2.Governance assumes an open system 2. Management assumes a closed
system
3.Strategy oriented 3. Task Oriented
4.Concerned with where the company is 4. Concerned with getting the
going company there
Theories of corporate governance
The first theory of corporate governance (theory of McGregor)
The stewardship theory (theory of Donanldson and Davis)
M G Th Y f h b h i
-
8/7/2019 BECG - MBA (2011) Slides
53/107
McGregor Theory Y of human behavior- The management of a corporation is responsible for productive
use of its resources in best possible way to accomplish corporategoals.- Employees by nature are not averse to behaving in accordance
to corporation requirements- Every employees has an in-built motivation to behave in way
that will help the corporation to achieve its objectives
Some of the reasons put forth by critics of stewardship theory
Separation of ownership from management There is no single shareholder who holds a major chunk of equitycapital
The inability of small investors to directly monitor the activities ofthe corporation in which they have invested.
Control over the corporation changing from the owners to themanagement
Divergent interests of the owners and management
-
8/7/2019 BECG - MBA (2011) Slides
54/107
Nature and evolution of corporate governance
-
8/7/2019 BECG - MBA (2011) Slides
55/107
Nature and evolution of corporate governance
Global and National Perspectives Global CG Models
Anglo- American Model Corporate Structure
Board of Directors Elect(Supervisors) Shareholders
(Owners)
Appoints and supervises Own
Creditors
Officers Lien( Managers)
Stakeholders
Manage Hold stake
Structural frameworkCompany
Legal System
-
8/7/2019 BECG - MBA (2011) Slides
56/107
German Model / French Model (modified)Corporate structure
Supervisory Board Appoint 1/2
Appoints Reports toandSupervise
Employees andLabor unionsManaging Board
(Including Labor relations)
Independently runsday to day
Appoint 1/2Shareholders
(own)C
ompany own
Japanese model of corporate governance
-
8/7/2019 BECG - MBA (2011) Slides
57/107
Japanese model of corporate governanceCorporate structure
Supervisory Board Appoint(including president) Shareholder own
Ratifies Consults
President
Consults Monitors and actin emergencies
ProvideMangers
Executive Management
(P
rimary board of Directors) Banks
ManagesLoans
Company
-
8/7/2019 BECG - MBA (2011) Slides
58/107
Evolution of Corporate governance
Many factors have contributed for the evolution of corporate governance
The responsibility for ensuring good corporate conduct shifted fromGovernment to free market economy
Active participation of individual and institutional investors
Increasing competition in global economy.
SEBI has taken various steps to strengthen corporate governance in India.Some of these steps are
Strengthen disclosure norms for IPOs following the recommendations ofthe committee set up by SEBI
Providing information in directors report for utilization of funds andvariations between projected and actual use of funds according to therequirement of Companies Act; inclusion cash flow and fund flow statementin annual reports;
Declaration of quarterly results
Cont.
-
8/7/2019 BECG - MBA (2011) Slides
59/107
Mandatory appointment of compliance officer for monitoring the sharetransfer process and ensuring compliance with various rules and
regulations Timely disclosure of material and price sensitive information including
details of all material events having a bearing on the performance ofthe company
Dispatch one copy of complete balance sheet to every household
and abridged balance sheet to all shareholders Issue of guidelines for preferential allotment ay market related prices;
and
Issue regulations providing for a fair and transparent framework fortakeovers and substantial acquisitions
Claims of various stakeholders
-
8/7/2019 BECG - MBA (2011) Slides
60/107
Claims of various stakeholders
Stakeholders may be Any group of people who have a stake in the business
Those who are vital to the survival and success of theorganization
Any group that is affected by the activities of the organization
Based on the relationship with the organization stakeholders can
be categorized as:
Internal stakeholders
External stakeholders
Internal stakeholders are> Shareholders
> Employees
> Management
Share holders
-
8/7/2019 BECG - MBA (2011) Slides
61/107
Share holders
> Shareholders responsibility
Maintaining good relationships with top management
Exercising their voting rights
Similarly, the organization must honor the trust of the shareholders.Therefore, the responsibilities of the organization towards theshareholders are:
> Managing company efficiently in order to secure a fair andcompetitive return on the owners investment
> Disclosing relevant information to shareholders, subject only tolegal requirements and competitive constraints.
