MODULE 1

Introduction To Ethics:
The term “ethics” is derived from the Greek word “ethos" which refers to character
or customs or accepted behaviors.

Ethics is a set of principles or standards of human conduct that govern the behavior
of individuals or organizations. Using these ethical standards, a person or a group of
persons or an organization regulate their behavior to distinguish between what is
right and what is wrong as perceived by others.

# Ethics can be defined as the discipline dealing with moral duties and obligation,
and explaining what is good or not good for others and for us.

# Ethics is the study of moral decisions that are made by us in the course of
performance of our duties.

# Ethics is the study of characteristics of morals and it also deals with the moral
choices that are made in relationships with others.

# Ethics is concerned with truth and justice, concerning a variety of aspects like the
expectations of society, fair competition, public relations social responsibilities and
corporate behavior.

Business Ethics:
Business ethics (also known as corporate ethics) is a form of applied
ethics or professional ethics, that examines ethical principles and moral or ethical
problems that can arise in a business environment. It applies to all aspects of business
conduct and is relevant to the conduct of individuals and entire organizations. These
ethics originate from individuals, organizational statements or the legal system.
These norms, values, ethical, and unethical practices are the principles that guide a
business. They help those businesses to maintain a better connection with their
stakeholders.

NATURE OF BUSINESS ETHICS

The nature of business ethics refers to the standard characteristics of human

behavior;

• Code of Conduct: Code of conduct is a set of principles and expectations that

are considered binding on any person who is member of a particular group.
The alternative names for Code of Conduct are “Code of ethics or Code of
Practice".

• Protects the social group: Business ethics protects the various social groups
of consumers, employees, small businesses, governments, shareholders,
creditors, etc.
• Provides basic structure: Business ethics provides a basic framework for
business. It gives social, cultural, economic, legal, and other business limits.
Businesses must be managed within these limits.
• Volunteer: Business ethics should be a volunteer. Traders need to adopt the
ethics of their own business. Business ethics will be like self-discipline. It
should not be enforced by law.

CHARACTERISTICS
1. A discipline: Business ethics are the guiding principles of business
function. It is the knowledge through which human behavior is learnt in a
business situation.
2. Ancient concept: Business ethics is an ancient. It has its origin with the
development of human civilization.
3. Personal dignity: The principles of ethics develop the personal dignity.
Many of the problems in ethics arise due to not giving dignity to individual.
All the business decision should be aimed by giving dignity to the
customers, employees, shareholders, distributors, and creditors etc.
Otherwise they develop immortality in the business conduct.
4. Related to human aspect: Business ethics studies those activities, decisions
and behaviors which are concerned with human aspect. It is the function
of the business ethics to notify those decisions to customers, owners of
business, government, society, competitors and others on good or bad,
proper and improper conduct of businesses.
5. Different from social responsibility: Social responsibility mainly relates to
the policies and functions of an enterprise, whereas business ethics to the
conduct and behavior of businessmen. But it is a fact that social
responsibility of business and its policies is influenced by the business
ethics.

What are the causes of unethical behavior in work place?

What is an unethical behavior?
An unethical behavior is defined as one that is not morally honourable or one that is
prohibited by law. Many behaviors will fall in the classification including
corruption, mail and wire fraud, discrimination and harassment, insider trading,
conflicts of interest, improper use of company assets, ethical relations with others,
disciplinary action, fraud, illegal business donations, patent infringement, etc.
• Insider trading:
Insider trading is an unethical behavior which occurs when a person who has
access to confidential information uses or shared the information for securities
trading purposes or any other purpose except the conduct of regular company
business. The confidential information of the company are not to be used for
achieving personal gain neither are they to be disseminated directly or
indirectly to friends, family members, and other outsiders who may in turn
trade on or misuse the information.
• Discrimination and Harassment:
Discrimination involves not providing equal opportunity in employment on
merit but on other basics such as sex, race, national origin, age, religion or any
other basics not related to job.
• Conflict of Interest:
Conflict of interest arises when one private interest interferes or appear to
interfere in any way with the interest of the organization.
Example of conflict of interest are;
# Diverting from the organization for personal benefit, a business
opportunity
# Using the organization’s asset for personal use.
# Accepting any valuable thing from organizations customers and
suppliers.
# Having a financial interest in an organization’s competitor.

ETHICAL REASONING

Ethical reasoning pertains to the rights and wrongs of human conduct. Each person
has standards that are defined by their personal values which come into play when
the person faces certain dilemmas or decisions. Commonly, ethical differences occur
as a result of individual interpretation of a subject or event, or may be political or
religious in nature.

Most human behavior has consequences for the welfare of others, even for society
as a whole. Individuals are able to act in such as way as to enhance or decrease the
quality of the lives of others, and generally know the difference between helping and
harming.

Ethical reasoning holds two roles in life:

• Highlighting acts that enhance the well-being of other people.

• Highlighting acts that harm the well-being of other people.

CODE OF CONDUCT AND ETHICS FOR MANAGERS.

A code of conduct is important for managers in every industry, as a workforce

can’t move forward without integrity from its leaders. The best managers place a
high value on fairness and ethics, as well as their own performance. Not only do
managers who create their own code of conduct benefit their workers, but they
also often benefit the entire company’s public image.

• Honesty: Managers in every industry must understand their company’s

policies and guidelines, as well as its mission, and how they are expected to
go about accomplishing their goals. They also need to know and follow the
laws of the government, particularly as they pertain to business. Mostly,
effective managers must be honest about aspects such as production and
profit at all times.
• Accountability: Good managers expect their workers to take responsibility
for their actions and overall performance, and demand the same of
themselves. That means answering to ownership or executive boards when
things don’t go right, accepting the blame, and coming up with solutions to
avoid future issues.
• Integrity: Managers who perform their jobs with a high level of integrity are
widely the best type of supervisors to work for. That’s because managers
who possess integrity are often consistent in their decision-making and
resolution of issues. These managers also make their goals clear and assist
employees when it comes to reaching those goals.
• Flexibility: While most companies don’t expect their managers to display
sympathy to employees who aren’t meeting expectations, most businesses
prefer leaders who are patient and work with those in need of assistance.
Good managers show their workers how jobs are best performed, then
monitor workers and offer suggestions and tips. After all, the goal of
managers in every industry is to make sure workers stay productive and the
company stays profitable

THEORIES OF ETHICS

Theories:

Normative Theory: There are two type of normative ethical theory. They include,

• Consequential Theory: Those that determine the moral rightness or wrongness

of an action based on the actions consequences or results.
• Non Consequential Theory: Those that determine the moral rightness or
wrongness of an action based on the actions intrinsic features or characters.

Consequential theory is also further divided into two parts.

1. Egoism: The view that morality coincides with the self-interest of an

individual or an organization. The theory of egoism holds that the good is
based on the pursuit of self-interest. This model takes into account harms,
benefits and rights for a person’s own welfare. Under this model an action
is morally correct if it increases benefits for the individual in a way that does
not intentionally hurt others, and if these benefits are believed to
counterbalance any unintentional harms that ensue. For example, a
company provides scholarships for education to needy students with a
condition that the beneficiary is required to compulsorily work for the
company for a period of 5 years. Although, the company is providing
scholarship benefits to the needy students, ultimately it is in the company’s
self interest

2. Utilitarianism:- The utilitarian ethical theory is founded on the ability to

predict the consequences of an action. To a utilitarian, the choice that yields
the greatest benefit to the most people is the choice that is ethically correct. One
benefit of this ethical theory is that the utilitarian can compare similar
predicted solutions and use a point system to determine which choice is more
beneficial for more people. This point system provides a logical and rationale
argument for each decision and allows a person to use it on a case-by-case.

Indian Ethos

ETHOS Vs. ETHICS

Ethos is a discipline that examines one’s morality or the moral standard of the
society.
Whereas, Ethics means expected standards in terms of your personal and social
welfare. It includes honesty, morality, responsibility, etc.
NEED OF INDIAN ETHOS
• Management attitude: Top management must have firm belief in value-
oriented holistic management of business. The Management is called upon
to meet expectations of all stakeholders. Eg: employees, customers, citizens,
and shareholders and fulfill the social responsibility. Profit is earned through
service and satisfaction of all these interested parties.
• Humanizing organization: There are three aspect of humane organization.
# Inter-personal relation.
# Man-machine equation
# Inner Management- Spiritual and mental.
An organizations can create best inter personal relations based on promotion
from within, equality, autonomy, self-esteem.
• Interiorizing(Self) Management: The manager is first man, and then a
manger. A manger should learn to manage and control himself. The first
need is to understand and know himself.
• Self- introspection: We have to embark upon self-study, self analysis, and
self-criticism to locate areas of friction and disharmony. We should prepare
a sheet of our strengths and weakness. By regular introspection we would
find out solution to problem so that the concerned parts of our being can be
persuaded and guided to play the desired role.

INDIAN WORK ETHICS

Work ethic is a value based on hard work and diligence. It is also a belief in the
moral benefit of work and its ability to enhance character.
Workers exhibiting a good work ethic in theory would be selected for better
positions, more responsibility and ultimately promotion. Workers who fail to
exhibit a good work ethic may be regarded as failing to provide fair value for the
wage the employer is paying them and should not be promoted or placed in
positions of greater responsibility.

Five Characteristics of a Good Work Ethics

# Reliability:
Reliability goes hand in hand with a good work ethic. If individuals with a good
work ethic say they are going to attend a work function or arrive at a certain time,
they do, as they value punctuality. Individuals with a strong work ethic often want
to appear dependable, showing their employers that they are workers to whom they
can turn. Because of this, they put effort into portraying -- and proving -- this
dependability by being reliable and performing consistently.

# Dedication:
Those with a good work ethic are dedicated to their jobs and will do anything they
can to ensure that they perform well. Often this dedication leads them to change
jobs less frequently, as they become committed to the positions in which they work
and are not eager to abandon these posts. They also often put in extra hours beyond
what is expected, making it easy for their employers to see that they are workers
who go beyond the rest of the workforce and truly dedicate themselves to their
positions

# Productivity:
Because they work at a consistently fast pace, individuals with a good work ethic
are often highly productive. They commonly get large amounts of work done more
quickly than others who lack their work ethic, as they don't quit until they've
completed the tasks with which they were presented. This high level of productivity
is also due, at least in part, to the fact that these individuals want to appear to be
strong workers. The more productive they are, the more beneficial to the company
they appear to those managing them.

# Cooperation:
Cooperative work can be highly beneficial in the business environment, something
that individuals with a strong work ethic know well. Because they recognize the
usefulness of cooperative practices such as teamwork they often put an extensive
amount of effort into working well with others. These individuals commonly
respect their bosses enough to work with any individuals with whom they are paired
in a productive and polite manner, even if they do not enjoy working with the
individuals in question.

