About the Author

Smarajit Kr Mandal is a Ph. D in Engineering from the University of

London, UK. He is an FIIM (Fellow of the Indian Institute of Metals),
FIE (Fellow of the Institution of Engineers) and the former Director
(Scientific Services), Tata Steel Ltd., Jamshedpur. Presently he is a
Management Consultant, Mentor and Academician based in Kolkata.
Dr. Mandal served the leading Tata Group of companies at Jamshedpur—
namely Tata Motors and Tata Steel—for over 32 years in various
capacities, and retired from a senior management position at Tata Steel.
He has vast industry experience and exposure to senior management
functions, and has been simultaneously associated with teaching and academic developments at
leading national institutions such as IIT-Kharagpur. His vast industry experiences coupled with
academic interests led him to work post-retirement in the field of management education. He
has published many books in this field, notably in the areas of managerial effectiveness, total
quality management, and management principles and practice. The present book on Ethics
in Business and Corporate Governance is an outcome of his endeavour to fill the gap in this
series of books connecting ‘Total Quality – Business – & Ethics’ (for management studies)—by
blending his industry experiences, insights, information and perceptions with the knowledge
from hitherto published materials and basic theories of ethics.
 Smarajit Kr Mandal
Visiting Faculty & Management Consultant
Formerly Director (Scientific Services),Tata Steel Ltd., Jamshedpur

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 Preface to the
Second Edition
In this strife-torn world—full of conflicts, corruption, complicity, coercion and (unhealthy)
competition affecting the stability of economic state, fairness of governance, sustainability of
business and welfare of the society—ethics are on everyone’s lips. Governments, regulators,
corporations, federations of business organisations, associations of professionals, and institutions
of learning are all coming out with the suggestion of ‘need for ethics’ and ‘code of ethics’.Yet,
ethics in business, governance and society remain illusive! We continue to hear almost daily about
scams in business and financial market; delay or denial of justice in governance; deprivation of
rights of the underprivileged and poor in the society; unethical business deals; complicity in
market operations; insider trading in capital market; curtailment of price of products; and many
other unethical acts and actions that continue to cause sufferings to the society and common
people. Greed and rush for making money by powerful actors in business, politics and society
is creating wider divide between rich and poor, and imbalances in social and national growth.
The welfare of the society, stability of the state and the concept of business as ‘an institution of
economic well-being for the society’ are being challenged daily by streams of unethical actions
and activities. We all agree to the urgent need for ethics in the society, marketplace, business
operations, corporate governance, administration of systems, applications of laws and any other
field of activities that touches and affects our lives; yet violation of ethics is very common and
rampant. There could be many reasons for such a state of affairs today, which is not confined to
India alone but is found across the world. There could be disagreement too about such reasons
amongst experts, but one thing is clear that these are not due to lack of laws, regulations or
systems. It is happening because individuals—the actors on the platforms of our society, business
and governance—are bent upon to circumvent laws and regulations and are often not inclined
to behave legally, morally or ethically.
Ethics cannot be imposed from outside; it is a matter of internal realisation, appreciation and
feeling about good and bad, fair and unfair, and just and unjust. Ethics have to be within us,
guiding our morality, moral responsibility and moral values and making us think, act and work
with honesty, dignity, integrity and (positive) creativity. Ethics are the expression of one’s good-
self; ethics (ethical standards, for that matter) are the expression of a society’s commitment to
goodness of all its members. Similarly, ethics have to be the expression of ‘goodness’ of business
 Preface to the Second Edition

leaders and managers’ commitment to ‘fairness and justice’ for all its stakeholders. It is time to
recognise that ‘good business’ is not for self-serving; inter alia it should serve the society, because
it is interdependent on the society for survival and sustainability.
Therefore, ethics in business—and corporate governance, for that matter—should
embrace ways and means to find (or establish) these expressions of ethics in business operations
and governance. Analyses of events, happenings and ethical expectations of society from the
business indicate that there is need for radical change in the direction of business operations
and governance by: (a) redefining the purpose of business and re-examining the morality of
business goals, (b) re-positioning or re-engineering the processes of business for more inclusivity
with social needs, (c) re-emphasising the importance of quality and morality of individuals
who act on behalf of the business, (d) reinventing and re-employing the moral and creative
potential of individuals in the business for creating ‘true value’ for the society and nation, and
(e) redrawing the lines of corporate governance—not only for abiding the laws and regulations
for conformity or profitability but also for the benefits of society, sustainability and sustainable
developments. Ethics have to be integrated into the policy-making and operational processes
of business enterprises as a core discipline, especially in areas of dealings with finance, market,
human resource, environment and governance. A change in viewing business from self-serving
commercial organisation with limited liability to ‘holistic’ economic institution with total responsibility for
the well-being of all concerned (i.e. stakeholders of the business) for long-term sustainability
is urgently necessary. Ethics demand integration of social and environmental needs into the
business purposes as a matter of ‘locked-in safety-support’ from the big-brothers—the Society
and the Environment (natural), called the second God of modern time—for sustainability.
This calls for ‘total transformation’ of business and corporate governance culture by seamlessly
infusing ethics into the business. Ethics being an ‘internalisation of morality’, as are our habits, it
is hard to change once malformed. One of the easiest ways of infusing ethics into the people and
business could be to start teaching ‘morality and moral issues’ to students early in their career
in order to develop the sensitivity to ethics, and then impart well-designed ethics courses to
all business studies and management education. Learning route to ethics through sustained and
focused education is essential for today’s business studies if we have to move forward to make
the business a safe, secured and sustainable institution of economic well-being for the society at
large. The first edition of this book—Ethics in Business and Corporate Governance—was designed
and structured to broadly serve this purpose. Now, the second edition is being brought out to
further strengthen that purpose by incorporating many new topics and additional features—as
suggested by experts and faculties of ethics.
Initial contents and structure of the book had been based on what I perceived as the needs
of students if I were a student now. I am very much encouraged by the positive reviews and
responses of the market and users of this book, i.e., the students and faculties. Encouraged by
the response, the publishers of the book—Tata McGraw Hill Education—have decided to take
further this book by bringing out the second edition. In accordance to their natural drive and
commitment to continuous improvement of educational products, the publishers collected
feedback on this book from a large number of experts and faculties in the country. They have
collected suggestions for inclusion of some more topics in the book to make it more useful to
 Preface to the Second Editio

the students of management and make it unique in the market for the practising professionals
from industries and business. The second edition, containing all suggested topics and few more,
is aimed at making this book more comprehensive and contemporary by filling the gaps from
the first edition, but without allowing the book to lose its original fervour and flavour.
The author and the publishers thank all the reviewers for their valuable comments and
suggestions and also hope that their efforts will be proved very useful to the students, faculties,
professionals and others interested in ethics of business and in ethical corporate governance.We
will feel vindicated and gratified by their positive response to this new edition.

Smarajit Kr Mandal
 Preface to the
First Edition
Historically, it is said that ‘Empires down the history have been known to get built only to be
lost subsequently’. This has proved true for the business empires too over the years of business
history, especially for those that got built on self-serving motives and unethical practices. Many
corporate giants got lost in history sooner than later—only for failing to be ethical and visionary
in their conduct of business practices. Recent examples of business empires lost due to alleged
unethical practices are Enron, WorldCom, Satyam, and Arthur Anderson—the one-time global
leaders of business in their respective fields. There are many such examples in every part of the
world, and they all tell the same story time and again. No doubt, many business enterprises
got buried in the history due to their failure to change with changes in technology, market
dynamics and business environment, but the most notable cause for lost business empires over
the centuries has been unethical behaviour and poor corporate governance.
Enron Corporation—one of the largest energy companies of the world in the US—went
bankrupt in November, 2001, due to accounting fraud and unethical business practices through
the 1990s, taking along with it Arthur Anderson—the fifth largest accounting firm in the
world. The incident impacted the whole business world and brought to the fore the urgent
need for stricter disclosure norms and compliance to ethical standards in business practices.
Enron became the symbol of ethical scandal and misconduct in the history of global business.
The incident shook the confidence of the investing public regarding functioning of business
enterprises. Governments and regulatory authorities around the world sat-up in dismay and
hurriedly enacted or enforced laws and codes of conduct and governance in industries and
businesses for protecting the interests of stakeholders and society. All professional institutions,
regulatory bodies and large corporate houses enforced their own set of ethical standards of
practice and ethical conduct of profession or business. Ethics came to be recognised as a
subject of paramount importance for successfully doing business in a free market environment.
Unfortunately, business world and its regulators did not learn enough from the Enron fiasco,
as it became evident from similar scandals at Satyam Computer Services Ltd. in India as late as
in December, 2008. The media in India and the USA came out with the startling discovery of
a stunning corporate fraud by Satyam Computer Services Ltd.—one of the largest computer
service providers in India with listing in New York Stock Exchange. It was alleged that Satyam
 Preface to the First Edition

cooked the account books, diverted money to other family business and fictitious accounts, and
inflated revenues and profits for several years with the alleged help of its auditor. The scandal
had the typical watermark of the Enron fiasco. Over 300 years of industrialisation dotted with a
number of ethical scandals, and their impact on public and modern societies brought to the fore
the urgent need for ethical conduct of governance, profession and business.What we learn from
the repetitive ethical failures in large and apparently well-managed companies throughout the
world, and their huge damaging impact on investing public and society, is the indisputable need
for ethics and ethical standards in business. Ethics in business practices and an ethical approach
to corporate governance have been proved time and again as essential ‘means and mechanism’
to curb malpractices, infringement of rights and justice, and to promote the direction of duties
and responsibilities of business for a balanced and sustainable social and economic growth.
Ethics and development of a society are closely related. John Samuel said: ‘Development is
the expansion of human freedom to enjoy and sustain life and environment’. In the same spirit,
ethics can be described as expansion of human freedom to enjoy a fair, equitable and just life. In this
industrialised world, much of these accomplishments depend on how industries and businesses
are serving these causes. Inwardly focused business theories for profits often ignore ethicality
and ethical standards, thereby harming the interests of people involved with the business, as
well as others in the society—on whose strength business can sustain and gain. Profit driven
business policy often fails to ensure ethical practices and priorities that include the spirit of
‘inclusive welfare’ of all concerned with the business, the nation and the society. Ethics and
ethical conduct in business are the exclusive means to foster partnerships between the business,
individuals, government, and the society for ensuring a just, fair, and morally correct agenda for
holistic socio-economic developments and growth. Ethics and ethical practices are crucial since
business and society are interdependent, and welfare of one is not complete without the other also
benefiting from it. Ethics is a conduit between business and the society through which flows
the well-being and welfare of all stakeholders, which has to be the essential outcome of business
for inclusive development and growth.
It is in this background that the contents of this book have been developed; a large number
of cases from the business and society—as reported in newspapers—have been analysed and
inferences have been drawn on the role of ethics in business and society for fairness, equity,
morality and justice. The contents and concepts have been exhaustively illustrated with examples mostly
from the Indian business context, and some well-publicised cases of the USA. Along with corporate
cases, many examples have been cited from Government actions, because ethics matter to
all organisations—industry, government or institution—all having similar mechanisms of
decision-making and norms for governance.The critical role of ethics in business and corporate
governance for emulating ‘best practices’ and sustained wellbeing has been emphasised upon
time and again. The recent collapse of many giant financial corporations in the USA and
elsewhere in 2008, and the resultant global economic meltdown, is a terse reminder of ethical
failures. Steps for ethical conduct of business and corporate governance enforced so far in the
business world have not been adequate to protect the rights and interests of all stakeholders.
As a further consequence, a large part of our society is under constant threat of wealth erosion,
exploitation, ecology destruction and environmental damages from unethical business practices
 Preface to the Fi

and inadequate corporate governance, which is in effect endangering the future of mankind.
Hopefully, business world will re-learn from its failures and make ethics an integral part of
planning and mapping the route to ‘true value creation and enduring success’ in business, and
in this respect, the role of good corporate governance is paramount. This book aims to provide
insights into the complexities of moral and ethical issues in society and business, and discusses
them with respect to principles of ethics, role of ethics in business, necessity for ethical conduct
in profession, and necessity of ethical and effective corporate governance for sustainable growth
and development of both economy and society. In the perspective of broader purpose of
business, the book emphasises upon the relevance and importance of ethics in fostering the
relationship between the business and the society. The book keeps reminding the readers that
the hallmark of ethics and ethical governance is: ‘do good to do well’.

Disclaimer
A number of cases have been referred to in this book during the course of discussions. In some
of these cases, names of a few companies or individuals in those companies have come up in
the discussion for illustrations. These names have been obtained from the media reports and
Internet that are widely published and accessible sources to all, and author or the publisher has
no malicious intention of passing judgment about their guilt or otherwise. It is appreciated that
some of these cases are at present merely allegations, which are still to be proved in a court of
law. Nonetheless, the importance of these cases and their overwhelming publicity and wide
coverage in the print and electronic media cannot be ignored. Therefore, it is beneficial to use
them for illustration or as learning materials for readers. These cases have been presented here
entirely from the learning point of view and names and allegations, as reported in the media,
have been retained to add value and authenticity to the cases for study.

Smarajit Kr Mandal
 Acknowledgments

If a subject has to be substantiated, it would require knowledge, information and lots of supporting
material. The primary sources of my supporting materials that I have referred to, discussed and
analysed in this book have come from various reports, coverages, articles, special reports, and
writings by eminent personalities and experts in different newspapers and journals nationally
and internationally. I am, therefore, indebted to this ‘news industry’ for being valuable to me, in
general, for this book. But, I would like to particularly thank The Telegraph, Kolkata, The Economic
Times, Kolkata, The Times of India, Kolkata & Mumbai, and Financial Times, USA, for their rich
coverage which contributed to my efforts in dealing with the very sensitive and ‘view-centric’
subject of ‘Ethics and Corporate Governance’. I deeply appreciate their depth and width of
coverage, and gratefully acknowledge their contributions. I have acknowledged them as sources
wherever possible, and without their contribution, this work would not have been what it is
now. In fact, almost all my views and logic got incubated and developed by specially following
these four reputed newspapers, though in many cases I had lost track of details of the report and
had to resort to support from the web later during writing for references. My profound thanks
to these ‘particular four print-media’ as referred to earlier and the contributors to these papers
for their extremely valuable contributions to my understanding of the causes and effects of social
injustice, environmental damages, and economical fallacies for a sustainable world. My thanks
are also due to various internet reports, blogs and publications that came handy for references
and proved very useful source of information. My thanks to all the contributors of the internet
world whose works have been referred to in this book. I especially wish to acknowledge
the contributions of ‘Wikipedia, the free encyclopaedia’ in providing with some very basic
information about different cases and occurrences or knowledge on topical subjects.
Information could be as good as it could be effectively used, which is a skill that comes
from past experiences and learning. My learning and experiences of using information for
management purpose had been with two great Tata Group of companies—Tata Motors Ltd., and
Tata Steel Ltd., Jamshedpur. At Tata Steel, I had the opportunity to be a part of the Management
Committee and experienced the course and results of a business where values, mission, ethics,
concern for people and the society, and ‘total quality’ as work culture got upper most attention.
My ability to see issues of ethics and governance from social, business and people-angle had
 wledgments

origin at Tata Steel. I am grateful to the company—especially to Dr. J.J. Irani, the then MD of
Tata Steel—and wish to deeply acknowledge their contribution in shaping my ethics related
business operations views.
A person can peacefully progress only when there is support of his family. I am lucky to have
such a family which supported and facilitated my pursuit of academic activities overlooking
other responsibilities. Many thanks to all of them—my wife, sons, daughter-in-laws and the
grandson. This book would not have been in present structure and style had not my elder son,
Dhruva—a senior Business Manager in USA—been critical and constructive on the first cut
of the book. His suggestions made me to rethink, change and remould the book in the present
style. I acknowledge his valuable contribution. Finally, I wish to thank my grandson, Nikhil,
who often asked me ‘why not I keep the book shorter’? The question kept ringing in my mind
and reminded me all the time that as a speaker must know when to stop, a writer must know
how to be concise. I don’t know if I have been able to be concise enough in discussing a subject
which is extremely ‘view-centric’, but whatever has been accomplished I owe that to Nikhil’s
question.

Smarajit Kr Mandal
 Brief Contents

Preface to the Second Edition vii

Preface to the First Edition xi
Acknowledgments xv

1. Introduction to Ethics and its Applications in Business 1

2. Principles of Ethics 58
3. Law, Ethics and Business 105
4. Ethics: Individuals and the Organisation 155
5. Ethics in Marketing and Consumer Protection 187
6. Professional Ethics 225
7. Ethics and the Environment 260
8. Ethical Issues of Some Contemporary Topics and
Technological Developments 299
9. Corporate Governance: Principles and Practices 333
10. Corporate Governance: The Indian Scenario 373
11. Ethics and Corporate Governance 408
12. New Paradigms in Corporate Governance: Ethics, CSR and
Sustainability 443
Bibliography 469
Index 473
 Contents

Preface to the Second Edition vii

Preface to the First Edition xi
Acknowledgments xv
Brief Contents xvii

1. Introduction to Ethics and its Applications in Business 1

1.1 Concepts of Ethics, Morality and Moral Standards 4
1.2 Characteristics of Moral Standards 12
1.3 Moral Reasoning for Ethics 15
1.4 Moral Responsibility 21
1.5 Moral Standards vis-à-vis Ethical Standards 28
1.6 Ethical Decision-Making and Ethical Dilemmas 33
1.6.1 Ethical Dilemmas and their Resolutions 33
1.6.2 Ethical Decision-Making 37
1.7 How Ethics Work in Business 42
1.8 The Role and Scope of Ethics in Business 46
Summary 53
Key Words and Concepts 55
Exercises 55
Further/Suggested Reading 57
2. Principles of Ethics 58
2.1 Introduction to Ethical Principles 60
2.1.1 Moral Theories 63
2.2 Utilitarian Approach to Ethics 65
2.2.1 Rule-Utilitarian Approach 70
2.2.2 The Common Good Approach in Ethics 72
2.3 Rights and Duties 74
2.3.1 Rights 74
2.3.2 Duties 79
 Contents

2.4 Ethical Rules for Contracts and Contractual Obligations 81

2.5 Justice, Fairness and Care 84
2.5.1 Justice 87
2.5.2 Justice of Fairness 91
2.5.3 The Ethics of Care 93
2.6 Judging Morality and Ethics 97
2.6.1 Ethics of Virtues 99
Summary 102
Key Words and Concepts 103
Exercises 103
Further/Suggested Reading 104
3. Law, Ethics and Business 105
3.1 Law and Ethics in Business 109
3.1.1 Employer–Employee Obligations for Ethics and Law 114
3.2 Ethics vis-à-vis Law 117
3.3 Business Philosophy, Systems and Ethics 123
3.4 Scope and Role of Business Ethics 127
3.5 Business System and its Environment vis-à-vis Ethics 133
3.5.1 Ethics in Business—Internal Environment 134
3.5.2 Ethics in Business—External Environment 139
3.6 Responsibility for Ethics in Business 144
3.7 Ethical Decision-Making in Business: Issues and Ways 148
Summary 152
Key Words and Concepts 153
Exercises 153
Further/Suggested Reading 154
4. Ethics: Individuals and the Organisation 155
4.1 Organisation and the Individuals 157
4.2 Rights and Obligations of Individuals in the Organisation 160
4.3 Organisation and the Responsibility for Ethics 165
4.4 Ethical Issues in Human Resource Management 170
4.5 Cases of Ethics Violation and Responsibility 175
Summary 183
Key Words and Concepts 184
Exercises 185
Further/Suggested Reading 186
 Contents

5. Ethics in Marketing and Consumer Protection 187

5.1 Issues of Ethics in Marketing 190
5.2 Importance of Consumer Protection 193
5.3 Who are Consumers? What does Consumer Protection Mean? 195
5.4 Approaches to Consumer Protection 201
5.5 Marketing and Ethics 207
5.6 Ethics in Market Place Under Monopoly and
Monopolistic Competition 213
5.7 Ethical Issues in Internet Marketing 217
Summary 221
Key Words and Concepts 222
Exercises 223
Further/Suggested Reading 224
6. Professional Ethics 225
6.1 Introduction to Professional Ethics 230
6.2 Ethics in Production and Product Management 232
6.3 Ethics of Marketing Professionals 235
6.4 Ethics in Human Resource Management 237
6.5 Ethics of Finance and Accounting Professionals 239
6.6 Ethics of Advertising 241
6.7 Ethics of Media Reporting 247
6.8 Ethics of Health Care Services 252
Summary 257
Key Words and Concepts 258
Exercises 258
Further/Suggested Reading 259
7. Ethics and the Environment 260
7.1 Introduction to Environmental Issues 265
7.2 Industry and Environment Pollution: A General View 268
7.3 Some Environmental Phenomena of Ethical Concern 273
7.4 Ethics of Controlling Environmental Pollution 281
7.5 Ethics of Ecological Protection 283
7.6 Rights, Duties and Care in Environment Protection 285
7.7 ‘Carbon Credit’—A Utilitarian Approach to Global Control of
Greenhouse Emission 291
 Contents

Summary 295
Key Words and Concepts 296
Exercises 297
Further/Suggested Reading 298
8. Ethical Issues of Some Contemporary Topics and
Technological Developments 299
8.1 An Overview of Contemporary Ethical Issues 303
8.2 Computer and Information Ethics 309
8.3 Ethics of Genetically Engineered and Modified Products 314
8.4 Intellectual Property Rights (IPR) 318
8.5 Ethics of International Business and Trade in the
Present-day Context 322
Summary 329
Key Words and Concepts 331
Exercises 331
Further/Suggested Reading 332
9. Corporate Governance: Principles and Practices 333
9.1 Corporate Governance: Role and Scope 337
9.2 Corporate Governance Principles and Structure 344
9.3 Codes and Standards of Corporate Governance 348
9.4 Models of Corporate Governance 356
9.5 Corporate Social Responsibility (CSR): The Social View of
Governance 361
9.6 ‘Best Practices’ in Corporate Governance 365
Summary 369
Key Words and Concepts 371
Exercises 371
Further/Suggested Reading 372
10. Corporate Governance: The Indian Scenario 373
10.1 Emergence of Corporate Governance in India and the Landmarks 377
10.2 Corporate Governance Models, Codes and Status in India 384
10.3 Indian Corporate Governance—Roles and Responsibilities of
Regulators and the Board of Directors 388
10.4 Corporate Governance: Some India-specific Issues 392
10.4.1 Corporate Governance Issues in Family-owned
Business in India 395
 Contents

10.5 Corporate Governance and the Indian Ethos 398

Summary 404
Key Words and Concepts 405
Exercises 406
Further/Suggested Reading 407
11. Ethics and Corporate Governance 408
11.1 Significance of Ethics in Corporate Governance 412
11.2 Ethical Dimensions of Corporate Governance 417
11.3 Ethical Approach to Corporate Governance 420
11.4 Improving Ethics in Corporate Governance 425
11.5 Managing Competition and Ethics 435
Summary 438
Key Words and Concepts 440
Exercises 440
Further/Suggested Reading 441
12. New Paradigms in Corporate Governance: Ethics, CSR and
Sustainability 443
12.1 Setting Governance Platform: Ethics and Sustainability 447
12.2 Effective Corporate Governance: Regulation versus Self-regulation 452
12.3 Challenges to Corporate Governance: Corporate Social
Responsibility (CSR) 456
12.4 Road Map for Excellence in Corporate Governance 460
Summary 465
Key Words and Concepts 467
Exercises 467
Further/Suggested Reading 468
Bibliography 469
Index 473
 CHAPTER 1
Introduction to Ethics and
its Applications in Business
 Ethics in Business and Corporate Governance

INTRODUCTION
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1a
http://en.wikiquote.org/wiki/Socrates, accessed on 30 September 2011
1b
http://www.megaessays.com/viewpaper/64922.html, accessed on 29 September 2011
2a
http://www.telegraph.co.uk/news/worldnews/asia/china/3540917/China-reveals-300000-children-were-made-ill-by-tainted-milk.html,
accessed on 29 September 2011
2b
http://www.msnbc.msn.com/id/28787126/ns/world_news-asia_pacific/t/face-execution-over-china-poison-milk-scandal/, accessed on 29
September 2011
 Introduction to Ethics and its Applications in Business

Case I illustrates the moral values and principles one holds even in the face of the gravest
threat to one’s own life; whereas Case II shows how individuals can flout the conscience of
morality and moral responsibility, while handling a company’s affairs, endangering the life and
safety of children for some personal gains. The question then is, why do people behave in such
widely differing manners in social or business contexts? The answer: because of the sense of
morality, moral standards and moral responsibility that each one believes in, and his or her
acts and behaviour based on the same. This morality related act or behaviour of an individual
is termed ethical or unethical depending on the moral reasoning and moral outcome of the
act. Thus, the subject matter of ethics is the study of morality of one’s act and behaviour and
its consequences. Ethics is a critical factor in promoting good moral behaviour and moral
standards in a society for the sake of well-being and welfare of individuals in the society. On
the other hand, it can also be said that ethics is a ‘moral filter’ for controlling the abetment and
collusion of individuals to harm or damage the interests of the others in society – and, for that
matter, in business organisations. Just as positivity of ethics can promote the well-being of a
society or nation, similarly, the absence of ethics in society or business can cause immense harm
and damage to the interests of a society and nation. The study of ethics is, therefore, an integral
part of social and business development.
The study of business ethics—also the subject of this book—involves understanding the
system of moral standards and their applications in the conduct of ‘business processes’ through
which modern society produces and distributes goods and services in a society and country.
As ‘business processes’ are conducted through a set of organisation, system and people who
are working for it, the study of business ethics applies to these systems and entities within the
business organisation.Therefore, business ethics, concerning both application and outcome, cover
a wide spectrum of topics and issues that are broadly grouped in business practices as: systemic,
corporate and individual.While ethical issues relating to these groups vis-à-vis business ethics are
discussed across the book, their understanding and interpretations call for a basic understanding
of moral standards, moral reasoning and moral responsibility. Therefore, fundamental concepts
and principles relating to morality and ethics will be discussed in this chapter. Here, the primary
purpose is to introduce and examine the concept of ethics, morality and moral standards that go
into investigating the ethical issues. Keeping in mind the end-purpose of this book, the concept
and understanding of ethics and moral standards will be discussed and developed in the first
few chapters—in terms of the main beneficiaries of business, i.e., individuals, corporate and
the society. Ethical reasoning, which is the touchstone of any investigation about conformance
to moral standards and moral responsibility, has also been addressed here to facilitate ethical
analysis and the judgment thereto. Although the concept of ethics has been discussed by often
referring to individuals, the primary aim of this chapter is to introduce ethical concepts that are
relevant to resolving moral issues pertaining to business operations and to impart reasoning and
analytical skills needed to apply ethical concepts to business decisions.Therefore, the conceptual
relevance of ethics and ethical responsibility in business operations has been introduced only
towards the end of this chapter.
 Ethics in Business and Corporate Governance

1.1 CONCEPTS OF ETHICS, MORALITY AND MORAL STANDARDS

The story of Socrates (refer to Case I) represents the epitome of ethics; it reflects the moral
values and moral principles one holds in his or her conduct and behaviour. Ethics and ethical
behaviour—reflecting moral principles and values—not only apply to personal lives but are also
applicable equally in society and business. Ethics in personal life refer to the standards of conduct
and behaviour of an individual with respect to his or her moral principles and values.The latter
attributes guide us in choosing what is morally right and wrong under given circumstances (i.e.
to pass or arrive at a moral judgment), and in taking appropriate decision and action based on
our moral judgment—thereby making us feel satisfied or dissatisfied with our decisions, their
actions and outcomes.We make this choice of decision on the basis of our moral understanding
and feelings. If the choice is just and fair, we feel happy and satisfied or vice versa. In practice,
as individuals, we feel, reason out and deliberate; and, based on these feelings and deliberations
we decide and act in given situations. Thus, our acts or responses to a situation practically reflect our
feelings, thinking and judgment based on our moral principles and values. This, therefore, brings out two
things: (i) our acts and behaviour are reflection of our ethics; and (ii) our feelings of satisfaction
and dissatisfaction or happiness and unhappiness are dependent on our moral judgment, which,
in turn, is based on our moral principles and values.
However, moral judgments, based on moral principles and values, may differ from one
individual to another or from one situation to another. Therefore, our ethical behaviour or
ethical response to a situation need not always follow a set pattern like a rule of law, as long
as our actions do not cause harm to others in the society/community or lead to damage to
the interests of others concerned. What matters most in our ethical behaviour is our feeling
of satisfaction or dissatisfaction about the decisions we take during the course of dealing with
situations and events in our lives.