> Conserving, protecting and increasing the shareholders assets.
> Respecting the shareholders requests, suggestions, complaints,and formal resolutions.
Employees
> Responsibility of Employees and Employers
-
8/7/2019 BECG - MBA (2011) Slides
62/107
-
8/7/2019 BECG - MBA (2011) Slides
63/107
External stakeholders> Consumers> Suppliers> Creditors> Competitors
Responsibility of business corporations towards consumers are:5 Rs
Right Quality
Right quantity
Right time
Right place
Right Price
Responsibility towards suppliers
Seek fairness and truthfulness in all activities, including pricing andlicensing. Cont.
-
8/7/2019 BECG - MBA (2011) Slides
64/107
Ensure that business activities are free from coercion and unnecessarylitigation.
Foster long-term stability in the supplier relationship in return for value,
quality, competitiveness and reliability Share information with suppliers and integrate them in the planningprocesses;
Pay suppliers on time and in accordance with the agreed terms oftrade; and
Seek, encourage and prefer suppliers and sub-contractors whoseemployment practices respect human dignity.
Creditors
Government
Community
-
8/7/2019 BECG - MBA (2011) Slides
65/107
A firms responsibility towards society include:
Respecting human rights and democratic values.
Supporting public policies and practices that promote humandevelopment through harmonious relations between businessand other segments of society.
Collaborating with such activities that aim at improving thestandards of health, education, workplace safety and economic
well-being. Promoting and stimulating sustainable development andplaying a leading role in preserving and enhancing the physicalenvironment and conserving the earths resources.
Supporting peace, security, diversity and social integration;
respecting the integrity of local cultures Encouraging charitable donations, educational and culturalcontributions and employee participation in community and civicaffairs
Why Governance? - Change in eighties
-
8/7/2019 BECG - MBA (2011) Slides
66/107
Why Governance? Change in eighties> Deregulations of financial markets contributed to finance driven governance> Merger activity became an important source of profits for the finance sector> Towards the end of 80s there were no underline pressures or incentives
> Volatility was generated endogenously> Takeover activity itself became a powerful tool for speculation> Speculators invested in stocks of takeover target for higher earnings> Valuation was not based on future earning ability, but on break up value,
dismember parts and sold off.
Self regulatory codes International Capital Markets Groups (1992)proposed the following benefits of self-regulation:
In self-regulation, it is possible to impose ethical standards , which gobeyond those, which can be imposed by statutory legislation. Self regulators are directly accountable to the members of their group, as
self regulatory systems have in built motivation to regulate for effectiveness andleast interference. Selfregulation operates in an environment where there is a willingness toaccept regulations formulated from within for the common good of the group. Self-regulators being part of the group understand the issues facing thegroup more intimately and are therefore more sensitive to the needs of entire
group. Cont.
-
8/7/2019 BECG - MBA (2011) Slides
67/107
The regulated have an opportunity to participate at all levels of the self-regulatory process. Thus makes it easier for them to appreciate andaccept new regulations
Self regulation has a built-in systems of checks and balances as theregulated see it as the regulated see it as their duty to expose non-compliance.
Self-regulators can identify complex regulatory problems at an earlystage and develop suitable solutions before these problems reach a stagewhere they can disrupt group operations.
Self regulators are more comprehensive than official regulations andare easier to operate and implement.
Reports of Committees on Corporate Governance
Cadbury Committee Report
Greenbury report
Hampel report
OECD Report
Cadbury Committee Report Committee set up in May 1991
-
8/7/2019 BECG - MBA (2011) Slides
68/107
Cadbury Committee Report Committee set up in May 1991The recommendations made by the Cadbury Committee on 27th May 1992are as follows:
Decision making power should not be vested in a single person, i.e. there
should be separation of roles of chairman and CEO.