# Character:
Those with a good work ethic often also possess generally strong character. This
means they are self-disciplined, pushing themselves to complete work tasks instead
of requiring others to intervene. They are also often very honest and trustworthy,
as they view these traits as befitting the high- quality employees they seek to
become. To demonstrate their strong character, these workers embody these
positive traits daily, likely distinguishing themselves from the rest.

ETHICS PROGRAMME

CODE OF ETHICS:
A code of ethics is a guide of principles designed to help professionals conduct
business honestly and with integrity. A code of ethics document may outline the
mission and values of the business or organization, how professionals are supposed
to approach problems, the ethical principles based on the organization's core values,
and the standards to which the professional is held.

A code of ethics also referred to as an "ethical code," may encompass areas such a
business ethics, a code of professional practice and an employee code of conduct.

• A code of ethics sets out an organization's ethical guidelines and best practices
to follow for honesty, integrity, and professionalism.
• For members of an organization, violating the code of ethics can result in
sanction including termination.
• In some industries, including banking and finance, specific laws govern
business conduct. In others, a code of ethics may be voluntarily adopted.

ETHICS TRAINING:

The purpose of Ethics Training is "to enable employees to identify and deal with
ethical problems developing their moral intuitions, which are implicit in everyday
choices and actions". At the same time, ethics training activities aim "to enable all
organizational members to understand, share and apply the values stated in the code
of ethics".
Training in Ethics helps the members of an organisation judge the moral legitimacy
of their decisions, enabling them to apply moral principles and values in business
decision-making. At the same time, ethics training fosters the employees'
agreement and compliance with the organisation's ethical vision representing a
mutually-acceptable balance between different stakeholders. Therefore,
implementing ethics training does not only mean informing employees about
choices made by the management of the company, but also putting each individual
corporate member in a position to understand, interiorise and contribute to the
corporate mission achievement through a conscious orientation of their own
choices and everyday behavior.

ETHICS COMMITTEE:-

A variety of organizations create ethics committees to oversee compliance with

the rules of conduct, standards and policies that guide the company. Committees
typically are made up of executives from various departments and an outside
third-party consultant who chairs the committee. An ethics committee can serve
a number of roles consisting of a range of responsibilities, but most follow a
basic premise.

The oversight process of the Ethics Committee of an organization involves the

following areas to be addressed by it:

# Review of the definitions of standards and procedures

The Committee should review the organization’s areas of operation, the activities
that require a formal set of ethical standards and procedures.

Once the review is complete and any shortcomings come to light, the ethics
committee should assign the creation of revised guidelines to the appropriate
personnel, including the design of a formal method for communicating standards,
and procedures to employees. This method should ensure that employees
understand as well as accept the ethics program.

The ethics committee can suggest behaviors to upper management that reinforce the
organization’s guidelines.

# Facilitate Compliance

The ethics Committee has the responsibility for overall compliance. It is the
responsible authority for ethics compliance within its area of jurisdiction. It
should serve as the court of last resort concerning interpretations of the
organization’s standards and procedures. In case of inconsistencies, the
committee should make recommendations on improving the existing
compliance mechanisms. And, there should be regular follow-ups to ensure that
compliance recommendations are understood and accepted.
# Due diligence of prospective employees

The ethics committee should define how the organization will balance the rights
of individual applicants and employees against the organization’s need to avoid
risks that come from placing known violators in positions of discretionary
responsibility. This includes the oversight of background investigations on
employees and applicants who are being considered for such positions.
# Oversight of communication and training of ethics programme

The ethics committee should define methods and mechanisms for

communicating ethical standards and procedures. This includes the distribution
of documents (codes of conduct, for example) to ensure that every employee
understands and accepts the organization’s ethical guidelines. To make certain that
published standards are understood, the ethics committee should provide regular
training sessions, as well.

# Monitor and audit compliance

Compliance is an ongoing necessity and the ethics committee should design

controls which monitor, audit and demonstrate employees’ adherence to
published standards and procedures. There should also be some mechanisms to
check the effectiveness and reliability of such internal controls.

# Enforcement of disciplinary mechanism

Disciplinary provisions should be in place to ensure consistent responses to

similar violations of standards and procedures (as against applying different
standards to different employees based on their position, performance, function,
and the like). There should be provisions for those who ignore as well as for those
who violate standards and procedures.
# Analysis and follow-up

When violations occur, the ethics committee should have ways to identify why
they occurred. It is also important that lessons learned from prior violations are
systematically applied to reduce the chances of similar violations taking place in
future.

ETHICS OFFICER:-

The Ethics Officer serves as the organization's internal control point for ethics
and improprieties, allegations, complaints, and conflicts of interest and provides
corporate leadership and advice on corporate governance issues.

ETHICS AUDIT:-
An ethics audit is the systematic, independent, and objective examination and
evaluation of the ethical content of the object of the audit. An audit is systematic
when it entails typical steps like planning, defining a framework, fieldwork
(collecting information and obtaining evidence) using established methods, analysis,
judgment, reporting, and documentation. An audit is independent when someone
who has no interests on the results of the audit performs it. This is the case when the
auditor is not part of the scope, clientele, or user of the audit. An audit is also objective
when it is honest and unbiased. A systematic, independent, and objective
examination and evaluation provides essential conditions for the users of an ethics
audit to trust the conclusions of an audit.

WHISTEL BLOWING:-

• It is the release of information by a member or former employee of an

organization

• Whistle Blowing is something that can be done only by a member or former

member of an organization.

• It must be an information, that is not available for public.

• It should be an evidence of some significant kind of misconduct on the part

of an organization.

• Release of information must be something that is done voluntarily as

opposed to being legally required.

• Whistle Blowing must be undertaken as moral protest.

Types of Whistle Blowing;

1. INTERNAL WHISTLE BLOWING:

Internal Whistle Blowing is the act of reporting wrong doing to another party
within one’s company or organization. For example, an employee at one
branch of a chain of coffee shops who report wage and hour violations at their
store to the company’s Corporate headquarters is an Internal Whistle Blowing.
2. EXTERNAL WHISTLE BLOWING:

An external whistle blower, in contrast, is an individual who reports wrong

doing to sources outside his or her company, such as law enforcement or the
media.

With any type of whistle blowing, the party who discloses the alleged wrong
doing must do so in good faith, meaning he or she must reasonably believe
wrong doing to be occurring and take reasonable steps to report it to the correct
authority. When a whistle blower does not act in good faith, he or she is not
protected by the Whistleblower Protection Act and thus not protected from
demotion or termination.

3. CYBER WHISTLE BLOWING:-

In recent years, a new type of Whistle Blower, the Cyber Whistle Blower, has
arisen as an advocate for consumer and employee protection in online spheres.
These Whistle Blowers report on security breaches in cloud storage systems,
encryption deficiencies, hacks and unsecure practices.

LEGAL SUPPORT TO WHISTLE BLOWERS:

1. Whistle Blowers in some areas are not without legal support. In United
States, both Federal and State Laws are aimed at protecting those who
undertake Whistle Blowing.

2. However, even with support, the potential whistle blower must still
contemplate a difficult and dangerous path.

3. The Primary Protection Law is the Federal Whistle Blower Protection

Act of 1989.
4. Another Federal Law is the False Claim Act, which has been around
since 1863.

5. Many state governments have passed their own Whistle blower

protection acts.

6. In India, we don’t have Whistle blower protection law as yet, However

the Public Interest Disclosure and Protection of Informers Bill, 2002 is
being examined.

TIPS TO SUCCESSFUL WHISTLE BLOWING:

1. Blow the whistle at the right time.

2. Blow the whistle according to the company policy.

3. Keep a record of your whistle blowing.

4. Only blow the whistle on unlawful activity.

5. Remember to report not to investigate.

6. Use a regulator if you must.

MODULE 2
ETHICS IN FUNCTIONAL AREAS OF BUSINESS
Financial Management
Finance is an important element of an organization and it helps in its growth and
development. Finance plays an important role in making resources available in an
organization, such as man, machine, material, market and money.

Unethical Practices in Finance

1.Window dressing
Window dressing is the practice by which the balance sheet is made to show a state of
affairs that is rosier or far better tan the actual sate of affairs. It implies showing outwardly
more prosperous position than what it actually is. It may be the result of some financial
policy adopted during the last few weeks of a trading period.

2.Misleading Financial Analysis

Financial analysis of an organization is misleading when it is used to misrepresent the
organization, its situation or its prospects.

This type of deceit is sometimes used to obtain money by misdirecting people to invest in a
stock market bubble, profiting (or assisting others to profit) from the increase in value, then
removing funds before the bubble collapses, for instance in a stock market crash.

3.Insider Trading
Insider trading is a malpractice wherein trade of a company's securities is undertaken by
people who by virtue of their work have access to the otherwise nonpublic information
which can be crucial for making investment decisions.

4.Churning
Churning is the practice of executing trades for an investment account by a salesman or
broker in order to generate commission from the account. It is a breach of securities law in
many jurisdictions, and it is generally actionable by the account holder for the return of the
commissions paid, and any losses occasioned by the broker's choice of stocks.

Human Resource Management

HRM is concerned with the management of the ‘people’ of an organization. The term HRM is
used to refer to the procedures, philosophy, policies, and practices related to the
management of people within an organization. HRM is an approach to bring the people and
the organization together so as to achieve the desired goals. It helps in creating a relation
between the management of the organization and the employees which is based on
cooperation and coordination according to the designed strategy. It is the art of promoting,
developing and maintaining a competent workforce to achieve the goals of an organization in
an effective manner. HRM is responsible for performing various functions like planning,
organizing, directing and controlling of human resources. HRM also involves activities like
procurement, development, compensation and maintenance.

The following are the key objectives of HRM:

1. To recruit trained and spirited employees
2. To help the organization reach its goals
3. To train the employees for best results
4. To communicate HR policies to the employee
5. To ethically respond to the needs of the society

Unethical Practices in Human Resource Management

1. Discrimination Based on age, gender, race.

Sex discrimination occurs when men and women who are similarly situated are treated
differently based on gender. It takes place when deliberate, repeated, or unsolicited verbal
comments, gestures, or physical contacts of a sexual nature are unwelcome. Sex
discrimination also occurs when an organization’s policy has a disproportionate adverse
impact on a person or group based on gender.
Eg: You worked your way up from the position of cook's helper to chef. A male chef with
similar training and work experience was recently hired, and you find out that he will be paid
more than you; you are a top salesperson for your company, but are moved to a less desirable
territory while a man with much lower sales is given your territory and client base, enabling
him to make much more in commissions than you will make for several years.

