Business Ethics An Indian Perspective (A.C. Fernando) (Z-Library)
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BUSINESS ETHICS This page is intentionally left blank. BUSINESS ETHICS AN INDIAN PERSPECTIVE SECOND EDITION A. C. FERNANDO Former Professor of Economics, Ethics and Corporate Governance and Director, Centre for Business Ethics and Corporate Governance Loyola Institute of Business Administration (LIBA) Loyola College, Chennai India Copyright © 2013 Dorling Kindersley (India) Pvt. Ltd. Licensees of Pearson Education in South Asia No part of this eBook may be used or reproduced in any manner whatsoever without the publisher’s prior written consent. This eBook may or may not include all assets that were part of the print version. The publisher reserves the right to remove any material in this eBook at any time. ISBN 9788131774342 eISBN 9789332514096 Head Office: A-8(A), Sector 62, Knowledge Boulevard, 7th Floor, NOIDA 201 309, India Registered Office: 11 Local Shopping Centre, Panchsheel Park, New Delhi 110 017, India PART 1 Brief Contents Chapter 1. Business Ethics: An Overview 4 Chapter 2. Concepts and Theories of Business Ethics 26 Chapter 4. Ethical Decision-making in Business 75 Chapter 3. Ethical Dilemmas, Sources and Their Resolutions Chapter 5. Globalization and Business Ethics Chapter 6. Creating an Ethical Organization PART 2 Chapter 7. Corporate Ethics: Good Governance Chapter 8. Corporate Ethics: Investors’ Rights, Privileges, Problems and Protection 57 101 128 150 195 Chapter 9. Handmaid of Ethics: Corporate Social Responsibility 223 Chapter 11. Environmental Ethics 295 Chapter 10. Ethics of Consumer Protection Chapter 12. Role of Various Agencies in Ensuring Ethics in Corporations Chapter 13. Ethics and Indian Business PART 3 Chapter 14. Marketing Ethics Chapter 15. Ethical Issues in Human Resource Management Chapter 16. IT Industry: An Overview and Ethical Perspective 262 336 366 397 426 448 vi BRIEF CONTENTS Chapter 17. Ethical Issues in Financial Management 470 Chapter 19. Corruption in India 507 Chapter 18. Whistle Blowing Appendix Glossary Bibliography Index 492 515 523 541 545 Contents Preface to the Second Edition Preface xiv About the Author xv Abbreviations xvi xiii PART 1: THEORIES UNDERLYING THE ISSUES AND PROBLEMS OF BUSINESS ETHICS Chapter 1: Business Ethics: An Overview Introduction Principles of Personal Ethics Principles of Professional Ethics What Is Business Ethics? What Is Not Business Ethics? Code of Conduct and Ethics for Managers Evolution of Ethics Over the Years Importance and Need for Business Ethics Significance of Business Ethics Honesty, Integrity and Transparency Are the Touchstones of Business Ethics Values and Ethics in Business Values, Ethics and Business Strategy Distinction Between Values and Ethics Roots of Unethical Behaviour Why Does Business Have Such a Negative Image? Why Should Businesses Act Ethically? Ethical Decision-making How Corporations Observe Ethics in Their Organizations? Changing Business Environment and Ethical Challenges Corporate Governance Ethics How Ethics Can Make Corporate Governance More Meaningful Benefits from Managing Ethics in Workplace Characteristics of an Ethical Organization Recognizing Ethical Organizations Summary Key Words Discussion Questions Notes Further Readings Case Study: Satyam Computer Services Limited 3 4 4 5 5 5 6 7 7 8 9 10 10 11 12 12 12 12 13 13 14 14 15 16 17 17 18 18 19 19 20 21 viii CONTENTS Chapter 2: Concepts and Theories of Business Ethics 29 Chapter 3: Ethical Dilemmas, Sources and Their Resolutions 57 Chapter 4: Ethical Decision-making in Business 75 Introduction Definitions of Ethics Personal Ethics and Business Ethics Morality and Law How Are Moral Standards Formed? Religion and Morality Morality, Etiquette and Professional Codes Management and Ethics Normative Theories Ethical Theories in Relation to Business Some More Normative Theories of Business Ethics Teachings of the Church Indian Ethical Traditions Summary Key Words Discussion Questions Notes Further Readings Case Study: Biocon—India’s Own Home-grown Biotech Company Introduction What is an Ethical Dilemma? How Ethical Dilemmas in Business Affect the Stakeholders? Corporate Dilemma Over Ethical Behaviour Sources of Ethical Problems Why Does Business Have a Negative Image? Why Businesses Should Act Ethically? How Corporations Observe Ethics to Reduce Dilemmas? Code of Personal Ethics for Employees How to Create an Ethical Working Environment? How Does a Company Establish Ethical Standards? Walton’s Six Models of Business Conduct How to Resolve an Ethical Problem? How to Resolve Ethical Dilemmas? Summary Key Words Discussion Questions Notes Further Readings Case Study: HLL’s Folly: Mercury Spill in Kodaikanal Introduction Ethical Models That Guide Decision Making 29 29 30 30 31 31 32 32 33 33 36 42 43 46 47 47 47 49 50 57 57 58 59 59 62 62 63 63 63 63 64 64 64 66 67 67 67 68 69 75 75 CONTENTS Which Approach to Use? Ethical Decision Making with Cross-holder Conflicts and Competition Applying Moral Philosophy to Ethical Decision Making Kohlberg’s Model of Cognitive Moral Development Influences on Ethical Decision Making Personal Values and Ethical Decision Making Corporate Values and Ethical Decision Making Role of Corporate Governance in Ensuring Ethics in the Workplace A Framework of Ethical Decision Making The Process of Making Good Ethical Decisions Summary Key Words Discussion Questions Notes Further Readings Case Study: Global Trust Bank: The Bank That Went Bust Chapter 5: Globalization and Business Ethics Introduction Growth of Global Corporations Factors Facilitating Globalization Doing Business in a Diverse World Role of Multinational Corporations Excessive Economic Clout Current Issues—Multinational Corporations International Business Issues Benefits of MNCs to the Host Nation Disadvantages of MNCs to the Host Country International Codes of Business Conduct The Limits of Voluntary Approach Caux Round Table: Principles for Business Challenges of Globalization in the Context of Growing Market Economies Public Awareness and Scrutiny Technological Challenges and Opportunities The Physical Environment The Social Environment Key Global Issues for Business Corporate Governance Is a Prerequisite for Globalization Global Compact Summary Key Words Discussion Questions Notes Further Readings Case Study: Sterlite: Using Money Clout to Maximum Advantage ix 77 78 78 80 81 82 85 86 86 87 90 90 91 91 93 94 101 101 101 102 102 103 104 105 105 106 106 107 108 108 110 111 111 111 112 112 114 115 116 117 117 117 118 119 x CONTENTS Chapter 6: Creating an Ethical Organization Introduction The Problem Is Not with Corporations, But the People Who Run Them Fat Pay Did Not Ensure Better Governance Fraudulent Accounting Too Played Its Destructive Role Independent Directors Too Did Not Help Reduce Malpractices Reasons for the Failure of Conventional Measures Suggestions to Improve Corporate Virtue Role of Corporate Governance The Role of Corporate Culture Role of Corporate Social Responsibility Other Influences in Creating an Ethical Organization Developing and Executing a Comprehensive Ethics Programme Codes of Conduct Ethics Committees Ethics Communication Systems Ethics Office/Officers Ethics Training Programmes Disciplinary System Summary Key Words Discussion Questions Notes Further Readings Case Study: Wipro Limited: An Earnest Effort to Create an Ethical Organizations PART 2: HOW CAN ETHICS BE APPLIED IN DAY-TO-DAY BUSINESS? Chapter 7: Corporate Ethics: Good Governance What Is Corporate Governance? Definitions of Corporate Governance Desiderata of Corporate Governance A Historical Perspective of Corporate Governance Significance of Corporate Governance to Developing Countries Issues in Corporate Governance Major Thrust Areas of Corporate Governance Strategies and Techniques Basic to Sound Corporate Governance Benefits to Society Benefits to Corporation Indian Model of Corporate Governance What Is ‘Good’ Corporate Governance? Obligation to Investors Obligation to Employees Obligation to Customers Managerial Obligation Legislative Changes Introduction of Regulations 128 128 128 129 129 129 132 130 130 131 132 134 134 134 135 135 136 136 137 138 139 139 139 140 141 149 150 150 150 151 153 154 155 158 160 160 161 163 164 166 166 167 168 169 170 CONTENTS Implementation of Recommendations of Birla Committee Report The Reserve Bank’s and Other Regulations Self-regulation Pioneers in Good Governance Practices Corporate Governance in India—A Performance Appraisal Future of Corporate Governance in India Impetus for the Growth of Corporate Governance in India Summary Key Words Discussion Questions Notes Further Readings Case Study: Tata Steel—A Company That Also Makes Steel xi 171 172 173 173 177 181 181 182 184 184 184 186 187 Chapter 8: Corporate Ethics: Investors’ Rights, Privileges, Problems and Protection 195 Chapter 9: Handmaid of Ethics: Corporate Social Responsibility 223 Introduction Ethical Governance Needed to Protect Stakeholders Theoretical Basis—Agency Costs Long-term Shareholder Value Rights of Shareholders Views of Various Committees on the Issue Poor Track Record of Shareholder Protection in India Guide for Investors/Shareholders Investor Protection in India N. K. Mitra Committee on Investor Protection Problems of Investors In India Law Enforcement for Investor Protection Lacunae in Investor Protection SEBI’s Poor Performance and Suggestions for Improvement Summary Key Words Discussion Questions Notes Further Readings Case Study: On Insider Trading (HLL–BBLIL Merger) Introduction Why Social Responsibility of Business? Definitions of CSR Today’s Corporate Social Responsibility Theoretical Justification for CSR What Are Corporations Expected to Do? Models for Implementation of CSR CSR as a Business Strategy for Sustainable Development 195 196 196 196 196 197 203 204 211 212 212 212 213 214 214 216 216 216 217 218 223 225 226 228 228 230 230 231 xii CONTENTS Advantages of CSR Scope of CSR Steps to Attain CSR External Standards on CSR Prestigious Awards for CSR The Indian Perspective India on the Ethical/CSR Matrix Core-BCSD India Ethics and Social Responsibility of Business Social Responsibility and Indian Corporations—A Score Card Future of Indian CSR Summary Key Words Discussion Questions Notes Further Readings Case Study: Dr Reddy’s Laboratories: Commitment to All-round Corporate Excellence Chapter 10: Ethics of Consumer Protection Introduction Consumer—An Important Stakeholder Hidden Taxation on Society Stakeholder Alliance Consumer and Consumer Protection Parties to Consumer Protection History and Growth of Consumer Protection Ralph Nader’s Contribution to Consumer Protection Consumer Protection, Why and How Consumer Duties and Responsibilities Consumer Protection: Indian Scenario Spate of Consumer-oriented Legislations How Are Indian Consumers Exploited? Consumer Protection in India Legal Protection to Consumers Consumer Protection Act, 1986 Consumer Protection (Amendment) Act, 2002 Prevention of Food Adulteration Act, 1954 Institutional Arrangements Under COPRA Quality Standards Standards of Weights and Measures Role and Initiatives of Voluntary Organizations Other Initiatives to Promote Consumer Protection Summary Key Words Discussion Questions Notes Further Reading Case Study: Wockhardt Ltd—Divergence Between Precepts and Practices 233 234 239 239 241 241 245 246 247 247 249 250 251 251 251 253 254 262 262 262 263 263 263 263 264 265 266 266 268 268 268 274 275 276 278 280 280 285 286 285 287 288 289 289 289 290 291 Chapter 11: Environmental Ethics Introduction Environmental Concerns History of Environmentalism Environmental Philosophy Environmental Preservation: Role of Stakeholders Future Outlook on Environment Partnerships International Issues Sustainable Development Costs and Benefits of Environmental Regulation Trade and the Environment Industrial Pollution Role of Corporations in Environmental Management Innovative Business Responses to Environmental Regulations Waste Management and Pollution Control Improving Corporate Environmental Performance Need for a New Approach Environmental Audit Managing Environmental Issues Product Differentiation Managing Regulation Redefining Markets Environmental Risk Management Environmental Management in India Charter for Voluntary Pollution Control Corporate India Gets Eco-friendly India’s Environment Policy Summary Key Words Discussion Questions Notes Further Readings Case Study-1: E-Waste: The Latest Contributor to Environmental Degradation* Case Study-2: Tirupur—A Study on Its Environmental Degradation Chapter 12: Role of Various Agencies in Ensuring Ethics in Corporations Introduction Public Opinion Role of Auditors in Ensuring Business Ethics Role of Board of Directors in Ensuring Ethical Business Media and Business Ethics Ethics in Advertising Role of Government Agencies in Ensuring Ethical Practices Role of the Judiciary Role of SEBI in Ensuring Ethical Corporate Governance CONTENTS xiii 295 295 295 296 296 297 299 299 300 300 300 301 301 302 303 304 307 308 308 309 309 309 310 311 312 313 314 315 318 319 319 319 321 322 327 336 336 336 337 340 345 348 350 351 351 xiv CONTENTS Role of Whistle-blowing Summary Key Words Discussion Questions Notes Further Readings Case Study: Ketan Parekh Scam 2001 Chapter 13: Ethics and Indian Business Impact of Globalization Role of Securities Market in Economic Growth Phenomenal Growth of Indian Capital Market Nature of the Indian Capital Market Development of the Indian Capital Market Deficiencies in the Indian Capital Market Major Indian Scams Can Unethical Behaviour Be Avoided? Reasons for Unethical Practices Among Indian Corporations Business Ethics in India Today Corporations in India Cannot Afford to Be Ethical Some Unethical Issues in India Why Should Indian Business Be Ethical? Studies on Ethical Attitudes of Managers Some Questionable Business Practices Summary Key Words Discussion Questions Notes Further Readings Case Study: Demat Scam 2003–2005 PART 3: FUNCTIONAL AREAS IN BUSINESS MANAGEMENT Chapter 14: Marketing Ethics* Introduction Role of Marketing Defining Marketing Ethics The Context of Indian Economy Normative Marketing Ethics Areas in Marketing Ethics Beyond the Four Ps Summary Key Words Discussion Questions Notes Further Reading Case Study: The Cola Conundrum 359 360 361 361 361 362 364 366 366 366 367 368 368 370 370 372 372 373 373 375 380 380 384 387 388 388 388 390 390 397 398 398 398 401 403 404 405 410 410 411 411 411 412 413 Chapter 15: Ethical Issues in Human Resource Management* Introduction Definition Genesis and Growth of Human Resource Management Scope of Human Resource Management Different Aspects of Human Resource Management Different Functional Areas of HRM Emerging Challenges of HRM Changing Profile of HR Professionals HR-related Ethical Issues Role of HRM in Creating an Ethical Organization Institutional Culture Creating an Ethical Organization Human Resource Development in India Functions Human Development Index Summary Key Words Discussion Questions Notes Further Readings Case Study-1: The Phaneesh Murthy Sexual Harassment Case Case Study-2: HMSI—Better Wages Cannot Suppress Workers’ Demand for Their Rights Case Study-3: The HR Intervention at Rourkela Steel Plant: Involving People in Quality-driven Improvement Culture CONTENTS xv 426 426 426 427 428 428 429 429 432 432 435 435 436 436 436 437 439 440 440 440 440 441 442 445 Chapter 16: IT Industry: An Overview and Ethical Perspective* 448 Chapter 17: Ethical Issues in Financial Management 470 Introduction Structure of IT–ITES Industry Unique Characteristics of IT–ITES Industry Ethical Perspective of IT–ITES Industry Key Words Notes Further Readings Case Study-1: Mphasis Case: If Individuals Do Not Comply, Safeguards Achieve Little Case Study-2: Credit Card Data Fraud Case Study-3: Cyber Crimes—The Glitches Amidst the Glow* Introduction Financial Accounting Management Accounting Financial Management Ethical Issues in Finance Frauds in Banks Measures Against Bank Frauds 448 449 450 452 456 456 457 458 459 460 470 470 471 471 472 473 474 xvi CONTENTS Constraints to Ethical Practices in Indian Nationalized Banks Frauds in the Insurance Sector Ethical Issues Arising out of Activities of Professional Players Mini Case 1: Xeroxing Corruption Mini Case 2: Foul Play by Soundcraft Industries’ Promoter Mini Case 3: Tricking Investors for Personal Gain Mini Case 4: Dereliction of Duty by a CFO Key Words Discussion Questions Notes Further Readings 479 484 487 488 489 489 489 489 490 490 491 Chapter 18: Whistle-Blowing 492 Chapter 19: Corruption in India 507 Introduction Whistle-Blowing in PSEs Who is a Whistle-Blower? Types of Whistle-Blowing Whistle-Blowing Is Not Accepted by All Emerging Trends in Accepting Whistle-Blowing Why Only a Few Act as Whistle-Blowers? Why is Whistle-Blowing a Significant Tool to Ensure Corporate Governance? Whistle-Blowing Promotes a Firm’s Competitive Advantage Whistle-Blowing Is Not Only Moral But Also an Obligation Whistle-Blowing Protection Law Guidelines for Whistle-Blowing Some Cases of Whistle-Blowing in India Key Words Discussion Questions Notes Case Study: Satyendra Dubey: A Patriotic but Unfortunate Whistle-Blower What Is Corruption? Indian Scenario How Can the Government Prevent Corruption? Case Study-1: The 2G Spectrum Scam Case Study-2: Widespread Corruption in Corporate India: An MDRA Study Computerisation Can Help Combat Corruption Ill Effects of Corruption on Indian Economy Indirect Effects of Corruption on the Economy Corruption Perceptions Index Key Words Notes Discussion Questions Appendix Glossary Bibliography Index 492 492 492 493 493 494 494 495 495 496 496 497 498 498 499 499 500 507 507 509 510 510 511 511 511 512 514 514 514 515 523 541 545 PREFACE TO THE SECOND EDITION The first edition of this book “Business Ethics—An Indian Perspective” seems to have served well and met the requirements of the academic community. Whatever feedback I received from those who patronised it has been positive and though I earnestly required them to let me know the defects they have observed in it, I did not get any adverse comments. However, I am loathe to take it to mean that the book is perfect in every respect. I have repeatedly gone through the book several times with a critical eye with a view to finding commissions and omissions both from the points of view of the scholar and layman so that I can correct errors wherever they occur in the book. In the process I have made several corrections in various chapters. I felt that there is a need to add a chapter on corruption in India, especially in the context of Gandhian Anna Hazare’s anti-graft movement that is touted in the popular idiom as India’s second freedom. Struggles of this type, of course, are not going to end such unethical practices in our society. Eternal vigilance and uncompromising efforts towards achieving probity in public life alone will help us realise a corrupt-free society. I hope this Second Edition of this book will contribute, even if it is to a limited extent, to help realise the goal. A. C. Fernando PREFACE When I was asked to handle the course on Business Ethics for students of postgraduate diploma in Business Management at Loyola Institute of Business Administration (LIBA), I came across a serious problem. While there were a few good books on the subject published from abroad, Indian books on Business Ethics with Indian illustrations and case studies were very limited. The available books were not properly structured––some of them did not touch upon the theoretical aspects of business ethics, while others had pieced together a few essays on some issues related to the subject and included writings or speeches of some eminent public figures. The paucity of good, well-structured books on the subject warranted a well-written India-centric book that would help students, and to some extent, the teachers. The lack of adequate number of text books is understandable because the subject of business ethics as a core course for management students is hardly two decades old. At the same time, more and more B-schools have started introducing Business Ethics as a core or an elective course. Hence, I felt a vital need for a good book on Business Ethics, which focuses on the Indian perspective, and the idea of writing this book was born. There was also another reason, rather a justification, for writing this book on business ethics. My well-received book on corporate governance brought out by the same publisher, Pearson Education, discusses Corporate Social Responsibility, Business Ethics, Corporate Governance etc. that are generally included in any book on Business Ethics. Follow-up efforts to improve future editions of Corporate Governance threw up new additional material that appeared common to both the subjects. In the meantime, the subjects of business ethics, corporate social responsibility and corporate governance were assuming greater importance in the media as well as academia with several articles and research papers being published in newspapers and journals. The idea of writing this book had thus become irresistible! While working on the chapterisation of the book––I should add in all humility––the course content that was followed by my predecessor at LIBA, Dr C. L. Ramakrishnan, former Director General of Police, Tamil Nadu looked well-conceived for me to emulate to a certain extent. By adding a few more topics, the book looked complete in all respects. I take this opportunity to salute Dr C. L. Ramakrishnan, an able and highly ethical police officer, for showing me a clear path in writing this book. I have borrowed some of his ideas at several places in the book. Since some of his imaginative ideas were presented more in power-points than as published text, I had to elaborate many of the points he had touched upon in his presentation. A book of this sort, with the need to explain much of philosophy and ethical dilemmas, could not have come from one who has been a student and teacher of economics all his life. I have generously drawn a lot of ideas, theories, and real life cases from many authors, some of whom lent their original contributions to the subject of Business Ethics that has been and still keeps evolving. Wherever I have borrowed from their works, I have acknowledged. If I have omitted to give credit to any source, it is needless to say it is unintentional and due to sheer lapse of memory. Humility is a virtue I cherish most, especially in owning up the original contributions I have used. However, if there are mistakes or inadequacies in the book, it is due to my fault and I have no hesitation in saying “Mea culpa”. The supplement for this book gives a lesson plan and PowerPoint slides at www.pearsoned.co.in/acfernando as useful study-aids. I have made an effort to make this book useful for students taking the course on Business Ethics. My publisher has also made serious efforts to get reviews of my peers to improve the coverage and quality of the book. I have carried out to the extent possible, all their suggestions. I seek the opinion and feedback of the academic community to make the future editions of this book more acceptable to all stakeholders. A. C. Fernando ABOUT THE AUTHOR A. C. Fernando has just retired as a senior professor of Economics and Corporate Governance at the Loyola Institute of Business Administration (LIBA), Loyola College, Chennai. He was also the director of the Loyola Centre for Business Ethics and Corporate Governance, a centre of excellence established by LIBA. Professor Fernando has been teaching economics-related subjects and corporate governance at LIBA since 1990. He was also the editor of Management Matters, a bi-annual business journal of the institution. Professor Fernando obtained a postgraduate degree in economics from the University of Madras, following which he was appointed a lecturer in the Department of Economics, Sophia College, Bombay, where he taught all courses relating to economics for fifteen years. He was also associated with the University of Bombay where he taught public finance for a couple of years at the postgraduate level and pursued research for a couple of years. Concurrently, he also conducted a socioeconomic survey on Catholic orphanages for Misereor and worked as a consultant in the industry. Subsequently, Professor Fernando moved to Chennai as the director of the training division of Datamatics Corporation, Chennai, where he designed and conducted several short-term non-formal management and other inter-disciplinary programmes. Having spent a decade as a non-formal educational administrator, he joined a large Chennai-based industrial conglomerate as the corporate manager, Publicity and Public Relations, and the editor of their world-renowned industrial directory, a position he held for almost ten years. During this time, he continued to teach management courses as visiting faculty at the University of Madras, the Institute of Chartered Accountants of India, the Institute of Company Secretaries of India, the Institute of Bankers and LIBA. He has co-authored six books on economics; edited three issues of a prestigious industrial directory, Kothari’s Industrial Directory of India, apart from several articles on management matters; authored articles on education, economics, management and corporate governance; which have been published by frontline publications including The Hindu. His latest books—Corporate Governance; Business Ethics; Business Environment; Corporate Ethics, Governance and Social Responsibility—have been wellreceived by instructors and students in institutes and universities across the country. A communicator par excellence, Professor Fernando’s expertise in business ethics and corporate governance stems from his fifty-year long experience of teaching the subject as well as his incisive knowledge of the functioning of the Indian economy. ABBREVIATIONS AAIFR ADB AFL-CIO AGM AIST ALI AMCs AMFI AOP ARF AS ASB ASC ASSOCHAM BCCI BIFR BIS BOL BOOS BOOT BOP BPE BSE CAC CAD CAG CAGR CAO CARE CBDT CBEC CCFI CCI CDSL CEO CFE CFO CFS CG CII CIS CISCO CLA CLB CMD CMIE COFEPOSA – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Appellate Authority for Industrial and Financial Reconstruction Asian Development Bank American Federation of Labor and Congress of Industrial Organisations Annual General Meeting Australian Institute of Superannuating Trustees American Law Institute Asset Management Companies, Annual Maintenance Contracts Association of Mutual Funds of India Association of Persons Assets Reconstruction Fund Accounting Standards Accounting Standards Board Accounting Standards Committee Associated Chambers of Commerce and Industry Bank of Credit and Commerce International The Board for Industrial and Financial Reconstruction Bank of International Settlements Build–Own–Lease Build–Own–Operate System Build–Own–Operate–Transfer Balance of Payments Bureau of Public Enterprises Bombay Stock Exchange Capital Account Convertibility Current Account Deficit Comptroller and Auditor-General Compound Average Growth Rate Chief Accounts Officer Credit Analysis and Research Ltd. Central Board of Direct Taxes Central Board of Excise and Customs Cabinet Committee on Foreign Investment Controller of Capital Issues Central Depository Security Ltd Chief Executive Officer Certified Fraud Examiner Chief Financial Officer Consolidated Financial Statement Corporate Governance Confederation of Indian Industry Commonwealth of Independent States The City Group for Small Companies, USA-based Software Company Central Listing Authority Company Law Board Chairman and Managing Director Centre for Monitoring Indian Economy Conservation of Foreign Exchange and Prevention of Smuggling Activities ABBREVIATIONS COPU COR COSO CPA CPA CPI CPSC CRA CRF CRISIL CRR CSO CSR CUTS D&OLI Policy DCA – – – – – – – – – – – – – – – – DCC DEA DEMAT DGCI&S DICGC DP DRI DTL EC ECB ECM ED EDIFAR EEC EEOC EFTA EMR ESAF ESCAP ESI ESOP ESOS ESPS EXIM BANK FRB FAO FASB FBI FCCBs FD FDI FEMA FER FERA FERC FICCI FIIA FIIs – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – xxi Committee on Public Undertakings Capital–output Ratio Committee of Sponsoring Organisations Certified Public Accountant Consumer Protection Act, 1986 Consumer Price Index Consumer Product Safety Commission Credit Rating Agencies Consumer Redressal Forum The Credit Rating Information Service of India Ltd. Cash Reserve Ratio Central Statistical Organisation Corporate Social Responsibility Consumer Unity and Trust Society Directors and Officers Liability Insurance Policy Department of Company Affairs (now renamed Department of Corporate Affairs), Government of India Depositories and Custodian Cell (of SEBI) Department of Economic Affairs Dematerialisation Directorate General of Commercial Intelligence and Statistics Deposit Insurance and Credit Guarantee Corporation Depository Participants Differential Rate of Interest Demand and Time Liabilities Executive Chairman External Commercial Borrowing European Common Market Executive Director Electronic Data Filing and Retrieval System (SEBI) European Economic Community Equal Employment Opportunity Commission European Free Trade Association Exclusive Marketing Rights Enhanced Structural Adjustment Facility Economic and Social Commission for Asia and the Pacific Employees State Insurance; Environmental Sustainability Index Employee Stock Option Plan Employee Stock Option Scheme Employee Stock Purchase Scheme Export and Import Bank Federal Reserve Board Food and Agriculture Organisation The Financial Accounting Standards Board Federal Bureau of Investigation Foreign Currency Convertible Bonds Fixed Deposits Foreign Direct Investment Foreign Exchange Management Act Foreign Exchange Reserves Foreign Exchange Regulation Act Federal Energy Regulatory Commission Federation of Indian Chambers of Commerce and Industry Foreign Investment Implementation Authority Foreign Institutional Investors xxii ABBREVIATIONS FIPB FIPC FMCG FTC FTZ GAAP GATT GCA GCF GDCF GDP GDRs GEF GFCF GFD GRT GSTP HDI HPAEs IAS IASB IASC IBM IBPs IBRD ICAEW ICAI ICC ICICI ICL ICRA ICRR ICSI ICWAI IDA IDBI IDI IDRA IEBR IEPC IEPF IES IFAC IFC IFCI IIF IFSA IGGD IIBI IIDC IIM IIP ILO IMF IPO – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Foreign Investment Promotion Board Foreign Investment Promotion Council Fast Moving Consumer Goods Federal Trade Commission Free Trade Zones Generally Accepted Accounting Principles General Agreement on Trade and Tariff General Currency Area Gross Capital Formation Gross Domestic Capital Formation Gross Domestic Product Global Depository Receipts Global Environment Fund Gross Fixed Capital Formation Gross Fiscal Deficit Gross Registered Tonnage Global System of Trade Preference Human Development Index High Performing Asian Economies International Accounting Standards; Indian Administrative Service International Accounting Standards Board International Accounting Standards Committee International Business Machines Inter-bank Participations International Bank for Reconstruction and Development (World Bank) The Institute of Chartered Accountants in England and Wales The Institute of Chartered Accountants of India Interstate Commerce Commission Industrial Credit and Investment Corporation of India Indian Confederation of Labour The Investment Information and Credit Rating Agency Independent Cash Reserve Ratio The Institute of Company Secretaries of India The Institute of Costs and Works Accountants of India International Development Association Industrial Development Bank of India Industrial Development Index Industrial Development and Regulation Act International Extra Budgetary Resources Investor Education and Protection Committee Investor Education and Protection Fund Indian Economic Service; Indian Education Service International Federation of Accountants Indian Fiscal Commission Industrial Finance Corporation of India Institute of International Finance Investment and Financial Services Association Investors Grievances and Guidance Division, SEBI Industrial Investment Bank of India Integrated Infrastructure Development Centre Indian Institute of Management Index of Industrial Production International Labour Organisation International Monetary Fund Initial Public Offer ABBREVIATIONS IPPs IRDA IRS IUCN LA LATAM LERM LIBOR LLP LTFP MAOCARO MAPIN MD MF MFA MFNC MIC MIS MMMFs MODVAT MoF MoU MRTP MRTP Act MRTPC MSBs MTN MTO NACD NAFTA NASSCOM NAV NBFCs NCAER NCDRC NCL NCLT NDP NEAT NEF NEP NFCG NGOs NIEs NLRB NPAs NRIs NRNR NSDL NSDP NSE OECD OGL OPEC OTCEI – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Independent Power Producers Insurance Regulation and Development Authority Internal Revenue Service International Union for the Conservation of Nature and Natural Resources Listing Agreement Latin America Liberalised Exchange Rate Mechanism London Inter-bank Borrowing Rate Limited Liability Partnership Long-term Fiscal Policy Manufacturing and Other Companies (Auditors Report) Order Market Participation and Investor Database (SEBI) Managing Director Mutual Funds Multi-fiber Agreement Most Favoured Nations Clause Monopolies Inquiry Commission Management Information System Money Market Mutual Funds Modified Value Added Tax Ministry of Finance Memorandum of Understanding Monopolies and Restrictive Trade Practices Monopolies and Restrictive Trade Practices Act Monopolies and Restrictive Trade Practices Commission Market Stabilisation Bonds Multilateral Trade Negotiations Multilateral Trade Organisation National Association of Corporate Directors North American Free Trade Agreement National Association of Software and Services Companies (India) Net Asset Value Non-banking Finance Companies National Council of Applied Economic Research National Consumer Disputes Redressal Commission National Commission on Labour National Company Law Tribunal Net Domestic Product National Exchange Automated Trading System National Equity Fund New Economic Policy National Foundation for Corporate Governance Non-government Organisations Newly Industrialised Economies National Labour Relations Board Non-performing Assets Non-resident Indians Non-resident Non-repatriable Rupee Account National Securities Depository Ltd Net State Domestic Product National Stock Exchange Organisation for Economic Cooperation and Development Open General License Organisation of Petroleum Exporting Countries Over the Counter Exchange of India xxiii xxiv ABBREVIATIONS PAC PBT PCAOB PCDCs PCFC PDS PMS POB PPDCs PPPs PSEs PSUs QRB R&D RBI RCF RoC ROI SAARC SADF SAT SBI SCDRC SCMRD SEBI SEC SFC SLR SNA SOX SPC SRI SRO STCI STP TCOs TDC TDICI TNCs TRIMs TRIPs UNCTAD UNDP UNESCO UNRID UPS UR UTI VAM VAT – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – Public Accounts Committee Profit Before Tax Public Company Accounting Oversight Board Partially Convertible Debentures Packing in Credit in Foreign Currency Public Distribution System Portfolio Management Scheme Public Oversight Board Process-cum-product Development Centres Purchasing Power Parities Public Sector Enterprises Public Sector Undertakings Quality Review Board Research and Development Reserve Bank of India Risk Capital Foundation Registrar of Companies Return on Investment South Asian Association for Regional Cooperation South Asian Development Fund Securities Appellate Tribunal State Bank of India State Consumer Disputes Redressal Commission Society for Capital Market Research and Development Securities and Exchange Board of India Securities and Exchange Commission (USA) State Financial Corporation Statutory Liquidity Ratio System of National Accounts Sarbanes–Oxley Act (USA) Small Private Company Socially Responsible Investing Self-regulatory Organisation Securities Trading Corporation of India Ltd. Straight Through Processing Technical Consultancy Organisations Technology Development Cell Technology Development and Information Company of India Ltd. Transnational Corporations Trade Related Investment Measures Trade-related Intellectual Property Rights United Nations Conference on Trade and Development United Nations Development Programme United Nations Educational, Scientific and Cultural Organisation United Nations Research Institute for Development Usual Principal Status Uruguay Round Unit Trust of India Value Added by Manufacture Value Added Tax ABBREVIATIONS VCF VOICE WDR WHO WPI WTO XGS ZBB – – – – – – – – Venture Capital Fund Voluntary Organisation in Interest of Consumer Education World Development Report World Health Organisation Wholesale Price Index World Trade Organisation Exports of Goods and Services Zero-base Budgeting xxv This page is intentionally left blank. This page is intentionally left blank. CHAPTERS 1 BUSINESS ETHICS: AN OVERVIEW 4 2 CONCEPTS AND THEORIES OF BUSINESS ETHICS 29 4 ETHICAL DECISION-MAKING IN BUSINESS 75 3 ETHICAL DILEMMAS, SOURCES AND THEIR RESOLUTIONS 5 GLOBALIZATION AND BUSINESS ETHICS 6 CREATING AN ETHICAL ORGANIZATION 57 101 128 Part One THEORIES UNDERLYING THE ISSUES AND PROBLEMS OF BUSINESS ETHICS Business ethics is applied ethics that studies moral standards and shows how these apply to the systems and organizations involved in businesses. Business ethics studies moral norms and values and aims to apply the conclusions gleaned from them to business which is carried out through a motley group of institutions, technologies, transactions, pursuits and activities. Such a study of business ethics is best served through a discussion of the basic framework of theories and principles that motivate and govern business behaviour. Once the underlying principles are learnt, we can proceed to discuss their implications for business. Chapter 1 provides an overview of the subject matter; Chapter 2 discusses concepts and theories of business ethics; and Chapter 3 focuses on ethical dilemmas, their causes and possible resolutions. Chapters 4 and 5 discuss respectively the sources and consequences of ethical dilemmas and how they are resolved, and ethical decision making in business. A globalized business world throws up newer ethical challenges, issues and problems that are discussed in Chapter 5. Chapter 6 provides a framework of creating an ethical organization. Cases attached to all these chapters illustrate how all these principles when put into practice are shown to impact business, sometimes positively, sometimes otherwise. One CHAPTER Business Ethics: An Overview INTRODUCTION The study of ethics has become an important ingredient of the syllabus of management schools in recent years. This is because of ethical issues that have come to the forefront as a result of many well-known failures of corporates. The fraudulent activities of these corporates have resulted in the defrauding of stockholders, consumers, employees, creditors and governments to varying degrees. It has therefore become important that students of B-schools as future managers of business should imbibe ethical values. Ethics reflects a society’s notions about the rightness or wrongness of an act. Ethics also involves the evaluation and application of certain moral values that a society or culture has come to accept as its norms. It is generally described as a set of principles or moral conduct. Business ethics, therefore, is a sum total of principles and code of conduct businessmen are expected to follow in their dealings with their fellowmen such as stockholders, employees, customers, creditors, and comply with to enact the laws of the land and to protect all these stakeholders. The word ‘ethics’ is derived from the Greek word ethikos meaning custom or character. The Concise Oxford English Dictionary defines ethics as the treating of moral questions. But this definition is imprecise and leaves a number of loose ends. Whose morals? Which moral questions? Business ethics covers diverse areas ranging from labour practices, free and fair trade, health concerns, euthanasia to animal welfare, environmental concerns, to genetic modification, to human cloning. Perhaps the definition provided by the Chambers Dictionary comes closest to providing a workable definition: ‘Ethics is a code of behaviour considered correct.’ What the society considers correct may have been arrived by the crystallization of consumer pressure on corporations and governments and regulatory forces. It is the science of morals describing a set of rules of behaviour. Business ethics itself is an offshoot of applied ethics. The study of business ethics essentially deals with understanding what is right and morally good in business. Ethics is a branch of philosophy and is considered a normative science because it is concerned with the norms of human conduct, as distinguished from formal sciences such as mathematics and logic, physical sciences such as chemistry and physics, and empirical sciences such as economics and psychology. As a science, ethics must follow the same rigours of logical reasoning as other sciences. Ethics, as a science, involves systemizing, defending and recommending concepts of right and wrong behaviour.1 The principles of ethical reasoning are useful tools for sorting out the good and bad components within complex human interactions. For this reason, the study of ethics has been at the heart of intellectual thought since the time of early Greek philosophers, and its ongoing contribution to the advancement of knowledge and science makes ethics a relevant, if not vital, aspect of management theory. PRINCIPLES OF PERSONAL ETHICS BUSINESS ETHICS: AN OVERVIEW Personal values are the conception of what an individual or a group regards as desirable. Personal ethics refer to the application of these values in everything one does. Personal ethics might also be called morality, since they reflect general expectations of any person in any society, acting in any capacity. These are the principles we try to instil in our children, and expect of one another without needing to articulate the expectation or formalize it in any way.2 The principles of personal ethics are: 1. 2. 3. 4. Concern and respect for the autonomy of others. Honesty and the willingness to comply with the law of the land. Fairness and the ability not to take undue advantage of others. Benevolence and preventing harm to any creature. People are motivated to be ethical for the following reasons: 1. Most people want to maintain a clear conscience and would like to act ethically under normal circumstances. 2. It is natural for people to ensure that their actions do not cause any injury, whether physical or mental, to others. 3. People are obliged to obey the laws of the land. 4. Social and material well-being depends on one’s ethical behaviour in society. PRINCIPLES OF PROFESSIONAL ETHICS A profession is a vocation or calling, especially one that involves a specific branch of advanced learning or a branch of science, for example, the profession of a doctor, advocate, professor, scientist or a business manager. A professional is one who is engaged in a specified activity as one’s paid occupation like a salaried business manager who is paid for his specific skill in managing the affairs of the business enterprise he is engaged in. There are certain basic principles people are expected to follow in their professional career. These are the following: ∑ ∑ ∑ ∑ ∑ ∑ impartiality: objectivity; openness: full disclosure; confidentiality: trust; due diligence/duty of care; fidelity to professional responsibilities; and avoiding potential or apparent conflict of interest. WHAT IS BUSINESS ETHICS? Ethics is a conception of right and wrong behaviour, defining for us when our actions are moral and when they are immoral. Business ethics, on the other hand, is the application of general ethical ideas to business behaviour. Ethical business behaviour is expected by the public, it facilitates and promotes good to society, improves profitability, fosters business relations and employee productivity, reduces criminal penalties from public authorities and regulators, protects business against unscrupulous employees and competitors, protects employees from harmful actions by their employer, and allows people in business to act consistently with their personal ethical beliefs. Ethical problems occur in business for many reasons, including the selfishness of a few, competitive pressures on profits, the clash of personal values and business goals, and cross-cultural contradictions in global business operations. Ethical issues, such as bribery and corruption, are evident throughout the world, and many national governments and international agencies are actively attempting to minimize such actions through economic sanctions and international codes of ethical behaviour. Although laws and ethics are closely related, they are not the same: ethical principles tend to be broader than legal principles. Illegal behaviour by business and its employees imposes great costs on business itself and the society at large. To be precise, ‘Business ethics is the art and discipline of applying ethical principles to examine and solve complex moral dilemmas’.3 Business ethics proves that business has been and can be and ethical and still make profits. Until the last decade, business ethics was thought of as being a contradiction in terms. But things have changed; today more and more interest is being shown to the application of ethical practices in business 5 6 BUSINESS ETHICS—AN INDIAN PERSPECTIVE dealings and the ethical implications of business. ‘Business ethics is that set of principles or reasons which should govern the conduct of business whether at the individual or collective level.’4 Ethical solutions to business problems may have more than one right answer or sometimes no right answer at all. Thus logical and ethical reasoning are tested in that particular business situation. ‘A business or company is considered to be ethical only if it tries to reach a trade-off between its economic objectives and its social obligations, such as obligations to the society where it exists and operates; to its people for whom it pursues economic goals; to the environment, from where it takes its resources; and the like.’5 Business ethics is based on the principle of integrity and fairness and concentrates on the benefits to the stakeholders, both internal and external. Stakeholders include those individuals and groups without which the organization does not have an existence. It includes shareholders, creditors, employees, customers, dealers, vendors, government and the society. WHAT IS NOT BUSINESS ETHICS? It is also equally important to clarify what is not ethics. ETHICS IS DIFFERENT FROM RELIGION Though all religions preach high ethical/moral standards generally, they do not address all the types of problems people confront today. For instance, cyber crimes and environment-related issues are totally new in the context of most religions. Moreover, many persons today do not subscribe to religious beliefs and have turned agnostics. But ethics applies to all people, irrespective of their religious affiliations. ETHICS IS NOT SYNONYMOUS WITH LAW Generally, a good legal system may incorporate many moral/ethical standards. However, there are several instances where law deviates from what is ethical. Legal systems may vary from society to society depending upon its social, religious and cultural beliefs. For instance, the United States law forbids companies from paying bribes either domestically or overseas; however, in other parts of the world, bribery is an accepted way of doing business. Similar contradictions may be seen in child labour, employee safety, work hours, wages, discrimination, and environmental protection laws. Law can be corrupted and debased by dictators and made to cater to serve interests of narrow groups. Sometimes, law could be unreasonable and even stupid, as for instance, it is illegal in Israel for a hen to lay an egg on a Friday or Saturday.6 It is also slow to respond to ethical needs of the society. People are often sceptical about the objectives of any legal system and comment ‘Law is an Ass’, while few people question ethical standards. ETHICAL STANDARDS ARE DIFFERENT FROM CULTURAL TRAITS The English adage ‘When in Rome, do as the Romans do’ leads to an unethical cultural behaviour. Some cultures may be ethical, but many of them are not. They may be quite oblivious to ethical concerns. For instance, our system of castes reflects an unethical streak inasmuch as it tends to take for granted that some people are superior to others in God’s creation. ETHICS IS DIFFERENT FROM FEELINGS Our ethical choices are based on our feelings. Most of us feel bad when we indulge in something wrong. But many, especially hardened criminals, may feel good even when they do something bad. Most people when they do something wrong for the first time, may feel bad, but if they find it to be beneficial or if it brings them pleasure, they may make it a habit without feeling any remorse. ETHICS IS NOT A SCIENCE IN THE STRICTEST SENSE OF THE TERM We draw data from the sciences to enable us make ethical choices. But science is not prescriptive and does not tell us what we ought to do in certain situations leading to ethical dilemmas. But ethics being prescriptive offers reasons for how humans ought to act under such situations. Moreover, just because something is scientifically or technologically possible, it may not be ethical to do it; human cloning, for instance. ETHICS IS NOT JUST A COLLECTION OF VALUES BUSINESS ETHICS: AN OVERVIEW Values are almost always oversimplifications, which rarely can be applied uniformly. Values tend to be underdefined, situational by nature and subject to flawed human reasoning such that by themselves they cannot assure true ethical conduct. Consider the sought-after value of employee loyalty. Should employees be loyal to co-workers, supervisors, customers, or investors? Since it may be impossible to be absolutely loyal to all the four simultaneously, in what order should these loyalties occur? Employers who demand employee loyalty rarely can answer this question completely or satisfactorily. CODE OF CONDUCT AND ETHICS FOR MANAGERS Having gone through the definitions of what is and what is not ethics, let us see now how ethics and values should form the bases of the code of conduct that ought to govern the behaviour of business managers. In the exercise of their duties and responsibilities, managers must observe the following ethical values: ∑ Integrity: Integrity is the cornerstone of all values. A business manager should be morally upright. It is this characteristic that distinguishes a professional manager from a mercenary. ∑ Impartiality: A manager should look at and treat all aspects of an issue in a fair and unprejudiced manner. ∑ Responsiveness to the public interest: Though a manager is paid to serve the interests of the stockholders of the company, public interest is no less important. In fact, managers should consider it as of paramount importance, if they have to be successful in their tasks. ∑ Accountability: Accountability is one of the basic characteristics of a good business manager. Business managers are responsible for all their actions and are accountable to all the stakeholders—stockholders, creditors, employees, consumers, government and the society at large. ∑ Honesty: A cardinal ethical value that a manager should possess is this quality. Managers should be fair, just and sincere both in character and behaviour. They should not indulge in cheating or stealing and should be free of deceit and untruthfulness. ∑ Transparency: Good business managers should be transparent and set standards for others to follow. They should be frank and open. Their actions should be easily discussed and understood by others. What values are to individuals, ethics is to business. EVOLUTION OF ETHICS OVER THE YEARS If we trace the history of ethics in business, we would realize that ethics had been a part of theological discussions prior to 1960. Before the 1970s, there were a few writers like Raymond Baumhart who dealt with ethics and business. Ethical issues were mostly discussed as part of social issues. Men of religion and theologians continued writing and teaching on ethics in business. Professors in B-schools wrote and continued to talk about corporate social responsibility (CSR), the handmaid of ethics. However, the catalyst that led to the field of business ethics was the entry of several ‘philosophers, who brought ethical theory and philosophical analysis to bear on a variety of issues.’7 Norman Bowie8 dates the genesis of business ethics as November 1974, with the first conference on the subject held at the University of Kansas. In 1979, three anthologies on business ethics appeared. They were (i) Ethical Theory and Business by Tom Beauchamp and Norman Bowie; (ii) Ethical Issues in Business: A Philosophical Approach by Thomas Donaldson and Patricia Werhane; and (iii) Moral Issues in Business by Vincent Berry. In 1982, Richard De George brought out Business Ethics, while Manuel G. Velasquez published his Business Ethics: Concepts and Cases. All these books created a lot of interest on the subject and business ethics courses were offered in several management schools. The emergence of business ethics, however, was not restricted to textbooks and courses in B-schools. By 1975, business ethics became institutionalized at many levels through writings and conferences. By the 1980s, the subject was taught in several universities in the United States and Europe. There were also, by this time, many journals of business ethics, apart from centres and societies established to promote ethical practices. By the year 1990, business ethics as a management discipline was well-established. ‘Although the academicians from the start had sought to develop contacts with the business community, the history of the development of business ethics as a movement in business, though related to the academic developments, can be seen to have a history of its own.’9 7 8 BUSINESS ETHICS—AN INDIAN PERSPECTIVE Parallel to these academic pursuits, around the time from the 1960s to the 1980s, the Consumers’ Association in Britain multiplied its membership and campaigned hard on issues such as consumer rights, quality, safety, price, customer service and environmental concerns. The late 1980s and early 1990s saw increased concern for the environment and by 1989 environment was the issue of greatest concern in Britain. In 1988, more than 50 per cent of the people in West Germany called themselves green consumers, that is, those who preferred to select one product over another for environment-friendly reasons. The United States followed with 45 per cent, Australia with 27 per cent, Great Britain with 14 per cent, which within one year shot up to 42 per cent. Simultaneously with these developments or even anticipating them, religion also lent its powerful voice. Catholic teachings such as Papal Encyclicals emphasized the need for morality in business, such as workers’ rights and living wages as in Rerum Novarum of Pope Leo XIII. Some of the Protestant seminaries developed ethics as part of their curriculum. During the 1960s, there was a rise of social issues in business and many business practices came under social scrutiny during this period. President John F Kennedy’s Consumer Bill of Rights reflected a new era of consumerism. During the 1970s, professors teaching business began to write about business ethics and philosophers began to involve themselves in the theoretical evolution of the subject. Businessmen became more concerned with their public image and addressed ethics more directly. From this historical development, we can see that business ethics as a field of study and research is a fairly nascent subject. IMPORTANCE AND NEED FOR BUSINESS ETHICS Ethics is closely related to trust. Most people would agree on the fact that to develop trust, behaviour must be ethical. Ethical behaviour is a necessity to gain trust. Trust will be used as an indicator variable of ethics. Basically, trust is three-dimensional, that is, trust in supplier relationships, trust in employee relationships and trust in customer relationships. In such a situation, the entire stakeholders of the company are taken care of. If the company is able to maintain this trust-relationship with the internal as well as external stakeholders, then we can call that company as an ethical company. Trust leads to predictability and efficiency of business. Ethics is all about developing trust and maintaining it fruitfully so that the firm flourishes profitably and maintain good reputation. Lack of ethics would lead to unethical practices in organizations as well as in personal life. One wonders why sometimes even educated, well-positioned managers or employees of some reputed companies act unethically. This is because of lack of ethics in their lives. We can point out to numerous examples of companies whose top managements are involved in unethical practices, for example, Enron and WorldCom, in 2002 and a host of others including investment bankers Lehman Brothers and Merrill Lynch in 2008. Earlier it was said that ‘business of business is business’. Now there is a sudden change in the slogan. In the contemporary scenario where ethics has got its due importance, the slogan has taken the form: ‘the business of business is ethical business’. Applying ethics in business makes good sense because it induces others to follow ethics in their behaviour. Ethics is important not only in business but also in all aspects of life. The business of a society that lacks ethics is likely to fail sooner or later. People as investors and members of civil society are concerned about unethical and anti-social development in organizations. The collapse of the Global Trust Bank, the UTI fiasco and the spat between the Ambani brothers caused concern to the investing and general public. A study of business ethics helps us unravel the underlying forces—Why these things happen? What are their implications and what are the options available to solve the problems that arose? Business ethics enables us ‘assess the benefits and problems associated with different ways of managing ethics in organizations’.10 It helps us assess the role of business in contemporary society. Even as business contributes to the growth of the society by offering products and services, enhancing incomes and standard of living, providing jobs, paying taxes to the government and being the facilitator for economic development, its functioning often raises several ethical issues such as pollution, environmental degradation, and corrupt practices. ‘That go to the heart of the social role of business.’11 By enabling people to understand these malpractices and the consequent repercussions, business ethics seeks to improve the welfare of the society by offering a social and political platform for remedial, and sometimes proactive action. There are thousands of companies which, notwithstanding the poor image business community as a whole has among the public, have succeeded in making profit and enhanced public esteem by following ethical practices in their realm of business. Some of such companies are: Johnson & Johnson, Larsen & Toubro, Wipro, Infosys and Tata Steel. They have gained the trust of the public through ethical practices. In India, the House of Tatas, for instance, adheres to, and communicates key ethical standards in several ways. The Tata Code of Conduct affirms that ‘The Tata name represents more than a century of ethical conduct of business in a wide BUSINESS ETHICS: AN OVERVIEW array of markets and commercial activities in India and abroad. As the owner of the Tata mark, Tata Sons Ltd., wishes to strengthen the Tata brand by formulating the Tata Code of Conduct, enunciating the values that have governed and shall govern the conduct and activities of companies associating with or using the Tata name and of their employees’.12 SIGNIFICANCE OF BUSINESS ETHICS Events in corporate America, Europe, and in many emerging economies at the beginning of the new millennium and more recently at the fag end of 2008, have demonstrated the destructive fall-outs that take place when the top management of companies do not behave ethically. Lack of ethics has led highly educated, resourceful and business savvy professionals in mega corporations such as Enron, Tyco, Waste Management, WorldCom and Adelphia Communications to get themselves into a mess. In India too, we have had several instances of highly successful corporations such as ITC and Reliance getting into severe problems when the top brass misled them to unethical practices. Recently, the chairman of the South Korean automobile giant, Hyundai, Chung Mong-Koo was arrested and jailed for diverting more than $1 billion from the company as bribe to government officials. If we analyse the reasons as to why such unethical practices take place in corporations, we may come across several dimensions to the discussion on the importance and significance of business ethics. There are quite a few businessmen and entrepreneurs who are of the opinion that business and ethics do not go hand in hand, as there is no proven evidence that following ethical practices does bring profits to the firm. They think that a company may not be in a position to reap the full benefits offered by the business environment if they were to worry about how ethically they should run the organization. It may not be able to take advantage of the opportunities provided by circumstances if they have to worry about ethical considerations all the time. Besides, the choice of an ethical alternative among many other alternatives and getting due benefits after investing on ethical practices may take time, which may act as a constraint. There are others to whom making profit and increasing market capitalization are the only imperatives and yardsticks of efficiency and successful corporate management. To them, the end justifies the means. There are hundreds of CEOs who hold this opinion and act unethically, though many of them were proved wrong when nemesis caught up with them as in the cases of top executives of WorldCom and Enron. Real-life situations have shown that use of ethical practices in business does create high returns for companies. There have been many empirical studies that have shown that companies that follow ethical practices are able to double their profits and show increased market capitalization compared to companies that do not adhere to ethics. In our own country, Tata Steel and Infosys are two classic examples that illustrate this line of thinking. Running a business ethically is good for sustaining business. Applying ethics in business also makes good sense. The corporation that behaves ethically prompts other business associates, by its good example, to behave ethically as well. Organizations work on synergy and delegation. It is the feeling of the oneness with the company, which is called as a feeling of ownership, that enhances the sincerity of a worker in an organization. Organizations cannot work in a manner where the employees are not given due importance in their affairs. For example, if a management exercises particular care in meeting all responsibilities to employees, customers and suppliers, it usually is rewarded with a high degree of loyalty, quality and productivity. Likewise, employees who are treated ethically will more likely behave ethically themselves in dealing with customers and business associates. A supplier who refuses to exploit his advantage during a seller’s market condition retains the loyalty and continued business of its customers when conditions change to those of a buyer’s market. A company like Sakthi Masala Pvt. Ltd, that does not discriminate against elderly or handicapped employees and uses every opportunity to convince them that they are wanted as much as others, discovers that they are fiercely loyal, hardworking and productive. There is a cultivated belief in society for thousands of years, may be due to religious influence or an unwavering faith in morality, that a ‘good man’ who steadfastly tries to be ethical is bound to overtake his immoral or amoral counterpart in the long run. A plausible explanation of this view on ethical behaviour is that when individuals operate with a conviction on the ethical soundness of their position, their minds and energies are freed for maximum productivity and creativity. On the other hand, when practising unethical behaviour, persons find it necessary to engage in exhausting subterfuge, resulting in diminished effectiveness and reduced success. Professionals like Kenneth Lay, Martha Stewart, Dennis Kozlowski or Bernard Ebbers, the CEO of WorldCom who earned themselves disrepute by paying themselves millions of dollars in compensation while 9 10 BUSINESS ETHICS—AN INDIAN PERSPECTIVE their companies were in dire financial straits were certainly aware of what constitutes ethics.13 They were either too blinded by self-interest or simply did not care that they were not following the standards that they had set for their subordinates. The top management of organizations, who take personal pay cuts in difficult financial times for their organizations are respected by everyone. Companies should have the flexibility of adjusting cost structures during bad times, replace old factories with new ones, or change technology in ways that would require fewer people to do the work. These decisions should be taken after ensuring that those affected are empathized with and are provided adequate financial support. Managers may face situations where they are not sure, or are perplexed about the ethical side of their actions. If a company believes that profits are more important than environmental protection, the decision of its manager to halt a process on account of his concern about its impact on the environment might not be appreciated by the company. It is up to the manager to analyse whether the proposed action would be in terms with the goals of the firm and take a decision accordingly. Moral or ethical behaviour can neither be legislated nor taught in a vacuum. Authority, it is said, cannot bring about morality. The best way to promote ethical behaviour is by setting a good personal example. Teaching an employee ethics is not always effective. One can explain and define ethics to an adult, but understanding ethics does not necessarily result in behaving ethically. Personal values and ethical behaviour are taught at an early age by parents and educators. The innate human belief that ethical, moral or good behaviour will find its reward ultimately is deeply ingrained in people’s psyche. This is demonstrated in stage plays and films where the ‘virtuous’ hero wins over the ‘wicked’ villain. The fact that people would rarely accept the success of evil or unethical forces over the ethical or good ones has been demonstrated time and again by the failure in box office of such plays or films depicting such an unconventional formula. Ethics are important not only in business but also in all aspects of life because it is an essential part of the foundation on which a civilized society is built. A business, as much as a society, that lacks ethical principles is bound to fail sooner than later. HONESTY, INTEGRITY AND TRANSPARENCY ARE THE TOUCHSTONES OF BUSINESS ETHICS Ethical corporate behaviour is nothing but a reiteration of the ancient wisdom that ‘honesty is the best policy’. The dramatic collapse of some of the Fortune 500 companies such as Enron and WorldCom or the wellknown auditing firm Andersen showed that even successful companies could ultimately come to grief, if their managers did not practise the basic principles of integrity. For every profession ‘we would think of a code of conduct or a set of values, which has a moral content and that would be the essence of ethics for that profession’.14 There should be transparency in operations leading to accountability, which should ensure safety and protect the interest of all stakeholders. VALUES AND ETHICS IN BUSINESS Business ethics are related to issues of ‘what is right’ and ‘what is wrong’ while doing business. The constituents of business ethics include adherence to truth, a commitment to justice and public integrity. What values are to individuals, ethics are to business. Personal values as we have seen earlier, refer to a conception of what an individual or group regards as desirable. A value is a view of life and judgement of what is desirable that is very much part of a person’s personality and a group’s morale. Thus, a benign attitude to labour welfare is a value which may prompt an industrialist to do much more for workers than what the labour law stipulates. Service-mindedness is a value which when cherished in an organization would manifest in better customer satisfaction. Personal values are imbibed from parents, teachers and elders, and as an individual grows, values are adapted and refined in the light of new knowledge and experiences. Within an organization, values are imparted by the founder-entrepreneur or a dominant chief executive and they remain in some form, even long after that person’s exit. J.R.D. Tata once said this when asked to define the House of Tatas and what links that forge the Tata companies together: ‘I would call it a group of individually managed companies united by two factors: First, a feeling that they are part of a larger group which carries the name and prestige of Tatas, and public recognition of honesty and reliability—trustworthiness. The other reason is more metaphysical. There is an innate loyalty, BUSINESS ETHICS: AN OVERVIEW a sharing of certain beliefs. We all feel a certain pride that we are somewhat different from others.’15 These several values that J.R.D. Tata refers to have been derived from the ideals of the founder of the group, Jamsedji Tata. Business ethics operate as a system of values relating business goals and techniques to meet specific human ends. This would mean viewing the needs and aspirations of individuals as part of society. It also means realization of the personal dignity of human beings. A major task of leadership is to inculcate personal values and impart a sense of business ethics to the organizational members. At one end, values and ethics shape the corporate culture and dictate the way how politics and power will be used and, at the other end, clarify the social responsibility in the organization. A typical dilemma faced by people in business is to decide whether to reconcile the pragmatic demands of work which often degenerate to distortion of values and unethical business practices, or to listen to the call of the ‘inner voice’ which somehow prevents them from using unethical means for achieving organizational goals. This dilemma stems from the fact that apparently the value system of the organization has already been contaminated beyond redemption. Some analysts attribute this to the acceptable behaviour in society at a particular point of time or justify it in terms of the rapid transition of a developing society where social mechanisms become obsolete. For instance, many multinational companies (MNCs) in India indulge in some undesirable practices such as resorting to payment of speed money, bribery, use of substandard inputs, evasion of excise duties and corporation taxes, etc., which they would be wary of doing in their home countries because of the stigma and penalty attached to such activities. Besides, the dire need to make a profit in a fiercely competitive environment also makes them indulge in such malpractices. Corruption in industry, which is a major by-product of degradation of values and ethics, is also related to the inability of industry to stand up to the discretionary powers of a regulatory system designed and administered by an unholy alliance of bureaucrats and politicians. But repeated observations have shown that excellent organizations—besides other values—have explicit belief in, and recognition of the importance of economic growth and profits, and are driven by values rather than avarice. It has been possible for Indian companies such as Infosys, Tata Steel, Asian Paints, Bajaj Auto and Wipro to excel on the basis of super-ordinate goals—a set of values and aspirations and corporate culture. Managers, therefore, have to provide the right values and ethical sense to the organizations they manage. Take for instance, such issues as consumers being taken for a ride on matters such as warranty, annual maintenance contracts, consumers being asked to pay very high prices for components, discriminating prices, management’s collusion with union leadership, FEMA violations, insider trading, lack of transparency, lack of integrity and unfair presentation of financial statements, feeding top managements only with information they want to hear, window dressing of balance sheets, backdating of contracts, manipulation of profit and loss accounts, hedging and fudging of unexplainable and inordinate expenditures and resorting to suppressio veri, suggestio falsi, and continuous upward revaluation of assets to conceal poor performance, etc. These are only the tips of the iceberg. VALUES, ETHICS AND BUSINESS STRATEGY Personal values and ethics are important for all human beings. They are especially important for business managers as they are custodians of the immense economic power vested in business organizations by society. However, can managers prevent their personal values from affecting business strategy formulation and implementation? This is a tricky question. It is often observed from failed corporations that management executives while working out their business strategy are guided generally by what they personally want to do, rather than what they have been directed to do by the board, or the company policy in the absence of any direct supervision. As a result, somewhere down the line, the right connection between values, ethics and strategy is lost while their managing business. However, it is vitally necessary that business managers should be guided as much by values and ethics as by economic reasons. Guided by this, it can be added that ‘purity of mind’, can come only from having the right connection between values, ethics and strategy. It is imperative that executives take business decisions not only on the basis of purely economic reasons but on ethical and moral values as well. ‘Using ethical considerations in strategic decision making will result in the development of most effective long-term and short-term strategies. Specifically, ethical criteria must be included as part of the strategic process before-profit decisions rather than after-profit decisions.’16 This will enable the company maximize profits and enhance the development of strategy and its implementation. 11 12 BUSINESS ETHICS—AN INDIAN PERSPECTIVE DISTINCTION BETWEEN VALUES AND ETHICS At this point, it is necessary to differentiate between values and ethics. Values are personal in nature (e.g., a belief in providing customer satisfaction and being a good paymaster) while ethics is a generalized value system (e.g., avoiding discrimination in recruitment and adopting fair business practices). Business ethics can provide the general guidelines within which management can operate. Values, however, offer alternatives to choose from. For example, philanthropy as a business policy is optional. An entrepreneur may or may not possess this value and still remain within the limits of business ethics. It is values, therefore, that vary among managers in an organization and such a variance may be a source of conflict at the time of business strategy formulation and implementation. Managers have to reconcile divergent values and modify values, if necessary. A typical situation of value divergence may arise while setting objectives and determining the precedence of different objectives. One group of managers (may be a coalition) may be interested in standardization of production-oriented objectives and mass production while another group may stress marketing-related objectives product quality and variety, small-log production, etc. These interests may be legitimate in the sense that they arise from their functional bias. It is for the chief executive to reconcile the divergent values. Obviously, this can best be done in the light of strategic requirements and environmental considerations. Modification of values is frequently required for business strategy implementation. A particular business strategy, say of expansion, may create value requirements such as stress on efficiency, risk-taking attitude, etc. Implementation may be sub-optimal if existing values do not conform to these requirements. In such cases, modification of values is necessary. But what was said of corporate culture is true for values too; they are difficult, if not impossible, to change. A judicious use of politics and power, redesigning of corporate culture, and making systematic changes in organizations can help modify values gradually. ROOTS OF UNETHICAL BEHAVIOUR People often wonder why employees indulge in unethical practices such as resorting to lying, bribery, coercion, conflicting interest, etc. There are certain factors that make the employees think and act in unethical ways. Some of the influencing factors are ‘pressure to balance work and family, poor communications, poor leadership, long work hours, heavy work load, lack of management support, pressure to meet sales or profit goals, little or no recognition of achievements, company politics, personal financial worries, and insufficient resources’.17 The statistical data given by Ethics Officers Association in 1997 show how certain practices or factors contribute to unethical behaviour. 18 Balancing work and family Poor leadership Poor internal communication Lack of management support Need to meet goals 52 per cent 51 per cent 51 per cent 48 per cent 46 per cent From the above statistics it is very much evident that conflicting interests lead to most of the unethical practices. WHY DOES BUSINESS HAVE SUCH A NEGATIVE IMAGE? The fact that by and large business has a negative image cannot be overstressed. Books, journals, movies and TV shows invariably depict business in bad light. Even though businessmen may not want to be unethical, factors such as competitive pressures, individual greed, and differing cultural contexts generate ethical issues for organizational managers. ‘Further, in almost every organization some people will have the inclination to behave unethically (the ethical egoist) necessitating systems to ensure that such behaviour is either stopped or detected and remedied.’19 WHY SHOULD BUSINESSES ACT ETHICALLY? An organization has to be ethical in its behaviour because it has to exist in the competitive world. We can find a number of reasons for being ethical in behaviour, few of them are cited below: Most people want to BUSINESS ETHICS: AN OVERVIEW be ethical in their business dealings. Values give management credibility with its employees. Only perceived moral righteousness and social concern bring employee respect. Values help better decision making. There are a number of reasons why businesses should act ethically: ∑ ∑ ∑ ∑ ∑ ∑ ∑ ∑ ∑ ∑ to protect its own interest; to protect the interests of the business community as a whole so that the public will have trust in it; to keep its commitment to society to act ethically; to meet stakeholder expectations; to prevent harm to the general public; to build trust with key stakeholder groups; to protect themselves from abuse of unethical employees and competitors; to protect their own reputations; to protect their own employees; and to create an environment in which workers can act in ways consistent with their values. Besides, if a corporation reneges on its agreement and expects others to keep theirs, it will be unfair. It will also be inconsistent on its part, if business agrees to a set of rules to govern behaviour and then to unilaterally violate those rules. Moreover, to agree to a condition where business and businessmen tend to break the rules and also get away with it is to undermine the environment necessary for running the business. Hard decisions which have been studied from both an ethical and an economic angle are more difficult to make, but they will stand up against all odds, because the good of the employees, public interest, and the company’s own long-term interest and those of all stakeholders would have been taken into account. Ethics within organizations is a must. It should be initiated by the top management, and percolate to the bottom of the hierarchy. Then alone, will the company be viewed as ethical by the business community and the society at large. ‘Further, a well-communicated commitment to ethics sends a powerful message that ethical behaviour is considered to be a business imperative.’20 If the company needs to make profit and to have a good reputation, it must act within the confines of ethics. Ethical communication within the organization would be a healthy sign that the company is marching towards the right path. Internalization of ethics by the employees is of utmost importance. If the employer has properly internalized ethics, then the activities that individuals or organizations carry out will have ethics in them. ETHICAL DECISION-MAKING Ethical decision-making is a very tough prospect in this dog-eats-dog world. However, in the long run all will have to fall in and play fair. The clock is already ticking for the unscrupulous corporations. In this age of liberalization and globalization, the old dirty games and unethical conduct will no longer be accepted and tolerated. Norman Vincent Peale and Kenneth Blanchard21 have prescribed some suggestions to conduct ethical business. ∑ Is the decision you are taking legal? If it is not legal, it is not ethical. ∑ Is the decision you are taking fair? In other words, it should be a win-win-equitable risk and reward. ∑ Follow the Eleventh Commandment—‘Though shall not be ashamed when found’, meaning when you are hauled up over some seemingly unethical behaviour, if one’s conscience is clear, then there is nothing to be ashamed of. HOW CORPORATIONS OBSERVE ETHICS IN THEIR ORGANIZATIONS? Organizations have started to implement ethical behaviour by publishing in-house codes of ethics which are to be strictly followed by all their associates. They have started to employ people with a reputation for high standards of ethical behaviour at the top levels. They have started to incorporate consideration of ethics into performance reviews. Corporations which wish to popularize good ethical conduct have started to reward ethical behaviour. Codes promulgated by corporations and regulatory bodies continue to multiply. Some MNCs such as Nike, Coca Cola, GM and IBM, and Indian companies such as ICICI, TISCO, Infosys, Dr Reddy’s Lab, NTPC, ONGC, Indian Oil and several others want to be seen as ‘socially responsible’ and have issued codes governing all types of activities of their employees. Securities and Exchange Board of 13 14 BUSINESS ETHICS—AN INDIAN PERSPECTIVE India (SEBI), the Indian capital market regulator, The Confederation of Indian Industries (CII) and such organizations representing corporations have issued codes of best practices and enjoin their members to observe them. These normative statements make it clear that corporate leaders anxious for business growth should not make plans without looking at the faces and lives of those oppressed by poverty and injustice. In fact, today, managers and would-be entrepreneurs are groomed to be ethical and socially responsible even while being educated. The Indian Institutes of Management (IIMs) and highly rated B-schools such as Xavier Labour Relations Institute (XLRI) and Loyola Institute of Business Administration (LIBA) have courses in their curriculum and give extensive and intensive instruction in business ethics, corporate social responsibility and corporate governance. Many corporations conduct an Ethics Audit and at the same time, they are continuously looking for more ways to be more ethical. CHANGING BUSINESS ENVIRONMENT AND ETHICAL CHALLENGES Companies these days respond to the changing business environment by adopting new and effective tools to communicate their ethical culture. The fast-changing external environment of business necessitates positive changes in the response of individual organizations. The change that is created by information and technological explosion is such that organizations cannot resist change any more. With these changes, several ethical issues have to be faced and solved to the satisfaction of all stakeholders. Due to the increasing shift in business growth, most of the organizations tend to give more powers to those at the lower levels of hierarchy leading to decentralization of power and decision making. The process of decentralization leads to a number of ethical issues in the organization. Conflicting goals of the individual and of the organization are the root cause of several unethical practices. Such strategic alliances have brought about complex and hitherto unknown ethical conflicts and have caused newer situations to emerge and challenge ethical decisions. With the huge increase in the availability of information coming from all sources such as partners, competitors and buyers, the possibility of unlawful and even illegal use of proprietary information is indeed enormous. When such conflicts of interest arise, companies have to solve them through ethical practices alone, as otherwise they will not in the long-run be able to survive in the modern fiercely competitive world. The ethical implications of a firm’s behaviour in a fast changing business environment were considered by McCoy22 who thinks ethics to be the core of business behaviour. He states: ‘Dealing with values requires continual monitoring of the surrounding environment, weighing alternative courses of action, balancing and (when possible) integrating conflicting responsibilities, setting priorities among competing goals, and establishing criteria for defining and evaluating performance.’ Apart from these, there are learning ways that bring this ethical reflection directly and fully into the policy-making processes. Increasingly, value-based skills are being recognized as integral components of performance and policy making and as central for effective management in a society and a world undergoing rapid change. CORPORATE GOVERNANCE ETHICS Though the concept of corporate governance may sound a novelty in the Indian business context and may be linked to the era of liberalization, it should not be ignored that the ancient Indian texts are the true originators of good business governance as one important sloka from the Rigveda says, ‘A businessman should benefit from business like a honey-bee which suckles honey from the flower without affecting its charm and beauty.’23 Business ethics and corporate governance of an organization go hand in hand. In fact, an organization that follows ethical practices in all its activities will, in all probability, follow best corporate governance practices as well. The Phoenix School of Management24 defines corporate governance ‘as a set of policies and procedures that the company’s directors employ in their conduct of the company’s affairs and their relationship with shareholders to whom they are responsible as managers’. Well-known and respected organisations such as the OECD, KPMG and the World Bank conceptualize corporate governance as an entire system with well-defined codes, rules and structures in order to direct and control business and non-business organizations. There are some others who define corporate governance as the guiding principle that on one hand tries to synthesize the seemingly conflicting goals among the individual, the corporation and the community, and on the other, between the immediate benefits to the corporation such as profits and the secular ‘and lasting BUSINESS ETHICS: AN OVERVIEW substantive social gains’.25 But more commonly, corporate governance is understood as a set of rules that govern the administration and management of companies. It is considered as ‘an entire system with codes, values, rules and structures to control the goals and goal performance of companies; and also as a method by which to evaluate the working of an organization in terms of how rights of various parties are defined and distributed’.26 In all these facets of corporate governance the underlying goalposts are transparency, integrity, full disclosure of financial and non-financial information, protection of stakeholders’ interests. These tenets are as much ethical practices as they are part of corporate governance. As a public company, it is of critical importance that a company’s filings with the regulators are accurate and timely. The CEO and the senior leadership of the finance department bear a special responsibility for promoting integrity throughout the organization, with responsibilities to stakeholders, both inside and outside of the company. A company, well governed in every aspect of internationally accepted corporate governance norms would put in place the following ethical practices27: 1. Act with honesty and integrity, avoiding actual or apparent conflict of interest in personal and professional relationships; 2. Provide information that is accurate, complete, objective, relevant, timely and understandable to ensure full, fair, accurate, timely, understandable disclosure in reports and documents that companies file with, or submit to the regulators; 3. Comply with the laws of the land, rules and regulations set forth by the different layers of governments and those of the regulatory bodies concerned with your business; 4. Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing one’s independent judgement to be subordinated; 5. Protect the confidentiality of the information provided at the workplace and not disclose it to anyone unless authorized or legally bound to do so; 6. Ensure confidential information made available in the place of work is not used to promote personal benefit; 7. Share knowledge and maintain skills important and relevant to stakeholders’ needs. ‘Proactively promote and be an example of ethical behaviour as a responsible partner among peers, in the work environment and the community’; and 8. Achieve responsible use of and control over all assets and resources employed or entrusted. HOW ETHICS CAN MAKE CORPORATE GOVERNANCE MORE MEANINGFUL? 1. Corporate governance is meant to run companies ethically in a manner such that all stakeholders— creditors, distributors, customers, employees, and even competitors, the society at large and governments—are dealt with in a fair manner. 2. Good corporate governance should look at all stakeholders and not just shareholders alone. Otherwise, a chemical company, for example, can maximize the profit of shareholders, but completely violate all environment laws and make it impossible for the people around the area even to lead a normal life. Ship-breaking at Valinokkam, near Arantangi in Tamil Nadu, leather tanneries and hosiery units in Tirupur, have brought about too much of environmental degradation, and along with it, untold miseries to people in and around their locations. 3. Corporate governance is not something which regulators have to impose on a management, it should come from within. There is no point in making statutory provisions for enforcing ethical conduct. There had been dozens of violations of SEBI rules, RBI guidelines, etc. when company managements were not inclined to follow them. On the other hand, there had also been several instances where companies had gone beyond these rules to serve stakeholders since the top management preferred them that way. 4. There are several provisions in the Companies Act, e.g., (i) disclosing the interest of directors in contracts in which they are interested; (ii) abstaining from exercising voting rights in matters they are interested, and (iii) statutory protection to auditors who are supposed to go into the details of the financial management of the company and report the same to the shareholders of the company. But most of these may be observed in letter, not in spirit. Members of the board and top management should ensure that these are followed both in letter and in spirit. 15 16 BUSINESS ETHICS—AN INDIAN PERSPECTIVE 5. There are a number of grey areas where the law is silent or where the regulatory framework is weak. These are manipulated by unscrupulous persons like Ketan Parekh and Harshad Mehta. In the United States, for instance, the courts recognize that new forms of fraud may arise, which may not be covered technically under any existing law and cannot be interpreted as violating any of the existing laws. For example, a clever conman can try to sell a piece of the blue sky! In order to check such crooks, there is the concept of the ‘blue sky’ law. However, such wide-ranging processes are not available to courts in developing countries like India. 6. SEBI has jurisdiction only in cases of limited and listed companies and is concerned only with their protection. What about the shareholders and stakeholders of other unlisted limited companies that far outnumber listed companies? 7. The Serious Fraud Investigation Office (SIFO) in the Department of Corporate Affairs (DCA) has been investigating several ‘vanishing companies’. By 2003, SEBI had identified 229 ‘vanishing companies’—which tapped the capital market, collected funds from the public and subsequently became untraceable. However, thousands of investors have lost their hard-earned money and no agency has come to their rescue so far with the seriousness it deserves. A business organization has to compete for a share in the global market on its own internal strength, in particular on the strength of its human resource, and on the goodwill of its other stakeholders. While its state-of-the-art technologies and high level managerial competencies could be of help in meeting the quality, cost, volume, speed and breakeven requirements of the highly competitive global market, it is the value-based management and ethics that the organization has to use in its governance. That would enable the organization establish productive relationship with its internal customers and lasting business relationship with its external customers. BENEFITS FROM MANAGING ETHICS IN WORKPLACE Several benefits accrue to an enterprise if it is managed ethically. They are the following: ATTENTION TO BUSINESS ETHICS HAS SUBSTANTIALLY IMPROVED SOCIETY Establishment of anti-trust laws, unions, and regulatory bodies has contributed to the development of society. There was a time when discriminations and exploitation of employees were high, the fight for equality and fairness at workplace ended up in establishing certain laws which benefited the society. ETHICAL PRACTICE HAS CONTRIBUTED TOWARDS HIGH PRODUCTIVITY AND STRONG TEAM WORK Organizations being a collection of individuals, the values reflected will be different from that of the organization. Constant check and dialogue will ensure that the value system of the employee matches the values of the organization. This will in turn result in better cooperation and increased productivity. CHANGING SITUATIONS REQUIRE ETHICAL EDUCATION During turbulent times, when chaos becomes the order of the day, one must have clear ethical guidelines to take right decisions. Ethical training will be of great help in those situations. Such training will enable managers manning corporations to anticipate situations and equip themselves to face them squarely. ETHICAL PRACTICES CREATE STRONG PUBLIC IMAGE Organizations with strong ethical practices will possess a strong image among the public. This image would lead to strong and continued loyalty of employees, consumers and the general public. Conscious implementation of ethics in organizations becomes the cornerstone for the success and image of the organization. It is because of this ethical perception that the employees of TISCO and the general public protested in 1977 when the then Minister for Industries in the Janata Government, George Fernandes, attempted to nationalize the company. STRONG ETHICAL PRACTICES ACT AS AN INSURANCE BUSINESS ETHICS: AN OVERVIEW Strong ethical practices of the organization are an added advantage for the future function of the business. In the long run, it would benefit if the organization is equipped to withstand the competition. CHARACTERISTICS OF AN ETHICAL ORGANIZATION Mark Pastin28 in his work, The Hard Problems of Management: Gaining the Ethical Edge provides the following characteristics of ethical organizations: a. They are at ease interacting with diverse internal and external stakeholder groups. The ground rules of these firms make the good of these stakeholder groups part of the organization’s own good. b. They are obsessed with fairness. Their ground rules emphasize that the other persons’ interests count as much as their own. c. Responsibility is individual rather than collective, with individuals assuming personal responsibility for actions of the organization. These organizations’ ground rules mandate that individuals are responsible to themselves. d. They see their activities in terms of purpose. This purpose is a way of operating that members of the organization highly value. And purpose ties the organization to its environment. There will be clear communications in ethical organizations. Minimized bureaucracy and control paves way for sound ethical practices. RECOGNIZING ETHICAL ORGANIZATIONS There are certain characteristics by which we will be able to identify an ethical organization. ON THE BASIS OF CORPORATE EXCELLENCE Corporate excellence mainly centres on the corporate culture. Values and practice of such values constitute the corporate culture. Values of the organization give a clear direction to the employee. Values are found in the mission statement of organizations. Often they remain as a principle and are never put into practice. Only the practised value creates the organization culture. When values act in tune with the goals of the organization we call it as the corporate culture of that organization. Often we see conflicting interests between the value and the organizations’ goal. Organizations must eradicate such impediments to be identified as ethical. IN RELATION TO THE STAKEHOLDERS Meeting the needs of stakeholders through the activities of the managers determines whether the organization is ethical or not. The top management is the representation of the stakeholders and every decision made must satisfy the needs of the stakeholder. It need not be stressed here that it was the stakeholders’ pressure that has been instrumental in bringing ethical issues into the centre-stage of corporate agenda. Consumers in most developed societies want corporations to demonstrate ethical responsibility in every area of their functioning and in their treatment of employees, the community, the environment, etc. Companies have been prompted to change their way of thinking and working so that ethical issues and corporate responsibility become an integral part of their business. The management while making decisions must see that the stakeholders enjoy the maximum benefit of that decision. For example, Marico, the makers of Parachute Oil, discovered a harmless tint in the oil from one of its production lines. The company withdrew the batch from the market, shut down the production line, but kept the workers on payroll and involved them in the investigation of the cause. Shortly, the workers located the cause, rectified it and resumed normal production. IN RELATION TO CORPORATE GOVERNANCE Managers are only stewards of the owners of the corporate assets. Thus they are accountable for the use of the assets to the owners. If they perform well in the prescribed manner, then there would not be much question of corporate governance. Such behaviour of the top managers would generate ethical practices or at least would 17 18 BUSINESS ETHICS—AN INDIAN PERSPECTIVE encourage ethical practices in the organization. If only the top management is paid as per their performance, this approach would work. SUMMARY Ethics involves systemizing, defending and recommending concepts of right and wrong behaviour. It is important to clarify what is not ethics. Ethics is different from religion since it applies to all people irrespective of their religious affiliations. Ethics is not synonymous with law. Ethical standards are different from cultural traits. Ethics is also different from feelings. And strictly speaking, ethics is not a science. While personal ethics refers to the application of desirable values in everything one does, business ethics is the application of ethical principles of integrity and fairness, and concentrates on the benefits to all stakeholders. Business managers should have integrity, impartibility, responsiveness to public interest, accountability, and honesty. Prior to 1960, ethics was part of theological discussions. Later on writers like Raymond Baumhart, Richard T. De George, Thomas Donaldson, Patricia Werhane, Vincent Berry and Manuel G. Velasquez contributed their mite to the growth of the subject. Along with academic pursuits, the Church, B-schools and consumer movement also added to the development of business ethics. In today’s world, business of business is ethical business. With the globalization of business, monopolistic market condition or State patronage for any business organization has become a thing of the past. A business organization has to compete for a share in the global market on its own internal strength, in particular on the strength of its human resource, and on the goodwill of its stakeholders. While the state-of-the-art technologies and high-level managerial competencies of an organization could be of help in meeting the quality, cost, volume, speed and breakeven requirements of the highly competitive global market, it is the value-based management and ethics in its governance that would enable it establish productive relationship with its internal customers and lasting business relationship with its external customers. Real-type situations show that use of ethical practices in business creates high returns for companies, for example, Tata Steel and Infosys. Besides, running business ethically is good for sustaining business. To exist and be successful in a competitive world, business has to be ethical. Moral or ethical behaviour should come from within and should be driven by examples of the top management. Managers have to reconcile divergent values and modify them if necessary. Organizations should work on synergy and delegation which will bring all round progress. Nowadays, companies adopt innovative tools to communicate their ethical culture as a response to the changing business environment. These changes bring in new issues and problems. Several benefits accrue to a firm if it follows ethical practices: it improves society, enhances productivity and team work, provides cause for ethical education, creates strong public image and insures against any pitfalls the firm may face. An ethical organization can be recognized on the basis of its corporate excellence and its relation to the stakeholders it follows: corporate governance, a set of rules that govern the administration and management of companies. Its goalposts are transparency, integrity, full disclosure of financial and non-financial information, and protection of stakeholders’ interests. These tenets are as much ethical practice as they are part of corporate governance. It is for these reasons that valuebased management and practice of ethics have become imperatives in corporate governance now, and in the foreseeable future. If values are the bedrock of any corporate culture, ethics are the foundation of authentic business relationships. KEY WORDS Ethikos ∑ Moral values ∑ Consumer pressure ∑ Regulatory pressure ∑ Applied ethics ∑ Empirical sciences ∑ Personal ethics ∑ Professional ethics ∑ Reasons of conscience ∑ Social need of non-injury ∑ Synonymous with law ∑ Mercenary ∑ Touchstones ∑ Collection of values ∑ Sustaining business ∑ Subterfuge ∑ Values and ethics ∑ Strategy ∑ Unethical behaviour ∑ Negative image ∑ Ethical challenges ∑ Corporate governance ∑ Listed companies ∑ Ethical organization ∑ Conflicts of interest ∑ Insider trading ∑ Credibility DISCUSSION QUESTIONS BUSINESS ETHICS: AN OVERVIEW 1. What is business ethics? Describe its nature. Is business ethics a necessity? 2. What are the major ethical issues that business faces today? Discuss them with suitable examples. 3. Explain what business ethics is, and what it is not. 4. What is the importance of ethics in business? Give suitable examples. 5. Explain the role of values in the making of business ethics. How these can be incorporated in working out business strategy? 6. What is corporate governance? How can ethics make corporate governance more meaningful? 7. What benefits accrue to business if ethics is made part of its strategy? 8. How would you recognize an ethical organization? What are its characteristics? NOTES 1. Ethics Quality. Available at www.aboutus.org/EthicsQuality.com 2. Larry Colero, A Framework For Universal Principles of Ethics. Available at www.ethics.ubc.ca/ -papers/invited/colero.html 3. Joseph W. Weiss, Business Ethics: A Stakeholder and Issues Management Approach (Orlando, FL: Harcourt Brace College Publishers, 1988), p. 7. 4. Christopher Cowton and Roger Crisp, Business Ethics: Perspective on the Practice Theory (New York, NY: Oxford University Press, 1998), p. 9. 5. Rituparna Raj, A Study in Business Ethics (Bombay: Himalaya Publishing, 1999), p. 3. 6. The Trends Team, Times of India, Chennai, July 7, 2008. 7. Richard T. De George, Business Ethics, 6th ed. (Englewood Cliffs, NJ: Pearson-Prentice Hall, 2005). 8. Norman Bowie, Business Ethics (Englewood Cliffs, NJ: Prentice Hall, 1982). 9. See Note 7. 10. Andrew Crane and Dirk Matten, Business Ethics, 2nd ed. (New York, NY: Oxford University Press, 2007). 11. Ibid. 12. Robert F. Drinan, “Globalisation and Corporate Ethics,” 10th J. R. D. Tata Oration on Ethics in Business, Jamshedpur: XLRI, 21 December 2000. 13. Henry Posters, “Importance of Ethics in Business,” August 2003, available at www.asqsandiego. org/articles/ethics1.htm. 14. P. Suresh Chander Pal, Chairman’s message. IEEE Madras Section Newsletter, September 2004, available at http://ewh.ieee.org/r10/madras/newsletter/04/nl-sep04.htm 15. See Note 11. 16. Susan Key and Samuel J. Popkin, “Integrating Ethics Into the Strategic Management Process: Doing Well by Doing Good,” Management Decision (1998), 36 (5): 331–338. 17. The Advantage, Personnel Management Consulting, Training and Support Newsletter; Walnut Creek, CA: The Management Advantage, Inc., (October 1997), 10 (2), available at www.management-advantage. com/newsletr/oct97.htm#PoorMotivation 18. Edward S Petry, Amanda E Mujica, and Dianne M Vickery, “Sources and Consequences of Workplace Pressure: Increasing the Risk of Unethical and Illegal Business Practices,” Business and Society Review (1998), 99 (1): 25-30. 19. Van Buren, “Ethical Dilemmas in Business,” 2007, available at http://mgtclass.mgt.unm.edu/ VanBuren/chapter%205.ppt#262,1, Why does business have such a negative image? 20. Jeri Calle, Ethics in Business, 2000, available at http://accounting.smartpros.com/x12209.xml 21. Norman Vincent Peale and Kenneth Blanchard, The Power of Ethical Management (New York, NY: William Morrow & Company). 19 20 BUSINESS ETHICS—AN INDIAN PERSPECTIVE 22. C. S. McCoy, Management of Values: The Ethical Difference in Corporate Polity and Performance, (Boston, MA: Ballinger, 1985). 23. C. L. Ramakrishnan, in the unpublished PPT on Business Ethics, LIBA, Rigveda. 24. The Phoenix School of Management, cited by A. C. Fernando in Corporate Governance (Delhi: Pearson Education, 2006). 25. S. M. Dewan, ed., Corporate Governance in Public Sector Enterprise (New Delhi: Pearson-Longman, 2006). 26. Ibid. 27. Arlington Housing Corporation, Code of Ethics, 2007, available at http://216.119.65.141/documents/ code_of_ethics.pdf 28. Mark Pastin, The Hard Problems of Management: Gaining the Ethical Edge (San Francisco, CA: JosseyBass, 1986). FURTHER READINGS Cowton, C. and Crisp, R., Business Ethics: Perspective on the Practice Theory (New York, NY: Oxford University Press), p. 9. Donaldson, T. “Values in Tension: Ethics Away from Home,” Harvard Business Review (September–October 1996). Drinan, R. F., “Globalisation and Corporate Ethics,” 10th J.R.D. Tata Oration on Ethics in Business, Jamshedpur: XLRI, 21 December 2007. Ferrel, O. C., Fraedrich, J. P., and Ferrel, L. Business Ethics: Ethical Decision Making and Cases, 6th ed. (New Delhi: Bizantra, 2006). Fritzsche, D. J., Business Ethics: A Global and Managerial Perspective (Singapore: McGraw-Hill, 1997). India Less Corrupt Than in 2005: Transparency, Deccan Chronicle, Chennai, 7 November 2006. Lala, R. M., “The Business Ethics of J.R.D. Tata,” The Hindu, 29 July 2004. Mulla, Z., “Corporates in India Cannot Afford to Be Ethical,” Management and Labour Studies (February 2003) 28 (1). Raj, R., A Study in Business Ethics (Bombay, Himalaya Publishing House, 1999), p. 3. Weiss, J. W., Business Ethics: A Stakeholder and Issues Management Approach (Orlando, FL: Harcourt Brace College Publishers, 1988), p. 7. BUSINESS ETHICS: AN OVERVIEW 21 CASE Study SATYAM COMPUTER SERVICES LIMITED (This case study is based on reports in the print and electronic media and is meant for academic purpose only. The author has no intention to sully the image of the corporate or executives discussed.) A BRIEF HISTORY Established on 24 June 1987 by B. Ramalinga Raju and his brother-in- law, D. V. S. Raju, Satyam Computer Services Limited (SCSL) was incorporated in 1991 as a public limited company. In a short time, it became a leading global consulting and IT-services company spanning 55 countries. During its heyday, it was ranked as India’s fourth largest software exporter, after TCS, Infosys and Wipro, and was one of the few Indian IT services companies listed on the New York Stock Exchange (NYSE). The 1990s, an era of considerable growth for the company, saw the formation of a number of subsidiaries, including Satyam Spark Solutions and Satyam Infoway (Sify)—the first Indian Internet company to be listed on the NASDAQ. Satyam acquired a lot of businesses and expanded its operations to many countries, and signed MoUs with many multinational companies in the early 2000s. The company signed contracts with numerous international players such as Microsoft, Emirates, TRW, i2 Technologies and Ford, claiming the privilege of being the first ISO 9001:2001 company to be certified by BVQI, and earning the reputation of a global IT company by opening offices in Singapore, Dubai and Sydney. In 2005, it acquired a 100 per cent stake in the Singapore-based Knowledge Dynamix and 75 per cent stake in London-based Citisoft Plc. Satyam was a company on the fast track to success and earned for itself a name in consulting in several key areas, from strategy to implementing IT solutions for customers. WHAT WENT WRONG WITH SATYAM? The success-run of the company was halted rather abruptly in early January 2009, when Satyam promoters resolved to invest the company’s funds in buying stakes for an amount equivalent to USD 1.6 billion against their book worth of only USD 225 million in two firms, Maytas Properties and Maytas Infra Limited, founded by chairman Ramalinga Raju’s sons. In response to the board of directors’ decision that such a move would amount to misuse of shareholders’ funds, the company’s promoters said that the decision did not call for the approval of the stockholders. However, a backlash in the market prompted the promoters to beat a hasty retreat, with the board annulling its earlier decision. Following this, the company’s stocks suffered severe mauling both at the Bombay Stock Exchange (BSE) and the NYSE, reflecting the unease and the anger of the investor community. On 7 January 2009 Ramalinga Raju confessed to massive fraud leading to the company’s stock crashing by more than 80 per cent on a single day. Raju then resigned as the Chairman of Satyam after admitting to major financial wrongdoings, involvement in inflating the profits of the company ‘for the past couple of years’. As a result of the revelation of the sensational fraud of about INR 80 billion by its promoters, the price of Satyam shares dived from INR 178.95 on 6 January 2009 to INR 3.80 before closing at INR 4.25 on 8 January 2009. Raju was said to have falsified accounts, created fictitious assets, padded the company’s profits and cooked up the bank balances, all the time keeping his employees and the board of directors in the dark. In his letter to the Satyam Board of Directors, Raju wrote candidly: ‘It was like riding a tiger, not knowing how to get off without being eaten!’1 In the next two days, the Government of India arrested Ramalinga Raju and his brother and dissolved the Satyam board. On 19 January 2009 ‘finding an apparent “nexus” between events taking place in SCSL and Maytas Properties Ltd and Maytas Infra Ltd, the government … expanded the scope of investigations being undertaken by the Serious Fraud Investigation Office (SFIO)’.2 WHY DID RAJU CONFESS TO THE CRIME SUDDENLY? It is intriguing as to why Raju confessed in early January 2009 to a crime which he presumably had been committing continually, in various forms, for quite some time. It now appears that he was forced to make a confession 22 BUSINESS ETHICS—AN INDIAN PERSPECTIVE as a result of whistle blowing by one of the company’s former associates. According to a 14,000-page report of the SFIO submitted to the government, an ex-insider, claiming to be a former senior executive in Satyam associated with its contract with the World Bank, under the pseudonym of Jose Abraham, acted as the whistle-blower. His e-mail to a Satyam board member triggered a chain of events that ended in Raju’s decision to confess to the financial crime. This person had first written to Krishna G. Palepu, one of the company’s independent directors, on 18 December 2008—a day after Raju was forced to abort Satyam’s plans to buy the two family-owned companies—that Satyam did not have any liquid assets, and this fact could be independently verified from its banks. This information spread like wildfire with Palepu forwarding the e-mail to the other directors and key people, including S. Gopalakrishnan of PriceWaterhouse Coopers (PwC), Satyam’s statutory auditor. A copy of the email was also forwarded to Ramalinga Raju, who had been then receiving calls from members of the board’s audit committee. The SFIO report added that Raju discussed the issue with the company’s CFO and vice president for finance, G. Ramakrishna, between 25 December 2008 and 7 January 2009, presumably to devise a plan to hide the colossal fraud. SFIO’s attempts to establish contact with Jose Abraham failed. However, on the basis of the SFIO report, criminal action was initiated against Ramalinga Raju, Rama Raju and Vadlamani Srinivas; S. Gopalakrishnan and Srinivas Talluri of PwC; and two other company finance managers, D. Venkatapathy Raju and C. Srisailam. According to the investigation report, the falsification of the company’s accounts began in the financial year 2001–02 after there was an informal meeting between Ramalinga Raju, his brother Rama Raju and Srinivas, apart from G. Ramakrishna. The scope of the falsification of accounts, which was around INR 2.34 billion in 2001–02, skyrocketed to INR 54.22 billion by 2007–08 and INR 73.33 billion by late-September 2008. But after the unearthing of several hidden records, the CBI, by November 2009, pegged the figure at more than double the amount, as shown in their additional charge sheet. MODUS OPERANDI Using cyber forensic techniques, the CBI has unearthed the modus operandi of the Satyam fraud in which the company created false invoices to show inflated sales by SCSL. Investigations revealed the use of fabricated invoices to artificially hike sales and the amounts shown as receivables in the books of accounts, thereby inflating the company’s revenues. According to CBI sources 7561 invoices worth INR 51.17 billion were found hidden in the Invoice Management System (IMS).3 Invoices were generated at SCSL through a regular application flow. This had a series of applications such as the Operational Real Time Management (OPTIMA) for creating and maintaining projects, Satyam Project Repository (SPR) for generating the project ID, an application to key-in the main hours put in by the employees called On time and a Project Bill Management Systems (PBMS) for generating the billing advice based on the data received from On time and the rates agreed upon with the customer. In addition, the regular process flow could be bypassed to generate invoices directly in IMS using Excel Porting. The accused had entered 6603 of these, amounting to INR 47.46 billion. The computer logs relating to both the IMS application and the computer network of the SCSL were studied. This study was matched with the company’s access control swipe card data. The individuals who generated and hid these invoices were identified. The computer server where these allegedly incriminating electronic records were stored was also identified, and the records retrieved. Apart from all these misdeeds, Ramalinga Raju and his associates indulging in crimes against their investors and other stakeholders have forged board resolutions and unauthorizedly obtained loans and advances to the tune of INR 12.2 billion, according to the latest CBI charge sheet. But there were no entries in the company’s account books reflecting these unauthorized loans. ‘This money is in addition to the unaccounted INR 12.3 billion that Raju claimed to have been infused into Satyam by promoters of 37 front companies floated by Raju. Even in this case, there were no entries in their account books.’4 Raju and his accomplices in the Satyam fraud had resorted to a criminal breach of trust and falsified accounts to the tune of another INR 1.8 billion by inflating prices pertaining to the acquisition of shares of Nipuna Services Ltd., the ITes arm of Satyam. The CBI also alleged that the fraudsters garnered INR 2.3 billion in the form of dividends on the highly inflated profits. The CBI has stumbled on more evidence that Raju and his accomplices had created fake customers and generated fake invoices against these customers to inflate revenues to the tune of INR 4.3 billion.5 The CBI has further, for the first time, charged in November 2009, the disgraced Satyam founder with siphoning off money from the company to tax havens across the globe. Charges of fund diversion to other countries have surfaced after the CBI team visited these countries to probe allegations about Raju having siphoned off money to tax havens and then having re-routed it back to India to pursue his pet passion, buying of more and more lands. ‘The re-routing of funds was done through European nations and was shown as investments in nearly 300 fictitious companies floated in the names of Raju’s relatives.’6 MONEY LAUNDERING The Enforcement Directorate (ED) of the Income Tax Department of Government of India has decided to register a case against Satyam of India its founder-chairman for alleged money laundering. The ED claims to have found prima facie evidence against Raju and others of violating the Prevention of Money Laundering Act.7 CBI’s charge sheet has been filed under Sections 120-B, 420, 419, 467, 471, 477-A and 201 of Indian Penal Code that refer to offences of criminal conspiracy, cheating, cheating by impersonation, forgery of valuable security, forgery for the purpose of cheating, using a forged document as genuine, falsification of accounts and for causing disappearance of evidence. The charge sheet was also filed against three senior finance executives of Satyam: G. Ramakrishna, vice-president, D. Venkatapathi Raju, senior manager and C. Srisailam, assistant manager. The three were arrested and sent to judicial custody.8 The supplementary CBI charge sheet filed on 24 November 2009 confirms money laundering by Ramalinga Raju and his cohorts. It affirms these men diverted funds obtained by manipulation of accounts to tax havens and were later on brought back to India to buy lands. The public prosecutor in the Satyam case said INR 12.5 billion at the rate of INR 200 million per month was siphoned off from Satyam by Raju over a period of many years. The diversion of the funds was routed mainly through Ramalinga Raju’s brother, Suryanarayana Raju and his mother, Appala Narasimha. In all, there were over 400 benami land deals running into several thousands of acres. Of these, the maximum were in Ranga Reddy district and were purchased through Akula Rajaiah, a wellknown real-estate broker in the district.9 According to the charge sheet filed by the CBI on 24 November 2009 in a Hyderabad city court, ‘A total of 1065 properties whose documented value is INR 3500 million have been identified and these include around 6000 acres of land, 40,000 square yards of housing plots and 90,000 square feet of built-up area’.10 INSIDER TRADING Satyam investigators have uncovered ‘systemic’ insider trading in SCSL.11 Investigations into the multi-billion fraud in Satyam by the Andhra Pradesh police and Central agencies have confirmed that the promoters had indulged in insider trading of the company’s shares to raise money for building a large land bank. It appears Ramalinga Raju and others made a concerted effort to showcase Satyam as a world leader in IT industry by inflating profits so that its share prices surged up. They invested the money earned by selling their shares to buy lands. The prosecution told the trial court that Ramalinga Raju BUSINESS ETHICS: AN OVERVIEW 23 disposed of 92,000 shares in a single transaction and that this was not possible without the connivance of the former CFO, Srinivas Vadlamani. The investigations also established the existence of fictitious fixed deposits in banks to the tune of INR 3.3 billion by forging fixed deposit receipts. Besides, the Income-Tax Department detected a fund flow of about INR 200 million from the Provident Fund and tax deductions of Satyam employees to the Rajus.12 As per the transaction records, CFO Srinivas Vadlamani has been the most active in offloading the shares. Srinivas offloaded 92,358 shares in two instalments in September 2008. Ram Mynampati, president of Satyam and a member of the board, also offloaded 80,000 shares in three instalments in May and June 2008.13 Interestingly, during this time, none of the top management team of Satyam has purchased its shares. Instead, it was the foreign institutional investors who had purchased them. The heavy selling of shares by the Satyam bigwigs in September 2008 was initially attributed to the developing uncertainty in the economic scenario. However, placed in the larger perspective, the sale could be a case of insider trading. The trend accentuated in December 2008 when 28,500 shares of the company were sold by its senior officials. In May, 250,000 shares were sold, while September accounted for sales of 153,000 shares. Yet another sell-out was effected by A. S. Murthy, chief information officer, who sold 21,000 shares between 12 and 15 December 2008. Sources at the SFIO revealed to the Press that several institutional investors dumped shares in the firm on ‘large scale’ up to two days before Ramalinga Raju confessed to ‘wildly’ inflating the company’s assets and profitability by around USD 1.7 billion. Most of the sales seemed to have taken place after Satyam failed in the bid to acquire Maytas Infra and Maytas Properties. He later admitted that these deals had been a last-ditch attempt to replace fictitious assets on Satyam’s books with real ones. The report added that the SFIO had worked with experts from the SEBI to determine whether insider information was used in the share deals. THE ROLE OF ‘INDEPENDENT’ DIRECTORS According to SEBI, independent directors are meant to protect the interests of the non-promoter shareholders and help promote the cause of corporate governance. At Satyam, whether these directors were ‘independent’ is questionable in view of the fact that each had been allotted significant stock options equivalent to at an unbelievable strike price of INR 2 per share (as against the then market price of INR 500 per share). In addition, all the non-executive directors also earned handsome commissions during 2007–08, as reflected in Satyam’s audited results. Table 1.1 shows the details of Satyam’s audited results for 2007–08. 