Non-executive directors should act independently while giving theirjudgment on issues of strategy, performance, allocation like resources anddesigning codes of conduct.
A majority of directors should be independent non-executive directors ,i.e. they should not have any financial interests in the company.
The term of a director should not exceed three years. This can beextended only with the prior approval of the shareholders.
There should be full transparency in matters relating to directorsemoluments . There should be a judicious mix of salary and performancerelated pay. A remuneration committee made up wholly or largely to non-executivedirectors, should decide on the pay of the executive directors.
The interim company report should give the balance sheet information
duly reviewed by the auditor.
The pension funds should be managed distinct from the company
-
8/7/2019 BECG - MBA (2011) Slides
69/107
g y
There should be a professional and objective relationship betweenthe board and the executives.
Information regarding the audit fee should be made public and
there should be regular rotation of auditorsGreenbury Report (1995) showed concern about Directorsremuneration.
Hampel Report (1998) - Made a review of Cadbury report.Recommended no need to revolutionize the CG systems in UK. Itaimed to harmonize the Cadbury and Greenbury recommendations
OECD Report On 27th-28thApril 98, OECD Ministers askedOECD to develop a set of Corporate Governance principles that wouldbe useful for its members and non-members countries. The principlesby OECD fall into five broad areas:
The rights of the shareholders The equitable treatment to shareholders The role of stakeholders Disclosure and transparency
The responsibilities of board
-
8/7/2019 BECG - MBA (2011) Slides
70/107
.Sarbanes Oxley Act (SOX Act.) July 2002
Adopted for changes virtually in every areas of CorporateGovernance particularly in areas of
Auditor independence Conflicts of interest
Corporate responsibility
Enhanced financial disclosures and penalties
The aim of the SOX Act was to clean up the auditing process. It sets up a
Public Company Accounting Oversight Board to oversee auditors
> It makes it unlawful for accounting firms to offer a number of other
kind of services to companies whose accounts they audit> It demands that directors sitting on corporate audit committees
(who are responsible for choosing the firms auditors) be independent.
Internal Corporate Governance Mechanism Board
-
8/7/2019 BECG - MBA (2011) Slides
71/107
Internal Corporate Governance Mechanism Board
Style and structure
Types of Directors
Executive directors
Non-executive directors
Nominee directors
Representative directors
Alternative directors
Shadow directors
Associate directors
Types ofBoard structure
All- Executive board
Majority executive board
Majority outside board
Two tier Supervisory board
Governance
-
8/7/2019 BECG - MBA (2011) Slides
72/107
Governance
Board
Management
All- ExecutiveBoard
-
8/7/2019 BECG - MBA (2011) Slides
73/107
G
-
8/7/2019 BECG - MBA (2011) Slides
74/107
Governance
Board
Management
Majority outside board
Two-tier Supervisory Board
-
8/7/2019 BECG - MBA (2011) Slides
75/107
p y
Advisory Boards
Issues in designing a board The board size
The role of chairman and the chief executive
Duality in subsidiary company board
Board Styles
Rubber stamps boards
Representative boards
Country club boards
P
rofessional boardFunctional Committees of the board
Audit committee
Remuneration committee
Nomination committee
-
8/7/2019 BECG - MBA (2011) Slides
76/107
HIGH
Country Club Professional board
board
Concern forrelationsamong
Directors
Rubber stamp Representativeboard board
LOW Commitment to HIGHeffective communication
-
8/7/2019 BECG - MBA (2011) Slides
77/107
Corporate governance Roles and responsibilities
of directors (Code of conduct)
Role of directors
The Performance role
The conformance role
Responsibilities of directors common responsibilities worldover
Responsibilities to shareholders
Obligation to maintain honesty and integrity
Legal aspects and liabilities of directors
Misrepresentations in offer documents and annual accounts
Failure to refund subscription money to investors
Contravention of law
D ti f di t
-
8/7/2019 BECG - MBA (2011) Slides
78/107
Duties of directors
Exercise care in the discharge of functions as directors Attend board meetings and devote sufficient time and attention tothe affairs of the company
Not to be negligent and not to commit or let others commit tort-liable acts
Act in the best interest of the company and its stockholders andcustomers Not to misuse power
Protect interests of creditors
Maintain confidentiality
Not to make secret profits and make good loss, if accrued due tobreach of duty, of negligence
Not to exercise powers for collateral purpose
Not to waste company assets
The role of the chairman
-
8/7/2019 BECG - MBA (2011) Slides
79/107
The role of the chairman> Relationship with the CEO> Relationships with executive directors
> Relationships with non-executive directorsFunctions of the chairman
To set standards and ensure that policies and practices are in place
To ensure that the directors make good decisions. To make sure that directors are continuously upgraded to the levelsrequired by investors to meet current and future needs of the company.