2.Sexual harassment
Sexual harassment, is intimidation, bullying or coercion of a sexual nature, or the unwelcome
or inappropriate promise of rewards in exchange for sexual favors. In some contexts or
circumstances, sexual harassment is illegal. It includes a range of behavior from seemingly
mild transgressions and annoyances to actual sexual abuse or sexual assault. Sexual
harassment is a form of illegal employment discrimination in many countries, and is a form of
abuse (sexual and psychological) and bullying.

Types of Sexual Harassment at Work

1. Employee-Employee Harassment
2. Gender Discrimination
3. Male Victims of Sexual Harassment
4. Hostile Work Environment
5. Manager-Employee Sexual Harassment
6. Obscene or Offensive Gestures Harassment
7. Physical Harassment
8. Requests For Sexual Favors
9. Same-Sex Sexual Harassment
10. Stalking Harassment at Work
11. Unwanted Attention Harassment
12. Unwelcome Touching Or Grabbing Harassment
13. Verbal Abuse at Work

Ethics at work place

1. Honest communication
2. Fair treatment
3. Special consideration
4. Fair competition
5. Responsibility to organization
6. Corporate social responsibility
7. Respect for law

Issues Effecting Privacy of Employees

Any person working with any organisation is an individual and has a personal side to his
existence which he demands should be respected and not intruded. The employee wants the
organisation to protect his/her personal life. This personal life may encompass things like his
religious, political and social beliefs etc. However certain situations may arise that mandate
snooping behaviours on the part of the employer. For example, mail scanning is one of the
activities used to track the activities of an employee who is believed to be engaged in activities
that are not in the larger benefit of the organisation.

1. Physical Searches
An employer’s search of an employee’s person or private belongings is perhaps the most
intrusive form of employer inquiry. However, a physical search may be warranted and lawful
under certain circumstances such as theft. A public employer’s right to conduct searches is
limited by the Fourth Amendment’s prohibition on unreasonable search and seizure
2. Video Surveillance
An employer may have a legitimate business interest in videotaping its employees. Employers
should only videotape in open or public areas in which there is no expectation of privacy (e.g.,
shop floor), and the employer should give its employees notice that they are being
videotaped.
3. Background and Credit Checks
The federal Fair Credit Reporting Act (FCRA) requires employers to obtain applicants’ consent
when a third party conducts a background investigation. Some states also have their own
background check laws.
4. Internet and E-Mail
The Electronic Communications Privacy Act of 1986 (ECPA) prohibits the unlawful and
intentional interception of any wire, oral, or electronic communication. Title II of ECPA, the
Stored Communications Act (SCA), also prohibits access to such information while in
electronic storage. The exceptions are the provider exception, the business-use exception,
and the prior-consent exception.

5. Social Networking Sites

Employees have increasingly been utilizing social networking sites for a variety of uses, both
personal and professional. Although these sites can be beneficial, their use can also have risks.
6. Genetic Information

The Genetic Information Nondiscrimination Act (GINA) prohibits employers from

discriminating against employees or applicants on the basis of genetic information. The law
applies to all public employers, private employers with 15 or more employees, employment
agencies, and labor organizations.

7. Medical Information
The Health Insurance Portability and Accountability Act of 1996 (HIPAA) created national
standards to protect individuals’ medical records and other personal health information and
to give patients more control over their health information.
8. Alcohol and Drug Testing

Many employers maintain drug- and alcohol-free workplaces. Note that state and federal law
may limit or regulate the employer’s ability to do drug testing and, if tests are permitted, to
maintain the privacy of results in a specified manner.
9. Legal and Recreational Activities Outside the Workplace

Many states have enacted laws protecting employees from adverse employment action based
on their lawful conduct outside the workplace.
10. Social Security Numbers (SSNs)
A number of states have passed legislation governing the manner in which employers and
other individuals handle Social Security Numbers.

Fairness of Employees Contracts

staff members have statutory employment rights. They’re set out in law to ensure equal and
fair treatment. There can also be variations depending on what’s contained in each
employment contract. So, employees’ entitlements are a combination of statutory and
contractual rights.

Statutory employment rights

1. Some of your responsibilities include:
2. Paying at least the national minimum wage.
3. Providing a written statement of main terms and conditions within two months of your
employee starting work. Most employees are legally entitled to this.
4. Ensuring there’s no discrimination in the workplace.
5. Providing notice of dismissal where your employee has worked with you for at least one
month.
6. In the employment contract there must be company policies along with the start date for
your employee, wage, and other essential details.

Contractual employee rights

The terms and conditions in company handbook will give employees rights and
responsibilities specific to your business. The contract may also give employees rights above
and beyond their statutory entitlement.

Part-time employee contract rights

A part-time employee works fewer hours than full-time staff. But the exact amount each
would work isn’t set in stone.
Here are a few types of part-time work:
1. Casual work.
2. Job share.
3. Evening work.
4. Weekend work.
Part-time employees should have the same contractual rights as full-time employees in
relation to:

❖ Annual leave.
❖ Career development opportunities.
❖ Redundancy.
❖ Career breaks.

The contract change process to follow

Before changing other details in employment contracts, should do the following:

❖ Have a discussion with the employee or their representative.

❖ Provide details about why the change is necessary.
❖ Take into account ideas about how you can do things differently.

Occupational Safety
Occupational health and safety is a cross-disciplinary area concerned with protecting the
safety, health and welfare of people engaged in work or employment. The goal of all
occupational health and safety programs is to foster a safe work environment. As a secondary
effect, it may also protect co-workers, family members, employers, customers, suppliers,
nearby communities, and other members of the public who are impacted by the workplace
environment. It may involve interactions among many subject areas, including occupational
medicine, occupational (or industrial) hygiene, public health, safety engineering, chemistry,
health physics.
BUSINESS ETHICS, CORPORATE SOCIAL RESPONSIBILITY AND
GOVERANCE
Module 2:
Marketing Management :
According to Philip Kotler, “Marketing Management is the art and
science of choosing target markets and building profitable
relationship with them. Marketing management is a process
involving analysis, planning, implementing and control and it
covers goods, services, ideas and the goal is to produce satisfaction
to the parties involved”.
Management is the process of getting things done in an organised
and efficient manner. Marketing management aims at efficient
operation of marketing activities. Marketing management
smoothen the process of exchange of ownership of goods and
services from seller to the buyer. Marketing management, like all
other areas of management comprises of the function of planning,
organising, directing coordinating and controlling.
Marketing management is the process of decision making, planning,
and controlling the marketing aspects of a company in terms of the
marketing concept, somewhere within the marketing system. Before
proceeding to examine some of the details of this process, com-
ments on two aspects will be helpful background.
Marketing management is “planning, organising, controlling and
implementing of marketing programmes, policies, strategies and
tactics designed to create and satisfy the demand for the firms’
product offerings or services as a means of generating an acceptable
profit.” It deals with creating and regulating the demand and
providing goods to customers for which they are willing to pay a
price worth their value.

From the above definitions, we can conclude that Marketing

Management is the process of management of marketing
programmes for accomplishing organizational goals and objectives.
Marketing Management Involves:
1. The setting of marketing goals and objectives,
2. Developing the marketing plan,
3. Organising the marketing function,
4. Putting the marketing plan into action and
5. Controlling the marketing programme.

Marketing Management is both a science as well as an art. Those

responsible for marketing should have good understanding of the
various concepts and practices in marketing, communication, and
analytical skills and ability to maintain effective relationship with
customers, which will enable them to plan and execute marketing
plans.

Process
Marketing Management process involves the following:

1. Managerial marketing process starts with the determination of

mission and goals of the entire enterprise and then defines the
marketing objectives to be accomplished.
2. Evaluate corporate capabilities on the basis of our strengths
and weaknesses.
3. Determine marketing opportunities which have to be
capitalised. We have to identify and evaluate unsatisfied and
potential customers’ needs and desires.
4. Once the company has full information regarding marketing
opportunities, they can formulate marketing strategies in the
form of dynamic action-oriented formal plans to achieve
mission, goal, and objectives.
5. Marketing action plans or programmes are to be implemented
through proper communication, coordination as well as
motivation of marketing personnel.

Price discrimination in Marketing Management

Price discrimination is a selling strategy that charges customers different

prices for the same product or service based on what the seller thinks they
can get the customer to agree to. In pure price discrimination, the seller
charges each customer the maximum price he or she will pay. In more
common forms of price discrimination, the seller places customers in
groups based on certain attributes and charges each group a different
price.

Price Discrimination

Price discrimination is a selling strategy that charges customers different

prices for the same product or service based on what the seller thinks they
can get the customer to agree to. In pure price discrimination, the seller
charges each customer the maximum price he or she will pay. In more
common forms of price discrimination, the seller places customers in groups
based on certain attributes and charges each group a different price.

Key takeaways

• With price discrimination, a seller charges customers a different fee for

the same product or service.
• With first-degree discrimination, the company charges the maximum
possible price for each unit consumed.
• Second-degree discrimination involves discounts for products or
services bought in bulk, while third-degree discrimination reflects
different prices for different consumer groups.

Price fixing
Price fixing is setting the price of a product or service, rather than allowing
it to be determined naturally through free-market forces. Although antitrust
legislation makes it illegal for businesses to fix their prices under specific
circumstances, there is no legal protection against government price fixing.
In an ill-fated attempt to end the Great Depression, for example, Franklin
Roosevelt forced businesses to fix prices in the 1930s. However, this
action may have actually prolonged the downturn.

Key takeaways

• Price fixing occurs when companies conspire to set the price of

products or services instead of allowing the free market to set the prices
naturally.
• Price fixing is usually either a fixed horizontal or vertical price.
• Price fixing is illegal but difficult to detect or prove because it's possible
for multiple companies to offer similar products and services at the
same price
Price Skimming

What Is Price Skimming?

Price skimming is a product pricing strategy by which a firm charges the

highest initial price that customers will pay and then lowers it over time. As the
demand of the first customers is satisfied and competition enters the market,
the firm lowers the price to attract another, more price-sensitive segment of
the population. The skimming strategy gets its name from "skimming"
successive layers of cream, or customer segments, as prices are lowered
over time.