24 BUSINESS ETHICS—AN INDIAN PERSPECTIVE their purpose. From this case, it is clear that Indian corporate regulation is inadequate, and its enforcement pathetic. AUDITING FAILURE Source: Satyam’s Balance Sheet for 2007–08, Satyam Computer Services Limited, Hyderabad. How can directors who had enjoyed such a huge largesse from the company’s promoters be expected to be ‘independent’? The idea of giving stock options to the independent directors, was perhaps, an intelligent ploy by Raju to successfully implement his plot at Satyam, with little resistance from the so-called independent directors, to whom, he was supposed to report to. It is disturbing that highly respected persons like T. R. Prasad and the former dean of the Indian School of Business, Rammohan Rao received stock options and commissions from Satyam, without wondering how this was acceptable to their status as independent directors. Satyam’s scam is one more proof that the mere compliance of SEBI’s rule of the minimum number of independent directors on the board does not guarantee ethical practices. The concept of independent directors, which is relatively new in corporate history inasmuch as it was suggested only in 1940s in the USA to protect the mutual fund investors, does not seem to be a safeguard against frauds that corporate entities are engaged in. There are several instances to prove that the mere existence of independent directors in the boards of companies does not ensure ethical practices, the most prominent one being that of Enron. ‘Enron had 80 per cent of its board consisting of independent directors, while Tyco had 65 per cent and WorldCom 45 per cent of such outside directors, and yet all of them had collapsed due to fraud and malfeasance.’14 There is no statistical relationship between board independence and financial performance of organizations, as found out by Dalton et al., through a meta-analysis of 54 studies of board independence.15 In an interesting postscript to the Satyam conundrum, seven independent directors of the company that included Krishna Palepu and M. Rammohan Rao pleaded that the investor lawsuits in the USA be dismissed since there were no specific allegations against them and these suits ‘fail to allege an intent to defraud as required by US securities law.’16 Corporate history of the past decade has more than clearly shown that independent directors have not served There are many observers who opine that Satyam’s scam is primarily due to audit failure. An auditor is a representative of the shareholders, forming a link between the government agencies, stockholders, investors and creditors. The objective of an audit of financial statements is to enable an auditor to express an opinion on financial statements, which are prepared within a framework of recognized accounting policies and practice and relevant statutory requirements.17 The choice of PwC as auditors for Satyam, especially, has been questioned since they had proved themselves to be untrustworthy in the past both in India and the USA. In Satyam’s case, in January 2009, the CID arrested S. Gopalakrishnan and Talluri Srinivas, partners in PwC, for their alleged involvement in the INR 71.36 billion fudging and manipulation of financial statements, as revealed by Ramalinga Raju. According to T. V. Mohandas Pai, member of the Infosys Board and Trustee of the IASC Foundation, the Satyam fiasco should be looked at more as an audit process failure and not as an accounting failure. He further said, ‘It is a failure of the auditing process. The auditing process says very clearly that you must ask for an independent confirmation of bank balances from the banks. To me it looks as if it has not been done.’18 But this line of arguments is refuted by some auditing experts. For instance, Shankar Jaganathan, author of Corporate Disclosures 1553–2007, argues that: A defined audit process cannot be a defence against frauds. He goes on to add that just as a low tide reveals the rubbish accumulated in a beach, a falling market will throw up frauds. The longer the bull-run, the higher is the duration of the frauds.19 In most cases, a successful fraudster would have easily overcome the defined audit process. In one’s attempt to balance these opposite views, one understands there is a wide irreconcilable difference between these two. It is the popular perception that auditors exist and are paid to detect fraud and financial wrong doings of unethical corporate managements. On the other hand, according to Samuel A. Di Piazza Jr, the CEO of PwC, ‘Generally audits are not designed to detect fraud. They are designed to assess the financial position of a company. While doing audits, we look carefully to see if there are things that appear unusual and yes, at times we may uncover fraud. Material fraud like you had in WorldCom, I agree, generally surfaces in an audit.20 An auditor is seen as a watchdog and not a bloodhound. In that case the judge held, ‘He is justified in believing the tried servants of the company in whom confidence is placed by the company’ This approach holds true even today. On 21 November 2009, the CBI arrested Satyam’s ‘internal audit head V. S. Prabhakar Gupta for alleged breach of BUSINESS ETHICS: AN OVERVIEW trust, forgery, cheating and fabrication of accounts … Gupta is charged with knowing that the auditing irregularities were perpetrated in a systematic manner and preventing them from coming into the open’. In Satyam’s case, its statutory auditor did not verify the authenticity of the account-books. Irregularities were noted in PwC’s handling of Satyam accounts in 2001, but mysteriously, no probe was conducted. Similarly, a complaint was filed with SEBI by Ramdas Athavale, Member of Parliament in 2003. But under political pressure, this was not followed up. PwC, which has audited Satyam’s accounts since 1991, is thus guilty of grave misconduct and is likely to face punitive action from the Institute of Chartered Accounts of India (ICAI) in due course. Ironically, the ICAI disciplinary council has two members from PwC! As a sequel to all these developments, almost a year after it was rattled by the Satyam scam, PwC announced in early December 2009 that Ramesh Rajan, India Operations’ chairman based in Singapore, who was at the helm of affairs when the scam broke out and who was questioned by the CBI in Hyderabad, stepped down prematurely to hand over charge to Gautam Banerjee.21 CRACKS IN INDIA’S CORPORATE GOVERNANCE STRUCTURES Above all, the Satyam scam has exposed huge cracks in India’s corporate governance structures and system of regulation through the SEBI, Ministry of Corporate Affairs and the SFIO. Unless the entire system is radically overhauled and made publicly accountable, corrupt corporate practices will recur, robbing wealth from the exchequer, public banks and shareholders.22 Raju is estimated to have made INR 20.65 billion by artificially jacking up the price of Satyam’s shares and selling his holdings (14 per cent of the total). Satyam’s CFO Vadlamani Srinivas has said the fixed deposits shown in the books were fictitious.23 There are two different opinions about the Satyam scandal—one, our corporate governance standards are not weak and it was a one-off incident, but on the other hand, there are others who point out to the several questions that remain to be unanswered. One fails to comprehend as to how a company with global presence and professionals of high standard can deceive themselves that they are not aware of what was going on inside their organization for so long. How can one believe that something as solid as cash and bank balances of the company can be fudged and nobody in the accounts department or finance department was simply aware of it for such a long time? What were the internal auditor, statutory auditor and the audit committee doing? Why were they not ascertaining and reconciling balance from the bank statements considered to be a very basic audit tool? In the Satyam fraud, there are many dimensions like these that are yet to be uncovered ... the simple suspicion in the minds of foreign investors would be if this can happen when an international 25 auditor can be as gullible and vulnerable as this, what about Indian auditors? Many experts in corporate governance, however, believe that the Satyam case should be seen as an aberration of the free-market economy and not as being representative of the Indian corporate governance standards. WHICH IS BIGGER: SATYAM OR ENRON? The Satyam scandal has often been compared to that of Enron by several writers and analysts. However, a close scrutiny of the facts relating to both the companies reveals that there are more dissimilarities, than similarities between the two scams: (i) One similarity between the two companies is like Enron, Satyam too had a board with the required quota of independent directors. Enron, for instance, had 80 per cent of its board consisting of independent directors, one of whom, a distinguished accounting professor, chaired the auditing committee of the firm.24 Likewise, in Satyam’s case, Krishna Palepu, one of the seven independent directors on its board, was the Ross Graham Walker Professor of Business Administration and Senior Associate Dean for International Development, at the Harvard Business School.25 A specialist in corporate governance, 26 Krishna Palepu was an advocate of tougher auditing rules;27 and (ii) Another similarity between Enron and Satyam has been the nexus, the heads of both the corporations established with political bigwigs mainly with the view to currying favours from them. Enron’s Chairman Kenneth Lay had established very close personal relationship with both President Bill Clinton and President George Bush and also had donated generously to their election funds. ‘With the political clout they acquired through hefty political contributions, Enron tried to influence public policies, either covertly or overtly, especially in the areas of business they were operating.’28 Likewise, Ramalinga Raju had developed close liaison with the then chief ministers of Andhra Pradesh, where SCSL was head-quartered and mainly operated namely, Chandrababu Naidu and Rajesekara Reddy, who were pitted against each other and were heading parties on the opposite sides of political spectrum. Raju obtained several favours from both of them, managed to get out-of-turn contracts for building gigantic infrastructure projects and acquired huge tracts of public lands at throwaway prices. But the dissimilarities between the two are more telling: (i) Satyam’s is a much bigger scandal than Enron. G. Ramakrishna, former SEBI chairman, holds the view that the Satyam fraud was unique for its scale, the period of its perpetration and the number of people involved. For instance, the amount stolen by insiders from Enron was INR 28.66 million at current exchange rates. In the Satyam case, according to the CBI’s charge sheet, a much bigger amount of INR 140 billion was involved. Viewed from the Indian context, Satyam scam is by far the biggest. Even globally, it ranks as the largest self-confessed scam. Also greater are the number of defaulting agencies and their failures.29 (ii) The impact of 26 BUSINESS ETHICS—AN INDIAN PERSPECTIVE the Satyam scandal had greater ramifications inasmuch as it adversely impacted its 53,000 employees—a number higher than the 40,000 Enron employees. Though initially it was suspected that Satyam had only 40,000 employees and Raju siphoned off the compensations of the non-existent 13,000 employees, a closer scrutiny of the company’s records supported by Provident Fund accounts confirmed the fact that the company did have 53,000 employees on its payroll. (iii) The Enron fiasco, besides, was almost a stand-alone incident which affected only the immediate stakeholders of the company, while in the case of the Satyam swindle, the entire IT industry was badly hit just when the global economic slowdown has already been severely hurting it. The World Bank’s ban on Satyam, Wipro and Mega-soft for unethical practices further aggravated the industry’s difficulties. (iv) Satyam’s fiasco has caused a lot of damage to the image, credibility, accountability and trust of India, Indian Corporate Inc., Indian Outsourcing Industry and the Software Industry in the eyes of the shareholders/stakeholders/public, the likes of which nobody had ever seen and probably would never see. The harm cannot be quantified, the extent of the rot never imagined, and issues which it has raised and the levels at which it has reached are of gargantuan proportions. PREVENTING SATYAM-LIKE SCAMS With the view to tightening the regulations and ensuring regulatory compliance, so as to studiously avoid the recurrence of scams like Satyam’s, the Indian capital market regulator, SEBI should follow two distinct approaches—preventive and palliative. Palliative measures should aim at detecting similar cases by introducing new processes and additional verification methods. These proactive measures would help build investor confidence. However, preventive measures are more important as they are likely to be more effective in the long run. The Central Government could introduce a simple and brief Act that makes accounting misstatements criminal, and impose tough penalty—both financial and imprisonment— and entrust its implementation to one specified authority with no possibilities of overlapping. The financial penalty should be reflecting the size of the fraud. With a view to enforcing the law and to expediting justice, special courts could be created. The Satyam fiasco, as indeed all other scams unearthed earlier, make it imperative that corrective measures need to be taken at the earliest to stem the rot. Corrective action is long overdue if corporations are not to cheat stakeholders and the public. Indian corporate promoters often milk their companies by appointing procurement and distribution agents, by under- and over-invoicing imports/exports, evading taxes, indulging in insider trading and dressing up balance-sheets. Satyam belonged to this category, which is the normal practice in most brick-and-mortar companies. In this context, some more corrective steps are possible. More than statutory auditors, we need to set up a Board of Audit which, like the Comptroller and Auditor General of India, is empowered to conduct surprise audit suo moto or on complaints of whistle-blowers. Besides, an auditor should not be allowed to continue for more than 3 years with a company. The Department of Corporate Affairs in consultation with ICAI, ICSI and ICWAI should create a pool of independent directors from amongst citizens of high integrity and prescribe them adequate remuneration. Cross-directorships must be banned. All agent employments must be thoroughly scrutinized. Penalties must be made stiffer. The conviction rate in corporate frauds, currently under a pathetic 5 per cent, must be improved. The law and administration should come down heavily on breach of trust and fraud. If an auditor fails in his/her duty in India, he/she now faces a ridiculous penalty of INR 10,000 and a maximum of 2 years imprisonment, whereas the US Sarbanes–Oxley Act prescribes imprisonment for 20 years. The USA has greatly improved fraud detection by reforming audit methods and offering incentives to whistle-blowers. We must learn from all this and acknowledge that deregulation promoted in the name of ‘trusting’ CEOs and creating a ‘favourable investment climate’ is dangerous.30 CONCLUSION In its efforts to revamp the company, Mahindra Satyam has appointed Vineet Nayyar, the erstwhile vice chairman as the whole-time director and the chairman of the company. It has also appointed former SEBI Chairman, M. Damodaran and Gautam Kaji as additional non-executive directors who will be members of the audit committee, effective from 10 December 2009. The company had further selected Deloitte Haskins and Sells as the firm’s statutory auditor for fiscal year ended 31 March 2009 as well as fiscal year ended 31 March 2010.31 The size of the board has been increased to eight comprising four independent directors, including two nominee directors of the Central Government, two non-executive and two whole-time directors.32 Even to a casual observer of the Satyam fiasco, the enormity of the scandal is a great eye opener. Corporate scams and frauds committed against unwary investors have been a regular and almost an annual feature in India. But the scale, magnitude, the reach and impact that the Satyam scam had created is unparalleled in the corporate history of India, and as some keen corporate observers point out, the world itself. That the reckless and ‘could-not-care-less’ swindlers were operating with impunity within the company for so long, notwithstanding the army of professional managers, internal auditors and independent-directors dominated board of directors, the market regulator SEBI, the Company Law BUSINESS ETHICS: AN OVERVIEW Board, the Department of Corporate Affairs and the system of jurisprudence only go to show with what great disdain the scamsters looked at all these institutions and authorities. There is a perception that most Indians, especially the first generation promoters, hardly make a distinction between a proprietary enterprise and a public limited company in terms of their rights and privileges and the corresponding responsibilities and accountability. It is a fact ‘that a vast majority of Indian corporations are controlled by promoter families which, while owning a negligible proportion of share capital in their companies, rule them as if they are their personal fiefdoms’.33 The idea of a corporation, and the values and principles that should guide its governance have hardly been imbibed by these promoters. Besides, the growth of corporate culture, not only was implanted much later in India than in the Western countries, but also checkmated by the very same forces that make the emergence of ethical business a difficult proportion in the Indian context. A lax administration, ill-equipped regulatory system and terribly delayed justice delivery process only make things easier for the corporate crooks to make a killing. It is not our case that there are more crooks in the Indian corporate world than found elsewhere, but the overall system here is so conducive and even attractive for them to flourish, rather than make lives difficult for them to continue their trail of crimes. KEY WORDS Public limited company ∑ Software exports ∑ Knowledge dynamix ∑ Maytas Properties ∑ Bombay Stock Exchange ∑ NYSC ∑ Skyrocket ∑ Investor community ∑ Modus operandi ∑ Project repository ∑ Electronic records ∑ Criminal breach of trust ∑ Falsified records ∑ Money laundering ∑ Insider trading ∑ Tax havens ∑ Independent directors ∑ Dissimilarities ∑ The Satyam fiasco ∑ Responsibilities and accountability DISCUSSION QUESTIONS 1. Trace the genesis and growth of Satyam Computer Services Limited. 2. What were the factors that led to the phenomenal growth of Satyam Computers? Also discuss the reasons that led to its downfall. 3. Write short notes on any two of the following: (a) Money laundering (b) Insider trading (c) The role of independent directors. 4. Critics claim that the Satyam scam has exposed huge cracks in India’s corporate governance structures and the regulation of Satyam through SEBI. Do you agree with this view? If it is so, suggest measures to remedy the situation. 27 5. It is an indisputable fact that the Satyam scam has exposed the weaknesses in the Indian corporate regulatory system. How can we prevent Satyam like scams in future? NOTES 1. “What Went Wrong with SATYAM?—A Brief Note on Satyam scam”, available at http://vandit007. blog spot.com/2009/01/what-went-wrong-with-satyam.html 2. “SFIO Looking into Satyam, Maytas ‘Nexus’”, The Hindu Business Line, 20 January 2009. 3. Vinay Kumar, “Satyam Fraud: CBI Reveals Modus Operandi”, The Hindu, Tuesday, 28 April, 2009. 4. ET Bureau Hyderabad, “Satyam Fraud Grows by INR 1,220 crore”, The Economic Times, 26 November 2009. 5. “CBI Claims Unearthing Additional Fraud of INR 4,793 cr in Satyam”, The Hindu Business Line, 25 November 2009. 6. Sharang Limaye, “CBI: Satyam Funds Diverted Overseas”, Financial Chronicle, 24 November 2009, http://www.mydigitalfc.com/news/cbi-satyam-fundsdiverted-overseas-399 7. ENS Economic Bureau, “Rajus Gave Fake Papers to Auditors: Ex-CFO to ICAI”, Indian Express, 6 April 2009. 8. “Satyam Fraud: CBI Files Charge Sheet Against Nine”, http://www.livemint.com/2009/04/07223402/Satyamfraud-CBI-fi les-charge.html 9. Times News Network, “Satyam Fudged FDs has 40,000 Employees: Public Prosecutor”, The Times of India, 22 January 2009. 10. V. N. Harinath, “CBI: Raju, Others Forged Resolutions”, The Hindu, 25 November 2009. 11. “Satyam Investigators Uncover ‘Systemic’ Insider Trading”, 21April 2009, http://www.bobsguide.com/ guide/news/2009/Apr/21/Satyam_investigators_uncover _%22systemic%22_insider_trading.html 12. N. Rahul, “Insider Trading in Satyam Established”, The Hindu, 14 January 2009. 13. Surabhi Agarwal, “Satyam Top Honchos Were Selling Shares from April”, The Financial Express, 20 December 2008. 14. A. C. Fernando, Business Ethics: An Indian Perspective, New Delhi: Pearson Education, 2009. 15. D. Dalton, C. Daily, A. Ellstrend, and J. Johnson, “MetaAnalytic Reviews of Board Composition Leadership, Structure, and Financial Perfor-mance”, Strategic Management Journal, 19 (1998): 269–90. 16. Agencies, “Ex-Satyam Directors Seek Dropping of US 28 17. 18. 19. 20. 21. 22. 23. 24. 25. BUSINESS ETHICS—AN INDIAN PERSPECTIVE Suits, a Box Item in ‘Satyam Gets INR 1,230-cr Claims’”, Times of India, 18 November 2009. A. C. Fernando, Corporate Governance, Principles, Policies and Practices, New Delhi: Pearson Education, 2009. “Satyam, an Audit Process Failure: Pai”, The Hindu Business Daily, Saturday, 17 January 2009. D. Murali, citing Shankar Jegannathan, “A Defined Audit Process Cannot Be a Defence against Frauds”. The Hindu Business Line, 22 January 2009. Di Piazza, “Samuel A. Jr, CEO, PriceWaterhouseCoopers, ‘Auditors Are Not Designed to Detect Fraud’”, Economic Times, Chennai, 18 February 2003. Times News Network, “PwC India Chairman Rajan Quits”, Times of India, 8 December 2009. Praful Bidwai, “Indian Capitalism Has Always had a Criminal Side”, 16 January 2009, http://www.rediff.com/money/2009/jan/16-indian-capitalism-has-always-had-a-criminal-side.html http://www.in.com/news/business/indian-capitalismhas-always-had-a-criminal-side-7614817-48306-1.html The Economist, 13 June 2002, http://72.14.235. 104/search?q=cache:Eob0zh lwT18J:www.anecdotage.com/index.php%3Faid%3D10345+Enron%27s+ad uditing+commitment&hl=en&ct=clnk&cd=1 Rhys Blakely, “Family Affair Is a Bid Too Far for Indian Investors”, The Times(London) News International, 19 December 2008. 26. http://www.slideshare.net/nasscom/how-to-make-corporate-boardmore-\effective-prof-krishna-g-palepuharvard-business-school} and http://www. nytimes.com/2009/01/12/business/worldbusiness/12outsource.html?_r=1 27. “Professor Caught Up in India’s Enron”, The Boston Globe, http://www.boston.com/business/articles/2009/ 01/14/professor_caught_up_in_indias_enron/?page=1 28. A. C. Fernando, Corporate Governance, Principles, Policies and Practices, New Delhi: Pearson Education 2009. 29. http://www.in.com/news/business/indian-capitalismhas-always-had-a-criminal-side 7614817-48306-1.html 30. Praful Bidwai, “Indian Capitalism Has Always Had a Criminal Side”, 16 January 2009, http://www.rediff.com/money/2009/jan/16-indian -capitalismhas-always-had-a-criminal-side.html 31. “Satyam Ends Upaid’s $1 bn Row for $70 m”, Times of India, Chennai, 10 December 2009. 32. “Vineet Nayyar to Head Mahindra Satyam”, The Hindu,10 December, 2009, http://www.hindu. com/2009/12/10/stories/2009121051491700.html 33. A. C. Fernando, Corporate Governance, Principles, Policies and Practices, New Delhi: Pearson Education, 2009. Two CHAPTER Concepts and Theories of Business Ethics INTRODUCTION We have already seen in the introductory chapter that the word ethics is derived from the Greek word ethikos meaning character or custom. Today we use the word ethos in a different connotation meaning a characteristic, or attitude of a group of people, culture and so on. When we talk of ‘business ethos’, we mean the attitude, culture and the manner of doing business of the business community. Philosophers generally distinguish ‘ethics’ from ‘morality’. To them while ‘morality’ refers to human conduct and values, ‘ethics’ refers to the study of human character or behaviour in relation to moral values, that is, the study of what is morally right or morally wrong. In ordinary parlance, however, people use these expressions interchangeably. When we say something was done ‘ethically’ or ‘morally’, we mean that things were done correctly. DEFINITIONS OF ETHICS Ethics is a branch of axiology which together with metaphysics, logic and epistemology constitutes philosophy. Ethics attempts to find out the nature of morality, and to define and distinguish what is right from what is wrong. Ethics is also called moral philosophy. Ethics according to Manuel G. Velasquez ‘is a study of moral standards whose explicit purpose is to determine as far as possible whether a given moral standard (or moral judgement based on that standard) is more or less correct’.1 Many ethicists assert that there is always a right thing to do based on moral principle, while others subscribe to the broader view that the right thing to do depends on the situation. To many philosophers, ethics is just a ‘science of conduct’. Epicurus, the philosopher, defined ethics as a science that ‘Deals with things to be sought and things to be avoided with ways of life and with telos’, which means the chief aim or end in life.2 Like one of its later-day offshoots, economics, ethics is also imprecise, as it deals with human behaviour that cannot be placed into a straitjacket. It is said that when there are five economists, there will be six different opinions. Likewise, philosophers have been discussing ethics at least for more than 2,500 years—since the time of Socrates and Plato, but they have not been able to arrive at an acceptable definition. Moreover, the area of study encompassing ethics is vast and covers the length and breadth of human behaviour, and that makes it far more difficult to comprehend. Many ethicists prefer to call ethics as the study and philosophy of human conduct, with an emphasis on determining right and wrong. While most dictionaries define ethics as the science of ‘morals in human conduct’, ‘moral philosophy’, ‘moral principles’, ‘rules of conduct’, etc., the definition of The American Heritage Dictionary is more focused: ‘The study of the general nature of morals and of specific moral choices; moral philosophy; and 30 BUSINESS ETHICS—AN INDIAN PERSPECTIVE the rules or standards governing the conduct of the members of a profession.’3 According to Ferrel et al.,4 ‘Values and judgements play a critical role when we make ethical decisions’ as compared to ordinary decisions. In sum, ethics as a moral and normative science refers to principles that define human behaviour as right, good and proper. However, it should be stressed that these principles do not lead to a single course of action, but offer a means of evaluating and deciding among competing options. PERSONAL ETHICS AND BUSINESS ETHICS Personal ethics refer to the set of moral values that form the character and conduct of a person. Organization ethics, on the other hand, describes what constitutes right and wrong or good and bad, in human conduct in the context of an organization. It is concerned with the issue of morality that arises in any situation where employers and employees come together for the specific purpose of producing commodities or rendering services for the purpose of making a profit. An organization can be described as a group of people who work together with a view to achieving a common objective, which may be to offer a product or service for a profit. Organization ethics, therefore, deals with moral issues and dilemmas organizations face both in business and non-business settings that include academic, social and legal entities. MORALITY AND LAW Philosopher James Rachels suggests two criteria fulfilling a minimum conception of morality—reason and impartiality. By the use of reason, Rachels means that a moral decision must be based on reasons acceptable to other rational persons. The criterion of impartiality is fulfilled when the interests of all those affected by a moral decision are taken into account, with of course, the recognition of finite knowledge of the repercussions of any ethical decision. Following Rachels, then, any legitimate moral theory must meet the tests of reason and impartiality. People often tend to confuse legal and moral issues. These are two different things. Breaking an unjust law is not necessarily immoral. Gandhiji during his Dandi Yatra broke the law the British made in India to the effect that one who produced salt would have to pay a tax. His civil disobedience movement also was meant to disobey or even to break the British-made law. By no stretch of imagination, these acts of the Father of the Nation could be considered immoral. Likewise, the legality of an action could not automatically be considered morally right. William Shaw in his book Business Ethics brings to focus two contexts to illustrate this situation5: 1. An action can be illegal, but morally right. For instance, during the freedom struggle many wanted freedom fighters (criminals according to the colonial rulers) had hidden themselves in the houses of patriotic Indians to save themselves from prosecution and imprisonment. Though this was against the British law in India, this patriotic deed of freedom-loving Indians was no doubt an admirably brave and moral action. 2. An action that is legal can be morally wrong. For instance, a profit-earning company anxious to retain its top brass may sack hundreds of its workers to save enough money to pay the former with a view to getting their guidance and managerial expertise. This act may be perfectly legal but morally unjustified. Then, how do we understand the relationship between law and morality? Generally, law codifies a nation’s ideals, norms, customs and moral values. However, changes in law can take place to reflect the conditions of the time in which they are enunciated. For instance, during the British rule in India, several laws were enacted that benefited the colonial power and its maintenance, and militated against the interests of natives. To keep those laws even after independence would not only be unanachronistic but also totally out of place. Moreover, even if a nation’s laws are both sensible and morally sound, they may be insufficient to establish moral standards to guide the people. The law cannot cover the wide variety of possible individual and group behaviour and in many situations is an inadequate tool to provide moral guidance.6 There is thus a clear-cut difference between law and morality. In a particular situation, an act can be legal but will not be morally right. For example, it will be legal for an organization which is running in loss to lay off a few employees so as to exist in the business situation. But it is not morally right to do so, because the employees will find it difficult to find a living. On the other hand, an action performed can be illegal but morally right. For example, during the second World War, in Hitler’s Germany it was illegal to help Jewish family to hide from the Nazis, but it was a morally admirable act. In the organization too, we will find such situations where an act will be morally right and legally wrong to perform. The strong ethical base of the individual as well as of the organization would come to the rescue CONCEPTS AND THEORIES OF BUSINESS ETHICS of that situation. The law cannot cover the wide variety of possible individual and group conduct. Instead, it prohibits actions that are against the moral standards of the society. HOW ARE MORAL STANDARDS FORMED? There are some moral standards that many of us share in our conduct in society. These moral standards are influenced by a variety of factors such as the moral principles we accept as part of our upbringing, values passed on to us through heritage and legacy, the religious values that we have imbibed from childhood, the values that were showcased during the period of our education, the behaviour pattern of those who are around us, the explicit and implicit standards of our culture, our life experiences and more importantly, our critical reflections on these experiences. Moral standards concern behaviour which is very closely linked to human well-being. These standards also take priority over non-moral standards, including one’s self-interest. The soundness or otherwise of these, of course, depends on the adequacy of the reasons that support or justify them. RELIGION AND MORALITY Many people believe that morality emanates from religion, which provides its followers its own set of moral instructions, beliefs, values, traditions and commitments. If we take Christianity as an illustration, it offers its believers a view that they are unique creatures of Divine Intervention ‘that has endowed them with consciousness and ability to love’. They are finite and bound to earth, and having been born morally flawed with the original sin, they are prone to wrongdoing. But by atoning for their sins, they can transcend nature, and after death, become immortal.7 One’s purpose in being born in this sinful world is to serve and love one’s Creator. For the Christian, the way to do this is to emulate the life and example of Jesus Christ who was the very embodiment of love and sacrifice. What greater love and sacrifice there can be than to lay down one’s own life for the sake of those whom you love? Christians find an expression of love in the life of Christ who died on the Cross to atone for the sins of mankind whom He loved abundantly. Their expression of this love is shown when they perform selfless acts to help even strangers in distress, develop a keen social conscience, and is therefore made intrinsically worthwhile. Service to fellow human beings is an inalienable part of the Christian virtue. Has not Jesus enjoined His followers: ‘Whatever you do to the least of my brethren, that you do unto Me?’ The life of Mother Teresa epitomized this basic Christian virtue of love that found expression in her selfless service to the lepers, the hungry and those afflicted with serious and terminal diseases. This commitment of love towards one’s fellow human beings hones the Christian sense of responsibility not only to his family but also to the wider community. Unlike in Christianity where most of the moral principles are drawn from the teachings of Christ who also provided the interpretations for the Ten Commandments and other moral standards gleaned from the Old Testament, Hinduism, the major religion in India, does not provide one acceptable source of moral standards. The Hindu view of moral standards is drawn from a large and bottomless cauldron that contains values accrued from various religious beliefs. The Hindu moral standards are exemplified in works such as the Ramayana, Mahabharata, Bhagavad Gita, Panchatantra, Naganantham and the Jataka tales. One of the common fundamental areas of agreement which can be called the Indian religious tradition is the theory of Karma, the doctrine of the soul and the doctrine of mukti (freedom).8 Almost all the Hindu religious traditions agree in the belief that a person’s actions leave behind some sort of potency which provide the commensurate power to ordain joy or sorrow in the person’s future birth. When the fruits of action are such that they cannot be enjoyed in the present life, it is believed that the benefits for righteous deeds or penalties for wrong doing will be reaped in the person’s next birth, as a human or any other being. It is also believed that the unseen potency of the action generally requires some time before it could give the doer the merited enjoyment of benefit or punishment. These would accrue and set the basis for enjoyment and suffering for the doer in the person’s next life. Only the extreme fruits of those good or bad actions can be reaped in the person’s present life. 9 The nature of a person’s next birth is determined by the pleasant or painful experiences that have been made ready for that person by the maturing actions in this life. The Bhagawad Gita also underlines the fact that a person has a choice in action, but never in its outcome. The results are determined the moment the action is carried out—the fruits thereof cannot be avoided, and in any case, are not under the control of human beings. Therefore, people should concentrate on their actions without worrying about the results they will bring. 31 32 BUSINESS ETHICS—AN INDIAN PERSPECTIVE All Hindu religious thinking leads to the general principles of ethical conduct that must be followed for the attainment of salvation. Controlling all passions, no injury to life in any form, and a check on all desires for pleasures, are principles which are acknowledged universally in all Hindu traditions and beliefs. The Indian religious philosophy drawn from the Hindu ethos and tenets provide a rich tapestry for ethical theories. The Hindu sage Thiruvalluvar, through his magnum opus, Thirukkural, has provided ethical prescriptions for the overall wellbeing of people. Anyone who reads the following couplet will understand its pithiness and eloquence: That conduct is virtue which is free from these four things: malice, desire, anger and bitter speech.10 Religion, therefore, provides not only a formal system of worship, but also a prescription for social intercourse. William H. Shaw quotes the most celebrated religious mandate which is found in almost all major religions of the world: ‘Do unto others as you would have them do unto you.’ Termed the ‘Golden Rule’, this injunction epitomizes one of mankind’s highest moral ideals. But then, though religious ideals, teachings and thoughts provide a platform for enunciation of what constitutes moral behaviour and are always inspiring, these are very general and can hardly provide guidelines for precise policy injunctions. Nonetheless, religious organizations do take positions and articulate their stands on specific issues on such diverse fields of human endeavour as politics, education, economy, administration and medicine. They also help mould public opinion on such important national social issues as abortion, euthanasia, homosexual relations, and international issues as nuclear weapons and developmental assistance to poor countries to fight poverty, HIV etc. The Roman Catholic Church has a rich tradition of trying to translate its core values to the moral aspects of industrial relations. Several Popes in the 20th century had spread the Catholic religious ideals through their encyclicals and pastoral letters such as Pope Leo XIII’s Rerum Novarum (1891) and Pope John Paul II’s encyclical Contesimus Annus (1991). Likewise, the Catholic Bishops’ Conferences in many major countries issue pastoral letters to their flock and take stands on important socioeconomic and even political issues. MORALITY, ETIQUETTE AND PROFESSIONAL CODES It is also necessary to understand the differences between morality and etiquette, and morality and law. While morality is the moral code of an individual or of a society, etiquette is a set of rules for well-mannered behaviour. Etiquette is an unwritten code or rules of social or professional behaviour such as medical etiquette. Morality can be also differentiated from law which consists of statutes, regulations, common law and constitutional law. Morality is different from professional codes of ethics which are special rules governing the members of a profession, say of doctors, lawyers and so on. Morality is not necessarily based on religion as many people think. Although we draw our moral beliefs from many sources, for ethicists the issue is whether these beliefs can be justified. When people work in organizations, several aspects of corporate structures and functions tend to undermine a person’s moral responsibility. Organizational norms, group commitment to certain goals, pressure to conform and the diffusion of responsibility can all make the exercise of personal integrity in the context of an organization difficult. Moral principles provide confirmatory standard for moral judgements. This process, however, is not mechanical. Principles provide a conceptual framework that guides people in making moral decisions. Careful thoughts and reflection with an open mind are very necessary to work from one’s moral principle to make a moral judgement. A person can hold a moral or ethical belief only after going through a process of ‘a conscientious effort to be conceptually clear, to acquire all relevant information, and to think rationally, impartially and dispassionately about the belief and its implications’.11 MANAGEMENT AND ETHICS Management of any business involves hundreds of decisions. Ethical issues occur in all decision making processes. Conflicts and ethical dilemmas are part and parcel of such processes. There arises a continuous conflict between the goals of an organization and various issues relating to its day-to-day management. The success of any business organization is measured by revenues, profits, cost-cutting, quality, quantity, efficiency, and so on. These objectives of the organization may run in direct conflict with its social commitment which is measured in terms of obligations to stakeholders, both within and outside the organization. For instance, cost-cutting may be used as a tool to enhance revenue and profit. In the process of realizing this objective, the company may have to lay off some workers. This creates a conflict between the organizational goal and the business units’ obligation to the stakeholders, in this case, the discharged workers. These issues, of course, will differ from organization to organization, people to people and the problems and issues thrown CONCEPTS AND THEORIES OF BUSINESS ETHICS up in each case may lend themselves to different interpretations. For its own survival, it is necessary that the organization should maintain its competitive edge in the market. It should produce useful, safe, and quality products and services at affordable prices. While doing so, the organization should ensure that the interests of the stakeholders are not adversely impacted. This requires a fine balancing act on the part of the organization. The dilemmas and conflicts that managements encounter during decision making processes and their obligations to stakeholders require a balancing act, involve analytical approach, and sound decision making in view of the fact that each of such decisions has its own rewards and penalties. Some of these decisions may have an impact on the health and safety of consumers. Sometimes, in order to push the sales of products, managers may be prompted to resort to deception, or suppressio veri, suggestio falsi (suppressing truth, suggesting falsehood). This creates a conflict of interest for them between their obligation to their organization and their obligation to consumers and other stakeholders. The business managers need to recognize the impact of their decisions and actions on their own organization and the community at large. A clear understanding of the moral consequences of their decisions and the manner of implementing them on all stakeholders is required at all levels in the organization. This may not be as simple as it sounds, because not all ethical questions have simple ‘yes’ and ‘no’ answers. ‘In practice, the ethical questions have many alternatives with different probabilities of occurrence and have different impacts on stakeholders. Each set of choices will have different economic and social consequences and may lead to further decision points.’12 NORMATIVE THEORIES Ethics is a normative study, that is, an investigation that attempts to reach normative conclusions. It aims to arrive at conclusions about what things are good or bad, or what actions are right or wrong. In other words, a normative theory aims to discover what should be, and would include sentences such as ‘companies should follow corporate governance standards’ or ‘managers ought to act in a manner to avoid conflicts of interests’. This is the study of moral standards which are correct or supported by the best reasons, and so ‘attempts to reach conclusions about moral rights and wrong, and moral good and evil’.13 For instance, the stakeholder theory has a ‘normative’ thrust and is closely linked to the way that corporations should be governed and the way that managers should act. There are different normative perspectives and ethical principles that often contradict one another. There are consequentialist and non-consequentialist normative theories (Fig. 2.1). In the organizational context, we can identify the following ethical theories that have an impact on the manner in which ethics or the lack of it could be identified in a business organization. These are, according to William H Shaw,14 the following: Fig. 2.1 Classification of Normative Theories 1. Egoism, both as an ethical theory and as a psychological theory. 2. Utilitarianism, the theory that a morally right action results in the greatest good to the largest number of people. 3. Kant’s ethics, with his emphasis on moral motivation and respect for persons. 4. Other non-consequentialist normative themes: duties, moral rights and prima facie principles. ETHICAL THEORIES IN RELATION TO BUSINESS EGOISM ‘The view that associates morality with self-interest is referred to as egoism.’15 Therefore, it can be said that egoism is an ethical theory that treats self-interest as the foundation of morality. Egoism contends that an act is 33 34 BUSINESS ETHICS—AN INDIAN PERSPECTIVE morally right if and only if it best promotes an agent’s (persons, groups or organizations) long-term interests. Egoists make use of their self interest as the measuring rod of their actions. Normally, the tendency is to equate egoism with individual personal interest, but it is equally identified with the interest of the organization or of the society. Decisions based on egoism mainly are intended to provide positive consequences to a given party’s interest without considering the consequence to the other parties. Philosophers distinguish between two kinds of egoism: personal and impersonal. The personalist theory argues that persons should pursue their longterm interest, and should not dictate what others should do. Impersonal egoists argue that everyone should follow their best long-term interest. It does not mean that an egoist will act against the interest of the society. They may be able to safeguard their interest without hurting the interest of others. When an organization performs or safeguards its interest without hurting the interest of others, then we can say that the organization acts ethically. PSYCHOLOGICAL EGOISM Egoism asserts that the only moral obligation we have is to ourselves, though it does not openly suggest that we should not render any help to others. However, we should act in the interests of others, if that is the only way to promote our own self-interest. Ethicists who propose the theory of egoism have tried ‘to derive their basic moral principle from the alleged fact that humans are by nature selfish creatures’.16 According to these proponents of psychological egoism, human beings are so made that they must behave selfishly. They assert that all actions of men are motivated by self-interest and there is nothing like unselfish actions. To them, even the so-construed self-sacrificial act like, say, whistle-blowing in an organization to bring to the notice of the top brass the unethical acts practised down the line, or by top executives, is an attempt by the whistle-blower to either take revenge or become a celebrity. Criticism of the Theory of Psychological Egoism Though there are a few advocates of the theory of egoism even today, one would hardly come across philosophers who would propose it as the basis for personal or organizational morality. Generally, the theory is criticized on the following grounds: 1. Egoism as an ethical theory is not really a moral theory at all. Those who espouse egoism have very subjective moral standard, for they want to be motivated by their own best interests, irrespective of the nature of issues or circumstances. They never try to be objective, and everything is viewed subjectively based on whether it would promote their own self-interests or not. 2. Psychological egoism is not a sound theory inasmuch as it assumes that all actions of men are motivated by self interest. It ignores and undermines the human tendency to rise above personal safety as proved in thousands of examples of personal sacrifices at times of calamities such as floods, earthquakes and other natural disasters. 3. Ethical egoism ignores blatant wrongdoings. By reducing every human act to self-interest and selfserving, the theory does not take a clear stand against so many personal or organizational vices such as corruption, bribery, pollution, gender and racial discrimination. UTILITARIANISM: ETHICS OF WELFARE There are two names associated with utilitarian philosophy; they are Jeremy Bentham (1748–1832) who is generally considered the founder of traditional utilitarianism, and philosopher cum classical economist, John Stuart Mill (1806–73). According to the utilitarian principle, a decision is ethical if it provides a greater net utility than any other alternative decision. Bentham’s principle can be stated thus: ‘The seeking of pleasure and avoidance of pain, that is, happiness, is the only right and universally desirable end of human action.’ Ethics is nothing else than the art of directing the actions of men so as to bring about the greatest possible happiness to all those who are concerned with these actions. It is not merely the agent’s own happiness but that of all concerned. Bentham viewed the interests of the community as simply the sum of the interests of its members. Summarized, the utilitarian principle holds that ‘An action is right from an ethical point of view if and only if the sum total of utilities produced by that act is greater than the sum total of utilities produced by CONCEPTS AND THEORIES OF BUSINESS ETHICS any other act the agent could have performed in its place’. The utilitarian principle assumes that we can somehow measure and add the quantities of benefits generated by an action and deduct from it the measured quantities of harm that act produced, and determine thereby which action produces the greatest total benefits or the lowest total costs.17 When utilitarianism argues that the right action for a particular occasion is the one that produces more utility than any other possible action, it does not mean that the right action is the one that produces most utility for the person who performs the action. On the contrary, an action is right, as pointed by J. S. Mill, if it produces the most utility for all the persons affected by the action.18 When we try to analyse the utilitarian theory, there are certain inferences and implications of the theory that we must take into account, as otherwise, we will get ourselves totally misled: (i) When utilitarians say that practising the theory will lead to ‘the greatest happiness for the greatest number’, we should include the unhappiness or pain that may be encountered along with the happiness; (ii) One’s actions will affect other people in different degrees and thus will have different impacts; (iii) Since utilitarians assess actions with regard to their consequences, which cause different results in diverse circumstances, anything might, in fact, be morally right in some circumstances; (iv) Maximization of happiness is the objective of utilitarians not only in the immediate situation, but in the long run as well; (v) Utilitarians agree that most of the time we do not know what would be the future consequences of our actions; and (vi) Utilitarianism does not expect us to give up our own pleasure while choosing among possible actions. Utilitarianism fits in correctly with the intuitive criteria that people use when they discuss moral conduct. For instance, when people have a moral obligation to perform some action, they will evaluate it on the basis of the benefits or harms the action will bring upon human beings. The theory leads to the inevitable conclusion that morality requires the agent to impartially take into account everyone’s interest equally. While assessing the usefulness of utilitarianism in the organizational context it should be understood that it provides standards for a policy action namely, if it promotes the welfare of all, more than any other alternative, then it is good. Second, the theory provides an objective means of resolving conflicts of self interest with the action for common good. Third, the theory provides a flexible, result-oriented approach to ethical or moral decision making. One major problem with the utilitarian theory concerns the measurement of utility. Utility is a psychological concept and is highly subjective. It differs from person to person, place to place, and time to time. Therefore, it cannot be the basis for a scientific theory. A second problem concerns the intractability to measurement that arises while dealing with certain benefits and costs. For example, how can one measure the value of life or health? Another problem of the utilitarian theory concerns the lack of predictability of benefits and costs. If they cannot be predicted, then they cannot be measured either. The fourth problem concerns the lack of clarity in defining what constitutes ‘benefit’ and what constitutes ‘cost’. This lack of clarity creates problems, especially with respect to social issues that are given different interpretations by different social or cultural groups. KANTIANISM: ETHICS OF DUTY Immanuel Kant (1724–1804) is regarded as the most important ethician in the rationalistic school in modern times. One of the basic principles of his ethics is his most famous ethical doctrine that a goodwill is the only unqualified good. Kant said that for an action to be morally worth it should reflect a goodwill. By will Kant meant the unique human capacity to act from principle. Contained in the notion of goodwill is the concept of duty: only when we can act from duty does our action have moral worth. When we act only out of feeling, inclination, or self-interest, our actions—although they may be otherwise identical with ones that spring from the sense of duty—have no true moral worth. Kant stressed that the action must be taken only for duty’s sake and not for some other reason. For Kant, ethics is based on reason alone and not on human nature. In Kant’s perspective, the imperatives of morality are not hypothetical but categorical. He says that the moral duty that binds us is unconditional. The core idea of his categorical imperative is that an action is right if and only if we can will it to become a universal law of conduct. This means that we must never perform an action unless we can consistently will that it can be followed by everyone. Organizational Importance of Kantian Philosophy Kantian theory of ethics has adequate relevance to a business organization. Though there are lots of criticisms against Kantian ethics we would consider the positive 35 36 BUSINESS ETHICS—AN INDIAN PERSPECTIVE aspects of his ethics which would be beneficial in organizational decision making. The categorical imperative of Kant gives us firm rules to follow in moral decision making for certain issues, because the result of such actions does not depend on the circumstances or the performer. Lying is an example. No matter how much good may result from the act, lying is always wrong. However, Thiruvalluvar has a different interpretation of the value of truthfulness. To him “Even falsehood has the nature of truth, if it confers a benefit that is free from fault’. (Ibid) Kant introduces an important humanistic dimension to business decisions. In the ethical theories of egoism and utilitarianism humans are considered means to achieve the ends. In the new economic scenario, human beings are sidelined by technological growth and other developments. Kant gives more importance to individuals. For Kant, an action has moral worth only when it is done from a sense of duty. A normal motivation of the kartha is a must to make that action morally right. People in the organization perform certain actions which are beneficial to them thinking that somehow it will be beneficial to the other. The Kantian principle of motivation of a performer of action comes as a correcting instrument to the organization. This is very much relevant for the organization when it takes decisions on ethical issues. The two formulations of Kant are as follows: 1. To act only in ways that one would wish others to act when faced with the same circumstances; and 2. Always to treat other people with dignity and respect. To sum up, to Kant, reason is the final authority for morality. Blind beliefs or rituals cannot be the foundation for morality. He emphasized that the basics of ethics are those moral actions that are taken by a sense of duty and dictated by reason. SOME MORE NORMATIVE THEORIES OF BUSINESS ETHICS There is a certain amount of confusion in defining business ethics as a field of study between the ethics theorists and those engaged in business. Business ethics is couched in abstract theory by academicians and philosophers. They express their theories in bombastic language and convoluted expressions such as ‘deontological requirements’, ‘hedonistic calculus’ and the like, which make no sense to ordinary businessmen who are neither philosophically inclined nor trained in philosophy. Businessmen express themselves in ordinary language and do not like to deal in abstractions. They are interested in solving the specific problems that confront them directly, rather than indulging in abstractions that look like a road to nowhere. It is imperative, therefore, that the business ethicist should produce a set of ethical principles that are both lucid and easy to comprehend for business folks, who can place them in the context of their day-to-day business and see whether they have any practical relevance. The search for a down-to-earth theory has led to the evolution of several normative theories that suit specific business environment. ‘A normative theory of business ethics is an attempt to focus this general theory exclusively upon those aspects of human life that involve business relationship.’19 In simple language, a normative theory is specifically meant to provide men with ethical guidance when they carry on their day-to-day business. Presently, there are three normative theories of business ethics that have evolved over a period of time. They are (i) stockholder theory; (ii) stakeholder theory; and (iii) social contract theory (Fig. 2.2). Of these three, the oldest and one that has fallen into disrepute with business ethicists in recent times is the stockholder theory, though economists like Milton Friedman, following the footsteps of Adam Smith uphold the line of thinking pursued by the promoters of the theory. To most of the critics, the stockholder theory is an unwarranted hangover from the ‘bad old days of capitalism’. The next theory evolved was the stakeholder theory, which, over the past three decades or so, has gained widespread acceptance among the business ethics community. However, in recent years, the social contract theory has emerged as a strong contender to the stake- Fig. 2.2 Classification of Normative Theories of Business Ethics CONCEPTS AND THEORIES OF BUSINESS ETHICS holder theory and occupies a pre-eminent position among the normative theories. It needs to be stressed here that each of these three normative theories upholds a distinctly different model of a businessman’s ethical obligations to society, and hence only one of them can be found to be correct. This, of course, will depend upon the sensitivity of the analyst and the manner of his logical interpretation. THE STOCKHOLDER THEORY The stockholder theory, also known as the shareholder theory, expresses the business relationship between the owners and their agents who are the managers running the day-to-day business of the company. As per the theory, businesses are merely arrangements in which one group of people, namely, the shareholders advance capital to another group namely, the managers to realize certain ends beneficial to them. In this arrangement, managers (including the Board of Directors) act as agents for shareholders. The managers are empowered to manage the capital advanced by the shareholders and are duty bound by their agency relationship to carry on the business exclusively for the purpose outlined by their principals. This fiduciary relationship binds managers not to spend the available resources on any activity without the authorization from their owners, regardless of any societal benefits that could be accrued by doing so. This obviously implies, as per this line of thinking, that a business can have no social responsibilities. According to the strict interpretation of the stockholder theory, managers have no option but to follow the dictates of their masters. If the stockholders vote by a majority that their company should not produce any obnoxious product—which in the perception of the managers would be a profitable business proposition—the managers still have to abide by the decision of the owners of the company. This may be a farfetched example, as shareholders who buy stocks of a company to maximize their return on investment may not issue any such direction. There are companies that produce cigarettes, liquor, and pistols and make money to maximize stockholders’ returns. In all such cases, stockholders seem to be happy with the high dividends they get apart from an increase in market capitalization of their stock and therefore, there is no reason for them to issue directions that negate the managers’ actions. The stockholder theory has been succinctly summarized by economist Milton Friedman who asserted thus: ‘There is one and only one social responsibility of business—to use its resources and engage in the activities designed to increase its profits so long as it stays within the rules of the game, which is to stay engaged in open and free competition without deception or fraud.’ A careful reading of the definitions of the stockholder theory provides us an understanding that it does not give the managers a carte blanche to ignore ethical constraints in the single-minded pursuit of profit. The theory stresses that managers should pursue profit only by all legal, non-deceptive means. A lot of adverse criticism against the theory could have been avoided had the critics appreciated the fact that the stockholder theory did not stress that managers were expected to pursue profit at all costs, even ignoring ethical constraints. The stockholder theory is also associated with the line of utilitarian argument adopted by liberal classical economists. One’s pursuit of profit, goaded by one’s enlightened self interest in a free market economy leads collectively to the promotion of general interest as well, guided as it is by Adam Smith’s ‘invisible hand’.20 ‘Invisible Hand’ was a term coined by Adam Smith to express the idea that though each individual in his/her economic activities acts in his/her own interest such actions are guided by a sort of ‘invisible hand’ which ensures that they are also to the advantage of the community as a whole. Each individual by pursuing his own self-interest promotes the interest of the society more efficiently than when he really intends to promote it.21 Such being the case, it is unwarranted to expect businesses to act directly to promote the common good. Therefore, there is no justification to make a claim that businesses ‘have any social responsibilities other than to legally and honestly maximise the profits of the firm’.22 Apart from this ‘consequentialist’ line of thinking in support of the stockholder theory, there is another ‘deontological’ argument as well to buttress it. The argument runs like this: ‘Stockholders provide their capital to managers on the condition that they use it in accordance with their wishes. If the managers accept this capital and spend it to realize some social goals, unauthorized by the stockholders, does it not tantamount to a clear breach of the agreement?’ Criticism of the Stockholder Theory Many business ethicists have been criticizing the stockholder theory for various reasons. It has been described, as part of corporate law that has outlived its usefulness; as one based on a ‘myopic view of corporate responsibility’ and as one that leads to ‘morally pernicious 37 38 BUSINESS ETHICS—AN INDIAN PERSPECTIVE consequences’. Robert C. Solomon23 in his Ethics and Excellence (1992) finds it ‘not only foolish in theory, but cruel and dangerous in practice’ and misled ‘from its nonsensically one-sided assumption of responsibility to a pathetic understanding of stockholder personality as Homo Economicus’ (The Economic Man). Many ethicists discard the theory as an outmoded relic of the past. If so many ethicists wish to dismiss the theory as impractical and even foolish, it is because of its perceived association with the utilitarian supporting argument and neo-classical economists’ faith in the ‘invisible hand of the market forces’. Most modern day ethicists have little faith in laissez-faire capitalism (absolutely uncontrolled free enterprise system) that is beset by market failures. They believe that to the extent the stockholder theory is associated with that type of economic model (laissez-faire capitalism) that cannot be relied upon to secure the common good. The theory itself stands discredited because of its failures. Another reason why the stockholder theory stands discarded today is because ‘the contemporary economic conditions are so far removed from those of a true, free market’.24 In today’s world, government— especially in its role in collecting huge taxes and spending the large sums that it earns on various welfare, people-centric, and even defence projects—influences the activities of corporations enormously. Besides, in the modern economies, as a producer the State itself has a significant stake in several utilities and environmental activities. In such a situation, it is very likely that the pursuit of private profit will not truly be productive for the public good. Another criticism of the stockholder theory is based on a false analogy. It goes like this: if governments of democratic societies have a moral justification to spend the taxpayer’s money for promoting the common welfare of people without taking their consent, then, it might mean, by inference, that businesses are also justified in carrying out social welfare activities without the consent of the shareholders. But then, this is based on a wrong and far-fetched assumption. The very objective of a government, apart from providing political governance, is to provide some basic utility services and also to ensure that the lot of the poor is improved over a period of time. Undertaking welfare measures is one of the generic functions of a government and on occasions such as natural calamities such as earthquakes, floods, tsunamis, etc., this may be the most important cause for its existence. Moreover, governments get a mandate from their electors to go ahead with the public welfare activities on the basis of promises made by political parties in their manifestos. However, in the case of a business organization, promoting social welfare is only incidental to its major function of increasing the profit of the company so as to enhance the long-term shareholder value. They give no undertaking to any shareholder that they would promote public welfare activities when they are formed. In recent times, many socially conscious companies such as Infosys, Dr. Reddy’s Labs and Tata Steel do seek and get the approval of their shareholders to spend a part of their profit on social welfare activities. STAKEHOLDER THEORY The stakeholder theory of business ethics has a lengthy history that dates back to 1930s. The theory represents a synthesis of economics, behavioural science, business ethics and the stakeholder concept. The history and the range of disciplines that the theory draws upon have led to a large and diverse literature on stakeholders. In essence, the theory considers the firm as an input–output model by explicitly adding all interest groups—employees, customers, dealers, government, and the society at large—to the corporate mix. Figure 2.3 illustrates the different kinds of stakeholders. The theory is grounded in many normative theoretical perspectives including ethics of care, ethics of fiduciary relationships, social contract theory, theory of property rights, theory of the stakeholders as investors, communitarian ethics, critical theory, etc. While it is possible to develop stakeholder analysis from a variety of theoretical perspectives, in practice much of the stakeholder analysis does not firmly or explicitly root itself in a given theoretical tradition, but rather operates at the level of individual principles and norms for which it provides little formal justification. In so far as stakeholder approaches uphold responsibilities to nonshareholder groups, they tend to be in some tension with the Anglo-American model of corporate governance, which generally emphasizes the primacy of ‘fiduciary obligations’ owed to shareholders over any stakeholder claims. However, the stakeholder theory unfortunately carries some sort of an unclear label since it is used to refer to both an empirical theory of management and a normative theory of business ethics, often intermixed and without distinguishing one from the other. In this theory, the stakeholder is defined as anyone who has a claim or stake in a firm. In a wider sense, a stakeholder will mean any individual or group who can affect CONCEPTS AND THEORIES OF BUSINESS ETHICS Fig. 2.3 Stakeholders of an Organization or is affected by the corporation. Interpreted narrowly, stakeholders would mean ‘those groups who are vital to the survival and success of the corporation.’25 In its empirical form, therefore, the stakeholder theory argues that a corporate’s success in the market place can best be assured by catering to the interests of all its stakeholders, namely, shareholders, customers, employees, suppliers, management and the local community. To achieve its objective, the corporate would have to adopt policies that would ensure ‘the optimal balance among them’. As a normative theory, the stakeholder theory stresses that regardless of the fact whether the management achieves improved financial performance or not, managers should promote the interests of all stakeholders. It considers a firm as an instrument for coordinating stakeholder interests and considers managers as having a fiduciary responsibility not merely to the shareholders, but to all of them. They are expected to give equal consideration to the interests of all stakeholders. While doing so, if conflicts of interests arise, managers should aim at optimum balance among them. Managers in such a situation may be even obliged to partially sacrifice the interests of shareholders to those of other stakeholders. Therefore, in its normative form, the theory does assert that corporations do have social responsibilities. A serious reading of the theory will show that a manager’s fundamental obligation is not to maximize the firm’s profitability, but to ensure its very survival by balancing the conflicting claims of its multiple stakeholders. There are two principles that guide corporations to comply with this requirement. According to the first, called the principle of corporate legitimacy, ‘the corporation should be managed for the benefit of its stakeholders: its customers, suppliers, owners, employees and the local communities. The rights of these groups must be ensured and, further, the groups must participate, in some sense, in decisions that substantially affect their welfare’.26 The second principle, known as the stakeholder fiduciary principle, asserts that ‘management bears a fiduciary relationship to stockholders and to the corporation as an abstract entity. It must act in the interests of stakeholders as their agent, and it must act in the interests of the corporation to ensure the survival of the firm, safeguarding the long term stakes of each group’.27 The stakeholder theory has received a wide acceptance among ethicists, perhaps due to the ‘fact that the theory seems to accord well with many people’s moral intuitions, and, to some extent, it may simply be a spillover effect of the high regard in which the empirical version of the stakeholder theory is held as a theory of 39 40 BUSINESS ETHICS—AN INDIAN PERSPECTIVE management’.28 However, the theory is not beyond reproach and criticism. It has been subject to many criticisms on many perfectly valid grounds. Criticism of the Stakeholder Theory The stakeholder theory is often criticized, more often than not as ‘woolly minded liberalism’, mainly because it is not applicable in practice by corporations. Another cause for criticism is that there is comparatively little empirical evidence to suggest a linkage between stakeholder concept and corporate performance. But there are considerable theoretical arguments favouring promotion of stakeholders’ interests. Managers accomplish their organizational tasks as efficiently as possible by drawing on stakeholders as a resource. This is in effect a ‘contract’ between the two, and one that must be equitable in order for both parties to benefit. The major problem with the stakeholder theory stems from the difficulty of defining the concept. Who really constitutes a genuine stakeholder? There is an expansive list suggested by authors, ranging from the most bizarre to include terrorists, dogs and trees, to the least questionable such as employees and customers. Some writers have suggested that any one negatively affected by corporate actions might reasonably be included as stakeholder, and across the world this might include political prisoners, abused children, minorities and the homeless. However, a more seriously conceived and yet contested list of stakeholders would generally include employees, customers, suppliers, the government, the community, assorted activist or pressure groups, and of course, shareholders. Some writers of the theory opine that where there are too many stakeholders, it is better to categorize them as primary and secondary stakeholders ‘in order to clarify and ease the burden it places upon directors’. Clive Smallman29 says: ‘The case for including both the serious claimants and the more flippant are rooted in business ethics, in managerial morality and in best practice in business strategy.’ Moreover, in his opinion, though the inclusion of a large number of claimants may be well-intentioned, it may not be practical for corporate managers to cater to such a large number of stakeholders. It is also argued further that the ‘intent of the theory is better achieved by relying on the hand of management to deliver social benefit where it is required’ rather than suggesting a wide range and diversity of stakeholders to cater to. In modern corporations, stockholders are too many and scattered to wield any effective control over them. Hence, they delegate the powers of decision making and execution to their agents, salaried managers through the Board of Directors. The agency model specifies mechanisms which reduce agency loss, i.e., the extent to which shareholders are put to loss when the decisions and actions of agents differ from what they themselves would have done in similar situations. In the assessment of Clive Smallman ‘The stakeholder model also stands accused of opening up a path to corruption and chaos; since it offers agents the opportunity to divert wealth away from shareholders to others, and so goes against the fiduciary obligations owed to shareholders (a misappropriation of resources)’.30 Thus, the stakeholder model of corporate governance leads to corrupt practices in the hands of managements with a wide option (because of too many stakeholders) and also to chaos, as it does not differ much from the agency model, while increasing exponentially the number of principals the agents have to tackle. The stakeholder theory also can be criticized on the ground that it extends the rights of stakeholders far too much. To draw ethical conclusions from observations of the state of law is as dangerous as to assume that what is legally required should be ethically justifiable. Moreover, to assume that all stakeholders who are impacted by a contract have a moral right to bargain about the distribution of its effects may also lead to an inference that they have a right to participate in the decision making process of business as well, which is absurd. THE SOCIAL CONTRACT THEORY The social contract theory is one of the nascent and evolving normative theories of business ethics. It is closely related to a number of other theories. In its most acknowledged form, the social contract theory stresses that all businesses are ethically duty bound to increase the welfare of the society by catering to the needs of the consumers and employees without in any way endangering the principles of natural justice. The social contract theory is based on the principles of ‘social contract’ wherein it is assumed that there is an implicit agreement between the society and any created entity such as a business unit, in which the society recognizes the existence of a condition that it will serve the interest of the society in certain specified ways. The theory is drawn from the models of the political–social contract theories enunciated by thinkers like Thomas Hobbes, John Locke and Jean Jacques Rousseau. All these political philosophers tried to find an answer for a hypothetical situation as to what life would be in a society in the absence of a government and tried to provide an answer by imagin- CONCEPTS AND THEORIES OF BUSINESS ETHICS ing situations of what it might have been for citizens to agree to form one. ‘The obligations of the government towards its citizens were then derived from the terms of the agreement.’31 As in normative theory of business ethics, the social contract theory draws much from the averments of these political thinkers. The social contract theory adopts the same approach as the one adopted by the political theories towards deriving the social responsibilities of a business firm. The theory assumes a kind of society that is bereft of any complex business organization such as the ones we have today. It will be a ‘state of individual production’. They go on to pose such questions as ‘what conditions would have to be met for members of such a society to agree to allow such businesses to be formed?’ The moral obligations of business towards individual members of society are then drawn from the terms of such an implicit agreement between the two. Therefore, the social contract theory is based on an assumed contract between businesses and members of the society who grant them the right to exist in return for certain specified benefits that would accrue to them. These benefits are a result of the functioning of these businesses, both for their own sake and for that of the larger society. When members of the society give the firms legal recognition, the right to exist, engage them in any economic activity and earn profit by using the society’s resources such as land, raw materials and skilled labour, it obviously implies that the firms owe an obligation to the society. This would imply that business organizations are expected to create wealth by producing goods and services, generate incomes by providing employment opportunities, and enhance social welfare. The concept of ‘social welfare’ implies that the members of the society are interested to authorize the establishment of a business firm only if they gain some advantage by doing so. Such gains occur to them in two distinct ways, namely, as consumers and employees. As consumers, members of the society benefit from the establishment of business firms at least in three ways: (i) business firms provide increased economic efficiency. This they do by enhancing the advantages of specialization, improving decision making resources and increasing the capacity to acquire and utilize expensive technology and resources; and (ii) business firms offer stable levels of production and channels of distribution; and (iii) business firms also provide increased liability resources, which could be used to compensate consumers adversely affected by their products and services. As employees, people are assured by ‘business firms of income potential, diffused personal legal liability for harmful errors, and income allocation schemes’.32 However, business firms do not provide an unmixed blessing. The interests of the public as consumers can be adversely affected by business firms when they deplete the irreplenishable natural resources, pollute the environment and poison water bodies, help to reduce the personal accountability of its members and misuse political power through their money power and acquired clout. Likewise, the interests of the public as employees can be adversely affected by their alienation from the product of their own labour, by being treated as mere cogs in the wheels of production, being made to suffer from lack of control over their working conditions and being subjected to monotonously boring, sometimes damaging and dehumanizing working conditions. Taking into account these respective advantages and disadvantages, business firms are likely to produce the social welfare element of ‘social contract’ and enjoin that business firms should act in such a manner so as to 1. benefit consumers to enable them reach maximization of their wants; 2. benefit employees to enable them secure high incomes and other benefits that accrue by means of employment; and 3. ensure that pollution is avoided, natural resources are not fast depleted and workers’ interests are protected. From the justices’ point of view, the social contract theory recognizes that members of the society authorize the establishment of business firms on condition that they agree to function ‘within the bounds of general canons of justice’. Though what these canons of justice mean is not yet a settled issue, there is a general understanding that these canons require that business firms ‘avoid fraud and deception . . . show respect for their workers as human beings, and . . . avoid any practice that systematically worsens the situation of a given group in society’.33 It can be summarized from the above arguments that the social contract theory upholds the view that managers are ethically obliged to abide by both the ‘social welfare’ and ‘justice’ provisions of the social contract. If fully understood, these provisions impose significant social responsibilities on the managers of corporations. 41 42 BUSINESS ETHICS—AN INDIAN PERSPECTIVE Criticism of Social Contract Theory The social contract theory, like the other normative theories of business ethics, is subject to many criticisms. Critics argue that the so-called ‘social contract’ is no contract at all. Legally speaking, a contract is an ‘agreement between two or more persons which is legally enforceable provided certain conditions are observed. It normally takes the form of one person’s promise to do something in consideration of the other’s agreeing to do or suffer something else in return’.34 A contract implies a meeting of minds, which does not exist in the so-called social contract. Social contract is neither an explicit nor implicit contract. Those who enter into a business do so merely by following the legal procedures that are necessary under the law of the land and would be shocked if they were told that while doing so, they had entered into a contract to serve the interest of the society in ways that are not specified in the law and that it would have a substantial impact on the profitability of the firm. Therefore, where there is neither a meeting of the mind nor an understanding of the implications of what goes when one gets into a contract, the social contract is more of a fiction than a true contract. But the proponents of the social contract theory are not unduly put off by such harsh criticisms. They concur with the view of the critics that the core theme of the theory namely, social contract is indeed a fictional or hypothetical contract and proceeds further to state that this is exactly what is needed to identify managers’ ethical obligations. In the words of Thomas Donaldson ‘If the contract were something other than a ‘fiction’, it would be inadequate for the purpose at hand; namely revealing the normal foundations of productive organizations’. According to social contract theorists, the moral force of the social contract is not derived from the consent of the parties. However, in their view ‘productive organizations should behave as if they had struck a deal, the kind of deal that would be acceptable to free, informed parties acting from positions of equal moral authority. . . .’35 TEACHINGS OF THE CHURCH The longing for justice has always been a central theme of the Catholic Church from earliest Biblical times to the present. The work for justice finds its expression from the Gospels. The opening lines of Gaudium Et Spes of the Second Vatican Council placed the centrality of justice to the Christian calling most vividly in the following words: ‘The joys and hopes, the sorrows and anxieties of the women and men of this age, especially those who are poor or in any way oppressed, these are the joys and hopes, the sorrows and anxieties of the followers of Christ.’36 The expression of the Church’s social teaching commenced in the late 19th century, 1891 to be exact, with the encyclical of Pope Leo XIII’s on the Condition of labor (Rerum Novarum). From this modest beginning, Catholic teaching has grown rapidly, representing a rising crescendo of social consciousness and concern in the Church. The social teaching of the Church, based on Christian ethics, comprises sets of principles, guidelines and applications which provide a compelling challenge for individuals as well as corporations in responsible citizenship. As pointed out, the Church always supports and promotes the welfare of the poor. The Church’s concern for the marginalized is always expressed through her teachings. The less privileged and the marginalized realize the fact that the wealth of the world is in the hands of a few. This emerging awareness of the mass is supported by the Church. People often think how business and ethical teachings of the Church can be related. People always tried to see business without any reference to religion. But now the trend has changed and organizations and institutions relate business with religion and ethics. This transition is due to the increased importance of ethics in business. The pressing concerns of the society are reflected in the teachings of the Church. ‘Option for the poor’ is the catchword of the Church’s teachings. The Church’s concerns and ethical teachings are found in several papal encyclicals. In the modern organization, sound ethics is a key criterion for success. RERUM NOVARUM Since the late 19th century, there developed a strong tradition of reflective thought on economic issues within the Catholic Church. This concern on economic issues started effectively in May 1891 with the publication of Rerum Novarum, an encyclical of Pope Leo XIII. The central theme of the papal letter to his flock was the relationship between the State, employers and the workers. It strongly laid the foundation for human dignity. It was a revolutionary work, because the Church could change the misconception that she supports the rich and the powerful of the society. CONCEPTS AND THEORIES OF BUSINESS ETHICS This encyclical directs the State and organizations to perform their duties to the working class. When man is deprived of dignity and equality, he will indulge in unethical practices. There should be mutual support in the society as well as in organizations. This mutual support will help him perform his best for productivity and profit. ‘The consciousness of his own weakness urges man to call in aid from without. We read in the pages of the Holy Writ: it is better that two should be together than one; for they have the advantage of their society. If one falls, he shall be supported by the other. Woe to him that is alone, for when . . . It is natural impulse which binds men together in civil society; and it is likewise this which leads them to join together in associations which are, it is true, lesser and not independent societies, but nevertheless, real societies. When the State and organizations perform their duty, there would not be corruption or unethical behaviour in the society.’37 GAUDIUM ET SPES Gaudium Et Spes is the Pastoral Documentation of the Church released during the Second Vatican Council in 1965. The burning concern of the Church is that the rapid change and technological advancement makes human beings aware of many facts and that their demands have changed. These aggressive demands have led to so many things that he or she should not have indulged in. To a certain extent this revolution leads to unethical practices. The internal fight of values and developments has changed the basic values of human beings. The social teaching of the Church has developed through addressing new circumstances and conditions of society as they have emerged. Today, the human race is involved in a new stage of history. Profound and rapid changes are spreading by degrees around the whole world. Triggered by the intelligence and creative energies of man, these changes recoil upon him, upon his decisions and desires, both individual and collective, and upon his manner of thinking and acting with respect to things and to people. Hence we can already speak of a true cultural and social transformation, one which has repercussions on man’s religious life as well. A change in attitudes and in human structures frequently calls accepted values into question.38 THE TRADITION OF CATHOLIC SOCIAL THOUGHT The papal encyclicals and pastoral letters that form the foundation of Catholic Social Thought (CST) are moral documents that reflect the concerns of the Church for the lives of millions of human beings as the result of the working of the economies. From the beginning, the focus of CST has been on the problem of poverty and the marginalization of the disadvantaged, first in the industrialized countries and then in the Third World. In the past three decades or so, there has been a growing concern about too much consumption by the rich and inadequate consumption by the poor. This concern was expressed by the Pope Paul VI in his encyclical, Popularum Progressio thus: ‘The superfluous wealth of rich countries should be placed at the service of poor nations . . . Otherwise their continued greed will certainly call down on them the judgment of God and the wrath of the poor.’ Another aspect of the Church’s concern is the impact of excessive consumption of the earth’s environment. Pope John Paul II in his encyclical Centesimus Annus expressed this concern thus: ‘Equally worrying is the ecological question, which accompanies the problem of consumerism and which is closely connected to it. In his (or her) desire to have and to enjoy rather than to be and to grow, man (or woman) consumes the resources of the earth and his (or her) own life in an excessive and distorted way’ (Para 37). Earlier he has noted: ‘It is not wrong to want to live better; what is wrong is a style of life which is presumed to be better when it is directed toward ‘having’ rather than ‘being’, and which wants to have more, not in order to be more but in order to spend life in enjoyment as an end in itself’ (Para 36). Thus, the CST reiterated and reinforced by various papal encyclicals advocates that the materialisticminded consumerism should be substituted by the creation of a more humane future through empowering people to rebuild the values and institutions necessary to morally constrain self interest.39 INDIAN ETHICAL TRADITIONS India has rich ethical traditions which envisioned in the scriptures of the land such as the Gita, the Upanishads, etc. Hindu scriptures speak of the performance of right duty, at the right time in the right manner. The rich 43 44 BUSINESS ETHICS—AN INDIAN PERSPECTIVE Indian tradition has always emphasized the dignity of human life and right to live in a respectful manner. The rich values that once prevailed in India are now disappearing from the mainstream. Indian traditions are copied and followed by Western countries in their social welfare and organizational conduct. GANDHIAN PRINCIPLES The Gandhian principle of trusteeship is another philosophy on ethics that has received increased importance in the present day world of decaying morals and lack of trust among individuals as well as organizations. The philosophy of trusteeship implies that an industrialist or businessman should consider himself to be a trustee of the wealth he possesses. He should think that he is only a custodian of his wealth meant to be used for the purpose of business. The wealth belongs to society and should be used for the greatest good of all. The trusteeship concept should also be extended to the labour in industry. It does not recognize capital and assets as individual property. This was basically to reduce the conflict between ‘haves’ and ‘have nots’. The origin of the trusteeship principle can be traced to the concept of non-possession detailed in Bhagawad Gita. Gandhiji also advocated Sarvodaya, meaning welfare for all. He was of the firm view that capital and labour should supplement each other. There should be a family atmosphere and harmony in work place. Gandhi’s philosophy of trusteeship has got more relevance in the present scenario. In the recent past, social involvement by business has, for the most part, taken the shape of philanthropy and public charity. This has led to the building of temples, hospitals and educational institutions. A few examples of such activities would include the Birla Temple in Kolkata, the Shree Vivekananda Research and Training Institute set up by Excel Industries in Mandvi which is very much in the spirit of trusteeship; the L&T Welfare Centre in Bombay, the Tata Institute of Fundamental Research, and the Voltas Lifeline Express that has been running on Indian tracks for over a decade. RIGHTEOUSNESS AS THE WAY IN THE GITA The Bhagawad Gita cites numerous instances of how moral values and ethics can be incorporated in one’s work life. Many of its verses are directly significant for the modern manager who may be confused about his or her direction, and struggling to find an answer to ethical dilemmas. The Lord reiterates that work or karma is the driving force of life, and this work has to be ethical. Chapter II, Verse 47 says ‘You have a right to perform your prescribed duty, but you are not entitled to the fruits of action. Never consider yourself the cause of the results of your activities and never be attached to not doing your duty’.40 This is the important message of Gita that the performer of the action has only to perform the prescribed duty and not indulge in the result of the action. If the worker leaves the result of the work to the Lord, on the realization that the result is beyond his control, then he can be serene forever, because he is not worried of the result whether it is good or bad. This teaching of the Gita draws one’s attention to Nishkama Karma. In the organizational context too when one is only worried of the result, he or she is likely to fall into improper activities. On the other hand, if one is ready to do his or her duty to the maximum of one’s ability and able to set aside the result, he or she will be an ethical person in the organization. Chapter II, Verse 56 says ‘One who is not disturbed in mind admits the threefold misery or elated when there is happiness and who is free from attachment, fear and anger, is called a sage of steady mind’.41 A steady mind, another mental state, is desirable in one’s work life, to retain one’s integrity in the work one does. A steady mind gives you the right attitude and right direction. Detachment is that quality which enables the individual not to accept anything for personal gratification. In the organizational context, this quality is very much valued. Personal desires and conflicting interests end up in unethical practices. Lord Krishna’s promise, in the seventh and eighth verse of Chapter IV of the Gita is that, whenever evil dominates, the Lord takes an avatar to set right the situation and re-establish the Dharma.42 Translated, these verses mean as follows: Yada yada hi dharmasya glanir bhavati bharata abhyuthanam adharmasya tatamanam srujamy aham43 CONCEPTS AND THEORIES OF BUSINESS ETHICS Whenever and wherever there is decline of Dharma and ascendance of Adharma, then, O scion of the Bharata race! I manifest (incarnate) Myself in a body.44 Paritranaya sadhunam vinashayacha dushkritam dharma samsthapanarthaya sambahvami yuge yuge 45 For the protection of the good, for the destruction of the wicked, and for the establishment of Dharma, I am born from age to age.46 BUSINESS AND ISLAM For Islam, all principles covering business emanate from the Holy Quran, as they are explained and amplified in the Hadith (collection of the Prophet’s sayings). In Islam, there is an explicit edict against the exploitation of people in need through lending them money at interest and doing business through false advertising. Mohammed, the last Prophet and Messenger, was very much involved in business before he was chosen by God. He was involved in trade from his early age and had widely travelled and had rich experience in business. The Prophet laid stress on honesty and truthfulness in business. He said ‘God shows mercy to a person who is kind when he sells, when he buys and when he makes a claim’.47 His teachings cover a wide range of business and economics. Muzammil H. Siddiqi,48 in his article ‘Business Ethics in Islam’: enumerates the following major business principles drawn from the teachings of Prophet Mohammed: 1. No fraud or deceit: The Prophet said, ‘When a sale is held, say—there’s no cheating.’ (Al-Bukhari, 1974) 2. No excessive oaths in a sale: The seller must avoid excessive oaths in selling an article: The Prophet ordained: ‘Be careful of excessive oaths in a sale. Though it finds markets, it reduces abundance.’ (Muslim, 3015) 3. Need for mutual consent: Mutual consent is necessary: ‘The sale is complete when the two part with mutual consent.’ (Al-Bukhari, 1970) 4. Be strict in regard to weights and measures: ‘When people cheat in weight and measures, their provision is cut off from them.’ (Al-Muwatt, 780) He told the owners of measures and weights: you have been entrusted with affairs over which some nations before you were destroyed.’ (Al-Trimidhi, 1138) 5. The prophet was very much against monopoly: ‘Whoever monopolises, he is a sinner.’ (Abu Da’ud, 2990) 6. Free enterprise: According to the Prophet, the price of the commodities should not be fixed unless there is a situation of crisis or extreme necessity. 7. Hoarding is forbidden: Hoarding the commodities in order to increase their prices is forbidden. 8. Forbidden transactions: Transaction of things that are forbidden is also forbidden, such as intoxicants. The Prophet Mohammed ordained that businesses should promote ethical and moral behaviour and should follow honesty, truthfulness and fulfilment of trusts and commitments, while eliminating fraud, cheating and cut-throat competition. SHARIAH AND INTEREST ON CAPITAL Shariah bans the taking of interest, because according to this law, investors can make profits only from business based on exchange of assets and not on money. As per the law, bankers sell sukuk or Islamic bonds only by the use of property and other assets so as to generate income which would be equal to the interest they would be paying on conventional debt. As per the Shariah, the money thus gained cannot be used to finance gambling, guns or alcohol. Such assets managed under Islamic rules will be $2.8 trillion by 2015, according to the Islamic Financial Services Board, an association of Central Banks based in Kuala Lumpur, 45 46 BUSINESS ETHICS AND CORPORATE GOVERNANCE Malaysia.49 According to Zafar Sareshwala, Managing Director of Parsoli Investments: ‘It is the religious requirement of a Muslim to be invested; rather it is unislamic to hold money. Interest is forbidden, but sharing risk and responsibility, that is, sharing profit and loss is acceptable. Equity investing is wholly acceptable under Shariah as long as it is in companies compliant with the Shariah rules.’50 This implies that Muslim investors invest only in a portfolio of ‘clean stocks’. They do not invest it stocks of companies dealing in alcohol, conventional financial services (banking and insurance), entertainment (cinemas and hotels), tobacco, pork meat, defence and weapons. Sectors such as computer software, drugs and pharmaceuticals and automobile ancillaries are all Shariah compliant. Currently, there are more than 800 Shariah compliant stocks on the exchanges. SUMMARY ‘Ethics’ and ‘morality’ though used interchangeably are two different concepts. ‘Morality’ according to philosophers refers to human conduct and values and ‘ethics’ is the study of a set of principles that define human character or behaviour in relation to what is morally right or morally wrong. The principles do not lead to a single course of action but provide a means of evaluating and deciding among competing options. Ethics is considered a normative study, that is, an investigation that attempts to reach normative conclusions. Ethics, in business relates to human conduct in a business organization. Ethical theories in business include the consequentialist and non-consequentialist normative theories and the normative themes of egoism, utilitarianism, and Kantian ethics. There are also, other non-consequentialist normative themes: duties, moral rights, and prima facie principles. Egoism asserts that an act is morally right if and only if it best promotes an egoist’s (person, group or organization) long term interests. According to the utilitarian principle an action is ethically right only if the sum total of utilities produced by that act is greater than the sum total of utilities produced by any other act that could have been performed in its place. In the organization, the usefulness of the utilitarianism is assessed by the policy decision that if it promotes the welfare of all more than any other alternative, then it is good. One of the basic principles of Kantian ethics is that a good will is the only unqualified good. Kant introduces an important humanistic dimension to business decisions which is to behave in the same way that one would wish to be treated under the same circumstances and to always treat other people with dignity and respect. Each of these theories has been subjected to criticism and has not been easily adopted by the business organizations. The search for a down-to-earth theory has led to the evolution of several normative theories that suit specific business environment. Presently, three normative theories of business ethics, namely stockholder theory, stakeholder theory and social contract theory have evolved over a period of time. The stockholder theory expresses the business relationship between the stock owners and their agents who are the managers running the day-to-day business of the company. As per the theory, managers should pursue profit only by all legal, non-deceptive means. Many business ethicists have been criticizing the stockholder theory for various reasons. Adverse criticism against the theory could have been avoided had it been properly understood. The stockholder theory did not stress that managers were expected to pursue profit at all costs, even ignoring ethical constraints. In recent times, however, many socially conscious companies such as Tata Steel do seek and get the approval of their shareholders to spend a part of their profit on social welfare activities. The stakeholder theory argues that a corporate’s success in the market place can best be assured by catering to the interests of all its stakeholders, namely, shareholders, customers, employees, suppliers, management and the local community. This objective is achieved when corporations adopt policies that would ensure the optimal balance among all stakeholders. The stakeholder theory is often criticized mainly because it is not applicable in practice by corporations and also because there is comparatively little empirical evidence to suggest a linkage between stakeholder concept and corporate performance. The major problem with the theory stems from the difficulty of defining a genuine stakeholder. The social contract theory is a nascent and evolving normative theory of business ethics. It is based on the principles of ‘social contract’ wherein it is assumed that there is an implicit agreement between the society and any created entity such as a business unit, in which the society recognizes the existence of a condition that the business unit will serve the interest of the society in certain specified ways. However, business firms do not provide an unmixed blessing. The interests of the public as consumers can be adversely affected by business firms when they deplete the irreplenishable natural resources, pollute the environment and poison water bodies, help reduce the personal accountability of its members and misuse political power through their money power and acquired clout. The social contract theory, like the other normative theories of business ethics, is subject to many criticisms. Though there are several ethicists who argue that religion and morality which form the basis and core of ethics are not necessarily interconnected, the concepts and theories that are dealt with in this chapter clearly demonstrate that almost all of them have their roots in religious beliefs. The world’s great religions––Christianity, Hinduism and Islam have all left their indelible marks on morality and the conduct of people in every aspect of human endeavour including business. Every religion has provided its followers its own set of catechisms, moral instructions, beliefs, values and virtues, traditions and commitments. It is true that even agnostics and non-believers can be ethical in their business dealings, but even they might find it difficult to prove that their values were not shaped by what they imbibed from the society, of which they are a part. And almost all societies, from the ancient to the present, are influenced by religions and their teachings. KEY WORDS Ethikos ∑ Moral values ∑ Science of morals ∑ Social conduct ∑ Ordinary parlance ∑ Norms of behaviour ∑ Moral standards ∑ Immortal ∑ Epitomized ∑ Terminal diseases ∑ Christian Virtue of love ∑ Ten Commandments ∑ Old Testament ∑ Religious philosophy ∑ Common law ∑ Constitutional law ∑ Conscientious effort ∑ Normative perspectives ∑ Egosim ∑ Utilitar- ianism ∑ Prima facie principles ∑ Psychological egoism ∑ Kantian philosophy ∑ Stockholder versus stakeholder ∑ Social contract ∑ Social welfare ∑ Canons of justice ∑ Explicit contract ∑ Implicit contract ∑ Encyclicals ∑ Pastoral letters ∑ Pastoral documentation ∑ Trusteeship principles ∑ Sarvodaya ∑ Righteousness ∑ Steady mind DISCUSSION QUESTIONS 1. Many social thinkers are of the opinion that morality and ethics are built on the foundation of religion. Do you subscribe to the view? Substantiate your answer. 2. Out of the three major normative theories (stockholder, stakeholder and social contract), which one, in your perception adequately explains the basis for business ethics? 3. An ideal normative theory of business ethics should capture the ethical obligations arising out of business agreements. In your perception, which normative theory is useful for constructing satisfactory proceedings justifying ethical obligations of business? 4. Business ethics is basically a Western concept. Would you agree? Substantiate your answer. 5. All major religions of the world provide a moral basis for their followers to carry on their business ethically. Do you agree? Either way, provide arguments to prove your point. NOTES 1. Manuel G. Velasquez, Business Ethics: Concepts and Cases, 6th ed. (Delhi: Pearson Education, 2007), p. 22. 2. R. V. Badi and N. V. Badi, Business Ethics (Delhi: Vrinda Publications, 2005). 3. The American Heritage Dictionary, 1st ed. (New York: American Heritage Publishing Company, 1969). Cited in Paul W. Taylor, Principles of Ethics: An Introduction, Encino, CA: Dickenson Publishing Company, 1975). 4. O. C. Ferrel, John Paul Fraedrich, and Linda Ferrel, Business Ethics: Ethical Decision Making and Cases, 6th ed. (New Delhi: Bizantra, 2005). 47 SUMMARY CONCEPTS AND THEORIES OF BUSINESS ETHICS 48 BUSINESS ETHICS—AN INDIAN PERSPECTIVE 5. William H. Shaw, Business Ethics, 4th ed. (Singapore: Thomson/Wadsworth, 2002). 6. Ibid., p. 9. 7. Ibid., p. 11. 8. Poonam Sharma and Kanika T. Bhal, Managerial Ethics—Dilemmas and Decision Making (New Delhi: Sage Publications, 2004). 9. Ibid., p. 11. 10. William H. Shaw, Business Ethics, 4th ed. (Singapore: Thomson/Wadsworth, 2002), p. 33. (Thirukkural, with English Translation by Rev, Drew and John Lazarus, Thendral Nilayam, Chidambaram, Tamil Nadu) 11. Thirukkural 12. See Note 2. 13. See Note 1. 14. See Note 10. 15. Ibid. 16. Ibid., pp. 46–47. 17. Hendry Sidgwick, Methods of Ethics, 7th ed. (Chicago, IL: Chicago University Press, 1962). 18. John Stuart Mill, cited in John Hasnas, The Normative Theories of Business Ethics—A Guide for the Perplexed, Business Ethics and Corporate Governance, Book of Readings (Hyderabad: ICFAI Center for Management Research, 1998). 19. John Hasnas, The Normative Theories of Business Ethics—A Guide for the Perplexed, Business Ethics and Corporate Governance, Book of Readings (Hyderabad: ICFAI Center for Management Research, 1998). 20. Milton Friedman, Capitalism and Freedom (Chicago, IL: University of Chicago Press, 1962), p. 133. 21. Adam Smith, The Wealth of Nations IV–V (London, UK: Penguin, 1999), p. 45. 22. Ibid. 23. Robert C. Solomon, Ethics and Excellence: Cooperation and Integrity in Business (New York: Oxford University Press, 1992). Cited in John Hasnas, The Normative Theories of Business Ethics—A Guide for the Perplexed, Business Ethics and Corporate Governance, Book of Readings (Hyderabad: ICFAI Center for Management Research, 1998). 24. John Hasnas, The Normative Theories of Business Ethics—A Guide for the Perplexed, Business Ethics and Corporate Governance, Book of Readings (Hyderabad: ICFAI Center for Management Research, 1998). 25. E. Freeman and D. Reed, “Stockholders and Stakeholders: A New Perspective on Corporate Governance.”, In C. Huizinga ed. Corporate Governance: A Definitive Exploration of the Issues (Los Angeles, CA: UCLA Extension Press, 1983). 26. Evan and Freeman, cited in John Hasnas, “The Normative Theories of Business Ethics: A Guide for the Perplexed,” Business Ethics Quarterly (January 1998) 8: 25–26. 27. John Hasnas, “The Normative Theories of Business Ethics: A Guide for the Perplexed,” Business Ethics Quarterly (January 1998), 8: 19–42. 28. Ibid. 29. Clive Smallman, “Exploring Theoretical Paradigms in Corporate Governance,” International Journal of Business Governance and Ethics (2004), 1 (1): 78–94. 30. See Note 8. 31. See Note 17. 32. Thomas Donaldson, Corporation and Morality (Englewood Cliffs, NJ: Prentice Hall, 1982), Chapter 2. 33. Ibid. CONCEPTS AND THEORIES OF BUSINESS ETHICS 34. Michael Greener, Penguin Dictionary of Commerce (Middlesex, UK: Penguin Books, 1979). 35. Thomas Donaldson, “Ethics of International Business.” in Thomas J. Donaldson and Edward Freeman, eds. The Ruffin Series in Business Ethics, 56, Oxford University Press, US, 1992. 36. Second Vatican Council, Gaudium et Spes Pastoral Constitution on the Church in the Modern World (Vatican City: Vatican, 1965). 37. Encyclical, 1891. 38. Pastoral document, 1965.. 39. Edward P. DeBerri et al., Catholic Social Teaching, Our Best Kept Secret (New York: Orbis Books, 1985). 40. Padman Govindarajan, “Secret of Action in Bhagawad-Gita,” available at www.salagram.net/ GP-ActionBG.html 41. SABCL. “Essays on the Gita, with Sanskrit Text and Translation of the Gita,” available at www. writespirit.net/inspirational_talks/talks_by_sri_aurobindo/the_message_of_the_gita__by_sri_aurobindo/ sankhyayoga_(chapter_ii) 42. N. Vittal, “Role of Vigilance and Its Process in Arresting Corruption,” 7 January 2001, available at http:// cvc.nic.in/vscvc/cvcspeeches/jan2k1.html 43. Subhamoy Das, “Learn a Verse from the Bhagavad Gita,” 2007, available at http://hinduism.about.com/ od/thegita/qt/gitaverse.htm 44. Bhagavad Gita, available at http://sss.vn.ua/bh_g_eng.htm#Chapter%20IV 45. Subhamoy Das, “Learn a Verse from the Bhagavad Gita,” 2007, available at http://hinduism.about.com/ od/thegita/qt/gitaverse.htm 46. The Vedanta Society of Japan (Nippon Vedanta Kyokai), available at http://vedanta.jp/en/tvk/06/ KyokaiJAug-Oct06.txt 47. Al-Bukhari, 1934. Cited in Muzammil H. Siddiqi, “Business Ethics in Islam,” 2007, available at www. pakistanlink.com/Religion/2004/12172004.htm 48. Muzammil H. Siddiqi, “Business Ethics in Islam,” 2007, available at www.pakistanlink.com/Religion/ 2004/12172004.htm 49. Will McSheehy and Shanthy Nambiar, “Islamic Bond Fatwas Surge on Million-Dollar Scholars,” May 1, 2007, available at www.bloomberg.com/apps/news?pid=20601109&sid=a.DsH16oTM6U&refer=home 50. Shailesh Menon, “Shariah Index Can Woo Islamic Funds,” available at http://economictimes.indiatimes. com/Create_Shariah_index_and_watch_Islamic_funds_flow_in/articleshow/1982487.cms FURTHER READINGS Chryssides, G. D. and Kaler, J. H., An Introduction to Business Ethics, 1st ed. (London, UK: Chapman & Hall, 1993). DeBerri, E. P. and Hug, J. E., Catholic Social Teaching, Our Best Kept Secret, 1st Indian ed. (New York: Orbis Books, 2004). Flannery, A. ed., Gaudium et Spes Pastoral Constitution on the Church in the Modern World, Second Vatican Council, 1965. 18 May 2007, Available at www.osjspm.org/majordoc_gaudium_et_spes_part_one.aspx Mackinnon, B., Ethics, Theory and Contemporary Issues, (Belmont, CA: Wadsworth/Thomson Learning, 2004). Sharma, P. and Bhal, K.T., Managerial Ethics—Dilemmas and Decision Making (New Delhi: Sage Publications, 2004). Smallman, C., “Exploring Theoretical Paradigms in Corporate Governance,” International Journal of Business Governance and Ethics (2004), 1 (1): 78–94. 49 50 BUSINESS ETHICS—AN INDIAN PERSPECTIVE CASE Study BIOCON—INDIA’S OWN HOME-GROWN BIOTECH COMPANY (This case study is based on reports in the print and electronic media, and is meant for academic purpose only. The author has no intention to sully the image of the corporate or executives discussed.) BIOCON—AN OVERVIEW Biocon was established in 1978. As India’s leading biotechnology company, it has evolved over the past 30 years from an enzyme manufacturing unit to a fully integrated biopharmaceutical enterprise, focusing on healthcare. It applies its proprietary fermentation technologies to develop innovative and effective biomolecules in oncology, cardiology, diabetology and other therapeutic segments. Biocon’s success has been primarily due to the company’s expertise to develop innovative technologies and products and to rapidly leverage them to adjacent domains. This unique ‘integrated innovation’ approach has yielded a host of patented products and technologies that have enabled multi-level relationships with its global clientele. Biocon India Limited and its two subsidiary companies, Syngene International Limited and Clinigene International Limited, form a fully integrated biotechnol- Fig. 2.4 Biocon’s Integrated Business Model (Source courtesy: Biocon, www.biocon.com/ biocon_aboutus_business.asp) ogy enterprise specializing in biopharmaceuticals, custom research, clinical research and enzymes (Fig. 2.4). BIOCON’S PERFORMANCE Biocon, as India’s own home-grown biotechnology company, has shown exemplary performance since its inception in 1978 (Table 2.1). Its integrated business model and the company’s excellent business strategy have earned for Biocon exemplary performance, both in terms of profits and ever-increasing value of its scrips. ∑ Biocon Ltd has posted a 44 per cent increase in its net profit at INR 475.1 million for third quarter ended December 31, 2006, compared with INR 327.9 million posted during the same period of the previous fiscal. The company earned a revenue of INR 8630 million, profit of INR 1080 million in 2006–07, and grew 23 per cent in the first quarter of 2007–08. ∑ During the period, the Biocon scrip, after several months, rallied over 10 per cent on both the bourses, closing at INR 410.25 on the Bombay Stock Exchange (BSE) and at INR 410.45 on the National Stock Exchange (NSE). It gained INR 75, touching an intra-day high of INR 445.65 on the BSE. CONCEPTS AND THEORIES OF BUSINESS ETHICS 51 ∑ The revolutionary oral insulin programme has passed phase I human clinical trials and is likely to enter phase II soon. BIOCON IN NEWS RECENTLY1, 2 Biocon has been very much in the news in recent times as shown below: ∑ New York Times called Kiran Mazumdar Shaw, the Chair person, ‘India’s mother of invention’ and The Economist gave her the title ‘India’s Biotech Queen’. ∑ Biocon’s Syngene enters into research partnership with Bristol-Myers Squibb on 14 March 2007. ∑ Biocon Limited unveiled comprehensive portfolio of renal therapy products on 8 March 2007 ∑ Biocon grants exclusive marketing license for BIOMAb EGFR for Pakistan on 18 January 2007. ∑ Biocon Limited and Neopharma signed MoU for a joint venture on 5 January 2007. ∑ Biocon buys US-based start-up IATRICa Inc in a sub$10 million deal. ∑ Biocon buys 70 per cent stake of the German pharma AxiCorp in a €30-million deal to market its injectible insulin, generics, biosimilars and biologics. Source: http://www.hindu.com/2011/04/22/stoies/ 201104 2264831700.htm BIOCON AND ITS SUBSIDIARIES Biocon, has floated three subsidiary companies in the process of building up an integrated business model and with a view to enjoying the benefits of complete integration in biotechnology business. 52 BUSINESS ETHICS—AN INDIAN PERSPECTIVE Syngene is a 99.99 per cent owned subsidiary of Biocon Incorporated. On 18 November 1993, its paid-up capital was INR 28.75 million. By way of a restructuring, 99.9 per cent of the shares held by Kiran Mazumdar Shaw, ICICI and a few other scientists were transferred to Biocon in consideration for the issue of shares by Biocon to the shareholders of Syngene on 31 March 2002. Clinigene is a 100 per cent owned subsidiary of Biocon Ltd. It was incorporated on August 4, 2000 with an authorized capital of INR 5 million. The paid-up capital of Clinigene was INR 500,000. Biocon Biopharmaceuticals Private Limited (BBPL) is a joint venture company of Biocon in collaboration with CIMAB SA, Cuba. The equity participation by Biocon is 51 per cent. The joint venture agreement was entered on 22 February 2002. The paid-up capital of BBPL was INR 8.8 million. PRODUCTS AND SERVICES Kiran Mazumdar Shaw, the founder of Biocon, firmly believes that India should make full use of her intellectual capital with a view rising high in the value chain in a manner totally different from the Western model, which did not take into account the affordability of medicines to the patients. Besides, ‘India needs to leverage its affordable cost base to deliver high-value innovation to global markets by building excellence across the innovation chain, from discovery to product and clinical development’. 3 This is the policy perspective that trigged the growth of Biocon over the past three decades. According to Sandeep Rao, General Manager, Business Development, ‘Biocon’s impressive range of products and partnered services continue to build a robust pipeline of biosimilar and discovery-led biological programs in oncology, nephrology, diabetes and autoimmune diseases’. 4 Since the enzyme business of Biocon declined, Mazumdar Shaw announced on 18 June 2007 that the company decided to sell the division to the Danish firm Novozymes for $115 million (INR 4,715 million). Biocon will put some of the sale proceeds into R&D and some for acquisitions. 5 BIOPHARMACEUTICALS Biocon manufactures a wide spectrum of biopharmaceuticals ranging from small molecules to biological and dosage forms which include anti-diabetic agents, anti-hypertensive and antiinflammatory agents, anti-oxidants, haemostatic agents, cholesterol-lowering agents, digestive-aid enzymes, hepatoprotective, immuno-suppressants, nutraceuticals and orthopedic agents. ENZYMES Biocon manufactures and markets a broad range of industrial enzymes, food additives and process aids which include amy- lases, amyloglucosidase, cellulases, catalases, lipases, and proteases. However, over the years all categories of enzymes have become less and less significant in Biocon’s staple of biotech products. From close to 90 per cent in the early 1990s enzymes’ share in the topline had dropped to 11 per cent in 2006–07. It has shrunk further to 5 per cent in the first quarter of 2007–08. FOOD ADDITIVES Food additives manufactured and marketed by Biocon include emulsifiers, hydrocolloids, natural colours, speciality fats and specialized proteins. SERVICES CUSTOM RESEARCH Biocon subsidiary, Syngene, leverages its synthetic chemistry skills to carry out custom research in early stage drug discovery and development. CLINICAL RESEARCH 6 Another Biocon subsidiary, Clinigene, conducts phases I– IV clinical trials and longitudinal research to discover novel biomarkers. Clinigene is a clinical research organization that offers global biotechnology and pharmaceutical majors strong clinical trial services, regulatory and laboratory capabilities for clinical drug development. The value-added services include patient registries and clinical databases in diabetes, lipidemia, oncology, and cardiovascular diseases. BIOCON’S CORPORATE SOCIAL RESPONSIBILITY (CSR) ACTIVITIES Biocon’s CSR activities centre around the Biocon Foundation that has been established with the aim of identifying and implementing projects that impact the social and economic scenario in the country. It main focus areas are to provide quality healthcare and health education for the betterment of Indian society. Through its initiative, Biocon Foundation, by establishing Arogya Raksha Yojana, aims to provide high-quality drugs at affordable prices to the masses at all BioCare Pharmacies and participating clinics. CLINICAL TRIALS AND DRUG TESTING IN INDIA7 Any development of new drugs needs various tests before being released in the market commercially. These tests are called clinical trials. One of the main areas of Biocon’s research focused on developing oral insulin to control diabetes, which also, like other medicines require extensive drug CONCEPTS AND THEORIES OF BUSINESS ETHICS testing. Biocon also conducts clinical trials, not only to test the efficacy or otherwise of its own products, but also of others associated with it through its subsidiary company, Clinigene. What are these clinical trials and what are its impacts on people affected by these trials? ‘India increasingly emerges as a preferred destination for outsourcing clinical trials—testing of new drugs on humans— and the country may also be heading toward providing the greatest source of human guinea pigs for the global drug industry.’8 Clinical trials come with a staggering price tag. Worldwide, clinical research was estimated to be a $5–6 billion market in 2002, and clinical research spending is expected to touch $20 billion by 2007. CMSInfo, Chesam, UK, reports that national spending on clinical trials in America alone was nearly $25.6 billion in 2006 and expected to rise to $32.1 billion in 2011—growing at an average rate of 14 per cent per year.9 ‘A recent presentation by the Drug Controller-General of India said that the market value for clinical trials outsourced to India was around $300 million, up 65% from 2006, and was expected to be between $1.5 billion and $2 billion by 2010.’ But industry stakeholders contest this claim.10 The business of clinical trials has increased multi-fold in recent times since it offers the pharmaceutical industry the raison d'être and the logic for obtaining governmental license to market their products. However, human beings from developing countries are being used as guinea pigs and are paid a pittance for the huge losses in health and life suffered by them. This is because in countries like India, there are teeming millions of people who are extremely poor and could be paid a small compensation compared to the citizens of developed countries. The drug industry has also involved uninformed, non-consenting people from developing countries as human volunteers.11 THE INDIAN ADVANTAGE India’s most significant offering is cost savings. More than 40 per cent of drug development costs are incurred in clinical trials and India offers immense savings on that aspect. India has 40 million asthmatic patients, 34 million diabetic patients, 8–10 million HIV-positive people, 8 million epileptic patients, and 3 million cancer patients, among other categories. India’s 34 million diabetics account for one-fourth of the global diabetic population and the number keeps increasing every year. The number is estimated to grow to 57.2 million by year 2025. Pharmaceutical companies often view this as ‘raw stock’. There were reports of several trials that were conducted in government hospitals where alone poor patients can afford to get treated. These poorly funded government hospitals look at these trials as a source of income to buy their equipment. Besides, there is no effective monitoring mechanism for research and often regulations have to be diluted. Since India possesses a huge target drug testing population and the country encourages the outsourcing of clinical trials, pharmaceutical companies from the West rush to India. India is 53 also an attractive destination for high-quality health services due to a variety of reasons such as low cost, trained personnel and medical infrastructure. A huge population with diverse untreated diseases: this is what people in the medical profession call the ‘India advantage’. ‘In India particularly, unethical and illegal clinical trials are most rampant and are conducted without fear because, say critics, there is no law to safeguard the interests of volunteers, while regulatory authorities, ‘by design or default’ fail to take action against such trials.’12 ILLEGAL CLINICAL TESTS A spate of unfortunate events over the past few years has brought to the fore the rampant practice of conducting unethical and even illegal clinical trials in India. This is causing immense concerns, triggering a huge public outcry over the regulatory authorities’ failure to check such practices, initiating even lawsuits.13 It has become more and more lucrative. Asia Times, in an article on the subject, quoted the CEO of Biocon (Kiran Mazumdar Shaw), who said that clinical research was expected to touch $10 billion by the year 2005.14 WHY ARE MNC DRUG COMPANIES FLOCKING TO INDIA? At the time of her independence, pharmaceutical research in India did not rely on clinical testing. Medical scientists mostly reverse-engineered drugs already developed in advanced countries. But everything changed when India submitted to pressure from the World Trade Organization (WTO) to stop the practice, and implemented rules that prohibit Indian companies from creating generic versions of drugs patented elsewhere. Now, multinational pharmaceutical companies have assured profits in the Indian market, and the country has suddenly become a profitable location for the expensive tests required for FDA’s clearance of any drug. Though it is still too premature to predict how much the legislative changes have boosted drug development, observers say the number of studies conducted by multinational drug companies has sharply increased now. Regardless of where clinical trials are performed, the FDA requires the same evidence showing that a drug is safe and effective before granting its approval for any drug. It is the responsibility of the institutional review boards at the medical institutions where the studies take place to ‘actively pursue issues of informed consent’. It is a fact that multinational drug companies are resorting to illegal clinical tests in India because of the ever increasing cost of drug research both in Europe and the United States. In developing countries such as India and China, governments are not too careful to ensure that such clinical tests do not lead to human suffering and death. Even in cases where such tests have led to deaths, the compensation paid to the victims’ families work out to be a small fraction of what it 54 BUSINESS ETHICS—AN INDIAN PERSPECTIVE would have cost them in developed countries. According to Ashish Singh, Vice President of Bain & Co., a consulting firm that reports on the healthcare industry, ‘the total spending on outsourcing clinical trials to India could top $2 billion by 2010’.15 Companies are attracted to India not only because of the huge patient pool and skilled workers, but also because many potential study volunteers are ‘treatment naive’, meaning they have not been exposed to the wide array of biomedical drugs that most Western patients have. Besides, doctors here are easier to recruit for trials because they do not have to go through the same ethics procedures as their Western counterparts. Moreover, in countries like India patients ask fewer questions about what is going on. UNETHICAL PRACTICES OF BIOCON Though Biocon as India’s own home-grown biotech company has been receiving rave reviews in the media for its innovative initiatives in biotechnology, it has also attracted adverse critical comments for underplaying ethical issues in its efforts to be a successful company. The following ethical lapses have been reported in the media in recent times. Biocon has accepted some lapses, justified some, while contested some others. The following instances demonstrate how acceptable it becomes for a successful organization to make compromises on ethical issues when it is addicted to the pursuit of success. ILLEGAL CLINICAL TRIALS BY BIOCON In 2004, Biocon and Shantha Biotech in Hyderabad came under scrutiny for conducting illegal clinical trials that led to eight deaths. It was alleged that Shantha Biotech failed to obtain proper consent from patients while testing a drug meant to treat heart attacks. Biocon tested a genetically modified form of insulin without the proper approval from the Drug Controller General of India (DCGI) or the Genetic Engineering Approval Committee (GEAC). After the outcry against Shantha and Biocon, the Indian government adopted stricter ethical guidelines for clinical research, but one cannot be too sure that companies are abiding by the new rules. ENVIRONMENTAL INFRACTIONS16 Biocon decided in February 2007 to set up a INR 10,000 million manufacturing facility at Jawahar Pharma City, a special economic zone (SEZ) near Visakhapatnam, Andhra Pradesh. Biocon has also decided to set up a centre on a 10-acre plot in the Hyderabad biotech SEZ being developed by the Andhra Pradesh State Industrial Infrastructure Corporation. The SEZ in Andhra Pradesh has a state-ofthe-art effluent treatment plant with marine discharge facility. Andhra Pradesh has promised Biocon uninterrupted power and water supply. Andhra Pradesh has been keen to get Kiran Mazumdar Shaw to invest in the state ever since it realized that the biotech major is unhappy over Bengaluru infrastructure. There is a view among many that the company is moving to Andhra Pradesh due to its inability to handle the pollution it generates and protect the environment as required by the Bengaluru Municipal Corporation. However, the Andhra Pradesh government provides a common effluent treatment for similar companies in its industrial estate. Biocon does not show that the company is interested in protecting the environment, as its first plant at Bengaluru is still running without the effluent treatment plant. BIOCON ENHANCES TRADE OPERATIONS IN BANGLADESH17 Biocon is on an aggressive drive in Bangladesh because of the country’s increasing dependence on the lifestyle disorder drugs such as cardiovasculars and anti-diabetics. Bangladesh, which is viewed as an attractive destination for active pharmaceutical ingredients (APIs), has been looking at leading Indian companies for its supplies, and companies like Biocon have managed to stay ahead in the region. For Biocon, 50 per cent of its earnings are from exports. The company’s range of APIs is accepted by leading generics and branded companies across the world and have also found favourable acceptance in Bangladesh mainly because the products are manufactured ‘under stringent standards’. Therefore, Biocon’s statin portfolio, oral anti-diabetics and immuno-suppressants are on the list of exports to Bangladesh. The latest drugs from the company’s stables being Insugen, an r-DNA insulin and BioMAb EGFR for head and neck cancer will see it being on the export list. Biocon has a reasonable presence with an advantage of being one of the few companies with a product offering as variant as cardiovascular, diabetes, and oncology, and has been a key exporter to the region. It is easier for companies like Biocon to put up a plant in countries like Bangladesh since the pollution norms are not strictly followed there. Furthermore, clinical trials could be easily conducted without any objection from the government. CONCEPTS AND THEORIES OF BUSINESS ETHICS PROCEDURAL LAPSES AT BIOCON18 The Karnataka government referred the issue of Biocon Ltd’s lapses in making methylcobalamin to the DCGI in 2006 for further action. Methylcobalamin, a form of vitamin B12, is used to treat nervous problems (neuropathy) among diabetics. Biocon holds a manufacturing licence for methylcobalamin since June 2003 and was to follow a seven-step procedure. However, the company skipped some steps and changed the process by using an intermediate drug (dimethyl benzimidazole) imported without licence from Auspure Biotech Ltd, China. The State Drugs Controllerate found in January 2006 that Biocon had cut short the steps and violated Section 18a (vi) read with Rule 78(b) of the Drugs & Cosmetics Rules by not intimating the changes in the standard operating procedure. The State Drugs Control authorities cancelled the licence in late January 2006. On 10 February 2006, Biocon applied for a fresh licence and received it in March. A Biocon spokeswoman said that the situation was rectified and the company continues to make the drug based on the new March licence. However, she argued that methylcobalamin in terms of sales and revenue was a ‘very insignificant product’ to the company. In its statements, Biocon said it had admitted to inspecting officials to a ‘procedural lapse’ in the manufacturing process. Also, import of an intermediate from China does not need a licence. It had now stopped importing the intermediate. It stated that it had revised its production process and had commenced the production of methylcobalamin. Accepting the fact that the company had committed a procedural lapse as it had not updated the drug controllers’ office about the changed process, they filed the new process seeking a fresh license. The company argued that the situation had been rectified once the Karnataka’s Drugs Control Department issued a fresh license in March 2006. The above news indicates that the company is not keen on the procedures and is willing to correct only when identified and informed. Biocon would have continued with its old procedure violating the guidelines of the Drugs Control Department of Karnataka, had it not been identified during the routine inspection. This also indicates that Biocon’s shift from Bengaluru to Andhra Pradesh is not only for the effluent treatment facility, but for other reasons as well. CONCLUSION Though many well-informed Indians are happy about the achievements of Kiran Mazumdar and her biotech company Biocon, there have also been several adverse criticisms against the unethical practices followed by the firm. In the drug industry, it is important for a home-grown company like 55 Biocon to be innovative in its practices with a view to making avaliable to the country’s poor medicines at affordable prices. But while doing this, a company should not indulge in unethical practices that tarnish the image of the country’s producers and their products. This is a lesson we should learn from this case. KEY WORDS Biocon ∑ Patented products ∑ Joint venture (JV) ∑ Memorandum of Understanding (MoU) ∑ Oncology ∑ Diabetology ∑ Cardiology ∑ Multilevel relationships ∑ Global clientele ∑ Unethical practices ∑ Proprietary fermentation technology ∑ Effluent treatment plant ∑ Clinical trials DISCUSSION QUESTIONS 1. Discuss the singular characteristics of Biocon as India’s fast-growing technology enterprise, while tracing its growth. 