To act decisively in times of crisis
To act as a representative of the company
Role of CEO
Relation with the chairman
Relation with directors
-
8/7/2019 BECG - MBA (2011) Slides
80/107
Functions of the board
-
8/7/2019 BECG - MBA (2011) Slides
81/107
> Strategic role of the board
Systematic level strategy
Structural and portfolio strategy Implementation strategy
> Policy making role of the board
> Monitoring and supervisory roles
Whistle blowers policy
The recommendation of the Committee on CG (2003) thatpersonnel who observe an unethical or improper practice shouldhave access to the audit committee to report is likely to haverestraining effect on management
A key provision of SOX Act. is whistle blowing. Board auditcommittees should provide employees with an anonymous andconfidential way to lodge complaints about suspected financialshenanigans in their midst. Employees have to be informedabout how the system works.
External Corporate Governance Mechanism
-
8/7/2019 BECG - MBA (2011) Slides
82/107
Regulators - Ministry of Corporate Affairs, Government of IndiaMinistrys vision To be a leader and partner in initiatives ofcorporate reforms, good governance, and enlightened regulation witha view to promote and facilitate effective corporate functioning,investors protection and inclusive growth; empower the Indiancitizen and have a global footprint.
Initiatives by Ministry of Corporate Affairs LAW - Limited liability and partnership Act
- Accounting standard- Amendment to Acts governing professionals- Comprehensive revision of Companies Act, 1956
INSTITUTION AND SYSTEMS BUILDING- Indian Institute of Corporate Affairs- Competition commission of India- National Foundation of Corporate Governance- Streamlining Field Organization
PEOPLE ISSUES
-
8/7/2019 BECG - MBA (2011) Slides
83/107
PEOPLE ISSUES
- Rebuilding Indian Corporate law service
- Empowering Investors and citizen
Market Regulator Security and Exchange Board of India (SEBI)
SEBI has laid down that the board set up a remuneration committeeto determine on their behalf and on behalf on the shareholders withagreed terms, the company s policy on specific packages for
executive directors. It is important for shareholders to be informed of the remuneration of
directors of the company
SEBI committee on CG (2003) made a mandatory recommendationthat compensation of non-executive directors as well as independentdirectors be fixed by the board and approved by shareholders
Issue of stock options to non-executive directors as well asindependent directors in any year and in total should be limited andshould vest only one year after retirement
Gate keepers All board of directors are prisoners of their
-
8/7/2019 BECG - MBA (2011) Slides
84/107
Gate keepers All board of directors are prisoners of theirgate keepers and only if the boards agents properly adviceand warn it, the board can function efficiently?
- John KofeeWho are these gate keepers?