Let us illustrate this with reference to a sight that we frequently come across in many a city
of India: begging on the roadside. Helping beggars is considered, by some, as detrimental
to society; hence it is a controversial subject. Under this circumstance, take into account
the contradictory behaviour of two persons—one, quietly passing by a beggar on the street
without looking at him; the other pausing to give some money into the beggar’s outstretched
hand. Both will have reasons to explain and justify their actions—based on respective moral
principles and values—and may feel satisfied about the same. The reasons forwarded by each
could be fair given the respective circumstance, and both may feel that they behaved morally
or that they did not do anything morally wrong! Indeed, both would be correct in assuming
that their chosen actions were satisfactory—provided they had acted in keeping with their
moral principles and value systems, and had felt satisfied about the same.

It can therefore be said that ethics is about self-education and self-regulation—as to how to be guided in
actions and decisions by some moral principles and values so that one is satisfied about his or her own action
and its outcome. Ethics is a value-based approach to life, which is at the root of our satisfaction
and success in life. Barack Obama, the 44th President of USA (United States of America),
alarmed by the erosion of certain value systems from society and present turmoil in the business
 Introduction to Ethics and its Applications in Business

world—largely due to the failure, of certain individuals running the business, to adhere to
established values and moral principles, reminded the Americans in his first Presidential address
(on 20 January, 2009): ‘...the values upon which our success depends—hard work and honesty, courage
and fair play, tolerance and curiosity, loyalty and patriotism—these things are old, but these things are true.
They have been the quiet force of progress throughout our history. What is demanded then is a return to
these truths’.
The cardinal principle of ethics is to respect the established moral principles and values
in society so as to protect the interests of others. In our personal lives, this is reflected in our
(ethical) conduct and behaviour; in business, it culminates in the attitude of trusteeship. Our
actions and decisions must not unduly harm others or others’ interest (though our actions may
not always further others’ interests), and must not be guided nor be motivated by greed, self-gain
or self-interest. The ultimate aim of ethical behaviour and practice is to feel satisfied (and not necessarily
justified) about one’s conduct and behaviour or action and its outcome. This is the characteristic of
ethical behaviour. In this context, there is a fine distinction between satisfied and justified. Most
people try to justify their action no matter what its outcome may be. However, if one cares to
examine the outcome of that justified action, we may not always feel satisfied about it—not for the
benefits of the result but for its consequences.

Let us examine this through the case of begging discussed earlier. Consider that person
who did not give any money to the beggar. He or she may have been justified in doing
so, as it may have encouraged the beggar to continue begging (or there could have been
some other morally justified reason). However, he or she may not have been aware of the
consequences of his not helping the beggar with some money, which could have actually led
to the beggar’s child starving at home. The beggar could have been a daily-wage worker who
had lost his regular source of earning due to a strike at workplace or a calamity, and who
had not managed to save for such contingencies given that he had to support a family of four
(husband, wife and two children). It could be that neither the government nor any social
organisation had undertaken a scheme to support such needy persons, due to which begging
had been the only way out, for that moment, to feed the family. So, had the person concerned
(who gave no money to the beggar) known this, he could have acted differently because of
his values and moral principles. Thus, what could have made the difference between his or
her justifying the action and feeling satisfied with its outcome is the knowledge about the
possible consequences. The person may have acted differently had he or she known the
consequences.

Thus, acting in keeping with one’s ethics also involves making an effort to know the possible consequences
of one’s action and, then, to be sure that the action is to his or her satisfaction. There are numerous
instances when we think that our actions have been justified, but that still leaves us unhappy.
Our moral principles, in these cases, make us feel sad or dissatisfied about the result of our
actions.
Ethics is a system of moral principles and attitude that guides our actions to be morally correct,
fair and just. Ethics are not simply professing about virtue or good behaviour; ethics are the
expression and exhibition of standards of moral conducts governing the members of a profession,
 Ethics in Business and Corporate Governance

business or society so that the interests of people involved in these organisations or associations
are protected.This subject relates to the morality of our actions or specific moral choices that we
make with regard to others in society or in business. Ethics are at the core of our behaviour and
response to an event or situation, which makes us feel good or bad, satisfied or dissatisfied, happy
or unhappy. And, in doing so, one has to be concerned not only with the action but also with the outcome
of the action. Therefore, ethics and ethical issues are concerned with the morality and fairness of
our decision and its consequences. This, in turn, is the manifestation of one’s character, his or
her feelings, reasoning, morality, judgment and actions. It has long been established that there
is a direct relationship between ethics and happiness. Not obeying the dictates of ethics (i.e.
not behaving morally) leaves a person with the feeling of guilt. To quote Socrates, ‘vice harms
doer’; the Greek philosopher observed that our vice harms us more than it hurts the one who
is harmed by it.This is the stark reality, and it is this very belief that prompts humans in a society
to think about ethics, ethical standard and morality of actions from very early stages of social
development. Ethics and ethical standard of behaviour are essential for the stability, growth and
harmony of and among the people in society, a business organisation or any other institution
that serves the society. Ethics guide the society about acceptable principles of what is morally right and
wrong, and aim to enforce the discipline of conformance to those principles (Figure 1.1).

The goal: Ethics

Means: Morality
Path: What is right,
just, fair and
virtuous?

Figure 1.1 Goal–Means–Path of Ethics

Ethics are a principled approach to life (in the case of individuals) and business (in the case of
a group of people who run an enterprise). In this regard, a distinction should be made between
‘principles’ and ‘rules’. Stephen Covey, the famous expert on ‘Effectiveness Management’, has
likened principles to the ‘lighthouse’ that guides a ship to move towards its destination. In the
case of principles, one must follow the directions in order to safely reach one’s destination or
even to stay on course. Rules, on the other hand, are specific in nature, and must be obeyed
by acting as per the procedure laid down for the specific purpose. As such, most rules relate to
 Introduction to Ethics and its Applications in Business

some laws or regulations. In terms of these features of principles and rules, ethics do not bind
one with rigid rules of behaviour and action as has been illustrated in the example of begging.
Ethics primarily aim to guide the behaviour and actions of a person or society or a business
through adherence to certain moral principles, standards and values so that the others are not
harmed by one’s unfair, immoral or unjust actions. The development of ethics in society and
business stem from this basic approach of protecting the society and individuals (in a business)
from being harmed by the action of others. It is more like ensuring that each one follows the
right path and the right process for the right outcome; here, the word ‘right’ denotes what is
‘morally right’. If the process and its outcome are not morally right, the person or the body
taking the decision is unlikely to feel satisfied and happy about the decision and action. Very
often this criterion of ‘feeling satisfied and happy’ is used as a test for ethical conduct in a given
situation. Thus, the purpose of ethical principles is to guide the individual, society or a business
towards doing what is morally right for those who are (or could be) affected by a decision
or action. Ethics is about enforceable morality, justice and fairness of conduct, actions and governance by
individuals, institutions, companies, organisations, societies and governments.
However, ethics are not the law unto itself nor are they instruments parallel to the laws of the
land. Ethics make for a complementary logic that aids laws in balancing equity, fairness and justice
in those matters of disputes and actions that touch or affect others. One should not confuse
ethics with the laws; although complementary in their purpose, laws may prevail over ethics in
the course of judgment. Aristotle promoted the legal philosophy of ‘virtue jurisprudence’ from
its early stages of development, which takes the view that laws should promote the development
of virtuous character (moral character) of citizens. Thus, morality and moral principles have
long since been coupled with legal jurisprudence and interpretation. Similarly, ‘legal positivism’
—a part of legal jurisprudence and philosophy—argues that ‘what the law is is determined by
social facts’, and ‘what obedience the law is owed is determined by moral considerations’. No
legal positivist, therefore, argues that the law is to be obeyed, no matter what. This recognition
of moral consideration and social facts in legal jurisprudence, and the argument against ‘no
matter what, laws should be obeyed’, is the source and scope of ethics in combining its power
of governance with law. Ethics and law, therefore, do not contradict each other; in fact, these
two instruments of the society have always reinforced each other to uphold fairness and justice.
(Chapter 3 will pursue this relationship between law and ethics).
At times, what the law may permit us to do, ethics may not. Governing laws and laws of
natural justice is directed to regulate our actions in accordance with certain established or
standard practices.The aim of law and ethics may be similar (i.e., to minimise or prevent damage
to others’ interests), but ethics will examine wider social issues involved with an action and may
direct the individual or a company to act differently from what law would do in normal course.
Ethics (and ethical approach) strike deep into the social, economic and environmental stability,
development and growth of a society and the nation. Ethical considerations, along with legal
provisions, act as the balancing ‘instrument’ for social justice, which are essential for sustained
growth of a society. This point is further illustrated as follows:
 Ethics in Business and Corporate Governance

Let us consider the case that stirred the Indian market in 2002–2003 when pesticides were
found in the bottled soft drinks sold by a multinational company. This is an illustrative
presentation of the case and not an exact representation of how the events occurred at that
time. The following account is based on various media reports3a and b:
Some objectionable levels of pesticides were found in some brands of soft drinks in India
in 2002. These branded soft drinks were manufactured in India by a US-based multinational
corporation, doing business all over the world. Coming from a multinational brand, the
soft drinks were accepted by people in India as of the quality that would be on a par with
the global standards of the company’s products and not harmful to human body, especially
children. At that time, India had no stringent law limiting the pesticide residual levels in
soft drinks that could harm the human body or could be beyond the safe level of tolerance.
Following the startling findings of harmful pesticide residuals in soft drink samples taken
from different parts of India, objections started pouring in from different quarters against
the company’s soft drinks. The company was asked to withdraw such products from the
Indian market. The Centre for Science and Environment Studies, New Delhi, tested similar
samples from the products marketed by the companies in the USA and found them free from
such pesticide residues3b. The company contested the findings and justified the marketing
of its soft drinks by stating that the pesticide residuals were within the legal permissible
limits applicable in India. It further argued that the problem originated from the quality of
ground water that people in India were otherwise consuming freely. Hence, any harm done
to people’s health due to its bottled drinks cannot be justified.
Unconvinced by the company’s logic, a mass movement to stop the marketing of these soft
drinks—in view of the health hazard it posed to consumers, especially children—began in
the country. The matter moved from a consumer court to a higher court. But the judiciary
could not stop the marketing of such products due to lack of clarity in the standards
regarding allowable pesticide residues, and also owing to the controversy over the accurate
determination of residual pesticides in water (on the part of test laboratories)’.

In these circumstances, there could be confusion about what should prevail upon the
manufacturers of the bottled drinks: the law of the land or the ethics of protecting the health
of consumers—even though there could be some doubt about the harmfulness of the product.
Though the law could not prevent the sale due to lack of regulatory standards, should the
ethics of business not have prevailed upon the manufacturer to either stop marketing its
products or immediately correct the contents so as to render the drink less harmful? Would the
manufacturer of the product not have gained by being ethical in practice—especially when an
issue as important as the health of consumers was concerned? Most certainly; in the perspective
of long-term business, the company would have gained a lot by complying with the ethical
responsibility towards consumers, rather than by taking refuge in the ambiguity of law. In such
3a
Pesticide in Cold Drinks, 5 August, 2003: http://www.cseindia.org/html/press_release/press_20030805_ihtu, accessed on 31 July 2009;
and www.ethicalcorp.com/content.asp?contentID=920, accessed on 31 July 2009; www.downtoearth.org.in/full6.asp?, accessed on 31 July
2009
3b
Pesticide in Soft Drinks, Centre for Science and Environment, New Delhi, http://www.cseindia.org/node/527, accessed on
28 September 2011
 Introduction to Ethics and its Applications in Business

situations, ethics examine the wider social issues and lead to some corrective actions that may
satisfy (and not justify) all those concerned. Therefore, in this case, ethics of business does not
approve the company’s conduct, even if it could be otherwise justified in the eyes of law.
Morality and morality of actions are the yardsticks of ethics. Hence, the study of ethics is
integrally related to the study of morality. But, it should be appreciated that although ethics deal
with morality, they are not the same as morality, i.e., morality is not the whole of ethics. The
study of ethics is involved with investigating and knowing if the outcome of an action has been
morally right. Thus, ‘morality’ is the subject matter that ethics investigates through a process of
moral reasoning. This means that, to determine whether a person has been ethical, his or her
moral beliefs and moral standards have to be examined by moral reasoning—with reference to
what is right and wrong, or good and evil in society or for business. The word ‘standard’ means
that the view about what is ‘right and wrong’, etc. can be compared to an established norm, i.e.,
acceptable or unacceptable to the society. Moral standards include those norms that we believe
are morally right or wrong as well as the value we place on subject matters that are morally good
or bad. Let us illustrate this through the example of Sharia:

As per Sharia, in the Islamic society, it is prohibited to accept interest accrued from money
lent or deposited. As such, many are led by the moral principle that receiving interest would
not be right on their part. An examination of this moral belief and moral argument may
hold good in that society, to decide what is morally right or wrong. But, is the acceptance
of interest from one’s own investments considered unethical by all? No; while it may be
immoral for some people in a society, it will not be unethical for someone with different
moral beliefs. The ‘ethicality’ of accepting interest off investment may be justified from the
standpoint of an individual’s moral belief and moral reasoning. One may forward the moral
reasoning that it is only logical that money be invested for economic growth of the country
or society, and it is only fair that the investor or owner of that money gets his or her due
share of profit (off the investment) in the form of interest. Therefore, there is nothing wrong
or unethical about it as long as the profit from the investment has been earned by honest,
legal and ethical means. Such investment and profit accrued by honest and ethical means is
not harmful, if not beneficial, to others in the society. Hence, what may not be ‘moral’ in
one society is not necessarily an immoral or unethical act in another society—if that can be
established by proper moral (ethical) reasoning.4a and b

Very often morality and ethics are used interchangeably, despite having a very fine distinction
as explained earlier. This is primarily because an individual is considered ethical if he or she
upholds certain moral values and moral principles in his or her conduct or behaviour. Thus,
morality and moral standards are the reflection of one’s ethical behaviour. Examples of moral
standards are: belief in: ‘integrity is good and dishonesty is bad’, ‘always tell the truth’, ‘don’t
intentionally harm others’, ‘think good to do good in life’, ‘it is wrong to spread rumours’, etc.
4a
Interest in Islamic Economics; Abdulkader S.Thomas (Ed.),Taylor & Francis, Oxford, 2005, http://www.google.co.in/search?hl=en&q=Islam
ic+Sharia+Law+abd+Interest+earning&btnG=Google+Search&meta=&aq=f&oq, accessed on 31 July 2009
4b
Interest in Islamic Economics—Understanding Riba; Abdulkader S. Thomas, http://books.google.com/books/about/Interest_in_
Islamic_economics.html?id=ybnkig5ci6cC, accessed on 29 September 2011
 Ethics in Business and Corporate Governance

Moral values include good or bad manners, honesty, respect for social norms, compassion for
others, aesthetic sense by which we judge good or bad art and artistic creation, etc. One’s moral
values and moral standards are the indicator of his or her ethics. However, moral standards are
developed in a person with maturity (i.e. they may change with time). Therefore, one’s moral
standards, which form a part of his or her ethical or non-ethical behaviour, can change with
time and understanding. Since we are all social beings, society also expects us to behave by
respecting its social and moral values. The morality and moral standards expected by society
from its individuals also depends on his or her social position. Thus, expected moral standards
vis-à-vis the society would depend on the social position one holds or the importance of
the concerned issue in relation to morality. Again, we illustrate this point through the earlier
example:

In the case of pesticides found in bottled cold drinks marketed and produced by a well-
known multinational company in India, the company approached a celebrity to endorse
its product—fearing loss of market-share due to such bad publicity and consumer apathy.
For the same, the celebrity was apparently paid a huge sum of money. Now, the question is:
‘Would the celebrity, who accepted the deal to endorse the product as fit for consumption,
be considered moral?’ The answer is: ‘No’; not if he or she chose to endorse the product
only for money—without conducting any checks, and knowing that the product was held
questionable for its harmful effects, especially on children. This is because, he or she did not
follow the generally accepted moral standards of his or her position, which expect a celebrity
to adhere to the morally accepted norms of behaviour: ‘it is wrong to mislead people’; ‘it is
wrong to certify without further checks’; ‘it is wrong to exploit one’s privileged position’;
‘it is wrong not to tell the truth’; ‘it is wrong to wilfully neglect one’s moral responsibility’;
etc. Since the celebrity, in this case, failed the test of morality, he or she is to be considered as
unethical with respect to the endorsement.

In a way, moral behaviour is a process whose outcome or result determines ethics. If the outcome is right
for the society, not harmful to others, and not for personal gain overlooking social interests, the
behaviour or action will be regarded as ethical. If the behaviour (moral standard) exhibited by
an individual result into right, just and fair outcome, that behaviour would be considered moral.
Moral standards expect a person to uphold his or her morality by demonstrating his or her moral
principles and by adhering to values such as honesty, truthfulness, integrity, trustworthiness,
etc. Ethics expect a person to uphold certain moral principles and values that are regarded as absolute
and necessary to live and let others live in society without any harm or detriment. Thus, morality is an
essential ingredient of ethics, but it alone does not quite equate to ethics all the time because
ethics is also outcome dependent, and the morality of a judgment may at times be limited to
a specific situation without having regard to wider social implications. To illustrate this point,
consider the following example:
 Introduction to Ethics and its Applications in Business

“The Government of West Bengal, a State in India, acquired a huge track of fertile agricultural
land at Singur, near Kolkata, for Tata Motors to set up a green-field small-car factory. The
proposed industry with potential to generate large-scale employment was welcomed by
people in general. But the acquisition of fertile agricultural land for the factory faced stiff
resistance from the landowners and cultivators who had been earning their livelihood from
this land for generations. Most of them strongly protested the government move to acquire
their land. Ultimately, the government had to use force to occupy the Singur land, fence it
and hand it over to Tata Motors. The forcible occupation of the land by the government
provoked intense protests not only from the land losers but also from social activists, interest
groups and some political parties. The movement against the Singur land acquisition got
intensified with time and finally forced Tata Motors to withdraw from the project after two
years of working5a”. Soon, the Singur case became a turning point for the land movements
in India and a large number of people affected or going to be affected by such acts of land
acquisition raised their voices and protested at different forums. Social activists, politicians,
philosophers and lawyers got into discussions and debates about the legality and ethicality
of this action.
From the ethics point of view, here this question arises: Is the forcible land acquisition
morally justifiable in India? The land acquisition may be justified by provisions of existing
laws and also by the moral argument that it would benefit a large number of people by
generating employment opportunities. Yet, one may argue the ethicality of non-voluntary
acquisition of such fertile agricultural land, considering the loss and damage it caused to
the interests of helpless farmers of that locality, who know no other means of livelihood
except traditional farming. Depriving them of farming would also lead to uprooting them
from the society and social environment where they have lived for generations. A one-time
financial compensation for the acquired land will not see them through the future as they
are not trained to invest or engage commercially. The Singur case poses a very pertinent
question: Even if a project offers opportunity for employment and wealth generation for the
nation, can the well-being and future of large numbers of agricultural people be sacrificed?
Here the moral issue is the farmers’ uncertain future in an industrial society. In reality, the
farmers are ill-equipped to survive in this society. In this case, ethics will guide to ascertain
whether the long-term well-being and continuation of livelihood of the farmers have been
taken care of by the sops that accompany land acquisition. The non-voluntary acquisition of
land—without guaranteeing long-term well-being and continuation of the same livelihood of
the affected farmers—may not allow the land acquirer (the doer) feel good and be satisfied
with the outcome of the acquisition act. Hence, such an act may not pass the test of ethicality
in view of its wider social implications.
(This need to follow ethics in land acquisition has been vindicated by the fact that the
Government of India in September, 2011 introduced a new bill in the Parliament for land
acquisition and rehabilitation where long-term financial and social view of the deal has been
proposed.)5b

5a
http://en.wikipedia.org/wiki/Singur_Tata_Nano_controversys, accessed on 29 September 2011
5b
http://www.thehindu.com/opinion/lead/article2366476.ece, accessed on 29 September 2011
 Ethics in Business and Corporate Governance

1.2 CHARACTERISTICS OF MORAL STANDARDS

A person develops moral standards from his or her very childhood. A child absorbs and
develops the morality from all sources that he or she comes across, such as: family, friends,
society, media, magazines, school or even some specific situations. As the child grows and starts
encountering more external sources, he or she starts exhibiting certain moral standards. These
standards are further modified as the child grows up, starts experiencing the real world, and
learns new things, develops intellectual capability, and matures to take his or her own decisions.
Through this process of maturity, persons learn and develop moral standards to deal with the
external world and dilemmas of adult life. It is expected that we live by these moral standards that we
develop and hold. If the standard matches that what is generally believed to be morally right and morally
good in the society we live, the person is called moral. The moral standards may, however, continue
to change and develop as we mature, grow further, learn afresh or as social and environmental
changes take place. Thus, moral standards of a person reflect his or her attitude and orientations
with which he or she grows, thinks, feels, behaves, reasons, judges and acts in life. These moral
standards are based on good and beneficial reasoning, and not on authority or command. Thus, the moral
standards one follows have to stand the test of good reasoning—and not the subjective opinion
of a superior or a command from an authority. In contrast to this, laws are concerned with
what is legally right or wrong e.g. obeying the instructions of superiors in office, not violating
the official code of conduct, not driving a car without a licence, etc. Laws and rules are framed in
consideration of the rightness or wrongness of acts, and compliance to the same is commanded by a position
or authority. Many a time, especially in business transactions, one may face the conflict between
legal and moral righteousness. For instance, let us consider the following example:

Consider the case when an employee seeks ‘leave of absence’ for a medical emergency (a close
family member undergoing an operation), even when he is not entitled to immediate leave. If
the boss does not sanction the leave, he is legally right—yet, he would be considered morally
wrong. This is because moral standards are based on good reasoning and not on authority.
Here, the reason for seeking urgent leave from work stands the test of good reason and moral
justification. Similarly, selling a product (say, a refrigerator) to a customer at a discount store
after customer’s inspection and satisfaction is legally right—yet, if that product does not
function, as specified by the seller, on installation and if the manufacturer or the seller (store
owner) does not take responsibility for malfunctioning, then that would be immoral. The
seller may take the legal stand that it is the buyer’s responsibility to inspect and be satisfied
before purchasing the goods under the legal dictum of ‘buyer to beware’ (i.e., the buyer has
to be aware of buying a product at his or her own risk), but it would be morally wrong
for the seller or manufacturer not to rectify or change or service that refrigerator, leaving
the customer helpless. (Fortunately, in the latter case, most manufacturers or sellers do not
invoke the ‘sale of goods’ act and try to resolve the complaint through warranty services.)

At times, one may act strictly as per the law or direction of an authority (e.g., owner of
the shop in the example cited earlier, or the head of a company, etc.) following one’s own
understanding of the situation, and thereby choosing non-moral standards over moral standards.
 Introduction to Ethics and its Applications in Business

Such action will not be morally acceptable under the cover that the law permits it or that it
conforms to the service condition of ‘obey the orders of superior’. To make people morally
conscious of their actions and help them to understand what is the required moral standard,
ethicists have suggested few characteristics that distinguish moral standards from that of other
standards not exactly related to moral standards, and called non-moral standards. These non-
moral standards are in vogue in society, at work or in business and often influence the behaviour
of an individual. Examples of such significant but non-moral standards are reflected in: etiquette in the
society, behaviour with superiors in the workplace, service to customers, individual behaviour
in a community, etc. These non-moral standards are generally guided by laws, regulations,
procedures, systems or conventions.They are important indicators of a person’s ethical standards,
but cannot be equated to ‘moral standards’. For instance, we apply our judgment in response to
different situations in our daily lives all the time. These judgments are generally based on our
moral values and moral reasoning, and influence our behaviour. For example, we often make
judgments about right and wrong, or good and bad, and say: ‘This is right’; ‘He is wrong’; ‘The
manager should not have punished him’; or ‘It is a good omen’; etc. Accordingly, we take our
stand vis-à-vis the issue or the situation. These judgments, that lead us to take positions, are
based on some kind of standards in the society, community or business, and get built into us
based on, or influenced by, some conventions, systems or established norms in society. But, they
are not moral standards—because, moral standards must be based on and established by good and
logical reasoning, and must not be dependent on a convention, regulation or norm. To live up to moral
standards, we must consciously learn to think about, deliberate on and reason out the actions
and their outcomes so that the latter does not harm others and is just and fair. Therefore, an
understanding of the characteristics of moral standards is necessary for us to think correctly,
deliberate and reason (Figure 1.2).

• Deal with subject matters of

Moral social, political, economic
standards : importance, irrespective of
implications–good or bad

• Based on impartial
Moral
considerations
standards :
• Not guided by self-interests

Moral • Self-regulating
standards : • Self-inflicting

Figure 1.2 Characteristics of Moral Standards

 Ethics in Business and Corporate Governance

Characteristics of moral standards

1. Moral standards deal with subject matters that have serious implications in society, environment
and workplace, irrespective of whether the implications are beneficial or harmful. For
example, pesticide content in cold drinks is serious enough to harm the health of
consumers and children and, hence, it is a moral matter.
2. Moral standards are self-regulatory, i.e., they cannot be changed by the laws and regulations
of bodies including the Government. In other words, moral standards cannot be enforced
by an authority or a superior.Validity of moral standards rests on the good reasoning. So
long as the reasons are good and adequate and the outcome of action does not unfairly
damage the interests of others, the stand remains valid. For example, even if India had
a governing standard for cold drinks and the pesticide content met the permissible
standards (of the law, that is), moral standards dictate that if the level of pesticide is bad
for health, the manufacturer must correct it and stop marketing the product till it makes
the correct or new formulation.
3. Moral standards are not guided by the self-interest or other non-moral standards and values.
Those who uphold their moral standards do not hesitate to sacrifice their self-interests
and other non-moral values. For example, the celebrity promoting the cold drinks, with
questionable pesticide content, should not be guided by the self-interest of receiving a
hefty consideration for his or her endorsement. Such a lure and trap of self-interest will
be construed as being immoral or as violating moral standards.
4. Moral standards are based on impartial considerations. This implies that one cannot take
a moral stand if there is no impartiality in the decisions and reasoning, i.e., the stand
should not advance the interest of a particular individual or group. For example, in the
pesticide in cold drink case, if the party who first brought out the report has done so
to safeguard the interest of a competitor, then it violates the moral standards. Moral
standard demands that the press or the person who reported the matter must have done
that on impartial consideration.
5. Moral standards are self-inflicting, i.e., if one fails to stand up to moral standards, he
or she feels bad, guilty of failure, or becomes remorseful. Such examples are many
amongst people who, after taking a stand, feel remorseful for being unable to uphold
the moral standards. For example, the celebrity who had endorsed the cold drink with
objectionable level of pesticide against payment might have felt guilty about not acting
as per the moral standards that the society expected of him or her. In some critical ways,
such unethical behaviour weakens the personality due to this sense of guilt.
Interestingly, the characteristic of moral standards – that a stand or action should not advance
the interest of a particular individual or group—may sometimes be questioned under a specific
business situation. Let us review this point with the following example:

A family owned business appoints the Promoter’s young son as the Director, superseding
many Senior Executives. Though such situations are often accepted without question, this
may appear as a violation of moral standards due to partiality. Questions may arise about
 Introduction to Ethics and its Applications in Business

how to deal with such a situation from the moral standpoint. Moral standards demand
impartiality but, in this case, the special position and relationship of the person being
benefited may call for a balanced approach in the context of safeguarding the interest of the
owner and his stake in the family business, provided he holds the overwhelming majority
stake and such an action does not harm the interests of other stakeholders. From this
standpoint, the decision—if taken with the consent of other members of the board—may be
justified as protecting majority interests, and the preferential treatment of an individual may
be legitimatised in this condition. But, ethics demand that such decision should be consistent
with the purpose of the business, must not impair the interests of other stakeholders, and
should not harm the present benefits of the superseded persons.
More about such situations will be dealt with later in this book.

In summary, moral standards have certain characteristics. They deal with matters that have
serious implications for the society and human beings, and are evaluated based on good reasoning
and not on authority or regulations. Judging moral standards must overlook self-interest, and
should be based on impartial considerations. Typically, violation of moral standards is associated
with a self-inflicted feeling of badness and guilt. Upholding moral standards in our acts and
deeds has, therefore, become the primary pointer towards ethics be it for happiness in personal
life or success in business. The study of ethics attempts to determine whether a stand taken
by an individual or a group (on behalf of an organisation) stands the test of moral standards
or provides fairness of actions based on that stand. The primary moral standards for judging
ethics are: theories of utility, justice, rights, and care. Business ethics in this book will base its
discussions on these standpoints.