2. What are the problems associated with conducting clinical trials in India? How has Biocon circumvented them? NOTES The author is obliged to the following two groups of EPGDBM students (indicated by 1 and 7) for the basic inputs produced by them to this case study: 1. M. S. Somasundram, B. Sai Ramesh, and A. Valliappan, “Biocon and its (Un)Ethical Practices,” unpublished report (Chennai: LIBA, 2007). 2. Correspondent, “Biocon picks up 70% in German pharma co AxiCorp for e30 mn,” The Economic Times, 11 February 2008, available at http://economictimes.indiatimes.com/News/News_By_ Industry/Healthcare_Biotech/Biocon_picks_up_70_in _German_pharma_co_AxiCorp_for_e30_mn/articleshow/2774679.cms 3. Kiran Mazumdar Shaw, “Innovation to Deliver Affordability,” Biocon Ltd., The Economic Times, 30 July 2007. 4. Biocon, “Products & Services,” 2007 available at www. biocon.com/biocon_products.asp 5. Venkatesha Babu, “Clean Cut From the Past,” Business Today, 10 August, 2007, Available at http://businesstoday. digitaltoday.in/index.php?issueid=18&id=1012&option = com_content&task=view 6. Biocon Press Release, available at www.biocon.com/ biocon_press_release_details.asp?subLink=news&Fileid= 926. 7. Ramani, N. Srinivasan, T. Suchithra, and S. Sudha, “Unethical Clinical Trials and Drug Testing by Biocon,” unpublished report (Chennai: LIBA, 2006). 56 BUSINESS ETHICS—AN INDIAN PERSPECTIVE 8. Vera Hassner Sharav, “Fast Growing Business: Unethical Clinical Trials in India,” Alliance for Human Research Protection, 27 July 2004, available at www.ahrp.org/infomail/ 04/07/27.php 9. Robert Fee, “The Cost of Clinical Trials: Drug Discovery and Development,” 1 March 2007, available atwww.dddmag.com/the-cost-of-clinical-trials-aspx 10. P. T. Jyothi Datta, “Clinical Trial Market to Fall Short of Billion-Dollar Projection,” The Hindu Business Line, 14 October 2008. 11. Pratap Ravindran, “Clincal Trial on Trial,” The Hindu Business Line, 1 November, 2004, available at www. thehindubusinessline.com/2004/11/01/stories/ 2004110100150900.htm 12. See Note 8. 13. Ibid. 14. See Note 7. 15. Scott Carney, “Testing Drugs on India’s Poor” Truthout, 2005, available at www.truthout.org/cgi-bin/artman/exec/ view.cgi/33/16613 16. Correspondent, “AP pips B’lore in Biocon Deal,” The Times of India, 17 February 2007, available at http:// timesofindia. indiatimes.com/articleshow/1630228.cms 17. Nandita Vijay, “Biocon to Enhance Trade Operations,” 27 July 2006, Pharmabiz.com, available at www. pharmabiz.com/article/detnews.asp?articleid=34481&s ectionid=50 18. Bureau, “Karnataka Refers Biocon’s Procedural Lapse to DCGI,” The Hindu Business Line, 4 April 2006, available at www.thehindubusinessline.com/2006/04/04/stories/ 2006040402040500.htm FURTHER READINGS Basu, I., “India’s Clinical Trials and Tribulations,” Asia Times, 23 July 2004, available at www.atimes.com/ atimes/South_Asia/ FG23Df03.html BBC News, “Drug Trials Outsourced to India,” 22 April 2006, available at http://news.bbc.co.uk/2/hi/south_asia/ 4932188.stm Gulhati, C. M., “Debate: Should Clinical Trials Be Allowed in India?” Business Standard, 18 February 2004. ––––––, “Needed: Closer Scrutiny of Clinical Trials,” Indian Journal of Medical Ethics (January–March 2004) 12 (1), available at www.issuesin medicalethics.org/121ed004. html Srinivasan, S., “Indian Guinea Pigs for Sale: Outsourcing Clinical Trials,” India Resource Centre, 8 September 2004, available at www.indiaresource.org/issues/globalization/2004/indianguineapigs.html Three CHAPTER Ethical Dilemmas, Sources and Their Resolutions INTRODUCTION All of us, as producers, distributors and even as consumers, confront situations where our moral behaviour is put to test. There are innumerable occasions when they may have to fight in courts, sellers try to suppress facts about their products or services; buyers collude with sellers in order to evade cases and taxes that are due to the government. Buyers more often refuse to take bills if taxes are added to the prices they pay for the products they buy. On every such occasion, we come across an ethical dilemma. In this chapter, we analyse the whys and wherefores of such dilemmas and how these can be surmounted by moral and upright behaviour. WHAT IS AN ETHICAL DILEMMA? An ethical dilemma is a moral situation in which a choice has to be made between two equally undesirable alternatives. Dilemmas may arise out of various sources of behaviour or attitude, as for instance, it may arise out of failure of personal character, conflict of personal values and organizational goals, organizational goals versus social values, etc. A business dilemma exists when an organizational decision maker faces a choice between two or more options that will have various impacts on (i) the organization’s profitability and competitiveness; and (ii) its stakeholders. ‘In situations of this kind, one must act out of prudence to take a better decision. As we can see, many of these ethical choices involve conflicts of values.’ According to Louis Alvin Day,1 these conflicts can arise on different levels. ‘Sometimes, there is an inner conflict involving the application of general societal values.’ A production manager, when asked to produce a commodity by his company may face an ethical dilemma, when he knows that it will harm the large number of consumers who buys and uses the same. Sometimes, there may arise a conflict between general societal values, as in the case of minimizing harm to others and professional values. For example, news reporters may willingly hide a sacrilege a mob committed in a place of worship if they feared that it would result in a communal frenzy and mass slaughter. ‘Ethical dilemmas involve problem solving situations in which decision rules are often vague or in conflict.’2 The outcome of an ethical decision cannot be predicted with any degree of accuracy or precision. We cannot be sure whether we have made the right decision; nor can any one tell us so. There is neither a magic formula nor a software available to find a solution to this problem. Even the most astute businesspersons do commit ethical mistakes while deciding business issues. In such cases, people have no other alternative but to think well and deeply before they make decisions and once decided, to take the responsibility for such decisions. A person’s intentions and what factors would prompt him or her to take the final decision are the ‘last steps in the ethical decision making process’.3 When peoples’ intentions and their final decisions are at variance with 58 BUSINESS ETHICS—AN INDIAN PERSPECTIVE one another, they may feel guilty for what they have done. Businesspersons and professionals come across several such situations in their lives. An advertising agent may be asked by the director of a mediocre B-school to draft an advertisement for admission stating that since its inception, the institute has 100 per cent placement. Though the advertiser knows it to be untrue, he or she may be prompted to draft and release the blatantly untrue advertisement due to extraneous factors. The advertiser’s refusal to release the advertisement would mean loss of business, income and loss of a big client, all of which would affect the bottom-line of the company’s business. The management may argue that as an advertising agency, they were expected to act according to the wishes of their client. Personally, the advertiser may also be affected if he or she disagrees with the boss, which might adversely impact his or her career and income. These external factors might influence his or her decision in favour of a resolution to his or her ethical dilemma (Fig. 3.1). This decision might be unethical though the agent knows it is morally wrong. Such wrong decisions may lead to a feeling of guilt in a person. Fig. 3.1 Structure of Ethical Dilemma HOW ETHICAL DILEMMAS IN BUSINESS AFFECT THE STAKEHOLDERS? Ethical dilemmas in business can be best explained by the triangle in Fig. 3.2 with the stakeholders as its vertices. The stakeholders in this case can be broadly classified into shareholders, employees and the society at large. Shareholders are the real owners of the company through their shareholdings in the firm. They expect a decent return on their investments (ROI). Corporations have to repay them for the opportunity costs they have incurred in investing in their firm. They have to be compensated through dividends, bonuses, bonus shares etc. In many corporations, the management is predominantly loaded with promoter family members holding a few shares. For instance, before the Indian economy opened up many promoter families had as little as 1.5–3 per cent shareholdings in the companies they had promoted, while the rest of the capital was contributed by the public, government-owned financial institutions and others. These promoter families, all the same, ran the corporations as if they were their personal fiefdoms and resorted to ‘asset-stripping’ and siphoned off the profits. The shareholders are given a raw deal in spite of their higher stockholdings. In other cases, corporations themselves indulge only in bettering the interests of the shareholders leaving the employees and the society high and dry. Such companies devote themselves entirely in furthering the Fig. 3.2 Ethical Dilemma in Business ETHICAL DILEMMAS, SOURCES AND THEIR RESOLUTIONS interests of the promoter families and their shareholders. The employees are given a raw deal. One look at the employee attrition rate would be an eye-opener. At the other extreme, in some organizations, employees become militant and demand huge bonuses even when the organization itself is facing severe losses. The unions demand huge bonuses every year and at the slightest provocation go on strikes, forcing the embattled management to declare lock-outs causing huge financial losses, and losses in market share. There had been numerous such instances in India. In Kerala and West Bengal several industries had to be closed because of communist-led militant trade unions. Even elsewhere, in Mumbai and Coimbatore, hundreds of cotton textile mills had to be closed because of high workers’ demands even when these units were running into losses. Society can be construed as creditors, competitors, suppliers, distributors and the common public in and around the organization. Corporations have to pay their suppliers on time. They have to repay their creditors due instalments of capital and the interests in time. They have to have partnership relations with their distributors, wholesalers and retailers so that all of them benefit from the channel partnership. Corporations owe a lot to the society at large. A corporation, for instance, utilizes the infrastructure, resources, trained manpower and a host of other things provided by the society. So it has to repay with gratitude what it receives from the society. After all, the organization is there because the society allows it to be there. It is because managements have understood the logic behind this reasoning that they are coming forward increasingly to show their concern for public welfare, especially those of the disadvantaged sections of society in and around their facilities, and some of them, even beyond. When there is an equitable distribution of wealth among all the three, namely, the shareholders, employees and the society, there will be peace and harmony and all-round well being. The corporation will earn the goodwill and the support from all of them. If this balance is tilted in favour of anyone in particular, then the corporation will be in trouble ultimately. CORPORATE DILEMMA OVER ETHICAL BEHAVIOUR Several corporate managements are in a dilemma whether it is worth their while to act ethically and practice corporate governance in their companies. Investing in ethical practices and being fair to all stakeholders will cost the corporates dearly. Therefore, most of them are in a dilemma. Moreover, in business, more than elsewhere, we are faced with moral and ethical dilemmas daily. We are faced with moral choices not only between right and wrong, but also between right and right. An ethics poster in Boeing said it all: ‘Between right and wrong there is a troublesome grey area.’ According to Joseph Badaracco,4 ‘We have all experienced situations in which our professional responsibilities unexpectedly come into conflict with our deepest values. We are caught in a conflict between right and right. And no matter which options we choose, we feel like we’ve come up short.’ Those in business come across several ethical problems that cause ethical dilemmas. The following are some instance: ∑ They feel that there is lack of clear linkage between business ethics and financial success; they know of several instances where unethical businesspersons flourish and often enjoy fruits of others’ labour, while many others, scrupulously honest and ethical, have failed in their businesses and fallen by the wayside; there is no magical formula that would help in resolving such a dilemma. ∑ They are not clear as to how much they should invest in the business ethics system; they would like to know how much is good enough. ∑ They are unclear about the right balance between business ethics and the investment required for the same; many business concerns may be at a loss to know when and where to strike a balance in the allocation of time, efforts and resources between the two. ∑ The seemingly long gestation periods and the lack of short-term gains also is an obstacle. Investments in ethical business may be large, in diverse areas and multi-dimensional. They may bear fruits after a very long time. For instance, companies that are working in restoring ecological balance, may have to wait very long to know the fruits of their labour. Sometime, it may be even a fruitless wait. SOURCES OF ETHICAL PROBLEMS According to Keith Davis and William C Frederick5 ethical challenges in business take several forms and raise different kinds of ethical dilemmas. Ethical challenges and their attendant dilemmas may arise due to (i) failure 59 60 BUSINESS ETHICS—AN INDIAN PERSPECTIVE of personal character; (ii) conflict of personal values and organizational goals; (iii) organizational goals versus social values; and (iv) hazardous, but popular products. Added to these, there may arise other ethical challenges when corporations cross boundaries and become multinational companies. Newer technologies, diverse religious, cultural and social beliefs, different economic systems, political systems and ideologies may bring in their own dilemmas and problems. The issues and problems confronting business are large, varied and ever growing. Different functions of management (marketing, production, financial, human resource management, sales, service, etc.) throw up different problems and dilemmas. ‘The primary tasks for business are to be aware of the ethical dimension, to learn how to reason ethically as well as economically, and to incorporate ethical considerations into the firms’ operations.’6 FAILURE OF PERSONAL CHARACTER A major source of ethical problems is failure of personal character. Companies, through no fault of their own, may recruit workers whose personal values are not desirable, without knowing the workers’ background. When they recruit their employees, they look for people with educational qualifications and experience that will match their job profiles. If the recruiters know that among otherwise qualified persons, some are undesirable, they will weed them out, but it is very difficult to spot persons with unethical qualities or to anticipate them to be so in future or to measure their ethical nature. Without such knowledge if recruiters take them in, those employees ‘may embezzle funds, steal supplies from the company, pad expense accounts, take unjustified leave, shirk obligations to fellow-workers, take bribes for favouring suppliers, use inside information for their personal benefit and to the detriment of others’. Such unethical persons reflect the manner of their upbringing, early family and childhood experience, the type of schools they attended, the friends they had, and values of their immediate society. Since business does not have an ‘ethics screen’, if it recruits and employs some such persons, it is not to be blamed for the situation. CONFLICT OF PERSONAL VALUES AND ORGANIZATIONAL GOALS Another source of conflict that gives rise to an ethical dilemma is when the company uses methods or pursues goals unacceptable to the manager or an executive. A typical example was that of George Couto, a marketing executive of the pharmaceutical giant, Bayer AG. In 2003, the company hatched a conspiracy to overcharge the American Medicaid programme for the antibiotic Cipro. Thanks to Couto’s effort to let the country know of the conspiracy, Bayer AG pleaded guilty to the criminal charge and paid a fine of $257 million when Couto’s exposure brought to the knowledge of public authorities (Food and Drug Administration) that Bayer AG used to relabel Cipro and sell it to another pharmaceutical company, Kaiser Permanente, with a different identification number so that it could claim more money from the Medicaid programme. In this case, Couto’s personal values conflicted with the goal of Bayer, which was to profit by overcharging the Medicaid programme by duping the authorities. He had heard Helge Wehmeier, head of Bayer’s US Operations say in a compulsory ethics training programme: ‘You will never be alone in adhering to the high standards of the law’ (in following ethical business) and continued ‘should you feel prodded, speak to a lawyer or call me. I am serious about that’.7 Couto’s conscience revolted against the hypocrisy of the top management. He wrote a short memo to his boss questioning him how the company reconciled the Medicaid practice with the company’s expectation of all employees adhering to the spirit and letter of the law. No one replied to his note. So, Couto went to a law firm which agreed to represent him and filed a law suit against Bayer in early 2000. He also quit the company soon after. In most cases, companies resort to unethical practices due to the following two reasons: ∑ intensive competitive pressures; and ∑ exclusive focus on economic goal of making profit. Employees like George Couto were not trouble makers but, in fact, trouble shooters. Their personal values and goals of their companies threw up an ethical dilemma. ORGANIZATIONAL GOALS VERSUS SOCIAL VALUES Activities of a company may be considered unethical by the stakeholders, due to changing social scenario or milieu. In a fast-changing situation, a company may find itself at odds against changing social values. For ETHICAL DILEMMAS, SOURCES AND THEIR RESOLUTIONS instance, the social and cultural mores that prevailed in India before 1991 when the economy was shackled by controls and licenses, were very orthodox and conservative. Organizations followed a hierarchical set up. Senior executives could be addressed only as ‘Sirs’. Hours of work were generally fixed from 9 am to 5 pm. Employees were expected to come to office well dressed. Men and women employees rarely mixed, kept a respectable distance from one another. Women rarely, if ever, worked during nights. But can we visualize such a situation today in many of our modern offices? The situation has now totally changed and if any organization managed by arch-conservatives insists on a model dress code, 9 to 5 working hours, expects juniors to address senior executives as ‘Sirs’, resorts to moral policing, etc., there will be a virtual riot in its premises! Keith Davis et al.8 point out some instances wherein some companies anticipate shifts in values and attitudes of people and try to align themselves with these to avoid ethical conflicts and dilemmas. ‘Procter & Gamble withdrew its Relytampon promptly when its use was linked statistically to some deaths and Johnson & Johnson cleared all retail shelves of its Tylenol analgesic within days of the discovery that some containers have been poisoned.’9 Both companies acted with alacrity with a view to protecting their reputations in the market place as responsible companies and being aware of the high value placed by the public on consumer safety. Obviously, they were praised for their ethical alertness. Thus, Procter & Gamble withdrew its product, which was linked to some user deaths, while Johnson & Johnson cleared all retail shelves of its Tylenol analgesic within days of the discovery that some containers had cyanide poison traces and had caused deaths. Though both companies were in no way directly responsible for the tragic deaths, they decided that in matters of life and death, it is better to be proactive than reactive, even though these withdrawals cost these companies dearly in money, but in the long run, they made up all losses and preserved their trust with the stakeholders. PERSONAL BELIEFS VERSUS ORGANIZATIONAL PRACTICES In recent times, ethical dilemmas in organizations arise when they employ multi-racial and multi-religious employees. Several organizations are accused of racial discriminations and gender bias in the work place and have been paying fines of billions of dollars or as out-of-court settlements. In the United States, mega corporations like Boeing have paid huge payments ‘for gender bias and racial profiling’. Infosys Technologies paid its former employee Reka Maximovitch $3 million in compensation in an out-of-court settlement ‘for alleged verbal sexual harassment, unwanted sexual advancements and unlawful termination of employment’ against the company and Phaneesh Murthy, the highest paid America-based executive of Infosys.10 In India too, there have been instances when companies run by a majority community organize religious functions in their premises in which persons belonging to other faiths are made not only to contribute towards expenses but also take part in religious rituals. Though these issues have not been brought out openly because of possible repercussions, they do add to the simmering discontent of the minorities. Though the country has adopted secularism, there are clear signs in public offices showing that it is not put into practice by a majority of officials. When people in power, be it in the public sector or private sector, show and display covertly or overtly their religious affiliations, it does send a wrong signal to all employees and to the public who have to frequent those offices. Several ethical dilemmas may arise because of this. PRODUCTION AND SALE OF HAZARDOUS BUT POPULAR PRODUCTS In our society, there are a number of harmful products that are produced and sold to their users notwithstanding the fact that a vast majority of people are aware of their harmful effects. People know that smoking cigarettes causes cancer, excessive drinking causes accidents and liver problems, use of drugs causes both psychological and mental problems, and yet these products are being produced and consumed. Is this practice ethical? Ethicists may pose a very relevant question: Those who defend sale of many harmful and obnoxious products argue that in a free society consumers use these products on their own volition, without any outside compulsion. Producers only cater to the consumers’ demands. If due to ethical considerations, these products are banned, it will create a black market leading to adulteration, profiteering and several undesirable consequences. Additionally, it will cause unemployment and loss of incomes to families. If for instance, companies like ITC Ltd. that produces cigarettes, and United Breweries Ltd. that manufactures and sells liquor are to be closed, will it not throw thousands of its employees out of their jobs? What, then, happens to their families? On the other hand, there are others who argue that allowing business people to produce these harmful products increase 61 62 BUSINESS ETHICS—AN INDIAN PERSPECTIVE social costs through higher health and insurance costs. Therefore, it calls for strong social controls on businesses that produce and sell these risk items such as alcohol, cigarettes and harmful drugs. Where does the ethical burden lie, when business sells products known to be actually or potentially harmful to society? ‘A cigarette is a roll of tobacco, fire at one end, and a fool at the other,’ said G.B. Shaw. Cigarettes cause a series of diseases: lung cancer, heart disease, circulatory disorders and yet companies like Philip Morris and ITC produce billions of cigarette sticks, sell them and make huge profits. Likewise, alcohol causes vehicular mishaps, irreversible brain damage, kidney failure, accentuates heart problems, and results in cirrhosis of the liver. Yet not only are companies like United Breweries permitted to manufacture liquor, sell and make money, but many state governments like Tamil Nadu have their own distribution outlets to sell it. The ostensible purpose is, of course, that the money thus earned is badly needed to provide welfare measures for the poor. But this reasoning does not seem to make any sense when it is known that it is mostly the recipients belonging to the very same poor families who waste their incomes and destroy their health through heavy drinking. Often, they drink with the money and the resources provided by the government, leaving their families penniless and starving. Is the principle of caveat emptor (let the buyer beware) in mercantile law to be adapted suitably in all these cases? Even that is now being relegated in view of consumer rights! Should individual rights and free choice override social costs? Could drunken drivers and carefree smokers deprive others of their legitimate rights to life and safety? Even items like hard drugs, dynamite and guns—could free trading in these be ethical? Will the ineffective statutory warning in the form of an inscription on the cigarette packet ‘Smoking is Injurious to Health’ legitimatize the unethical business? OTHER ETHICAL CHALLENGES There are other unethical practices that are too many to enumerate. Some of the sample practices are: ∑ ∑ ∑ ∑ ∑ ∑ price fixing and profiteering due to monopoly, and often artificially created scarcity; shifting unfair shares to the producer stakeholders and employees; discriminatory wage structure; using up scarce and irreplenishable industrial resources and raw materials; shifting or locating business at the cost of society; and overworking women and children. WHY DOES BUSINESS HAVE A NEGATIVE IMAGE? We have already noted that ‘Competitive pressures, individual greed, and differing cultural contexts generate ethical issues for organizational managers’.11 Further, in almost every organization some people will have the inclination to behave unethically (the ethical egoist)—necessitating systems to ensure that such behaviour is either stopped or detected (after unethical behaviour occurs) and remedied. Business has always been portrayed negatively by media, books, and movies. According to Batstone, ‘less than two percent of Americans rated US companies as excellent Corporate Citizens’ in 2003. When companies do some good, they are hardly highlighted, while any wrongdoing by them is heavily publicized. There are several reasons why business has to confront ethical issues. When consumers in particular, and people in general observe that most of the businessmen have only one objective, namely, the single minded pursuit of profit even at the cost of consumers’ legitimate interests; when they try to profiteer; create artificial scarcity to charge a premium price for their goods and services; use low-quality inputs, do not honour their warranties and guarantees; use the media to hoodwink the hapless and uninformed consumers; damage wantonly the ecology and environment and resort to suppressio veri, suggestio falsi, people are prone to have a negative image of business. There are also many enterprises that are honest, scrupulous in their dealings and are passionately involved in community welfare and environmental protection, but they are not publicized much by the media. It seems to appear to the general public that such ethical enterprises are exceptions rather than the rule. WHY BUSINESSES SHOULD ACT ETHICALLY? There are a number of reasons why business should act ethically: ∑ to meet stakeholder expectations (and protect business reputations); ETHICAL DILEMMAS, SOURCES AND THEIR RESOLUTIONS ∑ ∑ ∑ ∑ ∑ to prevent harm to the general public; to build trust with key stakeholder groups; to protect themselves from abuse from unethical employees and competitors; to protect their own employees; and to create an environment in which workers can act in ways consistent with their values. HOW CORPORATIONS OBSERVE ETHICS TO REDUCE DILEMMAS? Organizations have started to implement ethical behaviour by publishing in-house codes of ethics that are to be strictly followed by all their associates. They have started to employ people with a reputation for high standards of ethical behaviour in the top levels. They have started to incorporate consideration of ethics into performance reviews. Corporations that want to popularize good ethical conduct have started to reward ethical behaviour. Most of these corporations conduct an ethics audit and at the same time they are continually looking for more ways to be more ethical. CODE OF PERSONAL ETHICS FOR EMPLOYEES Most company codes list the following values that are expected from their employees: ∑ ∑ ∑ ∑ ∑ ∑ ∑ ∑ Respect confidential information to which you have access. Maintain high standard of professional responsibility. Avoid being placed in situations involving conflict of interest. Act with integrity. Do not discriminate against anybody or anything on any bias. Maintain professional relations based on mutual respect for individuals and organizations. Be committed to the goals of the organization. Do not give up your individual professional ethics. HOW TO CREATE AN ETHICAL WORKING ENVIRONMENT? ∑ ∑ ∑ ∑ ∑ ∑ ∑ ∑ Make the decision to commit to ethics. Recognize that you are a role model by definition, by your action, and by your values. Assume the responsibility for instilling ethical behaviour. Articulate your values. Train the staff in ethical behaviour. Encourage open communication. Be consistent. Abide by the laws of the land. HOW DOES A COMPANY ESTABLISH ETHICAL STANDARDS? It is very necessary these days for organizations to establish ethical standards so that their workers have least doubts as to what their company stands for. Most companies in advanced countries and some even in developing countries have developed their own codes of conduct which provide some ethical standards for their employees. Such codes of conduct may not help in resolving every ethical issue that arises but they help employees and executives deal with ‘ethical dilemmas by prescribing or limiting specific activities’. It should be emphasized here that it is not enough for a company to merely have the codes of ethics, but these should be effectively communicated to employees so that they are aware of them and abide by them. The effectiveness of the exercise, of course, will depend on how serious the top management is in implementing them, and the good example they set in observing them. In a widely reported instance in Wipro Technologies, a very senior executive who had put in long years of service in the company and had contributed significantly to its growth had to be dismissed because he claimed in his travel expenses more than his due. 12 Disciplinary actions like this send a strong signal that the company means business in expecting ethical behaviour from its employees and it will get it in a large measure. Generally, taking such a severe action against one of the senior most executives will cause a serious ethical dilemma to the management and resolving it in a manner that Wipro’s top brass did is an abject lesson in ethical management. 63 64 BUSINESS ETHICS—AN INDIAN PERSPECTIVE Think and reflect about yourself, about the management, about the people, and about the relationship and the values you wish to incorporate. Create time for thinking and reflection. Periodically take time off to reflect and consider ‘where I am’, ‘where I have to go’ and ‘how I am going there’. WALTON’S SIX MODELS OF BUSINESS CONDUCT To understand business conduct, Walton13 has classified it into six models. 1. The austere model: It gives almost exclusive emphasis on ownership interest and profit objectives. 2. The household model: Following the concept of an extended family, the model emphasizes employee jobs, benefits and paternalism. 3. The vendor model: In this model, consumer interests, tastes and rights dominate the organization. 4. The investment model: This model focuses on the organization as an entity and thus on long-term profits and survival. In the name of enlightened self-interest, it gives some recognition to social investments along with economic ones. 5. The civic model: Its slogan is ‘corporate citizenship’. It goes beyond imposed obligations, accepts social responsibility and makes a positive commitment to social needs. 6. The creative model: This model encourages the organization to become a creative instrument, serving the cause of an advanced civilization with a better quality of life. Employees in such organizations behave and perform as artists, building their own creative ideas into actions, resulting in new contributions not originally contemplated. These six models may be thought of as points on a continuum from low to high social responsibility. As a result, employees become proud of their company’s performance, and develop a sense of belonging and creativity. Regardless of the model adopted by an organization, one of its most important jobs is to establish and blend its value together so that it becomes a consistent, effective system that is known and accepted by the fair primary claimant groups—investors, employees, customers and society, including government. The system must be strong enough to withstand changes by partisan pressure groups but flexible enough to move with the changing society. The primary responsibility of management is to reduce conflict areas among different claimants for sharing benefits of business and to bring about harmony of interest among diverse stakeholder groups. Frederick C. Crawford14 has rightly expressed this idea thus: Management stands in the middle of a triangle. At the lower right corner is labour, with a rope round the management’s right leg yanking for raises. At the lower left corner is capital, with a rope round management’s left leg, yanking for dividends. The top corner, the market corner, is the worse. It has a rope round the management’s neck like a noose yanking for ever bigger bargains. It is necessary, therefore, that an enlightened management must continuously balance the diverse objectives without allowing any conflict to arise between two or more objectives. HOW TO RESOLVE AN ETHICAL PROBLEM? Is it a policy, a decision or an action? Is it ethical or unethical? To resolve these questions that create a dilemma, ask three questions: ∑ Utility: Does its benefits exceed cost (shareholder)? ∑ Rights: Does it respect human rights (society)? ∑ Justice: Does it distribute benefits and burdens evenly (employees)? Answers to these questions in the affirmative will be the first step in the process of solving ethical problems. HOW TO RESOLVE ETHICAL DILEMMAS? Ethical issues take centre-stage in organizations today as managers, executives and employees face increasingly complex decisions. Most of these decisions are made in an organizational environment with different value systems, moral philosophies, competitive pressure and political ideologies, all of which provide ample opportunity for misconduct. Ferrel et al.15quote a KPMG survey in 2000 which revealed that 76 per cent of ETHICAL DILEMMAS, SOURCES AND THEIR RESOLUTIONS the nearly 24,000 workers covered in the survey indicated that they had observed violations of the law or of company standards during the previous year. With such abundance of opportunities for unethical behaviour, ‘companies are vulnerable to both ethical problems and legal violations if their employees do not know how to make the right decisions’.16 Therefore, it is absolutely necessary that each company puts in place an ethics programme and makes it known to all its employees so that they know its values, mission and vision and comply with the policies and codes of conduct, all of which create its ethical climate. Many MNCs and several Indian companies have such ethics programmes and their employees are being made aware of the ethical values they stand for. To a great extent, this awareness reduces ethical dilemmas. There are two basic approaches in resolving ethical dilemmas: deontological and teleological. Under the deontological (action-oriented) approach, an ethical standard is consistent with the fact that it is performed by a rational and free person. These are the inalienable rights of human beings and reflect the ‘characteristic and defining features of our nature’. These fundamental moral rights are inherent in our nature and are universally recognized as part of human beings, defining their very nature. These fundamental human characteristics are, inter alia, rights to fairness, equality, honesty, integrity, justice and the respect of our dignity.17 If we follow a deontological outlook while analysing an ethical dilemma, we are led to a much narrow focus. We confront such questions as: ‘Which actions are inherently good?’ ‘Does it respect the basic rights of everyone involved?’ ‘Does it avoid deception, coercion and manipulation?’ ‘Does it treat people equitably?’ Ethicists are of the view that the major problem with this approach is its inflexibility and uncompromising stance. There could be occasions when people may lie to help someone in dire straits. A co-worker may feign ignorance if the management makes a big fuss about the loss of worthless scrap of asbestos when he or she knows that one of his or her colleagues has taken them to provide roof material for inhabitants of several hutments who otherwise would suffer when it rained cats and dogs. It may produce more good than harm. Likewise, a person may steal a loaf of bread to feed a group of hungry children. A deontological approach to either of these cases will still condemn these acts. The other approach to ethical dilemmas and their resolution lies in teleological (results-oriented) ethics. This approach to ethics takes a pragmatic, commonsense, layman’s approach to ethics. According to this school of thought, ‘The moral character of actions depends on the simple, practical matter of the extent to which actions actually help or hurt people. Actions that produce more benefits than harms are “right”; those that don’t are “wrong”.18 A teleological approach to the above mentioned examples will tend to condone those acts of charity. When we analyse an ethical dilemma in the context of these two approaches with a view to finding a solution to it, then we see the basic elements converge in determining the ethical character of our actions. While one school of thought points to the actions, the other points to the results that arise from the actions. Between them they reflect a wide spectrum of internal and external factors of human action that have moral consequence. While the deontological and teleological approaches to ethical issues seem to contradict each other in theory, in practice they complement each other. In the process of identifying and finding pragmatic solutions to ethical dilemmas, we should not ignore either of them, since each acts as a check on the limitations of the other. 19 From these two philosophical standpoints to ethics, we can draw two methods for resolving ethical dilemmas; one that focuses on the practical consequences of what can be done, and the other that focuses on the actions. While the first school of thought argues that as long as no harm is done, there is nothing wrong, the other considers that some actions are always wrong. Which of these two is the right approach to resolve an ethical dilemma has been at the centre of debate among ethicists for centuries, with no definite answer in sight. However, many of them do agree, as pointed out earlier, that both approaches provide complementary strategies to help solve ethical problems. The Center for Ethics and Business20 offers ‘a brief, three-step strategy’ in which both the deontological and teleological approaches converge. The strategy is as follows: STEP 1: ANALYSE THE CONSEQUENCES Assuming that the resolution to the ethical dilemma is to be found within the confines of law—ethical dilemmas that arise in business should be resolved at least within the bare minimum of law and legal framework as otherwise it will lead to a sort of mafia business—one has to look at the consequences that would follow one’s proposed actions. And when one has several options to choose from, there will be an array of consequences connected with each of such options, both positive and negative. Before one acts, answers to the following questions will help find the type of action that can be contemplated: 1. Who are the beneficiaries of your action? 2. Who are likely to be harmed by your action? 65 66 BUSINESS ETHICS—AN INDIAN PERSPECTIVE 3. What is the nature of the ‘benefits’ and ‘harms’? The answer to this question is important because some benefits may be more valuable than others. Letting one enjoy good health is better than letting one enjoy something which gives trivial pleasure. Likewise, some ‘harms’ are less harmful than others. 4. How long or how fleetingly are these benefits and harms likely to exist? After finding answers for each of one’s actions, one should identify the best mix of benefits or harms. STEP 2: ANALYSE THE ACTIONS Once you identified the best possible option, concentrate on the actions. Find out how your proposed actions measure against moral principles such as ‘honesty, fairness, equality, respect for the dignity and rights of others, and recognition of the vulnerability of people who are weak, etc.’ Then there are questions of basic decency and general ethical principles and conflicts between principles and the rights of different people involved in the process of choice of the options that have to be considered and answered in one’s mind. After considering all these possible factors in the various options, it is sensible to choose the one which is the least problematic. STEP 3: MAKE A DECISION Having considered all factors that lead to choices among various options, analyse them carefully and then take a rational decision. This three-step strategy should give one at least some basic understanding to resolve an ethical dilemma. SUMMARY An ethical dilemma is a moral situation in which a choice has to be made between two equally undesirable alternatives. A business dilemma exists when an organizational decision maker faces a choice between two or more options that impacts on (i) the organization’s profitability and competitiveness, and (ii) its stakeholders. Businesspersons and professionals come across several such situations in their lives. Ethical challenges in business take several forms and raise different kinds of ethical dilemmas. These dilemmas may arise due to (i) failure of personal character; (ii) conflict of personal values and organizational goals; (iii) organizational goals versus social values; and (iv) hazardous, but popular products. There are several reasons why business has to confront ethical issues. When consumers observe that most of the businessmen have only one objective, namely, the single minded pursuit of profit even at the cost of consumers’ legitimate interests; when they try to profiteer; create artificial scarcity to charge a premium price for their goods and services; use low quality inputs, do not honour their warranties; use the media to hoodwink the hapless and uninformed consumers; damage wantonly the ecology and environment by adopting a policy of suppressio veri, suggestio falsi, people are prone to have a negative image of business. Ethical issues take centre-stage in organizations today as managers, executives, and employees face increasingly complex decisions. Most companies in advanced countries and some even in developing countries have started to implement ethical behaviour by publishing in-house codes of ethics that are to be strictly followed by all their associates. With an abundance of opportunities for unethical behaviour, ‘companies are vulnerable to both ethical problems and legal violations if their employees do not know how to make the right decisions’. When faced with an ethical dilemma, two basic approaches—deontological and teleological—are used. While the deontological and teleological approaches to ethical issues seem to contradict each other in theory, in practice they complement each other. According to Kenneth Blanchard and Norman Vincent Peale,21 authors of The Power of Ethical Management, there are three questions one should ask oneself whenever one is faced with an ethical dilemma, and grapples to find a solution for it. ∑ Is it legal? In other words, will the person be violating any criminal laws, civil laws or common laws by engaging in this activity? If it is not legal, the decision is not ethical. ∑ Is it balanced? Is it fair to all parties concerned both in the short term as well as in the long term? Is this a win-win situation for those directly as well as indirectly involved? ∑ Is it right? Most of us know the difference between right and wrong, but when we are placed in a piquant situation, how does this decision make you feel about yourself? Are you proud of yourself in making this decision? Would you like others to know you made the decision yourself? Most of the time, when dealing with ‘grey decisions’, just one of these questions may crop up. But by taking the time to reflect on all the three, you will often find that the answer is very clear. KEY WORDS Ethical dilemma ∑ Personal values ∑ Organizational goals ∑ Social values ∑ Profitability ∑ Competitiveness ∑ Decision making process ∑ Return on investments ∑ Equitable distribution of wealth ∑ Goodwill ∑ Financial success ∑ Gestation period ∑ Conflict of values ∑ Orthodox and conservative ∑ Proactive versus reactive ∑ Repercussions ∑ Caveat Emptor ∑ Price fixing ∑ Competitive pressures ∑ Individual greed ∑ Ethical working environment ∑ Ethical standards ∑ Beneficiaries of action ∑ Grey decisions DISCUSSION QUESTIONS 1. What is an ethical dilemma? When does it arise in an organization? Who are the stakeholders impacted by ethical dilemma in business? 2. What are the sources of ethical problems in business? How can these be resolved? 3. Why does business have a negative image? How can a company establish ethical standards? NOTES 1. Louis Alvin Day, Ethics in Media Communication: Cases and Controversies, 4th ed. (Belmont, CA: Wordsworth/Thomson Learning, 2003). 2. O. C. Ferrel, John Paul Fraedrich, and Linda Ferrel, Business Ethics: Ethical Decision Making and Cases, 6th ed. (Boston, MA: Houghton Mifflin Company, 2004). 3. Ibid. 4. Joseph Badaracco, cited in “Leadership: Facing Moral and Ethical Dilemmas,” 2001, available at www.leadershipadvantage.com/moralAndEthicalDilemmas.shtml 5. Keith Davis and William C. Frederick, Business and Society: Management, Public Policy, Ethics, 5th ed. (New York: McGraw Hill, 1983). 6. Ibid. 7. Sucheta Dalal, “Whistle-blowing in Banks: How Can It Be Effective?” Lecture at the 8th Balasubramaniam Memorial Conference for Corporation Bank Officers’ Organization, cited in P. S. Balaj and Raj Agarwal, Business Ethics, An Indian Perspective (New Delhi: Bizantra, 2004). 8. See Note 5. 9. Ibid. 10. A. C. Fernando, Corporate Governance: Principles, Policies and Practices (New Delhi: Pearson Education, 2006). 11. Van Buren, “Why Does Business Have Such a Negative Image?” UNM Anderson School of Management, 2006, available at http://mgtclass.mgt.unm.edu/VanBuren/chapter%205.ppt 12. S. H. Venkatramani, “Morals in Management,” Lifepositive, cited in Syed Zia ur Rahman, YaHind, available at www.yahind.com/articles/morals.shtml 13. Cited by C. L. Ramakrishnan, PPTs on Business Ethics (Chennai: LIBA, 2004). 14. Ibid. 67 SUMMARY ETHICAL DILEMMAS, SOURCES AND THEIR RESOLUTIONS 68 BUSINESS ETHICS—AN INDIAN PERSPECTIVE 15. See Note 2. 16. Ibid. 17. Thomas White, “Philosophical Ethics,” 2006, available at www.lmu.edu/Asset/ 9671.aspx?method=1 18. Ibid. 19. Ibid. 20. LMU/LA, “Resolving an Ethical Dilemma,” 2006, available at www.lmu.edu/Page27945.aspx 21. Kenneth Blanchard and Norman V. Peale, The Power of Ethical Management, 1st ed. (New York: William Morrow, 1988). FURTHER READINGS Bayer’s Record Fraud, available at http://multinationalmonitor.org/mm2003/03may/may03front.html Center for Ethics and Business, available at www.lmu.edu/Page20711.aspx Davis, K. and Frederick,W. C., Business and Society:Management, Public Policy, Ethics, 5th ed. (New York: McGraw-Hill, 1983). Ferrel, O. C., Fraedrich, J. P., and Ferrel, L. (2005). Business Ethics: Ethical Decision Making and Cases, 6th ed. (New Delhi: Bizantra, 2006). Josephson Institute of Ethics, “Making Sense of Ethics”, available at www.josephsoninstitute.org/ MED/MED6beingperson.htm ETHICAL DILEMMAS, SOURCES AND THEIR RESOLUTIONS 69 CASE Study HLL’S FOLLY: MERCURY SPILL IN KODAIKANAL (This case study is based on reports in the print and electronic media, and is meant for academic purpose only. The author has no intention to sully the image either of the corporate or the executives discussed.) INTRODUCTION In March 2001, more than 400 residents of Kodaikanal, an idyllic hill station on the Western Ghats in the south of India, caught the multinational Hindustan Lever Ltd (HLL) red-handed when they found a dumpsite with toxic mercury-laced waste from the company’s thermometer factory located in the heart of the town. ‘The 7.4 ton stockpile of crushed mercury-containing glass was found in torn sacks, spilling onto the ground in a busy scarp yard located near a school.’ 1 ‘The expose marked the beginning of an ongoing saga of dishonesty and botched coverup efforts’ 2 by Unilever’s Indian subsidiary, Hindustan Lever Ltd. On the same day, during HLL’s chairman’s annual review meeting held in the headquarters in Mumbai, ‘a query came from N. Jayaraman of Corporate Watch, an NGO, whether there had been any disposal of mercury contamination waste along with broken thermometer and ground glass from HLL’s thermometer plant in Kodaikanal, Tamil Nadu’.3 The company also learnt that earlier that day several Kodaikanal residents led by a few non-governmental organizations (NGOs), including representatives of Greenpeace staged protests outside the plant. It was estimated that more than 32,000 potentially affected people lived in Kodaikanal. Ten workers had died at the factory while it was functioning. Greenpeace, a global NGO committed to environment protection, claimed that the deaths were linked to mercury poisoning. Symptoms reported by ex-workers were fatigue, headaches, nausea and other stomach dysfunctions, blurred vision, skin complaints including burns and dermatitis, respiratory disorders, kidney dysfunction, central nervous system problems such as loss of memory, tremors, depressions and some report of seizure disorders. The ex-workers claimed that many of them got these symptoms after they were employed at the factory which had been functioning in Kodaikanal since 1983. HISTORY OF THE HLL FACTORY Hindustan Lever’s thermometer plant at Kodaikanal had a chequered history. The factory which was originally in New York was shutdown for environmental reasons. US-based Chesebrough Pond’s relocated its aging mercury thermometer factory from Watertown, New York to Kodaikanal in 1983. Kodaikanal is a verdant hill station in the upper Palani Hills in southern Tamil Nadu. The town measures 21 sq km, with a population of 32,000. The factory was acquired by Unilever, after it bought Chesebourgh Pond’s owner of HLL, which is Unilever’s 51 per cent owned Indian subsidiary. The factory was said to be the largest thermometer plant in the world. Unilever, the Anglo-Dutch fast-moving consumer goods (FMCG) giant, imported all the mercury and glass for the thermometers from the United States, and exported all the finished thermometers to the US-based Faichney Medical Co. which in trun exported them to markets in the United States, United Kingdom, Canada, Australia, Germany and Spain. Mercury is a toxic metal, which when converted into deadlier forms such as methyl mercury and released into the environment could cause tremendous health problems to people living nearby and even far away. The factory that manufactured glass mercury thermometers for exports was split into two main areas—the first area converted glass tubing into empty thermometers, stems and bulbs. The second area filled them with mercury, marked the scale, sealed the end and packed. Both areas, working with glass, generated considerable quantities of scarp. Glass scrap from the first area was sent for recycling to the glass merchants. Glass from the second area containing mercury was first treated (crushed and heated) to recover the mercury. The remaining scrap was sold to recyclers unlawfully and in breach of the company’s operating policies. All water from the plant was led to a dedicated effluent treatment plant. Sludge from the effluent treatment plant was dried, packed in plastic drums and stored in the pit on site under cover. During the investigations, it was also found that the factory buried glass scrap on the site after appropriate regulatory approvals. The Pambar stream that runs through the forests below the back wall of the factory flows down to the 70 BUSINESS ETHICS—AN INDIAN PERSPECTIVE Kumbhakarai waterfalls, a popular tourist bathing site. Below the waterfalls, the stream surpasses into canals flowing from the Vaigai dam that irrigates lands down south. The slopes where the wastes are dumped are part of the Pambar Shola watershed, draining water through the Pambar river. This small river eventually ends in the plains leading up to the temple city of Madurai. DAMAGE TO WORKERS AND THE ENVIRONMENT Before the HLL thermometer factory was shut down on the orders of the Tamil Nadu Pollution Control Board (TNPCB), it was reported that between 600 and 800 workers were exposed to mercury due to unsafe working conditions and the willful negligence of the HLL management in not warning employees about the dangers of mercury. Mahendra Bapu, President of the Pond’s-HLL Ex-Mercury Worker’s Welfare Association claimed: ‘HLL has caused irreparable damage to the health of the workers. More than 20 workers between the age group 22 and 35 years have died due to poisoning from the factory’4 over the past 18 years. Besides, workers who were directly exposed to the hazardous toxic metal, thousands of people in the vicinity of the factory suffered from ‘skin diseases, premature graying, incessant headaches, stomach pain, kidney problems and blood in the urine’.5 Moreover, what was difficult to understand was the fact that HLL, a subsidiary of Unilever that was signatory to the UN Global Compact principles discontinued occupational safety measures at the factory from 1985, that is, the second year of operation. Besides, the only warning given to the workers by the management was ‘wash hands before eating’, without giving any inkling to the uneducated workers the hazardous nature of the work they were engaged in, thereby covertly endangering their lives. Another problem was that the poisonous vapour carrying mercury traveled far beyond the factory fence, encircled the entire Kodaikanal town that is dependent on tourism and boarding schools and contaminated the Pambar Shola and the scenic lake. HLL also had to bear a vicarious responsibility to its criminal negligence of its worker’s safety and health hazards of citizens of the town inasmuch as it refused to provide any credible information on mercury use and its disposal at the factory, despite repeated requests by TNPCB. This prevented timely remedial measures, as independent analysts could not verify the claims of HLL’s consultants that mercury releases posed no danger to the town’s people and environment. HLL’S RESPONSE TO COMPLAINTS Despite legitimate concerns of the workers and Kodaikanal citizens regarding the adverse health effects of workers and factory neighbours, HLL sought to dismiss the complaints. The company’s responses to the mercury-dumping controversy were ‘characterized by denials, cover-ups, untruths and a singular lack of transparency.’ After denying in March 2001 of any mercury waste leaving the factory and admitting that the factory keeps meticulous records of all mercury inventories, the company accepted later that it shipped out a load of 5.3 tonnes of mercury-bearing waste to a scrap yard in Kodiakanal.6 However, independent verification by activists showed that the actual quantity of mercury waste sent out of the factory to the Kodaikanal scarp yard was 7.4 tonnes. Subsequently, HLL admitted to having systematically sold over 98 tonnes of those toxic factory wastes to various parts of Tamil Nadu and Karnataka. Though HLL was very defensive at the early stages, with local and Greenpeace activists becoming more vociferous in their complaints against the company to the public and TNPCB, the company responded quickly, transparently and even aggressively. HLL duly informed TNPCB of the details of mercury disposal. The persons responsible for the breach of the company’s well laid waste disposal policy were identified and penalized, the penalty depending on the severity of the offence committed. A new factory manager, R. John George, who knew the local language, Tamil, and who had no reason to defend the past actions of the factory administration was appointed. Following the directive of TNPCB, manufacturing operations were suspended on 8 March 2001. Earlier, in 1999 itself the glass scarp that was stored in old and worn-out shed known as the ‘bakery’ till 1998 was shifted to a safe and secure place. The factory personnel rendered jobless in the wake of suspension of work in the factory were employed for verifying weights and packing of glass scrap. An environmental audit was commissioned by HLL on 11 March 2001. It appointed the well-known URS Dames & Moore (URS) of Australia to conduct a detailed environmental audit. URS admitted that the estimated discharge of mercury to the Pambar Shola forest was approximately 300 kg. The HLL-appointed consultant also said that another 700 kg of mercury wastes were released through air-borne emissions. Apart from the environmental audit by URS, HLL also engaged the services of an acknowledged international expert in the eco-toxicology of mercury, Dr P. N. Vishwanathan, to study the environmental and health aspects relating to Kodai thermometer factory. However, unlike the URS scientists, this former Director of Industrial Toxicology Research Centre of the Council for Scientific and Industrial Research (CSIRITRC), Lucknow, found no evidence to risks caused by mercury either to humans or environment. Another survey among former employees of HLL by Dr Mohan Isaac of Bangalore-based community health cell noticed symptoms consistent with mercury exposure among some of the participants, and recommended that based on the available data, a thorough investigation of the potential health hazards be made. ETHICAL DILEMMAS, SOURCES AND THEIR RESOLUTIONS All the surveys and studies made both by HLL and activists offered conflicting views about the exact nature and impact of the mercury waste on workers and the immediate community of the Kodai thermometer factory. HLL EXITS FROM THERMOMETER PRODUCTION Hindustan Lever Ltd also decided, in principle, in January, 2001 to exit from the thermometer business. The company said in a statement, that it was quitting the business because it is not core to the company. ‘The company’s core business is the manufacture and marketing of soaps, detergents, skin care products, deodorants and fragrances, food and beverages.’7 Moreover, in response to complaints from former workers and NGOs, including Greenpeace activists, the TNPCB ordered the factory to close down and clean up the toxic mess the company had created. TNPCB also directed HLL to decontaminate the site and its surroundings to global standards. The company also was under great pressure from the public and government to cart away the mercury waste. The company sent back at least 300 tonnes of the toxic material to the United States in 2006. ROLE OF NGOs IN MAKING HLL REDRESS PUBLIC GRIEVANCES If unlike Union Carbide (now Dow Chemicals) in Bhopal, HLL saw reason rather early in the period of public agitation and took corrective measures, it was because of the active role of NGOs spearheaded by Greenpeace activists. The NGOs left no stones unturned to mobilize public opinion and to pressure TNPCB and the Tamil Nadu government to compel HLL to make amends for its acts of commission and omission in the unlawful disposal of the hazardous toxic waste and in the exposure of its workers to potentially dangerous work environment. It was the NGOs that galvanized workers, concerned citizens and environmental activists to force the factory to suspend operations in March 2001, after discovering that the company had dumped the mercury-contaminated waste at several public locations. The NGOs were also responsible to form the Tamil Nadu Alliance Against Mercury (TAAM), which tried to identify and contain contaminated soil. They were also behind several measures initiated by TNPCB to set up a special Hazardous Waste Management Committee (HWMC) to monitor the complete site remediation by HLL, after removing the mercury-laden broken thermometers and crushed glass. Greenpeace campaigners Ameer Shahul and Navroz Mody took the lead in canvassing for remediation measures by HLL and later initiated the Department of Atomic Energy (DAE) investigation. On examination DAE 71 found that the atmospheric levels of mercury near the factory was 1.32 micrograms per cubic meter (1.32 µg/m3 ), which was about 1,000 times more than what is generally found in uncontaminated areas. 8 The NGOs were also behind the former workers approaching the Supreme Court of India in 2005, demanding compensation from HLL for the loss of their jobs and the health hazards they suffered. The apex court appointed a Monitoring Committee to study the issue and report it to the court. The Supreme Court Monitoring Committee in turn has acknowledged mercury-related health damage to the workers and community residents: ‘The situation at HLL is extremely serious in nature. There can be no two opinions that remediation and rehabilitation of the natural environment and of workers and others are both urgently required.’9 The NGOs and their activists by their incessant and continued demands and demonstrations ensured that the livelihood of workers was not jeopardized by HLL’s negligent and irresponsible behaviour, a detailed investigation was made into the extent and nature of pollution caused by the mercury waste inside the factory and outside environment; the ongoing threat to the adjacent school children and the nearby community was eliminated by forcing HLL to clean up the dumpsite; the damage to the health and safety of the workers, past and present was properly assessed and compensated adequately; and that HLL accepted both the responsibility and the financial liability for the damages caused to the workers, the community and ecology of the Kodai town and the surroundings hills. The most laudable part of the NGOs role is the novel and dramatic manner in which they kept the mercury waste spill issue alive throughout, by using a variegated set of measures available to them. They shouted slogans and showcased placards during HLL’s annual general meetings on 13 June 2003 and 29 June 2004; they bound themselves by chain to the HLL Chennai branch office on 15 November 2002; they enlisted constantly the support and sympathy of the general public to the cause they were fighting through issue of leaflets, and organizing demonstrations and meetings. They also very effectively used the Greenpeace Website, photo albums, seminars and anniversaries on a regular and timely basis so that the issue is not forgotten by all the stakeholders—the former HLL employees, Kodaikanal town’s concerned citizens, environmentalists, TNPCB and the Tamil Nadu Government. As pointed out earlier, there have been conflicting reports from teams of HLL-appointed as well as NGO-commissioned professional experts as to whether the unlawful disposal of mercury wastes have caused damages to the health and safety of humans and environment, but the NGOs were convinced that the spread of mercury wastes had done considerable harm to both. 72 BUSINESS ETHICS—AN INDIAN PERSPECTIVE WHERE DOES THE TRUTH LIE? Two scientific studies, made after the closure of the Kodai factory in March 2001, have shown high levels of mercury contamination within the town, in the forests, and in locations as far as the beautiful and nature-made lake, 20 km from Kodaikanal. The studies also revealed that the Pambar Shola forests, acknowledged as one of the bio-diversity hotspots of the world were also adversely affected. Scientists from the National Centre for Compositional Characterization of Materials (CCCM), a DAE institute had reported the incidence of atmospheric mercury in some areas outside the HLL factory site in Kodaikanal. The concentrations of mercury up to 1.32 mg/m3 was reported to be about a thousand times higher than in the areas that were not contaminated. HLL responded to this finding by saying that the findings of the report were at ‘variance with the data collected by independent foreign consultants’ and that the levels detected were ‘much lower than 50 mg limit prescribed under the factory rules’.10 Obviously, the statements made by HLL betray its lack of understanding of mercury as a serious toxic hazard. A study conducted by Greenpeace Research Laboratories reported considerable amounts of mercury along the hills surrounding Kodaikanal Lake to the west of the factory and in the Vattakanal and Pambar Sholas. The study showed the distance to which the impact could be felt. ‘The manifold increases in accumulated mercury in the elevated lichen samples give an indication of potential impacts on ecosystems at these locations. Plants that accumulate atmospheric mercury are likely to form part of the diet of fauna living in the vicinity. Through such processes, mercury can be transferred into the wider ecosystem, possibly bio-accumulating in certain species.’11 The findings of the Greenpeace report was similar to a study conducted by the DAE. HLL meanwhile, continued to deny responsibility based on the insufficient data provided by their study teams for any mercury impact on the health of workers at the plant, or of the surrounding community or environment. These studies led HLL to deny that their mercury could be responsible for the death of 10 young men working in the factory. But eventually, the company which had earlier denied all charges against its thermometer factory of dumping mercury waste illegally has finally admitted that the 5.3 tonnes of mercurycontaining glass wastes currently lying at the Munjikal scrap yard in Kodaikanal came from their factory. In an official communication to Greenpeace, the company promised ‘to track and retrieve other such shipments that have been sent to various locations outside the factory, and to clear the wastes that were found to be dumped in the watershed forests behind the factory wall’.12 Though TAAM, rallying against the company’s unlawful practice welcomed these admissions, were legitimately upset that HLL had not apologized to the community. Many environmental organi- zation and NGOs (Box 3. 1) have demanded justice from HLL for their folly. However, it is only fair to point out that this was the first time a major company has actually accepted a part of its faults openly. ULTIMATE DEMAND TO GOVERNMENT The coalition of ex-workers, community representatives of Kodaikanal and Greenpeace demanded the following: ∑ The government should initiate legal action against HLL for lying to a statutory body like TNPCS and providing false information, and for destroying evidence in a matter concerning the lives and health of hundreds of workers, their families and many thousands more who reside in the vicinity of the factory or those who might have come into contact with mercury. ∑ The government should take serious action against the Inspectorate of Factories, who for 18 years failed in their assigned duty to find any traces of mercury at the factory site or beyond, thus jeopardizing the lives of workers and the environment. ∑ The government should initiate, at HLL’s expense, independent long-term studies to monitor the impact of mercury on this fragile hill-forest ecosystem, the town and the people. The mercury in the forests could have far reaching implications both in the town of Kodaikanal and downstream Palani and Vaigai, as pointed by the DAE and Greenpeace studies. ∑ The government should order, at HLL’s expense, an independent inquiry on the impact of mercury on the health of the workers, their families and other susceptible members of the community, and initiate long-term monitoring and treatments for detoxification of affected populations. ∑ The government should find ways and means of compensating families of the 10 dead workers and affected community members for loss of earning capacity, damages for mercury contamination and long-term health remediation, and ∑ The government should ensure that the mercury retrieved from HLL’s wastes is permanently destroyed and not released once again in another unsuspecting part of the developing world. CONCLUSION There has been ample evidence to prove that the mercury emitted from the HLL plant had far greater and wider impacts than the experts commissioned by HLL were prepared to reveal. And yet, five years after being caught, HLL is yet to submit complete clean-up protocols to the TNPCB. If it were in a developed country, HLL would have been forced to clean-up and remediate such a disaster site immediately, using the best international standards and practices. ETHICAL DILEMMAS, SOURCES AND THEIR RESOLUTIONS 73 BOX 3.1 YSC PROTEST FOR KODAIKANAL WORKERS The Youth for Social Change (YSC) activists staged a protest in Chennai against Hindustan Unilever Ltd accusing the company of not taking any steps to clean the environment even after seven years of shutting down its mercury thermometer plant in Kodaikanal. They alleged that at least thousand workers were exposed to the mercury contamination and no compensation has been made to any of them. The YSC members left after submitting a petition to the company representatives.14 Besides, as pointed out by J. Arunachalam, head of the DAE centre, mercury is still prevalent in the atmosphere because the discarded factory scarps and contaminated vegetation re-emit absorbed mercury.13 The loss to the environment is huge. Thousands of people, especially workers, their families and other relatives, have been unsuspecting victims of the persistent dangers posed by HLL’s inadequate commitment to transparency, or concern for public health and environment. Hindustan Lever’s behaviour violates the environmental principles of the UN Global Compact such as supporting a precautionary approach to environmental challenges, undertaking initiatives to promote environmental responsibility and promoting the diffusions of environmental technologies. Unilever, the parent organization of HLL is a prominent signatory of Global Compact. If HLL and Unilever stand by these high principles, they should ensure they put these principles into practice in every conceivable situation relating to their closed factory at Kodaikanal. KEY WORDS Idyllic hill station ∑ Stockpile of scrap ∑ Stomach dysfunction ∑ Dermatitis ∑ Respiratory disorders ∑ Kidney dysfunctions ∑ Central nervous system ∑ Seizure disorders ∑ Willful negligence ∑ Hazardous toxic metal ∑ Premature greying ∑ Lack of transparency ∑ Meticulous records ∑ Independent verification ∑ Occupational safety measures ∑ Giving any inkling ∑ Credible information ∑ Timely remedial measures ∑ Manufacturing operations ∑ Safe and secure place ∑ Environmental audit ∑ Eco-toxicology ∑ Potential health hazards ∑ Non-government organizations ∑ Greenpeace activists ∑ Acts of commission and omission ∑ Biomonitoring of mercury ∑ Multinationals ∑ Health hazards ∑ Uncontaminated areas DISCUSSION QUESTIONS 1. Trace the history of the establishment of Kodaikanal thermometer factory and how it came into the adverse view of the NGOs, the public and the TNPCB? 2. How did Hindustan Lever Ltd respond to the initial complaints of various stakeholders that the company had adopted a callous attitude towards the disposal of hazardous mercury-laden waste? What type of strategy did the company adopt when it realized that the entire fault lay in the carelessness of the factory’s administration? 3. What was the role of NGOs in bringing to light HLL’s dumping of mercury waste in various parts of Kodaikanal locality? To what extent were they able to get justice to the affected workers and the general public? 4. Explain in your own words the HLL Kodaikanal mercury spill controversy. What is the present status of the controversy? 5. What kind of roles have NGOs such as Greenpeace India, played in bringing to the open the issue of HLL’s spill of toxic mercury waste in and around Kodaikanal hills? Did it have the desired impact, in your view? 6. How would you reconcile diametrically opposite views held by HLL-assigned scientists and those appointed by the government and NGOs about the quantity and the toxic nature of the spilled mercury waste and its impact on the frail ecology of Kodai hills? Was there any meeting point at all between these two viewpoints? NOTES 1. Nityanand Jayaraman, “Unilever’s Mercury Fever,” India Together, 2001, available at www.indiatogether.org/environment/articles/unilever.htm. 2. Ibid. 3. A. V. Vedpuriswar, “Environmental Pollution at Kodaikanal and Hindustan Lever’s Response,” 2005, cited in C. V. Baxi and Ajit Prasad, eds, Corporate Social Responsibility, Concepts and Cases: The Indian Experience (New Delhi: Excel Books, 2005). 4. “Ex-workers Ask HLL to Accept Liability for Mercury Deaths,” 19 January 2007, available at www.whereincity. com/news/13/12753 5. Ibid. 74 BUSINESS ETHICS—AN INDIAN PERSPECTIVE 6. Anand Chokhani, “Ethical and Unethical Practices of Hindustan Lever Ltd,” (Chennai: LIBA, 2005). 7. Nityanand Jayaraman, “Hindustan Lever Will Export Mercury Waste to USA,” 31 March 2003, Environment News Service, available at www.ens-newswire.com/ ens/mar2003/2003-03-31-02.asp 8. Greenpeace India, “Hindustan Lever Limited Found Guilty Again,” 4 February 2004, available at www.greenpeace. org/india/news/the-department-of-atomic-resea 9. “Ex-workers Ask HLL to Accept Liability for Mercury Deaths,” 19 January 2007, available at www.nerve.in/ news:25350031085 10. See Note 6. 11. See Note 8. 12. See Note 6. 13. See Note 8. 14. Express News Service, “Unilever Urged to Clean Up Kodai,” The New Indian Express, Chennai, 7 March 2008. Kodaikanal Factory,” 20 June 2001, available at www.timesofindia. Com ———, “HLL to Stop Production at Kodaikanal Plant,” 20 June 2001, available at www.timesofindia.com/ 200601/ 20busi6.htm Greenpeace, “Greenpeace Accuses Unilever of Negligence Over Mercury Poisoning of Indian Tourist Resort,” 7 March 2001, available at http://archive.greenpeace.org/ pressreleases/toxics/2001mar7.html ———, “Hindustan Lever Admits to Dumping of MercuryContaining Wastes,” 22 March 2001, available at www. greenpeace.org/india /press/ releases /hindustan-leveradmits-to-dump ———, “Tamil Nadu Groups Launch Alliance Against Mercury and Lever,” 28 March 2001, available at www.greenpeace.org/india/press/releases/tamilnadugroupslauch-allianc FURTHER READINGS ———, “Unilever Admits to Toxic Dumping; Will Clean Up, But Not Come Clean,” 19 June 2001, available at http://archive.greenpeace.org/pressreleases/toxics/ 2001jun19.html Bureau, “Greenpeace Charges HLL With Toxic Dumping at TN Plant,” Hindu Business Line, 21 June 2001, available at www.blonnet.com/2001/06/21/stories/02212575.htm Jayaraman, N., “Unilever’s Mercury Fever, Inconsistencies Galore, A Timeline on Unilever’s Mercury Dumping in India,” Corpwatch.org, 4 October 2001. ———, “Hindustan Lever Has Decided to Discontinue Manufacture of Mercury Thermometers at Its Mathrani, S., “Greens Force Hind Lever to Close Kodaikanal Plant,” The Economic Times, 29 June 2001. Four CHAPTER Ethical Decision-making in Business INTRODUCTION Managers and executives make hundreds of decisions in an organization everyday in their business dealings. Many of these decisions may be morally and ethically justifiable, while some of them, often taken in the context of exigencies of business or compulsions of competitive pressures, may be unethical and even illegal. However, social thinkers, ethicists and academicians would like businessmen to improve their ethical standards, notwithstanding the pressures and compulsions of competitive business. This has become vital in the context of present day business and social environment. This raises the million dollar question: how to improve ethical decision making in business? We should understand how persons make ethical decisions in the organizational context to answer this ticklish question. Generally, it is assumed that employees in organizations make decisions in the same manner they make decisions in families or in their personal lives. But this is a flawed thinking. ‘Within the context of an organisational work group, however, few individuals have the freedom to decide ethical issues independently of organisational pressure.’1 In a company, there are set rules, need for hierarchical sanctions, departmental pressures, the need for cost cutting and enhancing profit, maintaining the reputation of the company and taking into account the interests of all pressure groups and stakeholders. Although it is not possible to generalize how exactly an employee or executive would make decisions, we can understand to some extent the factors that would influence his or her ethical decisions. This understanding may be based on the experiences of business magnates and case studies on companies, research findings and, to some extent, the contours of the ethical decision models that have been widely accepted by academics and practitioners. Based on these studies and models, we can conceptualize a framework for understanding ethical decision making in business organizations. ETHICAL MODELS THAT GUIDE DECISION MAKING There are several ethical theories that have been developed by philosophers over the years. These theories offer certain benchmarks to set organizational or professional standards, and more importantly, help develop a basis for normative judgement that could transcend organizational or professional cultures. However, it must be stressed here that business theorists have not made much use of these theories that could offer models of ethical decision making. There are a couple of reasons for this: (i) ethical theories and their relevance to business research are not easily understood by business theorists; and (ii) ethical theories, being normative, are difficult to put into practice.2 However, some writers have developed models of professional standards based on some of these ethical theories. Of these, three models based on rights, justice and utilitarianism are prominent and used more often than others.3 76 BUSINESS ETHICS—AN INDIAN PERSPECTIVE RIGHTS THEORIES The rights-based theories were advocated by Immanuel Kant4 who stressed personal rights, and Locke5 who underlined the importance of property rights. Both the proponents focussed on the entitlements of individuals as persons with dignity and held the view that ethical decisions should protect the legal and moral rights that an individual is entitled to. According to ethicists these individual rights would include the rights to (i) free consent; (ii) freedom of conscience; (iii) privacy; (iv) free speech; and (v) due process.6 These moral rights are important, normative, justifiable claims and are derived from the nature of the members of the moral community. According to DeGeorge,7 there is a considerable overlapping of legal and moral rights. But while legal rights are protected by law, moral rights have to be protected by society. It should be stressed, however, that these rights are not absolute. Rights imply corresponding duties, especially the duty to respect others’ rights. JUSTICE THEORIES Chronologically, justice theories precede rights theories and can be traced to Greek philosophers, Plato and Aristotle in the fifth century BC. These theories advocate that all persons should be guided by fairness, justice, equity and by a sense of impartiality. Rawls8 has made some contribution to the development of the theory in a modern format. In the modern context, ethical decisions should result in a situation where all human beings are treated equally, and in case some are treated unequally, it must be based on some defensible reasons. It is in the nature of things that all persons cannot, and should not be, treated equally. A Supreme Court judge and a daily wage-earner working in the construction industry cannot be treated equals in terms of salary, accommodation, protocol and status in the society. That will be grossly unfair to the judge who has to maintain higher status to command respect from those on whose issues, he or she sits on judgement. Moreover, treating unequals as equals is unjust in itself. So, people should be treated equitably, that is, equality based on justice. In the article ‘A Framework for Thinking Ethically’, Markkula Center for Applied Ethics9 poses an ethical dilemma thus: ‘We pay people more based on their harder work or the great amount that they contribute to an organization, and say that is “fair”.’ Such a disparity in incomes between the top management and workers is widening almost every decade, not only in advanced countries of the West, but also in the emerging economies. This obviously raises a disturbing question. Are these disparities based on some measurable yardsticks or are they simply the outcome of an unfair and indefensible imbalance of power that is found to grow increasingly in the market driven economies? We have also situations in India that are, though not similar, indefensible and look grossly unfair. In many of our sunrise industries such as software and pharmaceutical industries, grade III employees who are directly employed by companies are paid much higher salaries, bonus and other perquisites while those who are brought to these organizations through employment agencies to do similar or harder work are paid a fraction of the formers’ emoluments. The differences in pay and perks are so stark and indefensible that the former may get five to ten times more than the latter, depending on the status of the companies. Besides, their jobs may be purely temporary, and as such, they are employees who are simply “hired and fired.” UTILITARIANISM Utilitarianism as an ethical theory holds the view that an action or decision is right if it maximizes utility or produces the greatest good for the largest number of people. This theory is based on economic postulates and can be traced to the thinking of such classical economists as Adam Smith, David Ricardo, Jeremy Benthem and John Stuart Mill, though it was the latter duo who formalized the ethical theory. ‘Utilitarianism employs a teleological approach to ethics and asserts that behaviour or actions should be evaluated in terms of their consequences. That is, the behaviour that produces the greatest net gain for all affected groups is considered moral.’10 However, when one follows the utilitarian principle in making an ethical decision, one should evaluate the rule under which the action falls. According to Barry,11 although following a chosen rule may not lead to the greatest benefit to a large body of persons in every situation over the long run the rule will result in decisions that will lead to the greatest societal benefit when compared to all alternative rules. For instance, several social welfare measures including reservations for the disadvantaged communities may adversely affect certain sections of society in the short run, but in the long run, the societal benefit is likely to be greater in terms of the country’s overall development, creation of a society based on equity and justice and minimizing potential social and political tensions. Veerappa Moily and P. Chidambaram, both of whom are associated with ETHICAL DECISION-MAKING IN BUSINESS the UPA-led Central Government’s reservation committees have been contending that the reservation for the other backward classes (OBCs) in the southern states in practice for more than five decades has not only uplifted the communities concerned but has also helped the overall development of the states of Tamil Nadu, Kerala, Karnataka and Andhra Pradesh as well. This is, of course, not to suggest a view that the interests of the needy and deserving candidates of the ‘forward’ communities should be totally overlooked by public authorities. There are two instances in which utilitarian-based decisions would be considered unethical by most theoreticians: (i) decisions that bring about personal gain at the cost of the society’s benefit; and (ii) decisions that result in inefficient attainment of desired ends.12 The utilitarian approach has a double-edged focus to an ethical problem: to increase the good done and to reduce the harm done. Apart from the three approaches to ethical decisions mentioned above, there are two more, which though appear related to them, can be used as singular and unique approaches to arrive at specific ethical decisions. THE VIRTUE APPROACH The virtue approach, a very ancient concept, advocates that ethical actions should be consistent with certain morally acceptable virtues that would pave the way for full development of humanity. The assumption behind the theory what constitutes morality in a given context is not only what is normally accepted as moral, but also what is acceptable to a mature person endowed with a good moral character.13 ‘Virtues are attitudes or character traits that enable us to be and to act in ways that develop our highest potential . . . (They) are like habits; that is, once acquired, they become characteristic of a person . . . The virtuous person is the ethical person.’14 When a person evaluates various options before making an action, he or she might pose such questions as ‘What kind of person will I be if I do this?’ or ‘Is this action consistent with my acting as an ethical person?’ The virtue approach stresses the importance of such eternal virtues that human beings would always like to showcase in persons who will be referred to as role models to others—as persons possessing such values as honesty, integrity, courage, compassion, love, fidelity, tolerance, prudence, sense of fairness, sacrifice, and self control. Since Mahatma Gandhi, Jawaharlal Nehru and Mother Teresa practised these virtues, people revere them and hold them as role models. THE COMMON GOOD APPROACH As the description of the approach suggests ‘the interlocking relationships of society’ are grounded in ethical reasoning, respect and compassion for others, especially for the vulnerable sections of society. 15 The common good approach, like the justice approach, was one that was advocated by Greek philosophers who underlined the societal view that life in a community is good in itself and that it is every person’s moral responsibility not only to contribute, but also to enrich it. The common good approach draws everyone’s attention to certain conditions such as effective system of law and order, policing, and fire service, health care, public education and even places of amusement, the establishment and maintenance of which are imperative to promote the overall welfare of everyone in society.16 WHICH APPROACH TO USE? Each of these theories discussed above has its own nuances, strengths and weaknesses and followers. Though all these theories can be claimed to be a set of ethical principles, each theory addresses an ethical aspect of behaviour that cannot be ignored. It is difficult to arrive at a standard answer on how to reconcile a decision situation when different views are competing with one another.17 Ethicists Velasquez, Cavanagh and Moberg18 have provided a schematic for ethical decision making that uses the criteria of utility, rights and justice together. According to these authorities, if an action meets all three criteria, it can be considered ethical. On the other hand, when an action falls short of all these three criteria, it is considered unethical. They also argue that in case an action does not meet any ‘one or two criteria, a person must consider whether any overwhelming factors’ would tilt his or her decision. Added to these criteria for ethical decision making, Carrol19 has suggested a system which uses an ‘ethics screen’, which includes ethical principles, ethical tests and standards which could be personal, organizational or societal, as the case may be. 77 78 BUSINESS ETHICS—AN INDIAN PERSPECTIVE ETHICAL DECISION MAKING WITH CROSS-HOLDER CONFLICTS AND COMPETITION The problem of ethical decision making becomes more complicated when we factor the conflicting interests of stakeholders in business. In a situation of conflicting interests of stakeholders, as for instance, when an organization with a view to increasing profits and declaring higher dividends to shareholders on a long-term basis, resorts to the introduction of high-technology labour-saving devices, and dismissal of its labour in hundreds, it leads to a very complex ethical decision making problem to managers. Such situations occur very often in industries. While the obligation of the management to the shareholders to make provision for declaring high dividends cannot be questioned, the means adopted for cost cutting through dismissal of hundreds of poorly paid employees by using state-of-the-art machinery without making adequate provision for the deployment of the discharged labour elsewhere, will create severe human problems. This kind of situation calls for a solution with a ‘human face’ as was done by Tata Steel. The company ensured that the displaced employees from one of its divisions which had to modernize its operations, were trained suitably to enable them to be absorbed in the company’s other divisions while others who were not in a position to be deployed within the company were paid wages for a reasonable period of time until they secured alternative employment elsewhere. But this is not an easy job—it is more easily said than done in real-life situations. Therefore, ethicists find it difficult to offer a solution to these conflicting situations. Barry20 (1986), however, proposed the following decision making rules regarding cases of conflicts and mixed effects: 1. Choose the more important obligation between two or more conflicting obligations. 2. Choose an action of higher ideal when two or more ideals conflict or when ideals conflict with obligations. 3. Choose the action that produces the greater good, or the lesser harm, when the effects are mixed. These guidelines when used along with various ethical principles offer an acceptable solution to those decision makers confronted with the ethical dilemmas arising out of cross stakeholder conflicts and competition. It will also lead to a definite ‘principled decision making with an aim towards ethical due process taking precedence over a haphazard or thoughtless consideration of the trade-offs involved’.21 Therefore, ethical decision making has to be made against standards that are set by the use of moral philosophy, especially from the norms arising out of a consideration of rights, justices, virtue and utilitarianism. APPLYING MORAL PHILOSOPHY TO ETHICAL DECISION MAKING Applying moral philosophy to ethical decision making is a normal process individuals resort to. However, what moral philosophy they take depends on whether they make a personal decision outside the work environment or they do so in a work-related matter. As we have seen earlier, this difference in the approach of applying moral philosophies may arise because the kind of goals and pressures that motivate persons to achieve success in the work environment does not exist in their domestic or personal lives. As a result, a worker may consider a certain deed good in his or her job-related environment, but unacceptable in the domestic arena. For instance, an executive if asked by his manager, may prepare an exaggerated expenditure account for his department for necessary sanction by the corporate office so that his department will have a comfortable annual budget with no constraint on expenditure, but when he has to prepare one for his domestic budget, he cannot be so generous, as he has to live within his means and so he will have to cut out all the ‘frills and pads’ in it. Intense and fierce competition to reach to the top in the organization may be wanted in the dog-eats-dog corporate world, but if this is practised among siblings it will lead to domestic discord and dismemberment of the family. The other reason why persons change their moral philosophies when applying them to ethical decision making may be due to the corporate culture that is practised in their work environment. According to Ferrel et al.22 ‘Rules, personalities, and historical precedence exert pressure on the person to conform to the new firm’s culture. As this occurs, the individual’s moral philosophy can change to be compatible with the work environment.’ When an employee joins a new firm, he or she may try to change certain values within his or her moral philosophy to suit the moral philosophy of the new firm. Take for instance, the story of Enron. It was said that Enron’s executives and employees imbibed a haughty culture cultivated by its Chairman, Kenneth Lay, and CEO, Skilling. Success in everything they did was the only mantra they knew. The corporate culture at Enron instilled in employees a tremendous sense of pride and confidence which gradually degenerated into arrogance and brashness. There was a lot of hypocricy and a perceptible dichotomy between precepts and practices in Enron. Though the chairman, Lay, swore by four core ETHICAL DECISION-MAKING IN BUSINESS values every time he spoke to his employees—communication, respect, integrity, and excellence—they were observed more in breach than in practice. It is no wonder that this haughty corporate culture which every Enron employee imbibed and exhibited played no insignificant role in the ultimate collapse of Enron. In India too, the initially highly successful Global Trust Bank collapsed because of the ‘ends justify the means’ kind of culture started by its founder chairman Ramesh Gelli. The attitude, ethical or otherwise, of the CEO or the chief mentor of an organization has a lot to do with the corporate culture developed over time in the organization. If Infosys Technologies is what it is today—a universally accepted ethical organization—it is without any semblance of doubt, due to the moral leadership provided by its founder-chief mentor, N. R. Naryana Murthy in shaping the corporate culture at the company.23 Another constraint that one faces in applying moral philosophy in ethical decision making, be it in personal or business environment, is its inexact and unscientific nature. Each of the moral philosophy we have analysed states an ideal perspective and we know that an ideal is a goal that is normally beyond the reach of ordinary mortals given to making compromises to suit or wriggle out of certain situations. In implementing moral philosophies from an individual perspective requires persons to make their own decisions based on what they believe to be right or wrong. However, when they make decisions in the business context, that is not enough. Business decisions require, apart from one’s own judgement juxtaposed with the corporate culture and policies, an understanding whether these decisions would produce ‘greatest benefits with the least harm’. Such decisions should be based on respect for the fundamental moral rights of all stakeholders as well as perspectives on fairness, justice and common good. Additionally, if we consider the virtue approach to business ethics, we know that it stresses on certain moral ideals and values that every person should strive for in order to achieve the maximum welfare and happiness of society. But it is not given to employees in a business environment to apply this moral principle, though they may be personally convinced that these are the lofty ideals they should follow in their lives. But as members of large organizations, these individuals are ‘mere cogs in the wheels’ of production who may not have the power to decide issues entirely from the moral perspective they believe in. Though almost all employees including the newly recruited and middle-level executives are responsible for their actions, they rarely, if at all, enjoy the power to impose their personal moral perspective on others in large organizations.24 Often companies make decisions that are morally wrong when they are motivated purely by profit, or worse, profiteering which is reprehensible to some of their own employees and other stakeholders. For instance, an NGO called the National Whistle Blower Centre in Washington that helps, guides and supports whistle-blowers says that employees who decide to blow the whistle have one thing in common—a strong sense of right and wrong, guided by their moral philosophy. And having the courage of conviction, they follow that belief come what may, even if it means that they end up being dismissed, ostracized by friends and colleagues, accused of having a grievance against their employer, or even worse, of trying to gain some benefit out of their accusations. How companies take decisions that directly come into conflict with moral philosophies will very much depend upon the core values they cling to. During the Tylenol crisis, if the top brass of Johnson & Johnson decided to withdraw from the shelves of pharmacies that most profitable product in the company’s stable, much against the advice of its top executives and notwithstanding the well-publicized information that the company was in no way responsible for the cyanide-laced capsules that caused six deaths and the loss of millions of dollars due to the withdrawal of the product, it was because of their staunch belief in the core values of the company as encapsulated in the company’s credo.25 Even a cursory analysis of corporate literature would reveal that these days most business houses have developed a mission statement on evolving a set of core values or a kind of corporate culture that reflect their philosophy of relating to their stakeholders and complying with the legal system and regulatory bodies.26 Employees face any number of problems in the workplace when they cannot solve successfully, ethical situations with the help of moral philosophy. If they have a clear understanding ‘of the basic premise of their decision rationale,’ they will have a firm grasp of the situation and can take sound decisions. In many developing countries like India, paying a ‘commission’ to get a large government contract has almost become a norm. It has now become common in the private sector industry. But if the company policy forbids it and the law is against it, then the employee concerned will be guided by his or her moral philosophy and may not offer such commissions to bureaucrats or to company executives in similar situations. But on the other hand, if the person’s goal is fast-track promotion and an exponential career graph, he or she may resort to such unethical practices and even may rationalize it by saying. ‘If you can’t beat them, join them in the game’. In this case, paying ‘commission’, a form of bribery, may be consistent ‘with the person’s moral philosophy of acceptable business behaviour’. 79 80 BUSINESS ETHICS—AN INDIAN PERSPECTIVE KOHLBERG’S MODEL OF COGNITIVE MORAL DEVELOPMENT While studying and evaluating the process of ethical decision making, it is appropriate, and to a great extent even necessary, to understand the concept of cognitive moral development as enunciated by psychologist Lawrence Kohlberg.27 His six-stage model of cognitive development explains why people make different decisions in similar ethical situations. According to him, they do so because they are in one of the six easily identifiable moral development stages, which grow from a lower level to the higher level as people’s knowledge and socialization continue to develop over time. Though Kohlberg’s model is not directly related to the business context, it explains how people make decisions based on the stage of cognitive moral development that they have reached. In Kohlberg’s model, people pass through the following six stages of moral development. THE STAGE OF PUNISHMENT AND OBEDIENCE This stage is generally associated with the behaviour of small children who respond to rules dictated to them by their parents or teachers and consider what is good or bad purely in terms of the potential penalty they have to suffer if they violate the rules. Even adults who are in this stage of cognitive moral development may follow this behaviour of obedience to rules out of fear of possible punishment by those who wield the power rather than adopting an attitude of reasoning by themselves what is good and what is bad. THE STAGE OF INDIVIDUAL INSTRUMENTAL PURPOSE AND EXCHANGE At this stage, the individual evaluates behaviour on the basis of its fairness to him or her. This is also called the stage of reciprocity because one’s decision and behaviour is not based on any eternal values of loyalty, or commitment to the job, but to what one gets in return. In India, in most rural communities, there is a practice among relatives to donate a sum of money to families that either celebrate a marriage or have to meet funeral expenses, so as to reduce their financial burden. It is an unwritten obligation for the recipient to pay back the amount when the donor has to meet similar expenses. It is only fair for donors to expect the return receipts when they need them most. THE STAGE OF MUTUAL INTERPERSONAL EXPECTATIONS, RELATIONSHIPS AND CONFORMITY This is a stage where individuals consider the well-being of others, though they may still be motivated by the obedience to rules. Unlike in the second stage, where the individual is concerned primarily with his or her own needs, in this stage, fairness to others is one of the individual’s ethical motives. At this stage, people tend to live up to what is expected of them by those close to them. People at this stage render the help without expecting any quid pro quo. It is expected of friends, especially when they are young, to go to the rescue of their close friends without expecting a return favour. THE STAGE OF SOCIAL SYSTEM AND CONSCIENCE MAINTENANCE During this stage, an individual considers his or her duty to society as being the right thing to do. ‘Duty, respect for authority, and maintaining the social order become the focal points.’28 In this stage, people tend to uphold laws except when they conflict with fixed social duties. We come across many persons to be law abiding and have such a commitment to these values that they follow them even at great inconvenience to themselves. THE STAGE OF PRIOR RIGHTS, SOCIAL CONTRACT OR UTILITY At this stage, an individual has a broader vision and develops a sense of social obligation or commitment. He or she is also concerned with the maintenance of values of society and observes the ‘social contract’ to other groups and recognizes the legal and moral views that may conflict. These individuals reduce such conflict and arrive at decisions by rational calculation of overall utilities.29 For instance, there are several instances of doctors attending to critically injured patients with a view to reviving them back to life, even ignoring the legal provision that in most such cases complaints have to be registered with the police before patients are attended to. The controversy that has arisen about doctors at Apollo Hospital, New Delhi, when they did everything they could to save the life of the critically ill Rahul Mahajan, even though they could have overlooked some legal problems to save the life, illustrates this point. THE STAGE OF UNIVERSAL ETHICAL PRINCIPLES ETHICAL DECISION-MAKING IN BUSINESS 81 An individual at this stage realizes that there are certain universal principles that are to be respected. Justice and equality before law are inalienable rights to which every person is entitled to and are ‘universal in nature and consequence’. These rights, laws, or social agreements are more effective because they are universal and a person in this stage favours social ethics to organizational ethics for ethical direction.30 There had been several instances of employees of organizations that produce harmful products demonstrating against such unethical practices notwithstanding the consequences because they believed that nobody had the right to harm or kill others for the purpose of enriching themselves or for any other reason. Kohlberg’s six stages can be further reduced to three levels of ethical concern: immediate self-interest, social expectations, and general ethical principles.31 His model also suggests that individuals tend to change their decision priorities after their formative years. Besides these, continuous changes that take place in a person’s moral development, an organization’s formal structure, work ethos, corporate culture including ethics training, have a bearing on his or her attitude towards ethical decision making when faced with dilemmas. INFLUENCES ON ETHICAL DECISION MAKING There are three major influences that have an impact on employees’ decision making in business—their personal moral standards, their workplace ethics and culture, and the nature of the issue concerned. Businesspersons and industrialists often face tough ethical dilemmas, such as whether to use inferior raw materials to cut costs or to lay off workers to increase dividends to shareholders. Moreover, they may also face the constraint of lack of time to contemplate and reflect on alternative courses of action without compromising their ideals due to the intensity of competitive business pressure. For instance, in India during November– January every year there is an increasing quantity of sales of every conceivable consumer product, and producers compete with one another to get a pie of the market. At this time of the year, either individually or in collusion with others, they resort to several practices that can be considered unethical like fake discounts, ‘convincing’ consumers to buy products they do not require and selling poor-quality products. Added to this problem of competitive business pressure, the complexity that is ingrained in business ethics makes ethical decision making still tougher. We come across situations when we find that fair-minded people have differences of opinion as to what constitutes ethical behaviour and how ethical decisions are made in a given situation. Of course, if we have a well-developed ethical outlook cultivated over time, having an understanding of various approaches to ethical decision making will help. However, though trained sensitivity to ethical issues will be helpful to make a good ethical decision, it also requires persons to have a full grasp of the ‘implications of choices, the ability to evaluate complex, ambiguous and incomplete facts, and the skill to implement ethical decisions effectively’.32 Apart from a strong belief in the importance of ethics and the capability to correctly choose the course of action to implement ethical decisions and evaluate its implications effectively, one should also need a framework of reliable principles to work on and a procedure for applying them to specific ethical problems. Besides, to make ethical decisions an individual has to reckon two sets of values—one, his or her own and the other, that of his or her workplace—which may converge or conflict. An individual’s ethical convictions and sensitivity might have been influenced by a host of factors such as the family background, upbringing, education, quality of role models, cultural roots, religious beliefs, friends’ circle, the kind of media exposure he or she is attuned to, personal experiences while growing up, organizational values, professional norms, laws and political habits and the stage of moral development he or she is in. WORK PLACE ETHICS When a person works in an organization, he or she has to reckon to a set of values that are part of the workplace—corporate culture, the set of beliefs, values, goals, norms, and the manner of solving problems that workers of the organization share. If the corporate culture is one that is straightforward, as per the mission and vision statements, well-laid out policies, and procedures and reflects a strong desire for protection of stakeholders, then it will not create any problem to an ethically sensitive employee during his or her day-to-day business. On the contrary, if the organizational culture is one of haughtiness, one-upmanship, or do-what-you-like, but-bringus-business-and-profit type of attitude as it was in cases of Enron and Reliance, conflicts between personal and professional roles are bound to arise.33 82 BUSINESS ETHICS—AN INDIAN PERSPECTIVE NATURE OF ETHICAL ISSUES Apart from these two sets of values, there may also arise situations of potential conflicts due to the nature of ethical issues to be dealt with in the work place. As we have seen, an ethical issue arises because of conflicts among individuals’ personal moral philosophies and the values and culture of the organizations they work for and of the society in which they live. A work environment which has a conglomeration of hundreds of individuals, presents a potential ground for unusual ethical issues and consequent dilemmas. Consider a factory where hundreds of workers belonging to a particular religion want to conduct a religious ritual or sacrifice animals to propitiate goddesses. Can the management, either covertly or overtly, support the same and make every worker fall in line, without being concerned about the sentiments and susceptibilities of other workers, even if they are in a minority, belonging to other religions? There had been an instance in an organization when a worker belonging to a religious sect called Jehova’s Witness refused to respect the National Flag and the National Anthem during Independence Day celebrations because he has been trained to offer such venerations only to his ‘God’ and none else. Likewise, recently there was an incident wherein Muslim parents were agitated when their children were ‘forced’ to sing Vande Mataram in their educational institutions. According to them, this went against their religious beliefs. There are several such instances where even if there are no conflicts arising in the workplace with the convergence of personal and professional ethics, there could be some extraneous issues that may create dilemmas to co-workers and managements in certain situations. PERSONAL VALUES AND ETHICAL DECISION MAKING An ethical decision maker needs to build and develop certain values. The Josephson Institute of Ethics34 has identified ethical values such as trustworthiness, respect, responsibility, fairness, caring and citizenship as being the most important of these values. These are called The six pillars of character. According to them, these universal ethical values could be used to guide our choices. ‘The standards of conduct that arise out of these values constitute the ground rules of ethics, and therefore, of ethical decision making.’ According to the Josephson Institute of Ethics, ‘The six pillars of character taken together act as a multilevel filter through which ethical decisions can be processed,’ and they believe, these can dramatically improve the ethical quality of our decisions, and thus our character and lives’. Let us now go into details of these core values and see how they will affect and improve ethical decision making at the individual level. TRUSTWORTHINESS When people trust us that is the greatest asset we can earn for ourselves from the society. When they repose their trust in us, it means they believe in us and hold us in high esteem. They believe that we are worthy of their trust and meet our obligations without any external prodding. This trust of others casts on us a great moral responsibility, where we must live up to their expectations and not let them down. Earning the trust of others may take a long time, while it can be destroyed in no time, if we are not careful enough to ensure that we do not commit any untrustworthy act. Trustworthiness is linked and intertwined with a variety of commendable qualities such as honesty, integrity and loyalty. From time immemorial, people realized that honesty is the best means of promoting business. We look up to and admire persons of honesty. We teach our children and our students to be honest as we believe it is a most basic and fundamental virtue that human beings should have. But how is one’s honesty expressed to outsiders? It is communicated through truthfulness, ‘playing by the rules, without stealing, cheating, fraud, subterfuge and trickery’. However, it is interesting to note that honesty as a virtue is not inviolate. Occasionally dishonesty is ethically acceptable. As noted elsewhere the great Tamil poet Thiruvalluvar has decreed, it is not a sin to be dishonest or to tell a lie, if it is meant to save a life or when it does not cause any harm to anybody. Of course, it should be stressed here that such occasions would be very rare and limited. Next to honesty, the other basic ingredient of trustworthiness is integrity. Integrity can be defined ‘as the individual and collective process of repeated alignment of moral awareness, judgement, character, and conduct that demonstrates balanced judgement, and promotes sustained moral development’.35 Managerial ethical integrity rests on three dimensions, namely, judgement, process and development. Integrity of a person reveals that one acts according to one’s belief and is consistent and unvarying in one’s behaviour whether one is alone or at home or in a public place. A person of integrity acts according to his belief, and not ETHICAL DECISION-MAKING IN BUSINESS out of expediency or duplicity. Such an individual is not a fair-weather cock. Integrity or lack of it is such an important element in one’s character that Stephen Carter36 was prompted to say in his book Integrity: ‘If a person lacks integrity, nothing else matters.’ When you want to describe persons who are devoid of integrity, you call them ‘hypocrites’ or ‘double-faced persons’. Reliability is another aspect related to trustworthiness. Reliability involves keeping our promises under all circumstances so that we do not let down those who rely on us. When we make promises we should show our intention to keep them. When we want others to trust us, we take the responsibility to ensure we fulfil our commitments. We should avoid false excuses and not try to rationalize non-compliance and unwise commitments while keeping up our promises, thereby not causing impediments to fulfil our commitments. Another important aspect of reliability is to avoid unclear commitments, which means ‘the other person understands what you are committing to do’.37 Loyalty is a sense of responsibility a person feels towards the interests of certain people, affiliations or organizations, as for instance, what a citizen feels towards his or her country, a wife towards her husband, employees towards employers, students towards their alma mater and so on. This sense of loyalty goes far beyond one’s duty or obligation we normally express towards others. However, loyalty is not inviolate. It has certain limitations too in the sense ‘no one has the right to ask another to sacrifice ethical principles’ in the name of loyalty. For instance, it is not ethical for an institution to force the alumni to collect donations for their alma mater by misrepresenting facts such as the institution lacks resources, it helps poor students through scholarships and it engages itself in promoting welfare activities, all of which in reality it does not. Likewise, we will have our own priorities in expressing our loyalty. For instance, our loyalty to our parents, children, spouses and siblings may take precedence over our loyalty towards our colleagues, business partners and countrymen. Loyalty may often imply that we keep some information confidential unless and until there arises a situation where it may cause harm to others. It is perfectly ethical for employees to be loyal towards their organization and maintain the confidentiality of the work place, but if they find that certain practices that are followed there are likely to harm others, it is equally ethical and morally justifiable for them to ‘blow the whistle’ to safeguard the larger interests of the society. It is also necessary for employees and public servants to avoid conflicting interests. When personal interests conflict with those of the public, the interests of the latter need to be protected. A manager of a company cannot double as the distributor of its products in a benami arrangement. It is bound to create a conflict of interest sooner than later. RESPECT We expect people to treat us with respect whatever be our status in life and society. It is only natural that others would equally expect us to treat them with respect, whoever they are and whatever they have done. Even when we deal with unpleasant and unreliable people we have to give them respect. The biblical exhortation ‘Do unto others what you would have them do unto you’ clearly epitomizes the pillar of respect. Respect for others implies avoidance of violence, humiliation, insults, manipulation and exploitation. It also calls for such societal values as civility, courtesy, decency, dignity, autonomy, tolerance and acceptance of others as equals. All these are qualities people are expected to possess and respond in equal measure to others in a civil society. By being civil and courteous towards others, we show ourselves as decent human beings who respect others’ dignity and autonomy. We should accept each other’s individuality and differences in human nature and beliefs without prejudice. A world where people accept and follow such values will be a better place to live in with lesser ethical dilemmas to face and solve. RESPONSIBILITY Being responsible is to take care of something or to carry out a duty diligently. A responsible person is trustworthy, capable of rational conduct while handling important duties. Responsibility also means being accountable for one’s actions. As persons imbued with the power of reasoning who are morally autonomous, we are answerable whether we follow or refuse to toe the line of ethical principles that should govern our behaviour. ‘Ethical people show responsibility by being accountable, pursuing excellence and exercising self-restraint. They exhibit the ability to respond to expectations.’38 Accountability is another basic ingredient of a person’s sense of responsibility. Accountability is a person’s obligation to account for his or her actions. A person who is accountable is expected to lead by example. He knows both his strengths and limitations and acts responsibly. A teacher, for instance, is accountable 83 84 BUSINESS ETHICS—AN INDIAN PERSPECTIVE not only to his employer-institution, but also to those whom he or she teaches. A teacher is expected to act ethically and responsibly. Likewise, the society expects a judge to show accountability and lead by example. That is why when we hear that teachers go on a strike or that a judge is involved in a drunken brawl, we show revulsion. The other elements of responsibility include pursuit of excellence, as others who follow a responsible person expect that person to have the knowledge, willingness and capability to perform the assigned tasks safely and effectively. Responsibility would also imply other values such as diligence, perseverance, and continued improvement in what one does and self-restraint, that is, exertion of self-control to the extent required by restraining passions and appetites that are likely to make persons deflect from their ethical path. FAIRNESS Fairness implies one’s tendency to view persons or events distinctly from oneself and one’s interests, opinions, likes or dislikes, so as to achieve a proper balance of conflicting interests. To achieve such a balance, one should be impartial, equitable, dispassionate, open, and follow due process. Fairness also means adherence to a balanced standard of justice without relating to one’s own personal feelings or attachments or inclinations. To be fair, it is necessary that one adopts a fair process. ‘A fair person scrupulously employs open and impartial processes for gathering and evaluating information necessary to make decisions. Fair people do not wait for the truth to come to them; they seek out relevant information and conflicting perspectives before making important judgements.’39 It also goes without saying that neither favouritism nor prejudice should cloud one’s decision making. Equity is another aspect of fairness. Justice should be done according to the natural law of justice and without any impartiality. It also implies that one should not take undue advantage of the weakness or ignorance of others. CARING Since ethics is related to one’s good relations with others, caring for others is the cornerstone of good ethical practice. Caring for the welfare of others and acting on that sentiment to relieve others of their pains and problems such as poverty, disease, deprivation, etc. is the core and essence of ethical behaviour. The whole world venerates the late Mother Teresa because of the fact she devoted her entire life to the care of the poor, sick, destitute and the dying without any expectation of reward. She scrupulously followed her Lord and Master, Jesus Christ, who exhorted His disciples: ‘Whatever you do to the least of my brethren, that you do unto Me’. It is not possible for anyone unconcerned about the welfare of others to be ethical. ‘Caring is the heart of ethics, and ethical decision making.’40 People who do not possess the sense of caring, may not care to be fair, honest, loyal or respectful towards others. When one cares for a cause or a person, one strikes an emotional cord with it or with him or her. When you care for others you feel an emotional response to both the pain and pleasure of others. A saint like Damien cared so much for the lepers that he succumbed to the disease and sacrificed his life for them. People who care are also generous with their time, efforts and resources. Persons who care for a cause or a person generously share what they have for the cause or the person. They may give until it hurts. Mother Teresa used to say that though she had received very large and generous donations from her rich benefactors for her charity work, what touched her most was the gift of a measly 10 paise coin a beggar gave her. Mother used to narrate this real life story. ‘In Calcutta, a beggar came to me and said, “Mother Teresa, everybody is giving you something. I also want to give you something. I have just this ten-paise coin, will you accept it?” Mother was in the horns of an ethical dilemma. She said, “I knew if I accepted the money, he would go hungry and if I did not, he would be hurt, so I put out my hand and took his gift”. For Mother Teresa, the beggar’s mite was greater than the Nobel Prize, because “He gave all that he had” and she saw “the joy of giving in his face”,41 it was because the beggar cared for the good work of Mother Teresa, he shared with her whatever little he had. Of course, there are times when you may be constrained to hurt someone you care, and it is part of the caring. Parents may be forced to hurt children when the latter may want something badly that is not good for their health or growth. Sometimes, we may be constrained to initiate some action against our friends to prevent some harm coming to them in future. We do these things because we really care for them. If we do not care for them, we may tend to ignore these things. Even when an employee blows the whistle against his or ETHICAL DECISION-MAKING IN BUSINESS her own company, it is because he or she cares for it so much that he or she wants to check any serious harm that may afflict the company in future, if the unethical things are overlooked. However, it is necessary to ensure that no harm is caused to anyone we care or some cause we espouse, than what is reasonably necessary to perform one’s duties. CITIZENSHIP A citizen is a person who owes allegiance to and is entitled to the protection of a sovereign State to which he belongs. If citizenship confers certain civic and civil rights on the citizen, it also enjoins him or her to practice some virtues and duties as part of a community. A good citizen knows and obeys the laws of the place, stays informed of the issues of the day, observes the rules and regulations and also enjoys the privileges as are entitled to a citizen. Likewise, a good corporate citizen is a legally incorporated entity, which even while enjoying the protection of the State and the privileges entitled to it, also discharges its duties and responsibilities to all its stakeholders—stockholders, employees, creditors, dealers and distributors, competitors, the public and the government. Such a responsibility to the public may have different facets including conservation of resources, maintenance of ecological balances and, to the extent necessary, promoting the overall welfare of the society. As noted earlier, the manner in which individuals decide on an ethical issue depends not only on their assessment of the situation from the personal point of view which is influenced by their moral standards imbibed and formed over a period of time, but also in the context of their work environment. CORPORATE VALUES AND ETHICAL DECISION MAKING In a person’s work environment, the values, the vision and stated mission of the company where he or she works have greater influence than his or her own values and moral standards. In organizations, decisions— ethical or otherwise—are made jointly through committees, consultations, discussions or at meetings of groups responsible for particular operations or by getting advice and inputs from experts in the field. The evolved culture and structure of an organization operate through the individual relationships of its members and have an impact on their decisions. Every organization has a culture evolved over the years, or imposed from the top when a new management takes over, and every employee tries his best to follow it, both in the interest of the organization and in his or her own interest. He or she can ignore it or transcend it only at his or her peril. A corporate culture can be defined as ‘a set of values, beliefs, goals, norms and ways of solving problems’ that an organization’s employees share and live up with in their work environment.42 It involves certain prescriptions of behaviour the organization’s employees are expected to follow. Some organizations may have developed a culture that is consumer-friendly; some may adopt employeecentred policies, while some others may be purely result-oriented in terms of making large profit or enhancing market capitalization. So, the set of values and policies companies follow will be attuned to achieve their respective goals or to realize their stated objectives. The ethical climate of an organization will provide a clear indication to outsiders on whether or not it has an ethical conscience. For instance, for organizations whose goal was to make a huge profit to show to its stockholders or to the market for enhanced capitalization—as in the cases of Enron or the Global Trust Bank—ethical conscience was secondary or perhaps an unwanted appendage. Apart from the overall ethical climate of the organization, there are certain pressure groups within it which may also exercise a considerable degree of influence on an employee’s decisions, such as managers, peer groups, co-workers and subordinates. Managers, for instance, exercise greater influence on those who work under them, as they have the power to determine the employee’s salary, perks, promotion and career growth. Apart from these influences that help crystallize the corporate culture of an organization, there are individuals and groups within the organization that often adopt their own values and rules, and even create subcultures as in the case of workers’ unions or sometimes regional or even communal groups. These groups may operate function-wise or group-wise or may function as informal groups. Informal groups often feed an informal channel of communication called the ‘grapevine’. Group norms are standards of behaviour that groups expect of their members. Group norms generally mean those acts of acceptable as well as unacceptable behaviour, from the members constituting the group. These norms may also set limits within which members’ behaviour is acceptable. However, these group norms are more tacit than expressly stated. It is also possible that group norms may conflict with those of an organization’s culture, especially when the head of the group has been inducted from a vastly different organization.43 85 86 BUSINESS ETHICS—AN INDIAN PERSPECTIVE It may happen often that employees’ own personal ethical standards may run counter to what their organization expects them to follow. Though there is no substitute for the employee’s own critical thinking and ability to accept responsibility for his or her decision, this may prove to be difficult especially when ethical decisions are often resolved by formal and informal groups, committees and outside experts. In some cases, the conflicts on an ethical issue may be so severe when employees like Couto of Bayer AG might have had no choice but to leave the organization, rather than live with and experience the guilt of being an accomplice in the crime everyday.44 ROLE OF CORPORATE GOVERNANCE IN ENSURING ETHICS IN THE WORKPLACE Over the past four decades, corporations with a view to reducing such conflicts of interest not only with employees, but also with other stakeholders have been following the best internationally accepted corporate governance practices. Such practices can help mitigate conflicts among employees, through formal codes, policies and rules that are put into practice and enforced by managements. These practices also can help minimize ethical dilemmas that arise in problem solving situations wherein decision rules are often vague or in conflict. Corporate governance centres around such values as integrity, accountability, transparency, full disclosure of financial and non-financial information and fair and open communication with concerned stakeholders. To ensure that these corporate values are in place and are scrupulously followed, the board of directors plays a critical and crucial role. The Organization for Economic Cooperation and Development (OECD) guidelines, for instance, explain in detail the functions of the board, which include risk-taking, corporate performance, fair accounting and reporting systems, monitoring effectiveness and changing them, if needed. Readers can refer to Chapter 7 to know more about corporate governance, what it means and the benefits that accrue to corporations and the society in general when it is practised. A FRAMEWORK OF ETHICAL DECISION MAKING From what we have seen, it is clear that making an ethical decision is a tough task. When as individuals, we have to decide fairly on an ethical issue, we face an ethical dilemma as to which of the choices before us is likely to result in greater good or if not, lesser harm to others. Our perception of the potential consequence and judgement as to whether it is morally right or wrong will clinch the issue of decision making in our personal context. But in the organizational context, it becomes more complex as the individual is not free to choose what he or she wants, but has to face and get acclimatized to several other issues such as the corporate culture, structure and the goals of the organization, its ethical conscience and the roles all these play in shaping the individual’s ability to take an ethical decision. Taken together, the individual’s moral values may or may not gel with the collective values of the organization. That makes ethical decision making still more complex in organizations. From available literature on the subject of working out a framework, we can recognize and identify a few steps that will lead to ethical decision making. As individuals, we are endowed with the opportunity and power to decide what we say and what we do. Once we exercise our choice and express ourselves or act as per our wish, we are responsible for the consequences of our choices. Sometimes our power to choose may be overwhelmed by external factors or inner emotions. When one is young and immature, one may act impulsively. When one is depressed or under the influence of alcohol, one may act as if one had only a Hobson’s choice. But one still has the power to exercise a choice and one is responsible for the consequences that follow. The power and responsibility associated with the exercise of choice exists even when it is very difficult to be reflective. Even though people plead so, anger, frustration, fear and passion are not acceptable excuses for bad choices. Taking help from Michael Josephson’s Groundwork for Making Ethical Decisions,45 we can construct the following components of good choices. TAKE CHOICES SERIOUSLY Though we make hundreds of decisions daily, not all of them need any deep reflection or intricate analysis. Most of these decisions are simple, straightforward and routine affairs based on past experiences or those with insignificant consequences. In such cases, our decisions may be instant, and as per our normal instincts. But there could be more complex situations involving potentially major ethical issues, when we may have to adopt ETHICAL DECISION-MAKING IN BUSINESS a careful approach. The greater the potential consequence, the greater is the necessity for careful decision making. In such complex cases, answers to the following four queries will help identify important decisions: 46 1. Would that decision cause you or someone else to suffer any physical harm? 2. Would that decision cause you or someone else to suffer serious emotional stress and strain? 