Third parties (intermediaries)
> whos cooperation if of essential
> who can prevent misconduct by withholding cooperation
Example
Accountants and lawyers
Bankers
Rating agencies
Physician, ISPs, Bartenders, Gun dealers
Role of Gatekeepers in CG - gatekeepers
-
8/7/2019 BECG - MBA (2011) Slides
85/107
Provide information and certification for directors and investors
Have ability to detect and deter misconduct
Are relied on effective CG
Recent scandals World com, Enron, Satyam due to multiple failure of
gatekeepers
Responsibility of gatekeepers gatekeepers role Is largely a by-product of providing a for free service
Imposes a cost on gatekeepers institution and the economy
Conclusion Each intermediary institution is different, no one-size-fits-all answer is
possible Moral responsibilities are linked to legal responsibility / liability
The appropriate moral and legal principle is what investor wouldchoice
Answer to cost-effective deterrence
-
8/7/2019 BECG - MBA (2011) Slides
86/107
Involvement of Institutional Investors PRO
-
8/7/2019 BECG - MBA (2011) Slides
87/107
Have significant stake in companies
Ability to exercise control on promoters management and prevent abuse
Have assess to information and better monitoring capabilities
Significant positive stock market performance and corporate governance
Research shows companies and countries weak in corporate governancesuffer larger collapses when hit by greater volatility
Major influence in attracting FDI
Involvement of Institutional Investors CON
Investment objectives and compensation system discourage participation Conflict of interest with primary fiduciary responsibility to own investors
and beneficiaries
Investors like MFs have short term performance measurement whichworks against active monitoring
Conclusion Active role should ensure
-
8/7/2019 BECG - MBA (2011) Slides
88/107
Board members have adequate experience and are trulyindependent
Executive remuneration, particularly for family members is notexcessive
Early warning signals are detected from the wealth of informationmade available to shareholders
Companys funds are not diverted to non-core activities or for
benefit to related parties Institutional investors should lead share holders in demanding
corrective action, where such action is warranted
Corporate Raiders create an environment of threat of take over andforce the target company to buy back shares at premium i.e. green mail
technique. These are countered by - Poison Pills
- Golden Parachute
- People Pills
- Sand bag
Corporate Governance Ratings
-
8/7/2019 BECG - MBA (2011) Slides
89/107
Corporate Governance Ratings
At the instances of SEBI two credit rating agencies (CRISIL and ICRA)have launched a unique model for rating CG in an enterprise.
The index subsumes the ability/track record of an enterprise in wealthcreation, wealth management and wealth sharing
The governance audit comprises a special comprehensive audit on thecorporate governances and business practices of the company
The report of governance audit will help to measure how best a
company is governed: excellent - complying with mandatory governancerequirements or below average or badly governed or misgovernedcompany
The audit is done mainly on the basis of disclosures keeping in view theinformation needs of investors , employees, customers and general
public. However, the committee on CG (2003) was of the view that corporate
governance ratings should not be mandatory
The checklist of disclosures and compliance compiled by
-
8/7/2019 BECG - MBA (2011) Slides
90/107
governance audit in such areas: Composition of board
Board procedures
Appointment of new director
Audit committee
Remuneration committee
Shareholders committee
Previous general meetings and postal ballots Management discussion and analysis report
Means of communication
Rating of debts / deposits
Related party transactions
Penalties / enquiries by any statutory authority
Information needs shareholders, customers, employees, community
Internal control and management assessment thereto
Statutory auditors report
Corporate Governance In India:
-
8/7/2019 BECG - MBA (2011) Slides
91/107
Corporate Governance In India:
Corporate form in India 50s to 90s
Development of CG in India during 90s and 2000s
Various reports on CG
CII Report under chairmanship of Rahul Bajaj Kumar Mangalam Birla Committee Report
Narayan Murthy Report
Naresh Chandra Report
JJ Irani Committee report
CII Report - A task force was set up in mid 1996 under theleadership of Rahul Bajaj
Recommendations made by CII Committee are:1 Th f ll b d h ld t i i f i ti f bl t
-
8/7/2019 BECG - MBA (2011) Slides
92/107
1. The full board should meet a minimum of six times a year, preferably atan interval of two months, which should have agenda at least for halfdays discussion
2. Any listed company with 100 crore or more turnover, should haveprofessionally competent non-executive, independent directors, whoshould constitute at least 30% of the board if the chairman is a non-executive director or at least 50% if the chairman and managing director(MD) is the same person.