1.3 MORAL REASONING FOR ETHICS

It is quite evident from the foregoing discussions that deciding what is ethically right or wrong
will depend on the ability of individuals to reason out what is fair and morally right. Our
sense of judging what is moral, or the development of our moral understanding, grows with
our maturity. What is moral at one stage of our life may not be so at another, because of the
change in our understanding of the needs of oneself, the society, family, the surroundings,
human rights, the nation, the institution we work for, and also owing to further development
of our sense of logic and reasoning to identify what is rational and universal. According to the
famous psychologist Lawrence Kohlberg6, there are three levels of our development of moral
understanding starting from childhood to maturity, which can be further divided into two steps
each, as follows:
Level – I: Childhood Stages
1. Punishment and obedience orientation as a child where physical consequences of an act
wholly determine the goodness or badness of an act.

6
http://faculty.plts.edu/gpence/html/kohlberg.htm, accessed on 30 October 2009
 Ethics in Business and Corporate Governance

2. Instrument and relativity orientation when right actions become those that can serve as
instruments to satisfy the child’s own needs or needs of those for whom the child has
concern and care, e.g., parent, friends, etc.
Level – II: Conventional Stages
3. Interpersonal concordance orientation where good behaviour is living up to the expectations
of those for whom one feels loyalty, affection and trust. Here, the right action is what is
expected of an individual by the family, friends, teachers, society, etc.
4. Law and order orientation where the sense of right or wrong comes from loyalty to the
conventions of the society in particular and the laws of the nation at large.
Level – III: Principled Stages
5. Social contract orientation when the person becomes aware that people hold variety of
conflicting personal views and opinions, and the fair way to reach an agreement, contract
and path, or the process of doing so, is by consensus after reasoning. The person comes
to believe that all norms are relative, and that they should be tolerated (or adjusted with)
as far as possible.
6. Universal ethical principles orientation where right actions come to be defined in terms
of moral principles which are chosen because of their logical comprehensiveness,
universality and consistency. These ethical (or moral) principles are not rigid like laws
or religious commandments; they are flexible, abstract principles dealing with: justice,
social welfare, equality of human rights, respect for the dignity of individual human
beings, and rights to fundamental necessity to live and protect lives. At this stage, a
person’s reasons for doing what is right are based on his or her understanding of these
moral principles.
Kohlberg’s study implied that people’s skill of moral reasoning is better at later stages of
maturity because people gradually develop the ability to see things from a wider perspective,
and have better ways to justify their decisions to others. At this mature stage, people can justify
their deeds on the basis of moral principles that are relatively impartial and reasonable. It is not
that all people ultimately reach the stage of maturity in moral understanding; some people may
remain at the childhood stages or in the conventional stages. However, as people grow and
interact with each other, they develop firmer and more mature moral perspectives, and thereby
improve their moral reasoning skills. That is why, moral reasoning may vary from person to
person though all the people may belong to the upper age group.
Moral reasoning tries to logically place or project facts and figures (or evidence and
information) that help one to judge human behaviour, institutional activities, policies,
programmes, etc. as to whether they are in accordance to, or in violation of, acceptable moral
standards. In order to judge this, there have to be two components of reasoning:
(1) An understanding of what ‘acceptable moral standards’ means, i.e., what exactly the
standards require, prohibit, condemn or value with regard to the specific situation; and
(2) Evidence or information which shows that persons, policies or behaviour have the kind
of features that these moral standards require, prohibit, condemn or value.
 Introduction to Ethics and its Applications in Business

Arriving at a
moral
judgment

Examination
of facts vis-a-vis
situation

Identifying
moral
standards

Moral
reasoning

Figure 1.3 Foundation of Moral Judgment

To better understand these components of moral reasoning, let us consider an earlier

example:

If we apply the steps of moral reasoning to the case of pesticides in cold drinks, the case has
to be examined for moral reasoning with regards to:
1. The maximum tolerable limit of pesticide residue in cold drinks that would not affect the
health of a child who would generally consume plenty of this drink: this would help in
understanding what the ‘acceptable moral standard’ permits, requires or prohibits; and
2. Evidence of pesticide residue higher than what can be tolerated in the bottled cold drink,
determined on the basis of statistical samples taken from different batches of production
and analysed in a well-equipped laboratory: this is to examine if the company’s behaviour
has the features that do not comply with the moral standards required for this specific
purpose.
It is only after examining the issue with regard to these two steps that one may be able
to judge if any violation of moral responsibility has occurred, and if the company is not
conforming to ethical principles of business.

Thus, moral or ethical reasoning has three distinct features in its process: (i) identifying what
constitutes ‘moral standards’; (ii) examining facts and figures concerning the policy, behaviour
and actions under the specific situation; and (iii) arriving at a moral judgment on the basis of
rightness or wrongness of policy, behaviour or actions (Figure 1.3). In this context, it is to be
noted that the purpose of ethical reasoning discussed here is to lead to a moral judgment, i.e., if the
actions are morally right irrespective of the legal standing.
 Ethics in Business and Corporate Governance

Let us further examine the complexity of moral judgment in a case where the direction of
morality differs from that of legality.

Industries in India often employ temporary workers for jobs that, in many cases, run
throughout the year. As per law of the land (i.e. India), employing contract labour for
more than eleven months at a stretch is not legal. [ref. The Contract Labour (Regulation &
Abolition) Act, 1970]. Therefore, industries resort to laying off the concerned labour force
for about a month and re-appointing the same under contract again for the next eleven
months. This saves the company from the commitment to provide certain benefits that go
with the permanent employment. Though the law also states that if the job is perennial in
nature, the workforce has to be made permanent. Under the condition of supply of labour
in excess of demand, all concerned are willing to accept this practice, because at least this
system facilitates some employment for some people for some period in a society where
unemployment is widespread. They argue that something is better than nothing, and accept
the temporary employment system under the legal framework.
Let us now consider that the concerned labour union raised objection to this practice
stating that the jobs are perennial in nature, and gave the company notice for a strike. In
turn, the company explained that though the jobs concerned are perennial in nature, it is
uncertain about the future demand (market conditions) and does not want to hold an extra
inventory of production. As such, the sustainability of jobs is doubtful, and it cannot make the
temporary workers permanent in such uncertain conditions. Therefore, the company cannot
afford to make a commitment to continue employment at this stage. It further explained that
if the labour union pressed the issue any further the company would altogether be forced to
stop taking temporary contract employees. It would get the jobs, associated with temporary
workers, done by the existing permanent workforce working overtime. Understanding the
present situation and its possible fallouts, a group of contract labourers insisted on continuing
with the present system of employing temporary contract labour for the jobs, and supported
the company. This move upset the union, and it suspended those members. Now, under the
circumstances, is the union ethically correct to disown that particular group? Is the company
ethically correct in continuing with the contract labour system for jobs that are actually
perennial in nature, and when law does not quite permit the same?

To find the answers, we examine the issues vis-à-vis the three features of the moral reasoning
process: (i) What should constitute ‘moral standard’ by which the actions and results will be
measured or compared? (ii) Is the unemployment situation really calling for some special
behaviour and actions on the part of the management and the union? (iii) How can we arrive at
a moral judgment regarding the rightness or wrongness of the company, as well as of the union?
These questions could be answered by both ‘yes and no’, but the idea of moral reasoning is that
one should be able to morally justify his or her actions or choices under a given situation so
that the decision is based on some rational and logical thinking, and does not harm the others
concerned. These are the principles to approach the purpose of ethical (or moral) reasoning.
If the law had been the sole guiding factor, the answer would simply be ‘no’ in this case (to continue with
the employment of contract labourers in jobs that are actually perennial in nature). But, considering the
likely damage to the interests of labourers due to loss of opportunity of employment (though
 Introduction to Ethics and its Applications in Business

partial), and following the logic of moral or ethical reasoning and its three distinct features,
one may ethically judge that: (a) The company may be allowed to continue the practice for a
while till the market stabilises to a degree of certainty; and (b) The labour union is ethically
wrong to disown the group, or force stoppage of the employment opportunity, without creating
alternatives. What moral reasoning is basically pursuing in this case is: Are we choosing the
alternative that provides greater good to a greater number of people in the society in a specific
situation?
Thus, the guiding principles for moral reasoning to find out if moral standards are being
followed can be summarised as:
To take a mature and wider perspective view of the situation or circumstances under
which an action is being called for. Examine if the action is leading to benefits of wider
section of the people in the society or more number of people involved in the process.
To consider, feel and deliberate on the needs for justice, social welfare, equality of human
rights, respect for the dignity of individual human beings, rights to fundamental necessity
for living and protection of lives, and other such human, social and environmental
factors.
To understand and define the ‘acceptable moral standards’ with regard to what the
standards require, prohibit, condemn or value in the given situation.
To unearth or identify factual evidences and information showing that the person or
the policy or the behaviour—either of a person or a company—has the kind of features
that the moral standards do or do not require, prohibit, condemn or value.
To arrive at a moral judgment through logical and consistent reasoning on the rightness
or wrongness of the policy, behaviour or actions, irrespective of the legality and based
on aforesaid factors.
There is no doubt that moral reasoning is not a simple, straightforward analysis of factual
information for decision-making. It requires sensitivity towards various human and social issues
involved, clear and unbiased mind, and understanding of: (a) expectations of the society or
benefactors or the aggrieved persons; (b) restrictions of the law, environment and codes of
conduct in an organisation or society; and (c) any other factors that may limit the scope of moral
judgment. Moral reasoning must be logical, evidences must be accurate, relevant and complete,
and the moral stand taken should be consistent with both the past and the present. Identifying moral
standards from the standpoint of factual information through ethical reasoning is a complex
task, but it must be diligently carried out to stop the damage to society or business due to
unethical behaviour of individuals, or the actions, policies and programmes of a company with
regard to its stakeholders and the society.
Many a time, individuals (working in an individual capacity or for and on behalf of the
organisation) genuinely believe that what they are doing is unbiased and morally justified
because that is the best solution in view of the organisation’s interests, but they fail to see the
expectations of the society or the aggrieved persons, or fail to play a fair role. To illustrate this
view, consider the following profile of a hypothetical case:
 Ethics in Business and Corporate Governance

A company advertised for a position stipulating certain academic qualification and job
experience. About 470 applications reached the office within the prescribed period. On
scrutiny, 278 candidates were found fulfilling the qualification and experience requirements.
On further analysis, it was noted that 163 candidates were female and the rest (115) were
male. The company decided to call 100 candidates for the interview; 50 each of both genders.
Having interviewed them, the company then selected 25 candidates—15 female and 10
male. When the list of selected candidates went to the ‘boss’ for the final approval, he asked
whether so many female candidates would befit the job specification that called for shift
duty—including night-shift. Hence, the list was revised and 20 male and 5 female candidates
were finally offered appointments. It must be noted, in this context, that the law of the land
prescribes equal opportunity in jobs for both genders, and that the company also claimed to
be an ‘equal opportunity’ organisation.

An analysis of information and facts in the aforesaid case show that:

It is the ‘boss’—an individual—who has acted in a partisan manner, on behalf of the
organisation.
The reason for the boss’s decision is the special circumstances of night shift where
females may feel insecure, but it is without enough investigation to unearth the facts
about it.
The company’s decision not to offer jobs to the original number of qualified female
candidates (15)—without discussing with them if they have any genuine problem not
to work the night-shift—is unfair and unjust.
The company has failed to uphold the spirit of the law of equal opportunity.
Therefore, the conclusion would be that the company had not acted fairly and in keeping
with the demands of ‘moral standards’. To morally justify the actions, the reasoning of the
company must be logical and fair; evidences of female candidates being unsuitable to work
in the night-shift must be accurate, relevant and complete; and the moral stand taken should
be consistent with the past and present. If the company can justify its action through moral
reasoning for the latter enquiries, then its action can be considered ethical in this case.
However, it may not always be possible to separate the intricacies of logic and reasoning from
the judgmental approach to moral standards.This is because of the difficulty to completely take
away the human touch from the process of reasoning. Nonetheless, attempts should be made
to identify all moral issues and standards pertaining to actions of importance and substance by
gathering factual information and relying purely on ethical reasoning. Individuals in a business
should leave no opportunity, as far as possible, to act unfairly and unethically under the cover
of ambiguity of moral issues and standards. Damage due to unfair and unethical behaviour
of individuals in business may reach out to a company’s policies and programmes, leading to
widespread damage to the interests of its stakeholders. The collapse of large corporate likes the
Enron and World Com in USA7, and Global Trust Bank and Satyam Computers in India8, is all
due to the unethical and immoral conduct of few individuals in these companies.
7
http://www.cato.org/pubs/handbook/hb108/hb108-22.pdf, accessed on 30 September 2011
8
http://www.wsws.org/articles/2009/jan2009/indi-j27.shtml, accessed on 30 September 2011
 Introduction to Ethics and its Applications in Business

Therefore, to decide if an action or policy is ethical, one has to exercise moral reasoning by
examining the factual information with regard to morality of the action or policy by analysing:
(a) the utility of the decision, rights and duties of the individuals concerned with the decision;
(b) if justice is being meted out by the decision; (c) the amount of care being shown to those
who are related and valued in the subject matter; and (d) the consistency of the decision with
the past and present. Any shortcoming in any of these norms for ethical behaviour would
render the decision or action either non-ethical or suspect depending on the gravity—or the
impact—of the situation.
For example, in the case of land acquisition for industry, the decision of the authority may
be right from the viewpoint of utility and justice being meted out in the form of financial
compensation, but considering the consequences of social and economic impact of displacement
on the people, it would be unethical if the decision is not justified as per the norms of protecting
their legitimate rights and showing special care to the concerned (affected) persons by some
concrete action that would benefit them more in future than the loss they would suffer in the
present. In cases of such a profile, all the conditions mentioned earlier in this section would have
to be satisfied for the deal to be treated as ethical; otherwise, the deal will be treated as unethical
or an ethical suspect.

1.4 MORAL RESPONSIBILITY

Deciding what is the appropriate moral standard and who is morally responsible for upholding
that standard is a part and parcel of ethical reasoning, and deciding ethical correctness of a
behaviour or action. However, it must be appreciated that moral standard is one thing, and
imposing moral responsibility is another thing altogether.The word ‘responsibility’ means being
legally or ethically accountable for the welfare or care of another. Psychologically, it is the
sense of responsibility that makes one careful and deliberative regarding any act and actions.
Therefore, the study of ethics may sometime involve reasoning to judge if one has been morally
responsible for any act injurious to others. Thus, ‘moral responsibility’ would mean owning
responsibility for doing something knowingly and deliberately that had caused harm or injury
to others. An individual or a company has the moral responsibility not to act wrongfully so
that it does not violates the acceptable moral standards and cause harm, loss or injury to others
—either to an individual, group, society or a company or its stakeholders. Examples of such
acts are: a company deliberately employing child labour; not paying the minimum wages to
a contract labour; practicing discrimination of pay for similar jobs; allowing free emission of
harmful particulates in air; discharge of industrial effluents without proper neutralising treatment;
negligence towards environment protection and regulatory compliance; etc. Any person or a
company wilfully indulging in such activities will be morally responsible for the violation
and damage caused by such actions—some of which may even attract legal repercussions. The
purpose of establishing moral responsibility through moral reasoning is to judge the extent to
which a person committing wrong deserves punishment or blame or penalty. Thus, establishing
moral responsibility has the connotation of law or rules, in addition to its ethical implications.
 Ethics in Business and Corporate Governance

Examples of wrongful or injurious acts cited earlier must have one thing in common: that
is, did the person commit wrong or harm knowingly, without understanding what is right
or ethical under the circumstances? There are instances of a person or a group doing things
without knowing or wilfully, but by chance or coincidence. Let us consider the following
hypothetical cases in a business scenario:

Selling an established product (say, air conditioner) that caused injury to the member of a
household due to an electrical short circuit and fire thereof. Here, the seller did not know if
the product had any defect that led to the failure, because it is not new and has, in the past,
satisfactorily served customers without any such problem. It is also presumed that the product
was brought to the shop after quality tests and with an ‘OK’ permit. Hence, the salesman did
not know if such a problem could arise nor did he anticipate anything like it. Therefore, in
such cases, the seller may feel bad or sad because of the buyer’s suffering, but he is not morally
responsible for the injury as long as he did not knowingly sell a defective product. But, if it
is established during a subsequent enquiry that the quality control personnel had failed to
detect the fault, due to negligence, then he or she and the company could be held morally
responsible for the injury. This goes to establish that a person is morally responsible for those
acts and their anticipated harmful or injurious consequences which he or she knowingly and
deliberately perform or fail to perform in order to prevent harm caused to others. Here, the
person concerned for quality check is morally responsible because he or she is paid by his
employer to do so correctly.
Another case, contrary to the former, comprises driving a car without a valid licence and
meeting with an accident causing injury to a pedestrian. Here, the driver knew that driving
the car without a licence—which is the legal testimony of minimum required driving skill—is
illegal and morally wrong. Hence, he cannot deny moral responsibility for the accident and the
consequent injury to the pedestrian. He is liable for punishment and monetary compensation
even if the insurer of the car refuses to extend any. In such cases, morality and legality will
work conjointly.

Then there are instances when people commit a wrong or fail to prevent a wrongdoing by
omission despite having knowledge about the consequences of the act. In such cases, the person
concerned is also held morally responsible for the injury or harm. Illustrated here is one such
case:

Daily Mail of the UK published a news item titled: Patients Leaving Hospitals ‘with surgical
instruments inside them’, reported by Daniel Martin on 08 April, 20079. Some relevant parts
of the report are reproduced below:
The report states: ‘Two patients a week are leaving hospital with surgical instruments still
inside them, it was revealed yesterday’. The report further goes on to say: ‘The list of lost
implements includes swabs, a catheter, a metal clip and a contraceptive coil, according to
data obtained under the Freedom of Information Act. . . . There were a total of 283 claims

9
www.dailymail.co.uk/health/article-447484/Patients-leaving-hospital-surgical-instruments-inside-them.html, accessed on 30 September
2011
 Introduction to Ethics and its Applications in Business

against the NHS in the last three years—nearly two every week. And that figure is likely to
be just the tip of the iceberg as there could be hundreds of other people who will never find
out about their doctor’s mishap.’ The report also states: ‘Over the last three years, the Health
Service has paid £4.3 million over a series of claims by patients that doctors have left foreign
bodies under their skin.’
Here, the doctor/surgeon knew of the consequences of the effect of leaving a surgical
instrument inside the body and was duty-bound to ensure that the cut-opened portion of the
body is thoroughly cleaned and checked before it is stitched close. Despite such knowledge,
they failed to prevent the incidents (damages) either by omission or by negligence. But,
whatever could be the cause, such doctors/surgeons will be held morally responsible for
the damages—as has been borne out by the admission of claims (to the tune of £4.3 million
pounds) from aggrieved patients by the NHS (National Health Services) of the UK), who in
these cases have acted as the ‘principal’ of their ‘agents’, the Doctors.

However, if any one under the circumstances acted out of (a) ignorance or (b) inability, he or
she may be excused of moral responsibility. Because, under the conditions, that person was not
in a position to either know the consequences or control the event, i.e., what he or she did was
not knowingly and freely done. Reasoning to affix moral responsibility must establish whether
the wrongdoing was wilful or due to ignorance. In this context, it is important to clearly
understand when ignorance and inability absolve a person of his or her moral responsibility.
The following is an instance in that regard:

Take the case of silicosis, a disease rampant among workers engaged in crushers of mica
mines or stone quarries all over the world.10 Here, the mine-owners cannot seek the excuse of
ignorance about the effect of siliceous dust in such working conditions. Yet the owner often
claims inability to prevent the wrongdoing saying that the miners refuse to wear protective
appliances, thus rendering the results beyond his control. In such circumstances, the test
of moral reasoning should first establish: if the owner has the right type and quality of
protective appliances; if those appliances are suitable to wear and work with; if he insists
that the workers wear the same and if there is an established mechanism to check and
control violations thereof; if he has communicated to and counselled the workers about the
ill-effect of not using the protective gear; if he has instituted periodic medical check-ups for
the workers to make them aware of their health and the necessity of using the appliances,
etc. Observations regarding these aspects must be logically analysed and only then should
any inference be drawn about the owner’s inability or moral responsibility. If the owner
deliberately wants or tries to keep himself unable to perform, then that inability cannot be
accepted as a reason for failure to hold moral responsibility.
Similarly, one cannot deliberately stay ignorant and claim innocence for a wrongdoing
—be it as a person or company. For example, if a company discharges untreated industrial
effluents containing poisonous chemicals in an open canal, and if some cattle accidentally

10
A study conducted by the World Health Organisation (WHO): www.who.int/collaboratingcentres/casestudies/en/index8.html, accessed on
02 August 2009
 Ethics in Business and Corporate Governance

drink that polluted water and die, then the company cannot plead ignorance about the
possibility of cattle drinking that water or its dangerous consequences. Similarly, if a patient
is discharged by a hospital (or a doctor) after being treated for a serious chest infection
—but before the complete treatment and cure—due to paucity of hospital beds, then that
hospital or doctor is morally responsible for any complication in the patient’s condition
that arises due to incomplete treatment. Neither can plead ignorance about the possibility
of complication due to the incomplete treatment and the consequences of any infection.
[To avoid legal responsibility of such consequences, hospitals often ensure that the patients
or their representatives sign the declaration that the patient is being discharged from the
hospital on his or her own accord. Despite such a declaration, the hospital cannot deny
moral responsibility for any harm to the patient or his family.]

More than as an individual, in business operations it is important for the management (an
individual owner or the group of people who manages the business) to make reasonable efforts
to know the consequences of any acts or deeds, and to take adequate steps to be informed,
equipped and act so that wrongdoings can be prevented in time—before any damage has
occurred. Let us refer to the tainted milk scandal in China cited earlier in this chapter:

It was reported that the contaminated milk caused the death of six children, and nearly
300,000 children fell sick after drinking milk that was intentionally laced with melamine, a
toxic industrial compound that can give a fake positive on protein tests. Officials of the Sanlu
Group were aware of the same, but did not make it public, nor warned the consuming public,
nor recalled their product in time to prevent the damage. It was a case of serious food safety
failure due to gross, moral negligence of company officials.
A Chinese court sentenced two men to death and the General Manager of the company
to life imprisonment. The company has since gone bankrupt due to this unethical scandal.
(see footnote 2).

The case was judged as one of the worst ethical failures in China, especially in the safety
sensitive field of food-processing. The law took serious note of the intention of the company
and its officials to take recourse to mixing a toxic in children’s food with a view to profit from
the protein tests. The people directly involved were held morally responsible and guilty for the
death and suffering of children. Even the General Manager could not escape the responsibility
as the Head of the Establishment that failed to check and prevent this serious failure, which
was his or her job. The court found that persons who were responsible for preventing such
food safety failures were directly involved with propagating the crime. Hence, the court took
very serious note of their acts while awarding punishment. The Sanlu case was not as a result
of ignorance or accident; it was deliberate and intentional failure on the part of the company
to prevent damages by not only acting unethically and immorally but also not waking up to
the call of moral duty (by warning the consuming public and recalling the product from the
market). Such gross moral violation and the resulting scandal invited the most severe reactions
from the public, the government and the law-enforcing authority, leading to severe punishment
of responsible officials and the closure of business at Sanlu.
 Introduction to Ethics and its Applications in Business

This kind of ethical misconduct is also frequently observed among individuals in society,
and not necessarily owing to ignorance but due to disrespect towards moral standards and a
lack of any sense of moral duty and responsibility. For example, consider the case of death of an
infant baby—as reported in a local daily—due to a public nuisance that we often come across
in Indian cities. A car driver was continuously honking loudly near a children’s hospital in the
dead of the night, despite numerous signboards displaying ‘Hospital’ and requesting not to blow
the horn. Due to this shrill and loud noise from the car, one child patient—critically ill—started
crying loudly, got choked in the process and died before any emergency treatment could be
extended at that time of the night. Under such circumstances, would the driver of the car be
held morally responsible for the death of the child? Ignorance cannot be an excuse for such
violation of rules (signboards reading ‘Hospital’ and ‘Silence Zone’ were prominently displayed
in the area) and, thereby, showing no respect for moral standards and obligation under ‘moral
responsibility’. Moral standards are not about the effect of one’s act and deeds on the self only; they are
more about the effect of one’s acts and deeds on the health, hygiene, safety and well-being of others.
Therefore, the principles to establish moral responsibility are:
1. Ignorance of fact or consequences. This principle is based on the fact that one can live up
to moral obligations if one is aware of the facts and consequences, and has control
over such happenings, which may not be possible if one is ignorant. In such cases of
ignorance, one cannot have any moral obligations, and the moral responsibility for
the causes of such actions is absent or minimal. For example, the refrigerator which
harmed the buyer (due to short circuit) was caused by a fault unknown to the seller,
who had sold the product in good faith presuming that it was sound. Hence, the seller
was neither in a position to have control over the fault—and the consequent damage or
injury—nor in a position to foresee the same. Therefore, he or she can claim ignorance
and be relieved of any moral responsibility.
2. Ignorance of moral standards. This principle considers that ignorance about some moral
standards may stand in the way of taking moral responsibility. For example, take the
case of a person smoking in a non-smoking zone—he does not know the rule nor
can he read English (the language on the signboard that reads ‘Non-Smoking’). Here,
he may plead ignorance of the rule and his inability to adhere to the required moral
standard, and ask to be excused from the moral responsibility that may have harmed
public health. Similarly, a tourist may tip a service provider in a foreign country—not
knowing it is tantamount to bribery and violation of moral standards in that country.
Such genuine cases of ignorance will not stand the test of moral responsibility.
Ignorance is generally connected to inability to comprehend or ascertain or understand. This inability
can be due to internal or external circumstances. A person may lack the knowledge, ability and/
or skill to act in accordance with moral obligations. For instance, a tourist cannot comprehend
signboards (written in the local language of that foreign country) and ignorantly trespasses onto
a forbidden zone; or, a villager visiting a metropolis for the first time fails to adhere to some
civic code of moral standards there. Here, it is a genuine case of ignorance that prevented each
from acting responsibly; had it not been for ignorance, he or she could have acted with moral
responsibility. On the other hand, a physically-challenged person who was unable to save help
 Ethics in Business and Corporate Governance

someone from drowning in a swimming pool may not have done so due to ignorance or lack of
moral standards or obligations, but due to sheer inability (or powerlessness born of his physical
inability to dive/swim) to prevent the bad incident. Here, the inability is not due to ignorance
but due to lack of power. At times, lack of power also prevents people from acting morally
and being responsible for moral obligations. For example, in business, it is not uncommon to
find an employee, under pressure from higher authority, forced to do an unethical task. Can
the Supervisor prevent the use of poor quality material in the construction of a building if the
Chief Engineer recommends the same and enforces his instructions? The resulting structure may
endanger the lives of many and the Supervisor may have the full knowledge and understanding
of the wrongness and immorality of such practices; yet, he cannot prevent it from happening
due to lack of power. As long as the Supervisor does not willingly and actively participate
and perpetuate the wrongdoing or action, he cannot be judged morally responsible for the
consequences of the act. However, it is expected from a person who is in the know of an act and
its consequences, to make some kind of moral protest against such wrongdoing. Hence, though
the Supervisor may not exactly be held morally responsible for the wrongdoing, he will feel sad
for being unable to stop an unethical act.This situation will be further qualified and clarified in
the following passage.
Uncertainty, difficulty, and involvement are other factors that play important roles in determining
the violation of moral standards and fixing moral responsibility. These factors may mitigate the
moral responsibility to a certain extent, but will not totally exonerate the person. For example,
a passenger at the airport is requested by a stranger to carry a parcel to a metro destination he
is flying to, and that, on reaching the destination, he will have it collected by someone. The
stranger may describe the urgency of the parcel reaching on time, e.g., a document required
for a court-hearing held that very afternoon; or a specific medicine for a patient critical in that
city, etc. Based on his judgment, the passenger may refuse or accept to deliver the parcel to the
requested destination. Here, he may be uncertain about the moral standard expected of him or its
consequences, but not altogether unsure of them or the risk involved. In such a case, if he ‘accepts’
the parcel and anything untoward—known or unknown—happens as a consequence of the
parcel reaching the destination (e.g., terror attack, illegal transfer of money for criminal activity,
etc.), he will be morally responsible. But, the degree of moral responsibility will be somewhat
mitigated due to his uncertainty. Similarly, it may be difficult for a clerk in an office not to approve
a false claim (bill) if he is instructed to do so by the ‘Boss’. Yet, it is not totally impossible for
him to ignore the order, because there are rules and regulations in the company that allow
for such wrongdoing to be notified to an even higher authority or to an audit committee. If
the clerk, under pressure, does obey the Boss’s instruction and passes the false bill, his moral
responsibility with regard to the act can be partly mitigated but not totally excused. Likewise, a
person may not be fully or actively involved in a wrong act or wrongdoing that happened under
a special circumstance. For example, a thief snatches a gold chain from a passerby and sells it
to a goldsmith on the pretext of contingency. Taking advantage of the situation, the goldsmith
buys the chain at a nominal price. Subsequently, the police get a tip from an informer, and
raid the goldsmith’s shop to recover the chain. The latter pleads that he bought the chain not
knowing that it was a stolen item. But, his partial involvement in the cycle of events is proven
 Introduction to Ethics and its Applications in Business

by the fact that he paid less than the market value only by suspecting something fishy about
the sale. In such circumstances, his moral responsibility for a series of wrong acts—stealing and
selling a gold chain—cannot be totally excused, though it may stand mitigated. However, the
other side of a similar example, where no such mitigation is allowed, can be illustrated through
the role of an auditor who was hired by a company to check for any fraud in the accounting
process. But the auditor compromised the situation and chose to be silent about that matter
and certified the accounts. When the fraud was ultimately exposed, the auditor pleaded that he
was not actively involved and, hence, was not responsible for the act. Here, he cannot escape
his share of moral responsibility for his failure—intentional or not—to report the matter in
time. Because, one cannot escape moral responsibility for a wrongdoing if preventing the unethical act was
the specific duty of that individual; in this case, the auditor. However, the foregoing conditions of
minimal or not-active involvement will not apply if the wrongdoing is of a serious nature as are
the consequences to society, e.g., terrorism, murder, rape, drug trafficking, etc. as shown in the
flow chart depicting moral judgment (refer to Figure 1.4).