3. Would that decision hurt your reputation, undermine your credibility or damage important relationships? 4. Would that decision jeopardize the realization of any important goal? GOOD DECISIONS ARE BOTH ETHICAL AND EFFECTIVE A decision will be ethical if it is in line with the values we cherish such as the ones explained in the ‘Six Pillars of Character’. Sometimes a decision could be effective, but might have been based on unethical inputs like suppression of truth and suggestion of falsehood. For instance, when governments provide relief for those affected by natural calamities, it is not often the deserving poor who get it, but the rich and influential who can easily prepare false documents to qualify for the relief. In such cases, even though the outcome is effective, the decision is unethical. An effective decision is one that realizes our objective or furthers our cause. ‘The key to making effective decisions is to think about choices in terms of their ability to accomplish our most important goals’47 over time—immediate, short term and long term. DISCERNMENT AND DISCIPLINE To make ethically sound decisions, one should know what to do, and more importantly, how to do it. These need the qualities of discernment and discipline on the part of decision maker. Discernment is good judgement based on insight. It also means the ability of a person to see what is not evident on the surface of an issue—something that escapes the attention of an average mind. Discernment requires intuition, insight, knowledge and good judgement. Discipline implies strength of character that is expressed in word or deed, irrespective of the outcome. To be disciplined in one’s action ‘often takes will power or moral courage, the willingness to do the right thing even when it is inconvenient, scary, difficult or costly’.48 THE PROCESS OF MAKING GOOD ETHICAL DECISIONS To make good ethical decisions, we should have a belief in the importance of ethics, an ethical sensitivity to the implications of the various choices we have, the ability to evaluate facts at our disposal which may be incomplete, complex, contentious and even ambiguous and the skill to implement effectively the ethical decisions we make. If these are the underlying requirements, what is the process one has to follow to make good ethical decisions? RECOGNIZE AND IDENTIFY THE KIND OF ETHICAL ISSUE YOU NEED TO RESOLVE First and foremost, we have to recognize the ethical issue and then seek answers to questions relating to it such as the nature of the issue, the conflict it has raised and how the decision could have impact on the people around us or the larger community. For instance, a corporate that wants to expand its operations, may want to go for the manufacture of heavy chemicals and put up a factory in the 20 acres of land it owns in the heart of the city. The manufacture of heavy chemicals may let out obnoxious gases and fumes that may adversely impact the health and welfare of thousands of poor residents who may still reside without any alternative arrangement. What should the company that is committed to make high profits to its shareholders who have not received a fair dividend for a long time do? The management of the company is in the horns of an ethical dilemma. They have to consider all aspects of the issue. Does the issue of putting up a chemical factory go beyond legal, institutional and environmental concerns? What does it do to the poor inhabitants in and around the proposed factory? What about their rights to livelihood and peaceful life, dignity and hope for a better life in a place they have chosen as home? On the other hand, what happens to the rights of investors who expect a decent return on their investments? The company has to reconcile these conflicting interests before they make any decision for or against putting up the chemical factory. 87 88 BUSINESS ETHICS—AN INDIAN PERSPECTIVE PAUSE AND THINK Before one proceeds further with an ethical issue on hand, one should pause for sometime, think ahead and reflect on the consequences that are likely to follow. Pausing to think offers several advantages. It will enable the management in our example to think calmly and quietly of the consequences of either decision, consult legal and environmental experts, prepare them for ‘thoughtful discernment,’ gather enough information and more importantly, avoid what could lead to a costly and hasty decision. MAKE SURE OF YOUR GOALS Before jumping into what could turn out to be a hasty decision, the management of the company should be clear of its goals, both short term and long term. The decision makers should weigh their options clearly. Putting up a heavy chemicals factory in the heart of the densely populated city may solve their immediate goal of earning a high profit in the short term. But will that situation prevail for a long time? Will the company earn the goodwill of the population surrounding the factory? What happens if they get agitated and create problems? What about the possibility of environmental groups spearheading agitations and pressurizing the government to withhold clearances? What about the reaction of the media on this issue? Will it be a better option for the company to sell this piece of precious land at a premium and move the proposed factory away, ‘far from the madding crowd’, so as to enable them make high profit for its shareholders without ruffling the feathers of so many? Will not the company be able to achieve its goal, both short term and long term, by this well thought-out decision? GET YOUR FACTS RIGHT To make important decisions, that too when these are likely to impact others, we should know all the facts concerning the issue, verify those which we are not very sure about, and get additional information that may throw some more light on various aspects of the issue to be decided. Once we begin to probe deeply, we may come across several facts unknown to us in the beginning, different versions of them and what they mean. We should try to weigh the collected facts dispassionately and evaluate their authenticity. There are some guidelines that would help us get reliable facts: ∑ What are the ‘facts’ of the situation? What are the root causes? What are the risks involved in the situation? ∑ Is it likely that some of the stakeholders may have different perceptions of the facts? ∑ Is it not necessary and important to judge the veracity of the persons who provide the facts? Are they reliable, credible and logically consistent? ∑ Have the persons who provided the facts personally know that these are genuine or have they seen them happen or experienced the impact? Are these persons honest, accurate and reliable? ∑ We may come across any number of assumptions, hearsay, gossip and grapevine. But we should realize that these are no substitutes for facts. ∑ We must also remember that when some facts are universal such as mortality of human beings, there may be other facts or truth that are coloured by perceptions of the viewers. They say that truth has three dimensions. What I hold as truth, what you hold as truth, and what is the real truth. This is because people believe unverified half-truths as truths. ∑ If the persons who provide the facts have different values from what we hold, this could affect perception of facts. Like this, there may be other perspectives that we have to take into consideration. ∑ We can take the opinion of people we respect, for their knowledge, expertise and experience. ∑ Having obtained all these inputs, we should evaluate the available information in terms of accuracy, reliability and completeness. EVALUATE CHOICES FROM DIFFERENT ETHICAL PERSPECTIVES Before one plunges into decision making, one should make a list of options that attempts to accomplish the goal. Ask yourself whether you have exhausted all the options. Have you, for instance, critically examined the availability of other options? While choosing the most appropriate option, one should test it against various ethical perspectives such as rights, justice, virtue or common good and also find out which option will produce the most good and do the least harm to others. You can also consult persons whom you trust to give you correct advice on the choice of appropriate action. CONSIDER CONSEQUENCES ETHICAL DECISION-MAKING IN BUSINESS Ethicists offer two techniques to find out the possible consequences of our proposed options; First, ensure that you do not hold on to any unethical option; see that your option is consistent with all core ethical values such as ‘trustworthiness, respect, responsibility, fairness, caring and citizenship’. You should also analyse the possible consequences of each of the options for each stakeholder. Also think in terms of those stakeholders who are likely to be for and those against, and the possible grounds on which their decisions are based. Ensure that the option does not involve any lying, breaking a promise, being disrespectful to others, generating unfair or uncaring attitudes or breaking any rule of law. Also ensure that the end result causes more good than harm. Second, identify the stakeholders who are likely to be impacted by the decision. Find out what important stake individuals and groups have, in the outcome. Also find out whether some have a greater stake because they have a special need or because we have special obligations to them. In the example that was given earlier, the stakeholders may be the people who live close to the proposed chemical factory; but there may be schools and hospitals located nearby. Inhabitants of these institutions may be considered special stakeholders whose need for clean air and safe environment is more important than those of others. MAKE A DECISION Having gone through all these steps honestly and sincerely, we have now come to the most important aspect of decision making—to make a decision. It should be the best and right option that is available. Before you make the ultimate decision, it would be better to prepare a checklist or rather a criteria derived from the facts gathered. Additionally, you can also create a decision criterion including the financial outcome, if any. When you are ready to choose the appropriate action, you should rate it against your list of criteria. However, if you are still in a dilemma as to what is the best option, try to talk to persons whose judgement you respect. What would they say? Can you justify your action in front of a gathering? You can also test the choice this way: If placed with the dilemma of choosing the right option, what would the most ethical person, society accept to do in such circumstances. What would Jesus Christ do? What would Buddha, Mahatma Gandhi or Mother Teresa do under such a circumstance? And, of course, you should follow the golden rule: ‘Do unto others as you would have them do unto you.’49 The process of decision making is not complete unless you chart out the communication issues involved with the decision and also the strategy to face possible objections from some of the adversely affected stakeholders. ACT, THEN REFLECT ON THE DECISION LATER Once you have made and implemented your decision, try to evaluate the consequences. How did it turn out to all stakeholders? Would you take the same decision or act differently if another opportunity presents itself again? This way, decision makers monitor the outcome of their choices, since no foolproof option is available for the successful resolution of an ethical issue. If the decision produced, for instance, an unintended or undesirable consequence, it may be necessary to reassess the choice and options and proceed to make new decisions. The foregoing analysis tries to trace the step-by-step process by which an ethical decision is made by persons in a business environment. We may wonder whether individuals go through what appears to be a tortuous process for arriving at a simple ethical decision. We know many decisions are made in a jiffy if they are meant to provide solutions to simple and routine ethical issues like when workers violate company rules on matters of discipline when they are stressed with personal problems. There are sets of rules that can be applied either strictly or leniently depending upon how the manager views the violations. But there can be many ethical issues that may be complex and require decisions that are difficult to make. As we have seen, a decision to solve an ethical issue may be arrived at differently by two individuals moulded in different ethical trails. We do not have any readymade solution or any magic formula to solve a complex ethical issue. There may be many ‘ifs’ and ‘buts’, unverified ‘facts’ wrongly arrived as perceptions surrounding and clouding the issue. Cases of collapsed mega corporations have revealed that CEOs who have been morally upright persons all through their lives have succumbed to certain internal and external pressures, have acted unethically, and caused the collapses. There had been also instances to the contrary. The problem of ethical decision making is as complex as human character and as difficult to follow as the Ten Commandments, with a lot of detractive attractions around us! The 89 90 BUSINESS ETHICS—AN INDIAN PERSPECTIVE analysis provides a sort of framework within which ethical decisions are sought to be arrived at for complex ethical issues in a business environment. SUMMARY Several ethical theories, developed by philosophers over the years, offer certain benchmarks to set organizational or professional standards. The rights-based theories were advocated by Immanuel Kant who stressed personal rights, and Locke who underlined the importance of property rights. Rights imply corresponding duties, especially the duty to respect others’ rights. Justice theories precede rights theories and can be traced to Greek philosophers, Plato and Aristotle in the fifth century B.C. Utilitarianism as an ethical theory holds the view that an action or decision is right if it maximizes utility or produces the greatest good for the largest number of people. The virtue approach advocates that ethical actions should be consistent with certain morally acceptable virtues that would pave the way for full development of humanity. The common good approach underlined the societal view that life in a community is good in itself and that it is every person’s moral responsibility not only to contribute, but also to enrich it. Managers and executives make hundreds of business decisions in their organizations everyday. It is not possible to generalize how exactly an employee or executive would make ethical decisions. There are three major influences that have an impact on an employees’ decision making in business—their personal moral standards, their workplace ethics and culture, and the nature of the issue concerned. Applying moral philosophy to ethical decision making is a normal process individuals resort to. However, it depends on whether they make a personal decision outside the work environment or they do so in a work-related matter. At the individual’s level, the core values of trustworthiness, respect, responsibility, fairness, caring, and citizenship affect and improve ethical decision making. In a person’s work environment, the values, the vision and stated mission of the company where he works, have greater influence than his own values and moral standards. It may happen often that an employee’s own personal ethical standards may run counter to what his or her organization expects him to follow. Employees face any number of problems in the workplace when they cannot solve ethical situations with the help of moral philosophy. While studying and evaluating the process of ethical decision making, it is necessary to understand the concept of ‘cognitive moral development’ as enunciated by the psychologist Lawrence Kohlberg. His six-stage model of cognitive development explains why people make different decisions in similar ethical situations. In Kohlberg’s model, persons pass through the following six stages of moral development: (i) the stage of punishment and obedience; (ii) the stage of individual instrumental purpose and exchange; (iii) the stage of mutual interpersonal expectations, relationships and conformity; (iv) the stage of social system and conscience maintenance; (v) the stage of prior rights, social contract or utility; and (vi) the stage of universal ethical principles. For ethical decision making, we can construct the following components of good choices: (i) take choices seriously; (ii) good decisions are both ethical and effective; and (iii) discernment and discipline. To make good ethical decisions, first, recognize and identify the kind of ethical issue you need to resolve, pause and think, make sure of your goals, get your facts right, evaluate choices from different ethical perspectives, consider consequences, make a decision, and act, then reflect on the decision later. KEY WORDS Hierarchical sanctions ∑ Ethical decisions ∑ Ethical models ∑ Organizational cultures ∑ Normative theories ∑ Difficulty in operationalizing ∑ Moral community ∑ Defensible reasons ∑ Utilitarianism ∑ Disadvantaged communities ∑ Conventional morality ∑ Common good ∑ Cross-holder conflicts ∑ Ends and means ∑ Mission statement ∑ Corporate culture ∑ Core values ∑ Cognitive moral development ∑ Instrumental purpose ∑ Stage of reciprocity ∑ Conscience maintenance ∑ Work place ethics ∑ Subterfuge ∑ Trickery ∑ Alma mater ∑ Conflicting perspectives ∑ Corporate governance ∑ Ethical perspectives ∑ Ethicists DISCUSSION QUESTIONS ETHICAL DECISION-MAKING IN BUSINESS 91 1. Discuss the reasons why decision making in business is both a mixed and vexed problem. 2. What are the models ethicists have provided to guide a businessman take decisions that are both moral and profitable? 3. What do you understand by moral philosophy? How is it evolved both for individuals and organizations? What kind of conflicts can be created by the confrontation of the individual’s and organization’s of moral philosophies in the work place? How can they be resolved? 4. Elucidate Kohlberg’s model of cognitive moral development in your own words with suitable examples. 5. Discuss a suitable framework for ethical decision making in business. What are the most important issues to be tackled in the process? NOTES 1. Richard T. DeGeorge, Business Ethics, 3rd ed. (New York: Macmillan, 1990) 2. David J. Fritzysche and Helmet Becker, “Linking Management Behavior to Ethical Philosophy—An Empirical Investigation,” Academy of Management Journal (Vol. 27, No. 1, 1984): 166–75. 3. See Note 1. 4. Immanuel Kant, Foundations of Metaphysics of Morals, translated by Lewis White Beck (New York: The Liberal Arts Press, 1959). 5. John Locke, Two Treatises on Government (London: Cambridge University Press, 1690). 6. G. F. Cavanagh, Dennis J. Moberg, and Manual Velasques, “The Ethics of Organisational Politics,” Academy of Management Review (Vol. 6, No. 3): 363–74. 7. Richard DeGeorge, Business Ethics (New York: Macmillan, 1986). 8. John Rawls, A Theory of Justice (Cambridge, MA: Harvard University Press, 1971). 9. Issues in Ethics (Winter 1988). Vol. 1, No. 2. Cited in “A Framework for Ethical Thinking,” Markkula Center for Applied Ethics, Santa Clara University, available at www.scu.edu/ethics/practicing/decision/ framework.html 10. V. Barry (1991), cited in Robert D. Gatewood and Archie B. Carrol, “Assessment of Ethical Performance of Organisation Members: A Conceptual Framework,” Academy of Management Review (Vol. 16, No. 4, 1991): 667–90. 11. V. Barry, Moral Issues in Business (Belmont, CA: Wadsworth, 1986). 12. Ibid. 13. O. C. Ferrel, John Paul Fraedrich, and Linda Ferrel, Business Ethics: Ethical Decision Making and Cases, 6th ed. (New Delhi: Bizantra, 2005). 14. M. Velasquez, G. F. Cavanaugh, and D. J. Moberg, “Organisational Statesmanship and Dirty Politics: Ethical Guidelines for the Organisational Politician,” Organisational Dynamics, cited in Robert D. Gatewood and Archie B. Carrol, “Assessment of Ethical Performance of Organisation Members: A Conceptual Framework,” Academy of Management Review (Vol. 16, No. 4, 1991): 667–90. 15. See Note 9. 16. Ibid. 17. See Note 10. 18. See Note 14. 92 BUSINESS ETHICS—AN INDIAN PERSPECTIVE 19. A. B. Carrol, Business and Society: Ethics and Shareholder Management (Cincinnati, OH: Southwestern Publishing Company, 1989). 20. See Note 10. 21. Robert D. Gatewood and Archie B. Carrol, “Assessment of Ethical Performance of Organisation Members: A Conceptual Framework,” Academy of Management Review (Vol. 16, No. 4, 1991): 667–90. 22. See Note 13. 23. A. C. Fernando,“Ethical Decision Making in Business,” Management Matters (Vol. 1, No. 6, March–August 2006a) Chennai: LIBA, p. 41–59. 24. See Note 13, p. 107. 25. A. C. Fernando, Corporate Governance: Principles, Policies and Practices (New Delhi: Pearson Education, 2006b). 26. See Note 13. 27. Lawrence Kohlberg, “Stage and Sequence: The Cognitive Development Approach to Socialization,” cited in D. A. Goslin, ed., Kin Handbook of Socialization Theory and Research (Chicago, IL: Rand McNallu, 1969); Lawrence Kohlberg, “Essays on Moral Development,” The Psychology of Moral Development (Vol. II, 1984). 28. See Note 13. 29. Ibid. 30. Ibid. 31. Ibid. 32. Michael Josephson, “Making Sense of Ethics,” Josephson Institute of Ethics, 2007a, available at www.josephsoninstitute.org/MED/MED-1makingsense.htm 33. See Note 23. 34. Michael Josephson, “The Six Pillars of Character,” Josephson Institute of Ethics, 2007b, available at www.josephsoninstitute.org/MED/MED-2sixpillars.htm 35. Joseph A. Petrick and John F. Quinn, Management Ethics, Integrity at Work. (Thousand Oaks, CA: Sage Publications, 1997). 36. Stephen L. Carter, Integrity (New York: Harper Perennial, 1997). 37. See Note 34. 38. Ibid. 39. Ibid. 40. Ibid. 41. Xavier Alphonse, S. J., Symphony Goes on . . . Legacy of Mother Teresa to the Modern World (Chennai: MCRDCE Publication, 2003). 42. See Note 13. 43. Ibid. 44. See Note 25. 45. Michael Josephson, “Groundwork for Making Ethical Decisions,” 2007c, Josephson Institute of Ethics, available at www.josephsoninstitute.org/MED/MED-3groundwork.htm 46. Ibid. 47. Ibid. ETHICAL DECISION-MAKING IN BUSINESS 93 48. Ibid. 49. Ibid. FURTHER READINGS Couto–Bayer case, available at http://multinationalmonitor.org/mm2003/03may/may03front.html DeGeorge, R. T., Business Ethics, 3rd ed. (New York: Macmillan, 1990). Fernando, A. C., Corporate Governance: Principles, Policies and Practices (New Delhi: Pearson Education, 2006). Ferrel, O. C., Fraedrich, J. P., and Ferrel, L., Business Ethics: Ethical Decision Making and Cases, 6th ed. (New Delhi: Bizantra, 2005). Forester-Miller, H. and Davis, T. “A Practioner’s Guide to Ethical Decision Making,” American Counseling Association, 1996, available at www.counseling.org/Counselors/PractitionersGuide.aspx? Hartman, L. P., Perspectives in Business Ethics (New Delhi: Tata McGraw Hill, 2003). Josephson, M., “Making Ethical Decisions,” Josephson Institute of Ethics, 2007, available at www.josephsoninstitute. org/MED/MED-intro+toc.htm Markkula Center for Applied Ethics, Santa Clara University, USA, available at www.scu.edu/ethics/ Murray, D., Ethics in Organisations, 1st Indian ed. (New Delhi: Crest Publishing House, 2001). Petrick, J. A., and Quinn, J. F., Management Ethics, Integrity at Work (Thousand Oaks, CA: Sage Publications, 1997). 94 BUSINESS ETHICS—AN INDIAN PERSPECTIVE CASE Study GLOBAL TRUST BANK: THE BANK THAT WENT BUST (This case study is based on reports in the print and electronic media. The case is meant for academic purpose only. The writer has no intention to sully the reputations of the corporate or the executives discussed.) LIBERALIZATION USHERS IN NEW GENERATION BANKS Post-1991, the new economic policy of the Government of India unleashed a process of liberalization and deregulation. Like in all other sectors of the economy, there were reforms in the financial sector too, and the new policy allowed the creation of private sector banks in the country after a lapse of almost three decades. The Reserve Bank of India (RBI) opened the doors of the banking industry to new players, and the era of the ‘New Generation Banks’ was on the cards. ‘Middle class’ Indians were awaiting new banking options after experiencing the poor service offered by the nationalized banks. Customers welcomed private sector banks. New banks were vying with one another to get a lead in this unbelievably huge market covering a banking public of almost 200 million people. There was a heady sense of anticipation in this industry and the expectations were high. Giant financial organizations like HDFC, ICICI and UTI started their own commercial banks and were able to leverage their reputation and cash reserves to establish credibility and financial stability. At the same time, the market was so big that there was enough space for all of them. amazing feat on the first day of its opening showed that it could take on more established and powerful nationalized banks through an eclectic mix of ambitious planning and diligent execution. GTB promoted its products through aggressive marketing and live-wire innovative advertising. As a result of these hitherto unused initiatives in the banking business, the brand of GTB expanded rapidly both in terms of increased number of branches and of products and services. The brain behind it was Ramesh Gelli, a ‘banking genius’ who captured the imagination of the banking public with his banking pyrotechnics. GTB appeared to have a bright future. To Gelli, it was indeed a long time dream come true. GTB within a short span of time tried to prove that it was as fast as its competitors were, and therefore as good as they were. The bank settled down quickly to focus on keeping its customers happy. In this, it achieved what few banks do— quick, powerful, foolproof systems that gave the front-office executive time to provide the customer with a warm personal touch. To the banking public, it was a new experience. The banker was warm and friendly and their job was done in a jiffy! There was no effort to impress or intimidate the customer, and transactions were quick and uncomplicated. The youthful front-office bankers performed their job well on moving the brand beyond the personality of its chairman. The promise of expertise was fulfilled and the transition to a warm but systems-driven GTB brand was complete. EMERGENCE OF GLOBAL TRUST BANK FAST, ULTRA-MODERN, COST-EFFECTIVE BANKING SERVICES The Global Trust Bank (GTB), one of the earliest private sector banks permitted by the RBI and the Union Government was formed on 30 October, 1993. Ramesh Gelli, Sridhar Subasri and Jayant Madhob were some of the major promoters of the bank. GTB opened its first branch in Secunderabad in Andhra Pradesh and on the very first day of operation, collected INR 1000 million of deposits, which was really a record of sorts at that point of time. GTB’s Since its inception in 1993, GTB has been extremely technology savvy, using the latest technologies to deliver worldclass service to its customers. Just as the banking job was done in an unconventionally friendly manner, GTB offered a number of products and services. The bank opened a large network of 275 automatic teller machines (ATMs) which allowed clients to withdraw and deposit cash, deposit cheques, know the account balance, get a mini statement of ETHICAL DECISION-MAKING IN BUSINESS transactions, transfer funds and also change the personal identification number (PIN). To many middle-class customers it was a delightfully new banking experience. The nationalized banks with which they were banking thus far had not yet started computerizing their banking activities, while they could not afford the high cost of service charges of MNC banks. As competition became intense, phone banking was introduced to attract customers. GTB’s phone banking provided a quick response and waiting time was less. Like ATM services, phone banking too permitted a customer to request a cheque book, enquire cheque status, cash credit status, and ask for an account statement by fax. ‘Anywhere banking’ was another innovative service offered to delight the customer. This service allowed a customer to get a banking job done in any branch even if he or she did not hold an account in that branch. Especially the cheque payments and collection services were very useful to corporate clients. GTB also announced its foray into electronic commerce on 31 July 1999. Infosys Technologies Limited, India’s leading software company, provided GTB with their software, BankAway, for this initiative. BankAway is a powerful electronic commerce platform that enables banks to provide an integrated financial services offering to both their retail and corporate customers—the one-click access to all their bank accounts, trade finance, cash management, bill payment, investments, on-line shopping and more. GTB’s core banking operations were based on Bancs2000, also provided by Infosys. With this, GTB joined a select band of banks that offered its customers world class banking services. Ramesh Gelli, Chairman, GTB boasted: ‘We have always aimed to provide our customers with worldclass products and the best service levels. Our electronic commerce initiative is another step in this direction, through which our customers will be able to conduct all their financial transactions anytime, from anywhere in the world.’ He also added that the bank was the first in India to provide its customers access to both their bank and depository accounts. He also assured his customers of GTB’s Global Securities Banking Services that they could be used to enquire details of their depository accounts over the Internet. According to him, GTB would offer the facility when the laws of the country permit deposition instructions to be accepted electronically.1 Apart from phone banking and ATM services, GTB also provided Internet banking. GTB initially offered its customers a ‘single view’ of all their accounts with any branch of the bank. Customers were able to inquire into their accounts and transactions; take a printout of their account statement; request for transfer of funds between their accounts, cheque books, and demand drafts, etc. Internet banking was thus another out-of-the earth banking service that attracted more and more individual and corporate clients to GTB. 95 GTB had a huge server network, consisting of 10 Sun RISC-based machines, 10 Alpha servers, and around 50 Intel based boxes. The network essentially connected 104 branches and 275 ATMs across the country, providing a wide array of services, including Internet and mobile banking. GLOBAL TRUST BANK’S FINANCIALS GTB made a flying start in 1993 but later ran into bad loan problems of INR 15,000 million. It had posted INR 2720.70 million net loss in the year ending 31 March 2003. GTB’s results for 2003–2004 were as follows: Deposits INR 69,200 million Advances INR 32,760 million Exposure INR 15,600 million Capital-adequacy ratio 0.7% Net NPAs/net advance 20% Return on assets 3.5% Gross NPA INR 11,000 million 90-day provisioning Norm NPA INR 12,000 million Source: www.rbi.org.in, www.capitaline.com, www.moneycontrol. com BETTER SERVICES, NO DOUBT; BUT PROBLEMS GALORE INSIDE But while the GTB brand and consumer encounters worked well, there seemed to be a lot of trouble behind the scenes. The bank was said to have funded scamsters like Ketan Parekh and its exposure to the securities market landed it in losses. The bank’s success run was abruptly halted. There were serious allegations of rigging of the GTB share price. GTB’s founder Ramesh Gelli tried to pull off a coup by merging his bank with UTI Bank and exit the company. GTB’s proposed merger with UTI Bank was called off unceremoniously by the RBI. Promoter Gelli was also allegedly sacked and instructed not to hold any post. More problems arose later when the Indian capital market regulator, Securities and Exchange Board of India (SEBI) prohibited GTB from raising money from the capital market. It was reported that GTB was suffering from an overexposure to the capital market and that the stock market fall left it with reportedly INR 11 billion of non-performing assets (NPAs) and a negative net worth. By 2003, within 10 years of its existence, GTB has been involved in all sorts of regulatory hassles especially in the last 4 years of its existence. GTB came under the regulatory lens the first time for its association with stock scamsters like Ketan Parekh. Soon thereafter, GTB had fallen to its lowest depth. 96 BUSINESS ETHICS—AN INDIAN PERSPECTIVE MORATORIUM BY RBI On an application by the RBI, the Central Government issued an Order of Moratorium in respect of the Global Trust Bank Ltd. on 24 July 2004. A moratorium is the permission granted by the government to banks to delay meeting their obligations for a period. The Order of Moratorium had been passed by the government in public interest, in the interest of depositors and the banking system. The moratorium was to be effective from the close of business on Saturday, 24 July 2004 up to and inclusive of 23 October 2004 or an earlier date, if alternate arrangements were put in place. During this period, the RBI would consider the various options, including amalgamation of the Global Trust Bank Ltd. with any other bank and finalize the plans in public interest and with a view to ensuring that the public deposits were protected. During the period of moratorium, the bank would be permitted to make only those payments that were specified in the Order of Moratorium and the depositors of the Global Trust Bank Ltd. would be permitted to withdraw up to INR 10,000 from their savings bank account or current account or any other deposit account through any of the branches of the bank. Withdrawals through ATMs of the bank/ATMs shared with other banks would not be permitted so as to give effect to the monetary ceiling prescribed in the moratorium, but the customers could make withdrawals up to the limit specified at any of the bank’s branches. Any requirement of cash at the branches of the bank for making permitted payments would be ensured in full by the RBI since cash balances were maintained with it by the Global Trust Bank Ltd. This came as a hard blow to the 8,00,000 customers of the bank who faced the possibility of losing their money. Customers were suddenly unable to transact because of their paralysed bank account, and those who needed more than INR 10,000 were unable to withdraw more than this amount. The loss of trust, the anger and betrayal that customers felt towards the bank meant that the GTB could no more win back their confidence. INVESTIGATION INTO THE SALE OF SHARES BY PROMOTERS RBI and SEBI, together with the market, were taken aback by the unusually large trading volumes in GTB shares that had no value, which were extinguished in due course. The promoters of GTB have been selling their stakes in the bank after the RBI’s moratorium. Among those who off-loaded the scrip, Girish Gelli, director and son of promoter and former chairman Ramesh Gelli, sold 8,49,238 or (0.70 per cent) shares of the bank. The transaction happened after the RBI imposed the moratorium. Sridhar Subasri, one of the main promoters of the bank, who along with Mr Gelli and Jayant Madhab, had set up the bank was also said to have sold off his entire stake in the bank of over 4 per cent. In July, Gelli had also sold around 3,00,000 shares in the bank. In all, around 40 million shares were traded within one week. Foreign stakeholders have also been continuously paring their stake in the bank. Stake had fallen from 0.34 per cent in the quarter ended December 2003 to 0.25 per cent in the quarter ended June 2004. International Finance Corporation (IFC) Washington, an affiliate of World Bank had a stake of 10.3 per cent in June 2004. Foreign Institutional Investors (FIIs) had also been selling their stake in the bank in the last quarter. Goldman Sachs, along with other FIIs, had a stake of 4.76 per cent in the bank of which the former’s stake was at 4.24 per cent in the quarter ending March 2004. The total FII stake in the June quarter had fallen to 0.98 per cent, after the crisis worsened. After that, for GTB, it had been a trail of regulatory pursuit. The bank was probed by the RBI, SEBI and the Joint Parliamentary Committee on the stocks scam. GTB came under SEBI scrutiny on alleged insider trading charges. Promoter Gelli was later banned by SEBI from conducting any stock market transaction. He was forced to leave the GTB board. The bank’s capital adequacy ratio (CAR) always stayed well below the RBI-mandated 9 per cent. GTB tried to bring Newbridge Capital to bring in the necessary fund. RBI rejected this request. SEBI CRACKS GTB DEALS SEBI then asked stock exchanges to disclose the buyers and sellers of GTB shares, both before and after the RBI slapped moratorium on the bank. ‘A full fledged probe will be done only if we sense any malpractice. Our surveillance wing is looking into the transactions. Exchanges have also been asked to keep a watch,’ said a SEBI official. ‘This is in line with the surveillance exercise that SEBI carries out in case of any abnormal trading,’ said the official. ‘It would be difficult to take a view on the transactions which took place weeks before the moratorium . . . the insider trading angle is a touchy issue, since only RBI and the finance ministry were privy to the information that a moratorium would be announced,’ said a SEBI official.2 COUNTDOWN TO COLLAPSE OF GTB The SEBI enquiry and the issue of the moratorium were the culmination of the crisis in the making since 2001. The genesis of the GTB collapse lay in now ousted promoter Ramesh Gelli’s involvement in the Ketan Parekh securities scam of 2001, when he gave huge unsecured loans to the stock broker and group companies of Zee Telefilms. GTB’s audited balance sheet for 31 March 2002, showed a net worth of INR 40.04 million and a profit of INR 400 million. However, RBI’s own inspection revealed that the net worth was negative. In view of the very large variance in the assessment of GTB’s financial position as reported by auditors and by RBI’s inspectors, an independent chartered ETHICAL DECISION-MAKING IN BUSINESS accountant was appointed to reconcile the position. GTB was placed under directions relating to certain types of advances, certain premature withdrawal of deposits, declaration of dividend and its capital market exposure. RBI also started monitoring GTB on a monthly basis. In view of the need to complete the statutory audit and to assess the necessary steps to be taken on the future set up of the bank, RBI permitted GTB to publish its annual accounts by 30 September 2003. On 31 March 2003, GTB announced deposits of INR 69,210 million and advances (loans) of INR 32,760 million. On its balance sheet, it showed gross non-performing assets of INR 9,150 million while total provisions (against bad loans) were INR 2,680 million. RBI issued a press release in this connection which said: ‘Even though the financial statements show an overall loss, the bank has made an operating profit for the year 2002–03. The RBI welcomes the decision taken by the GTB and its board to clean up the balance sheet.’3 The RBI having discovered that GTB’s net worth had fallen and its capital adequacy ratio had turned negative, advised the bank to initiate immediate steps to bring in fresh capital so that its problems could be remedied.The bank was advised to raise fresh capital by merging with another bank or from domestic sources. GTB’s proposal to RBI for infusion of capital and restructuring by global private equity major NewBridge Capital was rejected by the central bank. THE CAUSE OF THE CRISIS Ramesh Gelli, one of the promoters and the ex-chairman, refused to take the blame for the failure of GTB, but held his management style of total delegation of power to senior managers and his hands-off approach as responsible for the bank’s collapse. Though there is a general perception that the woes of private banks were due to priority sector lending, available data disprove this theory. Of GTB’s total NPAs of INR 15,000 million, priority sectors such as agriculture and small industries together accounted for 22.5 per cent (agriculture less than 1 per cent and small industries 21.5 per cent). The bulk of NPAs, namely, 77.5 per cent, was from the non-priority sector lending. GTB had an exposure of about 52 per cent of its advances to the stock market—which was a blatant flouting of RBI directives—so that a part of the problem must have come about from erosion in the value of investments. In the two years between 1999–2000 and 2000– 01, the bank’s capital market exposure went up to around 30 per cent of its total assets. When the market collapsed in February–March 2001, the value of securities came down drastically and the bank could not recover from this, even though its exposure was reduced by then. PROPOSAL TO MERGE GTB WITH OBC The RBI which has a mandate to protect depositors of commercial banks had to rush through with the merger proposal 97 in the last one month. Almost all nationalized banks including Canara Bank, Andhra Bank and J&K Bank were approached. Even Corporation Bank was also sounded out. The RBI finally zeroed in on Oriental Bank of Commerce (OBC) as the bank’s NPA level had come down drastically. Once the regulator selected the bank, it thrashed out all the merger modalities such as safeguarding the depositor’s money and retention of employees. At the announcement of the amalgamation of OBC, RBI officials said that any swap ratio would be unlikely. As a part of the scheme, the entire amount of the paid-up capital and reserves of GTB would be treated as provision for bad and doubtful debts and depreciation in other assets. Estimates showed that GTB had a negative net worth of around INR 9,000 million. The capital of the bank as on 31 March 2003 was at INR 1213.5 million while reserves and surplus were at INR 1461.6 million. The RBI’s decision followed hectic activity in the corridors of the Ministry of Finance to save the bank following negative reserves. The RBI and SEBI were to oversee the merger so that it was completed quickly. OBC was to take over GTB, with all its assets, loans and NPAs. The bank was to take over GTB’s INR 15,000 million bad loans in exchange for which it would get 104 branches of GTB and 8 lakh customers. The RBI sop of no swap ratio was the icing in the cake for OBC. If any surplus remained after accommodating all appropriations, only then would shareholders get the amount on a prorata basis. SYNERGY BETWEEN GTB AND OBC There could not have been a better proposal for a merger. North-based OBC got 8 lakh customers and 104 branches mostly in the southern states of Andhra Pradesh and Maharashtra. With GTB’s net worth being negative there was no share swap. But OBC could well be paying a big price. It was adding INR 15,000 million of GTB’s bad debts to its clean balance sheet. However, OBC’s CMD B. D. Narang was confident of recovering 40 per cent of GTB’s debts. The scheme of amalgamation drafted by the RBI clearly stated that all GTB employees would continue to retain their jobs and get the same salary package and work on the same terms and conditions as applicable prior to the closure of business hours on July 24. But ‘salary fitment problems’* could only be a part of the ‘people problems’ to be faced by OBC. OBC said it had made the offer to merge GTB with itself as it perceived synergy between the two banks. The OBC got customers from the GTB and its branches, many of which * ‘Salary fitment problem’ arises as salaries of staff of GTB, a private sector bank varied much with those of the OBC, a public sector bank. There were differences in salaries and perquisites of staff of both the banks, which when they became one merged entity would cause a lot of problems amongst the workers. This was a serious problem, among other things, that had to be sorted out in order to ensure harmonious working conditions after the merger of both the banks. 98 BUSINESS ETHICS—AN INDIAN PERSPECTIVE were based in South India wherein the nationalized OBC has a limited presence. The two banks also shared a common technology platform. B. D. Narang, Chairman and MD of OBC saw a great deal of synergy between the two banks. Since OBC was a north-based bank and GTB, a south-based one, the merged entity would complement each other across geographies. He felt that OBC would be able to clean up the books in a very short time.4 WHO IS TO BE BLAMED FOR THE GTB FIASCO? This was a classic case where the gullible investors were made to pay a heavy price for their trust in a crafty and manipulating banker and the inefficiency of the regulator. The 8,00,000 and odd investors placed their hard-earned money in GTB because of the reputation of the promoter Ramesh Gelli, considered to be a wizard in the banking circles. The bank did remarkably well in the early days; it provided excellent customer-friendly services and all their banking operations were modern and computerized; and above all, there were no plausible adverse reports about its legally impermissible investment from the regulators. Then, why blame and penalize them? The fiasco does throw up several uncomfortable questions pertaining to RBI’s regulatory policies with regard to the banking industry. One of the questions, uppermost on the minds of the unwary GTB depositors, was why did the RBI wait so long despite being aware of the murky goings-on in GTB? 1. The RBI could have moved against GTB in 2002 itself when its inspectors stumbled upon the bank’s crooked ways and could have superceded the GTB Board under the Banking Regulation and RBI Act. Having done so, it could have appointed its own executives to clear up the mess, before putting it up on the block or inducting a new management, like it did in case of the Centurion Bank. 2. Some analysts recall that the RBI indicted Gelli in 2001 for being hand-in-glove with the scamster Ketan Parekh in the stock market manipulations. Gelli was later removed as the chairman of GTB. That there were skeletons in the GTB cupboard was known since the Gelli–Ketan Parekh connection was unearthed in the aftermath of the 2001 stock scam. Even after the replacement of Gelli as the chairman of GTB, why did the RBI fail to address the fundamental problem with GTB, its murky management practices and shady financials? Matters did not mend in GTB even after the RBI brought in R. S. Hugar as Chairman and provided substantial liquidity support. Should not serious action have been initiated right then so that the gullible investors who lost everything now would have been adequately protected? 3. The central bank was also aware of the fact that GTB was misleading investors and depositors by overstating its net worth, profits and understating its NPAs. To be doubly sure, the RBI got an external auditor to scan the books, and the finding was confirmed in February 2003. With the result, GTB came under the RBI scanner for certain advances, capital market exposure, premature withdrawal of deposits, and was tracked on a monthly basis. GTB was advised to change its auditors and given time till 30 September 2003 to publish results for financial year 2003. On 30 September 2003, the RBI said it welcomed GTB’s move to clean up the balance sheet after the GTB turned in an operating profit. Did not all these show that the RBI itself was gullible enough to be taken for a ride by GTB executives? 4. After all, in just 10 months, the RBI had gone back on its view about the GTB, and placed it under a threemonth moratorium, creating a needless liquidity crisis for the poor GTB depositors. The RBI could have taken action against GTB two years earlier, but because of its procrastination everyone who had anything to do with the bank had to suffer. If this is the case, is there not a need for regulating the regulator? GLOBAL TRUST BANK IS NOW ORIENTAL BANK OF COMMERCE The Government of India sanctioned the scheme of amalgamation of the Global Trust Bank Ltd. with the Oriental Bank of Commerce. The amalgamation came into force on 14 August 2004. All the branches of Global Trust Bank Ltd. now function as branches of Oriental Bank of Commerce with effect from this date. CUSTOMERS/DEPOSITORS OF GTB Customers, including depositors of the Global Trust Bank Ltd., operate their accounts as customers of Oriental Bank of Commerce with effect from 14 August 2004. Oriental Bank of Commerce has made the necessary arrangements to ensure that service, as usual, is provided to the customers of the Global Trust Bank Ltd. SHAREHOLDERS OF GTB In accordance with the scheme of amalgamation, the shareholders might receive pro-rata payment if any surplus remained after meeting all the liabilities out of the realization of assets of GTB. As part of the merger proposal, OBC would get income tax exemptions in transferring the assets of GTB in its book during the merger process, while all the bad debts of the merged entity would be adjusted against the cash balances and reserves of GTB. OBC was confident of turning around the GTB within one year. According to OBC chairman B. D. Narang, GTB ETHICAL DECISION-MAKING IN BUSINESS ‘suited it’ because of synergies. While the weakness of GTB had been bad assets, the strength of OBC was recovery. Since GTB was a south-based bank, it gave OBC the muchneeded edge in the southern part of the country. Moreover, both the banks had a common core banking solution ‘Finacle’, which would help in the consolidation. POST-MERGER SCENARIO Soon after the merger, skeletons started tumbling out of GTB’s cupboard and OBC lodged a complaint with the CBI about advances made by the latter which had serious financial improprieties. According to OBC, internal investigations revealed that GTB had taken high credit exposures in certain accounts. In some cases the exposures exceeded the norms prescribed by the RBI. OBC found a high degree of imprudence on the part of GTB officials in exercise of sanctioning powers. GTB had abetted certain group of borrowers to siphon off funds through the banking channel. The conduct of most of these accounts revealed that deliberate attempts had been made to camouflage the position of NPAs by making fresh sanctions in sister or allied concerns including some front companies. On the basis of internal investigations, OBC filed criminal complaints with the CBI in the following cases: 1.1 A case was filed against Unitel Software Limited for having caused wrongful loss to the tune of INR 67.68 million to the erstwhile GTB in the matter of sanction, disbursal and utilization of the credit facilities. 2.1 The CBI registered a case against Ashok Advani of Business India Publications, Mumbai, and concerned officials of the erstwhile GTB for cheating the bank to the tune of INR 150 million by obtaining credit facilities through misrepresentation. Whereas the publication had been the client of GTB since 1994 and had defaulted in repayment of credit facilities sanctioned earlier, it was falsely mentioned in the process note that the account of Business India was a new one. 3.1 The CBI registered a case against Petro Energy Products Co. Ltd., since the company cheated GTB to the tune of INR 784.1 million at Bandra, Mumbai branch and INR 231.5 million at the Chennai branch. 4.1 The CBI registered a case against Shonk Technologies International Ltd, for a wrongful loss to the tune of INR 384.9 million caused to the erstwhile GTB through misrepresentations and diversion of funds for purposes other than for which the loan was sanctioned. 5.1 The CBI has registered a complaint against Pearl Distilleries Ltd situated at Bangalore, for having caused wrongful loss of INR 102.8 million to GTB in the sanction, disbursal and utilization of credit facilities. A Ministry of Finance statement on the complaints filed by OBC said that some other cases were also being looked into and further complaints would be lodged with the CBI in due course. OBC’s move comes days after the Finance Minister, 99 P. Chidambaram, assured the Parliament that criminal cases would be filed in matters relating to GTB shortly. Stating that ‘serious financial improprieties’ were revealed in the five accounts during the post-merger due-diligence conducted by OBC, the Ministry of Finance said, ‘high degree of imprudence in exercise of sanctioning powers have been observed where the bank appears to have abetted certain group of borrowers to siphon off funds through banking channel’.5 CONCLUSION When we analyse the factors that led to the failure of the 10year old Global Trust Bank, which entered the banking industry with a lot of fanfare and hype, it appears to be the same old story in which several players have enacted their roles to suit their convenience, but ultimately it is the small, unwary and gullible investor who had to pay a heavy price. The unethical practices of the much-trusted promoter Gelli in funding Ketan Parekh,6 in manipulating the bank’s financials with the help of his auditors, while portraying a façade of technology-savvy banking wizard, and the lethargy of the banking regulator, which notwithstanding its finding on the accounting manipulations chose not to act in time, all seem to have together brought down the bank and its investors. Or were there some other factors too that were responsible for the collapse of one of the much-hyped ‘new generation bank’? KEY WORDS Ambitious planning ∑ Anywhere banking ∑ Automatic teller machine ∑ Deregulation ∑ Fiasco ∑ Foolproof system, ∑ Imprudence ∑ Insider trading ∑ New generation bank ∑ Order of moratorium ∑ Salary fitment problem ∑ Swap ratio ∑ Unleashed DISCUSSION QUESTIONS 1. The collapse of GTB should be attributed not only to the lack of ethics and avariciousness of its promoters, but also to the lack of competence and the alacrity of the regulators. Would you agree? Explain your stand. 2. From the hindsight of GTB’s ultimate failure, trace its emergence as the most technology-savvy brand among banks in India. 3. Explain the causes that contributed to the ultimate collapse of GTB. 4. Comment: ‘The failure of GTB is also the failure of the banking regulatory system in the country.’ NOTES 1. Infosys, “Global Trust Bank Launches Electronic Commerce Initiative With BankAway From Infosys,” 31 100 2. 3. 4. 5. 6. BUSINESS ETHICS—AN INDIAN PERSPECTIVE July 1999, available at www.infosys.com/media/ GT BankAway.pdf A. C. Fernando, Corporate Governance: Principles, Policies and Practices (New Delhi: Pearson Education, 2006). Ibid. Banknet India, “Global Trust Bank is Now Oriental Bank of Commerce,” available at www.banknetindia. com/ banking/gtb5.htm Banking Bureau, “GTB Skeletons Tumble Out,” Domain-b.com, 4 January 2005, Available at www. doma in-b.com/finance/banks/global_ trust_bank/20050104 _ tumble_out. html ICFAI, “The Ketan Parekh Scam,” 2002, available at www.icmr.icfai.org/casestudies/catalogue/Finance/ FINC006.htm FURTHER READINGS Banknetindia.com, “Global Trust Bank is Now Oriental Bank of Commerce,” 2004, available at www.banknet india.com/ banking/ gtb5.htm Celestine, A. and Aggarwal, A., “How the Trust Was Lost,” Business World, 9 August 2004, available at http://businessworldindia.com/aug0904news01.asp Celestine, A. and Dhoot, V., “Flawed Birth,” Business World, 30 August 2004, available at http:// businessworldindia.com/aug3004/indepth01.asp “Global Trust Bank to Be Merged With OBC,” Tribune News Service, 27 July 2004, available at www.tribuneindia.com/2004/20040727/main1.htm “Global Trust Bank: Broke,” 9 August 2004, available at www.brandchannel.com/features_profile.asp?pr_id=192 Hindu Bureau, “Talwar’s Sabre to Take Over Centurion,” 24 April 2003, available at www.blonnet.com/2003/ 04/24/stories/2003042402650100.htm Infosys’ Press Release, “Global Trust Bank Launches Electronic Commerce Initiative With BankAway From Infosys,” available at www.infosys.com/media/ GTBank Awaypdf Mallick, J., “GTB Scrip Manipulation—SEBI Probe to Focus on Old Suspects,” Kolkata, 10 August 2004, available at www.blonnet.com/2004/08/11/stories/ 2004081 101691500.htm Reserve Bank of India, “Scheme for Amalgamation of Global Trust Bank Ltd. With Oriental Bank of Commerce,” 26 July 2004, available at www.rbi.org.in/ scripts/Notification User.aspx?Mode=0 &Id=1800 Five CHAPTER Globalization and Business Ethics INTRODUCTION Today, commerce, be it industry, trade or mutual exchange, has truly become global. No country, however well endowed in terms of human and natural resources, can afford to be isolated and claim to be self-sufficient. Human wants have expanded and increased so much that no economy fulfils all the needs and wants of its constituents on its own. Added to this is the fact that there is a lot of difference between countries in terms of natural resources, the degree of development, incomes and their distribution, increasing pent-up demands and so on. Communication explosion too has added its own dimension in as much as it has exposed the people of poor countries see for themselves the affluence of people in developed countries and the amenities, comforts and luxuries they enjoy. This kindles in them the desire keep up with the Joneses through what is called the ‘demonstration effect’. Corporations tend to exploit this trend and spread out their wings to encompass the global village to their advantage. In this chapter, we study the role of business ethics in such a globalized scenario. GROWTH OF GLOBAL CORPORATIONS International business has become an important economic force during the second half of the 20th century. Today few countries, if any, can claim to be economically self-sufficient. India, even with her vast human and natural resources, cannot insulate herself from the world economy. Though there was tremendous political opposition from within, India was constrained to open up her economy and join the World Trade Organization (WTO). In every country, developing or developed, international business touches people’s lives. Today, most business enterprises, big or small, are drawn to doing business across national borders. They may purchase raw materials from foreign suppliers, assemble products from components made in several countries, or sell finished goods or services to customers in other nations. With time and with more countries reducing trade barriers, the number of firms affected by international competition keeps on increasing every day. In our day-to-day life we consume goods and services that have an international character about them— clothes, books, CDs, computers and soft drinks. Many MNCs have subsidiaries, affiliates and joint venture partners in most of the developing countries so much so that, in some cases, the number of foreign employees of these corporations may exceed that of the home country. 102 BUSINESS ETHICS—AN INDIAN PERSPECTIVE FACTORS FACILITATING GLOBALIZATION In recent times, many factors play a facilitating role to promote and foster international trade. Many developing countries adopted protectionist policies and raised huge tariff barriers for decades to protect their vulnerable home industries from foreign goods. Global business opportunities were also limited by poor communication facilities, slow development of infrastructure, inordinate delays in travel and shipping and a host of non-tariff trade barriers raised by many countries. Today, people can reach any place on the globe in one day and international communication is instantaneous. ‘Business operations can be managed effectively simultaneously’. Increasingly, global corporations set up production units in developing countries having better factor endowments and plentiful human resources with a view to exploiting them for their benefit and profit.1 At the beginning of the 21st century, nations are more closely linked to one another than ever before through trade in goods and services, flows of capital, movement of labour—though to a limited extent—and through investments in each other’s economies. There are several factors that have played a key role in promoting international trade. These are as follows: 1. Falling trade barriers: Liberalization of trade has been recently accelerated as a result of free trade agreements, emergence of trade blocs and the facilitating roles played by international organizations such as the WTO, International Monetary Fund (IMF) and the World Bank. 2. Political reforms have opened up new frontiers: As pointed out by James Post et al.,2 the former communist nations of Eastern Europe are now open to doing business around the world. Millions of people in these countries are now able to take advantage of goods and services that global commerce provides in an open and free market. There have been other factors such as the reunification of East and West Germany, and the enormous growth in global tourism, transport and communications that have added to this stupendous growth in world trade. 3. More developing nations joining the bandwagon of global business: Several countries such as Taiwan, Thailand, Malaysia, Singapore and Indonesia have been growing rapidly in recent years in addition to the industrial prowess of Japan and South Korea in the Asia-Pacific region. China, India, Brazil and Russia have recently emerged as successful global players and have invited business from across the world to invest in them. 4. Emergence of new technologies and businesses spanning continents: New technologies and business based on them such as computer hardware and software, pharmaceuticals, and communications that have worldwide investments and markets, have brought about a tremendous transformation in fostering world trade. Likewise, business process outsourcing (BPOs) and several information technology enabled services (ITES) have widened the horizons of international business opportunities. DOING BUSINESS IN A DIVERSE WORLD Earlier, corporations doing business in many countries considered the country of their origin as the major source of their capital, revenues and personnel. Under this ethnocentric perspective, the home country’s laws were viewed as dominant, but nowadays companies have understood that they should consider the entire world as their home and have to adapt their business practices to different environments and cultures while sticking to global identity and policies. Under this geocentric perspective, firms develop managers at all levels from a worldwide pool of talent and seek to use the best people for all jobs regardless of where they come from. In fact, in recent times transnational corporations which used to deploy persons from their home countries in senior management positions in their subsidiaries in India and elsewhere, have started recruiting their future managers from top-notch Indian educational institutions such as the IIMs and IITs to man their units worldwide. Banking companies like Citibank and Standard Chartered Bank and firms like Bata and Hindustan Lever have a number of Indian managerial personnel not only manning their subsidiaries, but even the parent organizations. In this context, James E. Post et al.3 have this to say: ‘Companies such as IBM, General Electric, and Exxon have long histories of bringing their managers from around the world to meetings and workshops’ with a view to widening and deepening their understanding of the environment in which their company functions. For instance, the world’s largest chemicals producer, Dow Chemicals, the American chemical MNC with global presence, ensures that technical experts from its facilities around the world are connected by information technology and meet many times a year to discuss improvements in science and technology for their mutual benefit. This practice is also followed by other MNCs including the Finland-based communications equipment GLOBALIZATION AND BUSINESS ETHICS producer, Nokia. Internationally diverse corporate board membership is seen in some European firms such as Nestle (Switzerland), ABB (Asea, Brown Boveri, a Swedish–Swiss Company), and Unilever (Great Britain– Netherlands).4 However, in the making of the geocentric outlook, it is not the size of the firm that matters, but the geographic location and awareness of the social and cultural characteristics of the firm’s stakeholders that reinforce the importance of an open approach to cultural differences. ‘To be a global company in the modern economy is to build a geocentric perspective into the very fiber of the business organisation.’5 For instance, when Nestle and Unilever carry on business in the Indian subcontinent, they face different political systems: India has a vibrant democracy, Pakistan a dictatorship and Bangladesh a fledgling and brittle democracy. In terms of economic systems too, there are substantial variations which are reflected in the kinds of economic policies they pursue. Though all these countries are supposed to have a common culture, their divergent religious and linguistic affinities bring in considerable variations in the manner they live and consume things. With different socioeconomic and political environment, legal framework, institutional set-up, fiscal, monetary and commercial policies, factor endowments, production techniques, nature of products and consumption habits, these companies will not only have to acclimatize themselves to the existing realities of each of these countries, but also be prepared to fine-tune their policies and business strategies to the fast moving changes that occur in these dynamic societies. As commerce becomes more global, customers, suppliers, competitors from other nations and cultures and managers have to understand and appreciate how diverse socioeconomic systems affect the markets and the socio-political environment of business and act accordingly, if they have to be successful in their global business. ROLE OF MULTINATIONAL CORPORATIONS Businesses in the present global society are carried on by multinational or transnational corporations, most of which are based in developed countries. ‘Multinational corporations’, or MNCs, are business entities that operate in more than one country. The name ‘multinational corporation’ is distinct from ‘international corporation’. The latter name was used in the 1960s to identify a company with a strong national identification. The home market was the company’s primary focus. Overseas operations were usually carried out by wholly owned subsidiaries controlled by home country nationals. By the 1980s, international corporations had evolved into more globally oriented companies. While still maintaining a domestic identity and a central office in the country where it was incorporated, a multinational corporation now aims to maximize its profits on a worldwide basis. The corporation is so large and extended that it may be outside the control of a single government. Besides subsidiaries, an MNC may have joint ventures with individual companies, either in its home country or foreign countries. Box 5.1 illustrates how MNCs whose sales/revenues are adversely affected by recession/depression depend on their own or subsidiary companies’ better performance in developing countries. BOX 5.1 MNCs TURN TO INDIA TO COMBAT RECESSION Multinational companies are increasingly focusing on emerging markets, including India, and launching new products and services tailor-made for these regions as developed markets are reeling under recession. India along with China had been the cynosure of MNCs even before the onset of the economic crisis. Once the recession was found to have a relatively lesser impact in these countries, it made sense to the MNCs to focus more on these booming markets rather than to be fully engaged with developed markets. Increasing per capita income, rising domestic demand for goods and services, conducive spending pattern of consumers and controlled inflation, and such other favourable economic parameters only go on to prove that a sharper focus on these economies can ensure better growth for MNCs. LG Electronics India, for instance, believes that India is relatively less affected by recession than many other countries, and expects 15 per cent growth in 2009. IT security company Trend Micro has recently set up three technology support labs in India as part of its Affinity Partner programme. Trend Micro intends to grow in India and to interact with its customers and partners in order to offer ‘the best-of-breed secure content management solutions’. In their perception, there are not too many economies that grow at 7 per cent or more in the world, as India. 103 104 BUSINESS ETHICS—AN INDIAN PERSPECTIVE The optimism over India is manifested in foreign direct investment (FDI) inflows. While China registered a total FDI inflow of USD 92.4 billion in 2008, up 23.6 per cent from 2007, India’s FDI inflows rose from USD 19.1 billion in 2007 to USD 32.4 billion in 2008. The positive results are already being seen. In July 2008, IT major Sun took a strategic business decision to make its presence strengthened in fast-growing markets such as India. To closely align sales with key growth areas, it created a business division to focus on emerging markets sales region, which inter alia included India. Producers of consumer durables, automobiles, telecom and infrastructure companies are also focusing more on emerging market in these tough times. Sun’s emerging markets sales region, for instance, announced in the financial year 2008, recorded an increase in revenues of 13.8 per cent over 2007 at USD 1.969 billion. Total revenue for the second quarter of 2009 in the emerging markets region was USD 558 million, up 20.5 per cent from USD 463 million in the first quarter of 2009. Sun also is positive that governments and businesses in emerging markets would be increasingly using the latest open source technology with a view to innovate at the lowest cost. Likewise, Sun rolled out a telecoverage model in December 2008 in the emerging markets. The model is aimed to help Sun reach out to high growth small- and mid-size businesses (SMBs), start-ups and Web 2.0 companies in these economies, thus optimizing its drive to success and profitability. The launching of a slew of new products and initiatives for emerging markets only goes on to strengthen this process. Microsoft India, for instance, showcased recently for the Indian market a host of custom-made offerings such as Language Interface Packs (LIPs) in 12 Indian languages, and Windows Live, comprising e-mail, instant messenger, online storage, photo gallery and social networking, in seven Indian languages. The Dutch global major and the consumer durables company Philips has created a model to scale up their presence in the emerging markets with a view of transforming itself into a focused, less cyclical company in the coming years. In 2007, approximately 40 per cent of the company’s revenues came from emerging markets. Going forward, emerging markets, especially India, will play a significant role for Philips. In 2008, Philips acquired two companies in India in the health care domain—Meditronics and Alpha XRay Technologies—with a view of stepping up its focus on emerging markets. Philips decided to focus on health care as it is a recession-proof industry, and to generate maximum revenues from this sector over time. Source: Swati Prasad, “MNCs Turn to India, China to Combat Recession,” ZDNet Asia, 26 February 2009. EXCESSIVE ECONOMIC CLOUT Global business does not function in a vacuum. It operates within the context of international, and where necessary, regional rules and regulations set up by appropriate government agents. Global business is dominated by MNCs that have their businesses spread across continents. According to a study conducted by Sarah Anderson and John Cavanagh for Corporate Watch 2000,6 the world’s top 2000 corporations have combined sales that are far greater than a quarter of the world’s economic activity and are bigger than the combined economies of all countries minus the biggest nine (economies), that is, they surpass the combined economies of 182 countries. The surprising thing about the inequities these corporations have brought about in the world economy is the fact that of the 100 largest economies in the world, 51 are global corporations; only 49 are countries. A study by the Institute for Policy Studies (IPS) indicates that 200 giant corporations, most of which are larger than many national economies, now control well over a quarter of the world’s economic activity. For instance, Philip Morris is larger than New Zealand, and operates in 170 countries. Instead of creating an integrated global village, these firms are weaving webs of production, consumption and finance that bring economic benefits to, at most, a third of the world’s people. Two-thirds of the world (the bottom 20 per cent of the rich countries and the bottom 80 per cent of the poor countries) are left out, are marginalized, or are hurt by these webs of activities. CURRENT ISSUES—MULTINATIONAL CORPORATIONS GLOBALIZATION AND BUSINESS ETHICS Multinational corporations face many of the same issues as domestic companies7 such as maximizing profits, meeting customer demands and adapting to technological change. In addition, MNCs must be up-to-date with trends and events in the various countries where they operate. Political reforms in South Africa, economic liberalization in India and social trends in Europe are examples of matters that are important to corporations operating in these countries. Accountability is another issue that MNCs face. Because they are so large, MNCs can, and sometimes have, exerted questionable political and economic power in some countries. As a result, critics view MNCs suspiciously and sometimes seek to have host countries impose restrictions on them. They have also aroused intense distrust among socialist-oriented parties as exploiters of the wealth of the developing countries. Since almost all the MNCs are incorporated either in the United States or in European countries, which were colonial powers that impoverished the colonies for centuries, the MNCs are considered as neo-colonial powers that are out to exploit the erstwhile colonies economically. INTERNATIONAL BUSINESS ISSUES Efforts to promote free trade and simultaneously protect domestic industry from foreign competition, is one of the most pressing issues in international business today. Intellectual property rights are another important issue. Countries that fail to protect the rights of international companies in terms of their patents, trademarks and industrial secrets may lose out from lack of foreign investment and access to technology. The issue of exploita- BOX 5.2 NEED FOR DIALOGUE ON THE ROLE OF THE CORPORATION (CONTINUED) With the onset of globalization and the business corporation spreading its wings outside the home country, there is an urgent need for a sustained dialogue, initially among senior business leaders from around the world, and then the leaders of governments and other institutions, to define the critical role of the corporation in a global society. Whether in the physical, social or economic environment, business leaders can no longer rely solely on past traditions, established strategies or earlier expectations of society. For such a dialogue to be fruitful, it requires a common framework and guidelines. The following beliefs can be considered as a framework for that discussion: ∑ The primary responsibility of the corporation is to conduct its operations proficiently, i.e., to be technologically innovative, competitive and financially sound. ∑ Corporations must be increasingly responsive to issues affecting the physical, social and economic environments not only because of their impact on business performance but also out of a proactive sense of responsibility to all constituencies served. ∑ Corporations need to consider the balance between the short-term interests of shareholders and the longerterm interests of the enterprise and its stakeholders. ∑ Meeting traditional objectives and performance criteria is not sufficient. Voluntary standards which exceed the requirements of prevailing law and regulations are necessary to the development of sustainable practices. Society’s ‘license or franchise to operate’ has to be earned. ∑ Corporations should lead by example through business practices that are ethical, transparent, and that reflect a commitment to human dignity, political, economic freedoms and preservation of the planet. ∑ Corporations cannot act alone but should seek to address key societal issues through cooperative efforts with governments, other institutions and local communities. Source: Ingrid Shafer, The Caux Round Table: An Introduction: Caux Round Table, 1999, available at http://astro.temple.edu/~dialogue/Antho/caux_in.htm. Reproduced with permission from the author. 105 106 BUSINESS ETHICS—AN INDIAN PERSPECTIVE tion of natural resources of developing countries by MNCs from the West has also assumed importance in recent years. International business is business conducted across national boundaries. It is concerned therefore with political, economic, social and cultural conditions in a variety of countries. As technology improves, international communications and transportation links, international business and international corporate activities will expand. This growing trend of business issues opens the need for dialogue on the role of corporaions in a global society (Box 5.2). BENEFITS OF MNCs TO THE HOST NATION ∑ Better access to worldwide markets: We have seen earlier that MNCs are huge in terms of their business and reach, and they cater to worldwide markets. Manufacturers like Nike and traders like Wal Mart can provide access to very large markets. This leads to production of quality goods at low prices because of economies of large-scale production and compulsions of fierce world competition. ∑ Best access to capital investment: MNCs that are headquartered in developed countries have access to a large quantum of capital. Their stocks are listed in international stock exchanges. Apart from their own capital, they can also bring in considerable amounts from pension funds. ∑ Transfer of advanced technology: Many MNCs because of their large presence worldwide bring in several benefits as in R&D. With their heavy investment in technology and R&D, they transfer superior technology to production units located in poor countries. Poor countries and developing nations cannot afford heavy investments in R&D. India, for example, spends hardly 0.5 per cent in this vital area of technology development. ∑ Encouragement of local supplier development: Multinationals because of their large needs, encourage local suppliers. For instance, MNCs like Ford and Hyundai outsource their spare parts and components to small Indian companies, which flourish and provide employment to thousands of people. ∑ New jobs for labour: With a worldwide market to serve, MNCs prefer to establish their manufacturing units in low income countries like China and India, and would use the cheap labour in these countries with a view to reducing cost of production and increasing their profits. This increases employment opportunities in these countries. ∑ Advanced training for labour: MNCs offer immense opportunities for advanced training of their labour force, to suit their requirements. ∑ Better access to managerial talent: Big corporations with worldwide business interests scout for managerial talents from wherever such talents are available. For instance, many MNCs recruit their future managers from IIMs and IITs and train them not only for their operations in India but also to work in their offices abroad. ∑ New products for consumers: Consumers are the greatest beneficiaries when MNCs are allowed to operate in their countries. They are able to enjoy all the amenities and appurtenances available to their counterparts in advanced countries. They get the latest technologically superior products at affordable prices. Besides, they get to choose from a wide array of products. ∑ Low-cost products and/or better products: Due to increase in efficiency, MNCs can produce goods on a large scale, get materials from cheapest sources, and enjoy economies of scale. Thus, they can bring down prices. ∑ Exports contribution to the host nation: Exports contribute favourably to the host nation’s balance of payments position, additional taxes and payments for the public exchequer. This is of great help to poor nations. For instance, MNCs like Hyundai8 and Nokia export thousands of their cars and mobile phones respectively every month, and this brings in considerable amount of foreign exchange to the country offsetting unfavourable balance of payments that arise due to heavy bills for importing petrol, etc. When a country has several big MNCs, the coffers of the government are enriched by direct and indirect taxes paid by them. Two of the most significant benefits of MNCs: ¨ ¨ Access to world-wide market (host country will produce for a larger market). Broad access to capital (which may be in short supply in the host nation). DISADVANTAGES OF MNCs TO THE HOST COUNTRY ∑ Loss of national sovereignty, as the host nation cannot control what an MNC does in other nations, which may be inimical to its interest. GLOBALIZATION AND BUSINESS ETHICS ∑ Political interests of MNCs may mirror the political interest of their respective home nations, and this may be detrimental to the host nation. For instance, an American MNC may serve the interest of America, while operating in India. ∑ The host nation may lose control over its own economy. ∑ Negative impact on the host’s balance of payments because of heavy imports of spares and components. ∑ Exploitation of the hosts’ irreplenishable natural resources leading to the dwindling of these. ∑ Exploitation of labour of the host when the country needs it. ∑ Indulgence in harmful environmental acts. The host nation’s industries may be destroyed due to unfair competition by MNCs. They may not be able to compete in an uneven playing field. MNCs have their industries established much earlier, have developed expertise and are in a position to sell qualitatively superior products at cheaper prices. It has been the practice of MNCs to acquire popular brands of products of host countries and kill them to ensure that their own products survive in the market place. For example, Coca Cola acquired several popular Indian soft drinks and gradually destroyed them.9 Much can be said on the positive and negative sides of MNCs operating in several countries. The ethics in MNC’s actions lies in making their activities beneficial both to them and the natives. INTERNATIONAL CODES OF BUSINESS CONDUCT In response to the growing world trade and the increasing influence of MNCs several attempts have been made during 1970s to establish and institutionalize international codes for ethical business practices. One such initiative was that of the International Labour Organization (ILO), which developed covenants with regard to better labour practices and encouraged member nations to practice these and their earlier covenants and incorporate them into their own national statues and codes. In 1974, the United Nations established the UN Commission on Transnational Corporations (UNCTC), at the instance of 77 developing countries that sought the creation of a new international economic order. In 1976, The UNCTC called for the creation of a code of conduct for transnational enterprises that would have a legal sanction. However, neither of these attempts had been successful as they were resisted by both developed countries and business associations. Although efforts of such broad spectrum disciplining of MNCs did not bear fruit until 1994, efforts to put in place legally binding codes focused on highly specific targets like the ‘Montreal Protocol’ on chemical processes that endangered the ozone strata of the atmosphere, the ‘Kyoto Treaty’ on global warming. In 1997, the Organization for Economic Cooperation and Development (OECD) statute prohibiting the bribing of foreign officials was made.10 Although not legally binding, the OECD guidelines had been adopted by the 30 members and 8 non-members. The guidelines provide voluntary standards and principles to encourage firms to follow responsible business practices. The guidelines are wide-ranging and include employment, labour relations, environment, information, disclosure, combating bribery and protection of consumer interests. By 1985, a series of initiatives was made by international civil society organizations to make the business community, more socially accountable both at the national and global level. These initiatives included the Caux Round Table (CRT), the Social Accountability International (SAI), the Global Reporting Initiative (GRI), Account Ability, and the Global Compact. In view of its widespread acceptance by the global business community and its contribution to the evolution of business ethics on a wider horizon, the CRT is discussed in detail later in this chapter. Social Accountability International offers a practical-oriented initiative by seeking to promote ethical business practices worldwide by developing an objective certification instrument called SA 8000. Companies can obtain this certification by having their practices audited by registered, objective third parties. According to Frederick Bird,11 thousands of companies from more than 30 countries, representing 36 different industries and more than 1,70,000 workers have benefited by receiving the SA 8000 certification, and the numbers are increasing. SAI, like its counterpart ISO, sponsors extensive training programmes to promote both awareness of these standards and compliance with them. SAI has been consistently striving to promote business responsibility, particularly with regard to labour practices through these common, objectively administered and thus credible certification process. 107 108 BUSINESS ETHICS—AN INDIAN PERSPECTIVE The GRI, founded in 1977 jointly by the Coalition for Environmentally Responsible Economies (CERES) and the United Nations Environment Programme (UNEP), attempted to develop standards on several issues which impacted global trade. Unlike SAI, GRI sought to address broad rather than narrow or specific social and environmental issues. It laid stress on auditing practices focussed on public disclosure of relevant information. The GRI tried to encourage corporations to report on their activities in response to a format of basic standardized questions covering parameters on the economic impacts on stakeholders, environment, society at large, treatment of workers and product responsibility. The GRI has also prepared a set of guidelines to help members prepare reports that are relevant, complete, accurate, transparent and timely in their form and content. As a result of committed involvement of business, trade unions, academia, civil society and the international association of professional accountants, and in response to the changing dynamics of global business, GRI’s reporting guidelines have been modified several times, the latest modification being in 2006. Frederick Bird,12 reports that more than 300 firms had followed the GRI in their sustainability reports in 2004, while around 600 companies from as many as 34 nations were using GRI reporting guidelines in 2005. Like GRI, The Institute for Social and Ethical Accountability, popularly known as Account Ability was established in 1995 with its headquarters in London. It has developed the AA 1000, an independent index to grade business practices and to evaluate firms on the basis of their learning process and commitment to social and ethical causes. AA 1000 is a self assessment process to help socially responsible organizations gain an appropriate perspective of their activities. It also helps corporations and their divergent stakeholders to understand and improve ways of meeting their several singular, as well as overlapping interests. Another well-received and popular initiative in this direction is The Global Compact. It was initiated by the United Nations in 2000 in response to a suggestion by Kofi Annan, the then Secretary General. Of late, GRI has been working closely with the UN Global Compact so that the organization can widen the number of corporations using its guidelines to report on their progress in implementing the 10 principles of the Global Compact. The Global Compact is dealt with in greater detail later in this chapter. THE LIMITS OF VOLUNTARY APPROACH Kavaljit Singh13 lists several inherent weaknesses and operational difficulties in implementing the codes, even if these are framed by organizations such as United Nations, OECD and ILO: (i) These are purely voluntary, legally non-binding codes, the non-compliance of which will not attract any censure or penalty. (ii) In spite of these codes being there for a long time, very few firms have adopted them and besides, they cover limited areas and sectors. A large number of them remain outside these. (iii) A firm, even while becoming a follower of the code, may choose to implement only one type say, the one on environment, while not complying with other important ones such as labour protection, health and safety. (iv) Most of these codes are limited in scope and usually set standards that are lower then prevalent national standards. ‘For instance, labour codes recognize the right to freedom of association, but do not provide the right to strike. In many countries, such as India, the right to strike is a legally recognised instrument’.14 (v) The multiplicity of these voluntary codes often work at cross purposes and ‘in an era of deregulated business, raises serious doubts about their efficacy’. These are also often misused by firms to deflect public criticism of corporate misdemeanor. CAUX ROUND TABLE: PRINCIPLES FOR BUSINESS In the context of promoting world trade in a principled manner, the Caux Round Table (CRT) has done yeoman service. The CRT, an international network of principled business leaders working to promote a moral capitalism was founded in 1986 by Frederick Phillips, former President of Phillips Electronics and Oliver Giscard d’Estaing, former Vice-Chairman of INSEAD, as means of reducing escalating trade tensions. In due course of time, the CRT began focusing attention on the importance of global corporate social responsibility in reducing social and economic threats to world peace and stability. The CRT believes that business has a crucial role to play in helping to identify and promote solutions to issues that impede the development of a society that is more prosperous, sustainable and equitable. The CRT advocates implementation of the CRT Principles for Business through which principled capitalism can flourish and be sustainable, socially responsible prosperity can become the foundation for a fair, free and transparent global society. The goal of CRT is to diffuse its suggested principles, standards, benchmarks, management concepts and practices, and understanding of a moral capitalism as widely as possible. GLOBALIZATION AND BUSINESS ETHICS At the company level, the CRT advocates implementation of the CRT Principles for Business (Box 5.3) as the cornerstone of principled business leadership. The CRT principles apply fundamental ethical norms to business decision making. A specially designed process for incorporating the CRT Principles into the culture of a corporation, the self-assessment and improvement process, is available for companies to use. Ethical training for corporate boards of directors and new ethics curriculum for business schools are being developed. To promote better outcomes for globalization, the CRT is working to raise the level of awareness of senior business leaders, and to gather elitist opinion from around the world about new opportunities to attack global poverty. These include legal and regulatory changes in developing countries that will improve the environment for productive investment of foreign and domestic equity capital. The CRT is working in alliance with global business leaders, international institutions and policy makers to improve investment environments in selected developing countries by suggesting certain principles for governments and advocating the adoption of the 12 core ‘best practice’ standards for transparent management of national financial institutions. The formation of the CRT was a significant step taken by senior business leaders from Europe, Japan and North America to address global issues arising from the performance and conduct of international business. Deeply concerned with the issue of promoting solutions to the tensions arising from trade imbalances, the CRT has monitored the continuing changes in the economic and political landscape, and its influence has grown through the formulation and wide circulation of its Principles for Business. The CRT Principles for Business are recognized by many as the most comprehensive statement of responsible business practice ever formulated by business leaders for business leaders. The CRT Principles for Business were formally launched in 1994, and presented at the United Nations World Summit on Social Development in 1995. These principles BOX 5.3 CAUX PRINCIPLES FOR INTERNATIONAL ETHICAL BUSINESS In the context of ever-growing international business with its attendant problems affecting physical, social and economic environments, there is a need to create certain ethical benchmarks to reduce potential conflicts amongst various stakeholders and promote sustainable and equitable solutions to the problems. The CRT Principles seek to serve a global society by offering guidelines for ethical principles for worldwide business. Towards Worldwide Business 1. The responsibilities of business are beyond shareholders and towards stakeholders; 2. Economic and social impact of business to world community; 3. Beyond the law and towards a spirit of trust; 4. Respect for rules; 5. Support for multinational trade (GATT/WTO); 6. Respect for environment; and 7. Avoidance of illicit operations, for example, bribery, money laundering, support for terrorists, gun running, drug trafficking. Stakeholders 8. Provide highest quality of products, services, etc. at reasonable prices; 9. Remedy customer dissatisfaction; 10. Health and safety of customer and quality of his or her life not impaired by ‘the’ work; 11. Ensure human dignity in goods or service offered; and 12. Respect the integrity and culture of customers. Employees 13. Work conditions to be fair and improved consistently; 14. Health and dignity of worker to be borne in mind; 15. Open in dealings, share all but classified information; 16. Listen to and, where possible, act on employee suggestions, ideas, requests and complaints; 17. In the event of conflicts, engage in good faith negotiation where possible, act on employee suggestions, ideas, requests and complaints and not legal wrangle; and 18. No discrimination on any ground; 109 110 BUSINESS ETHICS—AN INDIAN PERSPECTIVE 19. Put the principles of ergonomics in practice; 20. Update the skills and knowledge of employees; and 21. Sensitive problems of employees to be tacked amicably. Owners/investors 22. Fair and competitive return on capital by efficient management; 23. Disclose all relevant information except those in the ‘classified’ list; 24. Conserve, protect and increase owners’ assets; and 25. Respect their complaints for solutions. Suppliers 26. Pricing to be fair; 27. No coercion or litigation; and 28. Long-term stability. Community 29. Human rights respected and maintained; and 30. Good corporate citizen through charitable donations to educational, cultural and civic needs of society. Source: Caux Round Table, “Principles of Business”, Caux Round Table: Charting a New Course for Business, 2003, available at www.cauxroundtable.org/documents/Principles%20for%20Business.PDF. Reproduced with permission from the Caux Round Table. articulate a comprehensive set of ethical norms for business operating internationally or across multiple cultures. The principles emerged from a series of dialogues catalysed by the CRT during the late 1980s and early 1990s. They are the products of collaboration among executives from Europe, Japan, and the United States, and were fashioned in a document called ‘The Minnesota Principles’. Globalization has facilitated free movement of people, capital, jobs and enabled trade and information and businesses to operate in a borderless manner. Consequently the role of nation states has become less important leading to the development of ‘soft’ laws, that is, the effect of international conventions and bilateral treaties being used by NGOs as representing society’s expectations of conduct, in advance of their adoption into the laws of individual nation states. Reluctant as some corporations have traditionally been to go beyond their operational objectives, the time has come for the roles of corporations, governments and other institutions to be significantly redefined—a time for new partnerships and greater cooperation at a global level. CHALLENGES OF GLOBALIZATION IN THE CONTEXT OF GROWING MARKET ECONOMIES Some commentators suggest that we are at a major turning point in history—a time that occurs only once every hundred years or so, when adequate vision is lacking, leadership is weak, new technology sweeps across nations, gaps widen between people, laws and institutions break down, values weaken, crime and corruption increase and human relations falter. Such factors inherently threaten world peace, stability and prosperity, while business globalization is accelerating in both the historically major economies and the strong new economies. The period since the CRT was founded has encompassed the completion of the General Agreement on Tariffs and Trade (GATT) agreement, strongly endorsed by CRT participants, and the formation of the WTO. Other developments include the completion of the Single European Market, the formation of North American Free Trade Agreement (NAFTA) and the Association of South East Asian Nations (ASEAN) agreements. The collapse of communism in Central and Eastern Europe has created both opportunities and challenges. The emergence of India and China as major economies, together with the resurgent growth of the South East Asian economies known as ‘Tiger’ economies, has generated unprecedented prosperity and GLOBALIZATION AND BUSINESS ETHICS industrial muscle. The emergence of market economies challenges expanding global businesses to help enable those markets to reach their potential and to enhance the prosperity of their populations. Threats to a prosperous and sustainable society include the gulf between the rich and the poor, between the successfully industrialized nations and their less developed neighbours. Social unrest and discontent are increased by religious fanaticism and organized crime. Unlawful immigration is a destabilizing influence as those without money, jobs, knowledge or opportunity are attracted to centres of prosperity. Business leaders rightly see major opportunities to access new markets, for the wider utilization of intellectual property and technology, and for new investment. But they are also faced with formidable challenges to reduce the attendant risks. PUBLIC AWARENESS AND SCRUTINY There has been a revolution in communications, itself a source of huge new global business operations. With easier and more immediate access to information, and the stimulus of media analysis, public interest in the conduct of business has intensified. Sophisticated media presentation focuses particular issues and heightens concern, especially where there are perceptions that public interest is threatened or power is being abused. Demands increase for greater transparency and for effective public scrutiny. Society expects corporations to be accountable, not just in traditional areas of financial performance, but across all functions that impact on the physical, social and economic environments. Society’s confidence is undermined by ignorance and suspicion, but reinforced by information and understanding. Without confidence and trust society cannot be expected to review its ‘license’ or ‘franchise’ for business to operate. It exercises its sanction through legislation and regulations—the operation of choice in the market place, actions of pressure groups, and corrosive public criticism of targeted sectors, corporations or key position holders. Recent campaigns on top executive compensation, environmental performance, employment conditions, sale of arms, and customer service standards provide evidence of the potentially harmful effects of public alienation. Conversely, companies that have addressed the challenges openly have been able to win public support even while undertaking major changes involving restructuring, adoption of new technologies sometimes seen as threatening, and in resolving highly controversial issues such as disposal of toxic waste. Increasingly, competitive advantage and customer loyalty are achieved through providing access and dialogue and demonstrating genuine concern for public interest and the needs of communities. TECHNOLOGICAL CHALLENGES AND OPPORTUNITIES Never in the chequered history of the human race, has there been such an explosive growth of technology in such a short span of time as there is now. Technological innovations have brought in immense changes to manufacturing, transport and communications, information and knowledge management, pharmaceuticals and biotechnology, banking and financial management and to a host of other spheres. The impact of these innovations on business and industry, as in other walks of life, is immeasurable. Methods and processes of productions have been shortened, distances reduced, and time taken lessened in every human endeavour. Business and trade have become global. The world itself has become so small as to be called the global village. In this fast-changing environment—social, political, economic and governmental—corporations have to adapt themselves faster, reckon competition and work out successful survival strategies. Even while they have to swim against the rising costs of technology-induced processes and changes, they have to acclimatize themselves to newly evolving corporate cultures and governance practices. Values keep changing and corporations have to be in the vanguard of these changes to succeed in their business. If challenges arising out of technological innovations are many, opportunities too are plentiful. An ever-increasing global market, large-scale manufacturing with its attendant economies of scale and lowered costs, escalating profits and a chance of becoming transnational corporate players are too significant a gain for corporations to ignore. THE PHYSICAL ENVIRONMENT Business has increasingly faced several challenges with regard to its effects on the physical environment and its sustainability. It is in this area that issues have become most global and intergovernmental conventions and 111 112 BUSINESS ETHICS—AN INDIAN PERSPECTIVE NGOs have had significant influence. Increasing awareness on this issue has reshaped legislations around the world and has led to the formation of new international institutions, with a huge impact on the policies and practices of businesses and their representative organizations. There are few remaining international corporations that have not published statements of environmental, safety and health policies, while significant sectors have adopted a coherent voluntary worldwide code of responsible practice. Considerable progress has been made in disclosure, and in introducing reporting and verification procedures. Although many aspects of environmental concern still await scientific verification, the concept of a voluntary precautionary approach has evolved, coupled with significant public commitments on performance goals. Science and emerging technology have enabled business to take many beneficial initiatives in areas such as efficient agriculture, safe water and hygienic food processing. However, maturing public attitudes introduce new challenges in terms of what is acceptable to the public. The adoption of unfamiliar risks raises deep public concern. Important examples include the application of biotechnology and pesticides in agriculture, and of additives and radiation in food preservation. Business must make both practical and ethical decisions on the adoption of risk, its assessment and communication to its constituencies. THE SOCIAL ENVIRONMENT Population growth and consequent unemployment, increasing inequalities between the rich and poor, public health, immigration flows and social disorder interact to affect the conditions in which business develops. The prevailing political framework determines whether the responses are subject to command economy rule, to free-market economies or to what are called mixed economies. Education and training are the precursors to economic development, and most political regimes give these high priority. However, the resources required to ensure efficient delivery may be inadequate, depending upon the general economic climate and social infrastructure. A natural consequence of successful business activity is that employment opportunities and wealth are created, together with an increasingly cohesive and supportive social fabric. Successful business depends upon its efficiency, competitiveness and its flexibility to adapt to changes in the marketplace. In the global market, even the most enduring businesses have to adapt, through measures affecting employment levels and disposition. Significant factors include changes in demand, new technology and the emergence of competition. KEY GLOBAL ISSUES FOR BUSINESS All of these developments have far-reaching consequences. Some of these favour business while others threaten it. The CRT affirms that the primary purpose of the corporation is to manage its business effectively. In doing so, however, global business cannot assert that ‘the only business of business is business’. It should seize the opportunity to be an active participant in contributing to peace, stability and prosperity. Many business leaders have recognized the implications of globalization for their corporations and have given increasing attention to the social concerns. A broad consensus has developed that business has a responsibility towards the communities it serves and depends upon, to contribute beyond the strict requirements of the law, and beyond the needs of self-protection. Participants in the CRT affirm this perspective, and seek to define the responsibility of global corporations in relation to certain key issues. In such a situation the following issues should be given precedence: ∑ ∑ ∑ ∑ the employment dilemma; sustainable practices and values; trust, honesty and transparency; and collaboration and partnerships for action.15 These issues need to be examined in the context of the fundamental social, economic, political and technological changes taking place throughout the world today. EMPLOYMENT DILEMMA The CRT has addressed the need for job creation regularly. Job creation involves a complex set of issues with far-reaching implications both in industrialized and developing nations. Resolution of the global GLOBALIZATION AND BUSINESS ETHICS employment dilemma may be fundamental to reducing risks of social upheaval and to finding solutions to other key global issues. One of the greatest strengths of business has been and must continue to be job creation, even as restructuring of current activities continues. Country after country has decided that increased private sector employment is the lynchpin to sustainable economic growth. Business has a responsibility to provide working conditions that respect each employee’s health and dignity, and to provide jobs and compensation that improve the living conditions of workers and their families. But some crucial questions must be answered: ∑ What can and should be the role of business in promoting job creation? ∑ What responsibility should business take for promoting flexibility and employability? ∑ What is its role in seeking to change regulations which inhibit change in employment practices or impose administrative burdens that threaten competitive employment? ∑ What steps must be taken to assist those without jobs? ∑ Is it true as some suggest that technological advances of recent years have eliminated more jobs than they have created? Or, on the contrary, does the problem lie in protectionism and resistance to change? ∑ What rectifying actions can be taken? Within a wider social and economic context, business also needs to address questions such as ∑ the gulf between rich and poor within nations and between well-developed and less-developed economies; ∑ the urgent need in developing nations for the rule of law, necessary infrastructure, nurturing of a new work ethic and other measures to assure sustainable development of a market economy; and ∑ the impact of increased immigration and freer trade agreements upon all sectors of societies, both within developed and developing nations. Global business leaders and their counterparts in governments must draw from past successes to develop policies that promote job creation, review regulatory constraints that inhibit job creation, and consider new risk-sharing between business and government. Above all, business leaders need to identify the factors that promote creativity and innovation, and inspire confidence in enterprise rather than resorting to protectionism. SUSTAINABLE PRACTICES AND VALUES It is widely understood by people now that short-term performance criteria have to be balanced against long-term considerations involving the effects of business on its environments, and thus its sustainability. While laws and conventions focus on particular provisions for the conduct of business, there is a growing consensus that attitudes, standards and practices must exceed legal requirements. Business needs to monitor the impact of its products and services, and to stand for values with which society will identify. Extending the practice of many corporations which already publish their general principles for the conduct of their business, and of a large number which publish their policies and performance in areas of safety, health, the physical environment and energy efficiency, business should define its role in areas such as ∑ ∑ ∑ ∑ ∑ ∑ ∑ resource management; technology transfer; human exploitation; employee development; illicit substances and their abuse; the family; and encouragement of sound values in society. Business will also have to determine the extent and scope of its responsibility in such sensitive areas, and find the right balance alongside other institutions involved. TRUST, HONESTY AND TRANSPARENCY CRT and other such similar organizations believe that business, as well as the professions have a duty to the society to be trustworthy, honest and transparent in their dealings. Public suspicion of business motives and 113 114 BUSINESS ETHICS—AN INDIAN PERSPECTIVE behaviour is a negative influence that can lead to restrictive legislation and can threaten job creation and other potential benefits to society. A loss of trust may result in a virtual revocation of business’s ‘license’ or ‘franchise’ to operate in public interest. Communications technology and media intensify the call for information and explanation. To obtain trust, worldwide business practices must satisfy the perceptions of society as to what is ethical. Global businesses should not participate in or condone bribery, money laundering or other corrupt practices but should cooperate with others to eliminate them. Some of the key questions to be addressed include the following: ∑ What are the practical obstacles to greater openness and transparency? ∑ What is a right balance between pro-active and reactive measures to achieve public understanding of the standards of business and its performance? ∑ How should business leaders approach the problem of corruption, given the diversity of cultures? ∑ How can business engage in sustained dialogue with all its constituencies to define shared responsibilities for resolving issues? COLLABORATION AND PARTNERSHIPS FOR ACTION The CRT believes that solutions to complex global issues require the cooperative efforts of business, government and other institutions. Working alone, these powerful players are likely to fail. Working together, they can apply local models to international situations and find multifaceted solutions to complex problems. The partnership developed in many cities where businesses collaborate with local authorities, central government, education, emergency services and special interest groups could be adapted to global initiatives. Although the difficulties in achieving effective collaboration are likely to be daunting, business needs to take the initiative and persevere in this process. Business needs to consider its role and approach in ∑ ∑ ∑ ∑ ∑ developing a coherent strategy for addressing global problems; establishing a constructive network embracing its principal world centres; developing dialogue with relevant public institutions; mounting and funding agreed initiatives and action programmes; and monitoring and reviewing progress and outcomes. CORPORATE GOVERNANCE IS A PREREQUISITE FOR GLOBALIZATION ‘Tiger economies’ refer to economies such as South Korea, Singapore, Hong Kong, Taiwan, Malaysia, Indonesia, the Philippines, Thailand and Vietnam that had undergone rapid economic growth generally accompanied by an increase in the standard of living of the people. The South East Asian crisis developed in June 1997 in Thailand, which faced a problem of loan repayment. Fears of loan defaults resulted in foreign creditors withdrawing their funds from the country’s financial institutions. It gradually spread to the Philippines, Malaysia and Indonesia. Two major reasons were attributed to the crisis: (i) The macro economic fundamentals of the economy were weak leading to low productivity and lack of competitiveness; (ii) Inadequate supervision of financial institutions and poor corporate governance practices resulted in over-borrowing, over-lending and over-investment. Further, current account deficits, inadequate capital inflows and currency speculation led to a high appreciation of the US dollar and devaluation. There was a dent in investor confidence and decline in overall investments. If India wants to ensure that a crisis of the same proportion experienced by Southeast Asia never occurs here, and if Indian companies want to be globally competitive in the new millennium, then good governance is an utmost necessity. The East Asian crises occurred due to the lack of public governance and corporate governance. Singapore suffered the least because it had good governance rules in place. Public governance involves setting up of regulatory bodies and a legal framework, and the establishment of institutions that ensured transparency. Rule of law and a proper financial system are essential. The first requirement of corporate governance is professional management. Even in family-owned companies, where family members often held the highest offices in companies, it is imperative that such family members are professionally qualified and competent for the office they hold. Few companies will voluntarily adopt ‘corporate governance codes’ because in their perception these will add to their costs without bringing much tangible benefits. Hence, the government must regulate their adoption and take the lead to enforce corporate governance through institutions. GLOBALIZATION AND BUSINESS ETHICS If the government fails to enforce governance codes, then businessmen must themselves take the initiative out of self-discipline. It will be best if private sector companies and public sector enterprises act in concert in this respect. Even if the government or public sector enterprises are not interested, private sector companies must adopt global corporate governance standards, because ‘globalization demands good corporate governance’. After all, globalization is likely to benefit private sector corporations more than public sector enterprises. Some analysts are very pessimistic and even suggest that Indian companies should not globalize until good governance rules are put in place, as otherwise India would go the East Asian way. In East Asia, all the good work built up over 10 years and more was destroyed in a matter of weeks, simply because the necessary framework was not there. If Indian companies want to globalize, they must adopt good corporate governance standards. One reason why Indian InfoTech companies were able to raise funds in the markets abroad such as Nasdaq was because they had adopted global corporate governance standards that satisfied the American investors. Another area of concern in the country as elsewhere is the lack of independent auditors. In the present times, it is imperative to have independent auditors who are reputed and above board. Due to the distrust in Indian auditors, most of the multinational companies have insisted that the parent company’s auditor should also audit the subsidiary companies in India, often at much higher costs. One of the problems with corporate governance is the fact that different regions have different economic philosophies. ‘In the US, the only concern is increasing the shareholders’ value, in continental Europe it is creating employment, while in Japan the companies worked in tandem with the government as per the national strategy. Thus, it is very difficult to have a universal governance code, but there are minimum standards that all companies worldwide can and must adopt.’16 GLOBAL COMPACT Kofi Annan, the United Nations’ former Secretary General, presented to the World Economic Forum at Davos on 31 January 1999 his proposal for a ‘Global Compact’. On 26 July 2000, Kofi Annan’s vision was put into action. Global Compact is a worldwide initiative under the aegis of the UN to make corporate social responsibility an area (CSR) of paramount importance to business. The Global Compact conists of 10 principles concerning issues of human rights, labour standards, environment and anti-corruption (Box 5.4). ‘The Global Compact is a voluntary initiative that seeks to advance universal principles on human rights, labour, environment and anti-corruption through the active engagement of the corporate community in cooperation with civil society and representatives of organized labour. The initiative is not designed, nor does it have the mandate or resources, to monitor or measure participants’ performance.’17 BOX 5.4 THE 10 PRINCIPLES The Global Compact’s 10 principles in the areas of human rights, labour, the environment and anti-corruption enjoy universal consensus and are derived from ∑ ∑ ∑ ∑ The Universal Declaration of Human Rights; The International Labour Organization’s Declaration on Fundamental Principles and Rights at Work; The Rio Declaration on Environment and Development; and The United Nations Convention Against Corruption. The Global Compact asks companies to embrace, support and enact, within their sphere of influence, a set of core values spelt out below: Human Rights Principle 1: Businesses should support and respect the protection of internationally proclaimed human rights; and Principle 2: make sure that they are not complicit in human rights abuses. 115 116 BUSINESS ETHICS—AN INDIAN PERSPECTIVE Labour Standards Principle 3: Businesses should uphold the freedom of association and the effective recognition of the right to collective bargaining; Principle 4: the elimination of all forms of forced and compulsory labour; Principle 5: the effective abolition of child labour; and Principle 6: the elimination of discrimination in respect of employment and occupation. Environment Principle 7: Businesses should support a precautionary approach to environmental challenges; Principle 8: undertake initiatives to promote greater environmental responsibility; and Principle 9: encourage the development and diffusion of environmentally friendly technologies. Anti-corruption Principle 10: Businesses should work against corruption in all its forms, including extortion and bribery. Source: United Nations: Global Impact, Note on Integrity Measures: The Global Compact, 2007, available at www.unglobalcompact.org/AboutTheGC/Integrity.html. Reproduced with permission from the United Nations. Under the terms of agreement of Global Compact, participating companies should publish annual reports and display on their Web sites ‘specific examples of how they put the Global Compact Principles into practice’. The United Nations’ reputation and moral authority are such that more than 700 companies, including a few from India like Tata Steel Limited, have subscribed to the Global Compact. SUMMARY Today very few countries can claim to be economically self-sufficient. Most business enterprises are drawn to doing business across national borders. Many factors such as falling trade barriers, newer technology and political reforms have come to play a facilitating role in recent times to promote and foster international trade. Businesses in the present global society are carried on by multinational or transnational corporations, most of which are based in the developed countries. Global business operates within the context of international and where necessary regional rules and regulations set up by appropriate governmental agents. It is dominated by multinational corporations that have their businesses spread across continents. International business is business conducted across national boundaries. It is concerned therefore with political, economic, social and cultural conditions in a variety of countries. As technology improves, international communications and transportation links, international business and international corporate activities will expand. In the context of promoting world trade in a principled manner, the CRT has done yeoman service. The CRT was founded in 1986 by Frederick Phillips, and Oliver Giscard d’Estaing, as a means of reducing escalating trade tensions. The CRT advocates implementation of the CRT Principles for Business through which principled capitalism can flourish and sustain, and socially responsible prosperity can become the foundation for a fair, free and transparent global society. The goal of the CRT is to diffuse its suggested principles, standards, benchmarks, management concepts and practices, and understanding of moral capitalism as widely as possible. Global business opportunities have grown tremendously in recent times, thanks to the opening up of the hitherto fettered markets of socialist and developing countries and the active role played by international organizations such as GATT, WTO, IMF and the World Bank. Stupendous growths in transport and communications and cutting-edge technologies in IT and IT-enabled services have added their own dimensions to this growth process. If this process of global trade in goods and services is to continue and sustain itself, the important players in this game, namely, corporations have to play their parts fairly and ethically. Corporations that are involved in the production and distribution of goods and services for a worldwide market should not only live by and exhibit ethical principles and good corporate governance practices, but also should be seen practising them. No corporation that is found to be unethical and wanting in terms of corporate governance will have a future. If transparency, honesty, fairness, integrity and ethical behaviour along with protection of all the stakeholders’ interests are commendable virtues within the country, they are far more preferred outside. The wide popularity of CRT’s Principles of Business bears ample testimony to the fact that the world likes and prefers to deal with good and reliable corporations than ones whose fairness and integrity are questionable. KEY WORDS Reduced trade barriers ∑ Multinational corporations ∑ Subsidiaries and affiliates ∑ Joint venture partners ∑ Global corporations ∑ Bandwagon of global business ∑ Businesses scanning continents ∑ Business in a diverse world ∑ Geocentric outlook perspective ∑ Domestic identity ∑ Economic clout ∑ Values and lifestyles ∑ Creative experience ∑ Need for dialogue ∑ Employment dilemma ∑ Sustainable practices and values ∑ Destabilizing influence ∑ Technological challenges ∑ Physical environment ∑ CRT principles for business ∑ Corporate governance DISCUSSION QUESTIONS 1. Why is it that even countries with abundant natural and human resources cannot afford to insulate themselves from others? 