Business Ethics andCorporate Governance

(As per the Revised Syllabus of Mumbai University for T.Y. BBI,Semester VI, w.e.f. 2014-2015)

Riya RupaniM.Com., MHRDM (M.U.), UGC-NET, SET

Head, Department of BMS & BBI,N.E.S. Ratnam College of Arts, Science & Commerce,

Bhandup (W), Mumbai-78.

MUMBAI NEW DELHI NAGPUR BENGALURU HYDERABAD CHENNAI PUNE LUCKNOW AHMEDABAD ERNAKULAM BHUBANESWAR INDORE KOLKATA GUWAHATI

© AuthorNo part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of thepublisher.

First Edition : 2010Second Revised Edition : 2011Reprint : 2012Reprint : 2013Third Revised Edition : 2014Fourth Revised Edition : 2015

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DedicationThis book is dedicated to My Parents who were

the constant source ofinspiration, vitality and guiding spirit

Ethics has become the buzzword in the corporate world because of globalisation andcommunication explosion. Ethics is related to every aspect of our life. It is the set of the guidingprinciple for doing right things.

Ethics is a part of business and the business cannot overlook various ethical issues. BusinessEthics has been a hot topic and a growing discipline in India.

This book is an adventure into the world of Business Ethics, Corporate Governance andCorporate Social Responsibility.

Corporate Governance deals essentially with ethical issues. The need to study CorporateGovernance has become imperative in view of the number of international frauds and otherirregularities that the business world has seen from the third quarter of the last century.

I am fully aware reference books are rather heavy for the majority of the students. It does notmean that students should follow the easy path and use only exam-oriented books.

Only I have made humble attempt to fill up the gap and help the students and teacherscommunity giving them a suitable textbook catering to their special needs.

The subject-matter of the textbook has been presented in a logical order.

The language is simple, lucid, convincing and easy to understand.

Also, throughout the development of the book, it has been my endeavour to tailor its approach,subject-matter and presentation according to the syllabus requirement of the course and students.

I would like to put on record the debt I owe to my parents for their constant encouragement andsupport, without which this book would not have seen the light of the day.

I wish to express my gratitude to Principal Mrs. Rina Saha for her cooperation and makingresources available to complete this book.

Constructive suggestions for the improvements in the quality and utility of the book fromteachers, students and other readers will be greatly appreciated. They can be sent to my e-mail address:riya_rupani@yahoo.com

RIYA RUPANI

Preface

Objectives: To understand ethical issues in business. To highlight the role of Corporate Governance practices in maintaining transparency in

business transactions. To highlight the importance of commitment to values and ethical conduct of business. To increase awareness about the statutory and legal compliances involved in corporate

governance.No. of Lectures

Unit: 1 Business Ethics: Meaning, Nature and Sources, Unfair BusinessPractices: Features and Reasons. Whistle Blowing Policy and LawsRelated to Protection of Whistle Blower, Insider Trading, Clause 49.Values: Meaning, Types, Teaching from Scriptures like. Gita, Quran,Bible w.r.t. Indian Value Systems in Business.

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Unit : 2 Corporate Governance: Meaning, Principles, Significance.Corporate Governance Reports of Narayana Murthy Committee, CadburyCommittee, Kumar Mangalam Birla Committee, Malhotra Committee.,CII Code, Narasimham CommitteeCorporate Governance in Globalised Economy, Corporate Governance inBanking and Financial Institutions.

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Unit : 3 Code of Conduct in Business Houses: Meaning, Features of a Good Codeof Conduct, Conduct of Conduct for Bank.Corporate Social Responsibility: Meaning, Scope and Significance.CSR of Business towards Various Groups and CSR towards SocialOrganisations.

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Unit: 4 Corruption: Meaning, Causes, Effects.Frauds and Scams in Banks, Insurance Companies. Financial Markets(Current Case Studies and Supreme Court Judgments)Measures to Overcome Fraud and CorruptionZero Tolerance of CorruptionCompetition Act, Ethical Approach in IPR with Respect to Designs,Patents and Copyrights , Ethics and IT.