KEY TAKEAWAYS

• Price skimming is a product pricing strategy by which a firm charges the

highest initial price that customers will pay and then lowers it over time.
• As the demand of the first customers is satisfied and competition enters
the market, the firm lowers the price to attract another, more price-
sensitive segment of the population.
• This approach contrasts with the penetration pricing model, which
focuses on releasing a lower-priced product to grab as much market
share as possible.
What is price fixing?
Price fixing occurs when competitors agree on pricing rather than
competing against each other. In relation to price fixing, the Competition
and Consumer Act refers to the ‘fixing, controlling or maintaining’ of prices.
A price fixing cartel occurs when competitors make written, informal or
verbal agreements or understandings on:
 prices for selling or buying goods or services
 minimum prices
 a formula for pricing or discounting goods and services
 rebates, allowances or credit terms.
Price fixing agreements do not have to be formal; they can be a 'wink and a
nod', made over a drink in the local pub, at an association meeting or at a
social occasion. The important point is not how the agreement or
understanding was made or even how effective it is, but that competitors
are working out their prices collectively and not individually.
Impact of price fixing
When businesses get together to fix, control or maintain prices, it can affect
consumers, as well as small businesses that rely on those suppliers for
their livelihood.
Take freight for example. A lot of consumer goods are transported by
freight. If the price of freight is artificially maintained or inflated by a cartel, it
can affect the whole supply chain, and result in higher prices for all sorts of
goods and services.

Ethics in Advertising

Ethics in advertising means a set of well-defined principles which govern

the ways of communication taking place between the seller and the buyer.
Ethics is the most important feature of the advertising industry. Though
there are many benefits of advertising but then there are some points which
don’t match the ethical norms of advertising.
An ethical ad is the one which doesn’t lie, doesn’t make fake or false
claims and is in the limit of decency.
Nowadays, ads are more exaggerated and a lot of puffing is used. It seems
like the advertisers lack knowledge of ethical norms and principles. They
just don’t understand and are unable to decide what is correct and what is
wrong.
Ethics in Advertising is directly related to the purpose of advertising
and the nature of advertising. Sometimes exaggerating the ad becomes
necessary to prove the benefit of the product. For e.g. a sanitary napkin ad
which shows that when the napkin was dropped in a river by some girls, the
napkin soaked whole water of the river. Thus, the purpose of advertising
was only to inform women about the product quality. Obviously, every
woman knows that this cannot practically happen but the ad was accepted.
This doesn’t show that the ad was unethical.
Ethics also depends
Surrogate advertising
Surrogate advertising is a form of advertising which is used to
promote banned products, like cigarettes and alcohol, in the disguise of
another product. This type of advertising uses a product of a fairly close
category, as: club soda, mineral water in case of alcohol, or products of a
completely different category (for example, music CD's or playing cards) to
hammer the brand name into the heads of consumers. The banned product
(alcohol or cigarettes) may not be projected directly to consumers but
rather masked under another product under the same brand name, so that
whenever there is mention of that brand, people start associating it with its
main product (the alcohol or cigarette). In India there is a large number of
companies doing surrogate advertising, from Bacardi Blast music CD's,
Bagpiper Club Soda to Officers Choice playing cards
Deceptive Advertising
Deceptive advertising, or false advertising, is any type of advertising that is
false, misleading, or has the effect of deceiving consumers. An ad can be
deceptive in many aspects, including:

 Price of a product
 Quantity of a product
 The quality or standard of the item
 Times, dates, and locations that the product is available
 Information regarding warranties
 False facts regarding deals or sales
 Confusion over interest rates or other factors

Under state and federal laws, advertising may be considered deceptive

even if the creator of the ad didn’t intend for it to be so. That is, a deceptive
advertising claim can be raised even if the ad contained a mistake.

Tying Arrangement
An agreement in which a vendor conditions the sale of a particular product
on a vendee's promise to purchase an additional, unrelated product.

In a tying arrangement, the product that the vendee actually wants to

purchase is known as the "tying product," while the additional product that
the vendee must purchase to consummate the sale is known as the "tied
product." Typically, the tying product is a desirable good that is in
considerable demand by vendees in a given market. The tied product is
normally less desirable, of poorer quality, or otherwise difficult to sell. For
example, motion picture distributors frequently tie the sale of popular video
cassettes to the purchase of second-rate films that are piling up in their
warehouses for lack of demand.

Tying arrangements are governed by the law of Unfair Competition. Such

arrangements tend to restrain competition by requiring buyers to purchase
inferior goods that they do not want or more expensive goods that they
could purchase elsewhere for less. In addition, competitors may reduce
their prices to below market level to attract purchasers away from
prospective tying arrangements. Competitors who sell their products at
below-market prices for an extended period can suffer enormous losses or
go out of business.

What Is the Black Market?

A black market is a transaction platform, whether physical or virtual, where
goods or services are exchanged illegally. What makes the market "black"
can either be the illegal nature of the goods and services themselves, the
illegal nature of the transaction or both.

A black market, underground economy or shadow economy, is a

clandestine market or series of transactions that has some aspect of
illegality or is characterized by some form of noncompliant behavior with an
institutional set of rules. If the rule defines the set of goods and services
whose production and distribution is prohibited by law, non-compliance with
the rule constitutes a black market trade since the transaction itself is
illegal. Parties engaging in the production or distribution of prohibited goods
and services are members of the illegal economy. Examples include the
drug trade, prostitution (where prohibited), illegal currency transactions and
human trafficking. Violations of the tax code involving income tax evasion
constitute membership in the unreported economy.

Production Management
Meaning of Production Management:
Production Management refers to the application of management principles
to the production function in a factory. In other words, production
management involves application of planning, organizing, directing and
controlling the production process.

Definition of Production Management:

It is observed that one cannot demarcate the beginning and end points of
Production Management in an establishment. The reason is that it is
interrelated with many other functional areas of business, viz., marketing,
finance, industrial relation policies etc.

Functions of Production Management

The definitions discussed above clearly shows that the concept of

production management is related mainly to the organizations engaged in
production of goods and services. Earlier these organizations were mostly
in the form of one man shops having insignificant problems of managing
the productions.
Scope of Production Management

The scope of production management is indeed vast. Commencing with the

selection of location, production management covers such activities as
acquisition of land, constructing building, procuring and installing
machinery, purchasing and storing raw materials and converting them into
saleable products. Added to the above are other related topics such as
quality management, maintenance management, production planning and
control, methods improvement and work simplification and other related
areas.

What is effluent?

Effluent is defined by the United States Environmental Protection Agency

as "wastewater - treated or untreated - that flows out of a treatment plant,
sewer, or industrial outfall. ... The Compact Oxford English Dictionary
defines effluent as "liquid waste or sewage discharged into a river or the
sea".

How are effluents treated?

The effluent treatment facility is installed for biological treatment of the

effluents. The effluent bears large amounts of organic matter. The direct
discharge of the effluent into the water bodies causes depletion of DO of
the water.

Genetically modified products

Genetically modified organisms (GMOs) are organisms whose genetic

material has been artificially modified to change their characteristics in
some way or another.

Various ethical issues associated with HGT from GMOs have been raised
including perceived threats to the integrity and intrinsic value of the
organisms involved, to the concept of natural order and integrity of species,
and to the integrity of the ecosystems in which the genetically modified
organism occurs.

Several scientific evidence that has emerged on GMOs over the last couple
of years shows that there are several clear risks to human health and the
environment. When genetic engineers create GMO or transgenic plants,
they have no means of inserting the gene in a particular position. The gene
ends up in a random location in the genetic material, and its position is not
usually identified. There are already several examples of such undesired
effects being identified in the US after approval (e.g., GM cotton with
deformed cotton bolls; increased lignin in GM soya, etc.). Releasing
genetically modified plants or crop into the environment may have direct
effects, including gene transfer to wild relatives or conventional crops,
weediness, trait effects on no target species, and other unintended effects.

Additive & intrinsically hazardous products

The use of chemicals has been increasing, mainly due to the economic
development in various sectors including industry, agriculture, food
processing and distribution, drugs, cosmetics, and transport (Pollak 2011).
As a consequence, people are exposed to a large number of chemicals of
natural and human-made origins. The trouble is that chemicals may have
unintended and harmful effects both on human health and the environment.
They may have immediate, acute effects, as well as chronic long term
consequences.1

Chronic, low-level exposure to various chemicals may result in a number of

adverse outcomes, including damage to the nervous and immune systems,
impairment of reproductive function and development, cancers, and organ-
specific damages. In addition, environmental emissions arising from the
use of chemicals vary in impact, depending on both the properties of the
chemical at stake and the purposes and methods of its use.

Ethics in Information Technology

Information technology ethics is the study of the ethical issues arising out of
the use and development of electronic technologies. Its goal is to identify
and formulate answers to questions about the moral basis of individual
responsibilities and actions, as well as the moral underpinnings of public
policy.
Information technology ethics raises new and unique moral problems
because information technology itself has brought about dramatic social,
political, and conceptual change. Because information technology affects
not only how we do things but how we think about them, it challenges some
of the basic organizing concepts of moral and political philosophy such as
property, privacy, the distribution of power, basic liberties and moral
responsibility.
Ethics in customer and Venture relationship
Customer Relationship Management (CRM) can be beneficial to both
supplier and customer. The supplier reduces costs by offering only
products that are wanted, when they are wanted, and he passes the cost
savings on to the customer who signed up for the company's CRM. To
implement such a system, extensive information about the customer must
be collected and stored. The two concerns with regard to this system are
customer privacy and the accuracy of the information collected.
When dealing with vendors, employees are expected to be as truthful and
candid as possible. Employees will never deliberately mislead vendors and
will openly and freely share information that is appropriate to the
relationship. Employees will never use deception or coercion to achieve an
unfair competitive advantage.
Module 3

Corporate Governance
INTRODUCTION
Governance implies a degree of control to be exercised by key stakeholders' representatives.
Governance is about governing. It is not merely about ownership. Even an owner has to learn to
govern. Good governance implies that the institution is run for the optimal benefit of the
stakeholders in it. The recognition of issues relating to corporate governance is timely as it is
appalling that we come across so many instances of well regarded corporates looting their
shareholders for personal gains of managers or the owners.

Corporate governance is a way of life and not a set of rules. A way of life necessitates taking
into account the shareholders' interests in every business decision In practice, the term means to
the role of the board of directors of the company and the auditors and their relationship with
shareholders. The ethical duties of nominated directors to all shareholders (foreign/ local) and
beyond the sectional interests they may represent could also be covered.

DEFINITION
It is a system by which companies are directed and controlled. us, placing board of directors of a
company in center.

A corporate governance is "a conscious, deliberate and sustained efforts on he part of corporate
entity to strike a judicious balance between its own interest and the interest of various constituents
on the environment in which it is operating."

Adrian Cadbury in UK emphasizes, "Corporate governance basically, has to do with power and
accountability: who exercise power, on behalf of whom, and how the exercise of power is
controlled."