2. Discuss the factors that facilitate the integration of the global economy. 3. What are the benefits and disadvantages MNCs bring to the host country? 4. Explain the background under which the Caux Round Table was established. What are its objectives and the issues it seeks to address? 5. Discuss the various initiatives of global organizations to ensure ethical business worldwide. NOTES 1. James E. Post, Anne T. Lawrence, and James Weber, Business and Society—Corporate Strategy Public Policy, Ethics, 9th ed. (New York: McGraw Hill, 1999). 2. Ibid. 3. Ibid. 4. Ibid. 5. Ibid. 6. Sarah Anderson and John Cavanagh, “Top 200: The Rise of Global Corporate Power,” Corporate Watch 2000. Global Policy Forum—Social and Economic Policy, available at www.globalpolicy.org/ socecon/tncs/top200.htm 7. Susan J. Lacey, “International Business and Multinational Corporations,” April 1994, www.cis. drexel.edu/faculty/shelfer/public_html/busrefpapers/intmulti.html 8. Hyundai: Drive Your Way, 2006, available at www.hyundai.co.in/aboutusn.asp?pageName=comp 9. Kala Vijayraghavan, “Wipro, Coke, Danone in the race for Bisleri,” Economic Times, 26 July 2007 10.Frederick Bird, “The Globalization of Business Ethics,” 2007, available at www.eabis.org/ Globalethicsandbusiness_doc_media_public.aspx 11.Ibid. 12.Ibid. 117 SUMMARY GLOBALIZATION AND BUSINESS ETHICS 118 BUSINESS ETHICS—AN INDIAN PERSPECTIVE 13. Kavaljit Singh, “Corporate Accountability: Is Self-Regulation the Answer?,” Mainstream (Vol. XLV, No. 25, 9 June 2007), available at www.mainstreamweekly.net/article165.html 14.Ibid. 15.Ingrid Shafer, “The Caux Round Table: An Introduction”, Caux Round Table, 22 April 1999, available at http://astro.temple.edu/~dialogue/Antho/caux_in.htm 16.Amberish K. Diwanji, “Good Governance in Corporates Is Essential for Globalisation, Say Experts,” 10 December 1999, Rediff Business, available at www.rediff.com/business/1999/dec/10corgov.htm 17.United Nations: Global Impact, “Note on Integrity Measures,” The Global Compact, 2007, available at www.unglobalcompact.org/aboutthegc/integrity.html FURTHER READINGS Caux Round Table, “The Critical Role of the Corporation in a Global Society: A Position Paper of the Caux Round Table (CRT),” 1997, available at www.cauxroundtable.org/documents/CriticalRoleofthe Corporation10-97.doc Dixon, P., “The Future of Corporate Governance,” www.globalchange.com/corporategovernance.htm Future Trends, 2007, available at Jebamalai, V., Myths and Realities of East Asian Model of Development—Lessons for India (Chennai: Centre for Research on New International Economic Order, 1999). Lopez, J., “Global Technology Slowdown Hits ‘Asian Tiger’ Economies,” 14 September 2001, World Socialist, available at www.wsws.org/articles/2001/sep2001/asia-s14.shtml Rajshekar, N. and Subbulakshmi, V. (eds.), Asian Banking Crisis in the 90s—Perspectives and Lessons (Hyderabad: The ICFAI University Press, 2004). Roberts, M., “Tiger Economies in Crisis: Slump in South East Asia,” 30 October 1997, available at www.marxist.com/economy/tiger.html Sinha, A., “Xeroxing Corruption,” September 2002, available at www.indiaresource.org/issues/globalization/2003/xeroxingcorruption.html Weissman, R.,“When the People Speak, the Corporations Squeak,” 1998, available at http://lists. essential.org/1998/corp-focus/msg00014.html ———, “Environmental Bad Guys,” 1999, available at http://lists.essential.org/corp-focus/msg00008.html ———,“The Criminal Element,” 1999, http://lists.essential.org/corp-focus/ msg00037.htm GLOBALIZATION AND BUSINESS ETHICS 119 CASE Study STERLITE: USING MONEY CLOUT TO MAXIMUM ADVANTAGE (This case study is based on reports in the print and electronic media, and is meant for academic purpose only. The author has no intention to sully the image of the corporate or the executives discussed.) COMPANY PROFILE Sterlite Industries (India) Ltd (SiIL) is a leading producer of copper in India. It was founded in 1986, bringing together several metal related activities managed by the Anil Agarwal family. SiIL pioneered the manufacturing of continuous cast copper rods in the country, and established India’s largest copper smelting and refining plant for production of world class refined copper. It is the first company in India to set up a copper smelter and refinery in the private sector and operate the largest capacity continuous cast copper rod plants. SiIL’s main products, copper cathodes and copper rods meet global quality benchmarks. It is the first private sector smelter in India with operations extending from the mines in Australia. The company went on stream in a record period of two years, with full stabilization of operation at rated capacity. The state-of-the-art technology is on par with the best in the world and is an added advantage to the company. Sterlite was first listed on the Mumbai Stock Exchange in 1988, while its parent company Vedanta Resources was listed in the London Stock Exchange in 2003. SiIL is the Indian subsidiary of the London-headquartered Vedanta Resources. In 1995, Sterlite acquired 80 per cent of MALCO, an integrated aluminium producer in Mettur in Tamil Nadu, establishing its stronghold in aluminium production. In 1995, it commissioned the copper smelter at Tuticorin. In 1999, it acquired the copper mines of Tasmania Pvt Ltd and Thalanga Copper Mines Pvt Ltd to source copper concentrate for Tuticorin. In 2001, Sterlite acquired a 51 per cent interest in BALCO—an integrated aluminium producer in central India—and a 26 per cent stake in Hindustan Zinc Ltd. (HZL)—an integrated zinc and lead producer—both from the Government of India, and a further 20 per cent through a compulsory open market offer. In 2003, it exercised an option to acquire a further 19 per cent of HZL to take the total holding to approximately 65 per cent. In 2004, Sterlite acquired 51 per cent stake in Konkola Copper Mines, Zambia, the largest producer of copper in the Zambian copper belt. Sterlite controlled just under half (42 per cent) of the Indian market in copper; nearly a quarter (21 per cent) of the country’s aluminium output, and a whopping 62 per cent of its trade in zinc. Sterlite always maintains total quality management (TQM) as a way of life for continual improvements. It uses TQM extensively to constantly reach new frontiers of excellence and to maximize employee involvement. The Tuticorinbased Sterlite is the first copper smelter in the world to be accredited with ‘Five Star’ rating and the International Safety Award by the British Safety Council. The company has been given the ‘Star Trading House’ status for export by the Government of India. SiIL has zero-effluent discharge systems integrated at every plant. It has dominant market shares in the various segments of copper consumption. The company has been a consistent national award winner for excellence in energy management. SiIL’S VISION 2010 SiIL’s vision is ‘To be the world’s “best-in-class” copper producer and build a progressive organization that all stakeholders are proud to be associated with’. SiIL’S MISSION1 ∑ To harness technology to its full potential in a safe and clean environment in the entire business cycle and integrate quality with continuous improvements. ∑ To harness the profitable and growing CCR market from 125 kmt to 300 kmt per annum. ∑ To achieve and sustain cost leadership in the global market. ∑ To become a vibrant, learning organization by building skills and competencies of employees for growth. ∑ To be the best and most respected corporate citizen. The group’s Executive Chairman, Anil Agarwal, is the group’s original promoter and founder having built the group from its inception in 1976. Volcan Investments Limited, a company controlled by Agarwal and his family, remains the group’s controlling shareholder with a 54 per cent interest. The relationship between Volcan, Anil Agarwal and the group is governed by a relationship agreement that was cre- 120 BUSINESS ETHICS—AN INDIAN PERSPECTIVE ated at the time of listing in December 2003; it is designed to ensure that the company can operate independently of the controlling shareholder. THE BOARD The board is responsible for setting leadership standards for the group, sponsoring and monitoring its principal businesses, securing financial and other resources to enable those businesses to pursue their strategic objectives, ensuring that the group maintains appropriate internal control systems and ensuring that effective relationships with shareholders are maintained. ∑ Board Composition—The board consists of an executive chairman, three executive directors and four independent non-executive directors. ∑ Independence—The board considers all of the non-executive directors to be independent of the company as defined by Code Provision A.3.1. ETHICAL CODE The Ethical Code of Sterlite stipulates the following: ∑ Uphold the rule of law and respect human rights solely in public interest. ∑ Maintain the highest standards of probity and integrity. ∑ Conduct themselves in such a manner that the public feels that decisions taken or recommendations made are objective, transparent, and not calculated to promote improper gains for anyone. This is particularly significant to the customers of the public service. ∑ Should not seek to frustrate or undermine policies, decisions and actions taken in the public interest by the management by declining or abstaining from action which flows from the management decision. ∑ Where following the instructions of the superior authority would appear to conflict with the exercise of impartial professional judgment or affect the efficient working of the enterprise, set out points of disagreement clearly in writing to the superior authority or seek explicit written instructions. ∑ Employees of Sterlite, if required by superior authority to act in a manner which is illegal or against prescribed rules and regulations, or if any legal infringement comes, decline to implement the instruction, and would also have a right to bring the facts to the notice of Chairman/Managing Director or Secretary. ACCOUNTABILITY AND RESPONSIVENESS TO THE PUBLIC ∑ Practice accountability to the people in terms of quality of service, timeliness, courtesy, people orientation and readiness to encourage participation of, and form partnership with citizen groups for responsive management. ∑ Be consistent, equitable and honest in treatment of the public, particularly the weaker sections of society and not even be or appear to be unfair or discriminatory. Decision in pursuit of discretionary powers should be justifiable on the basis of non arbitrary and objective criteria. ∑ Accept the obligation to recognize and enforce customer’s right for speedy redressal of grievances and commit them to provide services of declared quality and standard to customers. ∑ Respect right of public to information on all activities and transactions of the organizations except where they are debarred in the public interest from releasing information by provisions of law or by valid instructions. ENVIRONMENTAL CONSCIOUSNESS SiIL takes active interest in the protection and conservation of the environment through development of environmentfriendly systems. The prestigious ISO 14001:1996 Environment Management Certificate awarded to the Tuticorin plant in Tamil Nadu, by Det Norske Veritas BV Netherlands, is evidence of its commitment to the cause of strict adherence to standards and constant endeavour to improve environmental protection. Sterlite Copper’s effort towards safeguarding the environment includes the implementation of Environment Management Schemes at an investment of more than INR 2,000 million. A REPORT CARD ON STERLITE’S ADHERENCE TO ETHICAL PRACTICES CONTROVERSIES SURROUNDING THE STERLITE TUTICORIN PLANT2 A proposal by Sterlite to set up the present (Tuticorin) facility in the Ratnagiri district of coastal Maharashtra had to be abandoned after farmers and fisher folk there put up a spirited fight. Upon the invitation of the then Tamil Nadu Chief Minister Jayalalithaa, Sterlite put together a copper smelter in Tuticorin in 1995 using outdated second-hand equipment from Australia, the United States and other countries. The proposal was pushed through without public consultation despite vociferous opposition by residents and political parties in Tuticorin. The Tamil Nadu Pollution Control Board’s (TNPCB) stipulations regarding where the factory should be located, or how much it should produce were promptly violated in spite of the fact that many conditions were relaxed in favour of Sterlite. Instead of locating the smelter 25 km away from the sensitive coral reefs of the Gulf of Mannar Marine National Park as stipulated in the TNPCB’s consent to establish the plant, the company located ‘the arsenic and sulphur GLOBALIZATION AND BUSINESS ETHICS dioxide-spewing smelter 14 km from one of the protected coral islands’. Rather than restrict its annual production to 40,000 tonnes of blister copper as per TNPCB’s consent to operate, Sterlite went on to produce more than 1,70,000 tonnes of copper anode from its smelter, and proudly announced its production achievements to impress its shareholders. Encouraged by the government’s pliability, the company went ahead with an ambitious capacity expansion plan to make its Tuticorin assets more attractive to global investors. Operating at higher than permitted capacity, and the setting up of a number of unapproved plants within the complex seems to have had an immediate bearing on the safety, health and environmental conditions within the factory. According to workers and ex-workers, most of the occupational injuries and fatalities go mostly unreported, and the local police, and even the district administration ‘cooperate’ with the company to cover up all but the most notorious of incidents.3 Between 1999 and 2004, accidents at the Tuticorin plant reportedly killed 13 people and injured 139. Criminal proceedings have been initiated in only 3 out of 15 incidents reported by workers. Ironically, the Tamil Nadu government issued safety awards to the company in 1999 and 2000, during which time at least 11 people were injured, and villagers had apprehended company staff for releasing toxic effluents into a village drinking water pond. SiIL claims that it believes in conducting its activities with a ‘social conscience’. ‘As a responsible corporate citizen,’ Sterlite has undertaken several initiatives to conserve the environment and serve the society. Even though Sterlite has its own code of conduct, the following are some of the ethical issues of the company. Some of Sterlite’s ethically unjustifiable activities should come as no surprise, given the company’s history of controversial dealings. The company has also been responsible for unfair labour practices as well as bypassing norms of environmental and worker safety. ETHICAL INFRACTIONS ENVIRONMENTAL ISSUES4 Environmentalists accused the company for its issue in the Tuticorin Environmental Impact Assessment (EIA), as it has omitted the critical assessment of suspended particulates and heavy metals in the smelter discharges. Coastal protection regulations forbidding the location of industrial plant within 25 km of the Gulf of Mannar biosphere reserve were flagrantly sidetracked. The plant has been emitting large quantities of arsenic, sulphur dioxide, lead, cadmium, antimony and bismuth. THE SMELTING POT The expansion of its Tuticorin copper smelter has been most threatening to people and ecology. The smelting pot was 121 imported from Australia in 1994 as a cheap second-hand, decommissioned plant. The smelter was rejected by the state of Maharashtra as too dangerous. But it was constructed 9 km from the Gulf of Mannar special biosphere reserve in Tuticorin, in violation of marine protection rules. The smelter had to be closed thrice within one year because of the order issued by the state government in the wake of protests staged by thousands of fishermen and other Tuticorin townspeople, adversely affected by waste discharge. In spite of unauthorized discharges of waste already made into streams outside the plant it was allowed to reopen notwithstanding the fact the waste contained toxic material. Recently, the Supreme Court Monitoring Committee on Hazardous Wastes (SCMC), set up by the country’s topmost court, discovered to its horror a huge pile of phosphorous and gypsum at one corner of the site. At the other end, a huge quantity, running into thousands of tonnes of slag bearing arsenic was dumped, exposed to rain and wind. An order of the much concerned Monitoring Committee to remove the toxic waste urgently was ignored by Sterlite. The company chose to almost double its design capacity, thereby enhancing its facilities. This doubling of capacity obviously caused the overload of the smelter. Sterlite, in spite of the adverse findings and advice of the team of experts appointed by the country’s topmost court, did pretty little to reduce the piling of the hazardous waste. Outraged by the inordinate delays and open defiance by the company, the SCMC issued an order in July 2005 to close down the smelter for ‘fully violating the Hazardous Waste Rules 1989 and the order of the Apex Court, dated 14-10-1993’ and also revoked the consent of TNPCB. DEFORESTATION In 2003, Sterlite with a view to quickening the pace of construction of the Lanjigarh alumina factory that would process the Nyamgiri bauxite appointed an Australian engineering company, Worley Parsons. Even though the Ministry of Environment and Forests had not granted any clearance the construction work went apace. In an appalling incident, two Majhi Khond villages were destroyed, their residents being brutally and illegally removed and housed in a sort of concentration camp. A study by an environment-based NGO pointed out that the entire bauxite deposit at Nyamgiri lies on top a protected forest area which boasts of many endangered species of flora and fauna. The company was least bothered about the havoc the building caused to these very rare species of medicinal plants, pests and animals. Forcible eviction of tribal families from their homes, illegal and violent take-over of private property belonging to tribals, unlawful confinement of local villagers by Vedanta security forces, and the use of police and district administration to suppress dissent were some of the other unethical practices resorted to by the company. 122 BUSINESS ETHICS—AN INDIAN PERSPECTIVE SAFETY CONSCIOUSNESS The company has been insisting that it believes that environmental concerns and safety should go together, and encourages its employees and contract workers to follow such good corporate practice. Sterlite claims that their workers are provided a safe, accident-free work environment by applying international benchmarking and process improvements. As a result of all these efforts the company has received the OSHAS: 18001 certification for Occupational Health and Safety Management and Systems by Netherlands-based DetNorske Systems Veritas BV, apart from the British Safety Council Society Award for two years.5 Notwithstanding all these averments, Sterlite did not care to follow the basic safety standards at its Tuticorin plant and took advantage of the ignorant contract labourers. The company totally ignored warnings of impending disaster at the plant. In 1997, the anticipated disaster finally struck at the plant when in the aftermath of an explosion at the top of the rotary kiln, molten metal dropped on the workers, charring to death two of them and maiming two others. The plant was forced to close its doors for a brief period. Finally, the TNPCB permitted them to reopen in 1999 with an order that the management should provide a new environment management plant (EMP) However, Sterlite managed to get away with not fully implementing the EMP. Likewise, Sterlite violated basic safety standards at its other sites as well. No other Indian company violated them with such impunity as Sterlite did. For instance, at its largest single mining complex in Mainpat in Chattisgarh, tribal workers were not given any safety gear, and were exposed to heat and dust, even while doing hazardous manual work.6 SOCIAL CONSCIOUSNESS Sterlite stresses the importance of social consciousness. The company knows its success depends on the contribution of the community around it. Its Community Care Program aims to fulfil its social obligation in improving the quality of life of the community around its facilities. With a view to promoting the overall sustainable community development, SiIL focuses on special groups—women, children and youth. Further, Sterlite stresses on a ‘bottom-up approach’ under which the local community is encouraged to participate actively from the conceptual to the execution stage of its community development projects. This participatory approach ensures that the benefit reaches the weaker sections of society, besides achieving the fullest utilization of resources in the four major thrust areas—education, health, sports and community welfare.7 In spite of all these pious pronouncements of Sterlite, there is nothing that may be called development that communities in and around the company’s facilities see except for the handful of jobs that the highly mechanized mining and refining may provide. As for the local people, they do not get more than a fraction of even those few jobs. The Sterlite group of companies has promised jobs only to one member of each family whose house site has been acquired. They are being trained in various trades, but they have been careful not to put it down in writing anywhere that, at the end of the training, they will get jobs as a matter of right. HEALTH AND HYGIENE One of SiIL’s initiatives in promoting health and hygiene is to conduct regularly, health programmes in rural areas to create awareness among the people of the need to be healthy and hygienic. The company’s three-pronged strategy to provide better healthcare for the neighbourhood community focuses on prevention, diagnosis and treatment.8 However, almost all bauxite miners employed by Sterlite are contract labourers who have to fund for themselves in matters of health and hygiene. At Mainpat, on a good day they can earn just over INR 60, while it is still less for women, for delivering one tonne of ore. The appalling living conditions in which these workers are kept in the quarry are beyond description. These tiny thatched hovels have no electricity and very little water. The company offers them no medical facilities and even workers injured at the worksite have to be taken down to the plains by taxi, at their own expense. They are not provided security equipment in spite of the workers’ demand. This laxity caused a worker’s death on 18 July 2005 at the Balco Korba expansion project, triggering one of the several strikes by workers of Sterlite.9 Sterlite’s integrated aluminium facilities at Mettur, in northern Tamil Nadu, display the worst health and environmental impacts of a notoriously polluting industrial sector, as well as toxic effects from an unsafe coal-fired captive power plant. The company’s claim that it has made bricks out of the large quantity of residues of red mud (caustic soda wastes), besides taking a long time to be implemented fully, is not an acceptable solution since it poisons agricultural soil, contaminates water bodies and kills cattle. Moreover, there were emissions from the power plant and the refinery causing unhealthy living conditions to the poor local residents, who suffered from respiratory problems, skin allergies, eye-related diseases, stomach disorders, chest pains and the like.10 COMMUNITY WELFARE Sterlite boasts that ‘Based on the requests from the community, SilL supports projects that improve the community infrastructure’. However, the boast seemed to be without any basis. For instance, the company’s project to build the Mansil Wakal dam at Udaipur in Rajasthan state, which the company managed and to which it contributed about one-third of the fund- GLOBALIZATION AND BUSINESS ETHICS ing, was meant to promote its own interest. In fact, the project was opposed for more than 15 years by the local population. Though attempts were first made by the then public sector company, HZL, the effort to build the dam acquired momentum only after Sterlite took over HZL in 2002. Sterlite literally seized village lands for the project. In should be noted that the dam is built on the rivers Joi and Wakal in a scheduled area, where lands cannot be acquired without the consent of the village administration and before making provisions for the resetting and rehabilitation of affected persons. In its zeal to build the dam for its own benefit, Sterlite went ahead without their consent. In fact, more than 80 per cent of the affected people are tribals whose livelihoods were threatened by the construction of the dam, which also inundated their homes and lands. More than 13,500 persons in 23 villages were adversely affected by the Mansi-Wakel dam project, while it only served the interests of Sterlite.11 But then, Sterlite was least concerned of their plights or of the law of the land meant to protect them. CONCERN FOR VALUE OF PUBLIC ASSET AND FUNDS Sterlite stresses, ‘Avoid wastage, extravagance and ensure effective and efficient use of the public money within their control. In cases of disputes or grievances, make efforts to resolve them quickly. No unlawful stoppage or disruption of work or damage to assets’. In June 2005, Sterlite was accused of grabbing around 1,000 acres of government land. It was also accused of illegally cutting down 20,000 trees to facilitate the three-fold expansion of its refining and smelting complex at Korba.12 BALCO ACQUISITION ‘Sterlite’s 2001 takeover of State-owned BALCO (Bharat Aluminium Company) sparked one of the major Indian political controversies of that year.’13 Through his manipulative efforts with politicians, Anil Agarwal engineered the controversial BALCO acquisition for a pittance. It was well-known that the company was grossly undervalued. Several assets of the public sector enterprise were not taken into account during the final valuation which enabled Sterlite pay a measly INR 5.51 billion, instead of its real worth of INR 30.00 billion. ‘Sterlite’s further acquisition of a 65.9% controlling stake in Hindustan Zinc was less controversial at the time; although it was later challenged in a submission to the Supreme Court which questioned the legality of the Government’s sale.’14 The [BALCO] deal is ‘economically irrational, politically deplorable, legally unsustainable and environmentally unsound,’ it violates a fundamental rights verdict of the Supreme Court in the landmark Samatha case, which vests 123 ownership of Adivasi land to tribal people.15 Fortunately for the country, it has become difficult for Sterlite to acquire the residual stake of 49 per cent, with the change of government at the centre. Both the Attorney General of India and the Core Group of Secretaries on Disinvestment (CGD) have opined that the government need not sell 49 per cent in BALCO to Sterlite. The Attorney General has suggested that the government could choose to retain 49 per cent stake, float a public offer, or opt for sale of shares in the market or even sell it to any other party.16 There were allegations that India’s right-wing BJP-led Central Government at that time deliberately prevented BALCO from modernizing on its own terms and with its own funds. In any event, the company was grossly undervalued; according to some estimates, Sterlite secured assets worth up to 10 times what it paid for. EMPLOYEE WELFARE Another aspect of Sterlite’s unethical practices relates to its behaviour as an employer. Apart from the fact that the company mostly employed contract workers at its Tuticorin smelter plant, it adopted poor safety standards. There was an explosion in the factory on 30 August 1997 in which two workers died and two others were maimed. The unions claimed that this accident could have been averted had the management adopted corrective measures on time when they were complaining of an impending disaster. The deaths caused by the accident led to intense scrutiny by the media. The Chennai High Court ordered the factory to be closed in November 1998, as a result of a report by the National Environmental Engineering Research Institute (NEERI), Nagpur. The report also pointed out that the plant was set up against environmental norms inasmuch as it was located within 25 km of an ‘economically fragile area’ without any justification.17 CORPORATE GOVERNANCE INFRACTIONS INSIDER TRADING In 1998, the capital market regulator, SEBI inducted Sterlite for insider trading, along with two other companies. This was, according to Praful Bidwai of Frontline was ‘the greatest indictment by any statutory body yet of Corporate malfeasance in the stock market’.18 As a result, Sterlite was banned from trading in Bombay Stock Exchange (BSE). The company had resorted to insider trading to push its scrip price in its failed effort to take over the Indian aluminum company.19 The London-based billionaire, Anil Agarwal’s analysis of India is extremely realistic. He was reported to have remarked: ‘I understand the Indian psychology. That’s my biggest advantage. In India, you must have patience. Everything will come through’.20 This has been demonstrated 124 BUSINESS ETHICS—AN INDIAN PERSPECTIVE GLOBALIZATION AND BUSINESS ETHICS time and again in the country where large industrial houses violate laws with impunity while constructing and operating mines and factories. ‘The formula for violating laws is simple: If you want to construct an illegal factory, just do it quick, make it big, and ensure that the investment is substantial.’21 Agarwal has fallen foul of the law both in Britain and in India where he was accused of collaborating with the infamous stock market scamster, Harshad Mehta. Known as the ‘Big Bull’, Mehta was notorious for insider trading and manipulating stock prices. ‘SEBI’s investigation reveals that a set of brokers was happy to deal with these unknown companies with no financial standing or professional expertise and without taking any security or deposit, only because of their faith in the Harshad Mehta magic.’ It was found by SEBI that the three companies—BPL, Videocon and Sterlite—were privy to Harshad Mehta’s mechanization in the stock market. Between April and 4 June 1998, their share prices moved up to 137 per cent, 232 per cent and 41 per cent, respectively, while the BSE Sensex registered a fall of 11 per cent as a result of several causes, both national and international. SEBI’s investigations also revealed that these three companies provided the initial funds to the ‘Big Bull’ to build up his purchases of their scrips. Mehta purchased these scrips heavily at the end of each ‘settlement period’ so that it could provide price benchmarks for the subsequent settlement. 22 PRICE RIGGING Sterlite’s shares manipulation, which began prior to its bid for Indal, was later dictated by the frequent upward revisions of its bid, when Indal decided to make a fight for it and announced a counter-offer. Sterlite’s first offer for Indal was at INR 90 a share in February 1998. The amount was later raised to INR 221, to be settled partly in cash and partly in optionally convertible redeemable preference shares. The company also made an unusual promise of a minimum conversion price of INR 350 to Indal shareholders. It was prompted to manipulate its scrip price to the level of April 1998 with a view to making its offer credible and attractive to them.23 The price collapse to INR 175 after the bid failed only proves the price rigging, according to SEBI. That same year, SEBI prohibited Sterlite from accessing the capital market for a period of two years for insider trading and other offences. However, a subsequent exoneration of the company by the Securities Appellate Tribunal (SAT) left many questions unanswered. When confronted with the mandatory disclosure and scrutiny by SEBI, Sterlite attempted to delist its shares from the BSE and tried to shift its Indian stock holdings to the United Kingdom.24 If Vedanta made tall promises to its stockholders, especially with reference to its Lanjigarh and Tutricorin operations, it was because of the management’s belief that its violations would be condoned by Indian authorities. None of them, not even the company’s investors and financiers 125 believed it otherwise. When Vedanta sought its listing in London Stock Exchange (LSE), a team of 120 persons comprising lawyers and bankers descended on India to scrutinize its assets. But none seemed to find out, anticipate or take seriously the legal issues and problems associated with the company’s legal infractions. Even At the company’s AGM in London in August 2005, a few shareholders concerned about the economic viability of the company’s Indian operations raised a few questions. But these questions were only met with a stoic and inscrutable smile from the CEO, Anil Agarwal.25 VIOLATION OF SHAREHOLDER AGREEMENT26 There have been several complaints that Sterlite has not been complying with various provisions of laws and that they have violated them with impunity (see Table 12.1). THE LATEST POSITION27 As on April 2011, the present capacity of the copper refinery is 2.05 lakh tonnes per annum. The total investment on the expansion is placed at INR 2,500 crore. The company claims that it has so far invested INR 500 crore in addressing environmental issues. The expansion scheme is expected to be completed by 2013, subject to getting clearances. However, the scheme is now put on hold due to cases on environmental issues pending before the Supreme Court. The company has put up a water desalination plant at a cost of INR 90 crore. The Tuticorin-based Sterlite plant, with a turnover of INR 13,700 crore, annually provides direct employment for 3,000 people, while 20,000 people are employed indirectly. It contributes around 3.5 percent of the total GDP of Tamil Nadu. It is the second-largest user of the Tuticorin port exporting copper worth about INR 6,000 crores in 2009–10. The plant supports about 50 ancillary industries in and around Tuticorin.28 CONCLUSION The case of Vedanta’s subsidiary in India, SiIL illustrates how a business unit with money power and economic clout can achieve whatever it wants to—enrich its coffers, without worrying about the niceties of law. The company has been flouting the laws of the land with impunity. It has grabbed the lands of tribals, caused irreparable harm to the ecology and environment, treated workers as sheer vendible commodities, taken over public property for a pittance with the connivance of powers, thrown all corporate governance norms to the winds, indulged in price rigging and insider trading. Yet our system is such that it allows such proliferation of scams and scandals by the rich and influential. Companies such as Sterlite do tout their CSR initiatives to the world with great fanfare, but it is obvious that it is done more to camouflage the sins of commission and 126 BUSINESS ETHICS—AN INDIAN PERSPECTIVE omission that goes beneath them, rather than out of a genuine concern for the poor and the marginalized sections of society. KEY WORDS Company profile ∑ Copper smelter and refinery ∑ Mumbai Stock Exchange ∑ Total quality management British Safety Council ∑ Executive chairman ∑ Relation agreement ∑ Responsiveness to the public ∑ Environmental consciousness ∑ Report card ∑ Adherence to ethical practices ∑ Social conscience ∑ Environmental impact assessment ∑ Smeltipot ∑ Deforestation ∑ Ethical infractions ∑ Safety consciousness ∑ Social consciousness ∑ Health and hygiene ∑ Community welfare ∑ Public assets and funds ∑ Insider trading ∑ Price rigging ∑ Share purchase agreement DISCUSSION QUESTIONS 1. Discuss the wide chasm that exists between Sterlite’s claim as an ethical organization and its unethical practices. 2. There seems to be wide variations between the profession of business ethics and actual practice at Sterlite. Do you agree? In your perception, why does this happen? 3. Explain the controversies surrounding the Sterlite Tuticorin plant. 4. Sterlite Industries Ltd. has been a profit-making corporation, notwithstanding the fact that the company seems to have gained certain degree of notoriety for various ethical infractions and non-compliance of legal norms. How do you account for the success of the company? 5. How do you account for the tremendous success Sterlite has achieved in spite of so many violations of law and acceptable governance practices? 6. Discuss the corporate governance infractions of Sterlite. NOTES 1. “Vision and Mission,” Sterlite Industries, available at http://sterlite-industries.com/vision.asp 2. Monahar D. Devadoss, K. S. Nandakumar and P. Ramesh, “Unethical Practices by Sterlite Industries (India) Ltd,” 2006, unpublished (Chennai: LIBA). 3. News Bureau, “Blast in Sterlite Unit,” Frontline, Vol. 14, No. 19, 1997. 4. MoEF Okays Vedanta/Sterlite’s Violate-First, RegulariseLater Mantra, Sterlite workers and ex-workers, 2005, available at www.esgindia.org/mosuno2005 /Sterlite%20 Copper%20Smelter%20Tamil%20Nadu.doc 5. Sterlite, available at www.sterlite-industries.com/ csr.asp 6. Nostromo Research and India Resource Center, “Ravages Through India,” Vedanta Resources plc Counter Report, 2005, available at www.indiarsource.org/issues/globalization/2005/Ravage sThroughIndia365.pdf 7. See Note 4 8. Ibid. 9. See Note 5. 10. Ibid. 11. Ibid. 12. Ibid. 13. See Note 2. 14. Ibid. 15. Praful Bidwai, “Poisonous Smelter Emissions,” 12–25 May 2001, Frontline. 16. V. Sridhar, “Battle Over Balco,” Cover Story, 17–30 March 2001, Frontline. 17. Rakesh Kalshian, “India Brings Darkness to India’s Indigenous Peoples,” India Resource Center, 16 June 2004, available at www.indiaresource.org/issues/ globalization/2004/sterlite.html 18. A London calling special, 10 January 2004, available at www.minesandcommunities.org/Aboutus/londoncall32.htm 19. Ibid 20. Business India, 13 March 2005, cited in Nostromo Research and India Resource Center, “Ravages Through India,” Vedanta Resources plc Counter Report 2005, available at www.indiaresource.org/issues/globalization/2005/ RavagesThroughIndia365.pdf 21. Infochange news and features, “How Big Businesses Get Away With Environmental Violations,” October 2005, available at www.minesandcommunities.org/Action/ press766.htm 22. Sucheta Dalal, “How Harshad Mehta Did it Again?” 24 April 2001, available at www.rediff.com/money/2001/ apr/24dalal.htm 23. Sucheta Dalal, “Sterlite and Videocon: The Harshad Link,” 26 April 2001, available at www.rediff. com/money/2001/apr/26dalal.htm 24. Nityanand Jayaraman, “Vedanta Undermines Indian Communities,” Corpwatch, 15 November 2001, available at www.corpwatch.org/article.php?id=12783 25. See Note 20. 26. S. Kumar, “BALCO After Privatisation,” People’s Democracy (Vol. XXVIII, No. 39), 26 September 2004, available at http://pd.cpim.org/2004/0926/ 09262004_balco.htm GLOBALIZATION AND BUSINESS ETHICS 27. Source:http://thehindu.com/business/companies/article1707115.ece 28. S. Varadharajan, “Sterlite Keen on Expanding Capacity,” The Hindu, 19 April 2011. FURTHER READINGS BALCO Officers Association, “Sterlite’s Malpractices: Violating Share Purchase Agreement With Impunity,” 127 People’s Democracy (Vol. XXVII, No. 50), 14 December 2003, available at http://pd.cpim.org/2003/1214/ 12142003_ balco.htm Nagaraj, S., “Balco Sell-off: Secretary Panel Backs AG Stand,” Economic Times, 21 August 2006, available at http://economictimes.indiatimes.com/ articleshow/1910502.cms Six CHAPTER Creating an Ethical Organization INTRODUCTION Is it possible to create an ethical organization? Can we make a corporation realize its objective of catering to the interests of all its stakeholders and yet keep its activities unblemished? In the present context, it appears that it is a task laced with insurmountable problems. People seem to have lost faith in corporations and look suspiciously at their goals and deeds. They believe that the potential for organizations to behave unethically has no limits. In today’s business world unethical practices seem to be commonplace and almost taken for granted. People hear and read day after day that corporations suppress evidences of the ill effects of their products on consumer health, dump polluted chemical wastes into rivers, resort to price fixing and insider trading, use their financial clout with politicians to acquire thousands of acres of land at throwaway prices and make the poor owners deprived of their livelihood, and steal information from government and competitors. Such being the case, can anyone blame the public when they are cynical about the possibility of companies ever becoming ethical or when someone argues that notwithstanding all these unethical practices, corporations can still be made to act ethically? THE PROBLEM IS NOT WITH CORPORATIONS, BUT THE PEOPLE WHO RUN THEM Are the corporations themselves responsible for the numerous unethical practices indulged and frauds committed in their names? As artificial legal entities, they are mere abstractions. It is the persons behind them, the so-called “agents” of the stockholders who are responsible for either the corporations having an ethical conscience or behaving waywardly to use the system to enrich their coffers. Enron collapsed because its founder and Chairman, Kenneth Lay conspired to defraud gullible investors while making personal fortunes of millions of dollars by selling company stocks when it was in deep financial straits. He used a company credit line to shore up his personal finances, contributed millions of dollars of company money to fund presidential elections with a view to using political influence to curry favour and persuaded his employees who considered him as a father figure to invest in shares of Enron which he knew was collapsing. In his attempt to swindle the company’s funds, he had an able ally, Jeffrey K. Skilling, who though was paid fabulously for being the company’s CEO, did contribute his mite to the collapse of Enron. Both Lay and Skilling were responsible for creating a corporate culture devoid of an ethical conscience. The same was the case with other mega corporations like WorldCom and Waste Management that collapsed. It was always the vile men who were paid fabulously to run their companies who committed frauds and malfeasance, causing the companies to become bankrupt. In India, the Global Trust Bank collapsed because its founder Ramesh Gelli indulged in unethical and illegal activities which he knew fully well would cause its failure. On the other hand, J. R. D. Tata and N. R. Narayana CREATING AN ETHICAL ORGANIZATION Murthy had built ethical organizations under more adverse circumstances because they were men of ethics and were committed to the cause they espoused.1 There are other innumerable instances, both negative and positive, to prove the point that a corporate is what its leader makes it to be. FAT PAY DID NOT ENSURE BETTER GOVERNANCE The above analysis indicates that by and large, the whole corporate sector has been infiltrated by malpractices, greed and unethical behaviour with a few honourable exceptions. For too often in recent times, both the print and electronic media have been full of accounts of corporate scandals and managerial misbehaviour. There are several striking evidences to show that managers of several mega corporations—some of which failed— amassed huge fortunes for themselves even while the organizations they were managing were heading for failure. Margit Osterloh et al.2 point out that in 1970, an American CEO earned, on an average, 25 times as much as an industrial worker, while in 1996 the average CEO earned about 75 times as much, if we take into account only basic salaries and bonuses. However, if other incomes such as exercised stock options are included, the income differential reached an almost incredible level. In developing countries like India too, the monetary and off the record compensations that CEOs of family-owned companies received almost matched, if not surpassed, those of American CEOs. But the rub is that the receipt of such huge salaries has led some of these top executives to act in ways that proved detrimental to their firms. They have been working more for shortterm gains than focusing on promoting long-term opportunities for their stockholders and other stakeholders. There are some analysts who hold the opinion that too much of pay and perquisites make corporate executives think that they are like government bureaucrats clothed with enormous powers and indulge in executive excesses that are detrimental to the interests of companies. FRAUDULENT ACCOUNTING TOO PLAYED ITS DESTRUCTIVE ROLE Apart from high executive compensations that have damaged the interests of corporations and consequently their stockholders, there is another factor that has played havoc with corporate performance, namely, fraudulent accounts. Once famous and successful companies such as Enron, WorldCom and Waste Management fell prey to this unethical practice of doctored accounts. In several cases, the very same CEOs who were paid fabulous compensations tampered with their companies’ accounts, like Enron’s Kenneth Lay and WorldCom’s Scott Sullivan (Cassidy). It is needless to stress that in all these accounting malpractices, these unethical men were diligently assisted by compromising accountants and auditors. If Arthur Andersen had refused to toe the lines of scamster CEOs, we would not have seen the collapse of mega corporations such as Enron and WorldCom. According to analysts, these scams caused severe damages not only to the affected companies, but also to the market economy as a whole through adverse market sentiments. The drop in stock prices has gained an added impetus and as a result of such misbehaviour investors have lost trust in managers. INDEPENDENT DIRECTORS TOO DID NOT HELP REDUCE MALPRACTICES Identifying the reasons as to why so many corporate scandals occur is a complex and difficult task. Proponents of corporate governance suggest that if the board of directors is proactive and provide professional guidance, it will help managers to run an organization on better and healthier lines. And to avoid the agency problem of vested interests in the board torpedoing stakeholders’ interests, they suggest that the board be made up of as many independent directors as possible. However, studies have shown that such practice too has not prevented malpractices in organizations. For instance, Enron had 80 per cent of its board consisting of independent directors, while Tyco had 65 per cent and WorldCom 45 per cent of such outside directors, and yet all of them had collapsed due to fraud and malfeasance. Dalton et al.3 argue that there was no statistical relationship between board independence and financial performance of organizations through a meta-analysis of 54 studies of board independence. Moreover, the firms were often audited by well-established professionals that included accountants, bankers and lawyers. For instance, as pointed by The Economist, Enron’s auditing committee was chaired by a distinguished accounting professor,4 while both the internal and external auditing of the firm was performed by one of the then world’s top five auditing firms, Arthur Andersen. In India, the earliest and the biggest mutual fund ‘The Unit Trust of India’ lost millions of rupees of investors’ money in spite of its board having non-executive directors and government’s own nominee directors. Many other boards of failed companies had independent directors, but almost all of them remained mute spectators in board meetings. 129 130 BUSINESS ETHICS—AN INDIAN PERSPECTIVE REASONS FOR THE FAILURE OF CONVENTIONAL MEASURES Identifying the real villain in ethical infractions in mega corporations is still more difficult because their activities are characterized ‘by a high degree of complex interdependencies’, which not only creates a governance problem, but also a difficulty in identifying any particular actor when things go wrong. Margit Osterloh et al.5 argue that offering individual incentives to get things done in organizations characterized by a web of interdependencies has caused havoc to the corporate virtue. “In the case of Enron, people were paid like entrepreneurs. Short-term thinking and, at the same time, performance distortion were encouraged. They were even induced to resort to illegal actions”. When top management was dishonest, it obviously percolated down to the bottom through the several layers of the administration. “With Enron, for instance, it was revealed that the whole board, including its president and vice president, knew about the malpractice. It was also general knowledge among the firm’s employees”. In the case of WorldCom, it was a slightly different story, scandalous nonetheless. In WorldCom, “dishonesty was not confined to the accounting department; the sales staff also falsified the accounts”.6 SUGGESTIONS TO IMPROVE CORPORATE VIRTUE Taking into account the reasons for the malpractices in the context of various studies that have been conducted, Margit Osterloh et al.7 have come to the conclusion that the means suggested through conventional wisdom enunciated by agency theorists and politicians to the malpractices do not work. Paying excessive compensations to top management and intensifying monitoring and sanctioning, according to them, tend to worsen the very problems they are designed to solve. Instead, they offer three alternatives: (i) Selection of managers should emphasize pro-social intrinsic preferences to ensure the conditional cooperation of other employees; (ii) stronger emphasis should be placed on fixed salaries to reduce the temptation to cheat; managers must be paid a fair market wage for their overall performance; and (iii) employees’ willingness to contribute to corporate virtue by identifying and admonishing anyone resorting to fraudulent accounting must be strengthened by participation possibilities and self governance. This promotes self-monitoring and sanctioning in an informal way, and to that extent, reduces the tendency to break rules.8 ROLE OF CORPORATE GOVERNANCE Corporate governance can be viewed as a set of arrangements internal to the corporation that define the relationship between the owners and managers of the corporation. Corporate governance relates to the working arrangement between various participants in determining the direction and performance of corporations who are (i) the shareholders, (ii) the management and (iii) the board of directors. The World Bank9 defines corporate governance from two different perspectives. From the standpoint of a corporation, the emphasis is put on the relations between the owners, management board and other stakeholders (employees, customers, suppliers, investors and communities). Another perspective in defining corporate governance is called ‘path dependence’ where initial historical conditions matter in determining the corporate governance structures that are prevalent today. So, a nation’s system of corporate governance can be seen as an institutional matrix that structures the relations among owners, boards, and top managers, and determines the goals pursued by the corporation. The Organization for Economic Cooperation and Development’s (OECD)10 original definition is, “Corporate governance specifies the distribution of rights and responsibilities among different participants in the company, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making and monitoring decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance”. Corporate governance plays a decisive and important role in creating the required values, virtues, commitments and corporate conscience for an ethical organization. Without corporate governance that is based on integrity, honesty, transparency, open communication, full financial disclosures and an uncompromising commitment to shareholder democracy, we cannot visualize an ethical organization. Corporate governance is needed to create a corporate culture of consciousness, transparency and openness. It refers to a combination of laws, rules, regulations, procedures and voluntary practices to enable companies to maximize shareholders’ longterm value. It should lead to increasing customer-satisfaction, shareholder value and wealth. With increasing CREATING AN ETHICAL ORGANIZATION government awareness, the focus is shifted from economic to the social sphere and an environment is being created to ensure greater transparency and accountability. It is integral to the very existence of a company. The fundamental basis of corporate governance and responsibility in the value system of the corporation includes the following: ∑ ∑ ∑ ∑ ∑ ∑ its human resource principles—respect and dignity for all its dedication to accurate and transparent accounting and financial standards its concern for the environment, for good business ethics and conduct, and for social advancement its over-riding passion to serve customers and to guarantee its products and services its insistence on fair treatment of suppliers and competitors its uncompromising commitment to comply with government laws and regulations in all countries in which it operates; and ∑ its desire to work with others to lead the society to a better economic standard and quality of life. Corporate governance enables corporations to perform efficiently by preventing fraud and malpractices. The ‘Code of Best Conduct’, policies and procedures governing the behaviour of individuals of a corporation form part of corporate governance. This enables a corporation to compete more efficiently in the business environment and prevents fraud and malpractices that destroy business from inside. Failure in management of best practice within a corporation has led to crises in many instances. The Japanese banks which made loans to property developers that created the bubble economy in the early 1990s, the foreign banks which granted loans to State-owned enterprises that became insolvent after the Asian financial crisis in 1997, and the demise of Barings bank are examples of managements not governing the behaviour of individuals in the corporation leading to their downfall.11 With ennobling features and characteristics, corporate governance can thus be described as the basic foundation on which an ethical organization can be raised. THE ROLE OF CORPORATE CULTURE Ferrel et al.12 define the term corporate culture as a set of values, beliefs, goals, norms and ways of solving problems by the members of an organization. Corporate culture can be created by a founder of the company based on his or her values and expectations. In the Indian context, Jamsetji Tata founded the Tata industrial conglomerate with his humanistic and philanthropic values, and till date his successors like J. R. D. Tata and Ratan Tata have followed his footsteps in evolving the distinctive Tata industrial ethos and culture. Likewise, N. R. Narayana Murthy of Infosys has seen that the information technology company he founded and nurtured embraced an ethical value system that made it one of the best organizations in the country even as it added feathers to its cap as one of the top and most successful IT companies in the country. The importance of the top person’s influence can also be illustrated by another example, this time as one having a baneful effect on the organization. There was a well-known managing director in a south India-based public limited company which had diversified business interests that included plantations, textiles, fertilizers, electronics, non-banking finance business, chemicals and several subsidiaries dealing in safe deposits, stock broking and granite. The founder of the group had the reputation of promoting the corporate culture in the south in 1930s and was one of leading lights of the Madras Stock Exchange. In the early 1980s, the group of companies had business worth Rs 2,500 million which was then considered quite a large business. The managing director (MD) who inherited the mantle of the founder-father was a post-graduate, well read, widely travelled, very amiable and articulate person who could deliver a speech extempore on any subject at a moment’s notice, and a popular and respected personality in society. He headed several national and international business and government organizations by virtue of his excellent leadership qualities. He was also instrumental in promoting many educational and charitable organizations to which he could collect funds by using his charisma, wide-ranging influence and sophistry. However, he had one weakness, the enormous love for money. He would expect a ‘cut’ in every business deal and it was rumoured that he had stashed enormous amount of black money in unnumbered Swiss accounts. A couple of times his home and office were raided by sleuths from the Income Tax Department who found huge amounts of unaccounted money. However, he could escape without being imprisoned or held accountable for the money by paying a fine only through a ‘deal’ with politicians. To cut the story short, his unethical practices were followed by his executives as well, and some of whom, who were very poor at the time of joining the company, amassed huge wealth. The company saw its decline with the sale of its chemical unit for less than Rs 250 million, whereas to put up a state-of-the art plant like it would have 131 132 BUSINESS ETHICS—AN INDIAN PERSPECTIVE cost no less than Rs 750 million at that point of time. One business after another failed and a few joint ventures with MNCs never took off for want of capital. An industrial empire he built on the foundations laid by his father collapsed one after another due to his avariciousness. He died unhappy and with a lot of unfulfilled ambitions. What he left behind was destroyed by his poorly equipped progeny. This is one case to illustrate how the unethical qualities of an industry leader infected the entire organization and caused the collapse of one of the most promising industrial conglomerates in the south, and with it resulted in a loss of substantial investments to its 40,000 shareholders. If the MD or CEO sets the tone and tenor of corporate culture, it easily moves down to the lower level. People pick up the values and try their best to follow them. They know what is acceptable and what is not in the organization. It is reported that Azim Premji, founder and chairman of Wipro Technologies, emphasizes a great deal on the integrity of his employees and ensures that it pervades every sphere and work in the organization. He also sits for long hours with the top management consulting and motivating to ensure this. He spends a considerable amount of time along with his team to recruit senior executives whom he considers men of integrity through their thoughts and deeds. In most organizations, senior posts are filled by people who are home-grown and are imbibed with the culture of the company. Each firm tries to develop its own corporate culture based on the values its founder wants to transmit in the work place. Rank outsiders who have worked in other organizations may have acquired values that are different and may take a long time to acclimatize themselves to the new culture, or if they are senior enough in the organization may influence others working under them to form a sub-culture that may not gel with the overall culture of the organization. This is the logic behind ethically bent organizations generally preferring to nurture and grow men and women imbibed with values they cherish to staff their divisions. ROLE OF CORPORATE SOCIAL RESPONSIBILITY The corporate culture of a firm is evolved by its people imbibing values, good or bad, which its top executives want to transmit by their own example. If the top executives have an ethical and social conscience, then they will, by their thoughts and deeds, inspire their subordinates to exhibit these values, both inside and outside their work life. Corporate social responsibility (CSR) is one value that is both inspiring and infectious. CSR refers to “an organisation’s obligation to maximise its positive impact and minimise its negative impact on society”.13 When an organization goes beyond its avowed economic goal of making profit to benefit its shareholders, reaches out to enrich social life through its philanthropic, environment-friendly, pro-poor and welfare activities, we say that it is socially responsible. Such philanthropic or social welfare activities are not required or normally expected of business, but these promote both goodwill and human welfare. CSR is a handmaid of business ethics. Figure 6.1 illustrates the place social responsibility occupies in the interconnected scheme of business ethics. Fig. 6.1 Steps Leading to Corporate Social Responsibility Source: Adapted from Archie B. Carroll: “The Pyramid of Corporate Social Responsibility, Toward the Moral Management of Organisational Stakeholders,” Business Horizons (July–August, 1991); p. 42, Figure 3. Used by courtesy of Archie B. Carroll. CREATING AN ETHICAL ORGANIZATION CSR comprises effective and ethical workplace practices, sustenance of depleting environmental resources, community welfare activities to narrow down the gulf between the rich and the poor and general exhibition of corporate citizenship. In recent years, many companies have established separate departments to document the best practices of CSR and integrate them into the organizational fabric. They are investing huge amounts in creating special foundations for the implementation of these practices with a view to making a difference to the people around them. They are also drafting special policies to ensure better working conditions and promoting family welfare of their workforce. The Tata group of companies, well-known for philanthropy and social concern, has involved all its units in some social initiative or the other. Their diverse approach towards CSR is designed to meet the needs of the environment as well as that of the community. They are more concerned in making an individual self-reliant rather than offering mere monetary assistance. Their offers of scholarships to meritorious students have encouraged many poor students to pursue their dreams of higher education. They have also created a relief committee to deal with eventualities, both natural and social. In addition, there are special programmes for the welfare of women, rehabilitation projects, etc. GE Foundation of the General Electric Company stands as a testimony of the philanthropic commitment of the corporate sector in India. Such foundations are instrumental in funding health and educational facilities, uplifting the poor and enhancing the standard of living of the poor in the rural sector. Infosys Foundation has done exceptional philanthropic work by providing shelter and assistance to destitute children and building libraries and science centres in several government schools run in remote areas. They are also providing financial assistance to artisans and their families in their endeavour to sustain and revive the disappearing art forms and the ethnic culture of rural India.14 Satyam Computer Services Ltd has a social vision and has set up several trusts to aid greater social equity and provide opportunities for the under-privileged. The company has set up two foundations called Byrraju Foundation and Satyam Foundation. While the former aims at rural transformation through enhancing health, education and living standards of close to a million people, the latter works in the area of urban transformation. Satyam also has revolutionalized the healthcare system in Andhra Pradesh and elsewhere by launching Emergency Management and Research Institute (EMRI) that offers one of the fastest ambulance services in the country. The TVS group companies, notably TVS Motor Company Ltd and Sundaram Fasteners Ltd have formed an NGO, Srinivasan Services Trust that has been doing yeoman’s services to rural communities by providing education, employment-oriented technical training, social forestry and promotion of tribal welfare in the states of Tamil Nadu, Maharashtra, Karnataka and Gujarat. The Trust has been in the forefront of providing relief during the Gujarat earthquake and the tsunami disaster in Tamil Nadu. Proponents of CSR argue that it offers several advantages, both within and without, to corporations engaged in social welfare projects. Within the organization, it cultivates a sense of trust and loyalty amongst the employees with organizational ethics. Still more significant is the fact that it offers a soothing diversion from the monotonous workplace routine and gives the involved employees a sense of satisfaction and fulfillment, in addition to offering a genuine meaning to their lives. Without, CSR enhances the positive image of the corporation amongst its immediate stakeholders and the larger society and earns a special respect amongst it peers.15 Another concept used in the context of ethical business and social responsibility is corporate citizenship. It is defined as “the extent to which businesses strategically meet the economic, legal, ethical and philanthropic responsibilities cast on them by their stakeholders”.16 It covers activities and various steps adopted by an organization to discharge its social responsibilities. Corporate citizenship implies a firm’s commitment and business focus to fulfil its social responsibilities as defined by its stakeholders. It involves the firm acting on its commitment of corporate citizenship philosophy and how it seeks to implement it.17 Several companies in India like Infosys, Tata Steel and Dr Reddy’s Laboratories have started developing a spirit of corporate citizenship. Loyola Institute of Business Administration (LIBA) confers The Mother Teresa Award for the Corporate Citizen every year to showcase a profitable listed company as a role model for commitment to the Corporate Citizenship, to management students and other corporations. It has so far chosen for the award, Titan Industries Ltd, Orchid Chemicals and Pharmaceuticals Ltd Tamilnadu Newsprints and Papers Ltd, Polaris Lab, Shriram Investments, TVS Motor Company Ltd, Tata Steel Ltd, and NTPC Ltd. CSR, as we have seen, emanates from the sense of corporate citizenship, which in turn is meant to meet the economic, legal, ethical and philanthropic responsibilities of an organization. The economic aspect of social responsibility relates how business firms use the country’s scarce resources and respond to fluctuating trends in the economy with a view to maximizing stakeholder, especially its employees’ interests. The ethical aspects of corporate responsibility lie in balancing the conflicting interests of its stakeholders including its 133 134 BUSINESS ETHICS—AN INDIAN PERSPECTIVE competitors. Organizations also observe their legal responsibility by complying with the law of the land established by governments to set minimum standards for responsible behaviour. Such laws relating to business are meant to regulate competition, protect employees and consumers, promote safety and equity in places of work, protect environment from capricious destruction, provide incentives and prevent misconduct. Perhaps the most visible and significant aspect of a firm’s social responsibility is philanthropy. This involves its commitment and contributions to the local community and society. Corporate philanthropy is set to get to society four advantages that include improvement in the quality of life, reduction in government intervention in the day-to-day business life, enhancing leadership skills of workers and above all promoting their morals.18 Philanthropic-minded companies contribute generously to education, public health, environmental causes, and provide support and succour to the poor and those affected by natural calamities. “Strategic philanthropy involves linking core business competencies to social and community needs”.19 Business ethics is another dimension of social responsibility. Business ethics would encompass such norms, standards, concerns and expectations of major stakeholders seen from the perspective of corporate social responsibility.20 Only when firms incorporate ethical concerns in their value system and include ethics in their business strategy, can social responsibility as a value be factored in their daily decision making. OTHER INFLUENCES IN CREATING AN ETHICAL ORGANIZATION We have analysed various factors that contribute to the creation of an ethical organization such as corporate governance and corporate citizenship both of which are to some extent guided by outside influences including those of the government and regulators who not only provide guidelines but also penalties in case of infractions or wrongdoing. But there are certain steps that a corporate can initiate internally, which will go a long way in creating an ethical organization. Ethical or unethical behaviour of individual employees are influenced in the context of the workplace both by their own moral development and the influences that the organizational culture exerts on them. They are influenced by a plethora of forces that surround them—their peers, their supervisors and superiors, the reward system, group norms, company values and policies and the manner of their implementation. Ethical behaviour in companies can be encouraged by a number of ways. The human resources management (HRM) department of a company plays a pivotal role in ensuring this through its role in training, communication with workers, and in its manner of enforcing discipline in the organization. DEVELOPING AND EXECUTING A COMPREHENSIVE ETHICS PROGRAMME Ethical behaviour in organizations can be encouraged in a number of ways, most of which are executed by the HRM department through its roles in training, communication and discipline. Some big corporations that are ethically committed, assign the primary task of managing and monitoring ethical behaviour to their HRM department. In some others, there may be ethics officers who are entrusted with the responsibility to bring in ethics in every endeavour of their organizations. Whichever agency is entrusted with the task of enforcing ethical behaviour in organizations, a sound ethics programme should include the following six components:21 1. formal codes of conduct; 2. ethics committees formed with a view to developing ethical policy for the organization and also investigating ethical infractions by employees; 3. ethics communication system that would include the facility for employees to post queries, get advice, or report any wrongdoing; 4. an ethics office with officer(s) to oversee the process and facilitate the communication of the policy to employees; 5. ethics training programmes meant to make workers conscious of ethical issues that are likely to arise at the place of work; and how to deal with them effectively; and 6. a disciplinary system that would ensure prompt, decisive and impartial dealings with violations. We will deal with each of these six components of an effective corporate ethics programme in some detail. CODES OF CONDUCT Several companies that have vowed to implement ethical behaviour at their work places have started the process with developing and implementing codes of conduct for their employees. Codes of conduct are statements of CREATING AN ETHICAL ORGANIZATION organizational values that comprise three components, namely, a code of ethics, a code of conduct and a statement of values. A code of ethics is an exhortation to employees to observe ethical norms and forms the basis for rules of conduct. A code of ethics is often inspirational and comprehensive enough to cover the entire scheme of organizational ethics expected to be followed by everyone in the company. It usually ‘specifies methods for reporting violations, disciplinary action for violations and a structure of the due process’ to be followed. A code of conduct is a written document, inspirational in content and specifies clearly what is acceptable or unacceptable behaviour at the workplace and beyond, when employees represent their organizations outside. Generally, the code is worked out with the active involvement of top management. It should reflect the managements’ desire to incorporate the values, rules, and policies of the firm, the compliance of which will ensure an ethical environment in the organization.22 A statement of values is one that is conceived by the management to serve the general public, and normally addresses the stakeholder groups. It should be emphasized here that though a distinction is normally made between these—a code of ethics, a code of conduct and statement of values—they are often used interchangeably. In India, all major companies have developed their codes of conduct after the publication of A Desirable Code by the Confederation of Indian Industry (CII) in 1998. Tata group of companies, Infosys, Hindustan Lever Ltd, Wipro Technologies Ltd, ICICI, HDFC, Cummins India, Ranbaxy, Dr Reddy’s Lab, Polaris Lab, Orchid Chemicals and Pharmaceuticals Ltd and the Birla group of companies are some of the prominent corporations that have adopted codes of conduct for their employees. ETHICS COMMITTEES Ethics committees are formed in many organizations that are exclusively devoted to the pursuit of ethics at their work places. These committees may raise concerns of ethical nature, prepare or update codes of conduct and resolve ethical dilemmas in companies. These committees may formulate ethics policy, develop ethical standards, and in the context of these norms, evaluate the company’s compliance with them. Members of ethics committees should be well chosen, if they are to serve any useful purpose in organizations. They should be well posted with the knowledge of their industry, their codes of ethics and community standards. There are a few constraints with regard to the organizing, development and usefulness of ethics committees. These are not as popular as they ought to be, as formalized structures to deal with ethical issues. Very few corporations have convinced themselves to appoint such committees, though almost all of them have ones to deal with finance, personnel, remuneration and even CSR. Another problem is their being misused by managements to serve their interests, or to legitimatize their ‘ethical’ standards on some issues. More often, selection of members to these committees may pose serious problems. Committee members should be selected for their objectivity and unwavering commitment to ethical standards and they should also be conscious of the corporate culture and ethical conscience of the organization. ETHICS COMMUNICATION SYSTEMS Ethics communication systems play a crucial role in making an ethics programme successful. If an organization keeps the various facets of the programme under the bushel as it were, it will serve no purpose. Ethics communication systems should allow employees to make enquiries, get advice if needed, or report wrongdoing. It is absolutely necessary to have a system in place to communicate and educate employees about the company’s ethical standards and policies. The objective of the ethics communication system should be to (i) communicate the company’s values and standards of ethical business conduct to employees; (ii) provide information to employees on the company’s policies and procedures regarding ethical business conduct; (iii) put in place processes to help employees obtain guidance and to resolve questions regarding compliance with the firm’s standards of conduct and values; and (iv) establish means of enquiry such as telephone hotlines, suggestion boxes and e-mail facilities for employees to get in touch with and get advice from competent authorities. It is also ideal to have one of these facilities available to allow anonymous contact, where and when required. Apart from these means of communication within the organization, there are other avenues that can be used to communicate a firm’s moral standards to its workforce. Top management people can communicate with managers at the operational level, such as in production, finance and marketing and enforce overall ethical standards within the organization. If the organization has a newsletter, it can be used to publicize the company’s code or statement of ethics. Since this internal medium of communication has an extensive reach within the organization, it is an effective means to get the message across. If the organization has an existing system 135 136 BUSINESS ETHICS—AN INDIAN PERSPECTIVE of briefing groups and management meetings, these fora can also be used as means of communicating values. In recent times, companies publish attractive multi-coloured laminated posters with their ethics policies printed and place them at the most visible and accessible places such as meeting halls and canteens for all to see and remind them constantly what the company stands for in terms of values. In some instances, there is a practice of making people sign their ‘allegiance’ to the organization and its values and goals. These firms require their employees to periodically sign a document reaffirming their commitment to the code of conduct. This practice, if done professionally and convincingly, is certainly one possible way of keeping the importance of ethical behaviour in front of people’s minds all the time. Some very big organizations also use the external media such as frontline newspapers and popular magazines to publish their ethical standards on special occasions like anniversaries both as a public relations exercise to project themselves as ethical organizations and as a means of getting across the message to external stakeholders. In such cases, however, special care should be taken to draft such media releases taking into account the most likely public responses when things go wrong. Thus, communicating with the employees the moral standards an organization stands for is the most important exercise in creating an ethical organization. A firm may have worked out well-formulated ethical standards with a view to making it an ideal organization ethically, but if it does not reach its employees or fails to convince them of its importance, it fails in its very objective. ETHICS OFFICE/OFFICERS In the United States and Europe, the practice of setting up ethics offices or appointing ethics officers has become popular among organizations to oversee the process and to facilitate communication of ethics policies to employees. The ethics officer has become a recognized job title, and there is now a professional association for such individuals.23 Ethics officers are usually “responsible for assessing the needs and risks that an organization-wide ethics programme must address, developing and distributing a code of conduct or ethics, conducting training programme for employees, establishing and maintaining a confidential service to answer employees’ questions about ethical issues, making sure that the company is in compliance with government regulation, monitoring and auditing ethical conduct, taking action on possible violations of the company’s code, and reviewing and updating code”.24 The position of ethics office/officer is relatively new, hardly about two decades old in most organizations even in advanced countries. The Sarbanes–Oxley Act and similar regulatory enactments provided the incentives for corporations to take the initiative of appointing ethics officers, as they wanted to develop a reputation for credibility, integrity, honesty and responsibility through the establishment of such ethics monitoring bodies. Since the position of ethics officers itself is new, its functions are yet to be standardized; they are gradually evolving over time. The position of ethics officers is slowly emerging in companies throughout the world. As of now, there is no specific cadre of trained ethics personnel companies can draw from to man their ethics offices. They often move into their positions from other jobs in their companies. The Ethics Officer Association (EOA) of the United States, which has currently around 1,000 members, is said to have one-third of its members with law degrees and one-fourth with financial backgrounds. In some cases, they have moved up from their companies’ ranks and were selected because of their knowledge of the company, communicative skills and their ability to develop training programmes. In India, ethics officers are an emerging breed. Many ethically committed, professionally run corporate bodies have started appointing ethics officers whose functions in the Indian context are still evolving, though their basic job descriptions remain the same as found elsewhere. ETHICS TRAINING PROGRAMMES One of the important components of a corporate ethics programme is the training given to employees, aimed at ensuring their ethical behaviour in an organization. The basic objective of such a training programme is to offer assistance to employees to understand the ethical issues that are likely to arise in their work environment, and how to deal with such issues. Mere mouthing of values and distribution of glossy brochures on company’s ethics policy at company meetings do not change employee behaviour to any significant degree. Reinforcement of the message on the importance of its espoused values will show that the company means business. One of the most powerful ways CREATING AN ETHICAL ORGANIZATION of achieving this objective is to ensure that the ethical principles the company believes in are incorporated in every aspect of employee training25 with a view to sensitizing them on the need for ethical behaviour. When new executives and workers are recruited, they should be made familiar with the company’s code of ethical behaviour and the importance of abiding by the code should be elaborately dealt with at the induction meeting. Additional facilitating factors such as a learning centre or special library of books, journals and films on business ethics and values could be helpful for employees. Proper and well-developed training can educate employees about the firm’s policies and expectations, important and relevant laws and regulations and the need to comply with them. “Training programmes can make employees aware of available resources, support systems, and designated personnel who can assist them with ethical and legal advice. They can also empower employees to ask tough questions and make ethical decisions”.26 Many firms are now incorporating ethics training into their employee and management training efforts both at the induction period and at their annual refresher courses. Ferrel et al. stress the fact that ethical decision making in an organization is influenced by the corporate culture, by peer groups and by the opportunities available to engage in unethical behaviour.27 Ethics training can affect all these factors. For instance, when employees are trained about the philosophy of management, rules and procedures, they will be aware of their importance. This will strengthen both the organizational culture and the ethical stance of peers and supervisors. If such awareness is sunk into their conscience, it will enable them to fight against unethical behaviour and reduce the potential for misconduct. If ethical training is thoughtfully and meaningfully worked out, it can ensure that everyone in the organization (i) recognizes situations that might require ethical decision making; (ii) understands the values and culture of the organization; and (iii) is able to evaluate the impact of ethical decisions on the company in the light of its value structure.28 For the ethics training programme to be effective and fruitful, it is important that there is the full involvement of senior executives from every department in the organization. There must be a detailed and uninhibited discussion on the ethical code and philosophy with enough opportunities provided to employees to express their concerns, seek solutions to questions and be aware of consequences for ethical infractions. Employees also should be clearly informed of the difference between personal and organizational ethics and how ethical dilemmas can arise when they conflict, with possible solutions based preferably on real-life situations and experiences. An effective ethics training programme will ensure a better understanding of ethical issues by employees and their ability to identify them, and eventually reduce the number of ethical dilemmas in the workplace. In the Indian context, ethics training has not assumed the importance it deserves to have. There are very few corporations in the country that have incorporated ethics training into their induction programmes for employees. Some amongst them invite outside speakers to talk to their employees on ethical issues as part of their employee improvement and welfare activities. Sometimes, priests or men of religion and morals may be invited to speak to employees about the importance of being good and e thical in one’s individual and group behaviour. DISCIPLINARY SYSTEM Just working out a code of conduct or of ethical behaviour will serve little purpose in an organization. If it is not properly enforced, it becomes mere window-dressing and will not help in achieving the company’s mission of enhancing ethical decisions and behaviour. It is absolutely necessary, therefore, for a corporation committed to ethics to establish a disciplinary system to deal with ethical infractions promptly and decisively. Workers in organizations generally desire such infractions to be dealt with severely. “Failure to respond to unethical behaviour may lead to feelings of inequity on the part of ethical employees and threaten the entire social system that supports ethical behaviour in the organization.”29 Moreover, efforts to seriously curb unethical conduct are needed for companies to establish long-term relationships with their workers, customers, and community at large. “If the code of ethics is aggressively enforced and becomes part of corporate culture, it can effectively improve ethical behaviour within the organization”.30 While enforcing disciplines, especially in large organizations, there is a likelihood that moral principles are enshrined into rules and regulations which, in course of time, become inflexible and inhuman. If applied too mechanically without humanitarian considerations, what is intended to be an instrument to ensure ethical behaviour may become an unethical straitjacket by itself. In the course of ensuring ethical conduct, companies should be (i) Consistent, that is, adopt a fair attitude towards everyone without any discrimination or 137 138 BUSINESS ETHICS—AN INDIAN PERSPECTIVE bias. Companies should not only be fair, but also appear to be fair. But even here, there should be a balance maintained between fairness and the consideration of circumstances that led to ethical violations and their gravity. (ii) Investigate causes thoroughly, that is, sometimes there may be some hidden causes that are treatable, or have been the result of a faulty system in the organization. In such cases, it will be unfair to penalize the employee. (iii) Think of the consequences, that is, often disciplinary action results in not only unexpected consequences but also unintended outcome on multiple stakeholders. It is necessary for the company to know of the consequences on various stakeholders before disciplinary action is initiated against the wrongdoer according to the rulebook. (iv) Show due care, that is, the objective of disciplinary action should be to ensure correction and not destruction. Without letting the disciplinary system be ruined, care should be exercised to evaluate the situation humanely and see whether the individual can be helped to recover from wrongdoing, of course, when the offence happens to be not so significant to cause a dent in the ethical policy of the company. An ethics programme, if it has to be effective and fruitful, may use a number of methods to monitor and measure its efficacy. Whether employees diligently pursue the ethical code can be monitored through keen observation by ethics officers, internal audits, surveys, investigations and reporting systems. Sometimes external audit and review of company activities may be used in benchmarking compliance.31 To have and maintain an effective ethics programme calls for a continuous monitoring of the tools used and results obtained. It should not be taken as a one-time affair. Consistent enforcement and pursuit of disciplinary system are necessary for achieving a sound and fruitful ethics programme. While implementing an ethics programme, companies should follow a coordinated approach if they want it to bear the desired results. They should (i) be very clear about the goals and means of implementing the programme; (ii) set realistic and easily observable objectives; (iii) associate senior managers in the development and running of the programme; (iv) develop programme literature that addresses the ethical dilemmas and concerns of the average employee; (v) develop a programme exclusively for the particular work place and not try to duplicate it elsewhere, especially in locations in other countries where there could be different norms of ethical behaviour; (vi) ensure that the programme is not a series of lectures; (vii) monitor assiduously, evaluate the effectiveness of the programme and adopt corrective measures wherever necessary; (viii) put in place an effective communication system to facilitate a two-way exchange of information; (ix) ensure the existence of a disciplinary system that penalizes promptly and appropriately the wrongdoers while patting and rewarding the achievers; and (x) create a machinery for continuous monitoring and evaluation, with a view to updating the programme and its methodology. SUMMARY The foregoing analysis enumerates the series of measures and steps that are required to be initiated by the management of a corporation to create an ethical organization. It is apparent that the whole exercise appears forbidding, and unless the top brass is totally committed to the single-minded pursuit of its goal, the roadblocks on the way could thwart their attempt. Questions will be raised at every step: is it worth it? how much to invest in it? is the outcome worth the investments in efforts, men and materials? how long should one wait to taste the fruits of all these investments? is the investment commensurate with the result of just being called an ethical organization? all these questions are, of course, superficial and uncalled for once the top brass has taken the irretrievable decision and commitment to pursue the path of being an ethical organization. It is not merely because a virtue is its own reward. It has taken hundreds of years, thousands of corporate failures and collapses, and branding of them by society as Shylocks who fatten on the miseries of the poor for business to realize that ‘the business of business is ethical business’. To reinforce the conviction comes a series of research findings to demonstrate that there are innumerable corporations in the world, which have proved that investment in ethical business has brought each one of them profit, a fair name, long-term goodwill and reputation they could never have been earned otherwise! At the same time, it must be emphasized that creating an ethical organization is not an easy affair. When hundreds of individuals with different moral standards assemble at a work place, creating its own ethical dilemmas and complex processes of decision making, it is not easy to be ethical in every aspect of such group behaviour. Those in authority with a tight grip over decision making process have to demonstrate their commitment to be ethical and ensure that such commitments percolates down to every layer of the organization. They have to demonstrate in their thoughts and KEY WORDS Ethical organization ∑ Unethical practices ∑ Com monplace ∑ Corporate culture ∑ Ethical conscience ∑ Market economy ∑ Fabulous compensations ∑ Corporate scandals ∑ Conventional measures ∑ Web-architecture of interdependencies ∑ Corporate virtue ∑ The code of best conduct ∑ Humanistic values ∑ Tone and tenor of corporate culture ∑ Corporate social re- sponsibility ∑ Handmaid of business ethics ∑ Pro-poor welfare activities ∑ Philanthropy ∑ Social concern ∑ Corporate citizenship ∑ Ethics programme ∑ Ethics committees ∑ Disciplinary committees ∑ Communication systems ∑ Ethics training programmes ∑ Ethical aberrations. DISCUSSION QUESTIONS 1. Discuss the reasons why the conventional model of corporate governance failed to improve the ethical performance of companies. List the measures you would suggest to improve ethical corporate performance. 2. How are business ethics, corporate governance and corporate social responsibility interconnected? What are the underlying principles that run through these ethical threesome? 3. Explain how you would build an ethical organization, step by step. In such an endeavour, which of our Indian entrepreneurs would you choose as your role model, and why? NOTES 1. A. C. Fernando, “Creating an Ethical Organization,” Management Matters (Vol. 1, No. 6, 2006), Chennai: LIBA. 2. Margit Osterloh and Bruno S. Frey, “Corporate Governance for Crooks? The Case for Corporate Virtue.” In Anna Grandori, ed. Corporate Governance and Firm Organisation (Oxford, UK: Oxford University Press, 2004). 3. D. Dalton, C. Daily, A. Ellstrend, and J. Johnson, “Meta-Analytic Reviews of Board Composition Leadership, Structure, and Financial Performance,” Strategic Management Journal (Vol. 19, 1998): 269–290. 4. The Economist, 13 June 2002, available at http://72.14.235.104/search?q=cache:Eob0zh1wT18J: www.anecdotage.com/index.php%3Faid%3D10345+Enron%27s+auditing+committee&hl=en&ct=clnk& cd=10 5. See Note 2. (Continued) deeds that they mean business, and the unwavering pursuit of their goal should be reflected in every work that is carried in the organization. The top brass, more than the employees, should show by their living example, that there is no divergence between the professions they make for public consumption and the way they practice ethics in life. Most mega corporations collapsed because of the divergences in professions and practices of their CEOs. Another important factor in the creation of an ethical organization is the need to institutionalize ethical practices in the structure and in every layer of the company. Most importantly, the management of the firm has to monitor ethical conduct of individuals at every stage through a well worked out system. Even in the best of organizations committed to ethical conduct, aberrations can arise. These aberrations have taken place at Infosys and ITC. Organizations should be careful enough to avoid them, develop a keen sense to anticipate them, tackle them well enough so that they do not harm the overall interests of the organization and more importantly, put in place systems and procedures to ensure that such aberrations do not repeat themselves. Eternal vigilance is the price a firm pays to ensure the ethical conduct of every one who constitutes the organization. 139 SUMMARY CREATING AN ETHICAL ORGANIZATION 140 BUSINESS ETHICS—AN INDIAN PERSPECTIVE 6. B. Spector, “The Un-indicated Co-conspirator,” Organizational Dynamics (Vol. 32, 2003): 207–220. Cited in A. C. Fernando, Corporate Governance: Principles, Policies and Practices (New Delhi: Pearson Education, 2006). 7. See Osterkoh and Frey (2004). 8. Ibid. 9. Stijn Claessens, “Corporate Governance and Development,” Global Corporate Governance Forum, available at www.gcgf.org/ifcext/cgf.nsf/AttachmentsByTitle/Focus_1_CG_and_Development/$FILE/ Focus_1_Corp_Governance_and_Development.pdf 10. OECD, “Corporate Governance of Non-Listed Companies in Emerging Markets,” 2005, www.oecd. org/dataoecd/48/11/37190767.pdf 11. See Note 1. 12. O. C. Ferrel, John Paul Fraedrich and Linda Ferrel, Business Ethics, Ethical Decision Making and Cases, 6th ed. (New Delhi: Bizantra, 2005). 13. Ibid. 14. U. Sandhya, “Corporate Social Responsibility,” The Hindu, 9 August 2006. available at www. thehindujobs.com/thehindu/jobs/0608/2006080900060100.htm 15. Ibid. 16. Paul W. Taylor, Principles of Ethics: An Introduction (Encino, CA: Dickinson, 1975). 17. See Note 12. 18. Ibid. 19. Ibid. 20. Ibid. 21. D. Cynthia Fisher, Lyle F. Schoenfeldt, and James B. Shaw, Human Resource Management, 5th ed. (New Delhi: Bizantra, 2004). 22. See Note 12. 23. See Note 21. 24. See Note 12. 25. David Murray, Ethics in Organisations (New Delhi: Crest Publishing House, 2001). 26. See Note 12. 27. Ibid. 28. Diane E. Kirrane, “Managing Values: A Systematic Approach to Business Ethics,” Training and Development Journal (Vol. 1, November, 1990): 53–60. 29. See Note 21. 30. Ibid. 31. Ibid. FURTHER READINGS 1. Fernando, A. C., Corporate Governance: Principles, Policies and Practices (New Delhi: Pearson Education, 2006). 2. Sarbanes–Oxley Act, 2002, available at www.klehr.com/Articles/Sarbanes_Oxley_Act2002.html CREATING AN ETHICAL ORGANIZATION 141 CASE Study WIPRO LIMITED: AN EARNEST EFFORT TO CREATE AN ETHICAL ORGANIZATION (This case study is based on reports in the print and electronic media, and is meant for academic purpose only. The author has no intention to sully the image of the corporate or executives discussed.) COMPANY PROFILE Wipro was established in 1945 as a small vegetable oil company by Azim Premji’s father M. H. Hasham Premji. Azim Premji joined Wipro in 1966 and transformed it into one of the largest product development and services outsourcing companies in the world. In 1979, he began developing his own computer and in 1981 started selling the finished machine, going on to become India’s top-selling computer maker in two decades. In 1984, Wipro attempted to break into packaged software by developing a spreadsheet and word-processing package. This started the ball rolling and Wipro expanded its research and development initiatives for global clients. Presently, the company is the country’s third largest software exporter. Wipro’s 300-plus customers sound like a virtual ‘Who’s Who’ of the IT industry and include such illustrious companies such as Microsoft, Sony, ABN Amro, Ericsson, General Motors, National Grid Transco, who are serviced from one of the 30 offices worldwide. The company has grown at an average rate of 42 per cent in the last 12 years turning over US$ 900 million, employing 23,300 people and making Azim Premji not only the second richest Indian, but also one of the richest men in the world. Recently, Forbes business magazine has placed Premji as World’s sixth richest TechTitan with a net worth of US$ 13.3 billion.1 Over 20 years, Wipro has built its services and expertise to deliver IT consulting in product design services, embedded systems software, control systems design and system integration. This includes ∑ ∑ ∑ ∑ package implementation; application development and maintenance; IT infrastructure outsourcing; remote processing applications including customer interaction services, business process outsourcing and knowledge services; ∑ total outsourcing; and ∑ hardware and software. Wipro still retains a light-bulb business, toilet soap and edible oil division and a 12-year-old joint venture with GE Medical Systems to make diagnostic equipment. Together they produce 35 per cent of Wipro’s sales and will continue to operate keeping the Wipro brand in the public eye. It is expanding into areas such as research, and helping customers design their IT systems. It is also expanding its business process outsourcing (BPO) services and building up software expertise in health care, retail and energy. Today, Wipro BPO is the largest third party BPO outfit. Wipro Limited is the first P CMM Level 5 and SEI CMM Level 5 certified IT services company globally. In the Indian market, Wipro is a leader in providing IT solutions and services for the corporate segment. In the Asia Pacific and Middle East markets, Wipro provides IT solutions and services for global corporations. Wipro’s ADSs are listed on the New York Stock Exchange, and its equity shares are listed in India on the Mumbai Stock Exchange, and the National Stock Exchange, among others. COMPANY PERFORMANCE Wipro Limited reported an 18 per cent rise in its net profit for the second quarter ended 30 September 2007, with a consolidated revenue of Rs 47,847 million representing a 35 per cent increase year-over-year (YoY), attributed to broad-based growth across verticals, services and geographies. 2 BUSINESS STRATEGY It has been commented that Wipro has been perhaps the most successful adapter among Indian corporations evolving with success from soap and consumer care to computer and services.3 However, the adaptation and evolution have not been smooth. There had been occasions when Wipro seemed to teeter on the brink. For instance, in the late 1990s, several senior executives left Wipro to start their own ventures. Everyone thought that this would put an end to the company’s onward march. However, Premji tided over the crisis by deftly capitalizing on the huge Y2K opportunity at that time. Capitalizing on the opportunity, Wipro branched into a new 142 BUSINESS ETHICS—AN INDIAN PERSPECTIVE area, becoming a full-fledged service provider to several international customers. Thus, Wipro emerged from the crisis created by the exit of several top executives much stronger. Again, in 2001–2002, when the dotcom bust in the United States from where most of Wipro’s business came from, the company was hit hard. The crisis also revealed a critical weakness the company suffered from—Wipro had too many eggs into too few baskets. Taking cognizance of its weakness and to remedy the situation, Wipro proceeded fast to diversify the company’s product portfolio by acquiring companies with diverse portfolios. Wipro went on an acquisition spree to take over a ‘string of pearls’. In July 2002, Wipro acquired Spectramind for US$ 4.069 million, considered to be too high a price at that time. Today, Spectramind, renamed Wipro BPO, is a goldmine for the company, having added during the second quarter of 2006, 54 clients, 11 of whom are Global 500 or Fortune 1000 clients, apart from posting strong revenue growth and operating margin improvement, reinforcing Premji’s confidence that the Wipro BPO is moving in the right direction of delivering industry-leading growth rates.4 Wipro has added nine ‘pearls’ so far, amounting to a net profit of Rs 20,674 million in the financial year 2005–2006 and is now homing on still large acquisitions. These acquisitions have helped boost the company’s scale and recorded a total income of Rs 106,206 million against Rs. 816,980 a year ago.5 WIPRO BPO OPENS RURAL CENTRE Wipro BPO, the business process outsourcing arm of Wipro Technologies, has opened its first rural centre at Manjakkudi village in Tiruvarur district of Tamil Nadu. This village has a population of about 2500 and has been selected because of the relatively high level of investment in education in the region. The centre has a capacity of 120 seats and will have a 50-seat pilot project for an international client in the retail sector. The centre focuses on capitalizing the talent pool available in the region. At the centre, graduate students would be employed to deliver a range of services to customers. The centre will be primarily engaged in non-voice data processing. By March 2013, Wipro would have 500 seats capacity in its rural BPO operations and intends to replicate this model across other states. This is an innovative model of delivery where an employee could stay with the company for a longer period compared to BPOs in urban areas as their workplace is closer to their residences. WIPRO’S SPIRIT OF WIPRO RUN Wipro organises every year the Spirit of Wipro Run in 35 locations across the world including India, US, UK and other countries of the world with participation from its employees, family and friends to spirit its values. The theme chosen for 2011 was ‘diversity’—diversity in all forms including people, gender and geographies. Reflecting the theme of diversity, Wipro’s online portal Channel W carried a live update of participants for the run with a picture and a small description about them to enable the runners to know more about one another. Started in 2006, it is an event that provides a profound platform for Wipro employees to know one another and experience camaraderie. WIPRO INTRODUCES 100% RECYCLABLE TOXIN-FREE GREENWARE PCS Wipro Infotech has announced in mid 2011 the launch of its new eco-friendly Wipro Greenware Desktops produced with material completely free of deadly chemicals such as PVC and BFRs for the first time in India. Wipro’s R&D team and suppliers have worked tirelessly for more than two years to find safer alternatives to these toxic chemicals. Wipro has also ensured that the basic technical requirement for alternative materials wherein they perform their intended function meet or exceed product reliability requirements and current flammability rating as per IT industry standards. WOMEN OF WIPRO COUNCIL TO EMPOWER WOMEN TO CREATE THEIR FUTURE The Women of Wipro (WoW) council has launched several initiatives to facilitate, enable and empower women employees to ensure a consistent increase in women representation at various levels in the company. Representation of women in Wipro has increased from 19 per cent to more than 30 per cent in 2011. Panel discussions with women leaders within the company, mentoring programmes for high potential women, workshops and development programmes and a Women of Wipro website enable women grow in their careers. ENABLING PEOPLE WITH DISABILITIES Being an equal opportunity employer, Wipro has created more career opportunities in the company for people with disabilities. Wipro’s recruitment, training and other policies reflect this and the firm has recruited 20 such people in the last 2 years. In recognition of these efforts, Wipro was conferred the NCPEDP Shell Helen Keller Award for 2009. Wipro has also addressed other societal issues such as ecological sustainability, social sustainability, Wipro Applying Thought in schools, Mission 10X emphasizing creativity of the learner, Wipro Cares focusing on education and health care for marginalized communities, and environment and disaster rehabilitation. CREATING AN ETHICAL ORGANIZATION 143 Fig. 6.2 Wipro’s growth: 1945–2005 Source: Ganesh Prabhu, Namaste Spain, 2005. Courtesy of Ganesh Prabhu. FACTORS BEHIND THE SUCCESS OF WIPRO Wipro Ltd attribute their success (Fig. 6.2) to investing heavily in their employees, state-of-the-art technology, and applying strict ethical standards. Wipro steadfastly adheres to corporate governance in a country well known infamously for corrupt business practices. Wipro also has been enjoying competitive advantage by engaging highly skilled Indian talents, who are comparatively cheaper than their Western counterparts. Other factors that brought them success include the following: ∑ Unwavering commitment to excellence. ∑ Maintaining transparency in its business practices and accounts. ∑ Following a business model that showcases four core values— integrity, human values, innovation and value for money. ∑ Leading the market by focusing on work at the cutting edge of technology. ∑ Putting in place the concept of Six Sigma qualities. Wipro has pioneered and earned significant savings from this initiative, by reducing cycle time and defects in its products and services. Six Sigma initiatives form the basics for a defect-free environment across Wipro. ∑ Attracting, investing, developing and retaining the best talent. ∑ Recognizing customers as the key stakeholders and making and enabling business divisions to be more responsive to consumer needs. ∑ “Innovation has been successful in launching and sustaining a long-term initiative of building an IP (intellectual property) portfolio, which requires investments in people, Capex (capital expenditure) and marketing for a long-term gain. The Wipro Innovation initiative is directly under 144 BUSINESS ETHICS—AN INDIAN PERSPECTIVE Azim Premji’s office to address this need”.6 Such initiative helps to identify ideas, concepts and areas that have potential marketability and prepare a suite of IPs and remedies that help the company create a differentiation with its competitors. Wipro’s mission, quality mechanisms and approach to innovation reflect the above-mentioned key initiatives.6 CORPORATE SOCIAL RESPONSIBILITY Wipro has used their wealth and standing to contribute to improvements in the community. One of the core values of Wipro is a strong sense of social responsibility and commitment to help people and communities. The company is actively involved in various community development programmes. Wipro has set up ‘Wipro Applying Thought in Schools’ and ‘Wipro Cares’. The former is an initiative focused on improving quality of learning for the child through systemic transformation of the education system. This initiative provides teachers’ training, conducts workshop for school leaders and parents apart from providing a forum for exchange of ideas among the educationists in India. The initiative is also to establish learning standards and develop curricular support material. Over 2,000 teachers and principals from about 100 schools in 10 cities are covered under the programme. ‘Wipro Cares’ focuses on improving quality of life of the underprivileged people living in slums and rural areas. In addition, Azim Premji personally funds the Azim H. Premji Foundation (AHF), which aims at building the future of India through transforming the lives of millions of children by promoting development of elementary education and bringing millions of poor into school. The Foundation works in around 4,000 villages across India, covering 550,000 children. In October 2006, the foundation was given the Corporate Citizen Award by The Economic Times.7 The Azim H. Premji Foundation, which focuses only on primary education, is funded entirely out of his personal wealth. Its annual spend is Rs 250 million. This is in addition to Wipro’s contribution of Rs 30 million every year. Premji firmly believes that “the education system should foster creativity rather than rote learning”. Since 2000, this literacy mission has financed 7,000 schools in Karnataka, Andhra Pradesh, Tamil Nadu, Himachal Pradesh, Madhya Pradesh, Punjab and Rajasthan. More than 1.8 million young students and 29,000 teachers have benefited from this programme. The mission was recently extended to Uttaranchal at the invitation of the state government. Wipro and AHF say they will go to other states if the government is willing to work with them to improve the education system. To ensure that those who run the system have a stake in it, Wipro and the AHF—which put in 50 per cent of the cost— insist that their partner organizations cough up the rest. Wipro employees are also encouraged to participate in the company’s literacy mission.8 BUSINESS ETHICS Wipro is perhaps the first Indian company to articulate a set of ‘beliefs’ to guide business conduct, as early as in the 1970s. The company has compiled an Integrity Manual, which is derived from the ‘Wipro Values’ and defines the way Wiproites should conduct business with their customers. The Integrity Manual guides Wiproites through the tough choices they may face in the daily execution of their role and helps create confidence in the mind of the customers, investors, suppliers and the society at large, with respect to Wipro’s dependability and sincerity. Wipro has introduced a Wipro Helpline known as ‘WIPRO SOS’. This helpline comprises senior members of the company, like Chairman Azim Premji, who have helped mould the ‘Wipro Values’ and have influenced the development of corporate culture greatly. They are always available for guidance on any moral, legal or ethical issues that a Wiproite may face. Wipro always believes that values are the guiding light of the organization and that it is these which energize each of their actions. It is the values that drive the organization, which reflects in its people. Wipro’s promise with four main values, is what makes one a true Wiproite. WIPRO’S PROMISE With utmost respect to human values, Wipro promises to serve its customer with integrity, through innovative, value for money solutions, by applying thought, day after day. HUMAN VALUES Their human values say, “We respect the unique needs of customers and employees. We are sensitive to their differing needs, in our interactions with them”.9 Values are what we get best out of the company’s employees. INTEGRITY With integrity they promise to deliver what they commit, and carry out whatever they do with honesty, fairness, reliability and uprightness. Integrity ensures that the company stands upright against all odds, is truthful and stays committed to resolving internal conflicts. It helps them in being ethical. INNOVATION To Wiproites innovation means that they consistently offer novel and superior solutions to satisfy the needs of the customer. In this competitive world, there are innumerable inno- CREATING AN ETHICAL ORGANIZATION vations. But at Wipro they see to it that their innovations make a difference and lasts longer. It helps to focus on solutions, speedy executions and building a superior organization. VALUE FOR MONEY Everybody promises value for money, but in Wipro they deliver it through constant improvement in quality, cost and speed. They provide exactly what a customer wants—higher quality with better price. They concentrate more on the substance rather than anything else and that is what makes Wipro different. Along with the value for money Wipro provides them with confidence. WIPRO PRESENTED ETHICS IN BUSINESS AWARD Wipro has been awarded the Ethics in Good Business Award for the year 2002 by the Punjab, Haryana and Delhi Chamber of Commerce and Industry (PHDCCI). The award recognizes an organization’s ethics and value-based business performance. OTHER AWARDS WON ∑ WIPRO ranked fifth in Asian Corporate Governance Association rating 2004. ∑ Wipro was the first entity to get Indian Credit Rating Agency’s (ICRA) highest category ‘SVG l’ rating for stakeholders value creation and governance practices. ∑ IEEE award for software process excellence. ∑ Quality improvement by encouraging Six Sigma projects. ∑ World’s first SEI CMM Level 5 company. ∑ Ranked by Business Week among the top 100 technology companies globally. AZIM PREMJI, CHAIRMAN AND MANAGING DIRECTOR OF WIPRO Following are the awards conferred on Azim Premji: ∑ was conferred an honorary doctorate by the Manipal Academy of Higher Education; ∑ was adjudged the Businessman of the Year 2000 by Business India; ∑ is a member of the Prime Minister Advisory Committee for Information Technology in India. ∑ is the second richest Indian, next only to Mukesh Ambani of Reliance Industries. ∑ Azim Premji Foundation was conferred the Corporate Citizenship Award by The Economic Times in October 2006. WIPRO’S OMBUDSPROCESS On 15 August 2003, Wipro introduced a process called the Wipro’s Ombudsprocess. Through this process if an employee 145 discovers information which he or she believes shows serious malpractice, impropriety, abuse or wrongdoing within the organization, this information would be disclosed internally without fear of reprisal. There are arrangements to enable this to be done independently of line management (although in relatively minor instances the line manager would be the appropriate person to be informed). According to the study carried out by the All India Management Association (AIMA),10 these are the findings which were brought into limelight about Wipro: (a) ‘Simplicity and character’ in the style of top management leadership, and almost austerity in their personal life and work situations. (b) Sustained leadership and nurturance of leadership and talent across the organization. The top management saw their term only as one part of the relay race, in which they were keen about the success of the company and their successor. (c) Passion and commitment for ambitious goals and urge for supremacy across the organization as the driving and energizing force. (d) Principle-centred paradigm, reflected in strongly held and explicitly articulated values and business philosophy, for doing business in a unique and ethical way. (e) Internationalization of all operations as the means for developing competencies for competitiveness in the global and domestic markets, benchmarking the productivity and quality parameters with world-class organizations. (f) Centrality of outstanding implementation skills and superior logistics as competitive advantage. (g) Quick response to changed business environment for maintaining strategic superiority. (h) Institutionalization of superior streamlined processes, systems and standard operating procedures for high level of productivity, efficiency, and quality, for performance management and alignment of activities and goals across different functions and regions. (i) ‘Win-win’ paradigm in relationship with the employees, suppliers, distributors, and other value contributors, almost like an extended family in the Indian ethos. (j) Balancing of interests of different stakeholders to mutually share the gains. (k) Openness, transparency, meritocracy, and professionalism in management and governance. (l) Sensing and creation of business opportunities, constant adaptation, pro-action, and change by the firm as an open social–technical–economic organic system. Coevolving with its business environment; creating and sharing value and wealth; and sensitive to its relevant societal issues. (m) Distinct institutional identity and culture, with deeply ingrained shared values, and a well-defined purpose that 146 BUSINESS ETHICS—AN INDIAN PERSPECTIVE create a sense of belonging and pride among the organization members, and endow the organization with a brand equity, cohesiveness and longevity. It is this addiction to ethical values that saw a senior general manager of the company leaving because he had inflated a travel bill. The amount involved was not very large. Nor was the general manager’s contribution to the organization insignificant. And yet, he was leaving because of one act of misdemeanour. It was a question of principle, of values. Premji said he was coming clean with the truth because he did not want any rumours doing the rounds about the general manager’s departure. He further clarified that the organization would come down with an equally heavy hand on anyone who sought to belittle the individual. BUSINESS PRACTICES NOT SO ETHICAL 1. Capital One terminates its relationship with Spectramind: On April 1 2004, one of India’s largest call centre service providers, Wipro Spectramind, announced that U.S. credit card provider Capital One terminated a telemarketing contract after agents were allegedly caught misleading customers during sales calls. Though there had been mounting criticism of the service quality of offshore outsourcing companies, this situation was not a cultural problem but a management issue according to analysts. “Call agents had been advised by team leaders and group leaders to make false claims about free gifts and membership fees while making their sales pitch”, according to Parvathy Ullatil. The story explained that Wipro’s quality assurance team, which evaluates agent performance, was “asked to stand back for two weeks every month so the agents could carry on undetected”.11 An audit at Wipro on Capital One’s request reported the findings leading to the non-renewal of its telemarketing contract for outbound calls.12 Wipro stated that of the 250 Wipro agents working at its Navi Mumbai and New Delhi centres for Capital One, 65 resigned. However, the company maintained that Capital One continued to work with Wipro to handle inbound calls. Wipro also confirmed that the revenue guidance for its current quarter would remain unchanged. The contract termination proves to be yet another blow to Wipro, which lost a help desk contract with Lehman Brothers following complaints about the quality of service. Some analysts, however, say that Wipro is not entirely to blame: “If you’re going to put [agents] under too much pressure on the financial side, they will start behaving this way,” says Lior Arussy, President of Strativity Group, a call centre consultancy in Livingston, New Jersey. “This is a classic case of aggressive sales incentive programs, starving [agents] on the base [salary], keeping ethical codes vague, and not monitoring behaviour”.13 2. Another instance of an adverse ethical situation with regard to Wipro is the fact that Azim Premji holds 82 per cent stake in Wipro Limited, whereas SEBI’s guideline stipulates 25 per cent floating shares. Floating shares are the shares that are held by non-promoters.14 3. Yet another not altogether happy corporate governance situation at Wipro is the question of management succession. Wipro had high turnover of Vice Chairmen (four in 6 years) and the prominent among them are the high-profile Vivek Paul, Raman Roy and Ashok Soota. A report by Lehman Brothers suggests these exits are the result of “the high level of ownership and control by the Chairman”.15 No one in the management has any stake in the company and stock options are limited. This is one reason why even senior executives leave Wipro to work for rivals or launch start-ups. There are rumours that Azim Premji might induct his elder son, Rishad on to the company’s board. CONCLUSION The above analysis shows that both ethical as well unethical practices may co-exist in a company. But as far as the studies and researches that have been carried out, Wipro seems to be on the right track, focusing clearly on ethical issues and implementing a process in place to curb non-ethical issues, making it come up to the top five companies in India. Wipro is credited to have thousands of skilled, well-paid jobs and provided ample opportunity for Indians to develop their expertise and skills. Their enterprise demonstrates that it is possible to create success and build prosperity among the poverty prevalent within India. The personal commitment of Azim Premji to CSR, ethical business and corporate governance need to be commended and applauded. DISCUSSION QUESTIONS 1. Account for the stupendous growth achieved by Wipro in a very short period of time. 2. Applying the various yardsticks that are listed in this chapter, would you be able to call Wipro an ethical organization? If not, list the flaws in the organization that fail the test. NOTES 1. Wipro Infotech, “Milestones,” 2007, available at www.wipro.in/Company/Milestones/ 2. “Wipro Pumps IT Up With 18% Higher Net,” The Economic Times, available at http://economictimes. indiatimes.com/articleshow/msid-2475714,prtpage-1.cms 3. S. Krishna, “IIMB Management Review,” available at www.azimpremjifoundation.org/html/iimminstitute.htm 4. “Wipro Records 17% Growth in Net Income/1; Results for the Quarter Ended June 30, 2002 Under US GAAP,” CREATING AN ETHICAL ORGANIZATION 5. 6. 7. 8. 9. 10. 11. 12. 13. Business Wire, 19 July 2002, available at http://goliath. ecnext.com/ coms2/gi_0199-2022086/Wipro-Records-17Growth-in.html CIOL, “Wipro 2005-06 Net Up 27 p.c: Revenues Cross Rs 10,000 Crore Mark,” 19 April 2006, available at http:// www.ciol.com/content/news/CorpResult/2006/1006051901. asp “Out of India”, UNDP Equator Initiative, December 2003, available at www.tve.org/ho/doc.cfm?aid=1383&lana= Enalish Wipro Technologies, “Azim H. Premji,” available at www.wipro.com/aboutus/azim_profile.htm Wipro, “Wipro Applying Thought in Schools, available at www.wiproapplyingthoughtinschools.com/reachof_ program/reachof_program.htm Rohit Sarda, “Values: What Makes Us True Wiproites,” available at www.wiprocorporate.com/values/humanvalues.asp.htm Abad Ahmad and O. P. Chopra, “Passion to Win,” AIMA Research, 2003, available at www.aima-ind.org/NewPdfs/ Passion_To_Win.pdf Parvathy Ullatil, “Capital One Ends Deal With Spectramind,” 24 March 2004, available at www.rediff.com/ money/2004/mar/24bpo.htm Rishi Seth, “After the Storm,” 2004, http://dqindia.ciol. com/content/industrymarket/bpo/2004/104060501.asp David Myron, “Capital One Terminates Its Indian Call Center Relationship,” 1 April 2004, available at www. destinationcrm.com/articles/default.asp?ArticleID= 3992&KeyWords=lior++AND+arussy 147 14. Rajesh Mahapatra, “Premji to Cut His stake in Wipro,” 31 August 2005, available at http://inhome.rediff.com/money/ 2005/aug/31premji.htm 15. Manjeet Kripalani Steve Hamm, “Leaving a Vacuum at Wipro,” 11 July 2005, available at www.businessweek. com/magazine/content/05_28/b3942071.htm#top FURTHER READINGS 1. Aiyar, Shankar, “Inside Inc’s Global Leap,” India Today, 18 July 2005; “Indian MNCs,” India Today, 6 November 2006. 2. Bureau, “Wipro Net Rises 46 pc on All-Round Growth,” Business Line, 19 October 2006, available at www. thehindubusinessline.com/2006/10/19/stories/2006101904 460100.htm 3. “Get, Set, Grow: Wipro, India’s Best Managed Company,” Business Today, 27 March 2005. 4. http://sebiedifar.nic.in/ 5. “Premji Foundation Chosen Corporate Citizen, 2005,” The Economic Times, 9 October 2006, available at www.wipro. org/aboutus/azim_profile.htm 6. “Premji Is Sixth Richest TechTitan,” The Economic Times, 24 August 2006, available at http://economictimes. indiatimes.com/articleshow/1921236.cms 7. Venkatramani, S. H., “Morals in Management,” 2007, available at www.yahind.com/articles/morals.shtml 8. WIPRO Annual Report 2005. 9. WIPRO Company Presentation for Investors, Apri1 2005. 