Action / Decision / Policy under scrutiny

Understand Moral Standards of the place, society and business

1. Apply Moral Reasoning as to (1) Understanding of 'acceptable moral standards', i.e., what
exactly the standards require, prohibit, condemn or value with regard
to the specific situation, and (2) Evidence or information that shows
that the person, policies or behaviour has the kind of features that
these moral standards require, prohibit, condemn or value.

2. Establish Moral by: applying the principles of ignorance of fact or consequences;

Responsibility ignorance of moral standard; uncertainty, difficulty and involvement.

3. Apply Moral Judgment on the rightness or wrongness of action, policy or behaviour.

Figure 1.4 A Tentative Flow Sheet for Ethical Judgment

To summarise, an individual is morally responsible for any injurious effect he or she has caused
to others or to the society by knowingly and freely committing a wrong or failing to prevent a
wrongdoing either by omission or commission. But, moral responsibility for such a wrongdoing
is completely excused if the wrong has been committed by genuine ignorance, inability or
insanity. There are occasions when a wrong could have been done under the condition of
uncertainty or difficulty or minimal involvement. At such times, moral responsibility for the
wrongdoing gets mitigated as long as the injury or effect of the wrongdoing is not serious
enough for the society, or preventing the wrongdoing was not a part of the specific duty of the
individual concerned. However, many ethicists feel that passively allowing something wrong to happen
and causing the wrong to happen is no different. Therefore, one’s moral responsibility cannot be
mitigated even though the individual might not have actively taken part in doing the wrong
and causing the injury. Thus, there could be many views about moral standards and moral
 Ethics in Business and Corporate Governance

responsibility, but they all have the ultimate aim of making a person conscious and responsible
for behaving morally and ethically in the society or in business, so that damages to the interests
of others concerned are minimised or eliminated. In the governance and administration of a
society or a business, following minimum acceptable moral standards and ethical behaviour
is absolutely necessary for the sake of prosperity of and peace in the society and growth and
sustainability of the business. In our domain of social and professional behaviour, these moral
and ethical imperatives are expressed in terms of ‘moral standards’ and ‘ethical standards’, which
are though used interchangeably but do not necessarily mean the same. Hence, the next section
will deliberate on this topic to understand their respective roles and implications.

1.5 MORAL STANDARDS VIS-À-VIS ETHICAL STANDARDS

It may be appropriate at this stage to have clarity about the ethics and moral standards and
their respective roles in governing the behaviour of individuals and the business. The question
is: do the ethics and moral standards mean same thing? Discussions so far have highlighted the

Moral standards are not absolute. They may change with society, place, and circumstance
or even with the maturity of the person. Morality is not simply the rules or standards
that people accept or follow. Moral standards have to be rationally justifiable standards
of behaviour for a society. Morality is not private nor secret and nor esoteric. In order
to expect people to be moral, morality should be seen as something open, acceptable
and accessible to all people—at least to those who are sensible and mature enough to be
held responsible for their actions.
Moral standards are based on impartial considerations without any self-interest or bias. Their
objective is to further the cause of rightness and goodness of a society or a group.
Moral standards are self-regulating and self-inflicting.They cannot, and need not, be enforced
by superiors or outsiders.They are based on good and value-based reasoning. If one fails
to come up with good reasoning for one’s actions and decisions, one would feel bad,
dissatisfied and even guilty.
Ethics, on the other hand, mean the logical study of morality of an action by searching the principles
that nullify the action or justify it as fair and good. For example, if a nursing home fails to
admit a road accident victim for want of ‘medical insurance coverage’, it would be
termed unethical according to ‘medical ethics’. The reason is medical ethics prescribe
certain ‘ethical standards’ to be maintained and upheld in the conduct and practices of
medical profession. Refusing to admit or to extend urgent treatment to a helpless road
accident victim is against the ethical standards of the medical profession.
The society by and large views ethical standards as enforceable when they pertain to the
behaviour of a body of people, profession, business, association and institution. In each case, the
respective ethical standards are based on the principles of ‘moral reasoning’, the perception of
‘moral responsibility’, and the application of ‘moral judgment’. Hence, ethical standards can be
described as a ‘product of the minds of people’ who frame the standards, for example, ethical
standards set by the leaders of organisations for their business operations.Thus, ethics and ethical
 Introduction to Ethics and its Applications in Business

standards of actions and decisions can influence the course of a business in a manner that could
be beneficial or harmful to different stakeholders of the business and the society it serves.
Therefore, for all practical purposes relating to business, morality and moral standards would refer
to ‘individuals’ and ‘people’ —be they a part of business or an independent entity — as regards
goodness, rightness or fairness of their actions and decisions. On the other hand, ethics and
ethical standards would apply to business, institutions, associations and professions as regards the
conduct, actions, decisions, behaviour and policy of the organisation or individuals running the
organisation. Ethical standards of working at these places and businesses are meant to build ‘trust’
and ‘belief ’ among different stakeholders, members, associates and the society by adhering to
some discrete characteristics that include:

Honesty Transparency Humanity

Integrity Accountability Legality
Values Respectfulness Commitment

The distinction between morality and ethics often gets blurred because these terms are
often used interchangeably and can mean the same thing in casual discussions. But morality
refers to adhering to certain moral standards or conduct of behaviour by people or individuals—taught or
established in a society as part of natural feature of reality for good, harmonious and fair living. Ethics or
ethicality of actions and decisions, on the other hand, would refer to the degree of goodness,
rightness and fairness of such standards and conduct (i.e. morality) exhibited by an organisation
or individuals running the organisation. Morality is more individual and more universal than ethics.
Ethics evolve from the sense of morality, and morality, in turn, is based on values and sense of fairness
and justice in each individual’s environment. Ethics in business seek to instal a fair, just and caring
organisational environment by promoting ‘ethical standards’ of thinking, behaviour, actions,
policies and decisions thereby cementing the purpose and process of business with focus on
each stakeholder’s interests, including customers, consumers and the society (Figure 1.5).

Honesty Integrity Values

Transparency Accountability Commitment

Legality Humanity
Humility

Figure 1.5 Characteristics of Ethics

 Ethics in Business and Corporate Governance

Another characteristic of ethics is consistency. Many moralists have argued that if people
consistently treat all human beings the same way, they will always act ethically. Ethical behaviour,
they argue, is simply a matter of being consistent by extending to all persons the same respect
and consideration that we claim for ourselves. To imply that ethics consist of nothing more
than consistency, they refer to these words from ‘The Bible’: “Do unto others as you would
have them do unto you: this is the whole Law and the prophets.” (Matt. 7:12). This is, perhaps,
not exactly ethics, but the principle of applying ethical rules. If it is so, then while applying
this aspect of ethics to set ethical standards, it would be necessary to ask: Can ethics be made
universal? The obvious answer is not because ethics are applicable in the environment of each
individual, and that cannot be universal. Therefore, what it means to be consistent is to apply
the ‘moral reasoning’—leading to ethicality of an action—of one situation to another the same
way unless we can show that the two situations differ materially and hence not suitable for
consistent application of ‘moral reasoning’.
Some may tend to pose the dilemma over morality and ethics distinction as the ‘chicken and
egg story’ —seeking to debate which one came first! No doubt, it is difficult to disentangle the
two terms—morality and ethics—from each other completely, but that is not necessary either.
Because these two terms are part of the same system, and the system is not complete without
either of them. This system is the system of defining goodness and rightness for the society at
large by taking recourse to ‘morality’, and fairness, justice and care for individuals living in the
society (or partnering an activity) by taking recourse to ‘ethics’. In fact, there are three distinct
standards that should guide, shape and control our behaviour in the society or in our activity,
such as business. These standards are described below:
1. Moral standards: These are common rules for everybody in a society. These are
necessary for making the society a harmonious place for everybody to live, enjoy and
prosper, prohibiting wrongdoing by following moral values and virtues.
2. Ethical standards: These are rules of behaviour established through ‘moral reasoning’
and exhibited by the culture, custom, thinking, actions and decisions of a society to
demonstrate its adherence to a certain degree of fairness, justice and care.
3. Legal standards: These are systems of punishment and incentives in a society or
country for enforcing laws and regulations, representing the minimum that the society
will tolerate for peaceful living. An individual’s or an organisation’s behaviour below
the legal standards will supposedly harm the society. Therefore, the wrongdoer will be
punishable under the law.
When one examines the spirit of these standards, it is observed that (a) ethical standards are
the offshoot and extension of moral standards, and (b) ethical standards are the ‘social extension
of legal standards’ because the society or community is not content with the ‘minimum tolerable’
limits that laws set. In other words, the society or community sets the ethical standards to reach
out to grey areas of legal standards, or outside the legal standards, to protect the larger interest
of people or to cover larger number of people. Often this results in exceeding the ‘minimum
tolerable limit’ of behavioural standards set by the legal systems.
 Introduction to Ethics and its Applications in Business

For example, consider the case of the detection of pesticide residual in the bottled soft drink,
which could not be acted upon by the legal standards due to the absence of an ‘Indian
specification’ limiting the maximum presence of certain harmful residuals in soft drinks. Hence
in this case, ethical standards—constraining a party from harming the health of children—
could be invoked to stop the marketing of such supposedly harmful products. Similarly,
many environmental issues—like vehicle pollution in a metropolis—can be addressed by
invoking ethical standards concerning the right of an individual to clean air if the pollution
control laws are weak. In such cases, application of ethical standards to the issue can help
protect the larger interest or the interests of large numbers.

Thus, the study of ethics or ethical standards involves understanding the issues of morality
in a society, judging an action by unbiased moral reasoning, and setting acceptable standards
of actions and behaviour that may even go beyond the boundaries of minimum tolerable limits
of legal standards. A good system of law may incorporate many ethical standards, but the law
can also deviate from what is ethical, as exemplified by the case of pesticide-laced soft drinks
in India. Another aspect of law is that it is framed by an authority, and if that authority is not
moral or ethical (e.g., a dictatorial or totalitarian regime) then the law can become ethically
corrupt, functioning as instrument of power alone and designed to serve the interests of a
narrow group. Hence, for a balanced judgment and governance, we require both legal standards
and ethical standards. In fact, in a democratic set-up, law and ethics often complement each
other in an attempt to ensure justice, fairness and morality of decisions or actions by individuals,
governments and corporates to promote harmony in the society and fairness in governance.

For example, the move by the Government of India in September 2011 to enact a new law
through the ‘Land Acquisition and Rehabilitation and Resettlement Bill’ to replace the old
and archaic 1894 Land Acquisition Act is a testimony of combining the law and the spirit of
ethics in the purpose and process of land acquisitions for public and private uses.11 Seemingly,
the aim of this new act concerning land acquisition, resettlement and rehabilitation is to do
justice to the fair and ethical demands of the farmers for their long-term well-being and their
right to continuation of livelihood of similar quality, if not better, after the loss of agricultural
lands.

There are innumerable instances in this world to show that without ethical standards of
behaviour, the society will crumble and become unmanageable for harmonious living, productive
work, equitable utilisation of resources and cooperative welfare. Despite such importance of
ethical standards in our life, it is often felt that identifying ethical standards—that we should
follow in a given situation and environment—is difficult because of somewhat abstract nature
of morality and ethics. Moral philosophers have suggested five approaches to ethical standards that
can be examined to arrive at what is ethical. These approaches are explained below:

11
http://en.wikipedia.org/wiki/Land_Acquisition_and_Rehabilitation_and_Resettlement_Bill, accessed on 17 September 2011
 Ethics in Business and Corporate Governance

1. The Utilitarian Approach

As per the utilitarian approach, ethical action is the one that provides the maximum
good or does minimum harm. This means that the ethical action produces the greatest
good and does the least harm to all those who are affected by it or its outcome, such as
a community, users of the environment, and customers, employees and shareholders of
a company. Ideally, the utilitarian approach should try both to increase the good done
and to reduce the harm done. If the action passes the test of utilitarianism, it can be said
to be ethical or conforming to ethical standards.
2. The Rights Approach
Ethicists also suggest that the ethical action is the one that best protects and respects
the moral rights of those affected. In this regard, it is noted that every living being has
certain ‘moral rights’, for example, the opportunity to live, the right to privacy, the right
to justice, not to be harmed, choice of actions, as long as the actions are not harmful
or injurious to others in the society. The rights approach to ethics, by implication, also
assumes that everybody has the duty to respect others’ rights. If an action violates any
such rights, it can be construed as unethical.
3. The Fairness or Justice Approach
This approach originated from the preachings of ancient Greek philosophers, like
Aristotle, that all equals should be treated equally. So strong was the dictum of this
concept that many of our judicial systems had subsequently developed on this concept
and called for equality of all human beings in the eyes of law. Any departure from this
principle has to be supported or justified as ‘fair’ by ‘logically defensible standard of
behaviour or action’. For example, persons guilty of similar crime have to be treated
equally for punishment, whether one is a common man and the other is a man of
high position in the society. Similarly, by fair play, a well-skilled person could be paid
higher wages compared to a person of lower skill or education, and that would not be
discrimination.
4. The Virtue Approach
Virtues are dispositions and habits of individuals that show considerations for well-
being of humanity, adherence to certain well-meaning values like the truthfulness,
honesty, integrity, generosity, fairness, prudence and self-regulation.The virtue approach
to judging ethics demands consistency of actions in conformity with these virtuous
dispositions.The virtue ethics ask for examining one’s actions by oneself to judge whether
the actions are consistent with one’s best beliefs, honesty, fairness and integrity.
5. The Common Good Approach
This approach suggests examining an issue with attention to welfare of everyone in
the society. The spirit of this approach is that everyone in the society is locked in a
‘do good’ relationship and all should respect this approach while taking or deciding
any action. This approach to ethics calls for showing compassion for wellness of all,
especially the vulnerable ones in the society, for example, children, the poor and the sick.
The purpose of common good approach is to spread the reach of ‘benefits’ to as many as
 Introduction to Ethics and its Applications in Business

possible in the society. Many ethics-based actions in the society and business are based
on this approach of common good; for example, the work of charitable trusts, blood
donation camps run by clubs, and the corporate social responsibility (CSR) activities of
companies and businesses.
It is not that an action or decision has to fulfil the criteria of all these approaches simultaneously
to be judged as ethical or of good ethical standards. But, no doubt, these examinations will lead
to something of a decision about which one could feel good and satisfied. These constitute
a test of moral reasoning that we use for ethics. More about ethical decision-making will be
discussed later.

1.6 ETHICAL DECISION-MAKING AND ETHICAL DILEMMAS

Ethics touch our social and work life in more than one way. We feel happy, satisfied, motivated
and fulfilled when we are treated ethically, but unhappy, frustrated and broken down when
treated otherwise. Ethics bind a society or a group together with the spirit of ‘do good’ to
our life and means of living. Ethics are necessary not only in our personal life but more so in
our work-life, profession and business where we work in a group or a team for the purpose
of serving a cause of our profession or a duty of our business, and we are responsible for our
actions, decisions and their effects. The impact of our decisions on our personal or professional
life can be far reaching, either good or bad, depending on the ethicality of our decisions. Hence,
discussions are necessary to establish the ways and means of making good ethical decisions
under different personal and working situations.
Making good ethical decisions requires sensitivity to ethical issues, an introspective mind and
attitude of being fair, just and caring.The process of ethical decision-making may take different
routes, but it should have clear focus of ‘doing good to others’ and must not be masked by self-
interest, bias or prejudices. More we place ourselves into others’ shoes (i.e., in the place of the
people to be affected by the decision), better would be our decision. Many experts believe that
ethical decision-making should be done by examining an issue with respect to five principles of
ethics, namely the utilitarian principles, the principles of rights and duties, the principle of justice, the ethics
of virtue and care, and the principle of common good. Still, many feel that ethical decision-making
is difficult because of the ‘ethical dilemmas’. Ethical dilemmas posing contradictions between
moral perceptions and imperatives do come up at times in our personal and professional life.
Therefore, resolving ethical dilemmas, if any, is essential for taking an acceptable ethical decision
by all means. Hence, before proceeding to ethical decision-making steps, we will discuss aspects
of ethical dilemmas and their resolutions.

1.6.1 Ethical Dilemmas and their Resolutions

Ethical dilemmas are a self-inflicted situation that arises due to various contradictions between one’s
moral perceptions and imperatives, conflicts of ideologies between people, differences in value systems, diversity
of culture, and skill of moral reasoning of an individual, putting the ethical principles at risk. An ethical
dilemma puts the decision-maker into a conflicting situation that might jeopardise the quality
of ethical decision, not because of failing to choose between ‘right and wrong’, but between
 Ethics in Business and Corporate Governance

the ‘right and right’! We do experience in business processes and executions some situations in
which our professional responsibilities come into conflict with our values—getting us caught in
a ‘grey area’, and no matter which option we choose, we are left with a feeling of shortcoming.
As per a Boeing (of USA) slogan: “Between right and wrong is a troublesome grey area”.
Hence, a part of ethical decision-making system must also include the process of resolving
the ethical dilemmas, if any, that cause ‘conflicts and contradictions’ in the decision system.
Some typical sources of ethical dilemmas are listed below:
1. Conflict of personal and professional values
2. One’s values and moral principles versus the perceived role of a task
3. Conflicting ethical values between ‘taker and giver’ of a service
4. Choice between two actions having equally favourable or unfavourable elements in a
decision
5. Choice between two unsatisfactory alternatives as a solution of a problem
6. Conflict between an action its consequence
Let us understand few of these dilemmas through examples from different professions and
functions of business.

1. A marketing executive is approached by a wholesale consumer to provide ‘cut-back’

money on the purchases he will make for continuation of an order of supplies.The executive
is under pressure to complete his annual sales target and checks up that this order is vital
for his meeting the sales target. This has put the marketing man into an ethical dilemma of:
‘Should he sacrifice his personal interest to protect his professional integrity of not striking
any underhand dealing?’
2. A project manager was faced with the challenge of ‘time over-run’ and consequent cost
escalation for failing to get the ‘environment clearance certificate’ from the concerned agency.
He had the option of bribing his way through to get the certificate without following any
mandatory conditions or to develop a new water body and planting ten thousand trees on
its banks. The former choice would be against his values and principles, whereas the latter
choice would require more time and money for completion of the project.This had put him
into an ethical dilemma arising from the conflict between his moral conscience and the sense
of responsibility as project manager.
3. A newly established private educational institution for vocational courses proposed to air
a 10-second advertisement at the peak time on a popular TV channel in a metro claiming:
‘Enrolment in the Institution automatically guarantees 100% jobs in Government offices’.
The proposal had put the accounts manager of the TV channel into a dilemma whether
to accept the advertisement—accepting the advertisement would mean supporting and
promoting ‘wrong’ information, and refusing the same would mean loss of revenues to the
 Introduction to Ethics and its Applications in Business

channel. The TV channel was more concerned with the consequences of their action that
might mislead many poor students to pay hefty fees to enroll in the course with job false
guarantee.
4.The mother of a brain-dead boy requests the head of the hospital where the boy is admitted
after an accident to withdraw the life support from the patient and allow him to die in natural
course. The reason is keeping the boy alive for long will cost enormous amount of expenses
that his family cannot bear. Besides, keeping the boy alive in the brain-dead condition is also
worthless. The dilemma before the hospital is which alternative to choose, as both are not
only equally bad and pathetic but also against the professional ethics and law. If the hospital
chooses to continue with the life support to the boy, can they force the mother to pay for the
treatment meted out purely on humanitarian ground and without her consent?

These are few examples of ethical dilemmas and questions they raise. Fortunately, we do
not always face such dilemmas in our business or professional work, but we do face them
nonetheless. Hence, a formal method of ethical decision-making should consider the ways and
means of resolving the ethical dilemmas satisfactorily to the extent possible.
Resolution of an ethical dilemma could not be a fixed line of ‘right or wrong’ approach
except that one should be on the right side of the law if there is any law concerning or
prohibiting the action involved in the ethical dilemma.This is not to say that it is always morally
wrong to break law. Here the purpose is to emphasise that the legality or legal provision has to
be taken into account while resolving a dilemma. For example, withdrawing the life support
from the brain-dead boy will tantamount to allowing ‘euthanasia’ that is not legally permitted in
India. But morally, it could be justified and supported by many. Resolving an ethical dilemma to
the satisfaction of all concerned is a difficult task. The most practical approach would be to do
something that makes you feel good and satisfied from the standpoint of your moral reasoning.
This might include the circumstances and environment leading to the ‘issue’ that poses the
dilemma and actions on that issue. There are two major approaches that philosophers use in
handling ethical dilemmas. One focuses on the practical consequences of what we do, and the other
focuses on the actions themselves and weighs the rightness of the action alone. It is often argued
in the realm of ethics that ‘if there is no harm, there is no foul’. Hence, the consequence of a
decision is important.The other approach claims that some actions are simply wrong in the eyes
of ethics, hence cannot be desirable as a solution. Therefore, it is up to one’s moral belief and
standards to choose any action as a solution to one’s dilemma.

Common Analytical Steps in Resolving Ethical Dilemmas

• Step 1: Identify the moral issues involved in the ethical dilemma and list out
where they are conflicting with the values, norms, equality, systems, laws, professional
codes, responsibilities, conscience and virtues.
• Step 2: Analyse the consequences of the issues regarding “who will be
benefitted and who will be hurt; and what will be the benefits or what would be
 Ethics in Business and Corporate Governance

the harms?” For example, who are to be benefitted may include individuals, society,
employees, shareholders and locality. And, the possible benefits could be cleaner
environment, better safety, better health, better work environment, compliance to
rules and regulations, sustainability and good living.
Examine these benefits and harms for long term or short term to arrive at a better
judgment of the decision.
• Step 3: Examine options for various alternative actions from different
perspectives, but without considering the consequences of those options on any
one.
Examine each option with respect to how it measures up against moral principles
like honesty, fairness, equality, respecting the dignity of others and rights of people.
Whether there is a conflict between the principles or between the rights of different
people involved? Is there a situation where one principle is seemingly more important
than the others?
Next, identify which options would offer actions that are less problematic for you in
your own situation and context. Then shortlist a few options (as few as possible) that
stand out better than the rest.
• Step 4: Examine the options in the light of the ‘principles of ethics’, especially
the utilitarian principle and the principle of common good, to find out further moral merits
of the decisions.
• Step 5: Make the final decision by taking into account the direction of approaches
mentioned earlier, that is, (a) the consequence of the decision, and (b) the rightness
of the decision. Identify which one will make you feel more good than the other if
there is still conflict between the choices and then take the call.

While dealing with ethical dilemmas, remember that you cannot resolve all dilemmas to the
satisfaction of all parties or address all aspects of the issue involved. Sometimes you may have
to choose the best among the worse. The idea is you should feel good and satisfied for having
taken that decision under the given circumstances and environment you are placed into. At
times, you (or a business enterprise or a government) may have to seek ways and means to
mitigate the harm or loss to the involved parties arising from an ethical dilemma.

For example, let us refer back to the case of land acquisition for industries in the country
(discussed in Section 1.1). The issue gave rise to conflicts that pitted the law vs ethics, the
interest of the nation versus displaced farmers, compensation versus sustenance, and rights (of
farmers) versus force (of the state). Ethical considerations arising from adverse consequences
of land acquisition on the farmers prohibit the forcible land acquisition (though that might
be legal as per law).
 Introduction to Ethics and its Applications in Business

Such an issue often poses an ethical dilemma to social scientists as to what to follow—
consequences of the act or rightness of the act as per legal provisions and practices. The state
can neither ignore the underlying ethical issues that go against the current laws nor can it be
an idle onlooker to the problems of industrialisation of the country. Hence, the Government
of India had to ultimately devise ways to mitigate the sufferings and losses of farmers due to
loss of land. The proposed Land Acquisition and Rehabilitation Bill, 2011 (referred earlier)
is proposing rehabilitation and guaranteed employment to each land losers for ensuring long-
term sustenance and prosperity. The solution to the problem, in this case, has been possible
not by sticking to the law of the land or by going against it due to ethical imperatives, but
by resolving the issues of dilemma by checks and balances that would do good to both the
interests.

1.6.2 Ethical Decision-Making

Any rational decision-making process should have at least five steps: (1) Clear perception of the
problem, (2) Analysis of the problem, (3) Developing different alternative solutions, (4) Analysing
alternative solutions for choosing the best, and (5) Implementation, control and monitoring
for results. Ethical decision-making should not be an exception to this process route. But this
process becomes somewhat more difficult and special for ethical decision-making, as it involves
ensuring morality and ethicality of the prospective solution.
Ethical decision-making requires sensitivity to ethical issues, an introspective mind and an
attitude of being fair, just and caring for those whom the decision will affect. Experts recommend
that ethical decision-making should be done by examining the five principles of ethics, which
are: the utilitarian principles, the principles of rights and duties, the principle of justice, the ethics of
virtue and care, and the principle of common good. Experts believe that the ethical decision-making
should be done by examining an issue with respect to five principles of ethics, namely the utilitarian
principles, the principles of rights and duties, the principle of justice, the ethics of virtue and care, and the
principle of common good. If an issue poses any ethical dilemma, the decision-making process
should more or less follow the steps described earlier. Fortunately, not all issues and decisions
concerning ethics are entangled in conflicts or enmeshed in dilemma situations. Nonetheless,
ethical decision-making is an important subject that impacts the way we live in the society, do
business in the market, treat our customers and consumers, protect the environment, care about
children and conduct our professions. Ethical decisions are the index of our ethical standards,
moral values, social virtues and attitude towards good and harmonious living. We need to have
a trained sensitivity and disciplined approach to ethical issues and a standardised approach for
exploring ethical aspects of a decision to be able to make an ‘informed choice’ for an action that
meets the acceptable ethical standards. Hence, having a separate method for ethical decision-
making is necessary and helpful.
Good ethical decision-making requires a careful exploration and analysis of the problem
by understanding the perspective of others, being fair and moral, impartial and caring, and
having an uncorruptible bent of mind for doing good to others. Ethics is a process of mind
 Ethics in Business and Corporate Governance

that is selfless, virtuous and benevolent. Making a good ethical decision is easier for a good
and transparent mind. A recommended method of ethical decision-making, adopted from the
research work at the Mark Kula Centre for Applied Ethics at Santa Clara University, USA12, is
described below. This approach is one of the ways to arrive at an ethical decision. There could
also be other methods to explore the ways and means for arriving at an acceptable ethical
decision.