NEED FOR CORPORATE GOVERNANCE (Why do we need Corporate

Governance?)
1. Wide Spread of Shareholders
Shareholders spread all over the nation and even the world; and a majority of shareholders
being unorganised and having an indifferent attitude towards corporate affairs. The idea of
shareholders’ democracy remains confined only to the law and the Articles of Association;
which requires a practical implementation through a code of conduct of corporate
governance

2. Changing Ownership Structure

The pattern of corporate ownership has changed considerably, in the present-day-times;
with institutional investors (foreign as well Indian) and mutual funds becoming largest
shareholders in large corporate private sector. These investors have become the greatest
challenge to corporate managements, forcing the latter to abide by some established code of
corporate governance to build up its image in society.

3. Corporate Scams or Scandals

Corporate scams (or frauds) in the recent years of the past have shaken public confidence in
corporate management. The event of Harshad Mehta scandal, which is perhaps, one biggest
scandal, is in the heart and mind of all, connected with corporate shareholding or otherwise
being educated and socially conscious.
The need for corporate governance is, then, imperative for reviving investors’
confidence in the corporate sector towards the economic development of society.

4. Greater Expectations of Society of the Corporate Sector

Society of today holds greater expectations of the corporate sector in terms of
reasonable price, better quality, pollution control, best utilisation of resources etc. To
meet social expectations, there is a need for a code of corporate governance, for the
best management of company in economic and social terms.

5. Hostile Take-Overs
Hostile take-overs of corporations witnessed in several countries, put a question
mark on the efficiency of managements of take-over companies. This factors also
points out to the need for corporate governance, in the form of an efficient code of
conduct for corporate managements.

ELEMENTS OF GOOD CORPORATE GOVERNANCE

Accountability of Board of Directors and their constituent responsibilities to the

ultimate owners-shareholders.
A key element of good governance is transparency and is perceived as such. It is
shared way of corporate functioning and not a set of rules. Transparency in turn
requires the right to information, timeliness and integrity of the information
produced.

a) System of checks and balances and greater simplicity in process of

governance.
b) Clarity of responsibility to enhance accountability
c) Adherence to the rules. Corporate action needs to conform to letter and spirit
to codes.
d) Adherence to the rules. Corporate action needs to conform to letter and spirit to codes.

Evidence of Corporate Governance from Arthashasthra

1) Kautilya - Describe the four-hold duty of a king.

2) Raksha - Literally mean protection, in corporate world it can be equated

risk management aspect, simply to say how to identify, evaluate and
minimize the risk as well as implement the risk management decisions.

3) Vriddhi - Means growth, in the present day it can be equated to stakeholder

value enhancement.

4) Palana - Means compliance it can be equated compliance of law.

5) Yogakshema - Means wellbeing, it can be equated to corporate social

responsibility.

CORPORATE GOVERNANCE THEORIES

There are many theories of corporate governance which addressed the challenges of
governance of firms and companies from time to time. The Corporate Governance is
the process of decision making and the process by which decisions are implemented
in large businesses is known as Corporate Governance. There are various theories
which describe the relationship between various stakeholders of the business while
carrying out the activity of the business. Some of the theories will be discussing
below

1. Agency Theory

Agency theory defines the relationship between the principals (such as shareholders
of company) and agents (such as directors of company). According to this theory, the
principals of the company hire the agents to perform work. The principals delegate the
work of running the business to the directors or managers, who are agents of
shareholders. The shareholders expect the agents to act and make decisions in the
best interest of principal. On the contrary, it is not necessary that agent make decisions
in the best interests of the principals. The agent may be succumbed to self-interest,
opportunistic behaviour and fall short of expectations of the principal. The key feature
of agency theory is separation of ownership and control. The theory prescribes that
people or employees are held accountable in their tasks and responsibilities. Rewards
and Punishments can be used to correct the priorities of agents.

2. Shareholder Theory

It states that the sole responsibility of business is to increase profits. It is based on

the premise that management are hired as the agent of the shareholders to run the
company for their benefit, and therefore they are legally and morally obligated to
serve their interests. The only qualification on the rule to make as much money as
possible is “conformity to the basic rules of the society, both those embodied in law
and those embodied in ethical custom.”

The shareholder theory is seen as the historic way of doing business with companies
realising that there are disadvantages to concentrating solely on the interests of
shareholders. A focus on short term strategy and greater risk taking are just two of
the inherent dangers involved. The role of shareholder theory can be seen in the
demise of corporations such as Enron and Worldcom where continuous pressure on
managers to increase returns to shareholders led them to manipulate the company
accounts.
3. Stakeholder Theory

Stakeholder theory incorporated the accountability of management to a broad range

of stakeholders. It states that managers in organizations have a network of
relationships to serve – this includes the suppliers, employees and business partners.
The theory focuses on managerial decision making and interests of all stakeholders
have intrinsic value, and no sets of interests is assumed to dominate the others

4. Stewardship Theory

The steward theory states that a steward protects and maximises shareholders wealth
through firm Performance. Stewards are company executives and managers working
for the shareholders, protects and make profits for the shareholders. The stewards are
satisfied and motivated when organizational success is attained. It stresses on the
position of employees or executives to act more autonomously so that the
shareholders’ returns are maximized. The employees take ownership of their jobs and
work at them diligently.
CODES AND GUIDELINES FOR CORPORATE GOVERNANCE

The Corporate Governance code applies to corporations that are incorporated in the United
Kingdom and that are registered on the London Stock Exchange. Overseas corporations that
are listed on the Main Market must disclose the substantial ways in which their corporate
governance practices are different than the practices outlined in the Corporate Governance
Code.

The principle behind the Corporate Governance Code is to demonstrate to shareholders and
stakeholders how the corporation applied the main principles of the code. In addition,
corporations that are subject to the code must confirm that they’ve fully complied with the
provisions of the code. Companies that can’t or won’t comply with the code’s provisions
must provide a reasonable explanation of why they haven’t complied with the code.

The requirements of the Corporate Governance Code are strikingly similar to those of the
Annual Corporate Report that the United States requires.

What is Corporate Governance Code?

Using best practices as its foundation, the Corporate Governance Code outlines the standards
for the expectations for corporate boards in protecting shareholder investments. The code
refers to standards for good practices relating to:

• Board composition
• Board development
• Remuneration
• Accountability
• Audit
• Shareholder relations

Five Pillars of Good Corporate Governance Make Up the Corporate Governance Code
Much like the pillars of good corporate governance in the United States, the Corporate
governance code in the United Kingdom comprises the pillars of leadership, effectiveness,
accountability, remuneration and shareholder relationships.

1) Leadership
The code requires companies to ensure to shareholders that they have an effective board of
directors that’s capable of providing excellence in board leadership. Boards of directors are
collectively responsible for the short- and long-term success of the corporations they serve.

Strong leadership requires corporations to have a clear division of the responsibilities

between board directors and executives. Boards are responsible for strategic planning and
oversight, and the executives are responsible for the day-to-day responsibilities of running the
company. The board chair is responsible for the board’s leadership and the chair must ensure
that the board operates as efficiently as possible in relation to all of their board duties and
responsibilities.

Non-executive board directors should constructively challenge the board and help to develop
successful proposals for strategy. The code expressly states that no single person should have
total decision-making power on a board.

2) Effectiveness
The code requires corporate boards to ensure that they have a composition that encompasses
the appropriate balance of skills, experience, independence and knowledge of the company so
that they’re able to perform their duties and responsibilities effectively:

• Boards are required to develop a formal, rigorous and transparent process for
appointing new board directors.
• Before accepting a position on a board of directors, nominees should ensure that
they have sufficient time to fulfil their board duties and responsibilities.
• Boards should avail their board directors of a comprehensive board orientation and
onboarding process. In addition, boards should provide regular opportunities for
board director training and education.
• Management should provide accurate information to the board that has the
appropriate form and quality so that the board can fulfil its duties in a timely
manner.
• Boards should also conduct rigorous annual self-evaluations for the board, individual
directors and significant committees, with the goal of improving their performance.
All board directors should be subject to regular elections as long as they continue to
perform satisfactorily.
3) Accountability
The board is wholly accountable for the actions and decisions of the company. The board
should make annual disclosures to shareholders that represent a fair, accurate and
comprehensive assessment of the corporation’s positions and corporate outlook.

The board is additionally responsible for assessing the nature and extent of risks it is willing
to take to achieve its strategic plans. Boards should participate in sound risk management and
internal control systems.

Boards should also establish formal procedures for corporate reporting, risk management
reporting and internal control principles. Procedures should include details of relationships
between the company and the internal and external auditors.

4) Remuneration
The United Kingdom favours remuneration packages that are designed to promote the long-
term success of the company and that are directly aligned with performance. Remuneration
should sufficiently challenge executives, be transparent and be rigorously applied.

The company should have a formal, transparent process for developing remuneration policies
and setting remuneration packages. Directors shouldn’t be involved in setting their own pay.

5) Shareholder Relationships
Boards should utilize their annual general meetings to communicate and engage with
investors on their objectives and strategic planning. The board should ensure that
communications with shareholders are satisfactory.