10. WIPRO Corporate Governance Report 2005. CHAPTERS 7 8 9 CORPORATE ETHICS: GOOD GOVERNANCE CORPORATE ETHICS: INVESTORS’ RIGHTS, PRIVILEGES, PROBLEMS AND PROTECTION HANDMAID OF ETHICS: CORPORATE SOCIAL RESPONSIBILITY 10 ETHICS OF CONSUMER PROTECTION 11 ENVIRONMENTAL ETHICS 12 ROLE OF VARIOUS AGENCIES IN ENSURING ETHICS IN CORPORATIONS 13 ETHICS AND INDIAN BUSINESS 150 195 223 262 295 332 362 Part Two HOW CAN ETHICS BE APPLIED IN DAY-TO-DAY BUSINESS? Ethics is applied to business in myriad ways and reflects in its diverse activities either positively or adversely. Part II discusses business ethics in its multifaceted dimensions, both in good companies and in bad ones. Chapter 7 discusses ethical issues and problems that arise in public limited companies as an ‘agency problem’ and how corporate governance with international best practices squarely addresses this. Chapter 8 deals with one of the basic issues that hinders or facilitates long-term shareholder value: investor protection. Nothing reflects a company’s commitment to ethical business than its adherence to corporate citizenship. Corporate social responsibility, analysed in Chapter 9, is an inalienable constituent of such citizenship. Chapter 10 discusses protection of consumers, the be-all and end-all of all corporate activities. Chapter 11 details environmental issues and the role played by various agencies to ensure its protection. Most corporations follow ethical practices if they suit them, and dump them, if they do not. Chapter 12 explains the role of various external agencies in ensuring corporate ethics. Chapter 13, the last in this section, discusses a very important issue relating to the very title of this book: Business Ethics: An Indian Perspective. Cases attached to all these chapters exemplify how ethical or otherwise are organizations in matters pertaining to their business. Seven CHAPTER Corporate Ethics: Good Governance WHAT IS CORPORATE GOVERNANCE? Corporate governance is typically perceived by academic literature as dealing with “problems that result from the separation of ownership and control.”1 From this perspective, corporate governance would focus on: The internal structure and rules of the board of directors; the creation of independent audit committees; rules for disclosure of information to shareholders and creditors; and, control of management. Figure 7.1 explains how a corporation is structured. Shareholders Board Management Employees Fig. 7.1 Separation of Ownership and Management DEFINITIONS OF CORPORATE GOVERNANCE Though the concept of corporate governance sounds simple and unambiguous, when one attempts to define it and scan the available literature to look for precedence, one comes across a bewildering variety of perceptions behind the available definitions. The definition varies according to the sensitivity of the analyst, the context of varying degrees of development, and from the standpoint of academics versus corporate managements. However, there is an underlying uniformity in the thinking of all analysts that there is a definite need to eradicate corporate misgovernance and promote corporate governance at all costs. It is not only the stakeholders CORPORATE ETHICS: GOOD GOVERNANCE who are keenly interested in ensuring adoption of best governance practices by corporations, but also societies and countries worldwide.1 Sir Adrian Cadbury, Chairman of the Cadbury Committee defined the concept thus: “Corporate governance is defined as holding the balance between economic and social goals and between individual and communal goals. The governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources”. The objective of corporate governance is to ensure, as far as possible, the interests of its stakeholders—enable individuals, corporations and society. It will enable corporations realize their aims and attract investment. From the standpoint of States, it will strengthen their economies, even while discouraging fraud and mismanagement.2 Experts at the Organization of Economic Cooperation and Development (OECD) have defined corporate governance as “the system by which business corporations are directed and controlled”. The structure of corporate governance, according to them, “specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs”. Such specifications define company objectives, provide a means to achieve the objectives and monitors performance.3 OECD’s definition, incidentally is consistent with the one presented by the Cadbury Committee. These definitions which are shareholder-centric capture some of the most important concerns of governments in particular and the society in general. These are (i) management accountability; (ii) providing adequate investments to management; (iii) disciplining and replacement of bad management; (iv) enhancing corporate performance; (v) transparency; (vi) shareholder activism; (vii) investor protection; (viii) improving access to capital markets; (ix) promoting long-term investment; and (x) encouraging innovation. According to the World Bank corporate governance can be defined from two aspects, namely, corporation and public policy. Defining from the perspective of a corporation, corporate governance is relations between owners, management board and other stakeholders (the employees, customers, suppliers, investors and communities) where emphasis is given to the board of directors to balance their interests to achieve long-term sustained value. From a public policy perspective, corporate governance refers to providing for the survival, growth and development of the company, and at the same time, its accountability in the exercise of power and control over companies. The role of public policy is to discipline companies and simultaneously initiate minimization of differences between private and social interests.4 The OECD also offers a broader definition: “. . . Corporate governance refers to the private and public institutions, including laws, regulations and accepted business practices, which together govern the relationship in a market economy, between corporate managers and entrepreneurs (‘corporate insiders’) on one hand, and those who invest resources in corporations, on the other.” 5 Fewer concerns are more critical to international business and developmental strategies than that of corporate governance. A series of events over the last two decades have placed corporate governance issues at centre stage as of paramount importance both for the international business community and financial institutions. It has become the cynosure of all issues connected with corporations. Successive business failures and frauds in the United States, several high-profile scandals in Russia and the Asian crisis have brought corporate governance issues to the forefront in developing countries and transitional economies. Further, national business communities are gradually realizing the fact that there is no substitute for getting the basic business and management systems in place in order to be competitive in the global market and to attract investment. DESIDERATA OF CORPORATE GOVERNANCE The OECD has emphasized the following requirements of corporate governance: RIGHTS OF SHAREHOLDERS The rights of shareholders that have been stressed as important for ensuring better corporate governance by all writers and organizations including the World Bank and Asia Pacific Economic Cooperation (APEC) include secure ownership of their shares, voting rights, the right to full disclosure of information, participation in decisions on sale or any change in corporate assets (including mergers) and new share issues. Shareholders have the right to know the capital structures of their corporation and arrangements that enable certain shareholders to obtain control disproportionate to their holding. All transactions should be at transparent prices and under fair conditions. Anti-takeover devices should not be used to shield the management from accountability. Institutional shareholders should consider the costs and benefits of exercising their voting rights. 151 152 BUSINESS ETHICS—AN INDIAN PERSPECTIVE EQUITABLE TREATMENT OF SHAREHOLDERS The OECD and other organizations such as the APEC have stressed the point that all shareholders including minority and foreign shareholders should get equitable treatment and have equal opportunity for redressal of their grievances and violation of their rights. Shareholders should not face undue difficulties in exercising their voting rights. Any change in their voting rights should be subject to a vote by shareholders. Insider trading and abusive self-dealing that are repugnant to the principle of equitable treatment of shareholders should be prohibited. Directors should disclose any material interests regarding transactions. They should avoid situations involving conflict of interest while making decisions. Interested directors should not participate in deliberations leading to decisions that concern them. ROLE OF STAKEHOLDERS IN CORPORATE GOVERNANCE The OECD guidelines, as also others on the subject of corporate governance, recognize the fact that there are other stakeholders in corporations apart from shareholders. Apart from dealers, consumers and the government who constitute the stakeholders’ group, there are others too who ought to be considered. Banks, bondholders and workers, for example, are important stakeholders in the way in which companies perform and make decisions. Corporate governance framework should, apart from recognizing the rights of shareholders, allow employee representation on the board of directors, profit sharing, creditors’ involvement in insolvency proceedings, etc. Where there is such stakeholder participation, it should be ensured that they have access to relevant information. DISCLOSURE AND TRANSPARENCY The OECD lays down a number of provisions for the disclosure and dissemination of key information about the company to all those entitled for such information. These may range from company objective to financial details, operating results, governance structure and policies, the board of directors, their remuneration, significant foreseeable risk factors and material issues regarding employees and other stakeholders. The OECD guidelines also spell out that annual audits should be performed by independent auditors in accordance with high quality standards. Like the OECD, the APEC also provides guidelines on the establishment of effective and enforceable accountability standards, timely and accurate disclosure of financial and non-financial information regarding company performance. RESPONSIBILITIES OF THE BOARD The OECD guidelines explain in detail the functions of the board in protecting the company, its shareholders and its other stakeholders. These functions would include concerns about corporate strategy, risk, executive compensation and performance, accounting and reporting systems, monitoring effectiveness and changing them, if needed. APEC guidelines include establishment of rights and responsibilities of managers and directors. The OECD guidelines focus only on those governance issues that arise due to separation between ownership and control of capital. Though these have limited focus, they are comprehensive, especially with reference to voting rights of institutional shareholders and obligations of the board to stakeholders. Though the APEC principles too reiterate them, they give foremost importance to disclosures. Again, instead of rights of shareholders, they reiterate the rights and also of the responsibilities of shareholders, managers and directors. To them, establishment of accountability standards is a separate principle by itself. The broad objectives and principles of corporate governance may be the same to all societies, but when it comes to applying them to individual countries we have to reckon the peculiar features, socio-cultural characteristics, the history of its people, their value systems, economic system, political set-up, stage and maturity of development and even literacy rates. All these factors have an impact on both political and corporate governance systems. Superimposing the governance systems and procedures that are effective in mature Western democracies on transition economies will be inappropriate, ineffective and may even be inimical to the interests of the people these are intended to serve. A HISTORICAL PERSPECTIVE OF CORPORATE GOVERNANCE CORPORATE ETHICS: GOOD GOVERNANCE The seeds of modern ideas of corporate governance were probably sown by the Watergate scandal during the Nixon presidency in the United States. The need to arrest such unhealthy trends was translated into the legislation of the Foreign and Corrupt Practices Act of 1977 in America that provided for the establishment, maintenance and review of systems of internal control. In the same year, the Securities and Exchange Commission (SEC) proposed mandatory reporting on internal financial controls. In 1985, a series of high-profile business failures rocked the United States, which included the collapse of Savings and Loan. With a view to identifying the main causes of misrepresentation in financial reports and to recommend ways of reducing such incidences, the government appointed the Treadway Commission. The Treadway Report, published in 1987, highlighted the need for a proper control environment, independent audit committees and an objective internal audit system. As a result of this recommendation, the Committee of Sponsoring Organizations (COSO) came into being. COSO’s report in 1992 stipulated a control framework for the orderly functioning of corporations. Between the period 2000 and 2002, the revelations of corporate fraud in the United States were of such magnitude and inflicted such damage on investors that company reputations were irreparably destroyed and investor confidence dipped to a new low. The fraud and self-dealing revelations resulted in investigations by the Congress, the SEC, and the State Attorney General in New York and the emergence of the Sarbanes–Oxley Act (SOA) enacted into law on 30 July 2002. A series of corporate scams and collapses in the late 1980s and the early 1990s made the United Kingdom realize that the existing rules and regulations were inadequate to curb unlawful and unfair practices of corporations. It was with this view a committee under the chairmanship of Sir Adrian Cadbury was appointed by the London Stock Exchange in 1991. The Cadbury Committee, consisting of representatives drawn from the echelons of British industry, was assigned the task of drafting a code of practices to assist corporations in England in defining and applying internal controls to limit their exposure to financial loss, from whatever cause it arose. The committee submitted its report along with the ‘Code of Best Practices’ in December 1992. In its globally well-received report, the committee elaborated the methods of governance needed to achieve a balance between the essential powers of the board of directors and their proper accountability. Though the recommendations of the committee were not mandatory in character, the companies listed on the London Stock Exchange were enjoined to state explicitly in their accounts, whether or not the code has been followed by them, and if not complied with, were advised to explain the reasons for non-compliance. In India, the real history of corporate governance dates back to the year 1992, following efforts made in many countries of the world to put in place a system suggested by the Cadbury Committee. The corporate governance movement in India began in 1997 with a voluntary code framed by the Confederation of Indian Industry (CII). In the next three years, almost 30 large listed companies accounting for over 25 per cent of India’s market capitalization voluntarily adopted the CII code. This was followed by the recommendations of the Kumar Mangalam Birla Committee set up in 1999 by the Securities and Exchange Board of India (SEBI), culminating in the introduction of Clause 49 of the standard Listing Agreement to be complied with by all the listed companies in stipulated phases. The Kumar Mangalam Birla Committee divided its recommendations into mandatory and non-mandatory. Mandatory recommendations included such issues as the composition of board, appointment and structure of audit committees, remuneration of directors, board procedures, additional information regarding management, discussion and analysis as a part of the annual report, disclosure of directors’ interest, shareholders’ rights and the compliance level of corporate governance in the annual report. From 1 April 2001, over 140 listed companies accounting for almost 80 per cent of market capitalization were to follow a mandatory code which was in line with some of the best international practices. By April 2003, every listed company followed the SEBI code. THE COMPANIES AMENDMENT ACT, 2000 Many provisions relating to corporate governance such as additional ground of disqualification of directors in certain cases, setting up of audit committees, Directors’ Responsibility Statement in the Directors’ Report, etc. were introduced by the Companies (Amendment) Act, 2000. Corporate governance was also introspected in 2001 by the Advisory Group constituted by the Standing Committee on International Finance Standards and Codes of the Reserve Bank of India under the chairmanship of Dr Y. V. Reddy, the then Deputy Governor. 153 154 BUSINESS ETHICS—AN INDIAN PERSPECTIVE NARESH CHANDRA COMMITTEE, 2002 In the year 2002, a high-level committee was appointed to examine and recommend drastic amendments to the law involving the auditor–client relationships and the role of independent directors by the Department of Company Affairs in the Ministry of Finance and Company Affairs under the chairmanship of Naresh Chandra. NARAYANA MURTHY COMMITTEE, 2003 The Company Law Amendment Bill, 2003 envisaged many amendments on the basis of reports of the Naresh Chandra Committee and subsequently appointed the N. R. Narayana Murthy Committee. Both the committees have done an excellent job to promote corporate governance practices in India. DR J. J. IRANI COMMITTEE REPORT ON COMPANY LAW, 2005 The Government of India constituted an Expert Committee on Company Law on 2 December 2004 under the Chairmanship of Dr J. J. Irani. Set up to structurally evaluate the views of several stakeholders in the development of company law in India in respect of the concept paper promulgated by the Union Ministry of Company Affairs, the J. J. Irani committee has made suggestions to reform and update the basic corporate legal framework essential for sustainable economic reform. The report has taken a pragmatic approach keeping in view the ground realities, and has sought to address the concerns of all the stakeholders to enable the adoption of internationally accepted best practices. Recommendations of the J. J. Irani Committee Some of the most significant recommendations of the Irani committee are: ∑ One-third of the board of a listed company should comprise independent directors. ∑ Allow pyramidal corporate structures, that is, a company which is a subsidiary of a holding company could itself be a holding company. ∑ Give full liberty to the shareholders and owners of the company to operate in a transparent manner. ∑ The new company law should recognize principles such as ‘class actions’ and ‘derivative action’. There are proposals to devise an exit option for shareholders who have stayed with a company and not participated in a buy back scheme implemented earlier. ∑ Introduce the concept of One Person Company (OPC) as against the current stipulation of at least two persons to form a company. ∑ Allow corporations to self-regulate their affairs. ∑ Mandate publication of information relating to convictions for criminal breaches of the Companies Act on the part of the company or its officers in the annual report. Provide stringent penalties to curb fraudulent behaviour of companies. ∑ Disclose proper and accurate compilation of financial information of a corporation. The history of corporate governance gives us an unforgettable lesson that vigilance and a continuing effort at building and strengthening it alone will give the investors the safetynet they require. SIGNIFICANCE OF CORPORATE GOVERNANCE TO DEVELOPING COUNTRIES Just as several developing countries are undergoing a process of economic growth, they are also witnessing a transformation in political and business relationships with regard to their industrial and commercial organizations, both in the private and public sectors. Economic and political compulsions are forcing them to move away from the hitherto closed, market-unfriendly and undemocratic set-ups to open, transparent, market-driven democratic systems. If they have to sustain long-term economic growth and development in such a situation, it is important that they establish good corporate governance mechanisms and practices that will enable their organizations realize maximum productivity and economic efficiency. Corporate governance systems and practices also will help them fight effectively corruption and abuse of power that are rampant in their societies and help them establish a system of managerial competence and accountability. Nicolas Meisel has identified four priorities developing countries should concentrate on when they put into practice new forms of public and corporate governance. These are (i) since good and effective communication CORPORATE ETHICS: GOOD GOVERNANCE is a desideratum for the efficient functioning of any organization, they should not only enhance the quality of information, but also ensure that it is created fast and reaches the public speedily; (ii) ensure individual players maximum autonomy while seeing that they are accountable for their acts; (iii) if there is a hierarchical set-up to regulate private sector activities with a view to promoting public interest, new counterveiling powers should be set-up to fill this role; and (iv) the role of the State and how government officials are appointed to carry out the role, should be clearly defined in the interest of sustainable development. 6 ISSUES IN CORPORATE GOVERNANCE Corporate governance has been defined in different ways by different writers and organizations. Some define it in a narrow perspective to include in it only the shareholders, while others want it to address the concerns of all stakeholders. Some talk about corporate governance as being an important instrument for a country to achieve sustainable economic development, while some others consider it as a strategy for a corporate to achieve a long tenure and a healthy image. To people in developing societies and transitional economies, it is a necessary incentive to usher in more powerful and vibrant institutions of control. To some, it provides another dimension to corporate ethics and social responsibility of business. Thus corporate governance has become several things to several people. But to all, corporate governance is a means to an end, the end being long-term shareholder, and more importantly, stakeholder value. Thus, all authorities on the subject are one in recognizing the need for good corporate governance practices to achieve the end for which corporations are formed. They identify some governance issues as being crucial and critical to achieve these objectives. These are as follows. DISTINGUISHING THE ROLES OF BOARD AND MANAGEMENT The constitutions of many companies stress and underline that business is to be managed ‘by or under the direction of’ the board. In such a practice, the responsibility for managing the business is delegated by the board to the CEO, who in turn delegates the responsibility to other senior executives. Thus, the board occupies a key position between the shareholders (owners) and the company’s management (day-to-day managers of the company’s resources). As per this arrangement, the board of a listed company has the following functions: (a) select, decide the remuneration and evaluate on a regular basis, and if necessary, change the CEO; (b) oversee (not directly, but indirectly) the conduct of the company’s business to evaluate whether or not it is being correctly managed; (c) review and, where necessary, approve the company’s financial objectives and major corporate plans and objectives; (d) provide advice and counsel to top management; (e) select and recommend candidates to shareholders for electing them to the board of directors; (f) review the adequacy of systems to comply with all applicable laws and regulations; and (g) review any other functions required by law to be performed. COMPOSITION OF THE BOARD AND RELATED ISSUES The board of directors is a “committee elected by the shareholders of a limited company to be responsible for the policy of the company. Sometimes, full-time functional directors are appointed, each being responsible for some particular branch of the firm’s work.”7 The composition of the board of directors refers to the number of directors of different kinds who participate in the working of the board. Over time there has been a change as to the number and proportion of different types of directors in the board of a limited company. Figure 7.2 illustrates the usual composition of the board in recent times in most of the countries. The Board of Directors of a company must have a optimum combination of executive and non-executive Directors with not less than 50 per cent of the Board comprising of non-executive Directors. The number of independent Directors should be at least one-third in case the company has a non-executive Chairman and at least half of the Board in case the company has an executive Chairman. The SEBI-appointed Kumar Mangalam Birla Committee’s report defined the composition of the board thus: “The Committee recommends that the board of a company have an optimum combination of executive and nonexecutive directors with not less than fifty percent of the board comprising the non-executive directors. The 155 156 BUSINESS ETHICS—AN INDIAN PERSPECTIVE Board Executive Directors Fig. 7.2 Types of Directors Independent Directors Non-Executive Directors Affiliated Directors (Nominee Directors) number of independent directors (independence being as defined in the foregoing paragraph) would depend on the nature of the chairman of the board. In case a company has a non-executive chairman, at least one-third of the board should comprise independent directors and in case a company has an executive chairman, at least half of the board should be independent”.8 As shown in Fig. 7.2, for instance, an executive director is one who is an executive of the company and who is also a member of the board of directors, while a non-executive director has no separate employment relationship with the company. Independent non-executive directors are those directors on the board who are free from any business or other relationship, which could materially interfere with the exercise of their independent judgement in the process of decision making as a member of the board. An affiliated director or a nominee director is a non-executive director who has some kind of independence, impairing relationship with the company or the company’s management. For example, the director may have links with a major supplier or customer of the company, or may be a partner in a professional firm that supplies services to the company, or may be a retired top management professional of the company.9 SEPARATION OF THE ROLES OF THE CEO AND CHAIRPERSON The composition of the board is a major issue in corporate governance as the board acts as a link between the shareholders and the management and its decisions affect the performance of the company. Professionalization of family companies should commence with the composition of the board. All committees that studied governance practices all over the world, starting with the Cadbury Committee, have suggested various improvements in the composition of boards of companies. It is now increasingly being realized that the practice of combining the role of the chairperson with that of the CEO as is done in countries like the United States and India leads to conflicts in decision making and that too much concentration of power in one person results in unsavoury consequences. In the United Kingdom and Australia, the CEO is prohibited from being the chairperson of the company. The role of the CEO is to lead the senior management team in managing the enterprise, while the role of the chairperson is to lead the board, one of the important responsibility of the board being to evaluate the performance of senior executives including the CEO. Combining the role of both the CEO and chairperson removes an important check on senior management’s activities. Besides, in large corporations, the job of the CEO as well as that of the chairman may be heavy and onerous and one person, with how much ever business acumen and astuteness, may not be able to deliver what he or she is expected to, competently, efficiently and objectively. That is the reason why many authorities on corporate governance recommend strongly that the chairman of the board should be an independent director in order to “provide the appropriate counterbalance and check to the power of the CEO”.10 SHOULD THE BOARD HAVE COMMITTEES? Many committees on corporate governance have recommended in one voice the appointment of special committees for (i) nomination, (ii) remuneration, and for (iii) auditing. These committees would lessen the burden of the board and enhance its effectiveness. According to the Bosch Report, committees, apart from having written terms CORPORATE ETHICS: GOOD GOVERNANCE of reference outlining their authority and duties, “should also have clear procedures for reporting back to the board, and agreed arrangements for staffing including access to relevant company executives and the ability to obtain external advice at the company’s expense.”11 APPOINTMENTS TO THE BOARD AND DIRECTORS’ RE-ELECTION As per the Company Law, shareholders elect directors to the Board. However, shareholders are a legion in large companies and also scattered, and to have them together to elect the directors will be expensive and timeconsuming. Therefore, in actual practice, in most cases, the board or its specially constituted committee selects and appoints the prospective director and gets the person formally “elected” by the shareholders at the ensuing Annual General Body Meeting. The shareholders in fact only endorse the board’s nominee and it is only in the rarest of rare cases that the shareholders refuse to ratify the board’s nominees for directorship. There are other issues of corporate governance in relation to the boards’ appointments such as: appointment of a nomination committee, terms of office, duties, remuneration and re-election of directors and composition of the board on which several committees have made their own recommendations. DIRECTORS’ AND EXECUTIVES’ REMUNERATION This is one of the mixed and vexed issues of corporate governance that first came to the centre-stage during the massive corporate failures in the United States between 2000 and 2002 and later reappeared with renewed vigour during the Wall Street crisis of 2008. Executive compensation has also in recent times become the most visible and politically sensitive issue relating to corporate governance. The Cadbury Committee Report stressed that shareholders should be informed all details pertaining to board remuneration, especially directors’ entitlements, both present and future, and how these have been determined. Other committees on corporate governance have also laid emphasis on related issues such as ‘pay-forperformance,’ heavy severance payments, pension for non-executive directors, appointment of remuneration committee, and so on. ‘However, while controversy often surrounds the size or quantum of remuneration, this is not necessarily an issue of corporate governance—a payment that may be excessive in one context may be reasonable in another’. More important than the size and quantum of remuneration of top management, key issues of corporate governance would include (i) transparency, (ii) justifiability of the pay in the context of performance, (iii) the process adopted in determining it, (iv) severance payments, and (v) non-executive directors’ pensions.12 DISCLOSURE AND AUDIT The OECD lays down a number of provisions for the disclosure and communication of ‘key facts’ about the company to its shareholders. The Cadbury Committee Report termed the annual audit as one of the corner stones of corporate governance. Audit also provides a basis for reassurance for everyone who has a financial stake in the company. Both the Cadbury Report and the Bosch Report stressed that the board of directors has a bounden responsibility to present to the shareholders a lucid and balanced assessment of the company’s financial position through audited financial statements. There are several issues and questions relating to auditing which have an impact on corporate governance. There are, for instance, questions such as (i) Should boards establish an audit committee? (ii) If yes, how should it be composed? (iii) How to ensure the independence of the auditor? (iv) What precautions are to be taken or what are the positions of the State and regulators with regard to provision of non-audit services rendered by auditors? (v) Should individual directors have access to independent resource? (vi) Should boards formalize performance standards? These questions are being answered with different perceptions and with different degrees of emphasis by various committees and organizations that have gone into and analysed these issues in depth. PROTECTION OF SHAREHOLDER RIGHTS AND THEIR EXPECTATIONS This is an important governance issue which has considerable impact on the rights and expectations of shareholders. Corporate practices and policies vary from country to country. There are a number of questions relating to this issue such as: (i) Should companies adhere to one-share-one-vote principle always? (ii) Should companies retain voting by a show of hands or by poll? (iii) Can shareholder resolutions be ‘bundled’? That 157 158 BUSINESS ETHICS—AN INDIAN PERSPECTIVE is, to place together before shareholders for approval a resolution that contains more than one discrete issue. (iv) Should shareholder approval be required for all major transactions? These questions have elicited answers with different emphases from various committees and organizations that have addressed these issues. DIALOGUE WITH INSTITUTIONAL SHAREHOLDERS The Cadbury Committee recommends that institutional investors should maintain regular systematic contact with companies, apart from participating in general meetings of shareholders. They should use their voting rights positively, take a positive interest in the composition of the board of directors of companies in which they invest, and above all, recognize their rights and responsibilities as ‘owners’ who should act in the best interests of those whose money they have invested. Tehy should influence the standards of corporate governance by bringing about changes in companies when necessary, rather than by selling their shares. If institutional investors have to exercise their rights and carry out their responsibilities, companies have to provide them the required information and facilities for doing so. MAKING A SOCIALLY RESPONSIBLE CORPORATE—INVESTOR’S ROLE This is an issue that highlights a conflict between two schools of thought. One school of thought based on past experience, contends that institutional investors should act in the best financial interests of the beneficiaries. This is based on the assumption that socially responsible behaviour of corporations such as ecological preservation, anti-pollution measures and producing quality and environment-friendly products always enhance costs and thus reduce profits. But there is another school of thought which asserts environment friendliness and economic gains are not contradicting goals, but on the other hand, they benefit corporations in the long run and cite the examples of Ford Motors, Johnson & Johnson, Pfizer to prove their point. Much can be, and is being said, on both sides and though the last word is yet to be said on the issue, present thinking worldwide across continents and divergent societies strongly prefers corporations that are committed to the overall welfare of people in whose midst they work and make their gains. MAJOR THRUST AREAS OF CORPORATE GOVERNANCE The latest, revised OECD principles, place their thrust on six major areas of corporate governance: (i) they call upon governments to put in place an effective institutional and legal framework to support good corporate governance practices; (ii) they call for a corporate governance framework that protects and facilitates the exercise of shareholders’ rights; (iii) they strongly support equitable treatment of all shareholders including minority and foreign shareholders; (iv) they recognize the importance of the role of stakeholders in corporate governance; (v) they stress the importance of timely, accurate and transparent disclosure mechanisms; and finally (vi) they deal with board structures, responsibilities and procedures. All issues of corporate governance, of course, emanate from and centre around these six major thrust areas. NEED FOR AND IMPORTANCE OF CORPORATE GOVERNANCE Many large corporations are multinational and/or transnational in nature. This means that these corporations have an impact on citizens of several countries across the globe. If things go wrong, they will affect many countries, albeit some more severely than others. It is, therefore, necessary to look at the international scene and examine possible international solutions to corporate governance difficulties. Corporate governance is needed to create a corporate culture of consciousness, transparency and openness. It refers to a combination of laws, rules, regulations, procedures and voluntary practices to enable companies to maximize shareholders’ long-term value. It should lead to increasing customer satisfaction, shareholder value and wealth. With increasing government awareness, the focus is shifted from economic to the social sphere and an environment is being created to ensure greater transparency and accountability. It is integral to the very existence of a company. GOVERNANCE AND CORPORATE PERFORMANCE Several studies in the US have found a positive relationship between corporate governance and corporate performance. That is, improved corporate governance is linked with improved corporate performance—either in CORPORATE ETHICS: GOOD GOVERNANCE terms of rise in share price or profitability. However, it would be overstating the case to say that these studies are conclusive, because other research has either failed to find a link or found it otherwise. One difficulty in looking for statistical evidence of the value of good corporate governance is that governance is multi-dimensional. There are several different corporate governance mechanisms, which can interrelate with and, sometimes, substitute for one another. There are strong signs that the world’s business-ethical standards are becoming more stringent, and what constitutes good business practice is becoming clearer. Eleven years ago, Korn/Ferry International and the Columbia University Business School conducted a 20-country poll on 1,500 business executives. They were asked to look ahead and identify a list of the most important characteristics of the ideal corporate CEO for the year 2000. It was found that ‘ethics’ was right at the top of the list. Not anywhere else, but right at the top. The Conference Board in New York, together with the Institute of Business Ethics in London, did similar studies in 1992, and found 84 per cent of responding US firms had a corporate ethics code, followed by 71 per cent of UK firms, and 58 per cent for the rest. The figure for the UK grew particularly fast; four years earlier, it had been just 55 per cent. It seems that the business stress on ethics is a very Anglo-American phenomenon. As these two countries are arguably the trendsetters in the global economy, their way of doing business would eventually affect the rest of the world and, with innovations and modifications to suit different countries and markets, could even become the global norm. In India too, there are several examples to illustrate the positive relationship between corporate governance and corporate performance, though this is the case with fewer companies and there is a long road to traverse for the entire Indian corporate sector as such. Among companies that have shown commendable success after introducing internationally acclaimed corporate governance practices are: Infosys Technologies Ltd that has consistently enhanced its performance and is a forerunner in espousing global governance standards; Tata Steel that which is recognized and rewarded not only in India, but also globally for its excellent corporate performance social commitment and activism; and Dr. Reddy’s Lab that which has excelled in all the important dimensions of corporate governance. There are several other group of companies belonging to the Tatas, Birlas, Murugappa’s, etc. in the private sector, and the oil companies in the public sector that have done India proud in the sphere of corporate governance. INVESTORS’ PREFERENCE FOR GOOD GOVERNANCE A recent large-scale survey of institutional investors found that a majority of investors consider governance practices to be at least as important as financial performance when they are evaluating companies for potential investment. Indeed, they would be prepared to pay a premium for shares in a well-governed company compared to a poorly governed company exhibiting familiar financial performance. In the US and the UK, the premium was 18 per cent while it was 27 per cent for Italian and 27 per cent for Indonesian companies (Global Investor Opinion Survey Key Findings, Mc Kinsey & Company, July 2002). Likewise, a survey by Pitabas Mohanty (Institutional Investors and Corporate Governance in India) has revealed that companies with good corporate governance records have actually performed better as compared to companies with poor governance records, and that institutional investors have extended loans to them easily. Another similar survey of institutional investors, globally, has also revealed governance to be an important factor in investment decision making. SIGNIFICANCE OF CORPORATE GOVERNANCE TO DEVELOPING COUNTRIES Just as several developing countries are undergoing a process of economic growth, they are also witnessing a transformation in political and business relationships with regard to their industrial and commercial organizations, both in the private and public sectors. Economic and political compulsions are forcing them to move away from the hitherto closed, market unfriendly and undemocratic set-ups to an open, transparent, marketdriven democratic system. If they have to sustain long-term economic growth and development in such a situation, it is important that they establish good corporate governance mechanisms and practices that will enable their organizations realize maximum productivity and economic efficiency. Corporate governance systems and practices also will help them fight effectively corruption and abuse of power that are rampant in such societies and enable them establish a system of managerial competence and accountability. Nicolas Meisel has identified four priorities developing countries should concentrate on when they put into practice new forms of public and corporate governance. These are: (1) Since good and effective communication is a desideratum for the efficient functioning of any organization, they should not only enhance the 159 160 BUSINESS ETHICS—AN INDIAN PERSPECTIVE quality of information, but also ensure that it is created fast and reaches the public speedily; (2) Ensure individual players maximum autonomy whilst seeing that they are accountable for their acts; (3) If there is a hierarchical setup to regulate private sector activities with a view to promoting public interest, new countervailing powers should be set up to fill this role; and (4) The role of the State and how government officials are appointed to carry out the role should be clearly defined in the interest of sustainable development (see Note 6). STRATEGIES AND TECHNIQUES BASIC TO SOUND CORPORATE GOVERNANCE Having understood the importance and significance of corporate governance to the growth and development of the corporate sector and orderly industrialization of a country, one should learn the various strategies and techniques necessary to ensure sound corporate governance practices. Some such strategies and techniques are found in several papers issued by the Basel Committee on Banking Supervision.13 The Basel Committee on Banking Supervision has issued papers on several topics such as principles for the management of interest rate risk (September 1997), framework for internal control systems in banking organizations (September 1998), enhancing bank transparency (September 1998) and principles for the management of credit risk (July 1999). Taken together, these documents have highlighted some strategies and techniques which are listed below:14 1. Corporations should cultivate values, develop codes of conduct and ethical behaviour and other standards of appropriate practices and put in place the system of governance with a view to ensuring their compliance. 2. A corporate strategy, appropriate and well-articulated, should be framed against which the success or otherwise of a business enterprise and the contribution of individual players can be measured. 3. Well-defined apportionment of responsibilities and assignment of decision making authorities, also specifying the hierarchy of required approvals from the level of employees to the board of directors. 4. Setting up a system to facilitate interaction and to ensure cooperation among senior management, the board of directors, and the auditors. 5. Establishing strong internal control systems, with both internal and external audit functions factored into it, risk management functions, which should be independent from business lines, and other checks and balances. 6. Ensuring a system monitoring of risk exposures where conflicts of interest are likely to arise including business relationships with borrowers connected to senior management, large shareholders, or key decision-makers within the firm (e.g., traders). 7. Instituting a scheme of financial and managerial incentives to act as a fillip to senior management, business line management and employees. These can be offered in the form of compensation, promotion and other means of recognition. 8. Ensuring the required information flows internally and to the public at large. BENEFITS TO SOCIETY Corporate governance brings to the society immensurable benefits. These benefits are as follows: 1. A strong and vibrant system of corporate governance can be a boon to society. Even in developing countries, where stocks of most firms are not actively traded on stock exchanges, adopting standards for transparency in dealing with investors and creditors is a major benefit to all stakeholders. Besides, it helps to prevent systemic banking crises. 2. Research has proved that in countries where strong corporate governance practices prevail, the system offers protections for minority shareholders and has led to large and highly liquid capital markets. Countries whose laws are based on not so mature legal traditions and on weak regulatory systems tend to evolve into a system in which most companies are controlled by dominant investors rather than a widely dispersed ownership structure. Hence, for countries that are trying to attract investors—whether domestic or foreign—corporate governance matters a great deal in getting the required funds out of potential investors. 3. It has been pointed out by many economists and management experts that competition in product markets as well as factor markets, especially for capital, act as constraints on unacceptable corporate behaviour. As a result, it promotes good corporate governance. In many developing countries, competition CORPORATE ETHICS: GOOD GOVERNANCE in products or goods markets is quite limited, especially where barriers exist. These ground realities further emphasize the importance of adopting the best possible corporate governance systems in countries where the market system is weak as in many developing countries, or yet to take proper shape as in many emerging economies. For instance, several Indian corporations that seek billions of dollars of foreign investments are prompted to put in their best corporate behaviour for that purpose. 4. Corporate governance is also an effective instrument for combating corruption. In many developing societies this is a very tough subject to deal with, since the tradition is very much ingrained in the system and could arouse political sensitivities and cause potential legal action. By following ethical and legal practices as envisaged by good governance, a serious attempt can be made to root out corruption and malfeasance. 5. Better corporate governance practices and procedures can bring about an improved management of the firm, especially in areas such as setting company strategy. Better corporate governance would also ensure that mergers and acquisitions are undertaken for strategic business reasons rather than for flimsy causes and that corporations’ compensation systems are made to reflect the performance of individual players. 6. Good corporate governance also would bring about improvements in management structure and systems. In many developing countries, there has been a tradition of involving the promoters directly in the management of the firms they helped to promote. For example, throughout Latin America and parts of Asia, including India, family business groups have been dominating business enterprises. However, this is now changing as a result of globalization, following the World Trade Organization’s liberalization rules, and the increasing integration of regional markets. Nowadays, firms in these countries are increasingly adopting modern management strategies, techniques and financial accounting systems. All of these inevitably lead to delegation of authority, paying increased attention to HR policies and use of modern management information systems, instead of the erstwhile centralized decision making structures. BENEFITS TO CORPORATION Good corporate governance secures an effective and efficient operation of a company in the interest of all stakeholders. It provides assurance that management is acting in the best interest of the corporation; thereby contributing to business prosperity through openness in disclosures and accountability. While there is only limited evidence to link business success to good corporate governance, good governance enhances the prospect for profitability. The key contributions of good corporate governance to a corporation include the following: CREATION AND ENHANCEMENT OF A CORPORATION’S COMPETITIVE ADVANTAGE Competitive advantage grows naturally when a corporation or its services facilitate the creation of value for its buyers. Creating competitive advantage requires both the vision to innovate and the strategy to manage the process of delivering value. An effective board should be one that is able to craft strategies that fit the business environment of the corporation, is flexible to accommodate opportunities and threats, and to compete for the future. Corporations that develop their strategies by involving all levels of employees create widespread commitment to make the strategies succeed. Practical examples of strategies that create value to corporations are sales and marketing strategies, customer base and branding strategies. Coca Cola projects American values to its customers worldwide. Sony is reputed for the invention of new products. Johnson & Johnson and Procter & Gamble are world renowned as the largest manufacturers of quality personal hygiene products. ENABLING A CORPORATION PERFORM EFFICIENTLY BY PREVENTING FRAUD AND MALPRACTICES The code of best practice—policies and procedures governing the behaviour of individuals of a corporation— form part of corporate governance. This enables a corporation to compete more efficiently in the business environment and prevents fraud and malpractices that destroy business from inside. Failure in management of best practice within a corporation has led to crises in many instances. The Japanese banks which made loans to property developers that created the bubble economy in the early 1990s, the foreign banks which granted loans to State-owned enterprises that became insolvent after the Asian financial crisis in 1997, and the demise of Barings are examples of managements not governing the behaviour of individuals in the corporation, leading to their downfall. 161 162 BUSINESS ETHICS—AN INDIAN PERSPECTIVE PROVIDING PROTECTION TO SHAREHOLDERS’ INTEREST Corporate governance is a set of rules that focuses on transparency of information and management accountability. It imposes fiduciary duty on management to act in the best interests of all shareholders and properly disclose operations of the corporation. This is particularly important when ownership and management of an enterprise are in different hands, as in these corporations. ENHANCING THE VALUATION OF AN ENTERPRISE Improved management accountability and operational transparency fulfil investors’ expectations and enhance the confidence on management and corporations, increasing the value of these corporations. ENSURING COMPLIANCE OF LAWS AND REGULATIONS With the development of capital markets and increasing investment by institutional shareholders and individuals in corporations that are not controlled by particular shareholders, jurisdictions around the world have been developing comprehensive regulatory frameworks to protect investors. More rules and regulations addressing corporate governance and compliance have been and will be released. Compliance has become a key agenda in establishing good corporate governance. After all, corporate governance ensures the long-term survival of a corporation. CONTEMPORARY CORPORATE GOVERNANCE SITUATION In the original concept of the company, the basis of corporate governance was shareholder democracy. Shareholders were relatively few and close enough to the board of directors to exercise a degree of control. Indeed in millions of smaller, tightly owned companies around the world, that is still the situation today. But for major corporations, particularly those that have their shares listed on a stock exchange, the governance situation has practically changed. In many countries, the shares of public companies are now held by diverse shareholders—some by private individuals, some by institutional investors such as banks, pension funds and insurance companies, and some by other companies, who might have business relationships with the company. Ownership structures of major public companies around the world these days are often complex. The first step in understanding the reality of corporate governance in a given company is to understand the ownership structure and, hence, the potential to exercise power and influence over that company. In the past, most institutional investors ignored their rights as shareholders, preferring to sell their shares rather than getting involved in challenging corporate performance. However, a trend in recent years has been for some institutional investors, particularly in the United States, Great Britain and Australia, to become proactive, calling for boards to produce better corporate performance, questioning directors’ remuneration, and calling for greater transparency on company finances and for more accountability from directors. Indeed, one US institutional investor, CalPERS (the Californian Public Employees Retirement System), has produced corporate governance guidelines for companies in France, Germany, Japan and the United States. GROWING AWARENESS AND SOCIETAL RESPONSES The growing awareness of corporate governance around the world has been reflected in a plethora of official reports on the subject. These include the American Law Institute Report (1992), the Cadbury (1992), Greenbury (1995) and Hampel (1998) reports from the United Kingdom, the Hilmer report (1993) in Australia, the Vienot report (1995) in France, the King report (1995) from South Africa, the OECD report in 1998, as well as studies in Hong Kong, Singapore, Malaysia and elsewhere. In India, the corporate governance code was first laid out by the CII in the wake of interest generated by the Cadbury Committee report, followed by an in-depth study made by the Associated Chamber of Commerce (ASSOCHAM) and the SEBI. SEBI appointed the Kumar Mangalam Birla Committee and adopted its report in mid-2000. The Reserve Bank of India (RBI) also constituted its own committee to study problems and issues relating to corporate governance from the perspective of the banking sector. Based on the inputs from these committees, the Department of Company Affairs amended the Companies Act in December 2000 to include corporate governance provisions, which became applicable to all Indian companies effective from 1 April 2001. Many of the official reports provide a code of best practices in corporate governance, detailing expectations on matters such as board structure, audit and audit committees, transparency in financial accounting CORPORATE ETHICS: GOOD GOVERNANCE and director accountability. Some institutional investors, particularly in the United States have also called for codes of corporate governance practices; the best known being the CalPERS’ Global Principles of Corporate Governance. Increasingly, to obtain access to international equity finance, companies around the world have to respond to the corporate governance requirements of these codes. Meanwhile the debate on companies’ responsibilities to other stakeholders, other than their own shareholders, has been increasing in the United States and the United Kingdom; the Royal Society of Arts’ (RSA) Inquiry in the United Kingdom produced a study called ‘Tomorrow’s Company’ (1995), which suggested responsibilities to a wider range of stakeholders. Further, most major companies now operate through group structures of wholly owned subsidiary companies, partly owned subsidiaries in which other external parties have a minority equity interest and associated companies in which the holding company has a significant, but not dominant holding. In addition, the globalization of business dealings has meant that major companies frequently engage in a variety of joint venture and other strategic alliances with other companies. The second step in understanding the reality of corporate governance in a given company is to understand the network of ownership throughout the group, identifying minority interests in group companies and partner interests in joint venture companies. Other reasons for the growing concern about corporate governance include changing societal expectations about the social responsibility of private sector companies, the attention being paid to more participatory political systems at national government level and the potential of global communications and information technology to spread ideas and to provide information on companies. The past decade has also seen a massive increase in academic research on corporate governance. At the heart of the exercise of governance over companies is the governing body, typically called the board of directors. It is vital to appreciate the role of the board. INDIAN MODEL OF CORPORATE GOVERNANCE The Indian corporations are governed by the Companies Act of 1956 that follows more or less the UK model. The pattern of private companies is mostly that of a business concern closely held or dominated by a founder, his or her family and associates. Available literature on corporate governance and the way companies are structured and run indicate that India shares many features of the German/Japanese model, but recent recommendations of various committees and consequent legislative measures are driving the country to adopt increasingly the Anglo-American model. In terms of the legislative mechanisms, Indian government and industry constituted three committees to study corporate governance practices in the country and suggested measures for improvement based on what was globally recognized as ‘best practice’. Significantly, most of the recommendations of the three committees—the SEBI-appointed Kumar Mangalam Birla Committee (2000), the Government-appointed Naresh Chandra Committee (2003) and the SEBI’s Narayana Murthy Committee (2003) are remarkably similar to those of England’s Cadbury Committee and America’s Sarbanes–Oxley Act, in terms of their approaches and recommendations. The thrust of the legislative reforms suggested by these committees and subsequent legislative actions adopted centre around the strengthening of external governance mechanisms. This would call for greater transparency of company accounts and their certification by independent auditors. Investors would have access to these transparent accounts, as envisaged the Anglo-American model. Investors continuing to remain in the company or quitting it will depend on the availability of accurate and reliable information. ‘Institutional reforms, including a strengthening of oversight committees and the development of a serious fraud office, are further evidence of the drive to seek external monitoring of corporate affairs’. With regard to reforms in internal mechanisms as in the case of board of directors it was recommended that non-executive directors should be given greater role, while checking the growth of non-executive directors, as seen in the Anglo-American practice.15 Further, experts point out that India has adopted the key tenets of the Anglo-American external and internal control mechanisms, in the wake of economic liberalization and its integration into the global economy. In the sphere of legislative framework, for instance, Indian government and regulators have been following more or less the recommendations of English and American committees on corporate governance. Moreover, a small number of high-profile Indian companies have adopted these recommendations on their own, mainly with a view to approaching international markets, the Anglo-American protocols on corporate governance.16 Thus corporate governance developments in India in recent years show a paradigm shift from the German/Japanese model to the Anglo-American model. There are differences between the three models of corporate governance. The actual practices adopted by companies also vary. Ideas and practices of corporate governance are evolving fast around the globe. There is no preferred model of corporate governance. 163 164 BUSINESS ETHICS—AN INDIAN PERSPECTIVE In the Anglo-American model, all directors participate in a single board, comprising both executive and non-executive directors, in varying proportions. In the German model, there are two boards, of which the upper board supervises the executive board on behalf of stakeholders, and is societal-oriented. In this model, though the shareholders own the company, they do not entirely dictate the governance mechanism. They elect 50 per cent of the upper board, while the other 50 per cent is appointed by labour unions, giving employees a share in the governance of the company. In the Japanese model, shareholders and the main lending bank together appoint the president and the board of directors. The main bank has a substantial stake in the equity capital of the company. Indeed, given the entrance of high-calibre directors with relevant experience, appropriate board leadership and a shared vision for the company’s future, each of the models can prove effective, provided they are consistent with the overall corporate governance infrastructure in that country. These various governance systems form a package of overall corporate control in each company law jurisdiction. It is vital to see the package as a whole. There has to be an integrated harmony between state legislation and regulatory infrastructure, stock market regulation and corporate self-regulation.17 WHAT IS ‘GOOD’ CORPORATE GOVERNANCE? Recently, the terms ‘governance’ and ‘good governance’ are being increasingly used in development literature. Bad governance is being recognized now as one of the root causes of corrupt practices in our societies. Major donors, institutional investors, and international financial institutions provide their aid and loans on the condition that reforms that ensure ‘good governance’ is put in place by the recipient nations. As with nations, corporations too are expected to provide good governance to benefit all its stakeholders. At the same time, good corporations are not born, but are made by the combined efforts of all stakeholders, which include shareholders, board of directors, employees, customers, dealers, government and the society at large. Law and regulation alone cannot bring about changes in corporations and make them behave better to benefit all concerned. Directors and management, as goaded by stakeholders and inspired by societal values, have a very important role to play. The company and its officers, who, inter alia, include the board of directors and the officials, especially the senior management, should strictly follow a code of conduct, which should have the following desiderata: OBLIGATION TO SOCIETY A corporation is a creation of law as an association of persons forming part of the society in which it operates. Its activities are bound to impact the society as the society’s values would have an impact on the corporation. Therefore, they have mutual rights and obligations to discharge for the benefit of each other. 1. National Interest: A company and its management should be committed in all their actions to ensure that all their activities are beneficial to the development of the countries in which they operate. 2. Political Non-alignment: A company should be committed to supporting a democratic constitution and should not offer its funds to any political party or campaign. 3. Legal Compliances: The company should abide by the laws of the country in which it operates. It should abide by the tax laws of the nation and should pay all taxes imposed by the government as and when they become applicable. 4. Rule of Law: Fair, legal frameworks that are enforced impartially are very important for good governance. An impartial judiciary is an essential requisite for good governance. 5. Honest and Ethical Conduct: Every officer of the company should deal on behalf of the company with professionalism, honesty, commitment and sincerity as well as high moral and ethical standards. 6. Corporate Citizenship: A corporation should be committed to be a good corporate citizen not only in compliance with all relevant laws and regulations, but also by actively assisting in the improvement of the quality of life of the people in the communities in which it operates with the objective of making them self-reliant and enjoy a better quality of life. Such social commitment consists of initiating and supporting community initiatives in the field of public health and family welfare, water management, vocational training, education and literacy and encourages application of modern scientific and managerial techniques and expertise. The company should review its policy in this respect periodically in consonance with national and regional priorities. The company should strive to incorporate them as an integral part of its business plan and not treat CORPORATE ETHICS: GOOD GOVERNANCE 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. them as optional or something to be dispensed with when inconvenient. It should encourage volunteering amongst its employees and help them to work in the communities. The company should develop social accounting systems and carry out social audit of its operations towards the community, employees and shareholders. Ethical Behaviour: Corporations have a responsibility to set exemplary standards of ethical behaviour, both internally within the organization, as well as in their external relationships. Unethical behaviour corrupts organizational culture and undermines stakeholder value. The board of directors has a great moral responsibility to ensure that the organization does not derail from an upright path to make shortterm gains. Social Concerns: Corporations exist beyond the time of their founders, and have to set an example to their employees and shareholders. The company should not only think about its shareholders but also think about its stakeholders and their benefit. A corporation should not give undue importance to shareholders at the cost of small investors. They should treat all of them equally and equitably. The company should have concerns towards the society. It can help the needy people and show its concern by not polluting the water, air and land. The waste disposal should not affect any human or other living creatures. Corporate Social Responsibility: Accountability to stakeholders is a continuing topic of divergent views in corporate governance debates. In line with developing an integrated model of governance for an ideal corporate, the emphasis should be laid on corporate social responsiveness and ethical business practices. These are not only the first small steps for better governance, but also the promise of a more transparent and internationally respected corporation of the future. Environment-Friendliness: Corporations tend to be of an intervening, altering and transforming nature. For corporations engaged in commodity manufacturing, profit comes from converting raw materials into saleable products and vendible commodities. Metals from the ground are converted into consumer durables. Trees are converted into boards, houses, and furniture and paper products. Oil is converted into energy. In all such activities, a piece of nature is taken from where it belongs and processed into a new form. So companies have a moral responsibility to save and protect the environment. All the pollution standards have to be followed meticulously and organizations should develop a culture having more concern towards the environment. Health, Safety and Working Environment: A company should be able to provide a safe and healthy working environment and comply in the conduct of its business affairs with all regulations regarding the preservation of the environment of the territory it operates in. It should be committed to prevent the wasteful use of natural resources and minimize the hazardous impact of the development, production, use and disposal of any of its products and services in the ecological environment. Competition: A company should support the establishment of a competitive, open market economy in the country. It should also cooperate in efforts to promote the liberalization of trade by a country. It should not resort to unethical advertistments and practices in order to sell its products. Trusteeship: The board of directors has the responsibility to act as trustees to protect the rights and interests of the shareholders as well as the company’s other stakeholders. They are duty bound to uphold the concept of equity. They have to ensure that the rights of all shareholders, large or small, foreign or local, majority or minority, are equally protected Accountability: Accountability is a key requirement of good governance. Government institutions as well as private sector and civil society organizations must be accountable to the public and to their institutional stakeholders. In general, an organization or an institution is accountable to those who will be affected by its decisions or actions.18 Effectiveness and Efficiency: Corporations must concentrate on producing results that meet the needs of society while making the best and sustainable use of resources. Timely Responsiveness: Good governance requires that institutions and processes try to serve all stakeholders within a reasonable timeframe. They should also address the concerns of all stakeholders and the society at large. Corporations Should Uphold the Fair Name of the Country: When companies export their products or services, they should ensure that these are qualitatively good and are delivered on time. They have to ensure that the nation’s reputation is not sullied abroad during their deals, either as exporters or importers. They have to maintain the quality of their products, which should then become the brand ambassadors for the country. 165 166 BUSINESS ETHICS—AN INDIAN PERSPECTIVE OBLIGATION TO INVESTORS That the investors, as shareholders and providers of capital, are of paramount importance to a corporation is such an accepted fact that it need not be overstressed here. 1. Towards Shareholders: A company should put in all possible efforts to enhance shareholder value and comply with laws that govern shareholder’s rights. Information should be disclosed to shareholders about all aspects of the company’s business in accordance with regulations. 2. Informed Shareholder Participation: A related issue of equal importance is the need to bring about greater levels of informed attendance and meaningful participation by shareholders in matters relating to their companies without, however, such freedom being abused to interfere with management decision. An ideal corporate should address this issue and relate it to more meaningful and transparent accounting and reporting. 3. Transparency: All decisions should be taken and enforced in an open manner. All rules and regulations must be followed. Efforts should be taken to ensure that information is freely available to those who are affected by decisions and their enforcement. 4. Financial Reporting and Records: A company should prepare and maintain accounts of its business affairs fairly and accurately in accordance with the accounting and financial reporting standards, and laws and regulations of the country in which the company conducts its business affairs. Likewise, internal accounting and audit procedures shall fairly and accurately reflect all of the company’s business transactions and disposition of assets. All required information shall be accessible to the company’s auditors, non-executive and independent directors on the board and other authorized parties and government agencies. There shall be no wilful omissions of any transaction from the books and records, no advance income recognition and no hidden bank account and funds. Such wilful material misrepresentation of and/or misinformation on the financial accounts and reports shall be regarded as a violation of the firm’s ethical conduct and invite appropriate civil or criminal action under the relevant laws of the land. OBLIGATION TO EMPLOYEES For too long, corporations in free societies had been adopting a ‘hire and fire’ policy in employment of men and women in their work places and hardly treated them humanely taking advantage of the fact that workers had a commodity, namely labour that was highly perishable with little bargaining power. But in the context of enhanced awareness of better governance practices, managements should realize that they have their obligations towards their workers too. 1. Fair Employment Practices: An ideal corporate should commit itself to fair employment practices, and should have a policy against all forms of illegal discrimination. By providing equal access and fair treatment to all employees on the basis of merit, the success of the company will be improved while enhancing the progress of individuals and communities. The applicable labour and employment laws should be followed scrupulously wherever they operate. That includes observing those laws that pertain to freedom of association, privacy, and recognition of the right to engage in collective bargaining, the prohibition of forced, compulsory and child labour, and also laws that pertain to the elimination of any improper employment discrimination. 2. Equal Opportunities Employer: A company should provide equal opportunities to all its employees and all qualified applicants for employment without regard to their race, caste, religion, colour, ancestry, marital status, sex, age, nationality, disability and veteran status. Its employees should be treated with dignity and in accordance with a policy to maintain a conducive work environment free of harassment, whether physical, verbal or psychological. Employee policies and practices should be administered in a manner that ensures that in all matters equal opportunity is provided to those eligible and the decisions are based on merit. 3. Encouraging Whistle Blowing: It is generally felt that if whistle-blower concerns had been addressed some of the recent disasters could have been avoided, and that in order to prevent future misconduct, whistle-blowers should be encouraged to come forward. So an ideal corporate is one that deals pro-actively with whistle-blowers making sure that employees have comfortable reporting channels and the confidence that they will be protected from any form of retribution. Such an approach will enhance the CORPORATE ETHICS: GOOD GOVERNANCE 4. 5. 6. 7. 8. company’s chances to become aware of, and to appropriately deal with a concern before an illegal act has been committed, rather than after the damage has been done. If reporting is delayed, the company’s reputation can be seriously harmed and it can face a serious risk of prosecution with all its disastrous consequences. An ideal ‘whistle-blower policy’ would mean (a) Personnel who witness an unethical or improper practice (not necessarily a violation of law) shall be able to approach the CEO or the Audit Committee without necessarily informing their supervisors. (b) The company shall take measures to ensure that this right of access is communicated to all employees through means of internal circulars, etc. The employment and other personnel policies of the company should contain provisions protecting ‘whistle-blowers’ from unfair termination and other prejudicial employment practices. (c) The appointment, removal and terms of remuneration of the chief internal auditor shall be subject to review by the audit committee. Humane Treatment: Now corporations are viewed like humans and a similar kind of behaviour is expected of them. Companies should treat their employees as their first customers and above all as human. They have to meet the basic needs of all employees in the organization. There should be a friendly, healthy and competitive environment for the workers to prove their ability. Participation: Participation by both men and women is the cornerstone of good governance. Participation could be either direct or through legitimate intermediate institutions or representatives. Participation needs to be informed and organized.18 Empowerment: Empowerment is an essential concomitant of any company’s principle of governance which stresses that management must have the freedom to drive the enterprise forward. Empowerment is a process of actualizing the potential of its employees. Empowerment unleashes creativity and innovation throughout the organization by truly vesting decision making powers at the most appropriate levels in the organizational hierarchy. Equity and Inclusiveness: A corporation is a miniature of a society whose well-being depends on ensuring that all its employees feel that they have a stake in it and do not feel excluded from the mainstream. This requires all groups, particularly the most vulnerable, to have opportunities to improve or maintain their well-being. Participative and Collaborative Environment: There should not be any form of human exploitation in the company. There should be equal opportunities for all levels of management in any decision making. The management should cultivate the culture where employees should feel they are secure and are being well taken care of. Collaborative environment brings peace and harmony between the working community and the management, which in turn, brings higher productivity, higher profits and higher market share. OBLIGATION TO CUSTOMERS A corporation’s existence cannot be justified without it being useful to its customers. Its success in the marketplace, its profitability and it being beneficial to its shareholders by paying dividends depends entirely on how it builds and maintains fruitful relationships with its customers. 1. Quality of Products and Services: The company should be committed to supply goods and services of the highest quality standards, backed by efficient after-sales service consistent with the requirements of customers to ensure their total satisfaction. The quality standards of the company’s goods and services should meet not only the required national standards but also endeavour to achieve international standards. 2. Products at Affordable Prices: Companies should ensure that they make available to their customers quality goods at affordable prices. While making normal profit is justifiable, profiteering and fattening on the miseries of the poor consumers is unacceptable. Companies should constantly endeavour to update their expertise, technology and skills of manpower to cut down costs and pass on such benefits to customers. They should not create a scare in the midst of scarcity or by themselves create an artificial scarcity to make undue profits. 3. Commitment to Customer Satisfaction: Companies should be fully committed to satisfy their customers and earn their goodwill to stay long in the business. They should respect in letter and spirit, warranties and guarantees given to their products and call back from markets, goods found to be sub-standard or harmful and replace them with good ones. 167 168 BUSINESS ETHICS—AN INDIAN PERSPECTIVE MANAGERIAL OBLIGATION Managers are the kingpins of a corporation and play a pivotal role in ensuring that the policies of the company, as enunciated in the shareholders’ meetings and strategized by the board are translated into action for the benefit of all stakeholders. As such, they have a great deal of responsibility towards the corporation, as explained below. 1. Protecting Company Assets: The assets of the company should not be dissipated or misused but employed for the purpose of conducting the business for which they are duly authorized. These include tangible assets such as equipment and machinery, systems, facilities, resources as well as intangible assets such as proprietary information, relationships with customers and suppliers, etc. 2. Behaviour Towards Government Agencies: A company’s employees should not offer or give any of the firm’s funds or property as donation to any government agencies or their representatives directly or through intermediaries in order to obtain any favourable performance of official duties. 3. Control: Control is a necessary principle of governance that safeguards the freedom of management and enables it to be exercised within a framework of appropriate checks and balances. Control should prevent misuse of power, facilitate timely management response to change, and ensure that business risks are pre-emptively and effectively managed. 4. Consensus Oriented: The mediation of different interests in society to reach a consensus on what is in the best interest of the whole community is an essential facet of good governance. A good understanding of the historical, cultural and social contexts of a given society is essential to develop such a consensus. 5. Gifts and Donations: The company’s employees should neither receive nor make directly or indirectly any illegal payments, remuneration, gifts, donations or comparable benefits, which are intended to or perceived to obtain business or uncompetitive favours for the conduct of its business. However, the company and its employees may accept and offer nominal gifts, which are customarily given and are of a commemorative nature for special events provided the same is disclosed on time to the management. 6. Roles and Responsibilities of Corporate Board and Directors: The role of the corporate board of directors as stewards of their stakeholders has gained significant importance in recent decades. Successive corporate failures, scams, debacles and other disasters have strengthened the demand for more transparency and accountability on the part of corporations. In the discharge of these onerous responsibilities, the corporate board has come to be regarded as the principal arbiter ensuring, on the one hand, that executive management creates wealth competently and through legitimate means, and on the other hand, such created wealth is equitably distributed to all shareholders after meeting the due aspirations of, and obligations to, other stakeholders. An ideal corporate calls for a greater role and influence for non-executive independent directors, a tighter delineation of independence criteria and minimization of interest-conflict potential and some stringent punitive punishments for executive directors of companies failing to comply with listing and other requirements. 7. Distinction between Direction and Management: It is necessary to distinguish the nature of the two basic components of governance, namely the policy making and oversight responsibilities of the board of directors and the executive and implementation responsibilities of corporate management comprising the managing director and his or her team of executives including functional directors. Executives who are also on the board as directors of the company in effect wear two hats, one as part of the board, and the other as part of the management. Directors derive their authority only when acting collectively as the board or when the board delegates specific authorities to be exercised as in the case of managing directors. Managers in the broadest sense of the term have the responsibility to execute the policies under the supervision of the board and for this purpose have the necessary authority to ensure compliance and implementation. An ideal corporate highlights this critical distinction particularly in the context of fixing responsibility for failure and the consequential liabilities that follow. 8. Managing Directors and Whole-Time Directors: Managing directors and other whole-time directors are required to devote whole or a substantial part of their time to the affairs of companies. And yet many of them serve as non-executive directors on several other boards. An ideal corporate affords the shareholders and stakeholders of the company the benefit of having their chosen executive’s full attention in the matters of the company. An ideal corporate must necessarily limit the nature and number of their other non-executive directorships. CORPORATE ETHICS: GOOD GOVERNANCE BOX 7.1 169 CREDO OF JOHNSON & JOHNSON We believe our first responsibility is to the doctors, nurses and patients, to mothers and fathers and all others who use our products and services. In meeting their needs everything we do must be of high quality. We must constantly strive to reduce our costs in order to maintain reasonable prices. Customers’ orders must be serviced promptly and accurately. Our suppliers and distributors must have an opportunity to make a fair profit. We are responsible to our employees, the men and women who work with us throughout the world. Everyone must be considered as an individual. We must respect their dignity and recognize their merit. They must have a sense of security in their jobs. Compensation must be fair and adequate, and working conditions clean, orderly and safe. We must be mindful of ways to help our employees fulfill their family responsibilities. Employees must feel free to make suggestions and complaints. There must be equal opportunity for employment, development and advancement for those qualified. We must provide competent management, and their actions must be just and ethical. We are responsible to the communities in which we live and work and to the world community as well. We must be good citizens—support good works and charities and bear our fair share of taxes. We must encourage civic improvements and better health and education. We must maintain in good order the property we are privileged to use, protecting the environment and natural resources. Our final responsibility is to our stockholders. Business must make a sound profit. We must experiment with new ideas. Research must be carried on, innovative programs developed and mistakes paid for. New equipment must be purchased, new facilities provided and new products launched. Reserves must be created to provide for adverse times. When we operate according to these principles, the stockholders should realize a fair return. Johnson & Johnson Source: Johnson & Johnson, Reproduced with permission. The forgoing analysis of the duties, responsibilities and obligations of different stakeholders illustrates the complexities involved in the administration of modern corporations. Gone are the days when the society looked at corporations as forms of business enterprises working exclusively for the material benefit of its shareholders. With the broadening vision of modern thinkers and opinion makers and enhanced and heightened social values, it is now an unacceptable proposition that corporations exist purely for the profit of those who constituted it. They are expected to be transparent, accountable and even beneficial to the larger society. Their employees, consumers of their products, and associates in their business such as dealers and stockists, the communities surrounding their facilities and workstations are as important as those who contribute their capital. Corporations cannot any more ignore the concerns of the society such as the environment and ecology. And these concerns are no more community-based or country-specific. In a global village such as the one all of us are moving into, if a corporate has to survive, grow and wants to be counted, its vision should focus on the ways and means of becoming a responsible and responsive corporate citizen, and its mission could no more be myopic as it used to be in the past. The values, concerns, duties and responsibilities the society casts on the corporations are exemplified in the following beautifully formulated and well-articulated Credo of Johnson & Johnson (Box 7.1). In the modern financial and business world, good corporate governance is not an optional extra. Good corporate governance is fundamental to raising capital, satisfying investors and running successful businesses in increasingly global markets. Good corporate governance is essential to all other stakeholders in the firm— employees, suppliers, customers, and bankers as well as to the local and national society for the provision of employment, the creation of wealth and the building of a modern state. Good corporate governance also encourages the levels of transparency, accountability and corporate social responsibility that is increasingly necessary for a modern nation. LEGISLATIVE CHANGES In the current era of globalization, Indian companies have to compete with global companies as well as inspire confidence in domestic and foreign investors. A legal framework that inspires confidence in investors, both domestic as well as foreign has become essential. The Department of Company Affairs (DCA) 170 BUSINESS ETHICS—AN INDIAN PERSPECTIVE has taken several steps including legislative changes and modernization of services for the ease of investors. Several changes have been made to corporate law. The Companies Act, 1956, has been amended thrice since 1999 and some further amendments are under consideration to give effect to the policy of liberalization. A bill was introduced by the Indian government in August 2001 to provide a legislative framework for the formation and conversion of cooperative business into companies. The bill was passed by the Parliament in 2001.The bill was introduced after deliberations by a high-level committee constituted by the government. The legislation is intended to provide primary producers an opportunity to produce and market goods in a professional manner by forming a new kind of business organization that would enhance their efficiency and competitiveness in global markets. The government constituted a committee to examine the laws relating to the winding up of companies. A bill was passed in August 2001 which provided for the constitution of a company law tribunal called National Company Law Tribunal (NCLT). The jurisdiction and powers presently conferred on the Company Law Board (CLB) would be vested in the proposed national tribunal. This would result in the dissolution of the Company Law Board. It also envisaged replacement of the Board for Industrial and Financial Reconstruction (BIFR) by repealing the Sick Industries (Special Provision) Act, 1985, for accelerating the pace of revival. 19 However, when the union cabinet gave approval for setting up the tribunals, it was challenged by the Madras Bar Association in the High Court which set aside the government’s order. On May 6, 2004, the Supreme Court admitted an appeal filed by the Centre challenging the order of the Madras High Court. According to experts, this would mean the setting up of the NCLT—a tribunal set up to take over the functions of the BIFR, AAIFR (Appelate Authority for Industrial and Financial Reconstruction), CLB, as well as the high courts, in the winding up of companies—may take some time.20 INTRODUCTION OF REGULATIONS Governance initiatives through regulation have also made significant strides in the country. SEBI has an ongoing programme of reforming the primary and secondary capital markets. SEBI was set up by the government in 1992 to counter the shortcomings found in the functioning of stock exchanges such as long delays, lack of transparency in procedures and vulnerability to price rigging and insider trading, and to regulate the capital market. SEBI, which has been made into a statutory body is authorized to regulate all merchant banks on issue activity, lay guidelines, supervise and regulate the working of mutual funds and oversee the working of stock exchanges in the country. In consultation with the government, SEBI has initiated a number of steps to introduce improved practices and greater transparency in the capital markets in the interest of the investing public. The stock exchanges in the country also mandate several statutory requirements through their listing agreements that every publicly traded company has to comply with. On the insistence of SEBI, stock exchanges have amended listing agreements to ensure that a listed company furnishes them annual statements showing the variations between financial projections and projected utilization of funds, which would enable shareholders to make comparisons between promises and performance. Among the professions, the Institute of Chartered Accountants of India has emerged as a responsible body regulating the profession of public auditors, and counts among its achievements, the issue of a number of accounting and auditing standards. Constitution of an independent National Advisory Committee on Accounting Standards has been legislated by the amended Companies Act of 1999. Other professional bodies such as the Institute of Cost and Works Accountants of India and the Institute of Company Secretaries of India (ICSI) have helped in promoting and regulating a well trained and disciplined body of professionals who could add value to corporations in improving their management practices. The Institute of Company Secretaries of India has also taken a major initiative in constituting in 2001 a Secretarial Standards Board comprising senior members of eminence to formulate secretarial standards and best secretarial practices and develop guidance notes in order to integrate, consolidate, harmonize and standardize the prevalent diverse practices with the ultimate objective of promoting improved corporate governance. R. Ravi, the ICSI President informed the press on 30 January 2005 that the institute has mooted a proposal to the government to make mandatory secretarial standards (SS) issued by it on the lines of accounting standards issued by the Institute of Chartered Accountants of India. The ICSI has issued three SSs till now on board meetings, general meetings and payment of dividends, and one on registers and records is being finalized.21 As mentioned earlier, with the interest generated in the corporate sector by the Cadbury Committee’s report, the issue of corporate governance was studied in depth and dealt with by the CII, ASSOCHAM, and SEBI. CORPORATE ETHICS: GOOD GOVERNANCE The Corporate Governance Code in India was first promoted by the CII. Further, the SEBI constituted the Kumar Mangalam Birla Committee and adopted its report in mid-2000. The Kumar Mangalam Birla Committee confined itself to submitting recommendations for good corporate governance and left it to SEBI to decide on the penalty provisions for non-compliance. In the absence of suitable penalty provisions, it has been difficult for the market regulator to establish good corporate governance. Some of the penalty provisions are not sufficient enough to discipline the corporations. For example, delisting of shares of the company is the penalty for non-compliance of the stipulated minimum of 50 in respect of the number of directors in the board that should be non-executive directors. This would hardly serve the purpose. In fact, this would be detrimental to the interest of the investors and to the effective functioning of the capital market. Similarly, an audit committee, which is subservient to the board, may serve no purpose at all; and one which is in perpetual conflict with the board, may result in stalemates to the detriment of the company. If a company is to function smoothly, it should be made clear that the findings and recommendations of the audit committee need not necessarily have to be accepted by the board which is accountable to the shareholders for its performance and which, under Section 291 of the Companies Act, is entitled to ‘exercise all such powers, and do all such things as the company is authorized to exercise and do’. However, some functional specialists are of the considered view that whenever there is a difference of opinion and the audit committee’s advice is ignored or overruled, the board should be required to place the facts before the general body of shareholders at their next meeting. IMPLEMENTATION OF RECOMMENDATIONS OF BIRLA COMMITTEE REPORT WHAT IS CLAUSE 49? The SEBI monitors and regulates corporate governance of listed companies in India through Clause 49. This clause is incorporated in the listing agreement of stock exchanges with companies and it is compulsory for them to comply with its provisions. Stock exchanges endeavour to bring in corporate governance standards among companies by the introduction of Clause 49 in the listing agreement they enter into with them. SEBI issued Clause 49 in February 2000. All Group A companies had to comply with its provisions by 31 March 2001. All other listed companies with a minimum paid-up capital of Rs 100 million and net worth of Rs 250 million had to comply by 31 March 2002, and the remaining listed companies with a minimum paid-up capital of Rs 30 million or net worth of Rs 250 million had to comply by 31 March 2003. Subsequently, on 29 October 2004, SEBI amended the original Clause 49 and issued a new Clause 49. All existing listed companies were directed to comply with the provisions of the new clause by 1 April 2005, which a sizable number of them did. However, it has already come into force for companies that have been listed on the stock exchange after 29 October 2004. PROVISIONS AND REQUIREMENTS OF CLAUSE 49 The provisions and requirements of Clause 49 are as follows:22 ∑ Composition of Board: The board should be composed of in the following manner: In case of full-time chairman, 50 per cent non-executive directors and 50 per cent executive directors. ∑ Constitution of the Audit Committee: The audit committee should have three independent directors with the chairman having sound financial background. The finance director and the head of the internal audit should be special invitees and a minimum of three meetings should be convened every year. ∑ Audit Committee: The audit committee is responsible for review of financial performance on halfyearly/annual basis; appointment/removal/remuneration of auditors; review of internal control systems and its adequacy. ∑ Remuneration of Directors: Remuneration of non-executive directors is to be decided by the board. Details of remuneration package, stock options, and performance incentives of directors should be disclosed to the shareholders. ∑ Board Procedures: The board should have at least four meetings a year. A director should not be a member of more than 10 committees and chairman of more than five committees across all companies. ∑ Management Discussion and Analysis Report: This should include (i) industry structure and developments; (ii) opportunities and threats; (iii) segment-wise or product-wise performance; (iv) outlook on 171 172 BUSINESS ETHICS—AN INDIAN PERSPECTIVE the business; (v) risks and concerns; (vi) internal control systems and their adequacy; (vii) discussion on financial performance; and (viii) disclosure by directors on material, financial and commercial transactions with the company. ∑ Shareholders Information: The company should provide a brief resume of new/re-appointed directors, and submit quarterly results to stock exchanges to be placed on web-site and presented to analysts. Shareholders’/Investors’ Grievance Committee under the chairmanship of independent director, should have a minimum of two meetings a year. The company should report on corporate governance and get certificate from auditors on compliance of provisions of corporate governance as per Clause 49 in the listing agreement.22 ∑ Nominee Directors to be Independent Directors: Nominees of institutions that have invested in or lent to the company are deemed independent directors. ∑ New Provisions Incorporated in the New Clause 49: The board will lay down a code of conduct for all board members and senior management of the company to follow compulsorily. The cash flow statements and financial statements will have to be certified by the CEO and the CFO. At least one independent director of the holding company will be a member of the board of a material non-listed subsidiary. In case a company follows a method of preparing financial statements that is different from the standard accounting standards, it should be disclosed in the financial statements and an explanation should be provided in the corporate governance report. ∑ CEO is Accountable for Company’s Risk Systems: Inspired by Sarbanes–Oxley Act, Clause 49 of listing agreement was scheduled to come into effect from 1 April 2005. However, bowing to demand from corporations, SEBI decided in the board meeting held on 23 March 2005, to defer the implementation of clause 49 till 31 December to provide listed entities, including public sector companies, giving time to appoint adequate number of independent directors and comply with norms. No special concession is to be extended to state owned enterprises which demanded exemption on this issue. SEBI felt that public sector undertakings are not looked upon as special class of companies. Under the new provisions, CEOs and CFOs in the country had been preparing for a litmus test. Beginning 31 December 2005, all CEOs and CFOs have embarked on massive documentation to meet the requirements of Clause 49 of SEBI’s listing agreement. ∑ Rules of the Game: CEOs and CFOs to be directly responsible for risk management (Provision 4C), and internal control systems (Section 5); Clause 49 is largely derived from the Sarbanes–Oxley Act; companies seek legal advice, they tap consultants to adopt new standards; companies want clarity on ‘material’ association of independent directors and fear new norms will lead to shortage of independent directors; companies will have to spend more time and money on compliance. THE RESERVE BANK’S AND OTHER REGULATIONS The Reserve Bank of India (RBI) also constituted its own Advisory Group on Corporate Governance under the aegis of the Standing Committee on International Financial Standards and Codes to view and recommend norms of corporate governance from the perspective of the banking sector. Based on the suggestions received from these committees, the DCA amended the Companies Act in December 2000 to include corporate governance provisions, which would be applicable to all companies. These new provisions came into effect from 1 April 2001. The regulatory move is extended to non-listed companies also. The Companies Act is applicable to all Indian companies—both listed and unlisted. It incorporates recommendations of the Birla Committee report, including those related to non-executive directors, independent directors, composition of related party disclosures, audit committees, etc. The concept of ‘a deemed public company’ has been eliminated from the act and therefore, all companies now are either public or private. While most of the large companies are public, the committee’s requirements are applicable only to companies with a share capital of over Rs 50 million. Also, only a 100 per cent subsidiary of a foreign company can seek exemptions as a private company. The Companies Act has reduced the number of companies a person can be a director in from 20 to 15. The SEBI code also forbids them to sit on more than 10 committees or to chair more than 5. The intent is to ensure that all directors fulfil their obligations and contribute in a greater measure towards the company affairs. The Companies Act now allows shareholders to participate in critical company resolutions through postal ballot. Until now, special resolutions required at least 75 per cent of the shareholders who are present at the CORPORATE ETHICS: GOOD GOVERNANCE meeting to vote. Hence, if 200 of a company’s 1,000 shareholders were present at a meeting, 150 votes were sufficient to pass a resolution. Under the new provision, however, all shareholders will be able to participate in the voting process. Of late, postal ballot has become a common practice and stock exchanges are informed almost on a daily basis about an impending postal ballot by companies. Recently, Hindustan Lever got the approval of BSE to transfer its Sewri plant and a polymer unit through postal ballot. Likewise, ITC got the approval to amend its objects clause to start a new business, ICICI Bank Ltd sought approval for its ADS issue, and Blue Dart wanted to sell its subsidiary, ACC, its Mancherial Cement unit, all using this postal ballot route to seek their shareholders’ approval.23 SELF-REGULATION Admittedly, some of the Indian companies compare most favourably with the best elsewhere in the world in the field of professional management and corporate governance. However, self-regulation lags in the area of corporate governance in the country and a vast majority of companies are languishing with outdated practices nurtured during the years of insulated economic environment that prevailed in the country for the better part of its post-independence history. The liberalization initiatives of the nineties have exposed the inefficiencies of many of these organizations which are now trying to come to terms with the paradigm shift in doing business. PIONEERS IN GOOD GOVERNANCE PRACTICES INDUSTRY INITIATIVES Changing with the times, industry associations have taken the initiative to come up with guidelines for their member companies in the area of governance. A formal effort was initiated by the CII when it produced in 1998 a document titled Corporate Governance—A Desirable Code through a Task Force headed by Rahul Bajaj, which for the first time formally recognized the obligation of listed corporations to create corporate wealth and distribute it among all their stakeholders. The need for transparency in reporting and the imperatives of having independent non-executive directors who could protect the interests of shareholders were clearly articulated. A similar initiative was mounted by SEBI with the constitution of a committee under the chairmanship of Kumar Mangalam Birla. Its report recommending guidelines on corporate governance published in February 2000 is a well-balanced compendium of good practices that will stand corporations in good stead in their governance-improvement endeavours. These recommendations that have been categorized as mandatory have since been incorporated in the listing agreements of the stock exchanges. To this extent, this initiative may be termed part regulatory, part voluntary. As a service to the corporate sector, the CII is putting together a roster of independent directors from which companies can choose their non-executive directors while constituting their boards. The CII will provide the necessary guidelines to choose good directors, screen them, and continue to monitor and rate them. This will help companies overcome the difficulties they face in identifying professionally competent and ethically sound non-executive directors. The existing diversity and complexity of forms and patterns of corporate governance will continue and, very probably, increase with time. Alternative governance will be needed to improve the effectiveness of governance, to influence the healthy development of corporate regulation, and to understand the reality of the political processes by which companies are governed, rather than the structures and mechanisms through which governance is exercised. In any development, it will be important to avoid the polarities of governance based on an expensive bureaucracy of regulation and the adversarial clash of vested interests. CORPORATE INITIATIVES Several studies have pointed out that the movement to introduce corporate governance practices in the country has achieved commendable progress. In fact, the country has evolved a system and structure of corporate governance considered to be one of the best among all developing countries. Unlike several other emerging markets, Indian companies maintain their shareholding patterns, making it possible to identify the ownership affiliation of each firm easily. It is by and large a hybrid of the ‘outsiders systems’ and ‘insiders systems’ of corporate governance. The legal framework for all corporate activities including governance and administration of companies, disclosures, shareholders’ rights, and dividend announcements has been in place since the enactment of the 173 174 BUSINESS ETHICS—AN INDIAN PERSPECTIVE Companies Act in 1956 and has been fairly stable. The listing agreements of stock exchanges stipulate conditions and imposes continuous obligations to companies to align with best corporate governance practices. It is well known that India has, for the past four decades and more, a fairly well-established regulatory framework. It also formed the basis for the evolution of corporate governance in the country. SEBI, the capital market regulator, has initiated several measures to promote corporate governance to fulfil the two objectives it was established for; namely: “investor protection and market development. For example, it has been instrumental in streamlining of the disclosure, investor protection guidelines, book building, entry norms, listing agreement, preferential allotment disclosures and lot more. Accounting system in India is well-established and accounting standards are similar to those followed in most of the advanced economies”.24 According to a survey on corporate excellence carried out by Credit Lyonnais,25 three Indian companies— Infosys, Hindustan Lever Limited and Wipro—are amongst Asia’s top 10 corporations in terms of good governance practices. ICICI, Cummins India, HDFC, Ranbaxy, Dr Reddy’s Lab, Orchid Chemicals and several Tata group companies also share this honour. The Birla Group has already adopted corporate governance provisions. Non-executive directors now dominate the group’s company boards, and they have also constituted nomination, remuneration and audit committees. INDIVIDUAL INITIATIVES There were some outstanding initiatives in India from individual personalities even before the concept of corporate governance gained currency. J. R. D. Tata, from the time he took over till his death, ran the Tata industrial empire professionally, unlike other family-run businesses. Under his guidance, the Tata group produced some outstanding CEOs. His belief in keeping business and politics separate did give the group a great deal of credibility and brought him laurels, and won the trust of everybody. The man who believed in empowerment never craved for power, money or glory. He ensured that the House of Tatas followed corporate governance practices in all its forms, both in the letter and spirit. Tata was, and continues to be, a household name and his shareholders have always been happy with him. Keshub Mahindra is another industrialist who like Tata, runs his empire professionally. He kept his daughters and relatives out of the boardroom. He has ensured that it is Mahindra & Mahindra (M&M) that is projected and not personalities. He has, like the Tatas, ensured that the business is divorced from politics. He has created a code of corporate governance for the company. Like Infosys, M&M’s annual report is pregnant with information. N. R. Narayana Murthy is the new icon and undisputed king of the new economy. He shook the corporate world by giving his employees a stock option scheme (ESOPS) that saw many corporations taking a leaf out of Infosys’ book. Even before corporate governance became the buzzword, Infosys showed the way by giving detailed information and guidance reports in its 200-page plus annual report. So much so, that the SEC has been asking US companies to use the Infosys annual report as a role model. The man who has created hundreds of millionaires within and at the bourses has set such high standards that Infosys keeps getting awards for being the best run company, best at maintaining investor relations, best employer and so on. The ultimate tribute to Murthy was the Government of India bestowing on Infosys the Award for Excellence in Corporate Governance. By leveraging brainpower and sweat equity, Murthy has built a world-class software firm from the scratch. Kumar Mangalam Birla who inherited a huge industrial empire challenged the conventional practices within the group companies when he took over in 1995. He has changed the culture of the group from being mainly a family run enterprise of old-timers to one with professional ethos. His group companies have been making extensive disclosures. Impressed by this young Birla’s initiative, the regulatory body, SEBI appointed him on a committee which is now known as the Kumar Mangalam Birla Committee on Corporate Governance. BANKS AND CORPORATE GOVERNANCE Banks in India as corporations are as much required to be governed under corporate governance norms as other firms. Additionally, they are also covered under the internationally followed Basel Committee norms about which details are provided in the chapter on Banking and Corporate Governance. The Basel Committee norms relate only to commercial banks and financial institutions. Banking and financial institutions stand to benefit only if corporate governance is accepted universally by industry and business, with whom banks and financial institutions have to interact and deal with. SEBI only partially attends to this need. CORPORATE ETHICS: GOOD GOVERNANCE Realizing the importance of corporate governance to banks which are highly leveraged entities whose failures would pose large risks to the entire economic system, the RBI formed an Advisory Group on Corporate Governance that submitted its report in 2001. It also created aother committee called the Consultative Group of Directors of Banks/Financial Institutions (known as the Ganguly Committee) which submitted its report in 2002. The RBI, after due deliberations, acted based on the recommendations of both these reports, and this has considerably strengthened the corporate governance mechanism in banks. TRANSPARENCY IN THE PRIVATE SECTOR The need for transparency, so far, appears to have been felt in the context of public authorities alone. Consequently, we have the Right to Information Act and a modification of the Official Secrets Act. While, there is no doubt that the government has to be completely transparent in its dealings since it deals with public money, privately managed companies also have a wide shareholder base. They also deal with large volumes of public money. The need for transparency in private sector is, therefore, in no way less important than in the public sector. However, private companies use ‘competitive advantage/company interests’ as a pretext to hide essential information. Awarding of contracts, recruitments, and transfer pricing (for instance, through under/over invoicing of goods in intra company transfers) are the areas which require greater transparency. Environmental conservation, redressal of customer complaints and use of company resources for personal purposes are some of the other crucial areas, which call for greater disclosure. Relevant details about these must be available for public scrutiny. Fear of public scrutiny will ensure corporate governance based on sound principles both in the public as well as private sectors. INITIATIVES OF THE DEPARTMENT OF COMPANY AFFAIRS In May 2000, the Department of Company Affairs invited a group of leading industrialists, professionals and academics to study and recommend measures to enhance corporate excellence in India. This Study Group in turn set up a task force under the chairmanship of Dr P. L. Sanjeev Reddy, which examined the subject of ‘Corporate Excellence through Sound Corporate Governance’ and submitted its report in November 2000. The Task Force in its recommendations identified two classifications, namely, essential and desirable, with the former to be introduced immediately by legislation and the latter to be left to the discretion of companies and their shareholders. Some of the recommendations of the task force include the following: ∑ ∑ ∑ ∑ ∑ ∑ ∑ ∑ ∑ greater role and influence for non-executive, independent directors stringent punishment for executive directors for failing to comply with listing and other requirements limitation on the nature and number of directorship of managing and whole-time directors proper disclosure to the shareholders and investing community interested shareholders to abstain from voting on specified matters more meaningful and transparent accounting and reporting tougher listing and compliance regimen through a centralized National Listing Authority highest and toughest standards of corporate governance for listed companies; and a code of public behaviour for public sector units. CENTRE FOR CORPORATE EXCELLENCE The Government of India has set up the Centre for Corporate Excellence under the aegis of the DCA as an independent and autonomous body as recommended by the Study Group. The centre would undertake research on corporate governance; provide a scheme by which companies could rate themselves in terms of their corporate governance performance; promote corporate governance through certifying companies who practise acceptable standards of corporate governance and by instituting annual awards for outstanding performance in this area. Government initiative in promoting corporate excellence in the country by setting up such a centre is indeed a very important step in the right direction. It is likely to spread greater awareness among the corporate sector regarding matters relating to good corporate governance, motivating them to seek accreditation from this body. The cumulative effect of the companies achieving such levels of corporate excellence would then no doubt be visible as the enhanced competitive strength of our country in the global market for goods and services. 175 176 BUSINESS ETHICS—AN INDIAN PERSPECTIVE The Award for Excellence in Corporate Governance, instituted in 1999 by the Ministry of Finance under the aegis of the DCA is sponsored by Unit Trust of India. For the very first year, the Award was presented to Infosys. A panel chaired by Justice P. N. Bhagwati and comprising eminent persons unanimously selected Infosys Technologies (Limited) for the award for the year 1999. The panel commended the company thus: “Infosys is an ethical organisation whose value system ensures fairness, honesty, transparency, and courtesy to all its constituents and society at large”.26 For the year 2000, the panel chaired by Justice M. N. Venkatachaliah unanimously selected The Tata Iron and Steel Limited (TISCO) for the award. This prestigious award was given to the company’s management for showing fairness, honesty, transparency and courtesy to all stakeholders and for its deep concern for the environment, pioneering social audit, taking good care of its employees and for driving change within the company in terms of knowledge management systems. CORPORATE RESTRUCTURING Substantive improvements have been made to the law. Improved laws now provide for the initiation of restructuring measures for a sick company at a much earlier stage of financial sickness. This has increased the chances of the company’s revival. Measures have also been enacted to rehabilitate workers and investors by setting up rehabilitation funds. The jurisdiction and powers relating to the winding up of works have been shifted to the National Company Law Tribunal. With globalization and opening up of the economy, the need was felt that the Indian market should be geared to face competition not only from within the country, but also from abroad. Based on several recommendations, the Competition Bill was introduced in the Lok Sabha. The Competition Bill, 2002 is a landmark development in economic legislation. The government had set up a high-level committee to examine the existing Monopolies and Restrictive Trade Practices (MRTP) Act, 1969, for shifting the focus of the law from curbing monopolies to promoting competition, and to suggest a modern competition law to suit Indian conditions in line with international developments. BEST PRACTICES The law governing corporations has been fine-tuned by amending the Companies Act to create the right ambience for the corporate enterprises to function effectively in the era of liberalization. With these amendments, corporations are now in a position to adopt the best practices in corporate governance in vogue elsewhere in the world. The DCA has adopted an ambitious programme to completely overhaul its services to the corporate sector by undertaking modernization and placing the services on the Internet. This is being done with a view to reducing the time and resources spent by corporations. The offices of the Registrar of Companies (ROC) curb malpractices that arise out of the situation and also tap the immense amount of economic data received through filing in ROC offices and through the cost audit branches in the DCA. Computerization and modernization is planned to be undertaken through private–public partnership. A committee has been set up to look into issues relating to auditor–company relationship such as rotation of auditors/auditing partners, restrictions on non-audit work/fee, procedures for appointment of auditors, determination of audit fees, the role of independent directors and disciplinary procedures for accountants. The recommendations of the committee, when implemented, are expected to help improve the credibility of company accounts and the integrity of audit work. They would also help in strengthening the disciplinary mechanism against erring accountants. ESTABLISHMENT OF THE SERIOUS FRAUD OFFICE The DCA has set up a Serious Fraud Office (SFO) as part of a new push to crack down on company fraud and improve corporate governance. The SFO will investigate economic crimes such as bribery by companies trying to win lucrative deals. The SFO which is to be part of the DCA will investigate company finances and prosecute them in cases where there have been violation of corporate laws. The establishment of the SFO has come as part of a general climate of change in corporate governance in India. The government is contemplating to set up a National Centre for Corporate Governance as a joint initiative with the private sector. A committee is also recently commissioned to examine how to make the country’s businesses more transparent. The SFO will pass the case on to other authorities if there is evidence that other laws, such as banking laws or tax laws, have been broken.27 CORPORATE ETHICS: GOOD GOVERNANCE ESTABLISHMENT OF THE NATIONAL FOUNDATION OF CORPORATE GOVERNANCE To provide a platform to deliberate on issues that relate good corporate governance as key to sustainable wealth creation, the Indian government has taken a step forward in setting up National Foundation for Corporate Governance (NFCG). In September 2003, the Union Cabinet had given its consent for setting up NFCG as a Trust. The Foundation has since been registered as a trust with the objective of promoting good corporate governance in India.28 Managing the trust will be a three-tier body comprising of a Governing Council, a Board of Trustees and an Executive Directorate. The Foundation will work in synergy with the Investor Education and Protection Fund (IE&PF), a corpus used for investor awareness programmes in issues such as capacity building. Promoting investor associations will be a common activity between the two bodies. Among the broad objectives of NFCG, is to provide research and training in the field of corporate governance. It would also be a source of financial or any other assistance for activities aimed at promoting corporate governance, including research and training. Besides, the US-based Global Corporate Governance Forum also supports the India-centric activities taken up by the various agencies. Meanwhile, IE&PF on its part is setting up a prime database called ‘Investor Watch out’ on the lines of a similar concept in Europe that will help educate the investors and list the names of the erring companies. In exercise of the powers conferred by Section 205 of the Companies Act, DCA has, in October 2001, established the IE&PF. The fund will get contributions from companies having unpaid dividend, matured deposits and debentures and share application money lying with them for seven years. The funds are to be utilized for promoting investors’ awareness and protection of their interests. A committee to administer this fund has already been constituted by the department. Recognizing the increasing concerns about the levels of corporate governance and ethical practices in the corporate sector, the DCA has undertaken active measures by promoting good corporate governance and enhancing the image of the corporate sector. CORPORATE GOVERNANCE IN INDIA—A PERFORMANCE APPRAISAL It is over a decade since the concept of corporate governance has become a passion with industry analysts in India. It has long passed the stage of being a fashion statement that it was in early 1990s, as its ideals have been propagated as the be-all and end-all of all corporate endeavour in the aftermath of economic liberalization in the country on one hand, and the then newly publicized Cadbury Report, on the other. All these got irretrievably intermixed to give the concept an aura and a halo. Now, after more than a decade down the line and with a lot of studies and in-depth research having been done by several committees, a reality check and analysis throw up a lot of somewhat unpalatable home truths. Indian industry has come a long way since 1991. There has been a phenomenal growth both in the quality and number of corporations in the country. Some of them are implanting their footprints abroad and some worldwide objective research has shown that our corporations, albeit small in number, are second to none in terms of corporate governance standards. Companies like Infosys are on top of the heap. If the American capital market regulator, SEC, commend Infosys’ balance sheet as a role model to be emulated by US companies, it speaks volumes about our better governed corporations. Sixty-three companies were short-listed for the conferment of the Government of India’s Award for Excellence in Corporate Governance for the period 1999 to 2001. The list was prepared on the bases of certain corporate governance criteria such as (i) governance structure, which includes composition of the board and committees of the board; (ii) disclosures in the annual report, which covers statutory disclosures and non-statutory disclosures; (iii) timeliness and content of information to the investors and the public, which take into account compliance with the listing agreement the concerned stock exchange, contents on Web site and grievance resolution ratio; and (iv) enhancement of shareholder value determined on the basis of share prices and return on net worth. The list of 63 corporations represents only a sample and is not exhaustive to cover all companies that are worthy enough to be short-listed. This implies that there are a sizeable number of corporations in the country that make serious efforts to adopt better corporate governance standards. There is another perspective to the issue of the Indian corporate sector’s earnest attempt to put in place corporate governance practices. According to Tata Sons executive director, R. Gopalakrishnan, Indian firms have spent Rs 8,000 million so far on corporate governance. “In the last three years, the money paid to auditors has jumped to Rs 8,000 million from Rs 4,000 million. This, I would say, is arguably the cost of corporate governance”. He pointed out that industry groups like the Tatas and Birlas believed in the trusteeship concept of wealth.29 177 178 BUSINESS ETHICS—AN INDIAN PERSPECTIVE Viewed from another angle, if many Indian industries are recognized across the world, it is also due to the image they have been projecting as successful corporations with good governance systems. In that sense the age of the Indian industry seems to have arrived. Two Indian companies—Infosys and Reliance Industries—are among the 44 global strategic partners, which have contributed their expertise and resources to the organization of the Annual Meeting of the World Economic Forum 2005. Infosys Chairman and Chief Mentor, N. R. Narayana Murthy was also one of the co-chairs in this prestigious annual event of the WEF held in Davos, Switzerland.30 PERFORMANCE APPRAISAL OF INDIAN CORPORATIONS Corporate governance seems to have favourably impacted only a handful of corporations whose leaders imbued with its lofty ideals have taken them to such heights, while others have done nothing but cosmetic changes in the governance of their companies and seem to have satisfied themselves with their meagre attempts. Let us go into the details. In the beginning of 2004, as part of the joint World Bank—IMF sponsored programme called the Report on the Observance of Standards and Codes, a corporate governance country assessment for India was carried out. The purpose of the report was to know to what extent Indian corporations practised corporate governance vis-à-vis the OECD principles of corporate governance (2004), considered a benchmark in this area by the World Bank.31 The report evaluated India’s compliance with each of the OECD benchmarked principles of corporate governance. The compliance level was placed into five classifications, namely, (i) ‘observed’, (ii) ‘largely observed’, (iii) ‘partially observed’, (iv) ‘materially not observed’, and (v) ‘not observed”. Out of 23 OECD principles, Indian corporations have been found to be observing 10, while six were ‘largely observed’. Another six were placed under ‘partially observed’ category, while one was said to be ‘materially not observed’.32 The assessment team had found Indian corporations ‘materially not observing’ one category of OECD principle that concerns facilitating all shareholders, including institutional shareholders, to exercise their voting rights. As per this principle, institutional shareholders are called upon to disclose their voting policy, explain when they act in a fiduciary capacity, and how they manage material conflicts of interest that may affect exercise of their key ownership rights. Table 7.1 below presents a chart of the relevant OECD principles and the areas where the assessment team found Indian corporations to be only ‘partially observant’. g Table 7.1: Areas where Indian companies are ‘partially observant’ of the OECD Principles OECD Principles Partial Observance by Indian Corporations Insider trading to be prohibited Though as per Indian law insider trading is a criminal offence, the enforcement is weak and ineffective. Shareholders should be treated without discrimination Board/managers should disclose interests in corporations they manage Mechanism for redressal for violation of stakeholders’ rights Annual independent audit, a necessity. The board should exercise objective judgement There is a grievance redressal mechanism available and shareholders can approach SEBI, the Company Law Board or the Investors Grievance Committee of concerned stock exchanges for redress of grievances. However, investors lack faith in the efficacy of legal remedies. Misuse of corporate assets and abuse in related party transactions are common and have not been effectively tackled. Redressal for violation of shareholders rights can be sought at Civil and High Courts, but the Indian judiciary is well known to be slow and lethargic. Auditors in India do provide consulting service to the auditee company depending on the level of audit fee, but lengthy disciplinary proceedings are common. Multiple board membership is common and it affects board performance. Special training is required for audit committee members, as some of the member-directors may lack knowledge of accounts and company finance. Source: Adapted from: Dilip Kumar Sen, “A Report Card That Does Not Impress,” Business Line, 27 January 2005. Used by courtesy of Dilip Kumar Sen. CORPORATE ETHICS: GOOD GOVERNANCE The report has made several policy recommendations, if a principle is less than fully observed. Some of the important policy recommendations are as follows: 1. Need for Sanction and Enforcement: The success or otherwise of a policy is dependent on not only the degree of compliance, but also the deterrent penalty provided for non-compliance. The existing provisions on sanctions in the Companies Act for violation of law are said to be inadequate, especially the measly fines imposed. For instance, at present stock exchanges cannot impose fines. If corporations are expected to carry out their business practices within the applicable laws and regulations, credible deterrents should also be there to impose sanctions and enforcements for non-compliance. The legal system should ensure that business practices are synchronized with the legal and regulatory framework, especially in relation to party transactions and insider trading. 