A Framework for Ethical Decision-Making12

(Partially modified by the author from the original work under reference 12)
A. Understand and Analyse the Problem and Identify the Apparent Ethical Issues
1. What are the relevant facts of the case? What facts are not known? Can we learn
more about the situation? Do we know enough to make a decision?
2. What individuals and groups have an important stake in the outcome? Are some
concerns more important? Why?
3. What are the options for acting? Have all the relevant persons and groups been
consulted? Have we identified some creative options?
B. Evaluate Alternative Actions
Evaluate the options by asking the following questions:
• Which option will produce the most good and do the least harm? (The Utilitarian
Approach)
• Which option best respects the rights of all who have a stake? (The Rights
Approach)
• Which option treats people equally or proportionately? (The Justice Approach)
• Which option best serves the community as whole and not just some members?
(The Common Good Approach)
• Which option leads you to act as a sort of person you want to be? (The Virtue
Approach)
• Which action makes you feel happy and satisfied?
C. Make a Decision by Evaluating Pros and Cons, and Test It
1. Considering all these approaches, which option does best addresses the situation?
2. Share your concern and decision with others in similar situation and observe their
reactions and suggestions.
3. Re-examine and modify, if necessary, your option for ‘optimum solution’. (The
best solution will always confuse you and elude you.)
D. Act and Check on the Outcome
1. Implement the decision taking care to communicate it to all concerned with the
issue and the decision.
2. Does the option take care not to harm other stakeholders’ interests? If so, what
extra measures are being proposed to mitigate the loss of interests?

12
http://www.scu.edu/ethics/practicing/decision/framework.html, accessed on 20 September 2011
 Introduction to Ethics and its Applications in Business

3. How did the decision turn out in result? Are people concerned with the issue and
option satisfied under the specific situation and environment of work?
E. Implant the Learning Points in the Organisation
Share your experience of ethical decision-making on important organisational issues
with colleagues, peers and bosses at a suitable ‘Training platform’. [Ethics is an internal
realisation, but comes in to a person from the sensitivity to external happenings and
learning.]

As discussed earlier, ethical decision-making becomes more difficult if we are faced with
ethical dilemmas. In such difficult situations, we need to rely more on transparent discussions
and dialogue with others, that is, different stakeholders of the issue. Only by careful exploration
of the problem, aided by the insights and different perspectives of others, we can make good
ethical choices in such situations.
Illustration: Let’s study a real-life difficult case that poses ethical dilemmas for decision-makers.
This high-profile case of proposed Posco Steel Projects in Orissa, India is pending for
years for satisfactory resolution13. The case summary is briefly presented below and a study of
the related social cost benefit analysis (a concern of ethics) is reported under reference14.

“POSCO-India Private Limited is a planned Indian subsidiary of POSCO, an integrated

steel producer with headquarters in Korea.
POSCO signed a Memorandum of Understanding (MoU) in June 2005 to incorporate an
Indian subsidiary and build a steel plant in Orissa, a state in eastern India. Posco India was
incorporated by POSCO in August 2005 with the Registrar of Companies, Orissa, under
India’s Companies Act 1956.
As of July 2011, various delays and controversies have prevented POSCO-India from building
the steel plant in Orissa. The June 2005 MoU expired in June 2011. The State Government
of Orissa expects to replace the expired MoU, and sign a new and revised MoU with
POSCO. As of September 2011, the MoU renewal remains a subject of negotiation between
POSCO India and the State Government of Orissa because the state has proposed changes
and new conditions to the original MoU signed in June 2005.
The National Steel Policy published by the Government of India claims that each additional
capacity of one million tons per annum of steel creates 2,000 direct jobs in India, after
accounting for productivity improvements and use of modern technology. The policy
document also claims that one man-year of employment in the Indian steel industry generates
an additional 3.5 man-years of employment elsewhere in the economy, such as transport,
mining, construction, machinery, and steel fabrication. Posco India’s 12 MMT plant, according
to this policy document, will create 108,000 jobs in the Indian economy.
13
The Posco India, http://en.wikipedia.org/wiki/POSCO_India, accessed on 21 September 2011
14
The Social Cost Benefit Analysis of Posco Steel Projects in Orissa, http://www.ncaer.org/Downloads/Reports/Posco.pdf accessed on
21 September 2011
 Ethics in Business and Corporate Governance

Posco India expected to start steel plant construction promptly after signing the 2005
MoU. However, Posco India has been unable to start construction because of social and
environmental controversies.
In July 2010, a nineteen-member committee, headed by N.C. Saxena, visited Orissa and
made a public denouncement about the non-recognition of forest rights by the Government
of Orissa and violation of the Forest Rights Act in the forest areas proposed to be diverted
for the POSCO India project. The committee urged the Ministry of Environment and Forests of
the Government of India to withdraw the clearance given to the State Government for diversion of the
forest land.
In August 2010, the Ministry of Environment and Forests of the Government of India,
in response to the claims of the NC Saxena committee, issued a stop work order. The order
directed that all land acquisition and transfer for Posco India project, including handing over
of the forest and non-forest land, be stopped forthwith, and details submitted to the Ministry.
The State Government of Orissa and Posco India respected the stop work order of the
Government of India. Then the Government of India appointed a four-member committee
headed by Meena Gupta for examining violation of the ‘Forest Rights Act’. This committee
claims to have conducted intensive inquiry by consulting a large number of documents, field
visits and meeting a large number of people (including officials of the Orissa Government,
local affected inhabitants, NGOs and civil society and experts in concerned fields). The
committee after examining various social, ecological and environmental issues returned a
split report to the government of India in October 2010:
Meena Gupta, the committee chairwoman, acknowledged that Scheduled Tribes enjoy an important
constitutional status in India, and disturbing or displacing them stands on a different footing from the
displacement of other people. She claims Posco India plant is planned to be located in a coastal
district which is not a Scheduled Area and has virtually no Scheduled Tribe people. The
people to be displaced are mostly agricultural and fishermen families (about 700 families).
She further claims that the land earmarked for Posco India is classified as forest land, but this
area is mainly sandy waste, having some scrub forest apart from casuarina plantations.
The other three members of the committee claim that past satellite imagery data suggests
that the current areas under casuarina plantation in the coastal areas were in the past covered
with mangroves. These forests were destroyed either during super cyclones or by illegal
cutting. The members also claim that 21 names from the voter list of 2006 of the area, where land is
proposed for Posco India, belong to Scheduled Tribes protected by the Forests Rights Act of 2008.”

In sum, the Posco case typically presents the ethical dilemma caused by the conflict between
the principles of ‘rights’ and the ‘common good/utilitarian’ approaches.According to the ‘rights’
approach, the tribals stand to lose their rights to forest land if the POSCO project comes up
at the proposed site. And, according to the ‘common good/utilitarian’ approach, the society
and the nation stand to lose huge employment and wealth generation potential if the POSCO
project is disallowed. Because of this ‘dilemma-catch’, the project could not take off since 2005.
Here, the choice is not between ‘right or wrong’, but between the ‘right and right’, presenting
 Introduction to Ethics and its Applications in Business

a ‘grey area’ where social scientists and the government agencies are confused.This situation led
to no action by the authority for long and now threatens the project to be scrapped or shifted
elsewhere.
If we apply the steps of solving ethical dilemma, we get the following best answer:
Step 1: Problem is ‘right versus common good’.
Step 2: Consequences are displacement of 750 tribal families, destruction of forest land, and
change in the ecology of the coastal belt.
Step 3: Options are: Relocate to avoid some villages, if possible; more than compensate with
assured rehabilitation and long-term living income guarantee; plant equal number
or more trees to compensate the forest and environmental loss; avoid construction
of high structures and discharge of industrial effluents in the coastal area affecting
the ecology; and promote ecological and environmental development work.
Step 4: Examine the options from the ethical point of view by taking into account the
views of the affected people and social scientists working in the area.
Application of the ethics of common good/utilitarian approach to the problem
seems to win the heart, but tribal people cannot be left in the lurch.
Step 5: Decision: (An illustrative decision only; this might not be the decision of the
authority)
Allow the project to use the earlier allotted land. Failing that, the consequences would
cost the region and the nation dearly.
Amend the law for tribal land acquisition at the State level, making it possible to acquire
tribal land whenever necessary for exceptional cause of common good, with provisions
for liberal special compensation to tribal people for securing their well-being and future
living.The amended law may also impose conditions of special actions for full guarantee
of the future prosperity of the affected people, such as by employment, promoting local
environment-friendly business and making the project owner to allocate a part of the
project money for CSR activities.
Amend the project agreement with Posco with the provision for compulsory
compensatory measures to protect and promote environment and ecology of the area.
Finally, there could not be a one-line satisfactory answer to all the problems in a difficult
ethical issue, and ethics may also not satisfy everybody’s interest. It is particularly true in cases
where serving someone’s interest prohibits the ‘rule of maximum benefits to maximum number
of people’ or the ‘common good principle’. A decision is good if it has been taken fairly
by considering all the options and chosen the best one that satisfies one’s moral values and
conscience. We must remember that ‘ethical perfection is illusionary’.
Notwithstanding these difficulties, we have to take ethical decisions regarding our work
and professions in a business because a business’s chance of survival and sustainability depends
much upon its ethical behaviour and standards. So far, we have focused our deliberations on the
fundamentals of ethics and the acts of ethics without distinguishing how ethics can work in a
business that is carried out by many people under the same umbrella and as per direction of a
 Ethics in Business and Corporate Governance

few at the top and the business head. Hence, our next step would be to discuss: how ethics work
in business?

1.7 HOW ETHICS WORK IN BUSINESS

It would be relevant in this introductory chapter to examine how the aforementioned ethical
rules and approach work in business set-up. A business operation includes a collection of
people working as a group under certain authority, with an assortment of activities directed
by few at the top, and run with a view to achieving certain objectives. It also has certain goals
and objectives, and the methods of working are regulated and controlled by some laws and
statutory regulations. Therefore, a business organisation is run more like a machine (i.e., with
built-in mechanisms) where systems and discipline are the key requirements. This is applicable
to all types of business, such as manufacturing industry, service industry, commercial houses,
institutions, hospitals, societies, governments, NGOs, etc. Because of the fact that organisations
are run and supervised by a small group of people at the top (called the management team)
who usually know what they are doing, these people can choose what rules and methods to
follow and can decide rules (pertaining to behaviour) for its employees (including themselves)
so as to adhere to ethical business practices. Such set-ups and systems can, therefore, assure that
every business is in a position to exercise controls over the collective and individual behaviour
of its people—who are a part of the organisation and whose behaviour represents organisational
behaviour. This means that business organisations are in a position to control and regulate their
own and their members’ actions by framing appropriate rules and codes for moral standards
and behaviour, and people working in the organisation have the responsibility of behaving and
acting in conformity to the rules and codes of moral standards. The failure of an individual to
comply with these codes and rules can be judged as ‘wrongdoing’ (or misconduct) and that
individual can be held morally responsible for his or her act and its consequences. Therefore,
responsibility for ethical behaviour, which relates to the morality of decisions and actions in
business practices, rests on individuals working in the organisation. Thus, ethics, in business
practices, are reflected through the display of feelings, reasoning, deliberations and actions of
individuals in the business. Let us explore this point further with the example of an employee:

An employee was asked by his boss to fabricate a report exaggerating the performance of the
department. In return for his act, the boss promised him some benefit. They both willingly
joined hands to fabricate a report for mutual benefit. In this case, fabrication of a report
untruthfully is against the moral standards of an employee (especially being a custodian of
the task of reporting), and benefiting from such an act is unethical. If the employee obliges
the boss, he is doing so on his own accord and shall be held accountable for his unethical
act. The boss will be also judged unethical for having induced or forced his employee to do
a wrong that is not in keeping with his position and his responsibility towards the company.
In this case, both the employee and the boss are acting as individuals, and are choosing their
acts as per their own moral standards. The business organisation, for which they both work,
is not responsible for this moral failure and unethical act—as long as the organisation has not
willingly agreed and approved of the actions of these employees.
 Introduction to Ethics and its Applications in Business

This leads us to the question: How can business, as an organisation, be held responsible for
ethics? Some may argue that, unlike an individual, a ‘business organisation’ cannot have feelings,
which are an important rider in the analysis of moral standards. Therefore, it cannot be held
responsible for ethics and morality.And, whether ethical principles and moral standards discussed
thus far are equally applicable to business? The answer is ‘yes’. Because modern corporations are
organisations which the law treats as ‘immortal fictitious persons’ who have the right to sue and
be sued, own and sell property and materials, and enter into contracts—all in their own names.
Hence, if the law can be applied to business, then why cannot ethics be applied to business?
Thus, businesses can be held responsible for their actions—be it legal or ethical—in the same
way as a ‘person’.This view is taken considering that actions and decisions of business originate
from the choices of individuals who are acting on behalf of the organisation. Moreover, a
business comprises systems, (corporate) processes and its people (including its customers,
suppliers, investors and shareholders), wherein an individual or a group empowered by the
company takes decisions and acts on behalf of the enterprise to further the cause of the business
objectives. These individuals who own, invest or work in the company are guided by motives
and objectives as set and directed by the company as well as by the rules framed by the company
in order to coordinate and control individual actions and efforts to accomplish certain outcomes
and objectives. Therefore, a company’s actions and behaviour have to be equally moral and
responsible as that of an individual, so as to ensure right direction and no wrongdoing or harm
to the society, employees, investors, suppliers, etc. —all of who are a part of the business and
are interested in its beneficial objectives/outcomes. Therefore, a business organisation cannot
escape its ‘moral responsibility’ for actions under the cover that an organisation cannot have
feelings to understand the effect of its action. A business cannot have feelings, but its people can have
the necessary feelings, and they are expected to act with feelings, reasoning and deliberations while working
for and on behalf of the business. The corollary of this would be: ‘Corporations do not commit crimes,
people working for it do’. Analyses of ethics in business consider if those individuals or groups who
are working for the company have upheld the acceptable moral standards in their acts and deeds
during the course of business operations. And, if an act has not been judged moral or ethical
and the same had the approval of the company, then the responsibility of the consequences of
that act rests with the organisation and not the individual. This implies that, in effect, business
ethics focus on rational evaluation of moral standards of those individuals or groups who have
acted (or act) on behalf of the enterprise regarding its business policies, procedures, dealings,
behaviour and motive. However, in the process of rational evaluation, the principles of moral
reasoning and principles of ethics (to be discussed in the next chapter) are examined.
The foregoing discussions establish that business organisations have the moral responsibility
to ensure that their policies, practices and behaviour (of its members) are fulfilling legal as well
as moral standards of the society and the country. They cannot indulge in immoral activities, be
unfair in business practices, harm the health of consumers or cause damages to the environment.
Let us understand this by referring to the earlier case wherein a subordinate was asked by his
boss to fabricate a report for mutual benefit:
 Ethics in Business and Corporate Governance

It was argued that both the employee and his boss had acted as individuals, and chose to act
as per their own moral standards. Hence, as individual employees, they were responsible for
the unethical act and its consequences. Accordingly, if the seriousness of their wrongdoing
calls for legal action, they can be penalised as per the standing rules of the company and law.
The business organisation, for which they work, is not responsible for this moral failure and
unethical act—as long as the organisation did not willingly agree and approve of the actions
of its employees.
Now, let us assume that the same report had been submitted to an external auditor (i.e.,
statutory auditor) to comply with a statutory requirement (e.g., for annual audit of
the company’s accounts), and that it was done with the full knowledge, connivance and
agreement of the top management (i.e., the company). Under this condition, the act will be
considered as an ‘unethical business practice of the organisation’ as well as of the individuals
concerned (including the top management) who had fabricated, connived and subsequently
submitted the report to the auditors. In this situation, the employees involved in fabricating
and submitting the report will be held responsible for unethical acts as individuals, and
the company will be also made responsible for ‘unethical business practices’. What could
then happen (as penalty or punishment) to the employees and the company is a different
matter, which would depend on the gravity of the wrongdoing and its impact on the business,
investors, employees, public and the society.

While the exact ways of dealing with such situations shall be discussed later in this book, the
high-points of such unethical acts and their consequences on individuals and the company can
be illustrated with reference to the infamous scandal at Enron, USA. Before its collapse, Enron
was the world’s largest energy generating and utility company, but it was totally wiped out soon
after the scandal, and many of its senior executives were sentenced to jail.

To recapitulate, Enron Energy Corporation, of USA collapsed in 2000 due to large-scale

accounting frauds, scandals and unethical practices, which were planned and practiced by a
few top executives—including the Chairman and Chief Executive—and were supported and
perpetuated by their audit firm, Arthur Anderson (AA), the world’s fifth largest accounting
company.
A few of Enron’s top employees, including its Chairman, Kenneth Lay, fabricated financial
statements through the 1990s with the help of auditors at AA—thus cheating the investing
public and institutions with the intent of personal gains. They cooked the company’s book of
accounts, suppressed the true health of the company’s finance, duped the stakeholders, and
apparently made substantial gains for themselves. When the financial scam was brought to
light in 2001, it was too late to save the company—leading to the collapse of this corporate
giant. Investigations revealed that many top officials at Enron and some from its accounting
firm were guilty of fraud and immoral acts for personal gain. As a result, the licence of its
accounting firm was also cancelled by the US regulator for unethical practices, leading to the
closure of one of the ‘big five’ accounting firms in the world. At Enron, concerned officials
were legally charged as individuals and punished (that included jail terms) for the fraud,
and the company faced many legal cases filed by the regulators, aggrieved shareholders and
 Introduction to Ethics and its Applications in Business

investors. Due to the widely publicised unethical and fraudulent acts, financial institutions
immediately withdrew any further support to Enron—making its financial condition even
more precarious. In the face of numerous lawsuits and huge debt, the company had to file
‘bankruptcy’ at the US courts, and this once-global-corporate-giant collapsed totally15.

However,with respect to business operations in general,the logic and methods of reasoning—to

establish if an action has been moral and ethical—need to be understood in retrospect to the
purpose of business organisations, their structures, environment, obligations and regulations
controlling the business. Some aspects of a business organisation and its structure, and how
they correlate to ethical behaviour, therefore, need to be examined. In this context, at least two
aspects of business have to be considered: (a) purpose of business; and (b) how and who takes
decisions for the business. With regard to (a), it is an accepted fact that every business is set up
and run with a common purpose, which is to make and maximise profits for the stakeholders.
There is nothing wrong in this approach, but what makes the difference is the concept of
‘stakeholders’. Not the few who head the business (or take decision for it) and can make money;
stakeholders include shareholders, promoters, employees, suppliers, buyers, society, government,
nation, etc.; in short, the term includes all those who can rightfully expect to gain from the
operations of the business. Hence, there is nothing wrong for business to make profit or gain,
but that gain must be accomplished by legal and ethical means and must be shared equitably by
all stakeholders and not by a few at the top. As regards (b), it is the top management—including
the Board—that takes the decisions through structured levels and delegated responsibilities.
These individuals at the top are in a position to frame, guide and control the organisation and
organisational activities, and are responsible for ensuring that the organisation’s actions are
legal and ethical. In the greater perspective of the nation and society, nation needs business as the
vehicle for economic growth, and business needs the nation and its national resources—including
consumers, finance, market, infrastructure, environment, etc.—for its growth and survival. They
are interdependent; each one provides a platform for growth to the other. Then, how can
business leaders, or the people employed in business, be oblivious of their (moral) duties and
responsibilities to other stakeholders? Ethical issues in business arise from this standpoint of
business purpose and operations.
Most aspects of ethics and moral behaviour in business arise from the concept of rights,
justice and fairness of deals with respect to its various stakeholders. These dealings can be with
employees, customers, dealers, suppliers, local bodies or the government. Ethical principles are,
therefore, essentially based on the elements of rights and duties, justice, fairness and care. For
example, if a company does not pay fair wages to its employees, the employees feel discriminated
against or exploited. If the senior executives get disproportionately higher remunerations than
the others in a company, then general employees feel differentiated and deprived. If the company
practices differential pricing for its products, buyers who pay more feel aggrieved. If a company’s
supplier does not get a fair share of business, despite offering competitive price and quality, he

15
http://en.wikipedia.org/wiki/Enron, accessed on 30 September 2011
 Ethics in Business and Corporate Governance

or she feels deprived. If the company is ‘adjusting’ its book of accounts to minimise payment
of taxes, the society feels it is evading tax. If a company pollutes the environment through its
effluents, it angers the society by causing and spreading ill-health. All such feelings are indicative
of the fact that affected people are not satisfied with the morality of actions, and they feel that
such actions are unethical—though there may be reasons behind each (immoral) act. It has been
stated earlier in this chapter that if any behaviour can be satisfactorily reasoned out from the
standpoint of ‘moral reasoning’, then that behaviour may stand the test of ethics. But, it should
be appreciated at this stage, that such moral reasoning must also satisfy the guiding principles
of ethics for it to be regarded as ethical. Judgment about ethics in business is embedded in the
inherent concepts of rights, duty, care, justice and fairness. Ethical practice of business must, therefore,
ensure reciprocal rights and correlated duties of the parties involved in business operations,
fairness and justice of decisions and actions, care and concern about people and stakeholders
of the business, and equitable distribution of benefits (or protection from harm and damages)
of interests. These aspects of ethics will be examined in the next chapter on ethical principles.
However, before moving to the discussions of ethical principles, let us further examine the role
and scope of ethics in business, its approach and coverage (see Figure 1.6).

Ethics of
Ethical corporate
standards governance
of operatios

Social
benefits

Ethics of business

Figure 1.6 Ethics of Business

1.8 THE ROLE AND SCOPE OF ETHICS IN BUSINESS

Ethics in business or business ethics, as it is popularly called, deal with application of ethics to
business operations, processes, actions, decisions, transactions, dealings, treatments and outcomes
concerning all stakeholders, both internal and external, of a business. The internal stakeholders
of a business are its employees, suppliers, shareholders and other investors, and the external
stakeholders are the customers, society, government, locality and environment. The aim of
 Introduction to Ethics and its Applications in Business

business ethics is to create a deeper understanding of what is good and bad, what is moral and
immoral or what actions are right or wrong in the operations of a business with respect to its customers,
employees, investors, society, and all other stakeholders in order to protect them from harm and damage
to their interests. The subject covers not only traditional businesses but also institutions, service
providers, society or the assortment of activities relating to consumers and users of goods and
services. Business ethics are concerned with the morality of actions in business operations, and
deal with (1) rightful expectations of consumers, society, employees and other stakeholders,
(2) fairness in competition and advertising of goods and services, (3) social responsibility and
care, and (4) overall corporate behaviour in governance.The ultimate aim of business ethics is to
protect people, society and all direct and indirect stakeholders from damages. Common examples
of immoral business practices in an economy are: bribery to manipulate business interests,
manipulation of market conditions for unfair practices and pricing, non-transparent business
transactions, violation of environmental laws and deficient customer services. Bribery, corruption
in public places, exploitation of labour market, unfair wage structures, unequal opportunity
based on colour, creed or sex, hazardous working conditions, unmindful destruction of ecology
and environment are a few of many unethical practices prevalent in businesses and industries.
And, all these activities are primarily carried out by individuals either out of their own choice
or on the bidding of their organisations. These non-moral actions in business operations always
hurt the interests of others in the business cycle or the society and its people at large. The
purpose of ethics in business is to protect these people and stakeholders from such unsuspecting damages
to their interests arising from the choices and actions of either a business organisation or its employees.
While analysing a business organisation’s ethical behaviour, it should be noted this organisation
is composed of human individuals who act under certain relationships and circumstances to
perform certain assigned activities and responsibilities for the propagation of business.Therefore,
a business organisation’s acts and choices originate from individuals who work for it. Because of
the fact that the business organisation’s acts originate in the choices and actions of individuals, it is these
individuals who must be seen as the primary bearers of moral duties and responsibilities for upholding
business ethics.
In all corrupt and failed business cases discussed so far, few individuals at the top had been
responsible for ethical violation and destruction of value in business.
More businesses failed due to violation of ethics than insolvency; cases in hand are the failures
of Enron of the USA and Satyam of India16—two large MNCs who had been the leaders in
their respective field of business. In these companies, few individuals at the top, especially their
CEOs, had been responsible for ethical violation, account manipulation and frauds to bring
down their companies. These failures point to the fact that ethics in business largely depend
on the honesty, integrity and character of individuals serving the business. But there are also
instances where businesses courted trouble due to risky business models, unrealistic business
targets, loose administration and slack regulatory controls.

16
http://www.allbusiness.com/corporate-governance/4070029-1.html, and http://www.nytimes.com/2009/01/08/business/worldbusiness/
08satyam.html, accessed on 14 November 2011
 Ethics in Business and Corporate Governance

All these causes originate from an organisation’s policies.Therefore, judging ethics in business
would require examination of (a) how ethics and ethical standards of working for individuals
are introduced, maintained and managed in an organisation, and (b) how ethical principles
and ethical governance are factored into the organisation’s policies and programmes. Also,
for effective integration of ethical standards with business practices, there have to be effective
regulatory controls over the conduct of business and professions in a country. The study of
business ethics and their practice, therefore, requires examination of the practical aspects of
business operations and how much of ethical standards have been maintained and displayed in
different actions and behaviour of an organisation. This has been a direct method of examining
the ethicality of actions or organisational behaviour.
But business operations, which is the sum total of taking policy decisions, setting goals
and deciding and pursuing a practical course that will ensure the best results, involve a large
number of functions, namely organising, structuring, manning, systematising, administering,
controlling and managing. Also, business situations are not static, that is, they change with
time, place and context. This brings about changes in circumstances, business environment and
goals thus necessitating corresponding changes in the course and conduct of a business. Since
business ethics encompass a wide variety of topics and situations, therefore some schools of
thought suggest examining these ethics by grouping them into three categories: (1) systemic
issues, that is, issues related to the systems of carrying out business (2) corporate issues, that is,
issues of ethical questions raised about the way a particular company decides its policy and
operates and (3) individual issues, that is, issues of the ethical behaviour and ethical questions
about individuals within a company. They argue that often business operations present us with
situations where decision-making involves tackling a large number of extremely complicated
and interrelated issues that can cause confusion unless these issues are first carefully sorted out
and distinguished from each other. This may be illustrated by considering a simple example
from the Indian industry, which is not uncommon in spirit and can be accepted for the purpose
of illustration.
Let us consider the following case:

‘An official of a company, operating in the eastern part of India, was asked at a very short
notice to travel to Delhi for getting one of their operating licences renewed immediately. The
licence in question is a mandatory requirement under the factory law for safety. The company
overlooked the renewal date and failed to take advance action, leading to this emergency.
Without that operating licence, one of the company’s mills has to be shut down immediately.
Hence, the officer was given the task of getting the licence renewed with utmost urgency.
The officer travelled to Delhi immediately on company’s duty. On reaching Delhi and meeting
the respective authority for renewal, he realised that some gratification was required to be
given to the person concerned with the licence renewal job to move the case on priority.
But his company as a rule did not allow any bribe to expedite any business related actions
in principle. Knowing well that the licence renewal on priority was not possible without
gratification of the concerned staffer, the officer conveyed the reality to his boss in the works.
 Introduction to Ethics and its Applications in Business

However, the boss was helpless in meeting the gratification demand due to the company’s
policy. Finding no other way to expedite the licence clearance, the officer adopted an indirect
method of pleasing the head of the licence renewing authority. He invited the head to a lavish
dinner to explain the urgency, make him sympathetic to the cause and act urgently. He kept
his boss informed about this step. This dinner was successful but cost the officer many times
more than the daily allowance he was entitled to charge from his company for his Delhi stay.
The officer spent the money at his own risk only to fulfil an urgent need of his company.
After succeeding in licence renewal, the officer returned and submitted the actual bill to
his company. But the company’s finance department refused to pay. He then withdrew the
bill and resubmitted a second bill showing the same expenses but under different heads,
for example, exaggerating the transportation bill and few other entitlements, as suggested
by his sympathetic boss. But the bill manipulation spelled trouble for him, as the finance
department held him guilty of submitting inflated travel bills and issued him a show-cause
notice for disciplinary action’.