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Syllabus

UNIT – I1. Introduction to Ethics 3 – 72. Business Ethics 8 – 123. Business Practices 13 – 174. Whistle Blowing and Insider Trading 18 – 225. Disclosure Requirements 23 – 266. Values 27 – 327. Teaching from Scriptures 33 – 39

UNIT – II8. Corporate Governance 43 – 509. Evolution of Corporate Governance 51 – 53

10. Recommendations of Various Committees on Corporate Governance 54 – 6811. Various Committees for Effective Corporate Governance 69 – 7312. Corporate Governance in Banks 74 – 7913. Corporate Governance in Insurance Industry 80 – 8314. Corporate Governance in Globalised Economy 84 – 91

UNIT – III15. Code of Conduct 95 – 10116. Code of Conduct for Banks 102 – 10617. Introduction to Corporate Social Responsibility (CSR) 107 – 11218. Arguments for and against CSR 113 – 11619. Social Responsibility towards Different Stakeholders 117 – 12220. CSR Initiatives 123 – 12721. CSR towards Social Organisations 128 – 132

UNIT – IV22. Corruption 135 – 14223. Frauds in Banks 143 – 15224. Fraud in Insurance Industry 153 – 15525. Scams and Scandals 156 – 16426. Competition Act, 2002 165 – 17027. Intellectual Property Rights 171 – 17628. Computer Crime 177 – 180

Case Studies 181 – 190

Contents

“It’s not hard to make decisions when you know what.”

Contents

1. Definition2. Derivation3. Meaning4. Nine Theories of Ethics5. Importance of Ethics6. Ethics and Morality7. Ethics and Law Origin Relationship Distinction Things Which Fall Within the Circle of Ethics But Not Within Law

8. Conclusion9. Review Questions

1. DEFINITION

Ethics is:1. The study of standards of conduct and moral judgment; moral philosophy.2. A treatise on this study.3. The study or code of morals of a particular person, religion, group, profession, etc.The first one refers to an academic concept. Philosophers, law professors, socialists, moralists

and a whole host of other academics are engaged in the study of what is considered moral behaviour.The study involves looking at different theories of ethics such as: situational ethics, consequentialethics, values, ethics, utilitarian ethics, moralistic ethics, ethical realism, ethical hierarchy, principlesof ethics and moral development of ethics.

Introduction to Ethics11

CHAPTER

The second one refers to all the writings about all of these.

2. DERIVATION

The term “ethics” is derived from the greek word “ETHOS” which refers to character or customsor accepted behaviour.

3. MEANING

1. Ethics is a branch of philosophy that addresses questions about morality that is, conceptssuch as good and bad, noble and ignoble, right and wrong, justice and virtue.

2. Ethics is the branch of study dealing with what is the proper course of action for man. Itanswers the question, “What do I do?” It is the study of right and wrong in humanendeavours.

3. Ethical behaviour is generally considered behaviour that is in line with the accepted moralcode and that is proper.

4. Ethics means the rules or principles that define right or wrong conduct. The term Ethics,refer to a code of conduct that guides an individual while dealing with others.

4. NINE THEORIES OF ETHICS

Nine major theories have been created to explain ethics and to determine whether a decision isethical or not:

1. Situational Ethics:It suggests that the ethically right thing to do depends on the situation. For example, lying iswrong, but if you lie to avoid hurting someone’s feelings, lying is right.

2. Consequential Ethics:An action is ethical depending on the consequences of that action. Lying isn’t wrong if theconsequences that result are positive.

3. Value Ethics:If you act according to your values and do what you feel is right, your behaviour is ethical.

4. Utilitarian Ethics:The behaviour that provides the most benefit is the ethical behaviour. If you can kill oneperson to save many, it is OK to do so.