2. Need for Clear Demarcation of Controls: Presently, the Indian regulatory framework distributes the responsibility of oversight of listed companies to three different quasi-legal agencies, namely, the DCA, the stock exchanges and the SEBI. The lack of clear demarcations of regulatory bodies and their functions leads to overlapping of controls and makes it possible for violators to play one against the other. The fragmented structure also leads to regulatory arbitrage and weaken enforcement. Considering the enormous size of India’s capital market, it is necessary to review this three-tiered supervision system and clearly demarcate the responsibility of each regulator. To avoid the multiplicity of the regulatory system, SEBI could be made the sole capital market regulator with powers of investigation and awarding penalty for violators. 3. Lack of Professionalism of Directors: Directors should improve their knowledge and skill. If boards are expected to be professional and competent, they must have a clear understanding of what is expected of them. Director training institutes can play a key role and expand the pool of competent potential candidates for directorship. 4. Role of Institutional Investors: Institutional investors acting in a fiduciary capacity do not play an effective role. They should be made to form a comprehensive corporate governance policy, including voting and board representation. There have been several instances in the Indian corporate history wherein thousands of poor investors have lost their hard-earned money, because the institutional nominees on the boards did not play other roles honestly. 5. Indian Boards Exhibit Poor Professionalism: The corporate governance reforms in India have been mostly on paper. This is very much reflected in the fact that most of the so-called ‘independent directors’ are nominated by the promoter groups in whose boards they are supposed to sit and help take independent and unbiased decisions! An analysis by L. C. Gupta and his team of researchers shows that a vast majority of the Indian listed companies have destroyed shareholder value. Whether or not a company has given proper attention to the interest of shareholders would ordinarily be reflected in two indicators of shareholders’ return, namely, dividends and capital appreciation.33 ∑ The study shows that the great majority of Indian listed companies have, in fact, destroyed shareholder value. ∑ Instead of severely punishing the guilty corporate managements, the Indian authorities let them go scot free. ∑ Indian directors give only a lip service to corporate governance practices, as pointed out by Dilip Kumar Sen in his article quoted above. In India, like most other developing countries, corporations are managed as if they are the CEO’s personal properties. They are not concerned much about the welfare of all stakeholders, but care only about the interest of the principal shareholders. It is also a fact that many directors do not know that they are agents of shareholders and that they hold a fiduciary responsibility, apart from a position of trust and faith. Participation of non-executive directors in the board or its committee’s meetings is inversely proportional to the health of the bottom line. The more attractive the bottomline is, the lesser their participation. Most directors of companies do not consider it their responsibility to update their knowledge and understanding about the changes in laws and regulations that have been introduced, or the business model or current strategy of the company in which they are directors. If the company performed well financially, refusal to approve or object to any proposal of the management is considered incorrect and inappropriate. 179 180 BUSINESS ETHICS—AN INDIAN PERSPECTIVE 6. Independent Directors Are Not So Independent: The Independence of independent directors seems to be only on paper. Most of the independent directors are hand-in-glove with the promoters. They rubber-stamp questionable decisions of promoters and ignore fund diversion and mismanagement in their companies. In several top companies, there are people who have remained as independent directors for as many as 20 to 30 years. In Reliance Industries, for example, these directors remained silent when the company made massive investment in other unlisted companies. A SEBI panel tried to stop this practice and proposed a limit (9 years) on their tenure. But Indian corporate bigwigs ‘intervened’ and lobbied for changes—finally, the limit is now with prospective effect.34 Sen continues to assert that non-executive directors do not consider themselves as watch-dogs of shareholders. According to him, board rooms are generally filled up with ‘yes’ men who do not raise relevant questions and give their assent to all proposals put up by the management. It is a well-established fact that in the Indian corporate sector, a person is invited to become a non-executive director only if he or she enjoys the patronage of the chairman/CEO through old school connections social circuits or golf clubs. With regard to nominee directors, it is seen that they too play a passive role at meetings except during a crisis. This has been proved time and again, when an objective analysis of corporate failures is made. It has also been observed by objective observers that in the Indian corporate sector what you preach on corporate governance you need not necessarily be practised in the company you manage. It is always for the other people. However, the same passive directors can become extremely vocal and are found to raise uncomfortable questions when the performance of the company is poor. In India, it is a tragedy that non-executive directorship is considered more as symbol of social status and connections than as a position of responsibility. A couple of years after Indian corporations tom-tommed the virtues of good corporate governance practices, the revelations at Reliance, the country’s largest private sector company, show that a lot still needs to be done. To be sure, corporate governance levels have improved in the last five years, but Indian industry still finds itself on the opposing side.35 In addition to what is revealed in the World Bank–IMF sponsored report, there are several other weaknesses that can be pointed out about the functioning of the Indian corporate sector. Some of the weaknesses are as follows: 1. Lack of a Whistle-Blower Policy: Last year SEBI had proposed that a whistle-blower policy should be made mandatory. However, after stiff resistance from the industry, it asked the N. R. Narayana Murthy panel to rework the policy. Later, the whistle-blower policy was made optional for companies. 2. Unlisted Investment Companies: This is the most confusing part of Indian industry and one that companies will protect tooth and nail. Companies and promoters have promoted thousands of unlisted subsidiaries. Many of them divert funds through these companies. The modus operandi is this: The listed company will give a loan (even interest-free) to these unlisted companies, which, in turn, will default repayment. A major chunk of these investment companies hold shares in their listed companies. In fact, promoters have floated several layers of such subsidiaries to hold their stakes in leading group companies. Most of corporate India, from the Tatas and Birlas, to Reliance, follows this practice. 3. Accounting Gimmicks: While there are some gaps in financial statements, corporate sources claim “We are now pretty close to the global best practices.” But this has to be taken with a pinch of salt. For instance, a study by Crisil in 2005 reclassified and sanitized the annual accounts of 616 manufacturing companies. It restated the accounts of 243 companies—and showed that their actual profits are different from what they had reported. Simply put, their books were cooked.36 4. Poor Shareholder Participation: Corporate misgovernance in India would not have gone thus far and promoter families would not have ruled the roost this much, had there been a well-directed shareholder activism. The Indian investors, more than their counterparts elsewhere, are scattered, unorganized, mute and uninterested in the affairs of the company they have invested in, except for the dividends and all other annual gifts doled out to them. They give their consent most obligingly enabling unscrupulous managements to perpetrate their dynastic rule with glee and making corporate democracy a sham. Voices of dissent are few and rarely recorded. The worst part of it is that even large institutional shareholders rarely record their dissent, and if they found board decisions and practices unacceptable they simply sell their securities and quit, rather than fight and help establish better governance practices. No wonder there has been a sizeable erosion of investor confidence in the country with every scam coming to light. CORPORATE ETHICS: GOOD GOVERNANCE 5. Obliging Auditors: Another weak link in the wobbling chain of corporate governance in the country is that of the auditing profession. Obliging auditors help companies in window-dressing, manipulation of profit and loss accounts, hedging and fudging of unexplainable expenditures and resorting to continuous upward evaluation of assets to conceal poor performance. It is common knowledge that there is a dire need for independent auditors who are reputed and above board. Due to distrust in Indian auditors, most of the multinational companies in India have insisted that their parent companies’ auditors also audit their subsidiaries in the country. Things have started improving with the Institute of Chartered Accountants of India insisting on the profession adopting improved accounting practices, but there is a lot to be achieved. 37 6. Other Problems: There are of course, several other problems in the country’s capital market that are responsible for the poor record of corporate governance in the country. It has been mentioned earlier and it requires repetition in this context. A soft State, a lethargic and slow-moving judicial system, a value system that is indifferent to moral turpitudes, an inefficient market regulator and poor enforcement of rules and regulations have all combined together to ensure that though the ideal of corporate governance is kept on a high pedestal, it is but occasionally put into practice. FUTURE OF CORPORATE GOVERNANCE IN INDIA Although India has a long way to go to be ranked among the best in the world in corporate governance, the driver is exactly right. A large number of CEOs now realize that their companies need financial and human capital in order to grow to scales necessary to survive international competition. They also understand that such capital will not be available in a non-transparent corporate regime that is bereft of international quality of disclosures and accountability. It is precisely this realization, which drives the corporate governance movement in India, with greater chances of delivering substance than the ticking of mandated governance checklists. It is important to note that there are still some lacunae in different aspects of corporate governance. ∑ India still has poor bankruptcy laws and procedures (legal and procedural barriers to good corporate governance). ∑ Indian accounting standards still do not mandate consolidation—although this is slated to change. ∑ Indian stock markets are still inefficiently run, and do not have adequate depth or width to give shareholders greater comfort. ∑ The Indian bond market is in its infancy. Pension funds need to invest much more in equity, and play an activist role. Mutual funds ‘need to walk the talk’ in corporate governance. Even so, it is necessary to recognize that corporate India has gone a long way in the business of governance, especially in the last decade—and more so given its legacy of the past. IMPETUS FOR THE GROWTH OF CORPORATE GOVERNANCE IN INDIA Although corporate governance has been slow in making its mark in India, the next few years will see a flurry of activity. This will be driven by several factors: 1. Competition: Most important, is the force of competition. With the dismantling of licenses and controls, reduction of import tariffs and quotas, virtual elimination of public sector reservations, and a much more liberalized regime for foreign direct and portfolio investments, Indian companies have faced more competition in the second half of the 1990s than they did since independence. Competition has forced companies to drastically restructure their ways of doing business. 2. New Players’ Professionalism: Many companies and business groups that were on the top of the pecking order in 1991 have been relegated to the bottom. Simultaneously, new aggressive companies have clawed their way to the top. Therefore, they are more than willing to have professional boards and voluntarily follow disclosure standards that measure up to the best in the world. 3. Growth in Market Capitalization: There has been a phenomenal growth in market capitalization. This growth has triggered a fundamental change in mindset from the earlier one of appropriating larger slices of a small pie, to doing all that is needed to let the pie grow, even if it involves dilution in share ownership. 4. Foreign Portfolio Investors: One cannot exaggerate the impact of well-focused, well-researched foreign portfolio investors. These investors have steadily raised their demands for better corporate governance, 181 182 BUSINESS ETHICS—AN INDIAN PERSPECTIVE 5. 6. 7. 8. more transparency and greater disclosure. Over the last two years, they have systematically increased their exposure in well-governed firms at the expense of poorly run ones. Media Influences: India has a strong financial press, which will get stronger over the years. In the last five years, the press and financial analysts have induced a level of disclosure that was inconceivable a decade ago. This will increase and force companies to become more transparent—not only in their financial statements but also in matters relating to internal governance. Influence of Banks and Financial Institutions: Despite serious lacunae in Indian bankruptcy provisions, neither banks nor financial institutions (FIs) will continue to support managements irrespective of performance. Already, the more aggressive and market-oriented FIs have started converting some of their outstanding debt to equity, and setting up merger and acquisition subsidiaries to sell their shares in under-performing companies to more dynamic entrepreneurs and managerial groups. This will intensify over time, especially with the advent of universal banking. Realization of the Benefits of Corporate Governance: Ultimately, Indian corporations have appreciated the fact that good corporate governance and internationally accepted standards of accounting and disclosure can help them access the US capital markets. Until 1998, this premise existed only in theory. It changed with Infosys making its highly successful NASDAQ issue in March 1998. This was followed by five more US depository issues—ICICI (which is listed on NYSE), Satyam, Infosys, Rediff and Wipro. There are at least 10 companies presently gearing up to issue US depository receipts, and all of them will be listed either at NYSE or at NASDAQ. This trend has had two major beneficial effects. First, it has shown that good governance pays off, and allows companies to access the world’s largest capital market.38 By the latest count, external commercial borrowings (ECBs) of Indian corporations during the financial year 2007–08 amounted to $33 billion, apart from an equivalent amount of foreign direct investment (FDI) inflows.39,40 Second, it has demonstrated that good corporate governance and disclosures are not difficult to implement—and Indian companies can do all that is needed to satisfy US investors and the SEC. The message is now clear: It makes good business sense to be a transparent, well-governed company, incorporating internally acceptable accounting standards. Impending Full Capital Account Convertibility: In a couple of years India will move to full capital account convertibility. When that happens, an Indian investor will seriously consider whether to put his or her funds in an Indian company or to place it with a foreign mutual or pension fund. That kind of freedom will be the ultimate weapon in favour of good corporate governance. Thankfully for India, the companies that matter have already seen the writing on the wall. Thus, it may not be wrong to predict that, in another couple of years India might have the largest concentration of well-governed companies in South and Southeast Asia. SUMMARY Corporate governance is typically perceived by academic literature as dealing with ‘problems that result from the separation of ownership and control.’ Sir Adrian Cadbury, Chairman of the Cadbury Committee defined the concept as “holding the balance between economic and social goals and between individual and communal goals”. Experts at OECD have defined corporate governance as “the system by which business corporations are directed and controlled”. All these definitions capture some of the most important concerns of governments in particular and the society. These are (i) management accountability; (ii) providing adequate investments to management; (iii) disciplining and replacement of bad management; (iv) enhancing corporate performance; (v) transparency; (vi) shareholder activism; (vii) investor protection; (viii) improving access to capital markets; (ix) promoting long-term investment; and (x) encouraging innovation. Corporate governance systems depend upon a set of institutions (laws, regulations, contracts, and norms) that create self-governing firms as the central element of a competitive market economy. “Governance is more than just board processes and procedures. It involves the full set of relationships between a company’s management, its board, its shareholders and its other stakeholders, such as its employees and the community in which it is located. The quality of governance is directly linked to the policy 1. 2. 3. 4. 5. Rights of shareholders Equitable treatment of shareholders Role of stakeholders in corporate governance Disclosure and transparency Responsibilities of the board. APEC guidelines include establishment of rights and responsibilities of managers and directors. The oft-quoted Cadbury Committee, submitted its report along with the ‘Code of Best Practices’ in December 1992. In its globally well-received report, the committee elaborated the methods of governance needed to achieve a balance between the essential powers of the board of directors and their proper accountability. Against the different issues in corporate governance, the benefits of good corporate governance to a corporation were highlighted to be the following: 1. 2. 3. 4. 5. Creation and enhancement of a corporation’s competitive advantage Enabling a corporation to perform efficiently by preventing fraud and malpractices Providing protection to shareholders’ interest Enhancing the valuation of an enterprise Ensuring compliance of laws and regulations. In India, the real history of corporate governance dates back to the year 1992, following efforts made in many countries of the world to put in place a system suggested by the Cadbury Committee. In 2002, a high-level committee under the chairmanship of Naresh Chandra was appointed to examine and recommend drastic amendments to the law involving the auditor–client relationships and the role of independent directors by the DCA in the Ministry of Finance and Company Affairs. The Company Law Amendment Bill, 2003 envisaged many amendments on the basis of reports of the Naresh Chandra Committee and the subsequently appointed N. R. Narayana Murthy Committee. The Government of India constituted an Expert Committee on Company Law on 2 December 2004 under the Chairmanship of Dr J. J. Irani. It has come out with suggestions that will go far in laying a sound base for corporate growth in the coming years. SEBI monitors and regulates corporate governance of listed companies in India through Clause 49. This clause is incorporated in the listing agreement of stock exchanges with companies and it is compulsory for them to comply with its provisions, which include that for composition of the board, constitution of the audit committee, the audit committee, remuneration of directors, board procedures, and shareholders information. In early 2004, a corporate governance country assessment for India was carried out as part of the joint World Bank–IMF programme of Report on the Observance of Standards and Codes. Past experience on governance issues in the country has shown that none of the corporate governance principles can be cast in stone and laid to rest forever. There is an ongoing need for constant review and course corrections to keep the country in the pink of health in terms of its corporate excellence. By a judicious mix of legislation, regulation and suasion, this task needs to be constantly addressed. With growing maturity and competitive compulsions, it should be possible to gradually reduce legislative interventions and increase regulatory compliance, with self-induced adherence to the best practice in this field. Till then, however, legislation and regulation to ensure at least certain minimum standard is inevitable. To facilitate such a graduation into better governance practices, globalization has opened up an array of opportunities to corporate India. To emerge successful in its new tryst with destiny, there are no soft options available, and the Indian corporate sector must necessarily turn to good governance in its pursuit of competitive excellence in a challenging international business environment. (Continued) framework. In the 21st century, stability and prosperity will depend on the strengthening of capital markets and the creation of strong corporate governance systems” according to William Witherek (OECD 2000). The OECD has emphasized the following requirements of corporate governance: 183 SUMMARY CORPORATE ETHICS: GOOD GOVERNANCE 184 BUSINESS ETHICS—AN INDIAN PERSPECTIVE KEY WORDS Capitalism at crossroads ∑ Corporate misgovernance ∑ Securities scam ∑ New economic policy ∑ Closed economy ∑ Sheltered market ∑ Transparent governance ∑ Globalization of the economy ∑ Forces of competition ∑ Market capitalization ∑ Economic liberalization ∑ Global concerns ∑ Privatization of industries ∑ Shareholder-centric definitions ∑ Narrow perspective ∑ Public policy perspective ∑ Cynosure ∑ Developing economies ∑ Transition societies ∑ Corporate democracy ∑ Board process ∑ Board procedures ∑ Equitable treatment ∑ Historical perspective ∑ Executive remu- neration ∑ Institutional shareholders ∑ Socially responsible corporate citizen ∑ Corporate performance ∑ Competitive advantage ∑ Governance mechanisms ∑ Societal responses ∑ Environment-friendly ∑ Whistleblowing ∑ Human treatment ∑ Credo ∑ Clause 49 ∑ Industry initiatives ∑ Performance appraisal ∑ Report card ∑ Impetus for growth ∑ Competition-driven ∑ Institutional investors ∑ Independent directors. DISCUSSION QUESTIONS 1. Trace the evolution of corporate governance, both in the Western countries and in India. What are the factors that led to the increasing awareness of the need for corporate governance? 2. What do you understand by corporate governance? Has the need for it arisen only because of the ‘problems that result from the separation of ownership and control’? 3. What are the requirements of corporate governance as envisaged by the OECD? 4. Discuss the various issues in corporate governance. Are these issues universal? To what extent are these issues viewed differently in the context of developing/emerging economies? 5. What is the relevance of corporate governance? Do you think better governance practices boost corporate performance? Give illustrations. 6. Explain what constitutes good corporate governance from the context of different stakeholders. 7. What is Clause 49? Do you think that if Indian corporations comply with all the stipulations of Clause 49 we will have better corporate governance mechanism in India? 8. Review the present corporate governance practices in India. Do you think that things are likely to improve on this front in future? NOTES 1. A. C. Fernando, Corporate Governance, Principles, Practices and Policies (New Delhi: Pearson Education, 2006) 2. Sir Adrian Cadbury, Report of the Committee on the Financial Aspects of the Corporate Governance, (London: Gee & Co. Ltd., 1992). 3. Jemrik, “Jemrik White Paper on Corporate Governance,” August, 2002, available at www.jemrik. com/admin/documents/25_JEMRIK_CGwhitepaper_EN.pdf 4. World Bank, “Corporate Governance: Framework for Implementation, Overview,” 1999, www. worldbank.org, cited in “Corporate Governance in Emerging Markets—Vol. II,” available at www. iupindia.org/books/Corporate%20Governance%20in%20Emerging%20Markets%20_%20Vol_2.asp 5. Charles P. Oman, “Corporate Governance and National Development: Working Paper No. 180,” OECD Development Centre, 2001, available at www.oecd.org/dataoecd/19/61/2432585.pdf 6. Nicolas Meisel, Governance Culture and Development (Paris: OECD Publishing, 2004) Source OECD, 27 July 2007, available at http://masetto.sourceoecd.org/vl=2159879/cl=14/nw=1/rpsv/cgi-bin/fulltextew. pl?prpsv=/ij/oecdthemes/99980010/v2004n9/s1/p1l.idx 7. S. Machold and A. K. Vasudevan, “Corporate Governance Models in Emerging Markets: The Case of India,” International Journal of Business Governance and Ethics (Vol. 1, No. 1, 2004). 8. R. Rajagopalan, Directors and Corporate Governance, 1st ed. (Chennai: Company Law Institute of India, 2004), p. 136. CORPORATE ETHICS: GOOD GOVERNANCE 9. Ian Ramsay and Geof Stapledon, “Corporate Governance: The Role of Superannunation Trustees,” ICFAI Journal of Corporate Governance (October, 2002): 57–89. 10. IFSA Guidance Note No. 2.00 “Corporate Governance: A Guide for Investment Managers and Corporations,” Investment and Financial Services Association, 19 July 1999, available at www. ecgi.org/codes/documents/ifsa_july1999.pdf 11. Product of Working Group composed of Australian Institute of Company Directors, Australian Society of Certified Practicing Accountants, Business Council of Australia, Law Council of Australia, The Institute of Chartered Accountants of Australia, and the Securities Institute of Australia, Bosch Report: Corporate Practices and Conduct, 3rd ed. (Warriewood, NSW: Woodslane Pty Ltd, 1995). 12. See Note 9. 13. Ibid. 14. Basel Committee on Banking Supervision, “Enhancing Corporate Governance for Banking Organisations,” September 1999, available at www.bis.org/publ/bcbs56.pdf?noframes=1 15. See Note 7. 16. Ibid. 17. Muzaffer Alacaogullari, “Corporate Governance: A System for Private and Public Companies,” available at www.lightmillennium.org/3rd_april_03/malacaogullari_corp_govern.html 18. UNESCO, “Good Governance,” available at http://portal.unesco.org/ci/en/ev.php-URL_ID=5205&URL_ DO=DO_TOPIC&URL_SECTION=201.html 19. Vinod Dhall, “The Corporate Sector: Some Recent Developments,” available at http://pib.nic.in/feature/ feyr2003/fjan2003/f080120032.html 20. Our Bureau, “Centre Moves SC on Company Law Tribunal,” Business Line, Chennai, 7 May 2004. 21. Richa Mishra, “Secretarial Standards Must Be Mandatory: ICSI,” The Hindu Business Line, 31 January 2005. 22. “What is Clause 49,” available at www.clause49.com/clause49.htm 23. You’ve got Mail. “But This Time from India Inc. More Cos Now Rely on Postal Ballot to Take Crucial Decisions,” Economic Times, 20 January 2005. 24. Tarun Khanna and Krishna Palepu, “Is Group Affiliation Profitable in Emerging Markets? An Analysis of Diversified Indian Business Groups,” The Journal of Finance (Vol. LV, No. 2, 2000): 867–891. Cited in Jayesh Kumar, “Agency Theory and Firm Value,” available at http://unpan1.un.org/intradoc/groups/ public/documents/APCITY/UNPAN023822.pdf 25. Amar Gill, “Saints and Sinners—Who’s Got Religion?,” CG Watch—Corporate governance in emerging markets, Hong Kong: CLSA-Emerging Markets, April 2001, available at http://web.management.mcgill.ca/ Art.Durnev/clsa_2001.pdf 26. Jinesh N. Panchali, Excellence in Corporate Governance (Mumbai: Indian Institute of Capital Markets, 2003). 27. BBC, “India Cracks Down on Fraud,” 10 January 2003, available at http://news.bbc.co.uk/2/hi/business/ 2645589.stm 28. Special Correspondent, “Foundation for Corporate Governance,” The Hindu, 3 September 2003, available at www.hindu.com/2003/09/03/stories/2003090305471600 29. Financial Express Corporate Bureau, “Indian Firms Have Spent Rs 800 Crore on Corporate Governance So Far,” Financial Express, 9 December 2004. 30. A K Bhattacharya, “India Shining at WEF, Infosys, Reliance Among 44 Global Strategic Partners,” Business Standard, 29 January 2005. 31. Dilip Kumar Sen, “A Report Card That Does Not Impress,” Business Line, 27 January 2005, available at www.thehindubusinessline.com/2005/01/27/stories/2005012700020900.htm 185 186 BUSINESS ETHICS—AN INDIAN PERSPECTIVE 32. Ibid. 33. L. C. Gupta, “Corporate Governance, Indian Style,” Economic Times, 17 March 2004. 34. George Mathew, “Indian Inc’s Grim Battle Against Transparency,” The New Indian Express, Chennai edition, 31 December 2004. 35. Ibid. 36. See Note 1. 37. A. C. Fernando, “Corporate Governance: Time for a Metamorphosis,” The Hindu Business Review, 9 July 1997. 38. Gayatri Nayak and George Smith Alexander, “ECBs to Top $10-bn This Fisc,” Economic Times, 12 February 2005. 39. http://finmin.nic.in/press_room/2008/sept_details.htm/#ExtDebtReport0708 40. www.indianrealtynews.com/real-estate-india/the-sub-prime-crisis-and-what-it-means-for-india-html FURTHER READINGS 1. Cadbury Committee Report, A Report by the Committee on the Financial Aspects of Corporate Governance. The committee was chaired by Sir Adrian Cadbury and issued for public comment on 27 May 1992. 2. The Combined Code of Best Practices in Corporate Governance, The Turnbull Committee Report, 1998. 3. The Committee on Corporate Governance, The Hampel Committee Report, 1998. 4. Confederation of Indian Industry, Desirable Corporate Governance: A Code, March 1998. 5. Greenbury Committee Report, 1994, Investigating Board Members Remuneration and Responsibilities. 6. Patterson Report: The Link Between Corporate Governance and Performance, 2001. 7. Principles of Corporate Governance: A Report by OECD Task Force on Corporate Governance, 1999. 8. Report of SEBI’s (N. R. Narayanamurthy) Committee on Corporate Governance, 2003. CORPORATE ETHICS: GOOD GOVERNANCE 187 CASE Study TATA STEEL—A COMPANY THAT ALSO MAKES STEEL (This case study is based on reports in the print and electronic media, and is meant for academic purpose only. The author has no intention to sully the image of the corporate or executives discussed) Tata Steel has articulated its strategic goals to take on new challenges while adhering to the values of Trusteeship, Integrity, and Respect for the Individual, Credibility and Excellence in co-creating its Vision 2007:2 CELEBRATING AN EVENTFUL CENTENARY ∑ To seize the opportunities of tomorrow and create a future that will make it an EVA (economic value added) positive company. ∑ To continue to improve the quality of life of its employees and the communities it serves. ∑ To meet the future economic challenges, Tata Steel intends: ¡ Creating wealth through growth in topline and improvement in shareholder value through its focus on revenue growth, EVA and market capitalization; ¡ Becoming the most cost competitive steel maker through improving customer satisfaction, reduction in production cost and right sizings; ¡ Broadening the stakeholder base for transparency, credibility and excellence; and ¡ Fast tracking to achieve waste utilization to the level of world benchmark through cleaner processes, technological innovations, and making the city of Jamshedpur a zero-dumping city. On 26 August 2007, Tata Steel, India’s first private sector steel unit celebrated its well-deserved centenary jubilee. Established exactly a hundred years ago, the company has now transformed itself into a global giant, with a production capacity of almost 26 million tonnes against a mere 100,000 tonnes it started with in 1907. Tata Steel’s coveted history is “linked intrinsically to the genesis and growth of an industrial India”.1 THE BEGINNING AND GROWTH In the 1890s, Jamsetji Tata conceived of a dream project—a modern steel plant, with a state-of-the-art technology to produce one million tonnes of steel. Work on the steel plant commenced in 1907 in Jamshedpur which became operational in 1912. The capacity of the unit at the time of India’s independence was around a million tonnes and this was increased to around 2 million tonnes by 1960. With the policy of the Indian government to give priority to the public sector to reach the commanding heights of the economy, the company, like many others in the private sector, was not allowed to grow until the liberalization of the economy in 1991. In fact, at the height of the socialist fervour of the 1970s, there was even a suggestion to nationalize of Tata Steel taking resort to the Industrial Policy Resolution that permitted nationalization of any industry if needed in public interest. Fortunately, there was stiff opposition to the move from the public and the government of the day did not have the resources to pay adequate compensation to the shareholders of the company after nationalization, and the effort was aborted. COMPANY PROFILE AND VISION The World Steel Dynamics has rated Tata Steel as one of the best steel companies in the world based on an extensive study. Its turnover in financial year 2005 was Rs 16,053 million. PRODUCT AND SERVICES Steel business forms 86 per cent of the company’s turnover. Broadly, about 85 per cent of its products are sold in the domestic market and 15 per cent exported. Steel product groups are delivered to customers through direct supply channels and a network of hubs, stockyards and consignment agents. A unique selling feature of products initiated by the company keeping in mind the consumer, is the recommended consumer price arrived at with retailers’ inputs and displayed at every retail shop. The company has installed a toll-free customer care centre—a major step forward—both for pre- and post-sales services. In addition, three types of surveys gauge customer satisfaction. One method is to measure satisfaction level segment-wise using products and service attributes as parameters. House surveys are employed for this purpose. The second tool is an annual IMRB survey conducted by the Ministry of Steel, which is used for awarding the Prime Minister’s trophy for the best-integrated steel plant. It concentrates on the evolving 188 BUSINESS ETHICS—AN INDIAN PERSPECTIVE needs of customers and their potential to influence referrals to other customers. A third method is an independent survey conducted biannually by an expert external firm. 2005 FOCUS ON SELECT BUSINESSES AND CORE COMPETENCY When Ratan Tata succeeded J. R. D. Tata as chairman, he ordered a comprehensive review of identifying and focusing on the core businesses of the group. It was then found that many of the well-established businesses of the group did not sync with the company’s major core competence, steel production, such as electronics, cement, soaps, pharmaceuticals and textiles. These were gradually phased out. Interestingly, there were suggestions that steel could be one of these! Table 7.2 chronicles the important milestones of the company over the past 100 years. g Table 7.2: Milestones in the Growth of Tata Steel 1907 1911 1912 1920 1921 1934 1937 1947 1951 1955 1956 1958 Establishment of Tata Iron and Steel Company in Jamshedpur Commencement of operation of a blast furnace production of the cast of pig-iron. First steel produced. The bar mills commenced rolling A slew of first-ever workers’ welfare measures in India introduced Tata Steel’s Jamshedpur Technical Institute opened with a strength of 23 students Profit sharing bonus introduced by the company for first time in India. Inauguration of the research and control laboratory Personnel Department set up, being the first for any Indian Industry Establishment of Community Development and Social Welfare Department Doubling of capacity to 2 million tonnes Joint consultations for ‘Working Together’ introduced 1979 On completion of 50 years of the company, the Jubilee Park built in the centre of the steel city, dedicated to the nation The Tata Steel Rural Development Society set up 1991 J. R. D. Tata dedicates a multi-disciplinary sports complex 1983 1992 1995 1999 2003 2004 Modernization of the steel works in four phases covering a 15-year period commenced. The process of expansion and modernize on commences 3 million tonnes capacity achieved Environment programme to plant 1 million trees proposed. Green Millennium Countdown 4 million tonnes capacity achieved; completion of 75 years of industrial harmony. Investments in NatSteel Asia, Singapore and MoU for 6 million tonnes project in Orissa 5-million tonne steel plant at Chhattisgarh. 12-million tonne steel plant at Jharkhand. Doubling of Jamshedpur steel plant capacity to 10 million tones per annum (mtpa). Jamshedpur Steel works 5 mtpa expansion completed. Agreement with Carborough Downs, Australia for supply of clean coal. Setting up of Met Coke manufacturing facility in West Bengal 2006 2007 Investments in Millennium Steel, Thailand Acquisition of Anglo-Dutch steel maker, Corus for US$ 12.1 billion, making Tata Steel, the biggest integrated steel producer in Asia and the fifth largest in the world. Centenary year. Corus-developed new technology tried in Tata Steel. Announcement of the Tata Steel Centenary Project with a corpus of Rs 1,000 million to benefit 40,000 tribals in Jharkhand, Orissa and Chhattisgarh. HEAVY INVESTMENTS AND PROFITS The steel industry earned very modest profits for several years of the last century. In the early 1980s, annual profits of Tata Steel were in the region of Rs 60 million. Since 1992, when the company started expansion and modernization, it had spent over Rs 100,000 million. But compared to the astronomical costs of expansion and acquisitions that took place in the aftermath of the country’s economic liberalization, these figures fade into insignificance. Moreover, consolidation of its activities and the new acquisitions have brought to the company immense benefits. For instance, for the first quarter of 2007–2008, Tata Steel reported an over six-fold leap in its consolidated profit after tax (PAT) at Rs 63,880 million, which incidentally reflects the profits earned with the acquisition of the Anglo-Dutch steel-maker, Corus Group, early in 2007.3 QUANTUM GROWTH PLANNED AND ACHIEVED Right through its history, Tata Steel has earned profits every year and declared dividends. (In 2002, it was just one of five companies world over that earned a profit.) The present era of high profits has prepared the company to aim for quantum growth which requires huge investments. But money has not been a limiting factor for the growth of the company to consolidate its presence in Southeast Asia. Tata Steel bought over Singapore’s NatSteel in August 2004 for US$ 484.6 million and Thailand’s Millennium Steel in December 2005 for US$ 404 million. These two acquisitions added roughly 4 million tonnes to the company’s steel making capacity and Rs 90,000 million in turnover. But more importantly, these two with their operations in China, the Philippines, Vietnam, Thailand and Singapore enabled Tata Steel to build a significant presence in Southeast Asia and China, especially in automotive steel. It also gives the company the advantage of de-integrated production—produce the raw steel somewhere CORPORATE ETHICS: GOOD GOVERNANCE and finish it close to the market.4 Tata Steel also went on to buy out the London-based Corus Steel for US$ 12.1 billion in 2007, the biggest ever cross-border deal for an Indian company to date. Thus, Tata Steel which produced just 5 million tonnes of steel per year, bought over Europe’s second largest steel company, Corus with an annual steel making capacity of 18 million tonnes, to emerge as the world’s fifth largest steel producer. INVESTMENT IN INDUSTRIAL RESEARCH ENHANCES QUALITY To achieve higher growth in production and to reduce cost per unit, Tata Steel has invested heavily in industrial research. It has enabled the company to earn the proud position of the world’s cheapest producer of steel. There have been collaborative research projects with Indian Institute of Technology, Kharagpur, Indian Institute of Science, Bangalore and also with research institutions in Sweden, Germany and Japan. As a result, there has been a steep increase in the number of research papers published and intellectual property claims registered. Tata Steel spent a dollar per tonne of steel produced on R&D, which compares well with US$ 1.8 per tonne spent by leaders like Nippon Steel. Such focus on development has helped Tata Steel strive continuously to improve the quality of its product mix and also to increase the share of branded products, both of which helped it to have better realizations for a given quantum of output. Combined with the success in achieving continuous increases in production through rising operational efficiency, and reduction in specific consumption of raw materials refractories, there is the twin advantage of handsome increases in labour productivity and a much more than proportionate increase in after tax profits. Of course, the steep increase in prices through the last few years has also contributed to this big jump in profit. CLOSE ATTENTION TO HUMAN RELATIONS At the root of the success of Tata Steel lies its close and continuous attention to human relations. The success of the management in regularly and continuously interacting with the union leaders has helped in resolving differences. “Succession of leaders believed that the temper of employees is as crucial as the temperature of the furnaces”.5 The tradition of maintaining a most cordial relationship with workers in the truest sense of trusteeship (wherein it is believed that the employer is ordained by God to take care of the interest of workers and hence the resources of the enterprise are entrusted to him) has been built by J. R. D. Tata on the very humane foundation laid by Jamsetji Tata, and it still continues. Workers are involved in the decision making process at all levels—works level, departmental level and management level. To the extent possible, all efforts are made to ensure that decisions are taken unanimously. “The inclusion of all 189 employees—Tata Steel has around 17,000 of them—in the decision making process gives them a sense of involvement, belonging and responsibility as well. It also gives them the feeling of having contributed to some improvement activity or the other”.6 The amicable relationship that exists between the management and workers of Tata Steel is to a great extent due to the proactive labour welfare activities initiated and implemented by the company, many of which were the first time pro-labour measures throughout the entire world (Table 7.3). g Table 7.3: Frontrunner in Labour Welfare Measures Introduced Welfare Measures by Tata Steel 1912 8-hour workday 1915 Free medical aid 1917 1919 1920 1921 1934 1937 1945 1978 1980 1983 1990 1990 1995 1995 1997 2000 2001 Establishment of welfare department Medical facilities for children Workers’ committee USA England, India Followed by Others in 1919 1948 India 1948 India 1947 India 1947 India 1948 Leave with pay Provident fund scheme India India 1948 1952 Profit sharing bonus India 1965 Study leave India — Technical institute for employees Retirement gratuity Life cover scheme Encashment of sick leave Pension scheme Incentive for higher tech qualification India India India 1961 1972 — — 1995 — Medical separation scheme — Early separation scheme — Employees family benefit scheme Annual bonus — India 1965 Effective and efficient downsizing of the number of employees by almost one half even while production has increased multifold. Tata Steels Orissa-based Sukinda Chromite mines conferred SA-8000 2001 certification. 2003 Best initiative in CSR Award 2007 Completes one century of its establishment. Initiates VISION 2007. Conferred Andrew Carnegie Medal of Philanthropy. 2005 The process of downsizing has successfully completed. 190 BUSINESS ETHICS—AN INDIAN PERSPECTIVE DOWNSIZING SANS TEARS Among the most interesting and enduring of Tata Steel’s saga of growth is its seamless and successful efforts in downsizing. For producing just 2 million tonnes in 1994, Tata Steel employed as many as 80,000 workers, while when the company has increased its production multifold, it employs only about one-half of the workforce, showing the unviable employment situation then. When the company decided to reduce the unwieldy number of employees, the management evolved a then novel and humanistic voluntary retirement scheme (VRS) policy to ensure that it did not cause any heartburn amongst the affected workers. The company offered the displaced workers 1.2 times of their monthly salary for the rest of their service, in cheques. They were also given an insurance cover. In case of their death, their family would continue to receive the benefit. The company also spent a lot of time and money to identify those eligible to take the VRS. As a result of these strenuous efforts, “The number of employees has been reduced from 77,448 in 1994 to 52,167 in 2000, and to 39,658 in 2005”.7 PROTECTING CONSUMERS FROM STEEP INCREASES IN PRICES Tata Steel is conscious of the imperative to protect consumers of steel from steeper price increases. With the high increase in the cost of basic inputs, such as coal, iron ore, scrap and petroleum products, there has been a focus on achieving costefficiencies. The company has been especially considerate to its bona fide customers for whom the prices are offered at around Rs 5,000 per tonne lower than market prices. With 70 per cent of products going directly to customers, this large section of consumers is treated with special concern. The company also strictly enforces its maximum retail price at the dealer end. To serve the domestic consumers better, Tata Steel also decided to limit exports last year to 15 per cent of total sales. ADMINISTERING JAMSHEDPUR TOWNSHIP It is well-known that Tata Steel has been administering the Jamshedpur town for the past eight decades, and anyone who visits the place is so impressed by its orderliness, extensive civic facilities and cleanliness that they would cite it as a model town. The company has been subsidizing around Rs 100 million for the administration of the township. The entire services relating to town administration, provision of transport services, running schools and hospitals are all done by the company. Tata Steel decided to launch a new company called JUSCO Ltd. (Jamshedpur Utilities & Services Company Ltd.) to handle power distribution, water supply and infrastructure maintenance. Jamshedpur is the first and the only Indian city where civic amenities and allied services are entirely managed by a corporate entity. It is interesting and significant to note that Jamshedpur is the “only city in South East Asia to have been selected by the United Nations to participate in the Global Compact Pilot Programme”.8 Spread over 64 km2, Jamshedpur and has a population of 700,000 with 625 km of roads, and 22,000 residential flats and bungalows of Tata Steel. In addition there are around 15,000 buildings of Tata Motors and 5000 of other Tata companies. In the township, over the years, the quality of municipal services has been maintained at high levels. JUSCO, with its considerable accumulated expertise in town management, especially in water and sanitation businesses, intends to become a national leader in these businesses and to bid for and undertake projects in other parts of the country. CONTINUOUS REBUILDING A 100-year plant obviously has evolved with different technologies and makeshift arrangements. Understandably, it lacks the advantages of building a state-of-the-art plant in a greenfield site. Large sections are getting scrapped and rebuilt on a continuous basis. New blast furnaces are being built to make iron-making more efficient. Simultaneously, capacities for sintering and coking coal are being enhanced. Continuous efforts are being made to improve and improvise existing technologies and introduce newer technologies. In a recent interaction with the press in Kolkata, B. Muthuraman, Managing Director, Tata Steel, said “that the company may be trying a new technology which was being developed by Corus . . . The new technology would result in cost savings by enabling the use of iron ore fines and coal instead of coke”.9 “WE ALSO MAKE STEEL” Tata Steel coined a beautiful slogan impregnated with a lot of meaning a decade ago. “We also make steel.” According to Muthuraman: “To me the statement represents everything Tata Steel does. It is pregnant with so much meaning and conveys a lot of things that making steel is not our only business, but a whole lot of other things define our business like corporate social responsibility, being ethical, spending effort and money on sports, having a green town caring for society . . .” TATA’S SOCIAL CONCERN AND COMMITMENT OVERVIEW OF TATA STEEL CORPORATE SOCIAL RESPONSIBILITY: TATA STEEL—CSR INITIATIVES Tate Steel firmly believes that the purpose of an industrial organization is to improve the quality of life of people and the community it serves. Tata Steel commits itself to consistently promoting high ethical values, improvement, and innovation, participative management with customer and CORPORATE ETHICS: GOOD GOVERNANCE stakeholder focus, and emphasis on creating economic and social value. TATA STEEL’S VISION Tata Steel’s vision statement tells it all, about what it stands for: “To seize the opportunities of tomorrow and create a future that will make us an EVA positive company. To continue to improve the quality of life of our employees and the communities we serve.” We Generate Wealth for the Nation. What comes from the people must, to the extent possible, therefore get back to the people. Jamsetji Nusserwanji Tata, 1903 The above quote succinctly illustrates the Tata ethos, and summarizes the guidelines laid down by Tata Steel’s founder, Jamsetji Nusserwanji Tata. A facet of the founder’s remarkable breadth of conception was his recognition that corporate social responsibility was fundamental to India’s drive for industrialization. Tata Steel’s philosophy and commitment towards social responsibility is guided by its corporate policy. THE CORPORATE SOCIAL POLICY OF TATA STEEL Tata Steel believes that the primary purpose of a business is to improve the quality of life of people. Tata Steel will volunteer its resources, to the extent it can reasonably afford, to sustain and improve healthy and prosperous environment and to improve the quality of life of the area in which it operates.10 ENVIRONMENTAL IMPROVEMENTS Tata Steel uses suitable resources, technology and work ethics to reinforce its concern for the environment and its desire to conserve natural resources. “It is committed to reducing its environmental footprint and to achieve the target levels set by it”. Apart from improving the general standard of rural population, Tata Steel has been dealing with the problems of education, health, hygiene, family welfare, agriculture extension, improving the welfare requirements, sports, games and culture. In addition to the above, it has also involved itself with the needs of the environmental improvements by way of bringing the awareness amongst masses of the benefits of land reclamation/rehabilitation and afforestation. Intensive efforts have been made for the utilization of barren and subsided land, as also utilization of fire areas by large-scale plantations. Over 0.9 million saplings have been planted during the past 8 years with a survival rate of 70 per cent. Enormous experience has been gained in the process and every effort is being made to use even the smallest bit of land to provide a shade of greenery in the area. 191 Several measures have been taken for controlling water pollution by use of waste water for growing crops and vegetables, supply of drinking water to the colonies after proper treatment and launching a pisciculture programme using the village ponds. Several wells and tube wells have been constructed and repaired for the local population. ENVIRONMENT CELL Tata Steel created a separate Environment Cell that independently looks after matters of the environment and pollution control activities of the division. They have regular meetings every month to review pollution control activities. This cell is continually being expanded. A laboratory to test air and water samples so as to monitor the environmental activities has been set up. The company appointed a team from CMRS, Dhanbad, to study the extent of pollution in their various establishments and to suggest action to be taken for reducing the pollution. A comprehensive programme of surface environmental studies with respect to air, water and noise has been undertaken. Appropriate steps are taken based on the studies conducted and their recommendations. CORPORATE GOVERNANCE AT TATA STEEL Good ‘corporate governance’ should be an integral part of all of the processes, not just (as often assumed) social responsibility and corporate citizenship. After all, a good corporate citizen needs to be accountable to stakeholders while conducting business as well as when investing in the community at a later date. Tata Steel has gone some way in ensuring corporate governance at all stages of the business process. Every year the company aims to exceed its targets on the Employee and Customer Satisfaction Indexes, and the Corporate Citizenship Index. In order to improve its internal management systems, it has also adopted two systems of evaluation: ∑ Tata Code of Conduct—follows guidelines established by the UN Global Compact. A company signing to the Tata Code of Conduct entitles that company to use the Tata brand name. It prescribes principles by which all employees are expected to act. ∑ Audit Committee SOCIAL INVESTMENT Tata Steel’s social investment reflects its ‘after-profit’ practice, work in and for the community that is not directly related to the ‘business of business’. Again, Tata Steel has internal procedures that guide policy, meaning that community initiatives are seldom ad hoc. Given below are six of these initiatives or procedures: 1. Tata Council for Community Initiatives (TCCI): TCCI is a product of the Tata Group’s commitment to the community. It serves to help the Tata companies in their business-com- 192 2. 3. 4. 5. BUSINESS ETHICS—AN INDIAN PERSPECTIVE munity relations, by drawing up ‘Tata Guidelines for Community Development,’ designing programmes, then implementing them. Programmes include training courses in which Tata companies conduct technical (IT, Vocational) training to members of the community. This is done with the help of company volunteers, often management staff. One of the projects involves the formation of a Tata Corps of Volunteers, under which employee volunteering plays an increasingly important role in developing business-community relations. Tata Social Evaluation, Responsibility and Accountability (ERA): ERA is a procedure by which Tata’s community projects are evaluated for their impact on the target communities and their level of accountability. Although ERA is not independent of Tata, such procedures are influential in improving programme delivery and ensuring continuing self evaluation and learning. Global Business Coalition (GBC): The Global Business Coalition on HIV/AIDS aims to check the growth of the disease with the help of over a hundred major international companies. Believing that business holds the necessary marketing skills, management and infrastructure to be able to raise awareness in rural communities, the GBC encourages companies to campaign with imagination and consistency. Tata Steel has done just that, and won an award in June 2003 for ‘Best Initiative’. Initially, Tata focused on educating employees, but now targets over 600 villages in the state of Jharkhand. This is done through the dissemination of mass media, as well as more inventive schemes, such as student workshops which employees are trained to deliver, or travelling street plays in local languages that reach the rural illiterate. Tata Steel paid for six condom-vending machines in the city of Jamshedpur in public places, which are also proving to be a success. At one of these locations, a busy coach station, there is also a clinic where passers-by can have free check-ups and learn more about HIV/AIDS. Volunteer Database: A ‘Directory of Employee Volunteers’ was established by the Tata Group as an efficient way of matching jobs in the community with employee skills and interests. A corporate committee, consisting of a senior executive, union and government officials, interacts with the communities to ascertain their needs. This is done on a quarterly basis with senior citizens of each village, and biannually with target women’s groups. Health Initiatives: Working with government to prioritize projects, Tata Steel’s involvement in health initiatives remains largely philanthropic, with the exception of the Global Business Coalition for HIV/AIDS awareness scheme. Tata Steel has invested in a local hospital which treats an average of 2,300 people per day. It has also bought specialist cancer-treating equipment, and part-finances the running of one blood bank, two rehabilitation centres and five homeopathic clinics. Donations to the clinics and centres are regular and on a long-term basis, which does indicate a move from ad hoc sponsorship to a more strategic social investment. This is organized by the Family Welfare Department. 6. Culture and Education: Education and Youth Development Programmes have built and maintained infrastructure for sports across Jharkhand. Over 1,500 young people are currently training at Tata Steel’s two sporting academies, six training centres or their Adventure Foundation. Awards are given to employees who excel in sports. A Tribal Cultural Centre was built in 1993 and a Jubilee Amusement Park in 2001 to enrich the cultural heritage of the city of Jamshedpur. TATA STEEL’S CSR COMMITMENT IS IN THREE CORE AREAS Tata Steel’s commitment to its CSR finds reflection in its adoption of the Corporate Citizenship Index, Tata Business Excellence Model and the Tata Index for Sustainable Development. Tata Steel spends 5–7 per cent of its profit after tax (PAT) on several CSR initiatives. The company’s CSR initiatives are spread across three core areas—employee welfare, the environment and the welfare of the community at large. Under this broad spectrum, diverse areas are covered. These include environment management, economic development, employee relations, civic amenities and community services, healthcare, sports and adventure, relief during natural calamities, education, arts and culture and social welfare.11 WELFARE ORGANIZATIONS To achieve its broader objectives of improving the quality of life of the people, Tata Steel supports various social welfare organizations such as the Rural Development Society, Tribal Cultural Society, Tata Cultural Society, Tata Steel Foundation for Family Initiatives, National Association for the Blind, Shishu Niketan, School of Hope, Centre for Hearing Impaired Children and the Indian Red Cross Society. The company has hosted 12 Lifeline Expresses in association with the Ministry of Railways, Impact India Foundation and the Government of Jharkhand and served over 50,000 people. It has also joined hands with village development committees in the Saraikela Kharsawa area to provide training to villagers. Tata Steel has also been actively involved in taking up integrated wasteland development programmes and watershed development programmes for rainfed areas. SELF-HELP GROUPS The company also supports women’s empowerment through self-help groups. These programmes cover 42 villages in the Gamharia block in Seraikela Kharsawa area. Tata Steel has also installed 2,600 tubewells to provide drinking water to over four lakh people. HEALTHCARE PROJECTS Some of the other CSR initiatives that the company has been involved in include facilitation of child education, immunization and child care. It has also invested in education by financing schools and colleges that teach nearly 10,000 students every year. GLOBAL RECOGNITION FOR TATA STEEL’S ACTIVE INVOLVEMENT IN CSR Tata Steel’s active involvement in CSR activities has earned for the company global recognition. In the past five years, Tata Steel was conferred the following distinguished awards: 1. Tata Steel-administered Jamshedpur is one amongst the six cities in the world chosen to participate in the UN Global Compact Cities Pilot Programme. The reason behind Jamshedpur being nominated into this international pilot project is the exceptional record of Tata Steel in the field of community development. 2. Tata Steel’s Sukinda chromite mines in Orissa was conferred the prestigious S.A 8000–2001 certification by Social Accountability International (SAI), USA. Social Accountability 8000:2001 Certification is a global verifiable standard for managing the workplace.12 3. Tata Steel is the only Indian manufacturing company to win the Asian Most Admired Knowledge Enterprises Award (MAKE), for two successive years, 2004 and 2005, for its relentless effort and contribution in the field of knowledge management. 4. Tata Steel ranks second in leadership development among companies in Asia Pacific, according to a study conducted by Hewitt Associates. 5. Tata Steel made a noteworthy beginning when it was conferred the ‘Shram Vir/Virangana’ award. This was the first time private sector companies were included within the ambit of the Prime Minister’s Shram Award Scheme. 6. Tata Steel was awarded the coveted Energy and Resource Development Institute Award for Corporate Social Responsibility in recognition of corporate leadership and citizenship and sustainable schemes of the company. 7. The National HRD Network’s Pathfinder Award 2004 in the CEO category was conferred on Tata Steel Managing Director, Mr B. Muthuraman, for steering a major transformation in the organization through people and processes. 8. Tata Steel’s works in Jamshedpur was conferred the prestigious Social Accountability (SA) 8000 Certification by Social Accountability International (SAI), USA in 2005.13 9. The Mother Teresa Award for Corporate Citizenship was conferred on Tata Steel for being a role model in Corporate Citizenship, for other companies and students of management to emulate, by Loyola Institute of Business Administration (LIBA), Chennai in 2005. CORPORATE ETHICS: GOOD GOVERNANCE 193 10. In 2007, the Tatas have been chosen for the internationally acclaimed Andrew Carnegie Medal of Philanthropy by the Carnegie Corporation of United States in recognition of their “longstanding commitment to philanthropic causes” which has contributed to “beneficial change in the lives of millions of people”.14 Thus Tata Steel has been a pioneer in discharging its social responsibility and has made considerable contributions in areas such as community development, social welfare tribal area development, agriculture and allied activities apart from promoting rural industrialisation. LOOKING TO THE FUTURE Along with the TCCI’s project to formalize employee volunteering, Tata Steel also hopes to align more with global standards and initiatives. In 2001 Tata Steel produced a Corporate Sustainability Report following guidelines established by the Global Reporting Initiative. This is another step forward for the company looking to make its mark on the new corporate responsibility agenda. KEY WORDS Jamshedpur ∑ Industrial policy resolution ∑ Intrinsically linked ∑ Economic value addition (EVA) ∑ Toll-free customer care centre ∑ Anglo-Dutch steel maker Corus ∑ Downsizing sans tears ∑ Integrated steel plant ∑ Industrial research ∑ Corporate social responsibility (CSR) ∑ Global Business Compact (GBC) ∑ Corporate governance ∑ Global recognition ∑ Self-help groups ∑ Healthcare projects ∑ Family initiatives ∑ Looking to the future. DISCUSSION QUESTIONS 1. How did Tata Steel achieve downsizing of the Jamshedpur Steel plant? Do you think it is an ideal policy for others to follow? 2. Jamshedpur city has been praised by people as a model city. What are the factors that have contributed to the evolution of the Steel City as a model city? 3. Explain Tata Steel’s CSR policy. In your assessment, to what extent the Tata Steel has put into practice its precepts of the CSR policy? NOTES 1. “Tata Steel Turns 100,” The Hindu, 26 August 2007. 2. Tata Steel in Its Nomination Application to LIBA, Chennai for consideration of Mother Teresa Award for Corporate Citizen (2005). 3. “Tata Steel Qi PAT Soars Sixfold on Corus Buy,” Economic Times, 30 August 2007. 194 BUSINESS ETHICS—AN INDIAN PERSPECTIVE 4. “India Inc’s Global Leap”, India Today, November 2006. 5. S. Viswanathan, “Tata Steel, Rolling Ahead, Gathering Moss,” Industrial Economist, Chennai, 15–29 January and 30 January–14 February, 2005. 6. Ambar Singh Roy, “Saga of Trust and Co-operation,” The Hindu Business Line, 26 August 2007. 7. “Ratan Tata’s Global Quest,” Business World, 9 October 2006. 8. Saklatvala, B. Sh., and Khosla, K., Jamsedji Tata, Builders of Modern India (New Delhi: Publications Division, Ministry of Information and Broadcasting, Government of India, 1970). 7. Dr J. J. Irani, quoted in the news item in “Tata Steel: Downsizing Minus the Tears,” The Hindu Business Line, 26 August 2007. 9. Tata Steel, “Setting Sustainability Standards,” available at www.tatasteel.com/ corporate sustainability/default. asp 9. “Tata Steel Looking at New Technology,” The Hindu, 8 September 2007. 11. http://icmr.icfai.org/casestudies/catalogue/Business Ethics/BECG008.htm 8. Ambar Singh Roy, “JUSCO—Blazing New Trials,” The Hindu Business Line, Special Feature on Tata Steel, 26 August 2007. 10. See Note 2. 10. Viswanathan, S., “Tata Steel, Rolling Ahead, Gathering Moss,” Industrial Economist, 15–29 January and 30 January–14 February 2005. 12. www.capindia.org/op3_history.htm 11. Ambar Singh Roy, “Towards Improving the Quality of Life of People,” The Hindu Business Line, 26 August 2007. 13. www.hindu.com/thehindu/mp/2004/08/05/stories/ 2004080500190300.htm 12. VISION 2007, Tata Steel, Jamshedpur 2007. 14. http://icmr.icfai.org/casestudies/catalogue/Business Ethics/ Tata.htm. 13. Ibid. 14. K. N. Arun, “A Double Honour for India,” The New Indian Express, Chennai Edition, 18 August 2007. FURTHER READINGS 1. “After Corus,” Business India, 25 February 2007. 2. “Corporate Social Responsibility, Putting Principles Into Practice,” A Tata Steel Publication. 3. Elankumaran, S., Seal Rekha, and Hashmi, Anwar, “Transcending Transformation: Enlightening Endeavours at Tata Steel,” Journal of Business Ethics (Vol. 59, 2005): 109–119. 4. “India Inc’s Global Leap,” India Today, November 2006. 5. “Making Corus Work”, Businessworld, 19 February 2007. 6. Mitra Mazumder, S., and Ghoshal, T., “Strategies for Sustainable Turnaround of Indian Steel Industry,” available at www.ieindia.org/publish/mm/1003/Oct033mm2. pdf. 15. www.hindu.com/2005/07/29/stories/ 2005072905991100. htm. 16. www.hindu.com/thehindu/mp/2004/08/05/stores/ 2004080 500190300.htm 17. w w w. h i n d u o n n e t . c o m / 2 0 0 2 / 0 1 / 0 5 / s t o r i e s / 2002010501821600.htm 18. www.rediff.com/money/2005/mar/17inter.htm 19. www.rediff.com/news/sep/24nandy.htm 20. http://in.rediff.com/news/oct/13assam.htm 21. www.rediff.com/business/sep/15tata.htm 22. www.synergos.org/globalgivingmatters/features/ 0503tatagroup.htm 23. www.tata.com 24. www.tata.com/o_beyond_business/community/index. htm Eight CHAPTER Corporate Ethics: Investors’ Rights, Privileges, Problems and Protection INTRODUCTION The phenomenal growth of modern corporations, especially those which have been immensely successful so as to span space to become multinationals, have brought about the kind and order of material wealth to the international community that was never imagined possible even a few years ago. Some of them produce goods and services for most parts of the world. Some of them make profits that are bigger than the gross domestic products of several countries put together. This kind of almost exponential growth would not have been possible, but for the evolution and growth of the organizational structure called public limited or joint stock companies. A joint stock company is a business unit that requires a large amount of capital. This is obtained by the promoters by dividing it into equal shares of small denominations. This enables investors to invest small or large sums according to their capability and desire. The profit of the company is distributed in proportion to the number of shares held. The most important feature of such form of business organization that makes it most attractive to investors is that the financial liability of the shareholders is limited to the extent of the shares held by them. Though the limited liability clause of this type of investment is an attraction, the investor (generally defined as one who makes financial investment in bonds, stocks or shares) faces a serious problem. He or she being a part-owner normally located far away from the place where the company’s business takes place and with little or no knowledge of the type of business it is engaged in, has to delegate the work of running it, to managers who may do their job in a manner different from what he or she would have done himself or herself. This ‘agency’ problem causes the investor the ‘agency costs’ that can be minimized if the management follows certain ethical and corporate governance practices such as integrity, transparency, full disclosure of financial and non-financial information, accountability and compliance with the law of the land. If the corporate managements fulfil these obligations, it will result in long-term shareholder value. Apart from these, the investor needs to be protected in a myriad ways. He or she should be allowed to participate in the decision making process to the extent possible. Appointments to the board of directors, auditors, etc., apart from decisions that involve heavy investments should have his or her concurrence and his or her rights should be protected and privileges zealously safeguarded. He or she should have his or her grievances amicably and adequately redressed. He or she should be paid his or her dividends in full and on time. In sum, he or she should be treated for what he or she is—a shareholder, who has a material stake in the corporation. To realize such an investor protection, countries have evolved rules, regulations, systems and mechanisms—both internal (to the company) and external. All these internal features are covered if companies follow universally accepted ethical and corporate governance standards, while the external ones are taken care 196 BUSINESS ETHICS—AN INDIAN PERSPECTIVE by public authorities of the countries concerned. It should be stressed here that corporate governance is a major instrument of investor protection. In the following pages, we will go through the various facets of responsibilities, problems and the protection available to investors both internally and externally. ETHICAL GOVERNANCE NEEDED TO PROTECT STAKEHOLDERS Corporate governance is needed to create a corporate culture of consciousness, transparency and openness. It refers to a combination of laws, rules, regulations, procedures and voluntary practices to enable companies to maximize shareholders’ long-term value. It should lead to increasing customer satisfaction, shareholder value and wealth. Corporate governance deals with a company’s ability to take managerial decisions vis-à-vis its claimants in particular, its shareholders apart from other stockholders. THEORETICAL BASIS—AGENCY COSTS The most fundamental theoretical basis of corporate governance is agency costs. Shareholders are the owners of joint-stock, limited liability company, and are its principals. By virtue of their ownership, the principals define the objectives of the company. The management, directly or indirectly selected by shareholders to pursue such objectives, are the agents. While the principals might assume that the agents will invariably do their bidding, it is often not so. In many instances, the objectives of managers are quite different from those of the shareholders. This divorce between ownership and management leads to agency costs, which in turn leads to the need for corporate governance. Two broad instruments that reduce agency costs and, hence, improve corporate governance are ∑ financial and non-financial disclosures; and ∑ independent oversight of management, which consists of two aspects—the first relates to the role of the independent, statutory auditors and the second to the board of directors of a company. LONG-TERM SHAREHOLDER VALUE There is a global consensus about the objective of ‘good’ corporate governance: maximizing long-term shareholder value. It is useful to limit the claimants to shareholders for three reasons: 1. In most of the countries, generally labour laws are strong enough to protect the interests of workers in the organized sector, and employees as well as trade unions are well aware of their legal rights. In contrast, there is very little in terms of the implementation of the law and of corporate practices that protects the rights of creditors and shareholders. 2. There is much to recommend in law, procedures and practices to make companies more attuned to the need for servicing properly debt and equity. 3. Managers have to look after the right of shareholders to dividends and capital gains, because if they do not do so, over time, they face the real risk of take-over. For a corporate governance code to have real meaning, it must first focus on listed companies. These are financed largely by public money (be it equity or debt) and hence, need to follow codes and policies that make them more accountable and value oriented to the investing public. There have been various committees and boards that have been set up both internationally and in India to improve the situation of shareholders with regard to corporate governance. Before we see how a shareholder could help bring about good corporate governance we need to see the rights of the shareholders as laid down by the Indian Companies Act of 1956. RIGHTS OF SHAREHOLDERS The members of a company enjoy various rights in relation to the company. These rights are conferred on the members of the company either by the Indian Companies Act of 1956 or by the Memorandum and Articles of Association of the company or by the general law, especially those relating to contracts under the Indian Contract Act, 1872. Some of the more important rights of shareholders as stressed by the above acts are the following. The shareholder CORPORATE ETHICS: INVESTORS’ RIGHTS, PRIVILEGES, PROBLEMS AND PROTECTION 1. has a right to obtain copies of the Memorandum of Association, Articles of Association and certain resolutions and agreements on request on payment of prescribed fees (Section 39); 2. has a right to have the certificate of shares held by him or her within three months of the allotment; 3. has a right to transfer his/her shares or other interests in the company subject to the manner provided by the articles of the company; 4. has a right to appeal to the Company Law Board if the company refuses or fails to register the transfer of shares; 5. has the preferential right to purchase shares on a pro-rata basis in case of a further issue of shares by the company. Moreover, he or she also has the right of renouncing all or any of the shares in favour of any other person; 6. has a right to apply to the Company Law Board for the rectification of the register of members; 7. has the right to apply to the court to have any variation or abrogation to his or her rights set aside by the court; 8. has the right to inspect the register and the index of members, annual returns, register of charges, and register of investments not held by the company in its own name without any charge. He or she can also take extracts from any of them; 9. is entitled to receive notices of general meetings and to attend such meetings and vote thereat either in person or by proxy; 10. is entitled to receive a copy of the statutory report; 11. is entitled to receive copies of the annual report of the directors, annual accounts and auditors’ report; 12. has the right to participate in the appointment of auditors and the election of directors at the annual general meeting of the company; 13. has a right to make an application to the Company Law Board for calling annual general meeting if the company fails to call such a meeting within the prescribed time limits; 14. can require the directors to convene an extraordinary general meeting by presenting a proper requisition as per the provisions of the Act and hold such a meeting on refusal; 15. can make an application to the Company Law Board for convening an extraordinary general meeting of the company where it is impracticable to call such a meeting either by the directors or by the members themselves; 16. is entitled to inspect and obtain copies of minutes of proceedings of general meetings; 17. has a right to participate in declaration of dividends and receive his or her dividends duly; 18. has a right to demand poll; 19. has a right to apply to the Company Law Board for investigation of the affairs of the company; 20. has the right to remove a director before the expiry of the term of his or her office; 21. has a right to make an application to the Company Law Board for relief in case of oppression and mismanagement; 22. can make a petition to the High Court for winding-up of the company under certain circumstances; 23. has a right to participate in passing of a special resolution that the company be wound up, by the court or voluntarily; and 24. has a right to participate in the surplus assets of the company, if any, on its winding-up. However, whether the shareholder has these rights in reality or if he or she is even aware of his or her rights is a moot question that leads invariably to unscrupulous managements taking the unwary investors for a ride. VIEWS OF VARIOUS COMMITTEES ON THE ISSUE Protection of shareholders’ rights is very important in order to ensure long term shareholder value, which is the be-all and end-all of corporate governance. Several committees have been formed by the Government of India. Among these are the Securities and Exchange Board of India (SEBI), the country’s capital market regulator and the Confederation of Indian Industry (CII) the leading industry association. They have discussed the issue in great detail, and their considered views on the subject of shareholder/investor rights and how these can be achieved are given here. 197 198 BUSINESS ETHICS—AN INDIAN PERSPECTIVE WORKING GROUP ON THE COMPANIES ACT Various committees have been set up both in India and elsewhere to guide the shareholders with regard to good corporate governance, especially their long-term interests. One among them is the Working Group on the Companies Act set up by the Government of India which has recommended many financial as well as nonfinancial disclosures. These disclosures call for greater transparency in the accounting of the organization. It calls for a tabular form containing details of each director’s remuneration and commission which should form a part of the Directors’ Report, in addition to the usual practice of having it as a note to the profit and loss account. Also, any cost incurred in using the services of a Group Resource Company must be clearly and separately disclosed in the financial statement of the user company. Again where the company has raised funds from the general public, it would have to give a separate statement showing the end-use of such funds, namely, how much was raised versus the stated and actual project cost; how much has been utilized in the project up to the end of the financial year; and where are the residual funds, if any, invested and in what form. There should also be a disclosure on the debt exposure of the company. With regard to the non-financial disclosure, the Working Group called for a comprehensive report on the relatives of directors either as employees or board members, to be an integral part of the Directors’ Report of all listed companies. The company should also maintain a register which discloses interests of directors in any contract or arrangement of the company and the fact that such a register is made and is open for inspection needs to be made known to the shareholders in the Annual General Meeting. Details of loans to directors should be disclosed as an annex to the Directors’ Report in addition to being a part of the schedules of the financial statements. Such loans should be limited to only three categories—housing, medical assistance and education for family members, and be available only to full-time directors. The detailed terms of the loan would need shareholders’ approval in a General Body Meeting. These are some of the disclosures that need to be made. The company should understand that though all other things being equal, greater the quality of disclosure, the more loyal are the company’s shareholders. Based on these recommendations, a number of changes were introduced in the Companies Bill, 1997. However, since many of these recommendations were not mandatory, it did not have much impact on the corporate governance scenario in India. CII’S COMMITTEE ON CORPORATE GOVERNANCE The next committee that had considerable impact on the corporate world with regard to the rights of shareholders to ensure corporate governance in the organization was the reports submitted by the CII. The CII has pioneered the concept of corporate governance in India and is an internationally recognized name in this area. Its code, the Desirable Code of Corporate Governance, was the first of its kind in India and is recognized as one of the best in the world. Corporate India has started recognizing the pivotal role that disclosures play in creating corporate value in the increasingly market-oriented environment. The objective of the CII was to develop and promote a code of corporate governance to be adopted and followed by Indian companies, be these in the private sector, banks or financial institutions, all of which are corporate entities. This initiative by the CII flowed from public concern regarding the protection of investor interest, especially the small investor, the promotion of transparency within business and industry; the need to move towards international standards in terms of disclosure of information by the corporate sector and, through all of this, to develop a high level of public confidence in business and industry. This code required listed companies to give the following information under ‘Additional Shareholder’s Information’: ∑ high and low monthly averages of share prices in a major stock exchange where the company is listed for the reporting year; and ∑ greater details on business segments up to 10 per cent of turnover, giving share in sales revenue, review of operations, analysis of markets and future prospects. These recommendations just like those of the Working Group were not mandatory and therefore most of the companies did not take them seriously. KUMAR MANGALAM BIRLA COMMITTEE The CII was the first to come out with its version of an Audit Committee. The SEBI, as the custodian of investor interests, did not lag behind. On 7 May1999, it constituted an 18-member committee, chaired by the young CORPORATE ETHICS: INVESTORS’ RIGHTS, PRIVILEGES, PROBLEMS AND PROTECTION and forward-looking industrialist, Kumar Mangalam Birla (a chartered accountant himself), on corporate governance, mainly with a view to protecting the investors’ interests. The committee made 25 recommendations, 19 of them ‘mandatory’, which were enforceable. The listed companies were obliged to comply with these on account of the contractual obligation arising out of the listing agreement with stock exchanges. It is interesting to note that the Kumar Mangalam Birla Committee, while drafting its recommendations was faced with the dilemma of statutory versus voluntary compliance. As mentioned earlier, the Desirable Code of Corporate Governance, which was drafted by the CII and was voluntary in nature, did not produce the expected improvement in corporate governance. It was thus felt that under Indian conditions, a statutory rather than voluntary code would be far more effective and meaningful. This led the committee to decide between mandatory and non-mandatory provisions. The committee felt that some of the recommendations were absolutely essential for the framework of corporate governance and virtually would form its code, while others could be considered as desirable. Besides, some of the recommendations needed a change of statute, such as the Companies Act for their enforcement. Faced with this difficulty, the committee settled for two categories of recommendations—namely, mandatory and non-mandatory. This committee made the following recommendations especially with regard to shareholders. Recommendations Relating to Shareholders The shareholders are the owners of the company and as such they have certain rights and responsibilities. But in reality companies cannot be managed by shareholder referendum. They are not expected to assume responsibility for the management of corporate affairs. A company’s management must be able to take business decisions rapidly, which cannot be done if they were to consult shareholders, who are too numerous and scattered for any meaningful consultation. Shareholders therefore, delegate many of their responsibilities as owners of the company to the directors who then become responsible for corporate strategy and operations. The implementation of this strategy is done by a management team. This relationship, therefore, brings in the accountability of the boards and management to shareholders of the company. A good corporate framework is one that provides adequate avenues to shareholders for effective contribution in the governance of the company while insisting on a high standard of corporate behaviour without getting involved in the day-to-day functioning of the company. Responsibilities of Shareholders The committee believed that the General Body Meetings provide an opportunity to shareholders to address their concerns to the board of directors and comment on and demand any explanation on the annual report or on the overall functioning of the company. It is important that shareholders use the forum of general body meetings for ensuring that the company is being stewarded for maximizing the interests of shareholders. This is important especially in the Indian context. It follows from the above that for effective participation, shareholders must maintain alertness and decorum during the General Body Meeting, so that it constitutes the forum in which they can get their doubts clarified, apart from airing their grievances, if any. The efficiency or otherwise of the board would be dependent on both the quality of the directors as well as the financial information provided. It would also depend to a great extent on the efficacy or otherwise with which the auditors execute their tasks. In order to ensure the quality and efficiency of directors and auditors, share holders must be actively involved in their appointment. The committee recommended that in case of the appointment of a new director or re-appointment of a director, shareholders must be provided with the following information: ∑ a brief resume of the director; ∑ the person’s expertise in specific functional areas; and ∑ names of companies in which the person also holds directorship and membership of committees of the board. This is a mandatory recommendation. Shareholders’ Rights As we have seen earlier, the Companies Act of 1956 confer certain rights to shareholders to enable them to enjoy their rights as rightful owners of companies. The basic rights of shareholders include the right to transfer and registration of shares, obtaining relevant information on the company on a timely and regular basis, participating and voting in shareholder meetings, electing members of the board and sharing in the residual profits of the corporation. The committee, therefore, recommended that as shareholders have a right to participate in, and be sufficiently informed on decisions concerning fundamental corporate changes. They should not only be provided information as under the Companies Act, but also be updated in respect of other decisions relating to 199 200 BUSINESS ETHICS—AN INDIAN PERSPECTIVE material changes such as takeovers, and sale of assets or divisions of the company. They should also be informed of changes in capital structure that will lead to change in control or may result in certain shareholders obtaining control disproportionate to the equity ownership. The committee recommended further that information such as quarterly results and presentations made by companies to analysts may be put on the company Web site or sent in such a form to the stock exchange on which the company is listed, to put this information on its Web site. The committee also recommended that the company’s half-yearly declaration of financial performance including summary of significant events in the last six months, should be sent to each household of shareholders. This recommendation is mandatory. The Kumar Mangalam Birla committee also prescribed that a company must have appropriate systems in place, which will enable shareholders to participate effectively and vote in shareholders’ meetings. The company should also keep shareholders informed of the rules and voting procedures, which govern the general shareholder meetings. This recommendation is mandatory. The annual general meetings of the company should not be deliberately held at inconvenient venues or at timings which makes it difficult for most of the shareholders to attend. The company must also ensure that it is not inconvenient or expensive for shareholders to cast their votes. This recommendation is mandatory. In today’s context in India, it is a practice that AGMs are held regularly by companies as a mere formality in order to comply with the law. This is because either very few of the shareholders are able to attend such AGMs because they are either not in the city where they are held or the shareholders are scattered through the length and breadth of the country as in cases of large companies. This makes corporate democracy a mere mockery. Share holders who are unable to attend meetings should be allowed to vote by postal ballot for key decisions such as investment proposals, appointment of directors, auditors, committee members, loans and advances above a certain percentage of net worth, changes in capital structure which will lead to change in control or may result in certain shareholders obtaining control disproportionate to equity shareholding, sale of assets or divisions and takeovers etc. This would require changes in the Companies Act. The committee was informed that SEBI has already made recommendations in this regard to the Department of Company Affairs. The committee recommended that the Department of Company Affairs should again be requested to implement this recommendation at the earliest, if possible by issue of an ordinance, so that corporate democracy becomes a reality in the true sense. The committee recommended that a board committee under the chairmanship of a non-executive director should be formed to specifically look into the redressal of shareholder complaints such as transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends, etc. The committee believed that the formation of such a committee will help focus the attention of the company on shareholders’ grievances and sensitize the management to the redressal of their grievances. This is a mandatory recommendation. The committee further recommended that to expedite the process of share transfers, the board of the company should delegate the power of share transfer to the registrars and share transfer agents. This is a mandatory recommendation. NARESH CHANDRA COMMITTEE Another committee that was set up with a view to promote corporate governance and through it, long-term shareholder value, was the Naresh Chandra Committee. The Naresh Chandra Committee’s report on ‘Audit and Corporate Governance’ has taken forward the recommendations of the Kumar Mangalam Birla Committee on corporate governance. Two major issues the committee addressed and made appropriate recommendations were ∑ representation of independent directors on a company’s board; and ∑ the composition of the audit committee. The Naresh Chandra Committee has made no distinction between a board with an executive chairman and a non-executive chairman. It recommended that all boards need to have at least half of its members as independent directors. As regards the audit committee, the Kumar Mangalam Birla Committee had stated that it should have three non-executive directors as its members with at least two independent directors and that the chairman of the committee should be an independent director. But the Naresh Chandra Committee recommended that all audit committee members should be independent directors. CORPORATE ETHICS: INVESTORS’ RIGHTS, PRIVILEGES, PROBLEMS AND PROTECTION The Naresh Chandra Committee has laid down stringent guidelines defining the relationship between auditors and their clients. In a move that could impact small audit firms, the committee recommended that along with its subsidiary, associates or affiliated entities, an audit firm should not derive more than 25 per cent of its business from a single corporate client. This, the committee said, would improve the independence of audit firms. While turning down the proposal for a compulsory rotation of audit firms, the committee stressed that the partners and at least 50 per cent of the audit team working on the accounts of a company need to be rotated by a firm once every five years. While the committee said that it had no objection to an audit firm having subsidiaries or associate companies engaged in consulting or other specialized businesses, it has drawn up a list of prohibited non-audit services more or less on lines of the American Sarbanes–Oxley Act with certain modifications to suit the Indian corporate sector. The committee has recommended an increased role for independent directors by assigning them at least 50 per cent seats on the board of a public limited company with a paid up capital of INR 100 million and above, and a turnover of INR 500 million and above. It has significantly asserted that nominees of financial institutions (FIs) could not be counted as independent directors. The committee has further recommended 1. tightening of the noose around auditors by asking them to make an array of disclosures; 2. asking the chief executive officers (CEOs) and chief financial officers (CFOs) of all listed companies to certify their companies’ annual accounts, besides suggesting; and 3. setting up of quality review boards for the Institute of Chartered Accountants of India (ICAI), the Institute of Company Secretaries of India (ICSI) and the Institute of Cost and Works Accountants of India, (ICWA) and a Public Oversight Board similar to the one in the United States. At a time when people are shying away from accepting the post of an independent director in a company because of the liabilities that might follow, the Naresh Chandra Committee has come up with recommendations that will help remove the fears. To attract quality independent directors on the board of directors of a company, the committee has recommended that these directors should be exempt from criminal and civil liabilities under the Companies Act, the Negotiable Instrument Act, the Provident Fund Act, the Factories Act, the Industrial Disputes Act and the Electricity Supply Act. However, unlisted public companies that do not have more than 50 shareholders and carry no debt from the public, banks or financial institutions, and unlisted subsidiaries of listed companies have been exempted from these recommendations. Thus, it can be seen that though the law has provided for the rights of the shareholder to have access to information as it may seem fit to the shareholder’s requirement, very rarely organizations make this information easily accessible to them. It is because of such prevalent situations that various committees have to intervene and see that they are taken care of. However, notwithstanding all these efforts nothing concrete has been done by public authorities to prevent corporate misgovernance. NARAYANA MURTHY COMMITTEE This SEBI-appointed Committee on Corporate Governance, which submitted its report on 8 February 2003, has in its own words, ‘The management needs to act as trustees of the shareholders at large and prevent asymmetry of benefits between various sections of shareholders, especially between the owner-managers and the rest of the shareholders’.1 The committee recommended that in order to achieve the objectives of corporate governance and to realize long-term shareholder value, companies should agree that 1. In case of appointment of a new director or reappointment of a director, the shareholders must be provided with the following information: (a) a brief resume of the director; (b) nature of his or her expertise in specific functional areas; and (c) names of companies in which the person also holds the directorship and the membership of committees of the board. 2. Information like quarterly result and presentations made by companies to analysts shall be put on the company’s Web site or shall be sent in such a form to the stock exchange on which the company is listed to put this on their own Web site. 201 202 BUSINESS ETHICS—AN INDIAN PERSPECTIVE 3. A board committee under the chairmanship of a non-executive director shall be formed to specifically look into the redressal of shareholder and investors complaints such as transfer of shares, non-receipt of balance sheet, declared dividends, etc. This committee shall be designated as ‘Shareholders/Investors Grievance Committee’. 4. To expedite the process of share transfers the board of directors shall delegate the power of share transfer to an officer or a committee or to the registrar and share transfer agents. The delegated authority shall attend to share transfer formalities at least once in a fortnight. Shareholders’ Rights and Postal Ballots The Narayana Murthy Committee asserted shareholders’ rights to receive from the company half-yearly declaration of financial performance including summary of the significant events during the past six months. The committee recommended the facility of postal ballot to those shareholders in absentia at the Annual General Meeting of the company, so as to participate effectively in corporate democracy and in the decisionmaking process. Key issues that may be decided by postal ballots could include 1. alteration in the memorandum of association; 2. sale of whole or substantially the whole of the undertaking; 3. sale of substantial investments in the company; 4. making a further issue of shares through preferential allotment or private placement basis; 5. corporate restructuring; 6. entering into a new business not germane to the existing business of the company; 7. variations in rights attached to class of securities; and 8. matters relating to change in management. DR J. J. IRANI COMMITTEE REPORT ON COMPANY LAW, 2005 The Government of India constituted an expert committee on Company Law on 2 December 2004 under the chairmanship of Dr J. J. Irani to make recommendations on (i) responses received from various stakeholders on the concept paper; (ii) issues arising from the revision of the Companies Act, 1956; (iii) bringing about compactness by reducing the size of the act and removing redundant provisions; (iv) enabling essay and unambiguous interpretation by recasting the provisions of the law; (v) providing greater flexibility in rule making to enable timely response to ever-evolving business models; (vi) protecting the interests of the stakeholders and investors, including small investors; and (vii) any other related, or incidental, to the above. Set up to structurally evaluate the views of several stakeholders in the development of company law in India in respect of the concept paper promulgated by the Union Ministry of Company Affairs, the J. J. Irani Committee has come out with suggestions that will go far in laying sound base for corporate growth. The expert committee comprised experts drawn from trade and industry associations, professional bodies and institutes, chambers of commerce, leading senior advocates and auditors. Representatives of government departments, regulatory bodies and other organizations were included as special invitees. The committee deliberated on various issues on Company Law requiring a review on the basis of comments and suggestions received in response to the Concept Paper, opinions expressed by experts, professional bodies, etc. The committee submitted its report to the Government of India on 31 May 2005. The committee’s report is a balanced and well-rounded document and attempts to equate the pulls and pressure of modern business and those of shareholder democracy. It is a step towards providing a growthoriented modern company law, with the thrust on stakeholder democracy and self-regulation. The report has taken a pragmatic approach keeping in view the ground realities, and has sought to address the concerns of all stakeholders to enable the adoption of internationally accepted best practices. Power to Shareholders The main thrust of the committee’s recommendations was to give full liberty to the shareholders and owners of the company to operate in a transparent manner. The committee calls for a significant shift from a government approval regime to a ‘shareholder approval and disclosures’ regime. The report thus gives more power to shareholders, allowing them rather than the company law administration to decide on certain crucial matters. Mergers between willing companies will be quicker. They will not be subject to the vagaries of the legal system and imponderables. Ratification by shareholders will be enough. To protect the rights of minority shareholders and also to ensure investor protection, the committee has aptly suggested that the new company law should recognize principles such as ‘class actions’ and ‘derivative action’. CORPORATE ETHICS: INVESTORS’ RIGHTS, PRIVILEGES, PROBLEMS AND PROTECTION The capital market got plenty of attention from the committee. There are proposals to devise an exit option for shareholders who have stayed with a company and not participated in a buy-back scheme implemented earlier. POOR TRACK RECORD OF SHAREHOLDER PROTECTION IN INDIA Though the above detailed analysis of shareholders’ rights as stressed by the Companies Act, other statues and various committees give any investor or the reader the impression that there are enough provisions in the laws of the land, there has hardly been any conviction under them all these years. The liberalization of the Indian economy since 1991 seems to have opened the floodgates of scams and provided vast opportunities to fly-by-night operators. These have destroyed shareholder values. As a result of some scams such as those involving UTI, non-banking finance companies, plantations and vanishing companies, millions of small investors lost their savings and investments. The plight of millions of such small shareholders was indeed pitiable and heart-rending. Most of them, especially those who invested in non-banking financial companies (NBFCs), lost their life-earnings and were driven to the street penniless. In spite of such misery caused to the poor investors and the high dent in their confidence, the government and regulatory authorities were grinding too slowly and did nothing to trace and penalize the scamsters or retrieve from them and return the poor investors’ money. Since 1990, more than INR 600,000 million was collected from prospective shareholders by several companies that did the vanishing trick. Though their names are posted on the World Wide Web, none of the directors or promoters has been prosecuted either by the Registrar of Companies or the SEBI who can file criminal complaints against them under Section 621 of the Companies Act. Directors and promoters can be made personally liable for false statements found in the prospectus. Apart from civil liability, Section 63 of the Companies Act stipulates that persons issuing false or untrue statements will be punishable with imprisonment for two years. Section 68 stipulates that any person who dishonestly induces other persons to subscribe for shares or debentures can be imprisoned for five years. But neither the government nor SEBI has thought it fit to prosecute these scamsters for more than a decade.2 However, it is heartening to note that recently, after a decade of inactivity the ministry has cracked the whip on vanishing companies. Prioritizing investor protection, particularly small investors, the Ministry of Company Affairs (MCA) has initiated prosecutions against vanishing companies under the Companies Act as well as other legislations. According to a spokesman of the MCA: ‘On review of the ongoing actions against the vanishing companies, those companies who came up with public issues during 1993–94 and 1994–95 and vanished with public money, focus has been laid on taking timely and effective action against such companies, their promoters and directors.’3 Besides, launching prosecutions under the Companies Act, action has been taken against such entities by way of registering first information report (FIR) under Indian Penal Code, and vigorously pursuing the prosecutions already launched. In its report, the Special Cell on Vanishing Companies in the Ministry has stated that out of the 52 ‘vanishing companies’ cases in the western region, prosecutions have been filed against 48 companies, while the remaining four are under liquidation. ‘In fact, in the case of Maa Leafin & Capital Ltd, the accused has been convicted for non-filing of statutory return,’4 a Ministry official said. Further, FIRs have been launched against 40 companies, of which 28 have been registered. In the case of Trith Plastic Ltd of Gujarat, charge-sheet has been filed in the court and directors of the company have been arrested. Of the 36 cases in the southern region, prosecutions have been filed against 32. For non-filing statutory returns, 21 prosecutions have been filed while FIRs have been filed against 19 companies. Of the 19 FIRs launched, nine have been registered. In the case of one company, Global Property Ltd, public issue money has been refunded. In the northern region, prosecutions have been filed against all 20 ‘vanishing companies’. In the case of Simplex Holdings, the accused have been convicted. For non-filing of statutory returns, 19 prosecutions have been filed. In case of Dee Kartvya Finance Ltd, the accused has been convicted and fined. FIRs have been filed against 15 companies of which four have been registered. In the eastern region, of the 14 ‘vanishing companies’ cases, prosecutions have been filed against 11 companies. The remaining three are under liquidation. FIRs have been filed in all 14 cases of which 13 have been registered. Further, 11 prosecutions have been filed for non-filing of statutory returns. In case of Cilson Organics Ltd, the managing director of the company has been convicted and a fine of INR 14,000 has been imposed. 203 204 BUSINESS ETHICS—AN INDIAN PERSPECTIVE However, it should be remembered that it has taken more than a decade for the government to initiate legal action against the scamsters. Besides, it should be kept in mind that the slow-grinding judicial processes will take its own time and if past experience is any guidance, it will take another decade or more at the fastest, to get the judgement. Even then, there is no guarantee that the guilty will be convicted and the poor investors’ money returned. This is the state of affairs that has caused untold misery to the poor Indian shareholder/investor. GUIDE FOR INVESTORS/SHAREHOLDERS To safeguard the rights and privileges of investors and to keep them aware of their responsibilities the SEBI in its guide titled A Reference Guide for Investors on Their Rights and Responsibilities describes the rights of a shareholder of a company (Box 8.1). BOX 8.1 SEBI’S GUIDELINES FOR INVESTORS The Securities and Exchange Board of India (SEBI), the Indian capital market regulator, in its guidelines to investors/shareholders, makes it known that a shareholder of a company enjoys the following rights: Rights of a shareholder, as an individual ∑ To receive the share certificates on allotment or transfer as the case may be in due time. ∑ To receive copies of the Annual Report, the Balance Sheet and the Profit & Loss Account and the Auditors’ Report. ∑ To participate and vote in general meetings either personally or through proxies. ∑ To receive dividends in due time once approved in general meetings ∑ To receive corporate benefits such as rights, bonus etc. once approved. ∑ To apply to Company Law Board (CLB) to call or direct the Annual General Meeting. ∑ To inspect the minute books of the general meetings and to receive copies thereof. ∑ To proceed against the company by way of civil or criminal proceedings. ∑ To apply for the winding-up of the company. ∑ To receive the residual proceeds. Besides the above rights one enjoys as an individual shareholder, one also enjoys the following rights as a group of shareholders: ∑ ∑ ∑ ∑ To requisite an Extraordinary General Meeting. To demand a poll on any resolution. To apply to the Company Law Board to investigate the affairs of the company. To apply to the Company Law Board for relief in cases of oppression and/or mismanagement. As a debenture-holder, one has the right ∑ ∑ ∑ ∑ To receive interest/redemption in due time. To receive a copy of the trust deed on request. To apply for winding-up of the company if the company fails to pay its debt. To approach the debenture trustee with the debenture holder’s grievance. However, one should note that the above mentioned rights may not necessarily be absolute. For example, the right to transfer securities is subject to the company’s right to refuse transfer as per statutory provisions. Shareholders’ responsibilities While a shareholder may be happy to note that he/she has so many rights as a stakeholder in the company, one should not be complacent; because one also has certain responsibilities to discharge, such as ∑ To remain informed. ∑ To be vigilant. CORPORATE ETHICS: INVESTORS’ RIGHTS, PRIVILEGES, PROBLEMS AND PROTECTION ∑ To participate and vote in general meetings. ∑ To exercise one’s rights on one’s own, or as a group. Trading of securities A shareholder has the right to sell securities that he/she holds at a price and time that he/she may choose. He/she can do so personally with another person or through a recognized stock exchange. Similarly, he/she has the right to buy securities from anyone or through a recognized stock exchange at a mutually acceptable price and time. Whether it is a sale or purchase of securities effected directly by him or through an exchange, all trades should be executed by a valid, duly completed and stamped transfer deed. If he/she chooses to deal (buy or sell) directly with another person, he/she is exposed to counterparty risk, i.e., the risk of non-performance by that party. However, if he/she deals through a stock exchange, this counter party risk is reduced due to trade/settlement guarantee offered by the stock exchange mechanism. Further, he/she also has certain protections against defaults by his/her broker. When one operates through an exchange, one has the right to receive the best price prevailing at that time for the trade and the right to receive the money or the shares on time. He/she also has the right to receive a contract note from the broker confirming the trade and indicating the time of execution of the order and necessary details of the trade, and the right to receive good rectification of bad delivery. If he/she has a dispute with his/her broker, he/she can resolve it through arbitration under the aegis of the exchange. If an investor decides to operate through an exchange, he/she has to avail the services of a SEBIregistered broker/sub-broker. He/she has to enter into a broker-client agreement and file a client registration form. Since the contract note is a legally enforceable document, he/she should insist on receiving it. He/she has the obligation to deliver the shares in case of sale or pay the money in case of purchase within the time prescribed. In case of bad delivery of securities by the shareholder, he/she has the responsibility to rectify them or replace them with good ones. Transfer of securities Transfer of securities means that the company has recorded in its books a change in the title of ownership of the securities effected either privately or through an exchange transaction. To effect a transfer, the securities should be sent to the company along with a valid, duly executed and stamped transfer deed duly signed by or on behalf of the transferor (seller) and transferee (buyer). It would be proper to retain photo-copies of the securities and the transfer deed when they are sent to the company for transfer. It is essential that one sends them by registered post with acknowledgement due and watch out for the receipt of the acknowledgement card. If one does not receive the confirmation of receipt within a reasonable period, one should immediately approach the postal authorities for confirmation. Sometimes, for an investors’ own convenience, he/she may choose not to transfer the securities immediately. This may facilitate easy and quick selling of the securities. In that case, he/she should take care that the transfer deed remains valid. However, in order to avail the corporate benefits such as dividends, bonus or rights from the company, it is essential that he/she gets the securities transferred in his/her name and become a shareholder. On receipt of the investors’ request for transfer, the company proceeds to transfer the securities as per the provisions of the law. In case it cannot effect the transfer, the company returns the securities giving details of the grounds under which the transfer could not be effected. This is known as ‘Company Objection’. When an investors’ happens to receive a company objection for transfer, he/she should proceed to get the errors/discrepancies corrected. He/she may have to contact the transferor (the seller) either directly or through his/her broker for rectification or replacement with good securities. Then he/she can resubmit the securities and the transfer deed to the company for effecting the transfer. In case he/she is unable to get the errors rectified or get them replaced, he/she can take recourse to the seller (Continued) 205 206 BUSINESS ETHICS—AN INDIAN PERSPECTIVE BOX 8.1 (Continued) and his/her broker through the stock exchange to get back his/her money. However, if one had transacted directly with the seller originally, one has to settle the matter with the seller directly. Sometimes, one’s securities may be lost or misplaced. One should immediately request the company to record a ‘stop transfer’ of the securities and simultaneously apply for issue of duplicate securities. For effecting stop transfer, the company may require to produce a court order or the copy of the FIR filled by him with the police. Further, to issue duplicate securities to him, the company may require him to submit indemnity bonds, affidavit, sureties etc. besides issue of a public notice. He/she had to comply with these requirements in order to protect his/her interest. Sometimes, it may so happen that the securities are lost in transit either from the shareholder to the company or from the company to him/her. He/she has to be on his/her guard and write to the company within a month of his/her sending the securities to the company. As soon as it is noticed that either the company has not received the securities that was sent or he/she did not receive the securities that the company claims to have sent to him/her, he/she should immediately request the company to stop transfer and proceed to apply for duplicate securities. Depository and dematerialization Shares are traditionally held in physical or paper form. This method has its own inherent weaknesses such as loss/theft of certificates, forged/fake certificates, cumbersome and time consuming procedure for transfer of shares, etc. Therefore, to eliminate these weaknesses, a system called ‘Depository System’ has been established. A depository is a system which holds shares in the form of electronic accounts in the same way a bank holds one’s money in a savings account. Depository System provides the following advantages to an investor: ∑ ∑ ∑ ∑ ∑ ∑ ∑ His/her shares cannot be lost or stolen or mutilated. He/she never needs to doubt the genuineness of his/her shares i.e., whether they are forged or fake. Share transactions such as transfer, transmission etc. can be effected immediately. Transaction costs are lower than on the physical segment. There is no risk of bad delivery. Bonus/Rights shares allotted to the investor will be immediately credited to his/her account. He/she will receive the statement of accounts of his/her transactions/holdings periodically. When a shareholder decides to have his/her shares in electronic form, he/she should approach a Depository Participant (DP) who is an agent of the depository and open an account. He/she should surrender his/her share certificates in physical form and his/her DP will arrange to get them sent to and verified by the company and on confirmation credit his/her account with an equivalent number of shares. This process is known as demateralization. One can always reverse this process if one so desires and get his/her shares reconverted into paper form. This reverse process is known as ‘re-materialization’. Share transactions (such as sale or purchase and transfer/transmission etc.) in the electronic form can be effected in a much simpler and faster way. All one needs to do is that after confirmation of sales/purchase transaction by one’s broker, one should approach his/her DP with a request to debit/credit his/her account for the transaction. The Depository will immediately arrange to complete the transaction by updating his/her account. There is no need for separate communication to the company to register the transfer. Source: Securities and Exchange Board of India, A Reference Guide for Investors on Their Rights and Responsibilities, 1997. Reproduced with permission from the Securities and Exchange Board of India. CORPORATE ETHICS: INVESTORS’ RIGHTS, PRIVILEGES, PROBLEMS AND PROTECTION When an investor who is holding securities in a firm is making an investment decision, he or she would have obviously taken note of and evaluated the attendant risks that go with such expectations, especially the possibility of the risk that the income and/or capital growth may not materialize. This mismatch between the expectations of the investors and the unexpected final outcome in terms of income and/or capital growth arises mainly because their hard earned money is entrusted to managers in a corporation whose investment decisions, apart from carrying certain risks of their own, may not match those of the investors. WHY IS INVESTOR PROTECTION NEEDED? An appropriate definition of investor protection is very much needed to relate it to corporate governance and to establish the correlation between these two. As stated earlier, when investors finance companies, they take a risk that could land them in a situation in which the returns on their investments would not be forthcoming because the managers or those whom they appointed to represent them on the board may keep them or expropriate them either covertly or overtly. This kind of betrayal of the investors by the ‘insiders’ as the managers or board of directors of the company as they are called may shake their confidence, which in the long run would have a deleterious impact on the overall investment climate with serious repercussions on the economic development of the country. The economic parameters of a nation such as output, employment, income, expenditure, and above all, overall economic growth will be badly jeopardized due to declining investment. Therefore, there is a very strong reason to maintain the investors’ morale, protect their interests and restore their confidence as and when there is a tendency for investors to lose confidence in the system or when their investments are at a stake. Research findings also reveal that when the law and its agencies fail to protect investors, corporate governance and external finance do not fare well. If there is nil/inadequate investor protection, the insiders can easily steal the firm’s profits, whereas if the investors’ interests are well taken care of, it will be difficult to do the same. DEFINITION OF INVESTOR PROTECTION Investors by virtue of their investments in securities of corporations obtain certain rights and powers that are expected to be protected by the State, which gave the charter or legal entity to the corporate bodies or the regulators designated by the State to do so. Their basic rights include disclosure and accounting rules that will enable them to obtain proper, precise and accurate information to exercise other rights such as approval of executive decisions on substantial sale or investments, voting out of incompetent or otherwise ineligible directors and appointment of auditors. There are also laws that mainly deal with bankruptcy and reorganization procedures that outline measures and procedures that enable creditors to repossess collateral to protect their seniority and to make it difficult for firms to seek court protection in reorganization. In many countries, laws and legal regulations are enforced in part by market regulators such as SEBI, in part by courts or government agencies such as the Department of Company Affairs in India and in part by markets themselves. If the investors’ rights are effectively enforced by one or all of these agencies, ‘It would force insiders to repay creditors and distribute profits to shareholders and thereby protect external financing mechanism form breaking down’.5 Thus, investor protection can be defined by both (i) the extent of the laws that protect investors’ rights; and (ii) the strength of the legal institutions that facilitate law enforcement. RELATIONSHIP BETWEEN INVESTOR PROTECTION AND CORPORATE GOVERNANCE Recent research confirms that an essential feature of good corporate governance is strong investor protection.6 According to Rafael La Porta et al7 (1999), ‘Corporate Governance is to a large extent a set of mechanisms through which outside investors protect themselves against expropriation by the insiders”. Expropriation is possible because of the agency problems that are inherent in the formation and structure of corporations. Shareholders or investors of a firm who are too numerous and scattered cannot manage it, and therefore, entrust the management of the firm to managers who include the Board of Directors and senior executives such as the CEO and the CFO. However, managerial actions depart from those required to maximize shareholder returns. Such mismatch of objectives results in agency problem. Investors do realize and accept a certain level of selfinterested behaviours in managers while they delegate responsibility to them. But when such self-indulgence by managers exceeds reasonable limits, principles of corporate governance come in to check such abuses and malpractices. The core substance of corporate governance lies in designing and putting in place mechanisms such as disclosures, monitoring, oversight and corrective systems that we can align the objectives of the two sets of players (investors and managers) as closely as possible and minimize the agency problems. 