These pillars are considered the minimum for the basics of good governance. Corporations
are encouraged to add their own best practices as they develop them and learn from other
corporations around the world.
Developments in corporate governance
India, US and UK Corporate Governance Norms - A
Comparative Approach
Example:

https://www.hms-networks.com/ir/governance/corporate-governance
Example:

https://www.billion.com/InvestorRelation/Overview
Example:

https://www.billion.com/InvestorRelation/Overview
Board of Directors and Governance
The role of the board of directors
The role of the board of directors

 Nearly all companies are managed by a board of directors, appointed or elected by the
shareholders to run the company on their behalf. In most countries, the directors are
subject to periodic (often annual) re-election by the shareholders. This would appear to
give the shareholders ultimate power, but in most sectors it is recognised that
performance can only be judged over the medium to long-term.
 The role of the board of directors includes:
 to define the purpose of the company
 to define the values by which the company will perform its daily duties
 to identify the stakeholders relevant to the company
 to develop a strategy combining these factors
 to ensure implementation of this strategy.
Structure of the board of directors

 There is no convenient formula for defining how many directors a company should have,
though in some jurisdictions company law specifies a minimum and/or maximum number
of directors for different types of company. Tesco plc, a large multinational supermarket
company, has 13 directors. Swire Pacific Limited, a large Hong Kong conglomerate, has 18
directors. Smaller listed companies generally have fewer directors, typically six to eight
persons.
 The board of directors is made up of executive directors and non-executive directors.
Executive directors

 Executive directors are full-time employees of the company and, therefore, have two
relationships and sets of duties. They work for the company in a senior capacity, usually
concerned with policy matters or functional business areas of major strategic importance.
Large companies tend to have executive directors responsible for finance, IT/IS, marketing
and so on.
 Executive directors are usually recruited by the board of directors. They are the highest
earners in the company, with remuneration packages made up partly of basic pay and
fringe benefits and partly performance-related pay. Most large companies now engage
their executive directors under fixed term contracts, often rolling over every 12 months.
 The chief executive officer (CEO) and the finance director (in the US, chief financial officer)
are nearly always executive directors.
Non-executive directors (NEDs)

 Non-executive directors (NEDs) are not employees of the company and are not involved
in its day-to-day running. They usually have full-time jobs elsewhere, or may sometimes
be prominent individuals from public life. The non-executive directors usually receive a
flat fee for their services, and are engaged under a contract for service (civil contract,
similar to that used to hire a consultant).
 NEDs should provide a balancing influence and help to minimise conflicts of interest. Their
roles include:
 to contribute to the strategic plan
 to scrutinise the performance of the executive directors
 to provide an external perspective on risk management
 to deal with people issues, such as the future shape of the board and resolution of conflicts.
Non-executive directors (NEDs)

 The majority of non-executive directors should be independent. Factors to be considered

in assessing their independence include their business, financial and other commitments,
other shareholdings and directorships and involvement in businesses connected to the
company. However, holding shares in the company does not necessarily compromise
independence.
 Non-executive directors should have high ethical standards and act with integrity and
probity. They should support the executive team and monitor its conduct, demonstrating
a willingness to listen, question, debate and challenge.
 It is now recognised as best practice that a public company should have more non-
executive directors than executive directors. In Tesco plc, there are five executive
directors and eight independent non-executive directors. Swire Pacific Limited has eight
executive directors and 10 non-executive directors, of which six are independent non-
executive directors.
Shadow Director

 An individual may be accountable in law as a shadow director. A shadow director is a

person who controls the activities of a company, or of one or more of its actual directors,
indirectly.
 For example, if a person who is unconnected with a company gives instructions to a
person who is a director of the company, then the second person is an actual director
while the first person is a shadow director. In some jurisdictions, shadow directors are
recognised as being as accountable in law as actual directors.
Segregation of responsibilities

 It is generally recognised that the CEO should not hold the position of chairman, as the
activities of each role are quite distinctive from one another. In larger companies, there
would be too much work for one individual, though in Marks & Spencer, a large listed UK
retail organisation, one person did occupy both positions for several years.
 The secretary should not also be the chairman of the company. As the secretary has a key
role in liaising with the government registration body, having the same person occupying
both roles could compromise the flow of information between this body and the board of
directors.
Standing committees

 The term ‘standing committee’ refers to any committee that is a permanent feature within
the management structure of an organisation. In the context of corporate governance, it
refers to committees made up of members of the board with specified sets of duties. The
four committees most often appointed by public companies are the audit committee, the
remuneration committee, the nominations committee and the risk committee.
Audit committee

 This committee should be made up of independent non-executive directors, with at least

one individual having expertise in financial management. It is responsible for:
 oversight of internal controls; approval of financial statements and other significant
documents prior to agreement by the full board
 liaison with external auditors
 high level compliance matters
 reporting to the shareholders.
 Sometimes the committee may carry out investigations and may deal with matters
reported by whistleblowers.
Remuneration committee
 This committee decides on the remuneration of executive directors, and sometimes other
senior executives.
 It is responsible for formulating a written remuneration policy that should have the aim of
attracting and retaining appropriate talent, and for deciding the forms that remuneration
should take.
 This committee should also be made up entirely of independent non-executive directors,
consistent with the principle that executives should not be in a position to decide their
own remuneration.
 It is generally recognised that executive remuneration packages should be structured in a
manner that will motivate them to achieve the long-term objectives of the company.
 Therefore, the remuneration committee has to offer a competitive basic salary and fringe
benefits (these attract and retain people of the right calibre), combined with
performance-related rewards such as bonuses linked to medium and long-term targets,
shares, share options and eventual pension benefits (often subject to minimum length of
service requirements).
Public oversight

 Public oversight is concerned with ensuring that the confidence of investors and the
general public in professional accountancy bodies is maintained. This can be achieved by
direct regulation, the imposition of licensing requirements (including, where appropriate,
exercising powers of enforcement) or by self-regulation.
 As the US operates a rules-based system of governance, these responsibilities are
discharged by the Public Company Accounting Oversight Board, which has the power to
enforce mandatory standards and rules laid down by the Sarbanes-Oxley Act. In the UK,
regulation is the responsibility of the Professional Oversight team of the Financial
Reporting Council.
UK Corporate Policy

 Overview of UK Corporate Governance Norms

 The UK Corporate Governance Code 2010 is overseen by the Financial Reporting Council
(FRC). The Listing Rules 2000 require that public listed companies disclose how they have
complied with the code, and explain where they have not applied the code - in what the code
refers to as 'comply or explain' . However there is no requirement for disclosure of
compliance in private company accounts.
U.S Corporate Policy

• Principle I: Ensuring the Basis for an Effective Corporate Governance

• Principle II: The Rights of Shareholders and Key Ownership Function
• Principle III: The Equitable Treatment of Shareholders
• Principle IV: Disclosure and Transparency
• Principle V: The Responsibilities of the Board
Comparative Analysis of Corporate
Governance Code in India and US
1. Board Structure:
US and India have a unitary structure of Board of Directors where all directors
stand on equal footing and are legally responsible for managing the
company’s business.
However, recently Dr. J. J. Irani Committee on Companies Act, 1956 has
expressed opinion on differentiation in the liabilities of the Directors as per their
involvement in the decisions of the Board.
Comparative Analysis of Corporate
Governance Code in India and US
2. Role of Board of Directors: US is seen to be liberal while deciding the role of
the Directors as a brief note on the role of the Board can be seen in the US
laws whereas India has a detailed role in respective laws.
Following is the role of the Board of Directors of US companies:
a. To select, evaluate and compensate the Chief Executive Officer (CEO);
b. To debate and ultimately approve the company’s strategy;
c. To ensure that the company is managed in the best interest of its
shareholders; and
d. To oversee the auditing process resulting in the proper disclosure of
accurate financial statements.
Birla Committee in its report reveals the
Board’s role in the parts of Direction and
Control as follows:
1. By direction, Directors are responsible for,
i. formulating and reviewing the company’s policies, strategies, major
plans, setting performance objectives;
ii. monitoring implementation and corporate performance;
iii. overseeing major capital expenditures, acquisitions and divestitures,
change in financial control; and
iv. compliance with applicable laws, taking into account the interest of
stakeholders.
Comparative Analysis of Corporate
Governance Code in India and US
2. By control, Directors are responsible for
i. laying down the code of conduct;
ii. overseeing the process of disclosure and communications;
iii. ensuring that the appropriate systems for financial control;
iv. reporting and monitoring for keeping the risk in place;
v. evaluating the performance of management, chief executive, executive
directors; and
vi. providing checks and balances to reduce potential conflict between the
specific interests of management and the wider interests of the company and
shareholders including misuse of corporate assets and abuse in related party
transactions.
Comparative Analysis of Corporate
Governance Code in India and US
3. Composition of the Board of Directors:
In US, neither SEC nor any federal legislation has rules on board size and
therefore number of directors varies significantly from company to company.
However, individual stock exchanges such as NYSE have determined that
listed companies must have majority of independent directors. ]
In India, Clause 49 determines the Board composition based on the
Chairperson of the Board i. If Chairperson is an executive Director, more than
50% directors on the Board should be Independent Directors ii. If Chairperson is
a non-executive Director, more than 33% directors on the Board should be
Independent Directors.
Comparative Analysis of Corporate
Governance Code in India and US
4. Independence of the Directors: The word independence is subject matter of
the present and past monitory relationship of a person with company, its
management and the executive directors. This is mainly to identify the
monitory dependence of the non-executive directors on the company and
the possible effect of such relationship on the decision making power of that
director. As the intention of the term independence is reducing dependence
on the company, these definitions are mostly negative while determining the
independence of a person as director.
In USA, independence of the Directors is defined in the NYSE Stock Exchange
rules. NYSE Corporate Governance Rules as approved by SEC states that listed
companies must have independent directors.
Comparative Analysis of Corporate
Governance Code in India and US
 In India, Naresh Chandra Committee in 2002 emphasized the point that
directors are fiduciaries of shareholders and not the management; and
should be expected to exercise “Independent Oversight Judgment.” The
concept was incorporated with recommendations of Narayan Murthy
Committee in 2003 with some minor revisions.
Comparative Analysis of Corporate
Governance Code in India and US
5. Terms of Service of Directors:
In US, there are no specific provisions defining the term of a Director to serve
on the company, neither mandatory nor recommendatory.
Whereas, in India, it is recommended that the Non-executive Directors should
serve as independent directors in any company not more than nine years.
Comparative Analysis of Corporate
Governance Code in India and US
6. Committees under Corporate Governance: To confirm the best delivery of
the judgement and the benefit of individual capacities of the directors, both
nations recognise the concept of sub-committees. US and India have three
committees that are mandatorily formed under Corporate Governance Code.
Comparative Analysis of Corporate
Governance Code in India and US
 US Corporate Governance Code requires the companies to form following
committees:
1. Audit Committee
2. Nominating / Governance Committee
3. Compensation Committee

 Whereas, Corporate Governance Code under Clause 49 requires Indian listed

Companies to form following committees of the Board:
1. Audit Committee
2. Shareholders’ / Investors’ Grievance Committee
3. Remuneration Committee
Duties and Liabilities of
Directors
Duties of Directors

 The directors of a company have a fiduciary duty to the company, the

shareholders and the employees as a whole. Directors have inter alia the
following statutory duties:
• The duty to act in accordance with the articles of association of the company.
• The duty to act in good faith to promote the objects of the company.
• The duty of care, skill and diligence and to exercise independent judgment.
 (Section 166, Companies Act 2013.)
 Independent directors also have additional duties which are codified in
Schedule IV of the Companies Act 2013. Тhe LODR Regulations also set out the
duties and liabilities of the directors and board of listed companies (regulations 17
and 25).
Liabilities of Directors

 If a director breaches the Companies Act 2013 or the LODR Regulations,

he/she is subject to a fine and/or imprisonment depending on the nature of
contravention. Some of the instances in which a director can be criminally
held liable include the following:
• Failure to file annual returns.
• The company failing to fulfil its corporate social responsibility obligations
under the Companies Act 2013.
• The issue of prospectus with a misleading statement.
• Breaching provisions in relation to related party transactions.