Reacting to the show-cause notice, the officer’s colleagues asked him whether the company
was morally and ethically right to punish a person for his sincere efforts to serve the interests
of the company though he had legally violated the travel rules. In this case, there are elements
of systemic issue, corporate ethical issue and individual issue.These elements are: (1) The officer
did not do any manipulation of travel bill for personal gain. (2) The company entrusted the
officer with a task without providing resources that such a task calls for. (3) The officer acted
according to the situation-specific need to save his company from loss due to mill closure
that could have led many to job loss. (4) The company’s system did not allow any relaxation
of travel rules for uniformity of application. (5) The finance department scrutinises travel bills
with focus on ‘what rules state’ rather than ‘exigencies of the organisation’s need or utility’.
Judging who is moral and ethical in this case is a bit dilemmatic and complex matter. However,
distinguishing the issues as per systemic, corporate or personal ethics can be helpful. In this
particular case, the officer cannot be blamed for compromising individual ethics in discharging
his duty. He had resubmitted the bill where he might have tried to manipulate the provisions
of travel rules. However, that was done not with profit motive but to get compensated for what
he actually spent.The system (i.e. travel rules in this case) of the company should be transparent
and uniform for all, and it should be respected. Hence, the company was right in rejecting his
travel bills. The company was also ethically right by not indulging in bribing. Then, how can
one operate ethically within this system? It is the task of the management to provide resources
for any job or official deputation to the extent it is fair and just; and to that effect there should
be provision and management controls in business practices. In this case, it will be unfair and
injustice if the officer is punished for his action. Fairness and justice call for examination of
the motive for an act, and not the process of act only. In fact, many companies are found to
be lacking in systems to promote good, transparent and ethical work culture. Morality and
ethics with respect to these distinguishable issues have been discussed earlier as general rules,
but how can we consolidate those moral and ethical rules in business-specific practices? This is
 Ethics in Business and Corporate Governance

the crux of ethical business practices. The practitioners of business have the task of balancing
a decision or action by considering ethical issues from various angles (as brought out in the
aforesaid example). Ethics are not an administrative tool but a template that acts for protecting
and propagating fair practices to ensure justice, fairness and care to all involved in the business
process.
There is somewhat similar approach to looking at ethics and ethical practices in business, but
with more clarity. This task of ethics for protecting and propagating fair practices in business
can be best fulfilled by examining different aspects of business operations. The practitioners of
business ethics suggest that the best way to consolidate and understand the ethical issues and
ethical practices in business would be to examine the ethics in relation to ethics of business
philosophy (i.e., principles and practices) and ethics of professional management in different areas of
business operations. The ethical issues in these areas of operations are by and large systemic and
corporate, but do not altogether exclude individual ethics in analysing cases.This approach stands
out because of its in-built character in assigning responsibility to the company for structuring
corporate processes and policies with an eye to what could be judged logical, ethical and fair to
all stakeholders.The cases described in the beginning indicated a lapse of ethical structuring and
policy formulation leading to greed and risky financial transactions and measures. It is widely
held that ethics in today’s business get reflected through: corporate governance (responsible for organisation
structuring and policy formulation, execution, monitoring and controls); corporate social responsibility
(CSR) that ensures integration of social well-being with the corporate goals; and systemic management of
people, processes and outcomes. The latter is also a part of corporate governance when considered
in totality. Broadly, ethics in business practices involve: (a) ethics as applicable to business philosophy,
namely corporate governance involving structuring, policy formulation, management,
employee relations, social justice, ethics in marketplace and environment management and (b)
ethics of professional management, namely ethics of human resource management, financial and
accounting management, engineering and new product development, sales and marketing,
R&D and IPR. Holding onto ethical business philosophy and professional management is the
responsibility of the corporates and their managements. In addition to the ethics of professional
management, which is the corporate responsibility, there is also a need for professional ethics
of individual professionals engaged in different fields of business operations, for example,
engineering, accounts, human resource management, sales and marketing and advertising. The
need for control over ‘professional ethics’ relating to professions such as medical and advertising
is more a social demand than viewing these professions as business organisations because the
society stands to lose or gain much by their ethical standards of behaviour. Professional ethics
of few important professions of our time will be discussed in a subsequent chapter. Control
of professional ethics in business practices is assuming overwhelming importance in present
competitive and service-oriented business environments.
Business ethics guide the application of ethical rules and principles discussed so far in the
context of commercial and business transactions, for example, the relationship between the
employer and the employee, the relationship between the business and the customer and the
obligations to the society. Business ethics examine various moral and ethical problems that can
arise in business operations, and help understand and make specific judgments about what ought
 Introduction to Ethics and its Applications in Business

to be done and ought not to be done. The main purpose of business ethics is to guide business
organisations in the light of ethical principles, discussed so far, for dealing with (a) various
practical and situational problems in their operations, (b) discharge of specific duties and
responsibilities of the business, and (c) conformance to ‘ethical standards’ as recognised by the
society, government and regulators. For example, looking after the distress of a loyal employee is
considered ethical, whereas the violation of environmental pollution norms, under whatsoever
compelling situation, would be considered as not conforming to the expected ethical standards.
Hence, a company’s business practice must cover wide-ranging ethical issues starting from the
employee welfare to the environment protection and development. However, such ethical binding
or responsibility must not be seen as a restraining factor in business operations. Because the ultimate aim of
business ethics is not to hold back the interests of business operations in terms of economy but to strengthen
the decision-making process to stop sufferings from bad employee morale, poor market reputation, lack
of customer support, legal and social penalty, and such other consequences that may deter the economic
progress of the company. It is in the long-term interest of a company to be ethical in its operations,
management and dealings with the customers and society. There are plenty of instances in
the corporate world (similar to corporate giants like Enron, WorldCom and Satyam) where
businesses had to close down due to unethical practices.
Many moralists had looked into business with suspicion, considering business as an institution
of making money even by trampling on the humanity and violating ethics. There are many
examples in the business world where greed for more profits had led the organisations to
destroy environment (e.g., destroying forests for woods), indulge in immoral business practices
(e.g., selling adulterated food stuff and drugs), deal in fake drugs, manipulate account books to
deprive fair share to stakeholders and deal in arms smuggling for civil wars in other countries.
But, those actions had mostly resulted in very short-term benefits to them, if any, and always
reminded business professionals the necessity to be moral in outlook and ethical in dealings for
driving long-term business benefits.
The need for ethics in the society and business is an age-old necessity. Hence, all moral
philosophers advocated maintaining ethical standards in the society and business practices.
However, some moral philosophers also believed that business and ethics are at odds and in
contradiction with each other. They argued that determining and doing what is practical from
the viewpoint of business profits and what is moral involves two different lines of thoughts that
cannot be reconciled. But with the growth of industries and global business, the purpose and
objectives of business have been redefined, especially with respect to customer satisfaction and
customer support. In a competitive business situation where customers (the term includes all
stakeholders like consumers, investors, employees and suppliers) have the choice of deciding
what they should buy and from whom, or where they should invest, work or supply, the
ethical image of a company and business has become important. Planning a business system and
strategy by holding onto ethical principles is now accepted by all as an essential requirement
for long-term survival and benefits of business. There are plenty of examples to show that
customers go to where ethics are. Hence, the business world is now faced with the challenge
of tailoring business models and practices in a manner that agrees with the principles of ethics.
Ethics are not at odds with the purpose of business in an open and competitive market. With the
 Ethics in Business and Corporate Governance

increasing globalisation of business operations, development of rapid communication avenues, surveillance

of electronic and print media, and general awareness of rights and duties by stakeholders of business, ethics
in business operations and management have become a benchmark of good governance and a hallmark of
brand image and success in recent times. No industry or business can now deny the moral rights to
its employees and customers and can evade the moral responsibility of protecting the health
and environment of the society in which it operates. A business has ethical responsibility to its
employees, society, government, and other stakeholders who are related to the well-being of
the business. Remember a business exists for the customers and society and not the vice versa.
Many NGOs in India are now successfully focusing on the prevention of ethical violations of
duties and responsibilities, especially in social services and social welfare measures.
In fact, ethical considerations often lead to the optimisation of benefits of a decision, which
otherwise would have been considered as conflict of interests.The following illustration, though
a trivial one in business operation, may clarify the situation.

The demand for festival bonus in our country is not uncommon. It is also not unknown
that there were many instances of work stoppage or strike due to non-payment of festival
bonus. Is festival bonus a right in our country? The system of giving ‘festival bonus’ in
Indian companies is based on the ethical principle of ‘care’ with a view to helping employees
celebrate the festivity without financial hardship. It is generally considered that such ‘care’
by the management at the time of their need keeps the employees committed and motivated
to the cause of the company. This bonus system involves sharing the cash surplus with the
employees. However, some shareholders (who are not receiving such festival bonus) may
regard this system as wasteful and a load on the cash-flow management, thereby limiting the
utilisation of company’s resources for making profits—the primary purpose of shareholders’
investments. From the perspective of shareholders’ interests versus employee benefits, the
system of giving festival bonus may appear a conflict of interests. But, a more realistic and
perspective analysis will show that the action is likely to lead to greater productivity and
profitability with the help of improved morale and motivation of employees. Thus, the action
may actually benefit both the parties in the business.

Thus, following the ethics of care of its employees by a company at the time of their need can
be looked upon as a good business strategy than a conflict of interests. Looking at this problem
as a conflict of interests would lead to a very short-term gain and greater losses in the long run.
Thus, an important role and scope of ethics in business is reconciliation and harmonisation of
conflicting interests.
In view of the role and scope of business ethics discussed here, ethical issues in business
practices would involve studies of: how individuals are encouraged to maintain ethical standards
in business, how the company takes care of consumers and the market environment, how
the company encourages standards of professional ethics, how the company takes care of the
ethics related to environment and ecology and the quality of corporate governance including
corporate social responsibility (CSR), which is now strongly looked upon as a ‘social view
of business’; CSR is no longer considered voluntary but obligatory. Various chapters of this
 Introduction to Ethics and its Applications in Business

book will focus on the ethical issues related to business, professions and individuals engaged in
business operations, including the issues of ethical corporate governance.

Summary
1. This chapter aims to: (a) Develop concept of ethics vis-à-vis morality and moral responsibility
and moral judgment in the society as well as in the business; (b) Identify and highlight relevance
of ethics in business and its functioning; and (c) Introduce corporate governance and corporate
social responsibility vis-à-vis their functions and ethical necessity
2. The chapter explains and establishes the relationships of morality, moral principles and moral
standards with ethics with the help of several examples so as to offer the right concepts and
approaches to ethics.
3. It illustrates how ethics are not only aimed at well-being in personal life but also make for a
critical factor in business, where individuals are the key components for decision-making and
actions.
4. Business actions are influenced by individuals and that’s why ethics in business and corporate
governance are so critically dependent on the quality of people and their moral standards of
behaviour and actions. In this regard, morality, moral standards and moral reasoning—to establish
moral responsibility—have been discussed thoroughly. It has been emphasised that, to understand
the role of ethics in business, we have to first understand the issues that govern the ethics in
personal life and then incorporate them in business dealings.
5. Ethics and law are not opposed to each other; they mostly complement each other with
the purpose of preventing wrongdoings in society and in business. Yet, ethics go beyond the
jurisdiction of law; they essentially deal with the issues of morality and moral standards in a wider
social perspective in order to determine if acts and their consequences are morally acceptable
and ethical in society.
6. Ethical principles, derived from the requirements for being moral, fair and just, are not rigid
like laws or religious commandments; they are flexible abstract principles dealing with morality,
justice, equality and fairness. Justice, social welfare, equality, human rights, respect and rights are
a few examples of the subject matter that ethics deal with. Ethics attempt to observe if ‘moral
standards’ are maintained in dealing with those subject matters that affect the interests of people
and society.
7. Moral standards have certain characteristics; they deal with matters that have serious implications
for individuals and the society, and are evaluated on the basis of good reasoning—and not
authority or regulations. Any judgment concerning moral standards must overlook self-interest
and should be based on impartial considerations. Typically, violation of moral standards is
associated with self-inflicting feeling of badness and guilt. Upholding moral standards in our
acts and deeds has, therefore, become the primary pointer towards ethics in personal life or in a
business.
 Ethics in Business and Corporate Governance

8. Business ethics focus on a rational evaluation of moral standards of the individuals or groups that
may have acted on behalf of the enterprise, regarding its business policies, procedures, dealings,
behaviour and motive. These individuals are thus the custodians of business ethics. And, in order
to aid these individuals in ethical decision-making, the study of business ethics, as a subject,
aims to create a deeper understanding about: what is good and bad, moral and immoral or what
actions are right or wrong vis-à-vis business operations—be that of an organisation, institution,
society or activities relating to consumers (users of goods and services). Business ethics are
concerned about, and deals with, rightful expectations of consumers, society and employees,
fairness in competition and advertising, social responsibility and overall corporate behaviour.
9. This chapter presents a road map (flow chart) to decide what is ethically right or wrong. What
is moral at one stage of our lives may not be so at a different stage because of the change in
our understanding about one’s own needs and those of the society, family, surroundings, human
rights, nation and the institution we work for. This also happens with the development of our
sense of logic and reasoning when it comes to identifying what is rational and universal—as
discussed with reference to Lawrence Kohlberg. Moral reasoning is not a simple, straightforward
analysis of factual information for decision-making; it requires sensitivity to the issues involved, a
clear and unbiased mind, and an understanding of the expectations of society or beneficiaries or
the aggrieved persons, the restrictions of law, environment, codes of conduct in an organisation
or society, and other factors that may limit the scope of moral judgment.
10. The chapter also critically discusses the role and scope of ethics in business and how ethics
work in business organisations that are, in fact, run by few individuals. It goes on to show that a
business organisation cannot escape the ethical responsibility for its actions under the excuse that
it does not have feelings necessary to understand the effect of its actions. A business organisation’s
actions are taken by individuals who have the necessary feelings, and they are expected to act
with feelings, reasoning and deliberations while working for and on behalf of the business. In
this connection, it has been pointed out that laws governing the conduct of business also treat
business as ‘immortal fictitious persons’ who have the right to sue and be sued, own and sell
property and materials, and enter into contracts—all in their own names. Therefore, if law can
be applied to business being an organisation, then why we cannot apply ethics to business?
11. Most aspects of ethics and moral behaviour in business arise from the concept of rights,
justice and fairness of deals with respect to its various stakeholders. These dealings can be with
employees, customers, dealers, suppliers, local bodies or the government. Ethical principles in
business are, therefore, essentially based on the elements of rights and duties, justice, fairness
and care of different stakeholders associated with the business. The judgment about ethics in
business is embedded in the inherent concept of rights, duties, care, justice and fairness. Ethical
practices in business must ensure reciprocal rights and correlated duties of the parties involved
in dealings with the business organisation, fairness and justice of decisions and actions affecting
the stakeholders, care and concern about the people who work for it, and equitable distribution
of benefits of interests or protection from harms and damages.
12. Finally, the role and scope of ‘business ethics’, as a subject, has been deliberated. It has been
pointed out that the aim of ethics in business (the subject matter of business ethics) is to create
a deeper understanding of what is good and bad, what is moral and immoral or what actions
 Introduction to Ethics and its Applications in Business

are right or wrong in the operations of a business with respect to its customers, employees,
investors, society and all other stakeholders in order to protect them from harm and damage
to their interests. The subject covers not only traditional businesses but also institutions, service
providers, society or the assortment of activities relating to consumers and users of goods and
services. Business ethics are concerned with the morality of actions in business operations, and
deal with (1) rightful expectations of consumers, society, employees and other stakeholders,
(2) fairness in competition and advertising of goods and services, (3) social responsibility and
care, and (4) overall corporate behaviour in governance. The ultimate aim of business ethics is to
protect people, society and all direct and indirect stakeholders from damages.
13. The main purpose of business ethics is to guide business organisations in the light of ethical
principles in dealing with various practical problems in their operations, and conform to specific
duties and responsibilities that might arise due to the necessity of being ethical or for conforming
with the ethical practices as recognised by the society, government and regulators. A company’s
ethical obligations vary widely, ranging from the employee welfare to the environment protection
and promotion. However, such ethical binding or responsibility must not be seen as a restraining
factor in business operations. Because the ultimate aim of business ethics is not to hold back the interests
of business operations in terms of economy, but to strengthen the decision-making process in order to stop
sufferings from bad employee morale, poor market reputation, lack of customer support, legal and social
penalty, and such other consequences that may deter the economic progress of a company. It is in the long-
term interest of a company to be ethical in its operations, management and dealings with the
customers and society. There are plenty of instances in the corporate world (similar to corporate
giants like Enron, WorldCom and Satyam) where businesses had to close down due to unethical
practices.

Key Words and Concepts

Concept and definition of ethics, aim and purpose of ethics, moral standards and moral responsibility,
methods of moral reasoning, moral judgment, moral principles and values, moral justification,
characteristics of moral standards, characteristics of ethical standards, violation of moral standards,
fixing moral responsibility, fairness and justice, scope of business ethics, how ethics work in business,
concept of stakeholders, corporate governance, corporate social responsibility, ethics officer, sustainable
development.

Exercises
Check Your Progress
1. Study of business ethics involves an understanding about ___________
2. Ethics in personal life refer to ___________
3. Moral standards are based on ___________
4. ‘Moral responsibility’ would mean owning ___________
 Ethics in Business and Corporate Governance

6. Ethicists feel that passively allowing something wrong to happen and causing the wrong to happen are
___________
7. Three important criteria of ‘moral standards’ are ___________
8. Three distinct standards that guide, shape and control our behaviour in the society are ___________
9. Moral philosophers have suggested five sources of ‘ethical standards’. These are ___________
10. Ethical dilemmas are ___________
11. Different sources of ethical dilemmas are ___________
12. Good ethical decision-making requires ___________
13. Law treats the business as ___________
14. Most aspects of ethics and moral behaviour in business arise from ___________
15. The aim of ethics in business is to create a deeper understanding of ___________

Review Questions
1. Why would you consider the study of ethics important for today’s business practices? Give examples of five
areas of business operations where ethical practices play dominant roles in the success of the business.
2. What is the difference between law and ethics? Illustrate with the example of a situation wherein abiding
by the law would not be adequate to protect the interest of the society or an individual.
3. Define ‘morality’ and ‘moral standards’.What are the characteristics of moral standards? Why it is important
to establish moral standards for ethical judgment?
4. Why does moral reasoning of people vary? Discuss the reasons with reference to Kohlberg’s theory of
development of moral understanding (from childhood to maturity). Discuss the purpose of moral reasoning
in ethical studies.
5. Discuss the stages of moral reasoning to establish any violation of moral responsibility. Illustrate your answer
with reference to an example of known violation of moral responsibility in a society or in a business
place.
6. Discuss the principles of establishing moral responsibility for an act either by commission or by omission.
When can moral responsibility be totally mitigated to a person?
7. Establish the moral responsibility of an engineer working for a contract firm executing a highway bridge
that collapsed prematurely, wounding five workmen on site. (Assume that the conditions or reasons for this
failure are poor quality of raw materials and failure to adhere to standard methods of construction).
8. In view of the fact that ‘business as such has no sense or feelings of its own’, discuss the roles of management
in ensuring that employees behave as per established ethical norms and responsibility.
9. ‘Many ethicists feel that passively allowing something wrong to happen and causing the wrong to happen
are no different’. Critically comment on this stand as per your own views. Illustrate your answer.
10. Critically discuss the following extract (taken from The Moral Life: What’s In It for Me by Thomas I. White)
on a discussion about ethics: vide http://www.ethicsandbusiness.org/vistas.htm, accessed on 18 February 2010
“The most frequently told joke about business is probably that the term ‘business ethics’ is an oxymoron.
Few people who use this one-liner actually mean that business is a fundamentally unethical enterprise; but
the remark does reveal major tensions between business and moral lives—tensions as disturbing as they are
important.There is one way, after all, where ‘business’ and ‘ethics’ do not necessarily go together. Succeeding
in business is largely about advancing our own private interests—aggressively competing against others,
beating them for the same prize, and having unlimited ambition for money, position and power. Moral
life, by contrast, focuses on our duties to others—not on hurting anyone (deliberately or accidentally)—to
place others’ interests ahead of our own when it is called for, and to always treat others with the dignity
and respect they deserve.Yet, being scrupulously honest and caring in our business dealings with others can
 Introduction to Ethics and its Applications in Business

unethical behaviour can even cost us our jobs. When taken too far in business, even healthy self-interest,
competitiveness and ambition can turn into selfishness, aggression and greed—traits that are clearly at odds
with living the moral life. It seems, then, that taking ethics seriously in business extracts a price and may
make success more difficult to come by. But, if this is true, why should any of us make the effort to do
what’s right? In particular, what would we say to someone who asks, ‘Why should I be ethical? What’s in it
for me?’”
11. Discuss the sources of ethical dilemmas and the method of resolving the same. Give three examples of
ethical dilemmas that you might have come across in your social or work life.
12. Why ethical decision-making is difficult? Analyse the steps of ethical decision-making discussed in this
chapter, identify the shortcomings and suggest some modifications based on your understanding of moral
standards and ethical behaviour.
13. Critically discuss the role and scope of ethics in business. Do you agree with some moral philosophers’ view
that business and ethics are at odds and in contradiction with each other?
14. Briefly discuss: How business, being an organisation that cannot have any feelings to understand the effects
if its actions, can be held responsible for violation of ethics? How law treats the business?
15. ‘Ethical issues in business arise from a business’s purposes and operations.’ Discuss the importance of this
approach in the methods of logical reasoning to establish whether an action has been ethical. Does this
approach contradict the purpose of ethics in business?

Further/Suggested Reading
1. Business Ethics—Concepts and Cases; Manuel G.Velasquez, Pearson Education, Delhi, 2002
2. Business Ethics (3rd edition); Richard T. DeGeorge, Macmillan Publishing Co., New York, 1990
3. A Pragmatic Approach to Business Ethics; Alex C. Michales, Sage Publications, 1995
4. The Theory of Morality; Alan Donagan, University of Chicago Press, Chicago, 1977
5. Methods of Ethics (7th edition); Henry Sidgwick, University of Chicago Press, Chicago, 1962
 CHAPTER 2
Principles of Ethics

To introduce the concepts of rights, duty, justice, fairness and care

Chapter Objectives

as guiding principles of ethics

To discuss the principles of moral theories with specific reference to
the ‘utilitarian’ theory and approach to ethics
To understand ‘rights’ and ‘duties’ in ethics
To understand ‘justice’, ‘fairness’ and ‘care’ in ethics
To elaborate on how to judge morality and ethics of actions
 Principles of Ethics

INTRODUCTION
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1
http://www.business-standard.com/india/news/teamlease-sevices-survey-says-nothing-ethical-about-ethics/43567/on, and http://content.
msn.co.in/MSNContribute/Story.aspx?PageID=95fdd7e2-428f-4120-9cf1-613d6f023bbd, accessed on 15 November 2011
2
http://www.msnbc.msn.com/id/29003620/ns/business-us_business/t/obama-imposes-limits-executive-pay/and http://www.fredericksburg.
com/News/FLS/2009/022009/02052009/443905, accessed on 15 November 2011
 Ethics in Business and Corporate Governance

The outcome of the study across Indian cities (refer to Case I)—in the backdrop of the
Satyam Computer scandal (cited earlier in this book)—could shock the investing public
and the regulators of business in India. It reflects serious lacunae in the ethical principles of
people working in Indian business. Lack of honesty and ethics at work is, therefore, seriously
challenging the very purpose of business in our country. Business cannot aim only at making
money for a few individuals; it must lead to social well-being, national economic growth, and
fair distribution of benefits to all stakeholders. Take how inconsiderate the senior executives of
one of the world’s most developed economies can be (refer to Case II). Even when the very
survival of their businesses was owing to taxpayers’ money (i.e., public money), they had neither
the morality to check their greed nor the moral responsibility towards the nation and the general
public (taxpayers). These executives so lacked in ethics that they saw no wrong in rewarding
themselves unfairly even for their highly irresponsible acts—leading to the near-collapse of
the companies they managed and, in turn, to global financial meltdown in 2008. Availing huge
bailouts facilitated by the US government, they resorted to regulatory loopholes to unfairly
reward themselves (for their failures), using taxpayers’ money, which is highly immoral, unfair
and unjust.
Both these cases are not old; they reflect the present—most recent—state of ethics in the
world of business. While Case I manifests lack of ethics and ethical values in the working
population of cities, Case II illustrates poor morals and moral values of even senior executives of
one of the world’s most developed economies.The concept of doing business without morality,
fairness and sense of duties, care and justice can only lead to more such Enron-and-Satyam-
like affairs. It is therefore critical to understand ethical principles, as they apply to business and
people, for the sustenance and welfare of business as institution for economic growth. While
we have already discussed (in Chapter 1) the concepts and approaches of ethics in business, this
chapter deals with principles of ethics, namely: rights, duty, justice, fairness and care. Here, the
aim is to introduce individuals to the elements and principles of ethics with a view to make
them aware of the tasks and responsibility in their professional discharge of duties.

2.1 INTRODUCTION TO ETHICAL PRINCIPLES

Generally, ethics and the ethical justification of an action are judged by the morality of that
action arrived at by adequate moral reasoning. Ethics, as a discipline, examine an individual’s
moral standards or the moral standards of a society, business, institution, etc.; how the standards
of these actions influence the lives and living of others; and whether these standards, exhibited
by individuals, are reasonable or unreasonable. In turn, the reasonableness or unreasonableness
of actions is established by examining if they are supported by good and moral reasons or not.

In the case of pesticides found in the bottled drinks in India (refer to Chapter 1, footnote
3a), the debate was not about the concerned company doing business in India, but about
the morality of carrying on with that business without correcting the quality of a product
that was consumed even by children. Fairness of business demands that, to make or market
products for children—who may be unable to judge or say if a product is good or bad for their
 Principles of Ethics

health—extra measures are taken to ensure freedom from harmful effects, notwithstanding
the legal provisions of the land. Therefore, such business would be deemed unreasonable
and immoral if the company goes ahead with the marketing of the debated product without
taking corrective actions. Reasons like ‘quality of water used’ to make the product, or ‘cost
of correction’ eating into the profit margin, etc. cannot be accepted as reasonable and moral.
The company is duty-bound to care for its consumers and to be fair and just in business.
Hence, the company’s business philosophy does not stand the test of ethics.

However, the subject matter of judging ethics in business, where decisions are taken by
individuals—making the process vulnerable to human follies and moral standards—is more
complex. It is not only the reasonableness of an action and moral reasoning, but also the
fairness, virtue (morality) and justification of an action that would determine ethics in business.
In supporting and revealing goodness or badness of actions, respectively, one has to examine
the case deeper to understand few more dimensions of ethics, namely utility, rights, duties, justice,
fairness and care. These aspects form the foundation of ethical principles, which are universally
applicable. An individual working for a business as well as the business organisation—as an
‘entity’ by itself—has to demonstrate these characters of ethics. Therefore, the concept and
application of ethics in business are embedded in the inherent concepts of rights, duty, care,
justice and fairness (Figure 2.1).

Rights &
duties

Care Utilities

Foundation
of ethical
principles

Justice Fairness

Figure 2.1 Foundation of Ethical Principles

Most of the issues about ethics and moral behaviour in business arise from the concept of
rights, duties, justice and fairness in dealing with different stakeholders. These dealings can
be with the employees, customers, dealers, suppliers, the government, a local body or even
with the people affected by the business. If a company does not pay fair wages to employees,
the employees feel that they are being discriminated or exploited. If the senior executives get
disproportionately higher and unjustifiable remuneration than the others in the company, then
 Ethics in Business and Corporate Governance

general employees feel differentiated and deprived. If a company fails to adequately compensate
an accident victim (injured while at work), the employees feel it is not doing its duty. If an
employee’s service is terminated without allowing him to defend his action, he feels that his
right to defend has been denied. If a sincere worker, who has served the company for many years,
is not offered help during his long illness, he may feel uncared for. These are simple illustrations
from what we encounter frequently in workplace, but here underlies the basic elements of
ethics—fairness, justice, duty and care. When these are denied, we feel aggrieved. Hence, these
basic principles of ethics must be examined to determine if an action or decision has been
ethical. The rule to judge ethics—in the perspective of elemental ethical principles—applies to
everybody’s action be it an individual, a business, an institution or government. A case in point
would be the government acquisition of lands to set up industries, as elaborated here. (This
case is coming up for discussion time and again because of its importance in our contemporary
society where people are now feeling morally empowered by their rights over land, and such
feelings are giving rise to important ethical debates all over the country. Hence, the case may be
referred repeatedly to illustrate various points and principles of ethics).