207 208 BUSINESS ETHICS—AN INDIAN PERSPECTIVE HOW DO INSIDERS STEAL INVESTORS’ FUNDS? The insiders, both managers and controlling shareholders, can expropriate the investors in a variety of ways. Rafael La Porta et al.8 (1999), describe several means by which the insiders siphon off the investor’s funds. In some countries, the insiders of the firm simply steal the earnings. These arrangements take various forms. Sometimes, major shareholders who control the company and their managers resort to underselling the output investors, to units they own. Such malpractices are nothing short of thefts. There are other instances where unfit or under-qualified family members are appointed to senior perks management positions with excessive pay and perks. In all these instances, it is clear that the insiders use the profits of the firm to benefit themselves (either as excessive executive salaries or in the form unjustifiable perquisites) instead of returning the money to outside investors to whom it legitimately belongs. In this context, minority shareholders and creditors are far more vulnerable. Expropriation also is done by insider selling additional securities in the firm they control to another firm or subsidiaries they own at below market prices, with assistance from obliging interlocking directorates, and also by diverting corporate opportunities to subsidiaries and so on. Such practices, though often legal, have the same effect as theft. However, it must be stressed that these sharp practices of insiders vary from country to country depending on the existence or non-existence of democratic and corporate values, maturity or otherwise of the securities market, financial systems, pace of new security issues, corporate ownership structures, dividend policies, efficiency of investment allocation, the legal system and the competence of the securities market regulator. RIGHTS TO INFORMATION AND OTHER RIGHTS Investor protection is not attainable without adequate and reliable corporate information. All outside investors, whether they are shareholders or investors have an inalienable right to have certain corporate information. In fact, several other rights provided to them under the law cannot be exercised by shareholders unless companies in which they have invested disclose such information. For instance, a creditor would be hard-pressed to understand whether a debt agreement had been violated or not, in the absence of appropriate accounting data. If investors do not enjoy these rights to information, there is nothing to prevent insiders from not repaying the creditors or distributing dividends to shareholders. Apart from the rights to information, creditors have also certain other rights, and these are to be protected. Minority shareholders have the same rights as majority shareholders in dividend policies and in access to new security issues. The significant but non-controlling shareholders need the right to have their votes counted and respected. This is the reason why the SEBIappointed Kumar Mangalam Birla Committee recommended postal ballot for the benefit of those who cannot attend the AGMs held by corporations in cities where their corporate offices are located. The committee recommended that in case of shareholders, who are unable to attend the meeting, there should be a requirement, which would enable them to vote by postal ballot on important key issues such as corporate restructuring, sale of assets, new issues on preferential allotment and matters relating to change in management. Likewise, even the large creditors such as institutional investors who are powerful enough by virtue of their large stakes and need relatively few formal rights, should be able to ‘seize and liquidate collateral, or to reorganize the firm’. Investors would be unable to protect their turfs even if they have a large number or percentage of the share, if they are not able to enforce their rights. There are, however, rules and regulations that are designed to protect investors. Some of the important regulations are with regard to disclosure and accounting standards, which provide investors with the information they need to exercise other rights of investors such as the ‘ability to receive dividends on pro-rata terms, to vote for directors, to participate in shareholders’ meeting, to subscribe to new issues of securities on the same terms as the insiders, to sue directors for suspected wrongdoing including expropriation, to call extraordinary shareholders meeting, etc. Laws protecting creditors largely deal with bankruptcy procedures and include measures which enable creditors to repossess collateral, protect their seniority and make it harder for firms to seek court protection in reorganization. In different jurisdictions, rules protecting investors come differently from various sources, including not only company, security, bankruptcy, takeover and competition laws but also stock exchange regulations and accounting standards. In India, for instance, rules protecting investors emanate from the Department of Company Affairs of the Ministry of Finance, the SEBI, the Listing Agreements of Stock Exchanges, Accounting Standards of the ICAI, and sometimes decisions of the Superior Court of the country. It should be stressed though that the enforcement of laws by these agencies are as crucial as their content and in most emerging economies these are lax, delayed and dilatory, resulting in poor corporate governance. CORPORATE ETHICS: INVESTORS’ RIGHTS, PRIVILEGES, PROBLEMS AND PROTECTION CORPORATE GOVERNANCE THROUGH LEGAL PROTECTION OF INVESTORS The objective of corporate governance reforms in most countries including several Latin American and Asian countries is to protect the rights of outside investors, including both shareholders and creditors. These reforms have a focus to expand financial markets to facilitate external financing of new firms, to infuse large foreign investments in existing firms, to promote external commercial borrowings, to help local firms access foreign capital by listing themselves in stock markets overseas, to move away from concentrated ownerships, to expose native firms to foreign competition, to wholesome corporate developments elsewhere and also to improve the efficiency of investment allocation. The importance of legal rules and regulations as a means to protect outside investors against insider expropriation of their money is in sharp contrast to the traditional ‘laws and economies’ perspective and has evolved over the past 45 years. As per this line of argument, financial market regulations are deemed unwanted, because most financial contracts are entered into between professional issuers and well-versed and knowledgeable investors. Investors generally know that there is a risk of expropriation of their investment by insiders. To avoid such occurrence, they would expect firms to contractually disclose financial and information about them routinely. If firms fail to abide by such contractual obligation, investors penalize them through the securities market. Entrepreneurs know this well and treat investors well by disclosing to them all relevant information besides limiting expropriation. It is the considered view of some authorities on the subject that under circumstances of enforcements of such contracts between issuers and investors, financial market regulation becomes unnecessary.9 A case in point is Russia, which has a good securities law, a good bankruptcy law and an equally good company law in books. Its Securities and Exchange Commission too is independent and aggressive but relatively has few enforcement powers. With an ineffective judiciary and weak enforcement of law, Russia’s financial market has not grown in an environment where blatant violations of the law are far too common. So, in reality, laws and their enforcement are the major factors that help outsiders to invest in corporate firms. Although the reputation and goodwill of a firm do help it raise funds, law and its enforcement are the clinching factors to decide on investment. It is an indisputable fact that to a large extent shareholders and creditors decide to invest in firms because their rights are protected by the law. The outside investors are more vulnerable to expropriation, and therefore, more dependent on law, than their employees or the suppliers, who are useful to them and also have reliable source of information to ward off any problems and are at a lesser risk of being mistreated. Besides, available evidence also suggests that in countries where there is poor investor protection there may be a need to change many more rules simultaneously to bring them up to best corporate governance practice. But this may not be easy as families controlling corporations may object to these reforms. Therefore, law and its enforcement are important means to protect investors and help promote corporate governance. IMPACT OF INVESTOR PROTECTION ON OWNERSHIP AND CONTROL OF FIRMS In many countries, firms are owned and controlled by promoter families and in such closely held firms, insiders use every opportunity to abuse the rights of other shareholders and steal their profits through devious means. In such cases where there is poor investor protection, large scale expropriation is feasible. Control through ownership acquires enormous value because it gives such owners opportunities to expropriate efficiently. Entrepreneurs who promote companies would not like to lose control and thereby give up the chances of expropriation by diffusing control rights when investor protection is poor. Promoter families in countries with poor investor protection would wish to have concentrated control of the enterprises they have floated. However, expropriation can be limited considerably in these family-owned firms, by dissipating control among several large investors, none of whom can control the decision of the firm without agreeing with others. But then this is a situation well entrenched, closely held firms’ promoters would wish to avoid. The evidence from a number of individual countries and the seven OECD countries with poor investor protection shows more concentrated control of firms than countries with good investor protection. In the East, except Japan where there is a fairly good investor protection, there is a predominance of family control and family management of corporations. The evidence available in many countries is in consonance with the proposition that legal environment shapes the value of the private benefits of control and thereby determines the ownership structures. 209 210 BUSINESS ETHICS—AN INDIAN PERSPECTIVE Therefore, the available evidence on corporate ownership patterns around the world supports strongly the importance of investor protection. Evidence also shows that countries with poor investor protection have more concentrated control of firms than countries with good investor protection. Studies made by various researchers testify to the fact that in countries where there is a concentration of ownership in the hands of few families, there may be stiff opposition to legal reforms that are likely to reduce their control over firms and promote investor protection. From the promoter families standpoint, legal reforms that will enhance the rights of outside investors, would cause a reduction over their control of the firms and a marked decline in opportunities for expropriation. This, in turn, will promote the total value of the firm and prompt investors finance new projects on more attractive terms. The ultimate impact of the legal reforms will be a massive redistribution of insiders’ wealth to outside investors. It is no wonder, therefore, that insiders (promoter families) from many parts of the world, where they are prevalent, are opposed to legal reforms, be it in Asia, Latin America, or Europe.10 According to these researchers, there is also another reason why the insiders in such firms are opposed to reforms and the expansion of capital markets. Under the existing conditions, these firms can finance their own investment projects internally or through captive banks or subsidiary financial institutions. Studies show that a large chunk of credit goes to the few largest firms in countries with poor investor protection. This was also the case in India as R. K. Hazari and his researchers found out in the early 1960s. Even recently as late as in 2001, it was found out that there has been a rapid expansion of assets and turnover of industrial houses owned by families and there is a massive concentration at the top. The assets of the Ambanis of Reliance, the Munjals of the Hero group, Shiv Nadar of HCL Technologies, Tatas, Birlas, Jindals, R. P. Goenka, Azim Premji of Wipro, TVS, Chidambaram and Murugappa groups have grown tremendously mostly due to insider domination and poor investor protection in the country. As a consequence of this fertile situation, the large firms obtain not only the finance they need but also political clout that comes with the access to such finance in a corruption-ridden society, as well as the security from competition of smaller firms that require external capital. Thus poor corporate governance provides large family-owned firms not only secure finance but also easy access to politics and markets. The dominant families have thus abiding interest in keeping the status quo lest the reforms take away their privileges and confer protection to outside investors. IMPACT OF INVESTOR PROTECTION ON THE DEVELOPMENT OF FINANCIAL MARKETS Investor protection provides an impetus for the growth of capital markets. When investors are protected from the expropriation of insiders, they pay more for securities, which makes it attractive for entrepreneurs to issue securities. Through investor protection, financial markets can develop with ease and perfection, which in turn can accelerate economic growth by (i) enhancing savings and capital information; (ii) channelizing these into real investment, and (iii) improving the efficiency of capital allocation, since capital flows into more productive uses. Further financial development improves efficient resource allocation and through this investor protection brings about growth in productivity and output, the two basic ingredients needed to speed up economic development. Research studies point out that countries with well-developed financial markets regulated by laws allocate investment across industries more in line with growth opportunities in these industries than countries with weak financial markets or poor regulatory mechanism. These studies also reveal that (i) most developed financial markets are the ones that are protected by regulation and laws while unregulated markets do not work well, may be due to the fact they allow too much of expropriation of outside investors by corporate insiders; (ii) improving the functioning of financial markets confers real benefits both in terms of overall economic growth and the allocation of resources across sectors; (iii) one broad strategy of effective regulation and of encouragement of financial markets begins with protection of outside investors, whether they are shareholders or creditors; and (iv) enforced outside shareholders’ rights in many countries encourage the development of equity markets as measured by valuation of firms, the number of listed companies and the rate at which firms go for public issues. However, investor protection does not necessarily mean rights just included in the laws and regulations alone, but the effectiveness with which they are enforced. In countries with poor investor protection, the insiders may treat outside investors fairly well as long as the firms’ future prospects are bright and they need the continued external financing by outsiders. But when the future prospects tend to deteriorate, insiders may step up expropriation. In such a scenario, unless there are effective laws against such malpractices and they are effectively enforced, outside investors will not be able to do anything but to withdraw their investments. Therefore, investor protection is absolutely essential for the orderly development and continued proper functioning of capital markets. BANKS AND CORPORATE GOVERNANCE CORPORATE ETHICS: INVESTORS’ RIGHTS, PRIVILEGES, PROBLEMS AND PROTECTION Banks play a significant role in the growth of the corporate sector by providing them finance for their operations. However, there is a difference in the roles they play in different countries and these diverse roles have different impacts, both on investor protection and its end result, corporate governance. There are considerable differences between bank-centred corporate governance systems such as those of Germany and Japan compared to market-centred systems such as those of the United Kingdom and the United States. In the former, the main bank provides both a significant share of finance and governance to firms while in the latter finance is provided by large numbers of investors and takeovers play a major governance role. But the classification of financial systems into bank centred and market centred is neither straightforward nor particularly useful. Rafael La Porta et al.11 point out to studies that showed that in the 1980s when the Japanese economy was being touted as the best and worthy of emulation by other economies, such bank-centred governance was widely regarded as superior, since it enabled firms to make long-term investment decisions, delivered capital to firms facing liquidity crisis thereby avoiding costly financial distress, and above all, replaced the expensive disruptive takeover with more surgical bank intervention when the management of the borrowing firm under-performed. The rosy situation, however, did not last long enough. When the Japanese economy collapsed in the 1990s, this form of financing and governance was found faulty. Far from being the promoters of rational investment, Japanese banks were found to be the source of the soft budget constraint, over lending to loss making firms that required restructuring, and resorting to collusion with managers to prevent external threats to their control and to collect rents on bank loans. Likewise, banks in Germany too were found to be wanting in providing good governance, especially in bad times. In the ultimate analysis of the two systems, the market based system with its focus on legal protection of investors, seems to be doing better as was demonstrated time and again, the latest being its successful riding of the American stock market bubble of the 1990s. In conclusion, it is to be stressed that strong investor protection is an inalienable part of effective corporate governance. Financial markets, very vital constituents of economic growth, need some protection of outside investors, whether by courts, market regulators, government’s agencies or market participants themselves through voluntary codes or guidelines. There have to be radical changes in the legal structure, the laws and their effective enforcement. With the integration of capital markets, the necessity to bring about these reforms is more pertinent today than it was in earlier times. INVESTOR PROTECTION IN INDIA Small investors are the backbone of the Indian capital market and yet a systematic study of their concerns and attempts to protect them has been relatively of recent origin. Due to lack of proper investor protection, the capital market in the country has experienced a stream of market irregularities and scandals in the 1990s. SEBI itself, though formed with the primary objective of investor protection, took notice of the issue seriously only after the Ketan Parikh Scam (2001) and the UTI crisis (1998 and 2001) and has developed sophisticated institutional mechanism and harnessed computer technology to serve the purpose. Yet, there are still continuing concerns about the speed and effectiveness with which fraudulent activities are detected and punished, which after all, should be the major focus of the capital market reforms in the country. The SEBI–NCAER study12 estimated that the investor population in India was 12.8 million or nearly 8 per cent of all Indian households. The bulk of the increase in the number of shareholders had taken place during the boom years 1990–1994 and tapered off thereafter. By 1997 the capital market bubble had burst. The Household Investors Survey of SCMRD (1997) revealed the following: (i) a majority of investors reported unsatisfactory experience of equity-investing; (ii) 80 per cent of the investors said that they had little or no confidence in company managements; (iii) 55 per cent respondents showed little or no confidence on the market regulator, SEBI; and (iv) most preferred saving instruments and government saving schemes and banks’ fixed depositors. This reflected a considerable erosion of investor confidence in securities and corporations. Many subsequent investor surveys also found broadly the same investor reactions. All these surveys underlined the need for restoring the investor’s confidence in private corporations, which enjoy little credibility with investors who have badly burnt their fingers in a series of scams. This calls for a credible programme of corporate governance reform, focusing on outside minority shareholder protection. The situation does not seem to have changed much today notwithstanding the CII’s code and SEBI’s guidelines and is the reason why investors prefer government securities rather than corporate securities. The sooner this trend is reversed, the better it will be for the development of the capital market in the country. 211 212 BUSINESS ETHICS—AN INDIAN PERSPECTIVE N. K. MITRA COMMITTEE ON INVESTOR PROTECTION The committee chaired by N. K. Mitra submitted its report on investor protection in April 2001, with the following recommendations: 1. There is a need for a specific Act to protect investor interest. The Act should codify, amend and consolidate laws and practices for the purpose of protecting investors interest in corporate investment; 2. Establishment of a judicial forum and award of compensation for aggrieved investors; 3. Investor Education and Protection Fund which is under the Companies Act should be shifted to the SEBI Act and be administered by SEBI; 4. SEBI should be the only capital market regulator, clothed with the powers of investigation; 5. The regulator, SEBI should require all IPOs to be insured under third party insurance with differential premium based on the risk study by the insurance company; 6. SEBI Act, 1992, should be amended to provide for statutory standing committees on investors protection, market operation and standard setting; and 7. The Securities Contracts (Regulation) Act, 1956, should be amended to provide for corporatization and good governance of stock exchanges. PROBLEMS OF INVESTORS IN INDIA Investor protection is a wide term that covers various measures to protect the investors from malpractices of companies, brokers, merchant bankers, issue managers, registrar of new issues and so on. It is also incumbent on the investor to take necessary and appropriate precautions to protect their own interest, since all investments have some risk elements. But where they find that their interests are adversely impacted because of malpractice by companies, brokers or any other capital market intermediaries, they can seek redressal of their grievances from appropriate designated authorities. Most of the investor complaints can be divided into three broad categories: 1. Against member-brokers of stock exchanges: Complaints of this category generally centre around the price, quantity etc at which transactions are put through defective delivery, delayed payments or nonpayments from brokers. 2. Against companies listed for trading on stock exchanges: Complaints against companies generally centre around non-receipt of allotment letters, refund orders, non-receipts of dividends, interest, etc. 3. Complaints against financial intermediaries: These complaints may be against sub-brokers, agents, merchant bankers, and issue managers and generally centre around non-delivery of securities and nonsettlement of payment due to investors. However, these complaints cannot be entertained by the stock exchanges, as per their rules. LAW ENFORCEMENT FOR INVESTOR PROTECTION There are several agencies in India that are expected to protect investors. In fact, there are so many with overlapping functions that they cause confusion to the investors as to whom they should go to for redressal of their grievances. The stated primary objective of the country’s sole capital market regulator, the Securities and Exchange Board of India, popularly known as SEBI, is protection of investors’ interests. SEBI has provided guidelines for an efficient redressal process in its reference guide for investors (Box 8.2). But, investor protection is a multi-dimensional function, requiring checks at various levels, as shown below: ∑ Company level: Disclosure and corporate governance norms. ∑ Stock brokers level: Self regulating organization of brokers. ∑ Stock exchanges: Every stock exchange has to have a grievance redressal mechanism in place as well as an Investor Protection Fund. ∑ Regulatory agencies: These include: Investors’ Grievances and Guidance Division of SEBI Department of Company Affairs Department of Economic Affairs Reserve Bank of India CORPORATE ETHICS: INVESTORS’ RIGHTS, PRIVILEGES, PROBLEMS AND PROTECTION Inventory Information Centres have been set up in every recognized stock exchange which in addition to the complaints related to the securities traded/listed with them, will take up all other complaints regarding the trades effected in the exchange and the relevant member of the exchange. Moreover, two other avenues always available to the investor to seek redressal of his or her complaints are 1. complaints with Consumers Disputes Redressal Forums; and 2. suits in the court of law. In this context, it is pertinent to note that already law courts have started imposing exemplary punishments to directors who violated codes and guidelines on corporate governance provided by competent authorities. In May 2004, Citigroup agreed for a US$ 2.0 billion settlement, and more than a dozen other banks including JP Morgan Chase and Deutsche Bank are likely to fall in line. In January 2005, at the insistence of a US Court, former directors of WorldCom (now known as MCI) have agreed to pay US$ 18 million out of their pockets as part of a shareholder law suit. Likewise, 18 former directors of the collapsed energy conglomerate Enron, agreed to pay US$ 13 million as part of a settlement in another shareholder lawsuit.15 Though these settlements are subject to confirmation by the concerned US District Court, corporate governance experts had hailed these settlements for setting a new standard in accountability of directors when companies they oversee go astray. In India too, as per the dictates of a lower court, recently the directors of a non-banking finance company have agreed to pay back to the company a large sum of money it lost, due to their indiscretion in an investment decision. LACUNAE IN INVESTOR PROTECTION Though there is a redressal mechanism in place in the country, investors could not get their complaints adequately addressed to, much less solved to their satisfaction by these public authorities. Multiplicity of authorities, overlapping functions, lack of knowledge and understanding of the common investor about these agencies and lack of enforcement have all acted against investor protection. Notwithstanding the existence of this seem- BOX 8.2 GRIEVANCE REDRESSAL PROCESS There will be occasions when an investor has a grievance against the company in which one is an investor. It may be that one has not received the share certificates on allotment or on transfer; or the dividend/interest warrant or refund order; or perhaps the Annual Accounts etc. The investor should first approach the company, Mutual Fund (MF) or the Depository Participant (DP) as the case may be. If he/she is not satisfied with their response, the investor can approach SEBI or the regulatory authority in whose purview the grievance falls. Implementation of steps that will ensure lasting shareholder value will vary among companies depending to a large extent on top management support, the nature and diversity of the business portfolio, the degree of decentralization and on its size, global reach, employee mix, culture, management style and the sense of urgency. However, bringing about long term shareholder value is the right thing to do and competitive pressures, greater awareness among shareholders, government regulations and institutional shareholders seeking maximum returns will ensure that the redressal system is there to stay. Source: Securities and Exchange Board of India, A Reference Guide for Investors on Their Rights and Responsibilities, 1997. Reproduced with permission from the Securities and Exchange Board of India. ingly comprehensive network of public institutions established for investor protection in India, a series of scams has taken place that has shaken the confidence of investors since 1991, the year of economic liberalization. Loss of investor confidence due to these scandals that conveyed an image of fraud and manipulation was so great that even after several years of moribund stock market, things have not improved. 213 214 BUSINESS ETHICS—AN INDIAN PERSPECTIVE The series of scams has cast a shadow over the credibility of SEBI, and its capacity to create a safe and sound equity market. SEBI’S POOR PERFORMANCE AND SUGGESTIONS FOR IMPROVEMENT The SEBI, the designated capital market regulator has a sort of mixed record in fostering and nurturing corporate governance in the Indian corporate sector. Since its inception in 1992, SEBI has registered substantial growth in its stature and reach. Presently, its regulatory framework is robust. It has also played a significant role in creating the country’s capital market infrastructure that is recognized as one of the more advanced in the world. If SEBI’s growth and reach over the past five years have been significant, its failure too has been spectacular. S. Vaidya Nathan lists the following failures: 13 1. Poor tackling of price manipulation and insider trading issues: ‘Insider trading and price manipulation ahead of key corporate actions still continue to be rampant.’ SEBI has not effectively tackled—unlike its American counterpart SEC—issues such as price manipulation and insider trading. It has to strengthen enforcement and surveillance and impose deterrent penalties to stop these wrong-doings. 2. Poor conviction rate: A ‘regulator’s credibility hinges on its ability to achieve a fairly high conviction rate against errant market players’. However, SEBI has not been able to penalize effectively violators of various corporate laws. In most cases, the appellate authority SAT has set aside SEBI’s penal measures against top market players for violation of its laws. It is necessary for SEBI to build up strong cases with impeccable evidences to ensure conviction of market violators, rather than let them go scot free because of SAT’s intervention. 3. Need to enhance its manpower skills: SEBI, as a capital market regulator, lacks the required manpower with necessary skill sets, especially in areas such as financial services, legal acumen, knowledge of various business functions, etc. to carry out its regulatory functions efficiently. It needs to invest heavily in the recruitment and training of such qualified manpower. SEBI has to build a coterie of professionals of competence, honesty and integrity. 4. It should simplify and trim regulations: SEBI has ‘to simplify and trim the regulations, so that they are compact, easy to follow and comprehend’. There is an urgent need for SEBI to place in the public domain in good time the large number of reports filed by innumerable market players, corporations and institutions in the process of complying with its regulations. This will facilitate analysts chronicle and spot market trends in different areas. Such efforts would enhance and compliment SEBI’s attempts to regulate the market effectively. 5. It should tone up quality of disclosures: It is also necessary to improve the quality of SEBI’s disclosures with a view to providing more useful information to investors, especially in matters of mergers and acquisitions, earnings of companies and FII inflows. It is also important that SEBI streamlines its thus far poorly managed Web site www.sebi.gov.in/ so that it is made into a valuable source of information. 6. It should solve issues of IPOs and mutual funds: There are a host of other issues it has to tackle, such as confusion over the clearance of IPOs in the INR 200 million range; ensure that SEBI files and maintains its internal databases accurately and efficiently; and formally shelf the move to convert the Association of Mutual Funds of India into a self-regulatory organization, as the time for it has not come and such a move could lead to conflicts of interest with SEBI itself. The foregoing analysis clearly shows that though SEBI has emerged as the one and only capital market regulator in the country, its functioning has been ineffective so far due to its failure to exercise its authority and bring to book the violators and the wrong-doers. It has also let itself to be influenced unduly and unjustifiably by some corporate big-wigs. Therefore SEBI badly needs to improve administration and accountability and restore its credibility as a powerful regulator. 14 The phenomenal growth of modern corporations, have brought about the kind and order of material wealth to the international community that was never possible a few years ago. But this growth was possible, due to the evolution of public limited or joint stock companies, which are most attractive to investors. In such organizations, financial liability of the shareholders is limited to the extent of the shares held by them. However, the investor needs to be protected from insiders as he is not involved in the day-to-day management of the company. To realize such an investor protection, (Continued) countries have evolved rules, regulations, systems and mechanisms—both internal (to the company) and external. There is a global consensus about the objective of ‘good’ corporate governance: maximizing long-term shareholder value. The members of a company enjoy various rights in relation to the company. These rights are conferred on them either by the Indian Companies Act of 1956 or by the Memorandum and Articles of Association of the company or by the general law, especially those relating to contracts under the Indian Contract Act, 1872. Various committees have been set up both in India and elsewhere to guide the shareholders with regard to good corporate governance, especially their long term interests. The Working Group on the Companies Act set up by the Government of India recommended many financial as well as nonfinancial disclosures. The objective of the CII was to develop and promote the Desirable Code of Corporate Governance, corporate governance to be adopted and followed by Indian companies. The SEBI, as the custodian of investor interests constituted an 18-member committee, chaired by Kumar Mangalam Birla. The committee made 25 recommendations, 19 of them ‘mandatory’, that is, these were enforceable. The Naresh Chandra Committee’s report on ‘Audit and Corporate Governance’ has taken forward the recommendations of the Birla Committee. Two major issues the committee addressed and made appropriate recommendations were: representation of independent directors on a company’s board, and the composition of the audit committee. The SEBI-appointed Narayana Murthy Committee on Corporate Governance focused on investors and shareholders. The Government of India-constituted J. J. Irani Committee has come out with suggestions for laying sound base for corporate growth. Though the Companies Act, other statutes and recommendations of various committees give an investor the impression that there are enough provisions in the laws of the land, there has hardly been any conviction under them all these years. Since 1991, the liberalization of the Indian economy seems to have opened the floodgates for scams and provided vast opportunities to fly-by-night operators to destroy shareholder values. Strong investor protection is associated with effective corporate governance. Investors by virtue of their investments in securities of corporations obtain certain rights and powers that are expected to be protected by the State which gave the legal entity to the corporate bodies or the regulators designated by the State to do so. Their basic rights include disclosure and accounting rules that will enable them to obtain proper, precise and accurate information to exercise other rights such as approval of executive decisions on substantial sale or investments, voting out of incompetent or otherwise ineligible directors and appointment of auditors. Recent research confirms that an essential feature of good corporate governance is strong investor protection. The ‘insiders’—both managers and controlling shareholders—can expropriate the investors in a variety of ways. Investor protection is not attainable without adequate and reliable corporate information. There are rules and regulations that are designed to protect investors. The objective of the corporate is to protect the rights of outside investors, including both shareholders and creditors. In many countries, firms are owned and controlled by promoter families and in such closely held firms, insiders use every opportunity to abuse the rights of other shareholders and steal their profits through devious means. Investor protection provides an impetus for the growth of capital markets. Due to lack of proper investor protection, the capital market in India has experienced a stream of market irregularities and scandals in the 1990s. There are several agencies in India that are expected to protect investors. These include the SEBI, Department of Company Affairs, Department of Economic Affairs, Reserve Bank of India, Consumer Courts and Courts of Law. An objective analysis of the problems faced by investors in countries like India, leading to an erosion of their confidence in the capital market with the attendant adverse impact on the economic growth, shows that the major problems arise due to corporate misgovernance and not due to minor aberrations in following the procedures set by SEBI. To rectify such a situation, actions that lead to corporate misgovernance should be codified and small investors provided with statutory rights to enforce civil liability against the directors whose misdeeds and non-application of minds in investment or other decisions have adversely impacted the company and its shareholders. Some of the misdeeds would include (i) breach of fiduciary duty; (ii) siphoning off corporate funds; (iii) misapplication of company’s funds; (iv) price manipulation or insider trading; (v) manipulation of accounts; (vi) failure to disclose conflicts of interests; (vii) fraud or cheating; (viii) misappropriation of corporate assets; and (ix) losses caused due to mismanagement or negligence. 215 SUMMARY CORPORATE ETHICS: INVESTORS’ RIGHTS, PRIVILEGES, PROBLEMS AND PROTECTION 216 BUSINESS ETHICS—AN INDIAN PERSPECTIVE (Continued) SUMMARY Another important protection to the investor would be by strengthening the enforceability of accounting standards in India, as has been done in the US through the Sarbanes–Oxley Act. In India, though all the accounting standards have been made mandatory as a result of forceful pleas by various committees on corporate governance, they have not still acquired the legal status, in practice. This lack of legal sanction enables violators and wrongdoers go scot free. Therefore, it is absolutely necessary that all the accounting standards should be legally enforced and exemplary punishments meted out to violators if the investor is to be protected and corporate governance ensured for the larger benefit of the economy and the nation. KEY WORDS Agency costs ∑ Joint stock company ∑ Limited liability company ∑ Long-term shareholder value ∑ Extraordinary general meeting ∑ Shareholder ∑ Investor ∑ Disclosure ∑ Transparency ∑ Listed companies ∑ Code of corporate governance ∑ Appropriate systems ∑ Investment proposals ∑ Share transfers ∑ Affiliated entities ∑ Unlisted public companies ∑ Postal ballots ∑ Shareholder protection ∑ Debenture holder ∑ Trading of securities ∑ Transfer of securities ∑ Depository ∑ Dematerialization ∑ Grievance redressal ∑ Investor protection ∑ Rights to information ∑ Ownership and control ∑ Financial markets ∑ Stock brokers ∑ Stock exchanges ∑ Regulatory agencies ∑ Legislative provisions ∑ Initial public offers ∑ Mutual funds DISCUSSION QUESTIONS 1. What is the need to protect the interests of investors? Discuss this in the context of family-promoted companies and corporations in emerging economics. 2. Discuss the rights of shareholders. Also explain the corresponding responsibilities of investors. 3. Several committees have discussed the issue of investor protection. In this context, discuss the views of the following committees on this issue: (i) (ii) (iii) (iv) Working Group on the Companies Act Kumar Mangalam Birla Committee Narayana Murthy Committee Dr J. J. Irani Committee 4. Discuss the problems that have led to poor investor protection in India. What are the investor grievances redressal mechanisms that have been put in place by SEBI and other authorities? How effective are these mechanisms? NOTES 1. Reports on Corporate Governance, “Report of the SEBI Committee on Corporate Governance” (New Delhi: Economic India Info-Services Academia Foundation, 2004). 2. Arvind P. Datar, “Safeguarding Investors Interest,” The Hindu, 12 July 2004. 3. Richa Mishra, “Ministry Cracks the Whip on Vanishing Companies,” Financial Express, 23 December 2004. 4. Ibid. 5. Rafael La Porta, Florencio Lopez DeSilanes, Andrei Shleifer and Robert Vishny, “Investor Protection and Corporate Governance,” Harvard University and University of Chicago, June 1999, available at http://rru.worldbank.org/Documents/PapersLinks/investor_protection_origins_consequences_reform_ latest.pdf 6. Mark L. Defond and Mingyi Hung, “Investor Protection and Corporate Governance: Evidence From Worldwide CEO Turnover,” Journal of Accounting Research (Vol. 42, No. 2, 2004): 269–312. CORPORATE ETHICS: INVESTORS’ RIGHTS, PRIVILEGES, PROBLEMS AND PROTECTION 217 7. ET Delhi Bureau, “SEBI Starts Probe Against Dalal Street’s Dirty Dozen,” Economic Times, 19 March 2005. 8. See Note 5. 9. Ibid. 10. Ibid. 11. Ibid. 12. A joint study of the Securities and Exchange Board of India and the National Council of Applied Economic Research, cited in Sri Ram Khanna, ed. Financial Markets in India and Protection of Investors (New Delhi: New Century Publications, 2004). 13. S. Vaidya Nathan, “Agenda for SEBI’s New CEO,” The Hindu Business Line, 20 February 2005, available at www.thehindubusinessline.com/iw/2005/02/20/stories/2005022000810600.htm 14. Sucheta Dalal, “Priorities for SEBI’s New Broom,” Financial Express, 7 March 2005. 15. A. C. Fernando, Corporate Governance, Principles, Policies and Practices (New Delhi: Pearson Education, 2006). FURTHER READINGS Academic Foundation, Reports on Corporate Governance (New Delhi: Academic Foundation, 2004). Cadbury, A., Cadbury Report. The Financial Aspects of Corporate Governance (London: Financial Reporting Council, 27 May 1992). De Fond, M. L. and Hung, M., “Investor Protection and Corporate Governance: Evidence From Worldwide CEO Turn-over,” Journal of Accounting Research (Vol. 42, No. 2): 269–312. Economica India Info-Services, Reports on Corporate Governance (New Delhi: Academic Foundation, 2004). Fernando, A. C., Corporate Governance, Principles, Policies and Practices (New Delhi: Pearson Education, 2006). Khanna, S. R., Financial Markets in India and Protection of Investors (New Delhi: VOICE, Voluntary Organization in Interest of Consumer Education, New Century Publications, 2004). Neelamegam, R. and Srinivasan, R., Investors’ Protection, A Study of Legal Aspects (New Delhi: Raj Publications, 1998). Parikh, K. S. and Radhakrishna, R. eds., India Development Report 2004–05 (New Delhi: Indira Gandhi Institute of Development Research, Oxford University Press, 2006). Porta, R. L, DeSilanes, F.L., Shleifer, A., and Vishny, R., “Investor Protection and Corporate Governance,” Harvard University and University of Chicago, June 1999, available at http://rru.worldbank.org/ Documents/PapersLinks/investor_protection_origins_consequences_reform_latest.pdf Report of J. J. Irani Committee on Company Law, 2005, available at http://dca.nic.in/report_expert _ comt.htm The Confederation of the Indian Industry, “Desirable Corporate Governance: A Code,” April 1998, available at www.ciionline.org/Services/68/Images/desirable%20corporate%20governance240902. pdf 218 BUSINESS ETHICS—AN INDIAN PERSPECTIVE CASE Study ON INSIDER TRADING (HLL–BBLIL MERGER) (The case is based on reports in the print and electronic media. The case is meant for academic purpose only. The writer has no intention to sully the reputations of the corporate or the executives discussed.) STATEMENT OF THE CASE The Indian capital market has witnessed several price-rigging and insider trading activities both of which are considered unlawful by the Securities and Exchange Board of India (SEBI). Price rigging occurs when persons acting in concert with each other collude to increase or decrease artificially the price of a security. Insider trading refers to a situation when a person having unpublished price-sensitive information such as financial results, expansion plans, take-over bids, etc. by virtue of his or her association with a company, trades its shares to make undue profits.1 This is a case that studies one such instance of alleged insider trading by officials of Hindustan Lever Limited (HLL, now known as Hindustan Unilever) when the company wanted a merger with its sister concern Brooke Bond Lipton India Limited (BBLIL). This is the first ever case of insider trading in India which was taken up by SEBI to scrutinize the manner of the involvement of a big company, HLL. It also exposes the major flaws in SEBI’s insider-trading regulations and the need to plug the loopholes in them. Although SEBI was investigating the case from May 1996, the final verdict was passed two years thereafter by the market regulator, which took the whole of corporate India by storm. ESTABLISHING THE CASE SEBI in its order that tried to establish an insider trading case against HLL management observed that it could be conclusively stated that while entering into the transaction for the purchase of 8,00,000 shares of BBLIL from the Unit Trust of India (UTI), HLL was acting on the basis of the privileged information in its possession, regarding the impending merger of BBLIL with HLL. It was pointed out by SEBI that in matters such as these it would be difficult to provide direct evidence by pointing out motives and intentions of the concerned individual players. ‘However, the chain of circumstances, the timing of the transaction, and other related factors demonstrates beyond doubt that the transaction was founded upon and effected on the basis of unpublished price sensitive information about the impending merger.’ 2 On 4 August 1997, SEBI issued a show cause notice to HLL claiming that there was prima facie evidence of the company indulging in insider trading, through the use of ‘unpublished price sensitive information’ prior to its merger with Brooke Bond Lipton India Ltd. (BBLIL). In March 1998, SEBI passed an exhaustive order, which sent shock waves through the country’s corporate sector. SEBI found HLL guilty of insider trading because it bought shares of BBLIL from UTI with the full knowledge that the two sister concerns were going to merge. Since it bought the shares before the merger was formally announced, SEBI held that HLL was using unpublished, price-sensitive information to trade, and was therefore, guilty of insider trading. SEBI directed HLL to pay UTI INR 34 million in compensation, and also initiated criminal proceedings against the five common directors of HLL and BBLIL: S. M. Datta, K. V. Dadiseth, R. Gopalakrishnan, A. Lahiri and M. K. Sharma, who were on the core team which discussed the merger. HISTORY OF THE CASE The case dates back to 1996 when the fast-moving consumer goods (FMCG) giant, Hindustan Lever, had decided to merge with its sister concern, Brooke Bond Lipton India Limited, so as to enable their parent company, Uniliver have a major stake in the merged entity. Both the companies informed the concerned stock exchanges of their desire to become a single entity by entering into a merger on 19 April 1996. However, much before the merger move became public, the share price and the volumes of BBLIL traded on the stock exchanges witnessed a steep hike. On 12 May 1996 SEBI, the market regulator, in an uncharacteristically swift move launched an investigation on HLL and on 4 August 1997 charged the company of indulging in insider trading. SEBI did not accuse any individual for the wrongdoing, but the company itself was accused of it. The culmination of the proceedings of the case took place on 11 March 1998 in the form of SEBI holding HLL guilty and prosecuting the five above-cited HLL directors for the offence of insider trading. QUESTIONS OF LAW AND ITS INTERPRETATIONS IN THE CASE CORPORATE ETHICS: INVESTORS’ RIGHTS, PRIVILEGES, PROBLEMS AND PROTECTION Naturally enough, Hindustan Lever decided to appeal against SEBI’s verdict to the Union Ministry of Finance, the appellate authority in such cases. The questions which were in everyone’s mind were two-fold: (i) Is HLL guilty of insider trading?; and (ii) Would SEBI’s charges stand legal scrutiny when contested, as there were several questions of law and its interpretations which would have to be settled? SEBI took the stand that only HLL knew about the forthcoming merger and it acted on the basis of such unpublished information it was privileged to know. According to SEBI, HLL and its directors misused such information. HLL was an ‘insider’ and by buying 800,000 shares of BBLIL from UTI (pre-merger), it violated the insider trading regulation. Shares were purchased from the UTI to ensure 51 per cent stake to Unilever in the post-merger company with the prior knowledge of share-swap ratio. On 17 January 1996, the merger decision made by the parent company, Unilever was communicated to the core team of directors by C. M. Jemmett, the parent company’s representative. In March 1996, HLL bought the shares from UTI. HLL announced the merger with BBLIL in April 1996. SEBI also charged HLL of acting in a manner inimical to the interests of thousands of ordinary shareholders. Besides, Hindustan Lever depleted its own resources by helping its holding company, Unilever obtain major stake in the merged entity. The funds that were shelled out by HLL to purchase BBLIL’s shares were to be extinguished and that too for the holding company. As per SEBI’s contention, this was against the interest of the ordinary shareholders. Further, SEBI charged that HLL deprived the country of precious foreign exchange, as Unilever would have invested nearly INR 450– 500 million to raise its holding to 51 per cent in the postmerger consolidated company. ARGUMENTS FOR AND AGAINST SEBI’S RULING SEBI’s notice to Hindustan Lever, the penalty the market regulator imposed on the company and its indictment of the Directors of the company not only created a storm in the Indian corporate sector, but also raised a number of legal issues relating to SEBI’s penal action and its sustainability by appellate authorities when contested by the company. These issues were as follows: (i) Whether HLL was an ‘insider’ or not; (ii) Whether or not the pre-merger information HLL had access to was ‘unpublished’; (iii) Whether or not HLL had any price-sensitive information with regard to the merger; and (iv) Whether or not HLL had gained any unfair advantage out of the deal. The first and most debated issue was concerning whether HLL was an insider at all. According to Clause 2(e) of SEBI’s regulations: ‘Insider means any person who is or was con- 219 nected with the company or is deemed to have been connected with the company, and who is reasonably expected to have access, by virtue of such connection, to unpublished price-sensitive information in respect of securities of the company, or who has received or has had access to such unpublished price-sensitive information.’ 3 To rebut this allegation of SEBI, HLL countered that though it was deemed to be connected to BBLIL, and though it knew about the merger before it bought BBLIL’s shares, it received the information only because it was one of the parties to the merger itself and not merely because of its connection to BBLIL. HLL stressed this distinction because, to be an ‘insider’, HLL should have received the information ‘by virtue of such connection’ with the other company. HLL’s defense centred on the fact that as an initiator and also as the transferee, it was the ‘primary party’ to the merger. M. K. Sharma, the Legal Director of HLL argued: ‘Nowhere in the world is the primary party to a merger considered to be an insider from the point of view of insider-trading.’4 SEBI refused to accept the company’s interpretation of the clause. It argued: ‘The phrase “by virtue of such connection” applied only to one kind of insider, ‘the connected’ or ‘deemed connected person’, who was expected to have access to information because of his/her connection.’ SEBI underscored the point that HLL also fell under the definition of someone ‘who was reasonably expected to have access by virtue of such connection’, as the core team of five common directors discussed the merger, and Unilever, the common parent, granted the ‘in principle’ approval, and besides, HLL was free to use the information to further the merger, but not to buy shares. There is a second part of the clause, argued SEBI that defined another kind of insider, who might not be connected to the company at all, but ‘who had received or has had access to such unpublished price sensitive information’. Therefore, SEBI argued that even if BBLIL was construed to be unconnected, HLL could still be an insider of the second type. Its order said, ‘If we were to accept HLL’s argument . . . it would permit a ‘connected’ or ‘deemed connected’ person to misuse the price-sensitive information because he has received the information independently’.5 The second issue raised in the case was whether or not the information, which HLL had access to, was ‘unpublished’. According to Clause 2(k) of SEBI’s Regulation on Insider Trading: ‘Unpublished price-sensitive information means any information which is of concern, directly or indirectly, to a company, and is not generally known or published by such company for general information, but which if published or known, is likely to materially affect the price of securities of that company in the market.’6 While SEBI argued that HLL has gone against this regulation, HLL contended that before the transaction, the merger was the subject of wide market and media speculation. After the formal announcement, press reports highlighted the fact that the merger caused no surprise at all to 220 BUSINESS ETHICS—AN INDIAN PERSPECTIVE anyone as it was part of the market grapevine for long. HLL pointed out that before the transaction, the share price of BBLIL moved up from INR 242 to INR 320 between January and March 1996, showing that the merger was ‘a generally known information’. HLL also pointed out that the Public Sector Mutual Fund, UTI was a large enough institutional player and, given the speculation, how could UTI have remained unaware that the merger was forthcoming? In spite of its being the second largest shareholder in both BBLIL and HLL, UTI did not complain against the transaction either formally to SEBI, or informally to HLL after the formal merger announcement. Moreover, HLL had, between the transaction and the formal announcement, privately told UTI of the merger. UTI also hosted an interinstitutional meeting to discuss it. UTI even sold HLL some more shares nine months later, though at a higher price. SEBI tried to show as proof that the information was not generally known to people at large by relying on an UTI official’s testimony that he was unaware of the merger, though he was, in his official capacity, concerned with the company. Though it had not defined either ‘unpublished’ or ‘generally known information’, SEBI officials were of the view that these could include press reports, even if unconfirmed by the company. ‘Since these reports were speculative, technically HLL’s knowledge was qualitatively better’. SEBI also claimed that one of the press reports carried a denial by the company. The third legal issue concerned the price-sensitive nature of the information regarding the merger. Section 2(k) of SEBI’s regulation laid down eight examples of price-sensitive information, which included inter alia ‘amalgamations, mergers, or takeovers’.7 HLL asserted that it was unaware of the swap ratio when the company bought BBLIL shares in March 1996. Further, it was not privy to any special price-sensitive information on the merger, as it had been highlighted by the media even before the official announcement. HLL also argued that both the companies, namely, itself and BBLIL involved in the deal were sister concerns and subsidiaries of Uniliver; operated in the same industry, and were large profit making enterprises with common recruitment of personnel. They had some common directors on their boards and were listed in several of the country’s stock exchanges, and their securities were actively traded. HLL argued that such being the case, information of the merger by itself was not enough to induce a reasonably knowledgeable investor to buy its shares until the share-swap ratio was known. The company thus argued that the merger information per se had little relevance to the issue. The only thing that was price sensitive was the swap ratio, and HLL was not aware of it when it purchased BBLIL shares from UTI. However SEBI, emphasized that the regulation cited explicitly defined ‘mergers’ as price-sensitive information. It said, ‘(the) swap ratio may be price-sensitive information, but that does not mean that information of the overall fact of merger is not price-sensitive.’8 The fourth issue that was debated between the contending parties was whether HLL had profited from the deal or gained any unfair advantage. In regard to this, neither the Act nor the Regulations stated that SEBI must prove that a profit was made or a loss was avoided. However, Section 15 of the Act prescribed that the regulator should consider ‘the amount of disproportionate gain or unfair advantage wherever quantifiable’,9 when levying penalties. With regard to this issue, HLL contended that the onus of proof of insider trading and the resultant gain by the concerned party rested with SEBI. The company also argued that it made no gain out of the deal: (i) After the merger, the company cancelled its BBLIL shareholding, and so financially there was no gain; (ii) HLL bought 800,000 shares from UTI at INR 350 per share at a premium of almost 10 per cent over the market price of INR 318; and (iii) HLL also contended that its intentions were only to consolidate Uniliver’s shareholdings, and to achieve this, it had cheaper options which it did not resort to, such as the issue of preferential shares either to Uniliver or to HLL. According to SEBI, HLL quoted the very provisions that helped the regulator to determine the penalty, not the violation itself. SEBl’s order said, ‘Making profit or avoiding loss is not a legal requirement under the regulation to establish the charge of insider trading. Section 15 . . .(is) only applicable in cases of levy of monetary penalties (and) has no bearing on determination of the contravention’.10 SEBI’s contention was that HLL did benefit from the deal inasmuch as the company could not predict how prices would move, after the merger announcement it might well have had to pay more for the BBLIL shares then. In support of its argument, it cited the instance that immediately after the merger announcement, BBLIL’s share price closed at INR 405, though it fell subsequently. Alternatively, if UTI had not sold, it would have got shares worth INR 488.3 million in the merged HLL, INR 208.3 million more than its sale price. WAS SEBI’S STAND JUSTIFIED? Experts maintain that SEBI as a market regulator has erred in its decision by favouring UTI and imposing a fine on HLL to pay INR 30.4 million as compensation to the public sector mutual fund. But being a regulator also calls for protection of the interests of all market players which essentially includes investors, both small ordinary and large institutional shareholders. Therefore, SEBI argued that it was justified in awarding compensation to UTI. But this line of argument also was countered by HLL when it explained that it had paid UTI INR 350 per share as against the then market price of INR 318. The interest for INR 280 million for 9 months at the rate of 18 per cent works out to INR 37.8 million, which is far more than the compensation set by SEBI. POSTSCRIPT CORPORATE ETHICS: INVESTORS’ RIGHTS, PRIVILEGES, PROBLEMS AND PROTECTION On 15 July 1998, the Union Finance Ministry, the appellate authority in all such cases had absolved HLL of charges of insider trading and struck down SEBI’s order of March 11, 1998 for prosecution of five of the company’s directors. The appellate authority consisting of Montek Singh Ahluwalia, Union Finance Secretary and C. M Vasudev, Special Secretary (Banking) upheld HLL’s view that its impending merger plan with BBLIL was “generally known” as it was widely speculated in the national media. The ministry said in its order: ‘An order of prosecution should be based on conclusive determination of all aspects of insider trading and on specific justification in terms of the gravity of the offence for these reasons. We hold that SEBI was not justified in ordering prosecution of the applicants.’11 The ministry held the view that the order of SEBI suffered from ‘procedural deficiencies and was also lacking in jurisdiction’.12 Stung by the tone and content of the ministry’s order, SEBI challenged the order before the Mumbai High Court. The appellate authority while reiterating its view as explained in the order saw it ‘as a good opportunity to clear up differences of opinion between the duo on the interpretations given to some crucial provisions of the SEBI Act. There are several grey areas in the SEBI Act’13 which led to conflicting interpretations in the HLL insider trading case. Moreover, the ministry would want the court to define clearly whether SEBI has the claimed powers to adjudicate a matter, go for prosecution or impose monetary penalties, all of which in the opinion of the Ministry was violative of the spirit in which the SEBI Act was legislated by the Parliament. CONCLUSION The charge against HLL had brought to the fore the debate over SEBI’s role as a watchdog of the Indian capital market and its ability to control financial crimes such as insider trading. It also highlighted the inability of its legal machinery to handle such cases. The case has also triggered the need for an urgent rehaul of SEBI’s regulations. With the changing scenario in the capital market, there is a pressing need to fine tune various policies and regulations guiding the transactions in the securities market. With tremendous growth in the capital market, and the diverse nature of transactions in a multiple product range, all of which have been impacted by technology-driven operations and explosion in communications, there is an urgent need for a system and structure of market regulation that will respond immediately, adequately and efficiently to challenges such as price rigging and insider trading. 221 KEY WORDS Insider trading ∑ Hindustan Lever Ltd ∑ Parent company ∑ Merger ∑ Brooke Bond Lipton India Ltd ∑ Unit Trust of India ∑ Legal controversy ∑ SEBI ∑ Public announcement ∑ Conducting enquiries ∑ Show cause notice ∑ Criminal proceedings ∑ Compensation ∑ Appellate authority ∑ Mumbai High Court ∑ Union Finance Ministry DISCUSSION QUESTIONS 1. Explain in your own words the insider trading case relating to HLL-BBLIL. 2. In your perception and judgement, do you think SEBI had sufficient reasons to charge HLL of insider trading and slap a fine on the company? 3. On what grounds did the Union Finance Ministry, the appellate authority, turn down SEBI’s orders and absolve HLL of the charge of insider trading? Was it justified in doing so? NOTES 1. HowToLaw.co.nz, “How to: The Rules Against Insider Trading,” 2003, available at www.howtolaw.co.nz/ html/ml226.aspsrini 2. M. Arif Mian, “In the Matter of Show Cause Notice No. SMD/TO/04/2006 Dated April 05, 2006 Issued to Mr. Mahmood Ahmed and Siyyid Tahir Nawazish Under Section 15B of the Securities & Exchange Ordinance, 1969,” Securities and Exchange Commission of Pakistan, 2006, available at www.secp.gov.pk/orders /pdf/Orders_06/ Jun_23_MrMahmoodNawazish.pdf 3. Clause 2(e), chapter I, Securities and Exchange Board of India [(Prohibition of Insider Trading)] Regulations, 1992. Page II. 359, cited in Ravi Puliani and Mahesh Puliani, eds., Bharat’s Manual of SEBI, Acts, Rules, Regulations, Guidelines, Circulars, Etc. (New Delhi: Bharat Law House, 2003) 4. The Case of Insider Trading (HLL-BBLIL Merger), available at www.icmr.icfai.org/casestudies/catalogue/Finance/ Finance%20-%20Case%20of%20insider%20trading% 20-%20HLL-BBLIL%20Merger.htm 5. www.icmrindia.org/casestudiedcatalogue/Finance/FINCO 14. htm 6. SEBI (Insider Trading) (Amendment) Regulations, 2002, cited in Ravi Puliani and Mahesh Puliani, eds., Bharat’s Manual of SEBI, Acts, Rules, Regulations, Guidelines, Circulars Etc. (New Delhi: Bharat Law House, 2003). 222 BUSINESS ETHICS—AN INDIAN PERSPECTIVE 7. A. C. Fernando, Corporate Governance, Principles, Policies and Practices (New Delhi: Pearson Education, 2006). 8. Ibid. 9. Ibid. FURTHER READINGS Fernando, A. C., Corporate Governance, Principles, Policies and Practices (New Delhi: Pearson Education, 2006). 10. Ibid. ICMR, “The Case of Insider Trading (HLL-BBLIL Merger)” (Hyderabad: ICFAI University, 1998). 11. UNI, “Montek-led Panel Absolves HLL on Insider Trading,” Rediff on the net,15 July 1998, available at www.rediff.com/business/1998/jul/15hll.htm Krishnan, V. C. and Dutta S., “The Case of Insider Trading (HLL-BBLIL Merger),” March 2002 (Hyderabad: ICMR, ICFAI University, 2002). 12. Ibid. 13. “Appellate Authority to Challenge SEBI Arguments in HLL Insider Trading Case,” Financial Express, 25 September 1998, available at www.expressindia.com /fe / daily/ 19980925/26855564.html Puliani, R. and Puliani, M., eds., Bharat’s Manual of SEBI, Rules Regulations, Guidelines Circulars Etc. (New Delhi: Bharat Law House, 2003). Reports on Corporate Governance, ECONOMICA India (New Delhi: Academic Foundation, 2004). Nine CHAPTER Handmaid of Ethics: Corporate Social Responsibility INTRODUCTION We live in an age in which companies have grown so large that they control much of the earth’s resources, and intervene in so many areas of social life, that they must be held responsible towards society and the environment. In India, as in the rest of the world, there is a growing awareness that capital markets and corporations are, after all, created by society and must therefore serve it, not merely profit from it. In the age of globalization, corporations and other business enterprises are no longer confined to the traditional boundaries of the Nation-State. One of the key characteristics of globalization is the spread of the market and the change in the mode of production—the centralized mode has given way to a highly decentralized one that has spread across the world. In the last 20 years, multinational corporations have played a key role in defining markets and influencing the behaviour of a large number of consumers. Globalization and liberalization have provided a great opportunity for corporations to be globally competitive by expanding their production-base and market share. The situation poses a great challenge to the sustainability and viability of such mega-businesses, particularly in the context of the emerging discontent against these multinational corporations in different parts of the world.1 There has been a widespread protest against the dominance of multinational companies. The developments in information technology and the effectiveness of knowledge-based economies have led to the creation of a new model of corporate governance. Business leaders are now concerned about the responses of the community and the sustainability of the environment. We need to analyse the new trends in corporate social responsibility (CSR) against the backdrop of these changes. The issue of social responsibility of business evokes varying—and often extreme—responses from both the intelligentsia and businessmen. Economists like Adam Smith and Milton Friedman were of the opinion that the only responsibility of business was to perform its economic functions efficiently and provide goods and services to society and earn for themselves maximum profit and that it was better to leave social functions to other institutions of the society like the government. To Adam Smith, ‘It is the profit-driven market system, also called price mechanism that drives business firms to promote social welfare, though they work for private gain’. He observed further: ‘Every individual endeavours to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end, which was no part of his intention. By pursuing his own interest, he frequently promotes that of society more effectively than when he really intends to promote it.’2 Likewise, Prof. Milton Friedman does not give much credit to the concept of social responsibility. To Friedman, the advocacy of social responsibility of business is the green signal to pure 224 BUSINESS ETHICS—AN INDIAN PERSPECTIVE socialism.3 He argued that business has no other social responsibility excepting making profits within legal and moral rules set by society. ‘Few trends could so thoroughly undermine the very foundations of our free society as acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.’4 However, those holding the opposite view have criticized this highly materialistic viewpoint on several grounds. In their perception, governments cannot and need not be the sole repository for promoting the welfare of masses. It is an area where the corporate sector can play a significant role. They assert that it is imperative for business to be socially responsible. Prof. Paul Samuelson, for instance, advocates a spirit of social responsibility as an inherent feature of a modern business firm. This view is based on the argument that business organizations, corporate or otherwise, are part of the society and have to serve primarily its interests rather than work for the narrow economic gains such as making of profit. T. F. Bradsha, a past president of the Atlantic Richfield Company in the United States, was of the view that Friedman ignored the fact that as a human being, a businessman is under pressure to fit within the social pattern to do something for society, more than making profit for himself. Further, Friedman has not taken into consideration the fact that in an explosively fast changing world, a businessman is judged on two counts—the social goals he meets, apart from the profits he makes.5 Further, Dr Clark C. Abt, the president of the Abt Associates Inc., Cambridge, in the United States, felt that business organizations while determining the socially responsible behaviour should first analyse its impact on short-term and long-term profitability of the organization. According to Prof. Robert Dahl, a well-known political theorist, it is obligatory on part of business organizations to be socially responsible as they primarily exist to benefit society. He expressed his view thus: ‘Today, it is absurd to regard the corporation simply as an enterprise established for the sole purpose of allowing profit making. We, the citizens, give them special rights, powers and privileges, protection and benefits on the understanding that their activities will fulfill our purposes.’6 Corporations cannot exist without our letting them to do so. From our part we let them to exist only because they are beneficial to us. Notwithstanding all these controversial thoughts, the concept of corporate social responsibility has come to mean that the responsibility of a corporate to the society is an inalienable part of its operations and strategy. CSR is about how companies manage the business process to produce an overall positive impact on society. Let us consider Fig. 9.1. Companies need to answer two questions relating to their operations: 1. The quality of their management—both in terms of people and processes (the inner circle). 2. The nature and quality of their impact on society in various areas. Fig. 9.1 The Business in Society in Relation to Its Responsibility Source: Mallen Baker, Corporate Social Responsibility—What Does It Mean?, 2007, available at www.mallenbaker.net/csr/ CSRfiles/definition.html. Courtesy: Mallen Baker HANDMAID OF ETHICS: CORPORATE SOCIAL RESPONSIBILITY Outside stakeholders are taking an increasing interest in the activity of the company. Most look to the outer circle—what the company has actually done, good or bad, in terms of its products and services, in terms of its impact on the environment and on local communities, or in how it treats and develops its workforce. Out of the various stakeholders, it is financial analysts who are predominantly focused on the quality of management as an indicator of likely future performance. WHY SOCIAL RESPONSIBILITY OF BUSINESS? ‘The business of business is business’ was the motto of businesspersons in early times. Narrowly interpreted, it would mean that corporations have only one responsibility, the single-minded pursuit of profit. To economists like Adam Smith and Milton Friedman, in a capitalist society profit maximization by the continued increase of efficiency is the most socially responsible way of conducting business. This implies making quick money, with utter disregard for the responsibility of business towards society. This limited view of business would prove to be counter productive in the long run. But on the other hand, the long range view of business, which would imply an aim at the long term gains rather than at quick returns, would take into account the important dimension of social responsibility. The ethical and social behaviour of corporations is essential for the generation of profit, owing its source to the reputation the corporation would acquire in view of its social behaviour. James Burke, the chairman of the well-known consumer product and pharmaceutical company, Johnson & Johnson said this: ‘I have long harboured the belief that the most successful corporations in this country, the ones that have delivered outstanding results over a long period of time, were driven by a simple moral imperative, namely serving the public in the broadest possible sense better than their competitors.’ 7 If we are to compete effectively in the global market, corporations must take a long, hard look at their values, practices and assumptions. They need to question their accepted modes of behaviour, promulgating new values and set up new standards of conduct which are openly held and shared within the corporation, while proclaimed to the outside world. ACCOUNTABILITY TO SOCIETY There is yet another reason why corporations should be conscious of their ‘socia1 responsibility’. In a democratic society any kind of enterprise exists for the sake of society. If private enterprise is justified and allowed to exist it is because it is seen to contribute better than public enterprise to the common good. It produces better goods and functions more efficiently, thanks to the encouragement given to individual initiatives. At the same time, private enterprise is not encouraged because individuals may accumulate wealth for their own exclusive and selfish benefit at the expense of the public. Industries are allowed to exist because they are perceived by the public to be useful in the attainment of the personal, social and material goals of the people. It is because of this ethical perception that the employees of TISCO and the general public protested in 1977 when the then Union Minister for Industry, George Fernandes attempted to nationalize TISCO. On the other hand, when the public perceives that certain corporations do not function in the general interest of the nation it does not object to their take-over by the government, as it happened in the nationalization of the coal fields, the oil industry and the Indian Copper Corporation. Since corporations exist for the sake of the public, they are accountable to the public and have a social responsibility. CORPORATIONS’ DEBT TO SOCIETY Corporations, whether public or private, draw much from society. No corporation is an island in itself. It depends on society for a developed infrastructure such as roads, water supply, electricity and an educated work force. It also depends on society for the maintenance of law and order, public health, transport facilities and for reaching out to its customers through the mass media. Finally, all consumers of its finished products are drawn from society. If a corporation draws so much from society it has to make its own contribution to society. It has a debt to pay to society. In the first place, a corporation has to behave as a good citizen. This is to be shown in the faithful and full payment of taxes, the observation of all local and national laws and perhaps even going beyond the law in matters of pollution, of standards of operational and product safety, and energy and resource conservation. The corporation has to donate generously towards causes of public welfare and must get itself directly involved, in social welfare programmes. 225 226 BUSINESS ETHICS—AN INDIAN PERSPECTIVE It is because of these aspects of social responsibility and public accountability that corporations have to consider not only the interests of its shareholders but also those of the workers, consumers, suppliers, the government and the general public who are its stakeholders. In short, corporations because of their social responsibility have to consider themselves as the ‘custodians of public welfare’. DEFINITIONS OF CSR What is corporate social responsibility? It is not as simple as it sounds. The definitions differ vastly according to the perception and sensitivity of the analyst. The World Business Council for Sustainable Development defines CSR thus: ‘Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.’8 The same report gave some evidence of the different perceptions of what this should mean, from a number of different societies across the world. Definitions as different as ‘CSR is about capacity building for sustainable livelihoods. It respects cultural differences and funds the business opportunities in building the skills of employees, the community and the government’ from Ghana, through to ‘CSR is about business giving back to society’ from the Philippines.9 In the United States, CSR has been defined traditionally much more in terms of a philanthropic model. Companies make profits unhindered except by fulfilling their duty to pay taxes. Then they donate a certain share of the profits to charitable causes. It is seen as tainting the act for the company to receive any benefit from the giving. The European model is much more focused on operating the core business in a socially responsible way, complemented by investment in communities for solid business case reasons. It is believed that this model is more sustainable because 1. social responsibility becomes an integral part of the wealth creation process—which if managed properly should enhance the competitiveness of business and maximize the value of wealth creation to society; and 2. when times get hard, there is the incentive to practise CSR more and better—if it is a philanthropic exercise which is peripheral to the main business, it will always be the first thing to go when push comes to shove. But as with any process based on the collective activities of communities of human beings (as companies are) there is no ‘one size fits all’. In different countries, there will be different priorities and values that will shape how business acts. Today, leading practitioners of CSR believe that CSR is an integral part of the wealth creation process and that it should enhance competitiveness of business and help the company in times of crisis. The stakeholder theory of CSR stresses that it is a manager’s duty to balance the shareholders’ financial interests against the interests of other stakeholders, such as employees, customers and the local community. Nobel laureate, economist Milton Friedman, says: ‘There is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it engages in open and free competition, without deception or fraud.’10 Some experts look at ‘CSR as the golden mean between capitalist and communist ways of thought as far as business is concerned’.11 To Henry Ford, ‘The purpose of business is to do as much good as we can, everywhere for everybody concerned . . . and incidentally to make money’.12 Going one step further, Kenneth Dayton, former chairman of the Dayton–Hudson Corporation, insisted: ‘We are in business to make maximum profit for our shareholders. We are in business . . . to serve society. Profit is our reward for doing it well. If business does not serve society, society will not long tolerate our profits or even our existence.’13 The meaning of the concept of CSR seems to differ from person to person according to his or her own sensitivity. To Dr Manmohan Singh, Prime Minister of India, ‘Corporate social responsibility is no philanthropy. It is not charity. It is an investment in our collective future’.14 The simplest and the most significant definition of CSR was given by Mahatma Gandhi who said: ‘Wealth created from society has to be ploughed back into society.’15 The sum and substance of all these definitions can be put into the following propositions: 1. It is an attempt made by companies to be voluntarily responsible to ethical and social considerations. 2. It is not a legal binding for the company, unlike corporate accountability (which makes company adhere to legal and social norms). HANDMAID OF ETHICS: CORPORATE SOCIAL RESPONSIBILITY 3. It is a set of obligations to pursue those policies, to make those decisions, or to follow those lines of action which are desirable in terms of the objectives and values of our society.16 4. The set of obligations an organization has to project, enhance, and otherwise work with to the betterment of the society in which it functions. 5. It is the overall relationship of the corporate with all of its stakeholders. These include customers, employees, communities, owners/investors, government, suppliers and competitors. Elements of social responsibility include investment in community outreach, employee relations, creation and maintenance of employment, environmental stewardship and financial performance. 6. The social responsibility of business will cover the economic, legal, ethical and environmental expectations society has placed on organizations at a given point of time.17 This could be explained by the following equation: Total corporate social responsibility = economic responsibilities + legal responsibilities + ethical responsibilities + philanthropic responsibilities 7. The socially responsible firm should strive to: ∑ make a profit; ∑ obey the law; ∑ be ethical; and ∑ be a good corporate citizen. 8. Social responsibility of business is temporal and society-based, that is: ∑ it differs from society to society; and ∑ it changes over time. 9. Societal differences exist, such that ∑ each society has a unique history, culture and institution. Some societies have few strong, formal institutions (government, business, organized religion) and rely more on informal institutions (family, clan, custom); and ∑ each society demands and receives different roles and actions from particular institutions. Most societies have strong roles and behavioural expectations for some institutions and weaker roles/expectations for others. What may be the responsibility of the family in one society may be the responsibility of government, religion, or business in another (income, security). For instance, in countries like India, governments become loco parentis for school-going children and provide them food, clothes, bicycles, footwear and free tuition to encourage literacy and empowerment amongst the poor. Therefore, the responsibilities of business organizations for social purposes vary considerably. 10. The concept of social responsibility for business is probably most advanced in the United States and in ‘Western’ societies than in the developing and emerging economies. 11. Today there is an even more expansive view: ‘To protect, enhance, and otherwise work to the betterment of society. ….’ Thus, broadly, the views governing corporate social responsibility may be classified into: classical economic model and socioeconomic model. THE CLASSICAL ECONOMIC MODEL ∑ Adam Smith, father of the classical economic model, believed that an ‘invisible hand’ promoted the pubic welfare. ∑ Smith believed that the public interest was served best by individuals pursuing their own self-interests. THE SOCIOECONOMIC MODEL ∑ Business is seen as one sub-system among many in a highly interdependent society. ∑ Recognizes that companies have stakeholders other than their stockholders. ∑ A stakeholder audit allows companies to systematically identify all parties that could possibly be impacted by the company’s performance. ∑ Business has an obligation to respond to the needs of all stakeholders while pursuing its profit. 227 228 BUSINESS ETHICS—AN INDIAN PERSPECTIVE TODAY’S CORPORATE SOCIAL RESPONSIBILITY Today’s corporate social responsibility is to ensure the betterment of the society in which it functions. Possible reasons for CSR achieving such importance may be ∑ the result of greater acceptance of business as linked to its external environment; ∑ greater professionalism of management; and ∑ drawing of managers from all levels of the general society. The concept of corporate social performance includes a business organization’s – configuration of principles of social responsibility; – process of social responsiveness; and – policies, programmes and observable outcomes as they relate to the firm’s societal relationships. Corporate social performance is not only acceptance of the idea of social responsibility, but a proactive approach (seeking out needs and implementing projects). CSR AND THE STAKEHOLDER CSR is essentially a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with stakeholders on a voluntary basis. Stakeholders are those organizations and individuals who have taken an interest or ‘stake’ in the business or corporation and its success. That includes clients, the population of small business people, other business assistance organizations, other economic development organizations, legislators at the country, federal, and state levels, executive branches of government, executive departments and agencies, the staff and contracted consultants and trainers, vendors and taxpayers. The list is very broad and inclusive. The development of CSR reflects the growing expectations of the community and stakeholders of the evolving role of companies in society and the response of companies to growing environmental, social and economic pressures. By committing voluntarily to CSR initiatives companies are making an investment in their future.18 Some of the driving forces behind the evolution of CSR are: ∑ ∑ ∑ ∑ concerns and expectations from citizens, consumers, public authorities and investors; decisions made by individuals and institutions influenced by social criteria; concerns about the impact of economic activity on the environment; and increased transparency of business activities because of the developments in information technology. IMPLEMENTATION OF CSR The systematic implementation of CSR means: 1. the adoption of strong organizational values and norms depicting behaviours that are appropriate towards a variety of stakeholders; and 2. the continuous generation of intelligence about stakeholder issues, along with positive responses to these issues. It is obvious that the pressure on business to play a role in social issues will continue to grow. Over the last ten years, those institutions which have grown in power and influence have been those which can operate effectively within a global sphere of operations. These are effectively the corporations and the NGOs. Those institutions which are predominantly tied to the Nation State have been finding themselves increasingly frustrated at their lack of ability to shape and manage events. These include national governments, police, judiciary and others. There is a growing interest, therefore, in business taking a lead in addressing those issues in which they have an interest where national governments have failed to come up with a solution. That is not to say businesses will necessarily provide the answers—but awareness is growing that they are occasionally better placed to do so than any other actors taking an interest. THEORETICAL JUSTIFICATION FOR CSR Social scientists have formulated several theories that justify the importance of corporations engaged in promoting welfare of the society in which they operate. These theories are described next. TRUSTEESHIP MODEL HANDMAID OF ETHICS: CORPORATE SOCIAL RESPONSIBILITY The trusteeship model has been evolved on a realistic and descriptive perspective. It considers the current situation of a public limited company reflecting that it is a social institution having a corporate personality as envisaged by the European concept of what constitutes a corporation. Further, several authorities on the subject reiterate the view and argue that a public corporation is not the creation of a private contract and thus not owned by any individual. Ownership is, by definition, where the owner has exclusive rights of possession, use, gain and legal disposition of a material object. Yet shareholders merely own their shares in a company and trade their shares with others in the stock market. They do not have rights to possess and use the assets of the company, to make decision about the direction of the company, or to transfer the assets of the company to others. The residual claims of the shareholders are determined by the company and if the company’s performance does not satisfy the shareholders’ requirements, the shareholders are left with a single option of ‘exit’ rather than ‘voice’, as shareholders in general are in no way able to monitor the management effectively and neither are they interested in running corporate business. In this sense, the assumption that the corporation is owned by the shareholders is in fact meaningless. To Kay and Silberston,19 ownership rights are not important to business. Many public institutions such as museums, universities, and libraries perform well without clear owners. In fact, the Indian Company Law does not overtly confer ownership rights on shareholders because in its view the corporation is an independent legal entity different from its members. It is also implied therein that share holders are merely the residual claimants of the company. The company has its own assets, rights and duties, and has its own will and capacity to act and is responsible for its own actions. Therefore, it is generally held that management is not the agent of shareholders. Instead, Kay and Silberston suggest that managers are trustees of the corporation. The trusteeship model differs from the agency model in two ways. First, the fiduciary duty of the trustees is to sustain the corporation’s assets, including not only the shareholders’ wealth, but also broader stakeholders’ value such as the skills of employees, the expectations of customers and suppliers, and the company’s reputation in the community. Managers as trustees are to promote the broader interests of the corporation as a whole, not solely the financial interest of its shareholders. Second, managers have to balance the conflicting interests of current and future stakeholders and to develop the company’s capacities in a long-term perspective rather than focus on shortterm shareholder gains. To establish a trusteeship model, they ask for statutory changes in corporate governance, such as changing the current statutory duties of the directors, ensuring the power of independent directors to nominate directors and select senior managers and appoint CEOs for a fixed 4-year term and so on. SOCIAL ENTITY THEORY This theory has, in recent years, been promoted by three major social thinkers—the democratic political theorist, Robert Dahl (1985) using economic democracy, Paul Hirst (1994) using associationalism, and Jonathan Boswell (1990)20 using communication notion of property. The social entity conception of the corporation regards the company not as a private association united by individual property rights, but as a public association constituted through political and legal processes and as a social entity for pursuing collective goals with public objectives. The social entity theory views the corporation as a social institution based on the grounds of fundamental value and moral order of the community. Sullivan and others argue that corporations are granted charter entity for a commercial purpose, but more importantly, as a social entity for general community needs. The corporation-identified executives are representatives and guardians of all corporate stakeholder’s interests. It is implied in the manner in which corporations are formed and managed that their executives are guardians of the overall interests of all stakeholders. The recent resurgence of the moral aspect of stakeholder perspectives has been in general associated with the social entity conception of the corporation. PLURALISTIC MODEL The pluralistic model supports the idea of multiple interests of stakeholders, rather than shareholder interest alone. It argues that the corporation should serve and accommodate wider stakeholder interests in order to make itself more efficient and more legitimate. It suggests that corporate governance should not move away from ownership rights, but that such rights should not be solely claimed by, and thus concentrated in, shareholders; ownership rights can also be claimed by other stakeholders, particularly employees. Stakeholders who make firm specific investments 229 230 BUSINESS ETHICS—AN INDIAN PERSPECTIVE and contributions and bear risks in the corporation should have residual claims and should participate in the corporate decision making to enhance corporate efficiency. It is asserted that if corporations practise stakeholder management, their performance such as profitability, stability and growth will be more successful. WHAT ARE CORPORATIONS EXPECTED TO DO? In support of the view that corporations have a moral and social obligation towards society, some economists argue that corporations depend on society for a number of facilities they enjoy such as developed infrastructure, peace and tranquillity in the work place and a trained workforce. They also depend on society for the maintenance of law and order, without which they cannot carry on their productive or distributive activities, and also for reaching to their customers through mass media. Consumers of products, without whom they have no raison d être, are all drawn from society. If a business body draws so much from society, it has to make its own contribution to the welfare of the latter. It has a debt to pay in the first place. It has to behave as a good citizen inasmuch as it has to pay its taxes in full and on time, observe the laws of the land and, going beyond it, ensure a clean and healthy environment, maintain standards of operational and product safety and help in energy and resource conservation. The corporations among the business community also have a moral responsibility to take a long and hard look at their values, practices and assumptions. They have to ensure that the country’s fair name is not compromised during their deals abroad, either as exporters or importers. They have to ensure maintenance of the quality of their products, keeping up to the delivery schedule, etc. In the Indian context, socially responsible corporations are expected to create employment opportunities for the disadvantaged persons by directly setting up ancillaries; provide financial resources in several ways such as financing customer-related marketing; share marketing, technical and management skills; make available marketing support by purchasing both products and services from disadvantaged communities; by sharing company facilities; and donating the company’s products and services.21 PRIVATE SECTOR NEEDS GOODWILL OF THE SOCIETY For historical and other reasons, private enterprise is not favoured much in countries like ours because they accumulate wealth for their own exclusive benefit at the expense of the public, and is not generally seen to contribute to the common good. Corporations should, for their own good, come forward to erase such perception in the minds of the common public. In an era of intense competition accentuated by the advent of MNCs, it is necessary for them to generate and sustain goodwill among their clients and the general public. Active participation in social welfare projects will definitely improve their visibility and place them favourably in public esteem. They should understand the fact that economic goals and social responsibility objectives need not be contradictory to each other and that these could be achieved simultaneously. They should donate generously towards public causes and must get themselves directly involved in social welfare programmes, if they have to create goodwill among the public, and to avoid being branded as profiteers and self-seekers. To summarize: ∑ Private sector is generally seen as not favouring the society. The trend is accumulation of wealth for its own cause and at the expense of the public. ∑ Corporations need to erase this perception, with the intense competition in mind. ∑ They should participate in social welfare projects which will improve public esteem. ∑ Participation in social welfare projects ensures the simultaneous achievement of economic and social responsibility goals. ∑ The private sector also has to maintain the country’s fair name when they export and import by maintaining the quality of products and sticking to delivery schedules. ∑ Corporations should create employment opportunities for the disadvantaged. MODELS FOR IMPLEMENTATION OF CSR Though there are several theories to justify CSR activities of corporations, not all of them lend themselves to be put into practice. A model for implementation of CSR is one that enables organizations to apply a particular concept or theory as a workable proposition. Before managers can apply the concept, they need a simple working definition of it, so that there is the required conceptual clarity. For instance, CSR can be associated HANDMAID OF ETHICS: CORPORATE SOCIAL RESPONSIBILITY g Table 9.1 Four Models of Corporate Social Responsibility 231 Model Emphasis Proponent Statist State ownership and legal requirements determine corporate responsibilities Jawaharlal Nehru Companies respond to the needs of stakeholders—customers, creditors, employees, communities, etc. R. Edward Freeman Ethical Liberal Stakeholder Voluntary commitment by companies to public welfare Corporate responsibilities limited to private owners (shareholders) Mahatma Gandhi Milton Friedman with philanthropy or a business strategy. When several such alternatives are available, a company may choose a model that is suitable to its core competence. There are four models of corporate responsibility globally (see Table 9.1). 1. Ethical model: In the ethical model, there is a voluntary commitment to public welfare. It can be traced back to the pioneering efforts of 19th century corporate philanthropists such as, Cadbury Brothers in England. In India, it has its roots in the Gandhian philosophy of trusteeship. Examples of this model are found in the Tatas, Birlas, Infosys, Dr Reddy’s Labs and Reliance Industries—who have provided cash for social welfare projects, community investment trusts and schools. Many companies, particularly family-run businesses, continue to engage in philanthropic activities based on this model. 2. Statist model: This model is based on the state-owned public sector units (PSUs). It is based on the socialist and Nehruvian mixed economy format that India had adopted for its economy. Propounded by Jawaharlal Nehru, this model calls for state ownership and legal requirements of CSR. The PSUs provide housing and schools to workers. They have existed in India since 1947, such as in Bhilai and Bokaro. The inspiration has been drawn from the labour laws and management principles. But this model is now being challenged by the trend of disinvestment and privatization. 3. Liberal model: This is the liberal approach where the belief is that the free market would take care of corporate responsibility. It is drawn from Milton Friedman’s view which states that a company’s responsibility lies mainly in improving the economic bottom-line and increasing the wealth of the shareholder. It is sufficient for the corporate to obey the law and generate wealth, which can be directed towards social ends through fiscal policy and charitable choices. 4. Stakeholder model: Since the late 1980s and through the 1990s, there has been an increasing realization that business has a social responsibility. It is generally understood that a stakeholder in an organization is an individual or a group of individuals who can affect or is affected by the objectives and activities of the organization. This has come about through public campaigns and pressure on the shareholders. Companies like Nike have been sourcing raw material from developing countries. There were allegations of sweatshops being run by Nike and it had to change its practices. Corporate responsibility now means ethical and environment-friendly practices. Companies are expected to stick to the triple bottomline of economic, social and environmental responsibility towards workers, the shareholders and the community. CSR AS A BUSINESS STRATEGY FOR SUSTAINABLE DEVELOPMENT What is CSR strategy? To IBM, CSR strategy refers to enhancing stakeholder value and the delivery of measurable results to society at large.22 In the context of developing societies, “CSR is about capacity building for sustainable livelihoods”. When CSR is adopted as a business strategy for sustainable development, it goes to improve corporate performance. It offers manifold benefits to corporations both internally and externally. Externally, it creates a positive image and goodwill among the public and earns a special respect amongst peers, customers, government agencies, investors and media, all of which go a long way in promoting longterm shareholder value and sustainable development. Internally, it cultivates a sense of loyalty and trust amongst employees in organizational ethics. More significantly, it serves as a soothing diversion from the mundane workplace routine and gives workers a feeling of satisfaction and a meaning to their lives. Companies like Infosys, Wipro, Satyam, Tata Steel, Dr Reddy’s Lab and Polaris, for instance, find ways and means of getting their employees interested in CSR activities. There are reasons to believe that such employee involvement has reduced attrition rates in these organizations. It is because of all these positive factors that organizations 232 BUSINESS ETHICS—AN INDIAN PERSPECTIVE involve themselves in socially responsible investing (SRI). SRI is gaining importance because of two factors: (i) Socially responsible companies offer long term value; and (ii) evaluating a company’s social impact on top of its financial performance provides an additional hedge against risk.23 For instance, a Chennai-based automotive parts manufacturing company faced a severe risk at its new plant in Pune when a posse of thugs barged into the plant and demanded INR 2.5 million as ransom when several locals who were the beneficiaries of the company’s CSR unit came to the rescue of the company and offered to guard it against the extortionists in future. Many MNCs which have socio-political problems in emerging markets in which they operate, find socially responsible investing as one of the means to blunt the adverse sentiments against them and as a strategy to ensure their sustainable development. Most critics of CSR are against it because they look at it separately from business strategy. CSR is an outcome for business models, which goes beyond just financial viability. Cost of helping communities to develop becomes cost of the business—like materials or labour. Billions of poor people have a potential to become part of the market, if helped. Before looking upon the poor as a potential market, the future business models must build sensitivities and capabilities to reach out to the poor.24 Businesspersons fail to appreciate the fact that CSR is a key constituent of business strategy, as to many of them it is pure philanthropy and ‘do good’ activity unconnected with their business. Sound strategy provides business with a source of competitive advantage. ‘For any competitive advantage to be sustainable, the strategy must be acceptable to the wider environment in which the firm competes.’25 Lack of CSR or its improper execution is bound to threaten the competitive advantage a corporate may hold in an industry. Besides there are certain costs associated with being a socially irresponsible organization. Nike suffered significant damage to its brand and sales when it was brought to light that the company had poor labour standards in its supply chain. On the other hand, Nike gained its brand and sales once it started improving its labour standards down the line and publicized its efforts to comply with them. Nowadays, Greenpeace and other activist groups highlight socially irresponsible corporate behaviour that leads sometimes to voluntary corrective action on the part of the companies themselves, and at other times invites government action as we have seen in several instances of public interest. Practitioners of CSR stress the fact that it is a cost-effective way to gain competitive advantage. Corporations in their effort to engage in strategic CSR aim to match business objectives with the needs of the community. For instance, in the rain-starved Wada taluk of Thane district of Maharashtra where its bottling plant is located, Coca Cola has been harvesting rain water since 2003 to recharge groundwater and has been supplying water to people in summer, in addition to instituting water supply schemes in some villages. All these CSR efforts of the company have been integrated with its business strategy and have helped it to earn the goodwill of village folks, apart from reducing absenteeism at the workplace. An IT company for instance could help educate school or college students in its neighbourhood, who could become their potential employees. Likewise, a BPO can create its future workforce by providing vocational and soft skills training to the children in neighbouring communities. This symbiosis between corporations and the surrounding communities will go a long way in integrating CSR and business strategy for mutual benefit. EVALUATION OF CSR ACTIVITY How to evaluate CSR activities of corporations? Experts suggest three basic principles to measure the impact of CSR—sustainability, accountability and transparency.26 Sustainability of CSR activity implies that there must be a clear linkage established between use of resources and their regeneration, like the soft drink industry that uses plenty of water trying to maintain water tables through rain harvesting and recycling; or a paper manufacturing company that destroys thousand of trees to make paper pulp replacing an equal number of saplings. Accountability lies in an organization assuming responsibility for the effects of its action that have impacted the external environment. This will call for the organization compensating for the cost of damages caused by its actions, by creating benefits that exceed costs to all affected stakeholders; and transparency means that the organization reports the impacts of its action to all stakeholders truthfully without misguiding them in any manner. This will enable stakeholders to have a full and fair view of the situation. WHY A LUKEWARM RESPONSE TO CSR IN INDIA? In spite of such strategy-based advantages, why does the Indian industry lag behind those in advanced countries in socially responsible investment? A survey conducted by Indianngos.com27 shows that the major HANDMAID OF ETHICS: CORPORATE SOCIAL RESPONSIBILITY obstacles to CSR in India are lack of awareness and conviction amongst the managers, and lack of impact analysis, that is, a system of measuring the impact of social activities. Absence of a clear linkage between CSR and financial success is another barrier to CSR. Besides, there are not enough trained managers and experienced advisers available to overcome these obstacles and support the process. ADVANTAGES OF CSR There are several advantages to corporations when they exhibit a sense of CSR and implement it. These advantages are the following: 1. Improved financial performance: Sometime ago a Harvard University study (www.risc.org.uk/readingroom/csr/csr_mainconcepts.pdf) has found that ‘stakeholder balanced’ companies showed four times the growth rate and eight times the employment generation when compared to companies that focused only on shareholders and profit maximization. 2. Enhanced brand image and reputation: A company considered socially responsible can benefit both by its enhanced reputation with the public, as well as its reputation within the business community, that would enhance the company’s ability to attract capital. Studies have found that excellent employee, customer and community relations are more important than strong shareholder returns in earning corporations a place in Fortune magazine’s annual ‘Most Admired Companies’ list. 3. Increased sales and customer loyalty: A large number of studies have suggested an increase in the sales of companies considered to be socially responsible. Customers have shown a desire to buy products based on value-based criteria such as ‘sweatshop-free’ and ‘child labour-free’ clothing, products with minimal environmental impact, and absence of genetically modified materials or ingredients. A 2001 Hill & Knowlton/Harris Interactive Poll showed that 79 per cent of Americans take corporate citizenship into account when deciding whether to buy a particular company’s product; 36 per cent of Americans consider corporate citizenship an important factor when making purchasing decisions. A 2002 Cone Corporate Citizenship Study found that 9 per cent of the American consumers, on knowing that a firm follows anti-corporate citizenship practices, would think of shifting to another firm; 85 per cent would communicate the information to friends and family; 83 per cent would stop investing in the firm; 80 per cent would refuse employment and more than three-fourth of the respondents would not buy the company’s products.28 4. Increased ability to attract and retain employees: Companies perceived to have strong CSR commitments often find it easier to recruit employees, particularly in tight labour markets. Retention levels may be higher too, resulting in a reduction in turnover and associated recruitment and training costs. Tight labour markets as well the trend towards multiple jobs for shorter periods of time are challenging companies to develop ways to generate a return on the resources invested in recruiting, hiring, and training. 5. Reduced regulatory oversight: Companies that demonstrate that they are engaging in practices that satisfy and go beyond regulatory compliance requirements are being given less scrutiny and freer reign by both national and local government entities. In many cases, such companies are subject to fewer inspections and paperwork, and may be given preference or ‘fast-track’ treatment when applying for operating permits, licenses or other forms of government permission. 6. Innovation and learning: Innovation and learning are critical to the long term survival of any business. Corporate responsibility stimulates learning and innovation within organizations helping to identify new market opportunities, establish more efficient business processes and to maintain competitiveness. Eighty per cent of European business leaders believe that responsible business practice allowed companies to invigorate creativity and learn about the market place. The long-term survival of organizations is dependent upon its ability to understand and act on societal and technological change. Many organizations are co-innovating with business partners to identify new approaches that deliver business benefits whilst tackling a social or environmental issue. 7. Risk management: Sir Robert Smith, Chairman of Weir group has stated, “Many corporations are broadening their definition of risk to encompass wider and longer-term risks that incorporate social and environmental issues. They are engaging with a wider external audience to understand needs and expectations and take action, where appropriate”.29 Over the past few years, there have been a number of guidelines and initiatives to encourage business to manage risks across their business. Morley Fund Management based in London has worked out 233 234 BUSINESS ETHICS—AN INDIAN PERSPECTIVE a sustainability matrix on the basis of which companies are ranked and listed on FTSE 100 Index. The index is based on the social and environmental performance of the concerned companies. Companies now recognize the long-term financial risks they face by ignoring environmental and social impacts. 8. Easier access to capital: The Social Investment Forum30 reported that, in the United States in 1999, there was more than US$2 trillion in assets under management in portfolios that use screens linked to ethics, the environment, and corporate social responsibility. It is clear that companies addressing ethical, social, and environmental responsibilities have rapidly growing access to capital that might not otherwise have been available. 9. Reduced operating costs: Initiatives like the reduced use of agrochemicals and efforts to reduce the emission of greenhouse gases can reduce operating costs as well as improve environmental performance. Companies can reduce waste disposal costs as well as gain additional income by selling recycled materials. Effort like flexible scheduling and other such programmes increase productivity in the company by reducing absenteeism and attrition. SCOPE OF CSR Three levels of social responsibility can be identified (evolution of areas of social responsibility) ∑ Market forces: Responding to the demands of the market. Managerial decisions may involve business responding to the economics of the market by efficiently and effectively using resources. The greatest impact of business on society comes form ‘normal’ operations, which therefore shows greatest social responsibility. ∑ Mandated actions: Government mandates or negotiated agreements (regulatory requirements and guidelines, contracts/agreements with stakeholders). Managerial decisions may reflect business responses to government-mandated requirements and/or pressure group stakeholders (e.g., unions) ∑ Voluntary actions: Managerial decisions may be undertaken without outside pressure, such as in voluntary social programmes. CSR addresses the following issues: ∑ ∑ ∑ ∑ ∑ ∑ community, assistance in solving community problems; health and welfare; education; human rights; natural environment; and culture (i.e., music, arts, sports, etc.). UNDERSTANDING SOCIAL RESPONSIBILITY OF BUSINESS The social status which people enjoy, the social groups to which they belong and within which they have grown and from which they have initially received their value system, deeply influence, and not infrequently, determine their understanding of social responsibility. This is true of the business world as well. J. R. D. Tata in his key note address at the inauguration of the Tata Foundation for Business Ethics some years ago, outlined the ethos/tradition of the Tatas in these terms: ‘The Tata Industrialist Ethos inherited from the great Jamsetji himself, tried to combine high standards and quality production with sincere concern for ethical values such as fair and honest management, product quality, human relations in industry and industrial philanthropy.’31 The scope of social responsibility is wide and could be considered in terms of different viewpoints, some of which are given as follows. PROTECTING AND PROMOTING STAKEHOLDERS’ INTERESTS Some consider social responsibility in terms of services rendered to claimants or stakeholders, who could be both insiders and outsiders. The insiders are employees and shareholders while outsiders include consumers, suppliers, creditors, competitors, government and the general public. Consumers expect quality goods and services at fair prices. Workers expect fair wages without being exploited. Shareholders expect reasonable dividends and fair return on investments. Managers expect challenging jobs with attractive salary. Government and the general public expect them to add to the wealth and welfare of the country without polluting the environment. In short, business organizations have to consider themselves the custodians of public welfare, by HANDMAID OF ETHICS: CORPORATE SOCIAL RESPONSIBILITY rendering such services to the various sections of society. Some of the corporate social responsibilities to different groups of stakeholders are given below: 1. To consumers and community ∑ Goods must meet the requirements of different classes, their tastes and purchasing power. ∑ Goods must be reasonably priced, must be of dependable quality and of sufficient variety. ∑ Provision of after-sales service advice, guidance and maintenance. ∑ A fairly widespread distribution of goods and services among all sections of consumers and community. ∑ Provision of free competition and prevention of concentration of goods in the hands of a limited number of producers or purchasers or groups. ∑ Present a ‘good image’ in the minds of the public for honesty and integrity of character. ∑ Advertising policy should be based on moral/ethical principles. It should not mislead by false, misleading and exaggerated advertisements. ∑ Support to educational, charitable and other programmes for the benefit of the community. ∑ Social accountability to consumers and public regarding the business conditions. ∑ Avoidance of social and moral dangers of ‘high spots’ and ‘social tensions’. ∑ Prevention of the growth of slums, improvement of housing conditions, elimination of crimes in industrial areas by providing training and job counselling for youth in situations where they may take to crime, and meeting the heavy costs of pollution and waste disposal. ∑ Business should have a progressive outlook. ∑ Proper training should be offered to the existing employees. ∑ Should be a law-abiding citizen of the State. ∑ To pay its dues and taxes to the state fully and honestly. ∑ Maintain impartiality towards political affairs, that is, to abstain from direct political involvement; and not to support political parties. ∑ To follow honest trade practices, and avoid activities leading to restraint of trade and commerce. ∑ To try not to contact public servants for selfish ends. ∑ To sell commodities without adulteration. 2. To employees ∑ Promote a spirit of cooperative endeavour between employees and employers through participation in decision making and in improving production and administration. ∑ To pay fair and reasonable wages to labourers and fair salaries to executives. ∑ To develop and adopt a progressive labour policy based on recognition of genuine trade union right; settlement of disputes and conciliation; to create a sense of belonging to the business, and improving human qualities of labour by education, training, living conditions, housing, leisure and amenities. ∑ To provide reasonable and just work conditions. ∑ To recognize the labourer as a ‘human being’ and respect his dignity, and to preserve his or her individual liberty. ∑ Provide facilities for joint consultation and collective bargaining. ∑ Help development of proper leadership from among the employees. ∑ Guarantee religious, social and political freedom to workers to take part in civic activities. 3. To owners and inter-business establishments ∑ To provide a fair return or dividend on the capital invested. ∑ Give fair and impartial treatment to all. ∑ Develop healthy cooperative business relationship between different businesses. ∑ Check the advance of such unfair practices as price-rigging, undercutting, patronage, unfair canvassing and unethical advertisements. ∑ Help in the control of monopoly and promotion of healthy competition. PROMOTION OF COMMON WELFARE PROGRAMMES Another way in which the scope of social responsibility could be viewed is in terms of social concern and promotion of common welfare programmes for the benefit of the poor and the indigent public. Companies have highlighted social issues and brought them to the notice of the public through hoardings and other means of 235 236 BUSINESS ETHICS—AN INDIAN PERSPECTIVE drawing the attention of people to the issue in question and generate public awareness. There had been occasions, though limited in number, where corporations have joined hands to sponsor advertisements promoting public causes or issues of social concern such as drug addiction and smoking. Business organizations could also consider social responsibility in terms of relatedness to their own activities. Producers of dental or eye care products organize mass clinics in villages and semi-urban areas, where surgeons attend to the medical needs of the poor and indigent. Such attempts greatly relieve the burden on the finance-strapped state in a developing country like India where people, due to poverty and for historical reasons, depend solely on the government to render every type of service. PHILANTHROPY There are others who view social responsibility as philanthropy. ‘Philanthropy has always been the reflection of a class society because it has depended on a division between rich givers and poor recipients. The wealthy have not only given because they have more; but because by alleviating distress they have secured their own position against those who might displace them” Philanthropy by big business is generally exercised through, ‘foundations’. Such philanthropic activity not infrequently adds to the prestige of an organization, builds up a humanitarian image among the public, and, more importantly, widens the organization’s influence to fields which often are of vital importance to the business world.’ Ford, Rockefeller and Carnegie Foundations have been key investors in the growth and development of higher education institutions, think tanks and research centres around the world. Indeed, The Ford Foundation has been described as the world’s largest investor in new ideas. They are architects of international networks of scholars and agencies involved in the production and dissemination of knowledge. Through these institutions and networks they have been in a unique position to influence cultural and social policies on an international scale. In India, it is a widely recognized fact that the House of Tatas is known for its acts of philanthropy for more than a century. Recently, the Tata family has been chosen for the internationally acclaimed Andrew Carnegie Medal of Philanthropy by the Carnegie Corporation of United States. The Tata family has been chosen along with three other families, all of them American, in recognition of its ‘long standing commitment to philanthropic causes’ which has contributed to ‘beneficial changes in the lives of millions of people’. The award was instituted in 2001 and for the first time an Indian family (Tatas) received the award at a ceremony in Pittsburg on 17 October 2007. Ratan Tata, Chairman of Tata Group companies, received the award from India’s former President, Dr A. P. J. Abdul Kalam.32 J. R. D. Tata in his keynote address at the inauguration of the Tata Foundation for Business Ethics some years ago said: ‘The Tata industrialist ethos inherited from the great Jamshetji himself, tried to combine high standards and quality production with sincere concern for ethical values such as fair and honest management, product quality, human relations in industry and industrial philanthropy.’33 However, in a strict sense, the concept is restricted to the observance of rules and regulations that govern business transactions, and in a way facilitates a smooth running of business. ‘In a wider sense, it demands conformity with accepted norms and interpretations of the laws dealing with business activity. Moreover, in a business world, where cut-throat competition and survival of the fittest dictate the law and have the upper hand over humanity, philanthropy also means a display of humanity which will manifest itself in some form of benevolent activity among the larger public. It undoubtedly benefits some individuals or communities in need.34 Take the instance of how industrialists came to the rescue of the quake-devastated people in Gujarat. When Gujarat was shattered by the fury of the worst earthquake in recorded history over the past 50 years, a free phone facility set up by Care India, Bharti-BT and CISCO provided the most immediate emotional relief for people anxious for news of their families, as well as access to medical assistance and advice. Industrialists through the Confederation of Indian Industry (CII) and the Federation of Indian Chambers of Commerce and Industry (FICCI) have committed large funds that have enabled several NGOs adopt villages that were most severely hit and provided several others a great deal of relief measures.35 Likewise, when disaster struck New York and Washington in the aftermath of terrorist attacks on 11 September 2001, American MNCs played their part as good corporate citizens. Most have donated substantial amounts towards the disaster relief funds and made serious gestures towards their social responsibility. While the US food giant McDonalds had offered food for the rescue workers at different locations across the country in addition to a donation of US$ 2 HANDMAID OF ETHICS: CORPORATE SOCIAL RESPONSIBILITY million, General Motors, General Electric, Ford Motor and Unocal also did their best to alleviate the sufferings of those affected by the tremendous human tragedy. GOOD CORPORATE GOVERNANCE Some social thinkers view that in the context of emerging economies good corporate governance itself is an ingredient of CSR. Indian corporations, for instance, have insulated themselves for too long from wholesome developments evolving elsewhere. A closed economy, a sheltered market, limited need and access to global business/trade, lack of competitive spirit, a regulatory framework that enjoined mere observance of rules and regulations rather than realization of broader corporate objectives, marked the contours of corporate governance for well over 40 years. Corporate democracy, professional management and maximization of long-term shareholder value are attributes of good corporate governance. Corporate governance has acquired a new urgency in India due to the changing profile of corporate ownership, increasing flow of foreign investment, preferential allotment of shares to promoters, gradual unwinding of the control mechanism by the State that had hitherto provided protective cover to even poorly managed corporations and the increasing role of mutual funds since 1991.36 RENDER SOCIAL SERVICE Some industrial houses have been promoting activities that supplement the efforts of public authorities in certain areas that are important for all-round human development. The Tatas have contributed to the growth of fundamental and social sciences by building and nurturing institutions of higher learning in these areas. The Birlas have been building and maintaining beautiful and monumental places of worship in several cities in addition to popularizing science through planetariums. Some corporations like Britannia Industries and MRF Tyres have been sponsoring sports events and helping sportspersons attain international standards. TISCO has made several contributions in such diverse areas as community, especially tribal area development, rural industrialization, etc., SAIL has done its mite in agriculture, health care, drinking water supply, dairy and poultry farming. ITC Ltd is socially active in agriculture, sports and pollution control, while Brooke Bond has interests in animal welfare, providing veterinary services and improvements in animal breeding. Down south, several corporations have contributed to the field of education and related areas and have also rendered social service. The Loyola Institute of Business Administration (LIBA) has instituted The Mother Teresa Award for Corporate Citizen to showcase as role models corporates that have rendered social services far beyond the call of their duty and responsibility for others to emulate. It has so far identified Titan Industries, Tamil Nadu Newsprints and Papers Ltd, Polaris Lab, TVS Motors and Orchid Chemicals and Pharmaceuticals for the Award in recognition of several socioeconomic projects they have been running for the welfare of the disadvantaged sections of society in and around the places where their factories are located. Some studies have shown that there are several others too who have done yeoman services to the people at large. Some of them are as follows: Bajaj Auto, Balmer Lawrie, Bank of America, Business Standard, Coca Cola India, Dr Reddy’s Laboratories, Forbes Marshall, L&T, NTPC, Nicholas Piramal, Excel Industries, Hindustan Machine Tools, Amar Jyothi Industries, Hindustan Lever and IBM, to mention a few major corporate players. While some of them work for the welfare of the poor, handicapped and the marginalized sections of society in and around their plants, facilities and offices, the others go beyond their locations and reach out to those who are in dire need. ABIDING BY RULES AND REGULATIONS In common practice, generally the concept of ethical responsibility is restricted to the observance of rules and regulations that govern business transactions. Such a concept is widely accepted since it facilitates a smooth running of business. It demands conformity with accepted norms and interpretations of the laws dealing with business activity. When we stress that corporation