5. Moralistic Ethics:There are certain moral absolutes and situations in which something is always right oralways wrong. For example, pacifists may believe war is ALWAYS wrong, no matter howjustified it may seem.

6. Ethical Realism:This theory recognises that in the real world, ethical principles can conflict and the best onehas to be chosen.

7. Ethical Hierarchies:Certain ethical values are more important than others; the most important should always bechosen when conflict exists.

8. Principles of Ethics:Ethical values are just principles or theories to guide decisions.

9. Moral Development:This theory suggests that ethics can be taught and that greater levels of ethical behaviour canbe achieved as one learns more.

5. IMPORTANCE OF ETHICS

1. Ethics is a requirement for human life.2. It is our means of deciding a course of action. Without it, our actions would be random and

aimless.3. To the degree which a rational ethical standard is taken, we are able to correctly organise our

goals and actions to accomplish our most important values.4. Any flaw in our ethics will reduce our ability to be successful in our endeavours.5. Ethics are important because they give us a baseline for understanding the concepts of right

and wrong.6. Ethics help us to have a ready understanding of how to react to a certain situation long

before that situation happens.7. There are situational ethics whereby we react as the situation dictates but our reaction is due

to our built-in value system that tells us what to do, not the situation itself.8. Ethics are important because they act as our mediator when dealing or coming into contact

with other people. If we have the wrong sense of ethics, we will react to people in a negativemanner.

9. Ethics are important because we pass them on to others. We have the ability to show othersthe correct way to act and behave by remaining ethical in the way we live, regardless ofwhether it involves our personal or business life.

6. ETHICS AND MORALITY

The term ethics and morality are not one and the same.

Ethics is the principle that guides the human behaviour. Morals are related to traditional beliefs,customs and convention that guide man’s social behaviour.

A great difference exists between ethics and morality because ethics is always based on moralstandard and code of conduct developed by proper testing to guide the human behaviour. Whereasmorality is concerned with generally accepted conducts, courtesies and conventions of the society.

Because human behaviour is influenced by emotions and sentiments, many organisations haveno predetermined ethics, they evaluate good or bad conduct of business on the basis of social customs,traditional beliefs and expectations of the society.

7. ETHICS AND LAW

OriginEthics is the science of conduct. It deals with certain standard conduct and morals.

Law is a code of conduct which the authority in power prescribes for society.

It is concerned with the minimum regulation necessary for public order which is enacted bygovernment.

RelationshipETHICS

LAW

Distinction BetweenSr. No. Ethics Law

1 Ethics examines both the individual andsocial goodwill in all directions.

Law is concerned with the minimumregulation necessary for public order.

2 Ethics contains all the social obligations,customs and traditions which are essentiallyimplemented in the society.

The social customs and traditional beliefscannot get a place in law.

3 The people who reject the ethical principleshave to face social boycott and be subjectedto society’s accusation.

People have to obey provisions of law,otherwise they will be subjected topunishment.

4 The scope of ethics is broad. The scope of law is narrow.5 Ethics means the rules or principles that

define right or wrong conduct.Laws are written rules about what is rightand what is wrong in various walks of life.

6 It does not use force. It uses force when necessary.7 Ethical behaviour will always be covered

under ethics.Ethical behaviour may or may not becovered by law.

8 It is not backed by power. It is backed by power.9. Ethics concentrates on Do’s. Law concentrates on Don’ts.

Following Things Will Fall Within the Circle of Ethics But Not Within Law Look after the aged. Be considerate to your workers. Teach well your students. Obey your elders. Do not tell a lie.

8. CONCLUSION

Unfortunately, there is no clear answer to what is ethical or to what an ethical behaviour is.Many turn to religion or to the law to give guidance as to ethical behaviour. Ultimately, however,ethics is a relative term not easily defined.

9. REVIEW QUESTIONS

1. Explain the concept of ethics.2. Give an overview of nine theories of ethics.

3. Explain the importance of ethics.4. Distinguish between ethics and morality.5. Distinguish between ethics and law.