In a recent case, the government of a state sought to acquire a huge plot of contiguous land,
in an essentially agricultural area, by promulgating the much outlived Land Acquisition Act
of 1894 (Chapter 1, footnote 5). Often, areas thus earmarked have many dwelling units and
include some agricultural land. But in this case, people owning the to-be-acquired land not
only earned their living from it they had also been living there since generations. Neither
educated nor trained, they could not take up industrial jobs to start a new way of life. They
feared that losing their land would also mean the loss of livelihood; they would be displaced
and lose recognition in a basically agrarian society. Naturally they were reluctant to give
away their valuable land, most of which had been passed down for generations. Yet, the
government required the land area to promote industrialisation—which has the potential
to generate employment for the people of that state in general. A prominent industrialist
had chosen that site for a prestigious automobile manufacturing facility with the promise of
large investments. The state government, being very keen on such investments, decided to go
ahead with the acquisition despite having oppositions from the farmers and landowners. The
government was ready to pay a reasonable sum as compensation—100 per cent more than the
then market value, but the people were still not ready to part with their land. Administrative
machinery was put in place to convince or coerce the people to give up their land voluntarily!
Soon, pressure groups for and against the land acquisition began campaigning as per respective
allegiance and interests. Finally, the situation went out of control of the people of the area
and became a fight between political groups. Taking advantage of this situation and the
helplessness of people, the government machinery entrusted with the acquisition task, moved
quickly to barricade the marked areas of land and forcibly acquired it by promulgation of
law.
Note: This is a part representation of the case to keep our focus on the discussion of ethical
principles.

In such a situation, has the Government been ethical and morally justified to take over the
land? Legally, it has the power to acquire land as per the prevailing Act of 1894 (which is an
 Principles of Ethics

archaic law with vaguely described conditions for acquisition), but the problem lies in the ethical
justification of such actions. If this taking over can be justified through adherence to the basic
characters of ethics, then the government’s action could be judged ethical. Industrialisation, one
may argue, is necessary in a state to create employment and wealth; it benefits a large cross-
section of population. And, for the purpose of industrialisation vast stretch of land are required.
Since self-interest groups would defend the acquisition deal so as to attain better bargaining
positions, the government is acting within its rights to offer reasonable monetary compensation
and take over the land for public utility. It may also be argued that this is morally correct, because
the action would serve the greater interest of the community. However, on the other hand, it is
the duty of the state to look after and protect the interest of every citizen, especially the weaker
section of people—to which, in this case, most agricultural people belong to. The government
cannot deprive or force a group of people to give up something they have legally inherited
and own in order to create employment and wealth for others. This is not justice to their cause.
The government must not act against the will of people and leave them displaced, disdained
and uncared for. If it follows the provisions of law, acquires the farmland by for even reasonable
compensation and forgets about the future of the affected people, the government would not
be fair and just, especially under the circumstances where one of the duties of the state is to
protect the interests of its citizen.
These two lines of arguments clearly bring out the conflict between law and ethics (in terms
of moral dealing). Even within the domain of ethical principles, the consideration of utility
supports government action. So, how do we judge the ethicality of this action or make the
action ethically acceptable to all? In such a complex situation, a more balanced view is likely if
we delve into the philosophy behind the workings of ethical principles (rights, duties, justice,
fairness and care). Here, applying the principles, the government may be required to act based
on good reasons, justification and utility of the land with minimum damage to the interests of
the affected people—and with a sense of duty and care for the affected people—to ensure their
future well-being. Law alone cannot offer a just and fair solution to such sensitive problems;
it has to be the collaborative and supportive approach of ethics along with law to arrive at a
balanced solution that is acceptable to all. Only ethical principles—along with our sensitivity to
rights and duties—can provide a fair and equitable solution to such socio-economic problems.
The study of business ethics, therefore, must examine how to determine whether an act is
moral, right, just and fair. While the term ‘moral’ simultaneously incorporates ‘utility’ of an
action in the greater interest of the people, ‘fairness’ is closely associated with care, which is also
an important issue to decide if an action or decision is ethical.

2.1.1 Moral Theories

There are four basic types of moral theories in ethical practices. They are the utilitarian theory;
the theory of rights and duties; the theory of justice; and the ethics of care (Figure 2.2).
1. The utilitarian theory is broadly based on the view that any action or policy should
be evaluated on the basis of benefits and costs it will impose on the society.Therefore, the
basic approach of this theory is that plans, programmes and actions of any organisation
should be chosen to produce the greatest net benefits for the largest number of people
 Ethics in Business and Corporate Governance

Moral Theories

The
The Theory of The The
Utilitarian Rights Theory of Ethics of
Theory and Justice Care
Duties

Figure 2.2 Types of Moral Theories in Ethical Practice

associated with the business—which includes the society. To determine net benefits,
all the costs and benefits (or damages)—be it financial or otherwise—should be taken
into account. This approach of utilitarian theory is to expand the scope of ethics and
to safeguard the society so that it does not suffer due to any partial analysis of cost and
benefit. For example, setting up a green-field industry at the cost of the environment
may be justified by choosing and considering the returns-on-investments, along with
employment generation and wealth creation, but, if one considers the dreadful effect
of global warming due to such damage to and depletion of the environment, then the
net benefit may not justify the action—especially if, as in most cases, the project involves
large-scale destruction of the environment.
2. The theory of rights and duties holds that all people have some basic rights,
concerned with the power of an individual to choose, pursue and protect his or her
interests, and all such rights are associated with correlated duties. When these rights arise from
legal provision or social convention, they become moral rights. If a company prohibits or denies
such rights to its employees (either through company rules or by discrete action), it may
be said to be unfair to its employees and its action would not be adjudged moral. For
example, an employee has the moral right to be rewarded (financially or otherwise) for
an invention of his, one that has led to patents and benefits for the company’s business.
But, if the company denies him any benefit (howsoever nominal) on the grounds that
the inventor was only performing his duty, then it would be unjust and unfair. Similarly,
it is the right of a customer to get the exact product for which he has paid for; or it
is the right of a supplier to get payment against his bill as the terms of contract. The
correlated duties, in the latter cases, would be: paying the right price at the right time
and supplying the correct material on schedule, respectively. The theories of utility, rights,
duties and justice (to be discussed in this chapter) are the polar direction to judge the
morality of a decision. This necessitates that any action of a company, group or body
(institution, association, government, etc.) should be judged by ‘moral reasoning’ under
the aforesaid moral theories. Any bias, unfairness or extra-influential behaviour would
be seen as unethical. For example, no person can be forced—against his will, interest
or benefit—to do a work that he does not want to do, or which is not a part of his
social or legal duty. Similarly, no minor can be engaged in factory-work—even with his
consent—because child labour laws prohibit any such engagement, making it illegal
and immoral. As such, the contractual rights of a company imply that it can forcefully
 Principles of Ethics

engage neither an employee in any activity without consideration to his wish, skill,
interest and hazards of the job, nor can it hire a minor or physically challenged person to
do a job which the law does not permit. Such engagements cannot be morally justified
going by the moral logic. Moral theories also offers employees the rights to refuse a
job if it does not conform to moral standards and professional ethics, even if he or she
has agreed to abide by the (service) rules of the company that carry the ‘non-refusal’
clause.
3. The theory of justice revolves around the fundamental principles to guarantee a just
and morally acceptable decision. It implies that the actions are guided by fairness, equity
and impartiality (vide discussion on justice later in this chapter).
4. The ethics of care refers to necessity of showing extra care and consideration to
protect someone else from the adverse effect of one’s choice (and no one else’s) that can
make someone vulnerable in a particular situation. Ethics of care necessitates examining
contextual details of the situation in order to safeguard and promote specific interests of
those involved because they are interdependent for accomplishing their specific interests
—as long as the interests are moral and legal.
The moral theory of rights, duties and care and the theory of justice together form the
principles of ethics in business, necessitating an understanding of each in the conduct of business.
The issues of utility, rights and duties, care and justice are considered to be the basic norms for
establishing whether an action or a policy can be termed ethical. The basic criterion of these
issues will be discussed as we proceed with this chapter.

2.2 UTILITARIAN APPROACH TO ETHICS

Jeremy Bentham, the founder of ‘utilitarianism’, sought an objective basis to make value judgments
that would provide the public and society a fair and acceptable method of determining what
is right and just.
The utilitarian approach works on the principle of utility or benefit of an action, and tries
to optimise the benefits to all constituents of the society. Though this approach was initially
developed to arrive at fair and just agreements and decisions—by looking into beneficial and
harmful consequences of various policies that a legislator or society can enact or introduce
—it now finds wide applications in many business decisions and actions as well. Basically, the
utilitarian approach advocates that, if an action produces greatest benefits to the maximum
number of people, the action or decision should be considered morally right. According to
the utilitarian theory, ‘An action is right from an ethical point of view if and only sum total of utilities
produced by that act is greater than the sum total of utilities produced by any other act the agent could have
performed in its place’.
Proponents of utilitarianism have further expanded this basic approach to incorporate the
following: inclusiveness of all stakeholders, net-benefit concept, and consideration of alternatives
that produce the greatest sum total of utility. Inclusion of these features in the assessment of
‘utility’ adds great value and sense of justice to this theory. Let us illustrate this point further:
 Ethics in Business and Corporate Governance

To review a case cited earlier—land acquisition for industry by the government—in

consideration of the provisions of the utilitarian principle, the government may argue that
its actions would bring about great utility of that land, and maximum benefit for a large
number of people in that locality, compared to conventional agriculture or any other form of
utilisation of the land. Hence, the action is the right course from the ethical point of view. The
question that may arise would be: If an action produces most utility, is it always moral?
The government can further examine—using the utility approach—whether the sum total
of the utilities produced by setting up a specific industry is greater than utilities that could be
produced by using that land in any other way. Of the several possibilities, only that action is
right whose overall (sum total) benefits are the greatest for all concerned—in comparison to
other possible actions or alternatives. This will require the government to: (a) Quantitatively
assess the resultant utility, which, in such cases, is not very straightforward to calculate or
estimate; (b) Examine other alternatives through which the same objective (to set up industry
in the state) could be accomplished; and (c) Justify that the chosen action is right because
it would produce the greatest benefit to all concerned and outweigh all visible and invisible
costs.
The utilitarian theory also implies that an action is moral and right only if it produces
the most utility for all persons concerned—including those who are affected by it and the
performer of that action. The principle thus includes all stakeholders in the process of
determining utility, which is a very important aspect of the utilitarian approach to justice as
it calls for a system of inclusive growth of a society or nation—a view recommended by most
economists in order to achieve real growth and sustainable well being of the nation. Hence,
for the government’s action (land acquisition) to be moral and right, it must be proved that
it would produce the most utility and benefit for all concerned, namely the state, people of
the state, locality, society and others (farmers) who would be losing their land due to the
government’s action.
The utilitarian principle also states that an action is right as long as its benefits outweigh the
costs. This means that benefits considered should not be immediate or near-term in nature;
they must consider the cost in terms of both immediate and foreseeable futures, as well as the
benefits that each alternative action pertaining to the matter can produce for each affected
individual, and the significant side effects (if any) of that action. If we analyse the land
acquisition case from the utilitarian viewpoint, then it can be justified by establishing that
the particular action of acquisition for the industrial purpose at the said location would be
more beneficial to all the stakeholders than any other way of utilising the land. For the same,
a cost-benefit analysis would have to be prepared and presented, in most transparent manner,
to the stakeholders. Furthermore, the analysis should not be limited to near-term benefits and
must consider that the land-losers or affected people stand to gain in the long term. For the
latter, it would be necessary to examine if the lives, livelihood and social environment of the
land-losers’ can be protected and assured in the long run (say, 15 to 20 years from the time
of acquiring their land and displacing them).

Thus, the government or the industry (responsible for acquiring the land) should examine
utility, alternatives, inclusiveness of benefits and gains, and the total cost (to arrive at the total cost,
the benefits and costs of actions affecting the parties involved in the deal are to be measured on
 Principles of Ethics

a common numerical scale and then examined for arriving at a truly beneficial action) incurred
by either party in the deal. Judgement about the acquisition—whether it is ‘right’ from the
ethical point of view—can only be made after a detailed examination of these parameters. No
doubt, in such cases, it is difficult to correctly assess future losses (of those who have lost their
land) and impact of any change in livelihood (due to social and environmental changes).
In view of these interpretations of the utilitarian theory, we examine those aspects of the deal
or action that help in judging its morality and rightness from the ethical standpoint:
(i) To find or determine the alternatives available to the doer of an action of a given situation.
For example, in the case of land acquisition, the government may have three alternatives:
to acquire the land by enforcing law, to shift the industry to a non-agricultural/barren
area of that district or state, and, to compensate the persons concerned with immediate
and long-term benefits that outweigh the cost of losing their land, as well as to consider
the side-effects that may precipitate due to consequent industrialisation.
(ii) To estimate direct and indirect benefits and costs of the deal or action for each alternative,
and examine how it benefits or affects each person concerned in the short-term as well
as long-term. In the case of land acquisition, this would mean: calculating the cost of
ensuring livelihood to all affected persons and their family members, indexing the price
escalation of living cost for the future, cost of acquisition with the projected rate of
inflation and market value of the property in terms of a projected (future) time period,
and the plan of mitigating the side effects of industrialisation on the society and its
people. In this case, for that matter, the alternative would mean shifting the industry to
a less populated and non-farming area.
(iii) To choose a particular alternative which produces the greatest benefits and utility to the
maximum number of people (affected by the action), and is also morally and ethically
appropriate as per the rules of moral reasoning.
The utilitarian principle of judging ethics and morality is in sync with many industrial,
institutional or government and public sector activities. Land acquisition has been one example,
the principle can be equally applied to many other areas of decision-making in the industry. For
example, fund allocation in a government budget—here, the fact that infrastructure (highways,
ports, etc.) are allocated higher funds compared to other areas of government spending, can
be justified on the basis of the utilitarian principle. Because such developments bring about
the greatest benefits to all the citizens in the country—investments, businesses, transport,
communication, etc.—and are extremely necessary for the growth of the economy and
modern society. The utilitarian principle is equally applicable to decision-making and regular
administration in business, e.g. formulating company policies for reward and punishment,
incentives, common services (facilities), social and environment policy, etc. For example, if a
company wishes to merge one of its loss-making units with one that is consistently making
profits, the utilitarian principle would require the company to examine: whether the merger
will bring greater benefits to all stockholders, loss and gain of all employees before and after
the merger, cost-benefit analysis with long-term perspective in view for greater benefits to all,
fairness to debtors and other investors, etc. Similarly, the utilitarian principle can be used to affix
production incentive bonus to workers for improving productivity in a machine shop. If the
 Ethics in Business and Corporate Governance

cut-off level to qualify for bonus is too high— i.e., if most workers are unable to reach that level
through honest and sincere efforts—then the scheme may not yield the expected improvement
in productivity and will benefit only a few. In fact, in many instances, such restrictions result
in ‘negative utility’. Yet, by working out a cost-benefit analysis, considering greater benefit to
greater number of people, the cut-off level can be kept within the reach of most workers, thus
turning the same incentive policy into ‘positive utility’.The objective of the utilitarian approach
is to arrive at a decision or action by considering both the alternatives and the net-cost concept
for greater benefits to greater number of people (or, in other words, minimise losses for all).
The utilitarian principle is quite popular in society; it fits well with our way of living and
making intuitive judgements. We commonly cite explanations about why we view or judge
some acts as morally wrong or morally right in the society. For example, we say that stealing is
morally wrong because such practices harm the society; dishonesty is immoral because it harms
the interests of a business; etc.. In fact, honesty, integrity, truthfulness, faithfulness, etc., in business
or in society, are all based on the utilitarian view in order to improve the utility of people or
to make them behave in a manner that does not harm the interests of others. The utilitarian
approach is so versatile in that we also try to justify our individual actions or preferences via
utility. For instance, a person unwilling to donate money to a roadside charity may justify that
such donation has limited scope and may not benefit those who are really needy, but if he were
to donate to an NGO working in the area of poverty alleviation then that would benefit a larger
number of needy people. Similarly, a company may refuse to donate money to a political party,
because that would not benefit people at large; instead, it would be morally right in making a
donation to a philanthropic society engaged in some social upliftment of a larger cross-section
of society.Yet, the most striking effect of the utilitarian view pertains to economic issues, with
which it attempts to maximise benefits for its stakeholders.
Consider the practices of discount or volume discount that companies offer at regular
intervals. Many hold the view that if the same goods are sold at cheaper rates during such
sales campaigns, then charging higher value at other times is not morally justified; while others
justify such discounts with the argument that it benefits customers (lower price), business
inventories (release of money locked in finished goods for further productive use), as well as
companies (produce more to replenish the stock in the market and thereby improving the
scope of employee wages).Thus, selling at a discount is often justified by the creation of greater
utility of resources and benefits for all concerned. A company can similarly attempt to justify
lower increments offered to its employees or low dividends to its shareholders in view of the
necessity to reinvest the surplus money in a new project for the long-term benefit of all—the
company, its employees and its stakeholders. In this way, the utilitarian theory throws light on
the rationale behind a decision that may affect others’ interests and, in turn, on the elements of
ethics involved in such decision-making or dealings. In application, this theory can be used to
make decisions regarding resource allocation in a company for maximum utility, or expenditure
control by a government, or other matters that call for appropriateness of actions or policies so
as to provide utmost benefit to people and society at the least cost. In India, too, economists use
the utilitarian viewpoint to justify various government subsidies for commodities like fertilisers,
oils, seeds, grains, etc.—which cost the exchequer a huge sum of the taxpayers’ money.
 Principles of Ethics

According to them, the subsidy is justified as it enables these sectors to become economically
viable to support a large part of country’s population that depends only on agriculture for
livelihood.The aim of the utilitarian principle is to examine such issues in order to gain maximum
utility of resources by benefiting maximum number of people, without causing any loss or harm
to society (the affected people) or environment (associated with industrial activities). However,
the principle of utility should not be overstretched to exploit the opportunity for maximum
benefit; the utilitarian principle should retain the spirit of ‘net-cost’ or ‘net-benefit’ to society.
Many social, political or business actions that we tend to justify via utility may not be justifiable
if we were to consider the long-term ‘net-cost’, because the bias or overzealousness behind such
decisions overlooks other alternatives that would bring similar benefits. Clearly summarising
the consequences of such biased actions, Aldo Leopold warned:‘Having to squeeze the last drop
of utility out of the land has the same desperate finality as having to chop up the furniture to
keep warm’.
As the utilitarian approach involves an estimation of cost-and-benefit, the process of judging
or justifying often involves measuring the outcome. While this is possible for benefits related to
productive or economic output, it is difficult in case of health or life or social ills. For example,
the effect of incremental damage to the environment on society and the health of people will
be difficult to assess. Similarly, the discovery of a drug for a particular disease may be beneficial
to public at large, but the clinical trails involved therein and their effects on human beings may
be difficult to measure. Here, ethics demand that utmost care and consideration is exercised
in all clinical trials necessary during research and development of new drugs so as to prevent
harm or side-effects on humans—otherwise the trial would be immoral and unethical. It is
also genuinely difficult to measure or estimate values and benefits in many areas of society
that are linked with business. For example, how does one assign value to life when it comes
to insurance cover? In awarding compensation for loss of life due to an accident, companies
or government or the court of law assign value based on status and income of the deceased
prior to his or her death. But is the price fair? Is it not morally inappropriate to put a price on
life itself? Thus, when it comes to measuring ‘net-benefit’ especially in areas of social benefits
and human life, there are some inherent difficulties in this popular approach to determine the
ethics of an act or decision. Nonetheless, the utilitarian approach has been recognised by most
sociologists and economists as a valuable tool to guide and influence decisions in many complex
social and business matters. Many economists argue that this approach is at the root of human
behaviour to maximise their utility. Such consciousness of utility in human approach to capital
and commodities let them fix the price that they are willing to pay, and, thereby, influence
the supply-demand curves of sellers and buyers in the market, especially in the competitive
market. However, it should be remembered that the utilitarian principle does not only deal
with the question of greatest benefits accrued of all alternatives, but also talks about benefits to
all affected persons as well as the morality and rightness of the chosen alternative. If an alternative
action can produce a better net-result but is morally questionable, then that alternative will not stand the
test of utility or morality. Thus, the purpose of the utilitarian principle is to help, guide and enable
business, institutions, society and the government in taking actions that are morally right and
most beneficial to the organisation, its people and the society at large. The utilitarian approach
 Ethics in Business and Corporate Governance

—in sync with general beliefs and thought processes of individuals—has been a trendsetter for
both justice and utility of resources in society.

2.2.1 Rule-Utilitarian Approach

Some critics, however, observe that the utilitarian approach is not always capable of dealing
with moral issues simultaneously related to rights and justice. Given the criteria of ‘greatest
benefits to all’, this approach may imply an action as morally right when, in reality, it could be
violating people’s rights. Take the case of land acquisition, and assume that the government can
justify the act with the principle of utilitarianism (all affected people would be most benefited
by the acquisition). Such a decision may, therefore, look morally justified, but it simultaneously
violates the ‘rights of possession of properties’ by a person. Similarly, the employment of child
labour as domestic help may bring more utility and benefit to both the household and the
parents of the child, but it cannot be morally justified in modern civilised society. Another case
in this regard, common in industries facing recession, is downsizing. Companies justify such
lay-offs by reasoning that it would help cut costs as well as to save the jobs of other workers.
Such an act may be justified with reference to greater benefits to many others involved, but it
also violates justice to those who lose jobs at a time when the economy is already bad. Thus,
the utilitarian approach may sometimes lead to paradoxical situations wherein actions violate
rights or moral standards and offend justice. Therefore, to deal with such situations, experts
propose an alternative to utilitarianism—called ‘rule-utilitarianism’. This ‘rule of analysis of
utility’ prescribes that, in order to determine if an action is ethical, one should not only consider
the greatest utility, but also consider if the action is required as per the correct moral rules that
everyone should follow, including the self. And, if an action (or alternative action) is justifiable
from this point of view, only then should it be considered as ethical.
Which brings us to the next question: What are correct moral rules? Rule-utilitarian prescribes that
an action should be judged in both contexts—‘maximising utility’ and ‘correct moral rules’—and not in
isolation of each other. Thus, there are two aspects to determining correct moral rules: (1) To examine what
would be most beneficial to all those affected by the decision; and (2) To understand if that is the correct
moral rule.These qualitative aspects of rule-utilitarian principle can be stated as:
1. An action is right from an ethical point of view if and only if the action would be required by those
moral rules that are correct; and
2. A moral rule is correct if and only if the sum total of utilities produced, when everyone were to
follow that rule, is greater than the sum total of utilities produced by following some alternative
rule.
This implies that an action, which maximises utility in a particular situation, may not necessarily
be right from an ethical point of view. For example, while applying rule-utilitarianism to the
case of land acquisition, one may show that the act would produce sum total of utilities greater
than any other alternative for everyone concerned. But from the ethical standpoint it would
be difficult to establish that the action is required by the correct moral rules, because, it would
displace many elderly people, making it difficult for them to adapt to an alien environment
at a late stage in their lives, and cause them uncertainty and hardships. The act may also bring
about new social and economical problems for them in the face of fraud, feud, forcible eviction,
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emotional and psychological disturbances, etc. Correct moral rules cannot support any activity that
create or aggravate the sufferings of large number of people, which cannot be compensated by financial
benefits alone. Perhaps, the public movement against the construction of a dam on the Narmada
river (in India) and, in doing so, displacing a large number of villages and villagers, can be
justified from the rule-utilitarianism angle. Assumptions of business or government institutions
that offer financial compensation to those displaced may provide the moral ground to justify
their actions. But thus affecting the life and living of others cannot always be justified by the
‘correct moral rule’ provision of rule-utilitarianism.
The spirit of either utilitarian or rule-utilitarian theory is to prevent injustice and violation
of rights taking place in the guise of ‘maximum benefit to all’. In this context, it should be
noted that not all results produced by an action can be measured by economic value; there
will always be some moral issues and losses that are not measurable in normal course. For
example, the working conditions in some industries (mining, electroplating, leather processing,
etc.) are hazardous to health. Some companies provide a special concession—milk allowance
or hazard allowance—to each employee engaged in such jobs, apparently to mitigate suffering
born of the hazardous environment. Such actions benefit all concerned—the management,
workers, customers. The management incurs lesser cost compared to the huge expenditure on
equipment that would otherwise extract fumes and dust from the workplace; the buyers get
raw material at lower costs; the workers earn more; and the public can buy the end-products at
relatively lower prices. But, is it moral and ethical to expose the workers to the toxic fumes and
chemicals that may cause permanent damage to their health? Arguing from the utilitarian point
of view, one may say that the action of providing special allowance for hazardous jobs produces
maximum benefits to maximum number of parties involved in the chain of business process;
hence, it is justified and there is nothing wrong with it.Yet, the rule of moral correctness does
not support the action as being right. Hence, rule-utilitarianism modifies the correctness of
decisions over utilitarianism. There are many such examples in business operations, including
marketing, where companies tend to be guided by the theory of maximum benefits to maximum
number of people, but such actions may not always be just as per the rules of moral correctness.
Consider the sale of ‘over-the-counter’ drugs in our country, which are indiscriminately sold
to the public irrespective of whether they really need them. These drugs are generally made
of various over-dosed harmful ingredients that have unfavourable side-effects on human body.
Furthermore, there is no control of usage in marketing such drugs ‘over-the-counter’ and this
can lead to serious health problems that cannot be justified by the rule of moral correctness.
Thus, such methods of reasoning suffer from two limitations: (1) the utilitarian approach is
difficult to apply when dealing with values that are difficult to measure (or estimate) in order
to determine the maximum benefits to all affected persons. For example: health hazards, moral
hazards, emotional disturbances, sentimental upsets, etc.; and (2) this approach seems inadequate
while handling situations that involve rights and justice. In fact, it is the latter limitation that
gave rise to the rule-utilitarian approach, so as to partly correct the situation involving intricate
moral issues in the choice of actions.
Another approach of ethics is to judge an action by the principle of common good. Many
consider this principle as an extension of the utilitarian approach. Hence, we need to discuss the
 Ethics in Business and Corporate Governance

principle of common good approach for complete understanding of the utilitarian and common
good approaches to ethical issues before proceeding to other traditional ethical principles.