3. No single person should hold directorships in more than ten companies.This ceiling excludes directorships in subsidiaries (holding of 50% ormore) or associate companies (stake between 25% to 50%)
4. Non-executive directors need to play material role in corporate decisionmaking , maximizing long term shareholder value and become activeparticipants of the board. These excludes those who joined board asexperts from technology and science fields.
5. To secure better effort from non-executive directors, companies shouldpay a commission over and above sitting fees for professional inputs. Thepresent commission is 1% if there is a MD and 3% where there is no MDis sufficient
-
8/7/2019 BECG - MBA (2011) Slides
93/107
> Default in payment of interest or non-payment of the principal on any
-
8/7/2019 BECG - MBA (2011) Slides
94/107
Default in payment of interest or non payment of the principal on anypublic deposit, and/or to any secured creditor or financial institution
> Defaults such as non-payment of inter-corporate deposits by or to the
company , or materially substantial non-payment of goods sold by thecompany
> Any issue which involves possible public or product liability claims ofsubstantial nature, including judgment or any order which might passedstrictures on conduct of the company or taken an adverse view regardinganother enterprise that can have negative implications for the company
> Details of any joint venture or collaboration
> Transactions that involve substantial payment towards goodwill, brandequity , or intellectual property
> Recruitment and remuneration of senior officers just below the boardlevel, including appointment or removal of the chief financial officer and thecompany secretary
> Labor problems and their proposed solutions
> Quarterly details of foreign exchange exposure and the steps taken bymanagement to limit the risks of adverse exchange rate movement, ifmaterial
8. Listed companies with either a turnover of Rs.100 crore or a paid up
capital of Rs 20 crore should set up audit committee within two years
-
8/7/2019 BECG - MBA (2011) Slides
95/107
capital of Rs.20 crore should set up audit committee within two years
9. Under Additional shareholders Information , listed companies shouldgive data on high and low monthly averages of share prices in a major
stock exchange where the company is listed for the reporting year; greaterdetails of business segments, up to 10% of turnover, giving share in salesrevenue, review of operations, analysis of markets and future prospects
10. Consolidation of group accounts should be optional and subject to financialinstitutions allowing Companies to leverage on the basis of groups assetsand the income tax department using the group concept in assessingcorporate income tax
11. Major stock exchanges should gradually insist upon a compliancecertificate , signed by CEO and CFO which clearly states that, themanagement is responsible for the preparation, integrity and fairpresentation of the financial statements and other information in the annual
report, and which also suggest that the company will continue in thebusiness in the following year; the accounting policies and principlesconfirm to standard practice, and where they do not, full disclosure hasbeen made of any material departures; the board has overseen thecompanys systems of internal accounting and administrative control
systems either directly or through audit committee (100 crore T.O or 20P
C)
12. For all companies with a paid up capital of Rs.20 crore or more,
the quality and quantity of disclosure A companys GDR issue
-
8/7/2019 BECG - MBA (2011) Slides
96/107
the quality and quantity of disclosure . A company s GDR issue
should be the norm for any domestic issue
13. Government must allow far greater funding to the corporate sector
against the security of shares and other paper14 It should be desirable for financial institutions as pure creditors to re- write
theirs covenants to eliminate having nominee directors except in events ofserious and systematic debt default and in cases of debtor company notproviding six monthly or quarterly operational data to the concerned
financial institution15 If the company goes to more than one credit rating agency, then it must
divulge in the prospectus and issue document, the rating of all theagencies that did such an exercise
16 Companies that default on fixed deposits should not be permitted to accept
further deposits and make inter-corporate loans or investments until thedefault is made good , and declare dividends only after the default is madegood
17 Reduction in number of companies where there are nominee directors.Many financial institutions have argued that they are in too manycompanies on the board, where only few operate their tasks properly.