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Legal framework
 Apart from the Companies Act 2013 and the LODR Regulations, there are many other
rules, notifications and circulars issued by authorities such as the MCA and the SEBI,
which provide clarifications and guidance on corporate governance regulations.
 Authorities that are in charge of enforcement include the:
• State-wise ROC and regional directors.
• National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal.
• SEBI and Securities Appellate Tribunal.
• Serious Fraud Investigation Office.
• The National Financial Reporting Authority.

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Evolution of Corporate Governance in India
Recent Corporate Governance Trends
 The Companies Act 2013 was notified (that is, published in the Official Gazette of
India on 30 August 2013), together with the rules, circulars and orders issued under it,
allows the corporate sector to self-regulate while requiring greater transparency and
enhanced disclosures for improved compliance. In addition to the Companies Act 2013,
the Securities and Exchange Board of India (Listing Obligations and Disclosure
Requirement) Regulations 2015 (LODR Regulations) provide a regulatory framework for
corporate governance in India.
 The Insolvency and Bankruptcy Code 2016 (Insolvency Code), notified on 28 May 2016,
is a comprehensive bankruptcy and insolvency law which provides mechanisms to
financial creditors (for a defaulted financial debt) and operational creditors (for an
unpaid operational debt) to resolve their disputes with a corporate debtor, initiate
insolvency proceedings against a corporate debtor who has been unable to pay its debt
and recover their debts in a timely manner. The Insolvency Code allows the shift of
control from the defaulting debtor's management to its creditors (so that the creditors
drive the business of the debtor with the Resolution Professional acting as their agent).
 The corporate governance initiatives for corporates in India are primarily taken by the
Ministry of Corporate Affairs (MCA). The MCA facilitates the effective implementation of
the various provisions of the Companies Act 2013 and its other allied laws, rules and
regulations which regulate the functioning of the corporate sector in accordance with
the law.
 To promote corporate governance and to crack down on shell companies, the
Companies Act 2013 has recently been substantially amended to introduce several
corporate governance reforms, such as the following:
• The requirement to declare significant beneficial ownership.
• The requirement to file an e-form to update active/inactive status.
• The requirement to file a declaration confirming receipt of share money from the
subscriber and verification of its registered address with the Registrar of Companies
(ROC).
 The NGBRC sets out nine core principles called the "nine thematic pillars" of doing
business in India. The core principles (among others) include:
• Conducting the business with integrity and in an ethical, transparent, and accountable
manner.
• Promoting equitable development and sustainable growth.
• Welfare of employees.
• Protection of environment.
 The Securities and Exchange Board of India (SEBI) is the authority which regulates the
corporate governance of listed companies in India. SEBI published a report on 5
October 2017 (Kotak Committee Report) on strengthening current corporate
governance provisions. SEBI majorly amended the LODR Regulations in 2018 and 2019
to give effect to certain recommendations of the Kotak Committee Report.
 As a result of the 2019 novel coronavirus disease (COVID-19) pandemic, the MCA has relaxed
compliance with certain corporate governance provisions of the Companies Act 2013,
including the following:
• Board meeting and extra-ordinary general meetings (EGM), which otherwise required the
physical presence of the quorum, are now allowed to be conducted through videoconference
and other audio-visual means.
• Under the Companies Fresh Start Scheme 2020, companies have been exempted from paying
additional fees for late filing of forms to encourage companies to rectify pending compliance
issues.
• Relaxation from paying any additional amount for any delay in filing of documents during 1
April 2020 until 30 September 2020.
• Minimum residency requirement of 182 days for directors of a company have been done
away with during the financial year 2019-2020.
 The SEBI also relaxed compliance with certain requirements of corporate governance
provisions under the SEBI Act and the regulations under the SEBI Act, as a result of
COVID-19. The SEBI relaxed the following compliance requirements (among others):
• The timelines for filing regulatory compliances or conducting meetings under various
regulations have been extended (for example, under the Takeover Code and the LODR
Regulations).
• Companies are now exempt from adhering to the maximum time gap between two
board meetings and audit committee meetings.
• Implementation of several policies introduced by SEBI has been relaxed.

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MODULE-5
CORPORATE SOCIAL RESPONSIBILITY

Meaning
The heart of corporate governance is transparency, disclosure, accountability and
integrity. It is to be borne in mind that mere legislation does not ensure good
governance. Good governance flows from ethical business practices even when
there is no legislation.

Governance is concerned with the intrinsic nature, purpose, integrity and identity
of an organization with primary focus on the entity's relevance, continuity and
fiduciary aspects.

The root of the word Governance is from 'gubernate', which means to steer.
Corporate governance would mean to steer an organization in the desired direction.
The responsibility to steer lies with the board of directors/ governing board.
Corporate or a Corporation is derived from Latin term "corpus" which means a
"body". Governance means administering the processes and systems placed for
satisfying stakeholder expectation. When combined Corporate Governance means
a set of systems procedures, policies, practices, standards put in place by a
corporate to ensure that relationship with various stakeholders is maintained in
transparent and honest manner.

Definition
 "Corporate Governance is concerned with the way corporate entities are
governed, as distinct from the way business within those companies is
managed. Corporate governance addresses the issues facing Board of
Directors, such as the interaction with top management and relationships
with the owners and others interested in the affairs of the company".

-Robert Ian (Bob) Tricker (who introduced the words corporate governance
for the first time in his book in 1984)
 "Corporate Governance is about promoting corporate fairness, transparency
and accountability".
-James D. Wolfensohn (Ninth President World Bank)

Need for CSR

Corporate social responsibility (CSR) promotes a vision of business accountability

to a wide-range of stakeholders, besides shareholders and investors. Key areas of
concern are environmental protection and the wellbeing of employees, the
community and civil society in general, both now and in the future.

The concept of CSR is underpinned by the idea that corporations can no longer act
as isolated economic entities operating in detachment from broader society.
Traditional views about competitiveness, survival and profitability are being swept
away.

Some of the drivers pushing business towards CSR include:

1. The shrinking role of government

In the past, governments have relied on legislation and regulation to deliver social
and environmental objectives in the business sector. Shrinking government
resources, coupled with a distrust of regulations, has led to the exploration of
voluntary and non-regulatory initiatives instead.

2. Demands for greater disclosure

There is a growing demand for corporate disclosure from stakeholders, including
customers, suppliers, employees, communities, investors, and activist
organizations.

3. Increased customer interest

There is evidence that the ethical conduct of companies exerts a growing influence
on the purchasing decisions of customers. In a recent survey by Environics
International, more than one in five consumers reported having either rewarded or
punished companies based on their perceived social performance.

4. Growing investor pressure

Investors are changing the way they assess companies' performance, and are
making decisions based on criteria that include ethical concerns. The Social
Investment Forum reports that in the US in 1999, there was more than $2 trillion
worth of assets invested in portfolios that used screens linked to the environment
and social responsibility. A separate survey by Environics International revealed
that more than a quarter of share-owning Americans took into account ethical
considerations when buying and selling stocks .

5. Competitive labor markets

Employees are increasingly looking beyond paychecks and benefits, and seeking
out whose philosophies and operating practices match their own principles. In
order to hire and retain skilled employees, companies are being forced to improve
working conditions.

6. Supplier relations
As stakeholders are becoming increasingly interested in business affairs, many
companies are taking steps to ensure that their partners conduct themselves in a
socially responsible manner. Some are introducing codes of conduct for their
suppliers, to ensure that other companies' policies or practices do not tarnish their
reputation.

THEORETICAL PERSPECTIVES

Corporate Governance Theories

The following theories elucidate the basis of corporate governance:

(a) Agency Theory
(b) Shareholder Theory
(c) Stake Holder Theory
(d) Stewardship Theory

(a) Agency Theory

According to this theory, managers act as 'Agents' of the corporation. The owners
or directors set the central objectives of the corporation. Managers are responsible
for carrying out these objectives in day-to-day work of the company. Corporate
Governance is control of management through designing the structures and
processes.

In agency theory, the owners are the principals. But principals may not have
knowledge or skill for getting the objectives executed. The principal authorizes the
mangers to act as 'Agents' and a contract between principal and agent is made.
Under the contract of agency, the agent should act in good faith. He should protect
the interest of the principal and should remain faithful to the goals.

In modern corporations, the shareholdings are widely spread. The management

(the agent) directly or indirectly selected by the shareholders (the Principals),
pursue the objectives set out by the shareholders. The main thrust of the Agency
Theory is that the actions of the management differ from those required by the
shareholders to maximize their return. The principals who are widely scattered
may not be able to counter this in the absence of proper systems in place as regards
timely disclosures, monitoring and oversight. Corporate Governance puts in place
such systems of oversight.

(b) Stockholder/shareholder Theory

According to this theory, it is the corporation which is considered as the property

of shareholders/ stockholders.

They can dispose of this property, as they like. They want to get maximum return
from this property.

The owners seek a return on their investment and that is why they invest in a
corporation. But this narrow role has been expanded into overseeing the operations
of the corporations and its mangers to ensure that the corporation is in compliance
with ethical and legal standards set by the government. So the directors are
responsible for any damage or harm done to their property i.e., the corporation.
The role of managers is to maximize the wealth of the shareholders. They,
therefore should exercise due diligence, care and avoid conflict of interest and
should not violate the confidence reposed in them. The agents must be faithful to
shareholders.

(c) Stakeholder Theory

According to this theory, the company is seen as an input-output model and all the
interest groups which include creditors, employees, customers, suppliers, local-
community and the government are to be considered. From their point of view, a
corporation exists for them and not the shareholders alone.

The different stakeholders also have a self interest. The interest of these different
stakeholders is at times conflicting. The managers and the corporation are
responsible to mediate between these different stakeholders interest. The stake
holders have solidarity with each other. This theory assumes that stakeholders are
capable and willing to negotiate and bargain with one another.
This results in long term self interest.

The role of shareholders is reduced in the corporation. But they should also work
to make their interest compatible with the other stake holders. This requires
integrity and managers play an important role here. They are faithful agents but of
all stakeholders, not just stockholders.

(d) Stewardship Theory

The word 'steward' means a person who manages another's property or estate.
Here, the word is used in the sense of guardian in relation to a corporation, this
theory is value based. The managers and employees are to safeguard the resources
of corporation and its property and interest when the owner is absent. They are like
a caretaker. They have to take utmost care of the corporation. They should not use
the property for their selfish ends. This theory thus makes use of the social
approach to human nature.

The managers should manage the corporation as if it is their own corporation. They
are not agents as such but occupy a position of stewards. The managers are
motivated by the principal's objective and the behavior pattern is collective, pro-
organizational and trustworthy. Thus, under this theory, first of all values as
standards are identified and formulated. Second step is to develop training
programs that help to achieve excellence. Thirdly, moral support is important to fill
any gaps in values.