Kumar Managalam Birla (KMB) headed the committee appointed bySEBI on May 7 1999 the committee was formed to promote and raise the
-
8/7/2019 BECG - MBA (2011) Slides
97/107
SEBI on May 7, 1999. the committee was formed to promote and raise thestandard of CG.
The objective of the K M B committee was to> Suggest suitable amendments to the listing agreement executed by the
stock exchanges with the Companies and any other measures to improve thestandards of corporate governance in the listed Companies, in areas such ascontinuous disclosure of material information both financial, manner and
frequency of such disclosures, responsibilities of independent and outsidedirectors.> Draft a code of corporate best practices> Suggest safeguards to be instituted within the Companies to deal with
insider information and insider trading
Recommendation made by KMB Committee are The board should have an optimum combination of Executive and Non-Executive directors
A qualified Audit Committee should be set up by the board or company
The board should set up a Remuneration Committee Cont.
The board should set up a committee under the chairmanship of non-
-
8/7/2019 BECG - MBA (2011) Slides
98/107
executive director to look into shareholders issues.
B
oard should delegate power to registrars or share transfer agents toexpedite the process of share transfers.
The CG section of Annual Report should make disclosures on issuesrelated to stakeholders
Board meetings should be held at least four times in a year
A s part of disclosure, apart from Directors report, managementdiscussion and analysis report should be part of annual report issued to
the shareholders.
All company related information like quarterly reports should be madeavailable in website for analysis
Cont.
There should be separate section of CG in the Annual report, with details
-
8/7/2019 BECG - MBA (2011) Slides
99/107
p p ,on level of by the compliance by the Company. Reason for non-compliance if any must be mentioned
No Director should be a member more than 10 committee or act asChairman of more than 5 Companies. It is mandatory to inform the positionhe / she occupies.
The company should provide brief resume, expertise in specific functionalareas and names of the companies in which the person holds Directorship.
Disclosure to be made by board by the management relating to allmaterial, financial and commercial transactions where they have personal
interest.
The half yearly disclosure of financial performance including summary ofthe significant events in last six months should be sent to eachshareholders. Cont.
The financial institutions should under normal circumstances have no
-
8/7/2019 BECG - MBA (2011) Slides
100/107
direct roles in the decision making in the company. They should notnominate anyone in the board. However, the term lending institution mayhave nominees in the board.
A separate section on compliance with mandatory recommendation ofclause 49 should form part of the report and details of non-complianceshould be highlighted.
A certificate from the auditors on compliance should be form part of theAnnual Report and Annual Return and a copy has to be sent to the StockExchange.