CORPORATE CITIZENSHIP

The Securities and Exchange Board of India (SEBI) had set up a Committee under
the Chairmanship of Kumar Mangalam Birla to promote and raise standards of
corporate governance. The Report of the committee was the first formal and
comprehensive attempt to evolve a Code of Corporate Governance, in the context
of prevailing conditions of governance in Indian companies, as well as the state of
capital markets at that time.

The recommendations of the Report, led to inclusion of Clause 49 in the Listing

Agreement in the year 2000.

These recommendations, aimed at improving the standards of Corporate

Governance, are divided into mandatory and non-mandatory recommendations.
The said recommendations have been made applicable to all listed companies with
the paid-up capital of Rs. 3 crores and above or net worth of Rs. 25 crores or more
at any time in the history of the company. The ultimate responsibility for putting
the recommendations into practice lies directly with the Board of Directors and the
management of the company.

A summary of the Report is reproduced hereunder:

• The Board should have an optimum combination of Executive and Non

Executive Directors with not less than 50 per cent of the Board consisting of non-
executive directors. In the case of Non-executive Chairman, at least one-third of
the Board should consist of independent directors and in the case of an executive
Chairman, at least half of the Board should consist of independent directors. The
committee agreed on the following definition of independence:

"Independent directors are directors who apart from receiving director's

remuneration do not have any other material pecuniary relationship or transactions
with the company, its promoters, its management or its subsidiaries, which in the
judgment of the board may affect their independence of judgment."

• Board meetings should be held at least four times in a year, with a maximum time
gap of four months between any two meetings. A director should not be a member
in more than 10 committees or act as Chairman of more than five committees
across all companies in which he is a director.

• Financial Institutions should appoint nominee directors on a selective basis and

nominee director should have the same responsibility, be subject to the same
discipline and be accountable to the shareholders in the same manner as any other
director of the company.

• Non-executive Chairman should be entitled to maintain Chairman's office at the

expense of the company and also allowed reimbursement of expenses incurred in
performance of his duties.

• Audit Committee - which a qualified and independent audit committee should be

set up by the board of a company.

• The audit committee should have minimum three members, all being non-
executive directors, with the majority being independent, and with at least one
director have the chairman of the committee should be an independent director.
• The chairman should be present at Annual General Meeting to answer
shareholder queries.

• The audit committee should invite such of the executives, as it considers

appropriate (and particularly the head of the finance function) to be present at the
meetings of the committee but on occasions it may also meet without the presence
of any executives of the company. Finance director and head of internal audit and
when required, a representative of the external auditor should be present as invitees
for the meetings of the audit committee.

• The Company Secretary should act as the secretary to the committee.

•Frequency of Meeting.

• The audit committee should meet at least thrice a year. One meeting must be held
before finalization of annual accounts and one necessarily every six months.

• The quorum should be either two members or one-third of the members of the
audit committee, whichever is higher and there should be a minimum of two
independent directors.

•Powers of Audit Committee.

• To investigate any activity within its terms of reference.

• To seek information from any employee.

• To obtain outside legal or other professional advice.

• To secure attendance of outsiders with relevant expertise, if it considers

necessary.

•Functions of the Audit Committee.

• Oversight of the company's financial reporting process and the disclosure of its
financial information to ensure that the financial statement is correct, sufficient and
credible.

• Recommending the appointment and removal of external auditor, fixation of

audit fee and also approval for payment for any other services.

• Reviewing with management the annual financial statements before submission

to the board, focusing primarily on.

Remuneration Committee

Remuneration Committee should comprise of at least three directors, all of whom

should be non- executive directors, the chairman of committee being an
independent director. All the members of the remuneration committee should be
present at the meeting. These recommendations are non-mandatory.

The board of directors should decide the remuneration of non-executive directors.

The Corporate Governance section of the Annual Report should make disclosures
about remuneration paid to Directors in all forms including salary, benefits,
bonuses, stock options, pension and other fixed as well as performance linked
incentives.

• Shareholders/Investors' Grievance Committee of Directors - The Board should set

up a Committee to specifically look into share holder issues including share
transfers and redressal of shareholders' complaints.

• General Body Meetings - Details of last three AGMs should be furnished.

• Disclosures - Details of non-compliance by the company including penalties and

strictures imposed by the Stock Exchanges, SEBI or any statutory authority on any
matter related to capital markets during the last three years must be disclosed to the
shareholders.

• Means of communication - Half-yearly report to be sent to each household of

shareholders, details of the mode of dissemination of quarterly results and
presentations made to institutional investors to be disclosed and statement of
Management Discussion and Analysis to be included in the report.

• General shareholder information - Various specified matters of interest to be

included in the Annual Report.

• Auditor's Certificate on Corporate Governance - There should be an Auditor's

certificate on corporate governance in the Annual Report as an annexure to the
Director's Report.
• Companies should consolidated accounts in respect of all subsidiaries in which
they hold 51 per cent or more of the capital.

• Information like quarterly results, presentation made by companies to analysts

may be put on company's web-site or may be sent in such a form so as to enable
the stock exchange on which the company is listed to put it on its own web-site.

• Shareholders to use the forum of General Body Meetings for ensuring that the
company is being properly stewarded for maximizing the interests of the
shareholders.

• A board committee under the chairmanship of a non-executive director should be

formed to specifically look into the redressing of shareholder complaints like
transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends
etc.

• Half-yearly declaration of financial performance including summary of the

significant events in last six-months, should be sent to each household of
shareholders.

The institutional shareholders should:

Take active interest in the composition of the Board of Directors Be vigilant

Maintain regular and systematic contact at senior level for exchange of views on
management, strategy, performance and the quality of management. Ensure that
voting intentions are translated into practice. Evaluate the corporate governance
performance of the company.

TYPES OF BOARD

Unitary Board

The unitary board, remains in full control of every aspect of the company's
activities. It initiates action and it is responsible for ensuring that the action which
it has initiated is carried out. All the directors, whether executive or outside, share
same aims and responsibilities and are on the same platform.

Two-tier Boards
The alternative board model to unitary board is the two-tier board, which was
developed in its present form in Germany.

A two-tier board fulfils the same basic functions as a unitary board, but it does so
through a clear separation between the tasks of monitoring and that of
management. The supervisory board (Asfusichtsrat) oversees the direction of the
business and the management board (Vorstand) is responsible for the running of
the company. The supervisory board controls the management board through
appointing its members and through its statutory right to have the final say in
major decisions affecting the company. The structure rigorously separates the
control function from the management function and members of the one board
cannot be members of the other. This separation is enshrined in law and the legal
responsibilities of the two sets of board members are different.

The supervisory board system was introduced to strengthen the control of

shareholders, particularly the banks, over the companies in which they had
invested. Shareholdings are more concentrated in Germany and most quoted
companies have at least one major shareholder, often a family or another company.
Banks play an important part in governance as investors, lenders and through the
votes of individual shareholders for which they hold proxies. They are, therefore,
well represented on supervisory boards.

STRATEGIES FOR CORPORATE SOCIAL RESPONSIBILITY

Recommendations of Report of Committee on The Financial Aspects on Corporate

Governance, 1992 under the chairmanship of Sir Adrian Cadbury set up by the
London Stock Exchange, the Financial Reporting Council and accounting
professions to focus on the control and reporting functions of boards, and on the
role of auditors.

Role of Board of Directors

The Report introduced "The Code of Best Practice" directing the boards of
directors of all listed companies registered in the UK, and also encouraging as
many other companies as possible aiming at compliance with the requirements. All
listed companies should make a statement about their compliance with the Code in
their report and accounts as well as give reasons for any areas of non-compliance.
It is divided into four sections:

1. Board of Directors
(a) The board should meet regularly, retain full and effective control over the
company and monitor the executive management.

(b) There should be a clearly accepted division of responsibilities at the head of a

company, which will ensure a balance of power and authority, such that no one
individual has unfettered powers of decision.

(c) Where the chairman is also the chief executive, it is essential that there should
be a strong and independent element on the board, with a recognized senior
member, that is, there should be a lead independent director.

(d) All directors should have access to the advice and services of the company
secretary, who is responsible to the Board for ensuring that board procedures are
followed and that applicable rules and regulations are complied with.

2. Non-Executive Directors

(a) The non-executive directors should bring an independent judgment to bear on

issues of strategy, performance, resources, including key appointments, and
standards of conduct.

(b) The majority of non-executive directors should be independent of management

and free from any business or other relationship which could materially interfere
with the exercise of their independent judgment, apart from their fees and
shareholding.

3. Executive Directors

There should be full and clear disclosure of directors' total emoluments and those
of the chairman and highest-paid directors, including pension contributions and
stock options, in the company's annual report, including separate figures for salary
and performance-related pay.

4. Financial Reporting and Controls

It is the duty of the board to present a balanced and understandable assessment of

their company's position, in reporting of financial statements, for providing true
and fair picture of financial reporting. The directors should report that the business
is a going concern, with supporting assumptions or qualifications as necessary. The
board should ensure that an objective and professional relationship is maintained
with the auditors.

CHALLENGES & IMPLEMENTATION

Company being an artificial person it requires certain natural persons to represent

the company at various fronts. The position of directors in their relationship to the
company is not only as the agents, but also trustees of the company.

Executive Director: The term executive director is usually used to describe a

person who is both a member of the board and who also has day to day
responsibilities in respect of the affairs of the company. Executive directors
perform operational and strategic business functions such as:
• Managing people
• Looking after assets
• Hiring and firing
• Entering into contracts

Executive directors are usually employed by the company and paid a salary, so are
protected by employment law.

Examples of executive directors are production director, finance director or

managing director or whole time director.

Section 2(26) of the Companies Act, 1956 defines Managing Director as -

"managing director" means a director who, by virtue of an agreement with the
company or of a resolution passed by the company in general meeting or by its
Board of directors or, by virtue of its memorandum or articles of association, is
entrusted with [substantial powers of management] which would not otherwise be
exercisable by him, and includes a director occupying the position of a managing
director, by whatever name called.

Provided that the power to do administrative acts of a routine nature when so

authorized by the Board such as the power to affix the common seal of the
company to any document or to draw and endorse any cheque on the account of the
company in any bank or to draw and endorse any negotiable instrument or to sign
any certificate of share or to direct registration of transfer of any share, shall not be
deemed to be included within substantial powers of management.

Provided further that a managing director of a company shall exercise his powers
subject to the Superintendence, control and direction of its Board of directors.

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