SEBI constituted a committee on CG under the chairmanshipof N.R. Narayana Murthy whose report was presented on 8th
February 2003
The issue discussed by the committee (2003) presented are related to
Audit committee
Audit report
-
8/7/2019 BECG - MBA (2011) Slides
101/107
Audit report
Independent directors
Related parties
Risk management Directorship and directors compensation
Codes of conduct
Financial disclosure
This report has also set out the recommendations of NareshChandra Committee (2003) on corporate audit and governanceset up by Department of Company Affairs. These relate to
Contingent liabilities CEO / CFO certification Definition of independent directors Independence of audit committee Exemption of independent directors from civil and criminal liabilities
under certain circumstances
J. J. IraniReport on Company Law, dated 31stMay 2005 Management and Board Governance
-
8/7/2019 BECG - MBA (2011) Slides
102/107
Management and Board Governance Board of Directors Minimum and Maximum number of Directors
Manner of appointment, removal and resignation of Directors Age limit of Directors Independent Directors
> The concept and numbers of independent Directors Definition of independent Directors / Attributes of Independent Directors Mode of Appointment of Independent Directors
Material Transactions Numbers of Directorships and Alternate Directors Directors Remuneration Sitting fees to Non-Executive Directors Disclosure of Remuneration Remuneration of Non- Executive Directors Board Committees Audit Committee for Accounting and Financial Matters Shareholders Relationship Committee Remuneration Committee Duties and responsibilities of Directors
Disqualification of Directors
Vacation of offices by Directors Resignation by Directors
-
8/7/2019 BECG - MBA (2011) Slides
103/107
Liabilities of Independent and Non- Executive Directors Knowledge Test Directors and Officers (D&O) Insurance Rights of Independent / Non- Executive Directors Meetings of Directors Related Matters Quorum for emergency meetings Matters to be discussed at a Board Meeting Restrictions ofBoards Powers
Meetings of Members Demand for Poll Other recommendations Higher deposit amount for notice regarding
nominating / appointing a Director Options of buy-back for shareholders of de-listed companies Corporate Structure
Key Managerial Personnel Interested Shareholders General Related Party Transactions Directors duty to disclose interest
Certain transactions, in which directors are interested, subject to approval
Disclosure
Restrictions on Loan to directors or holding office or place of profit by
-
8/7/2019 BECG - MBA (2011) Slides
104/107
g p p yrelative of director
Duty on directors to disclose information relating to directorship and
shareholding in the company and in other companies
Introduction of CG - Clause 49 in the Listing Agreement issued
via circulars dated 21st February, 9th March and 12th Sept 2000
and 22nd January, 16th March and 31st December 2001
Revision of Clause 49 listing agreement with effect from
01.04.2005
1. Board of Directorsa) Composition ofBoard
b) Non- Executive Directors compensation and disclosure
c) Other provision to as to Board and Committees
d) Code of conduct
2. Audit committee
a) Qualified and independent audit committee
-
8/7/2019 BECG - MBA (2011) Slides
105/107
) p
b) Meeting of audit committee
c) Powers of audit committee
d) Role of audit committeee) Review of information by audit committee
3. Subsidiary companies
4. Disclosures
a) Basis of related party transactions
b) Disclosure of accounting treatment
c) Board disclosure Risk management
d) Proceeds form public issues, right issues. Preferential issues etce) Remunerations of directors
f) Management
g) Shareholders
Corporate Governance in practice in India
The Ministry of Company Affairs set up National Foundation
-
8/7/2019 BECG - MBA (2011) Slides
106/107
The Ministry of Company Affairs, set up National Foundationfor Corporate Governance (NFCG) in partnership with CII, ICSIand ICAI
The NFCG has the following Vision and Mission
VISION: Be a catalyst in making India the best in Corporate Governancepractices
MISSION:
To foster a culture for promoting good governance, voluntary complianceand facilitate effective participation of different stakeholders
To create a framework of best practices, structure, processes and ethics
To make significant difference to Indian corporate sector by raising thestandard of Corporate Governance towards achieving stability and growth
The NFCG focuses on the following areas Creating awareness on the importance of implementing good CGpractices both at the level of individual corporations and for the economy as
a whole. The foundation would provide a platform for quality discussions
and debates among academicians, policy makers, professionals and
corporate leaders through workshops, conferences, meetings and seminars
-
8/7/2019 BECG - MBA (2011) Slides
107/107
Encouraging research capability in area of CG in the country andproviding key inputs in developing laws and regulations, which meet the twin
objectives of maximizing wealth creation and fair distribution of this wealth.
Working with regulatory authorities at multiple levels to improveimplementation and enforcement of various laws related to CG
In close co-ordination with the private sector, work to instill a commitmentto CG reforms to facilitate the development of a CG culture
Cultivating international linkages and maintaining the evolution to-wardsconvergence with international standards and practices for accounting, audit,
and non-financial disclosure
Setting up National Centers for Corporate Governance across thecountry, which would provide quality training to Directors as well as produce