2.2.2 The Common Good Approach in Ethics

The common good is a term that describes a ‘specific good’ that is shared and beneficial for
most people in a society or for members of a community or locality. The Catholic churches,
which are said to be the pioneers in promoting the concept of ‘common good’ approach,
defined it as ‘the sum of those conditions of social life that allow social groups and their
individual members relatively thorough and ready access to their own fulfilment’. Common
aim of the ‘common good’ aspect of ethics is to benefit all individuals in the society or a group
and to make the society sustainable. Many ethicists consider it to be a part of the ‘utilitarian’ ideal,
representing ‘the greatest possible good for the greatest possible number of people’. For instance, as per
the rule-utilitarian approach, ‘a moral rule is correct if and only if the sum total of the utilities
produced, when everyone were to follow that rule, is greater than the sum total of the utilities
produced by following some alternative rule’. This approach is very close to the spirit of the
common good approach that advocates benefit for most people by the application of a rule
or decision that may even entail some sacrifice by a few in the society. According to this view,
the common good is a complementary approach to the ‘utilitarian principle’ for solving ethical
issues dealing with values, damages or benefits, which are difficult to measure or estimate, in
order to determine the maximum possible benefits to the maximum possible number of people
concerned in the society or in a group.
The common good should have some reference criteria as to what specific good we are
talking about. ‘Specific good’ that is talked about in the parlance of common good generally
refers to basic rights of individuals in the society; and fulfilment of some basic requirements of
individuals in the society, namely food, water, shelter, environment, health and dignity that enable
the society to better the quality of life and living. These elements of basic rights are necessary
for sustainability of a community.The common good approach to actions and decisions requires
that we pay attention not just to our individual good but also to the common conditions that
are important for the welfare of the society.Thus, the common good approach has the reciprocal
obligation for the individuals in a society to consider the ‘interests of the society’ first before
their ‘personal or private interests’. People should be ready to accept modest sacrifices for a common good
in a society. A person is not important while making decisions about the common good; it is the
society or a large group of people whose benefits or protection should be the guiding criteria.
However, there is no uniform definition of the common good for each situation because it
may change from society to society, locality to locality, and also as per the perception of people
about what is good and what is bad. But, despite this flexibility, this bit of ethics—the common
good approach—has to focus on the betterment of the society as a whole. John Rawls, the great
philosopher, viewed ‘good’ as activity to create a better world that is just, fair and liberal, allowing pursuit of
virtue. Thus, the common good concept gets attached to ethics. It represents the philosophy of
being moral, virtuous, fair, right and just. The common good, therefore, means to create social
systems, institutions, and environments—technical and natural—on which we all can depend
to work in a manner that benefits the maximum people and hurts very few. For example, issues
 Principles of Ethics

of protection of natural environment, provision of basic state-supported primary healthcare,

free basic primary education and schemes and actions for poverty elimination represent the
common good approach in India. A common good decision will be valid only if it helps create
such beneficial social environment that is capable of serving the interests of maximum people
as against the interests of few.
As ethics are not enforceable from outside, the common good is also not enforceable from
outside. The implementation of the common good calls for a willingness to cooperate and
make some sacrifices for the benefit of a greater number of people. This is the difficult part
of this approach, and it arises mostly from the contradictory ways of living in a so-called
‘pluralistic society’. Different people in a society have different ideas about what is ‘good’ or
‘bad’ for us or them.They are not ready to compromise on or sacrifice their ideas.The society is
getting further divided on the lines of ‘underprivileged’, ‘minority’, ‘backward class’ and ‘weaker
section’, making it difficult to identify direction in which the principle of the common good
should work to create a ‘better society’ or what would constitute better society. Hence, ethical
decision-making under the common good approach is also dilemmatic. For example, the case of
the acquisition of fertile agricultural land for industry (referred to in Chapter 1) had precipitated
many differing voices and views as to what should be good for that particular situation, society
and locality. The force of the movements that started ‘for and against the land acquisition’ got
so strong that the government of India had to think of replacing the old land acquisition law
by a new one with more clarity of thinking about the society and the people who could be
affected by such actions and how those could be appropriately dealt with (vide ref. 5 and 11).
Many believe that this action of the government was primarily guided by the principles of the
‘common good’ approach (and not the utilitarian approach) so that the locality or society is not
harmed unnecessarily by the land acquisition.
The application of the principle of common good helps us take decisions under such
situations where applying other ethical principles might invite controversies. For example, a
company wants to spend some money for the development of a locality. Local people come up
with different ideas as to what would be good for them as per their perceptions. Some people
suggest provision of drinking water, some want improvement in educational facilities, and some
other prefer building of roads and infrastructure. These differing views about people’s priorities
are natural in a pluralistic society where individuals enjoy the freedom of expression. However,
overlooking one group’s views over those of the other group may violate the principle of
treating people equally. It may also be construed as not respecting the freedom of expression of
those who do not subscribe to a particular priority for the development of the locality.This will
cause some ethical dilemmas. Such a situation makes us deeply analyse and reflect over different
development priorities expressed by the people and choose the one that would best fulfil the
aim of common good. If one chooses drinking water because of its importance in maintaining
the health of all, then that would imply sacrifice of others’ views which are also part of the
common good approach. However, the common good cannot satisfy all but must benefit the
majority of the society members or bring about a major benefit to the society. The latter
aspect can be illustrated by an important contemporary issue that shows how the common
good approach can be applied for addressing certain issues. The case relates to ‘restricting and
 Ethics in Business and Corporate Governance

monitoring the mobile technology services and e-mails in the terrorist-infested areas of the
country’. Any such action will be construed as curtailing the freedom of expression and the
right to communicate, and also an infringement of the privacy of those who live in the area
but are not part of terrorist groups. But, considering the grave consequences of terrorism, the
common good approach will justify sacrifices of some interests and rights by the society for the
‘more good’ of the country.
There are arguments against the common good approach as well. It is also described as a route
to discriminate and deprive an individual from his or her rightful place or benefits. For example,
reservations for backward classes in higher education or jobs deny persons belonging to other
groups their rights over equal education and job opportunities. This is against some established
ethical rules. But, considering the impact of the backwardness of a large group of people on the
overall well-being of the society, reservations may be justified.The action of job reservation and
the necessity for others to sacrifice a part of their rights and interests would be valid from the
common good approach to the issue of backwardness. No doubt, the situations described here
demonstrate the complication of deciding what is good under the common good approach, but
they simultaneously establish the need for such a rule in the ethical decision-making process for
overall social benefits and betterment. The common good approach is, therefore, widely used
nowadays in situations where traditional ethical principles cannot offer a clearly satisfactory or
non-controversial solution. These traditional ethical principles are: Rights and Duties, Justice,
Fairness and Care, and Ethics of Virtues. These will now be discussed in relation to ethical
business practices.

2.3 RIGHTS AND DUTIES

Rights and duties are conjoint factors, i.e., every right of a person (or an organisation) is
associated with the performance of certain correlated duties. For example, if one has the right
to work, one is also duty-bound to observe the rules and regulations of the workplace. Or, for
that matter, if one has the right to just remuneration, he or she also has to work with efficiency
and commitment.Thus, the concept of rights and duties and their situation-specific analysis are
important factors in the understanding of ethics, and in deciding the moral correctness of an
action, especially in business dealings and operations.

2.3.1 Rights
Rights are of two types, legal and moral.
Legal rights are conveyed to a person by the statue of law or the constitution of the nation.
For example, freedom of speech, right to vote, right to self-defence, right to own property, right
to service under a duly executed contract, etc. are our legal rights. However, legal rights are limited
by the jurisdiction within which a person or a business operates. For example, an Indian can cast his or
her vote only in the place where he or she lives or works, i.e., voting is jurisdiction-specific. A
nation can restrict the right to properties only to its nationals and may not allow other nationals,
working in the country, to acquire properties in their names. Similarly, an employee has the
right to work under the service contract of an employer, but he has no right to simultaneously
 Principles of Ethics

take on another (paid) job at another workplace; he or she is duty-bound to seek the approval
or permission of the original employer.
Moral rights devolve from social norms and moral standards, and are independent of any
legal system. For example, the right to free primary education, right to work, right to basic
medical treatment, right to safe drinking water, etc. are our moral rights, but not legal rights
—unless they are made legal by the special enactment of a law in the country. Moral rights are
also called human rights, because they try to protect the basic human needs of a person in order
to survive in society. With the progress of civilisation, the changing outlook of the society, and
the realisation of the need to protect the dignity and well-being of human life for the overall
welfare of society (i.e., for the greater benefits of the society at large), moral rights now play a
major role in shaping the ethical behaviour of both society and business. Given that moral rights
are derived from the considerations of humanity and social welfare, they are nearly universal in
application. Consider the case of an air-passenger who was stuck at the emigration clearance
department of a foreign country due to some clearance or visa related issue. Legal authorities
detained him for further questioning and verification, but he could not be denied his moral
rights to be treated humanly with dignity and to be provided with food and shelter till the
investigation was complete and decisions taken. He also had access to legal services to defend
himself. Similarly, a person visiting a foreign country cannot be denied emergency treatment
there, although he may not have medical insurance appropriate for that country. On moral
ground, the hospital or clinic is supposed to first provide emergency service and then look for
how to get reimbursed for the treatment. Similarly, a person wounded in a road accident has
the moral right to first get treatment at any nearby hospital or health centre—even if he has no
medical insurance.These moral rights are based on humanitarian considerations, and are equally
applicable to all by virtue of being human.
‘Rights’ make for a powerful tool that helps an individual, a group or a business to freely
choose what to pursue, protect or indulge in for the benefits of the self, society and business—
as long as those choices are not illegal, prohibited by law (competent authority) and injurious
to others. For example, if the law in a country or a state does not forbid gambling, no one can
bar people from willingly participating in a wager—it is their choice to exercise their right
to gamble. Those who consider gambling to be harmful to society can organise a protest or
run an educational programme to persuade others not to participate in that activity; it is their
right to peacefully protest what they do not agree with, but they cannot forcibly stop a willing
participant from gambling. Participating in a legal activity by own choice is one’s right. On the
other hand, protesting or educating others about something that one considers socially harmful
is the right of others in the society. This illustrates how rights can be exercised as ‘checks and
balances’ within the society. In the exercise of rights in business, a company may claim its right
to engage in any business of profit, but that business must have legal sanction or provision.
For example, dealing in spurious drugs, that are injurious and harmful to others, cannot be
considered as a right. Rights must have legal or moral sanction, and can accordingly be invoked
or revoked under different situations, such as:
1. Rights attained by the absence of law or prohibition. For example, there may be no law
prohibiting begging so the action of begging cannot be stopped. However, a municipal
 Ethics in Business and Corporate Governance

authority can prohibit beggary on its streets, due to resulting traffic disturbance or
distraction leading to higher chances of accidents. Then, begging becomes prohibited
and the beggar loses his or her right to beg. Similarly, it may be the right of an employee
to move freely within the workplace, but the company can prohibit free access to
certain areas of operations (e.g., research and development) or other vital installations
—thus limiting the right to free movement for its employees and visitors. This is not
considered as violation of rights of the employees or an unethical business practice.
2. Rights that accrue from employment, authorisation or empowerment to do something either to
secure the interest of others (such as the employer) or the interest of self or society. For
example, a boss’s rights to command his people to do a job, a CEO’s rights to appoint a
person to a position, the rights of a person possessing power-of-attorney, the rights of a
union leader to negotiate wages on behalf of all employees, etc. In business, these types
of rights frequently come into use in the course of performing duty or discharging
responsibility.
3. Rights that descend by default. For example, consider the employment conditions of
a company that states that locals fulfilling the desired qualifications would get first
preference. This would amount to granting rights to people living in a particular area,
when those living elsewhere are equally qualified for the same jobs. Similarly, when
company rules state that an auditor must be provided all necessary information to carry
on with his task, then the auditor is empowered with the rights to call for any information
pertaining to the operations of that business. Or, when a company’s rulebook states that
all employees shall maintain confidentiality in respect of information and data about its
customers, then the company has the right to take disciplinary actions for any violation
of the rule or disclosure of customer-data by an employee.
4. Rights that devolve from moral standards and social norms. For example, the right to protest
and protect people from cruelty or obscenity is a moral right that devolved from moral
standards expected by the people in the society.
These examples—except for rights devolving from moral standards and social norms—are
mostly concerned with legal rights. As stated earlier, moral rights are independent of any legal
system. For example, an employee—who has worked sincerely for over 15 years in a company—
meets with an accident in the course of employment and is permanently disabled. He, being the
only adult member of the family, seeks that the company employs his wife on moral grounds of
sustenance and continuation of education of his minor children.The company, however, is only
legally bound to pay suitable compensation as per his service contract or factory laws, and is
not bound to employ his wife. The question is: Can the employee demand employment for his
wife as a right? The legal answer is ‘no’, he cannot. But he can seek employment for his wife on
moral grounds, i.e., as moral rights, provided that has been the norm of the company in the past
or is inherent in the moral standards of the local industry. Thus, as far as industries and businesses
are concerned, moral rights impose the requirements of doing or pursuing acts that are humanitarian
or moral or legal (or prohibit acts that are non-humanitarian) and allow justice and fairness to prevail
when dealing with situations. An example of prohibition of moral rights would be the case of
suspension or termination of an employee—who has been indulging in unethical activities
 Principles of Ethics

—without allowing him or her a chance to explain or defend. In normal course, it would be
morally wrong if the company did not allow the employee to defend his or her action and
unilaterally suspended the employee, but if the employee’s offence is of serious nature—such as
terrorism, spying, swindling, etc.—then the employee can be suspended without notice.
Moral rights have three distinct features that help in understanding their nature and in
deciding about the specific performances under the obligation of moral rights. They are:
1. Moral rights are closely interlinked with duties. Generally, the moral rights of a person arise
from—or are rooted in—the moral duties of another person or organisation to which
the person is linked with owing to a common interest or consequence. For example, in
the aforementioned case of a disabled employee seeking employment for his wife, his
moral rights are rooted in the moral duty of the management (company) to stand by
hardworking and sincere employees at the time of their need. In turn, the sense of moral
duty of the management arises—at least partly—from the sense of moral responsibility
arising due to the cause of the distress, e.g., the accident that occurred while the
employee was doing his duty for the company. Thus, rights and duties are conjoint like the
two sides of a coin; they are derived from each other. It is the moral duty of of all employees to
think and act for the well-being and prosperity of the company they serve, in order to
attain certain specific actions on the part of the employer in accordance with the latter’s
moral rights. In other words, by not doing their duties well, employees may lose their
moral rights to get some specific actions from the employer even at the time of their
distress or need.
Here, a very frequently asked question would be: If citizens have the ‘moral right’ to
work for a living, then is it the ‘moral duty’ of the state (government) to provide them
with jobs? The answer is: Not necessarily; not unless the state or government has enacted
laws to that effect (i.e., offered such legal rights to its citizens). In fact, in recognition of
this right and duty, many developed countries provide unemployment benefits to job
seekers. In this context, it is also the moral responsibility of the state to create sufficient
opportunity for its citizens to acquire skills and suitable jobs—which can be achieved
by promoting education, training, business, industries, etc. The state is thus duty-bound,
by its moral responsibility, to create opportunities for its citizens to work, in fulfilment
of their moral right to work. But, such rights also create a reciprocal duty on the part of
the citizens to equip themselves with skills necessary for jobs.
2. Moral rights are equally and equitably applied between the concerned parties. In other words,
if one has the moral right to pursue an interest or course of action, then that should
neither interfere with nor subordinate the moral rights of another person or body. One is
free to pursue one’s interest as long it does not subordinate the rights of others—and vice versa. For
example, an employee having a genuine reason not to work night-shifts can appeal to
the management to make some concession, but he cannot suggest the name of another
person to work the night-shift in his place—because that would be morally incorrect.
Similarly, a person has the moral rights to seek higher remuneration owing to her own
merits, but she cannot cite the example of another person getting a higher salary as her
reason for seeking similar treatment—because that may amount to subordination of
 Ethics in Business and Corporate Governance

other’s interest. Or, consider the case of a hacker who has the moral rights to pursue this
interest in the electronic media (the Internet), but, taking advantage of his moral rights,
he cannot hack into another person’s email or bank account—because that would
amount to subordination of the interest of others, which is immoral.
3. Moral rights may be used to justify one’s action or for invoking the protection or help of others.
Consider the case of eve-teasing in a public place. A person with strong social values
may utilise moral rights to object to such act in public, and can attempt to stop the act
with the help of police and other people, i.e., he can invoke the help of others to aid
him in doing so, with full moral justification. Similarly, in business, an employee has the
moral rights to raise objection to a discriminatory or unethical act within the company,
and may invoke the help of others or the trade union to stop the same. If he fails to stop
such practice despite invoking others’ help, he has the moral right to make it public
and seek help of external institutions (e.g. media) with a view to find remedy. This
implies that if one has the moral right to do something, then he or she will be morally
justified in seeking moral help of others who can help or aid the situation or mitigate
the sufferings arising due to some immoral or unethical actions.
Moral rights provide the basis for moral judgments on matters relating to individual welfare
or well-being and protection of interests and rights. Thus, it is helpful in deciding actions
within the scope of industries and business practices employing a large number of people.
Utilitarianism, on the other hand, emphasises the need for morality of an action for the greater
benefit or utility of the society as a whole. The utilitarian approach protects or promotes the
interest of individuals as an entity or a constituent part of the society, but emphasis remains on
the society. Moral rights more clearly indicate what is due to an individual from the others in
the society or business; protect the individuals from interference while pursuing their legal or
moral rights; and promote the welfare and well-being of individuals. Recognition of individual
moral rights is essential for a healthy society or business so that each individual can pursue his
or her interest without undue interference or obstruction by others—though that interference
or obstruction may lead to some greater benefit to others—compared to the benefits that the
individual may gain from the pursuit of his own interests. For example, a person may set up
an ‘ashram’ on his own land to pursue his religious beliefs and convictions, and no one in the
society can interfere with that on the grounds that a school set up in the same location would
be more beneficial to society. Others may convince that person, but cannot force him. Similarly,
an employee of high merit (e.g. a researcher), exercising his rights to seek better growth, may
decide to join another company. If he so decides, no one can morally force him to stay in
the company—although that would benefit the company more in terms of new business and
success.
In general, moral rights take precedence over the rules of utilitarianism when it comes to
settling disputes or conflicts of interests and morality, unless the impact of the issue on the
society is so great that people at large would rather go with the choice of lesser harm or greater
benefits. For example, a person, using his rights to pursue, may decide to put up a liquor shop
on the roadside across a school. Considering his business would cause psychological harm to a
large number of school-going children and the nearby residents, the propriety of such an action
 Principles of Ethics

can be debated as per the rules of utilitarianism. Considering that his business would have
limited utility in society, other justifiable alternatives could be worked out, to convince him to
shift his liquor shop to a location away from a school or residential area. The objective of this
change in decision would be guided by the fact that a liquor shop alongside a primary school
is not morally correct, and that relocation is morally justified. Similarly, hawking merchandised
goods on city pavements or footpaths is often justified by the moral consideration that hawkers
have the right to pursue their interest in a manner that benefits a large section of consumers; but
the same cannot be morally justified in the society when one considers the encroachment of
the moral rights of citizens to use pavements freely and move safely amid city roads. Congestion
in city areas and the threat to safety and security of citizens due to such encroachments on roads
and pavements are denial of rights to citizen. However, since the issue bears a larger economic
impact on the livelihood of many hawkers (as is common in Indian cities today), moral rights
may take a backseat and utilitarianism may be allowed to decide the course of action. Likewise,
the right to carry on a business may be restricted if the business or industry causes pollution
or is known to pollute the adjoining areas. Thus, there is a trade-off between moral rights and
utilitarianism when it comes to areas of serious social implications of the actions. In the Indian
context, the Supreme Court is the final authority to judge the extent of allowable rights in
circumstances of any infringement of rights. Protecting moral rights is the supreme task of a
society as well as the legal authority of a country so as to ensure health and happiness of its
citizens. Business enterprises are no exception to this. In the words of Ernest Hemingway,
‘What is moral is what you feel good after’. Moral rights are, thus, a bar which when crossed
should give all parties involved in the subject matter a sense of good feeling and satisfaction.

2.3.2 Duties
Duty is either contractual obligation or mutually understood obligation. An employer has certain duties
towards its employees—providing safety, recreational facility, health checks, good workplace
environment, clean drinking water, regular and timely payment of wages, etc. Failure to provide
these may be termed a violation of moral duties, and employees may well demand them in the
workplace. Similarly, employees are also duty-bound to their employer to work with honesty,
discipline, trustworthiness, obedience, etc. If an employee fails herein, it may construe as failure
to behave morally. Generally, a company conveys behavioural moral standards, applicable at
the workplace, through its service rules and codes of conduct. If the duty is contractual, and
a violation has serious consequences, it may be tenable under the law for punitive actions;
otherwise it is considered a moral violation and actions can be taken as per the company’s code
of conduct. However, obligations for duty cannot force an employee to do any immoral or unethical job.
A common example of mutually understood obligation (i.e. duty) is the relationship between a
doctor and his patient. A person, seeking medical treatment, has the moral right to go to a doctor
practicing nearby or to a hospital, and it is moral duty of the attending doctor to consider the
patient’s problem and offer treatment. Here, it is the mutually-understood obligation of rights
and duties that brings them together. Though business is bound by the contractual obligations
of duty, society and social welfare mostly runs on mutually understood obligations and duties.
 Ethics in Business and Corporate Governance

Contractual rights and duties arise when two parties enter into an agreement for a specific
purpose and end-result e.g. employment, supply of goods and services, execution of a turnkey
project, etc. Here, the rights are limited by the contract terms and the duties are limited by
correlated activities. For example, when a manager is appointed for territory-wise marketing of
a product, the employer is entitled to his best performances in that territory, and the employee
is duty-bound to provide his best services in selling that product in that territory. If there
are any constraints in the performance, the employee has the rights to bring the same to the
attention of the employer and the employer is duty-bound to attend to that problem. Failure
of honouring any of these rights and correlative duties could lead to loss of benefits and lower
utility of the services. Thus, both employer and employee have duties and rights towards each
other, which are to be understood (in the context of the job or contract) and performed with
mutual understanding in order to fulfil the terms of the contract or employment. Furthermore,
as a result of this employment, the employer and the concerned employee have contractual
rights and duties only to each other—and not to any other external person or agency. If any
supervisor lays claim to the relationship of ‘duties and rights’ in the workplace, then that supervisor can
do so on the authority of the employer and, in that event, the supervisor is the virtual employer with all
associated rights and responsibilities.
To understand contractual rights and duties, we must analyse their distinct characteristics,
which are:
1. Contractual rights and correlative duties are not universal—they get attached to only
those specific individuals who are a part of that contract. Like, for instance, between
employer and employee, buyer and seller, supplier and customer, etc. Thus, rights and
correlative duties between the government and public cannot be contractual unless
there is a specific deal or contract between the two; all such issues have to be dealt with
either legally or morally. (In this regard, refer to the discussion on citizens ‘rights to
work’, which has been treated as ‘moral rights and duties’ only in the analysis in Sections
1.3 and 2.4).
2. Contractual rights and correlative duties can arise only when there is a contract or
agreement or transaction between particular parties with the provision of considerations
and benefits. For example, an employee will render a job and the employer will pay
remuneration; a seller will sell goods and the buyer will pay the price; buyers will buy
products and manufacturers will provide after-sales service; etc. This implies that unless
one person or party promises or agrees to a duty, the other does not acquire a contractual right
over that person or party. Yet, moral duties and rights may not depend on a contract thus
expressed. For example, a student seeking admission in a college has the moral right
to good education and the college has the moral duty to provide that to its students—
though no contract may have been expressed to that effect at the time of admissions.
3. Contractual rights and duties can be imposed only if the performances involved are a
part of the publicly recognised systems or laws. For example, an employer has the right
to ask an employee to work for eight hours per shift with a break of half-an-hour as per
the provision of factory laws and the employee has the duty to comply with the same;
but a labourer on a farm, where no such government laws may apply, could be asked
 Principles of Ethics

by the landowner to work for 10 hours with an hour’s break for lunch, if this system is
prevalent and recognised publicly in that area. Here, the landowner is aware of that right
and the labourer is equally aware of his obligation towards that duty, as this system is
prevalent and recognised in that region. Publicly recognised systems and verbal promises
are, thus, often counted as contractual agreements especially in rural and remote areas
where there are not many facilities to draw legal contracts. One common example of
such an imposition of rights and duties is the marriage of two adults, one male and
other female, which is mostly performed as a publicly recognised system in the society.
Modern business operations cannot function smoothly without the imposition and
application of contractual rights and duties. Business transactions can include any of the three
types of contracts described earlier—including verbal agreement of rights, responsibilities and
duties—pertaining to the performance of a specific assignment. The institution of contract
—imposing contractual rights and duties, in whatever forms it may be—provides flexibility
in operations and creates an atmosphere of trust and confidence in the organisation, thereby
helping to avoid conflicts of rights and duties. For example, the Director of a company may ask
his Marketing Manager to represent him in a committee of the Chamber of Commerce, with a
view to ensure the protection and propagation of company’s interests. Though this may not be
a part of manager’s job contract, the director has the right to assign the task and it is the duty of
the manager to perform that assignment.Without this understanding of rights and duties in the
workplace, business operations would have become inflexible and difficult to manage. Often,
a business runs on verbal instructions, i.e., one party exercises its rights verbally and the other
party obliges by doing the duties as instructed—as long as the instruction is not unethical. In such
cases, that party which exercises its rights has the moral responsibility to own up to or share the
consequences of the action, if anything untoward is to happen. In such cases, the contractual
rights and duties pass through the words of the individuals concerned—as mutually understood
obligations—and in the smooth functioning of the business.

2.4 ETHICAL RULES FOR CONTRACTS AND CONTRACTUAL OBLIGATIONS

Considering that contractual rights and duties are at the hub of the machinery that helps run
businesses, ethicists insist that such contracts should adhere to certain rules and systems for a clear
understanding of what one party is offering and the other is accepting. A part of such contracts
can be legally enforceable and another part can be pure moral obligations. For example, in the
earlier case of the disabled employee seeking employment for his wife, it may not be legally
enforceable but the wife’s employment can be morally justified. To enforce the performance
under contractual rights and duties, a contract should have the following characteristics for its
ethical acceptance:
(i) Both parties in a contract must have clear understanding and full knowledge of the
nature of the agreement they are entering into;
(ii) Neither party to the contract shall intentionally misrepresent the facts of the contractual
situation to the other party;
 Ethics in Business and Corporate Governance

(iii) Neither party to the contract must be forced to enter the contract under duress or
coercion or deceit; and
(iv) The contract must not bind the parties to any immoral or illegal act.
Any contract that violates one or more of the aforesaid conditions is considered void and
not morally tenable or ethical. The importance of these characteristics for a valid contract can
be easily visualised with reference to many sales offers in the market. For example, in the Indian
sector, as often reported in the media, homebuyers are misled by intentional misrepresentation
of factual situations. Later, when such cases are referred to the Consumer Court or to any other
court of law, very often the contracts are struck down essentially due to the inherent violation
of moral duties and rights—superseding the dictum of traditional commercial law of ‘buyers be
aware’. Examples of such contract are plenty, be it in health care operations, financial products
(e.g. mutual funds), etc. where customers are made to sign contracts or agreements with the
intention of disowning any responsibility for damage later on. But, can this absolve a company
or organisation of disregarding its duty and responsibility towards its customers? Sociologists and
ethicists question such practices—which are conducted with a view to self-guard rather than
with the intent of performing one’s moral duties—when it comes to protecting the interest of
individuals in a fair, moral and equitable manner.
As per the utilitarian approach, a person has moral rights to an action or performance
because this maximises the benefits or utility for the maximum number of people. Generally,
this is conditional to the fact that an action should produce maximum utility and should also be
a morally correct decision. A view contrary to this approach is that, if a person has the ‘moral
right’ to do something, then that should be irrespective of utilitarian benefits. In support of
this view, Immanuel Kant, a pioneer in social studies in the fields of moral rights and duties,
propagated the idea of moral rights and duties based on the theory that all human beings
possess certain moral rights and duties regardless of any utilitarian benefits that the exercise of
those rights and duties may derive for others. Kant viewed the moral rights and duties as imperative
in a society where everyone should be treated as equal to everyone else. This means that everyone in
the society has a moral right to equal treatment, and everyone has the correlative duty to treat
others in the same way. His approach to imperative rights and duties—known as Kant’s Principle
—encompasses the following points:
1. An action is morally right for a person in a certain situation if his or her reason to carry
out that action is one which he or she would be willing to accept as good enough for
other persons to adopt similarly under similar situation. For example, before firing a
subordinate on the spot for some mistake, the manager should ask himself if he himself
would have liked to be fired similarly by his own boss under a similar situation (without
any opportunity to explain or defend the mistake). Such situations are not uncommon
in industries especially when dealing with contract labourers. Similarly, before mis-
informing about the utility of a product to an ignorant customer, a salesman should ask
himself if he would like to be treated likewise when while buying a particular product
from the market.This implies that one must be ready to accept all those reasons that one
uses as valid for others to use in similar circumstances—even if others were to use those
 Principles of Ethics

very reasons against him. In many ways, this approach reflects the oft-quoted proverb:
Do unto others as you would have them do unto you.
2. An action is morally right for a person if, in performing the action, a person does not
merely use others as a means to advance individual interest, and both parties involved
in that action respect the principle of choosing freely and having equal capacity to do
so. This implies that a person should not be treated as an object incapable of choosing
freely, nor be exploited to satisfy the self-interests of others. It recognises that all human
beings have equal dignity, and should not be treated as mere tools or cogs to satisfy
one-sided interests. For example, in the earlier cited issue of pharmaceutical companies
conducting clinical trials, the company must not use a patient who is in distress as a
means to try a new medicine that is being developed, and, if it does so, the company
must explain the risk and allow free choice to the patient before administering the
new drug. This principle of free choice and equal right also objects to the fact that an
employee can be asked to do any task without his consent and without the scope for
free choice if that act exposes him or her to any adverse consequences such as a health
risk, moral hazard, etc.This principle also has an important bearing on any fraudulent or
forceful contract that a person would not have otherwise entered into given the right to
choose freely. For example, a hospital should not make a patient sign a no-objection and
no-indemnity bond before being treated for an ailment. Because, one should be granted
the right to freedom to choose one’s action, and protection against being used as a mere
tool under a given situation for the fulfilment of other’s self-interest.
To summarise, Kant’s principle states that (a) if something is moral to me, it must be morally
right for others too; and (b) everyone is of equal value and has equal freedom. The former
implies that if it is moral for one person to do something vis-à-vis others, then it will be
moral for others to do the same to that person. Kant’s ethical stand is aimed at forbidding
exploitation, of the weaker party in a contract, to take advantage of the situation and suit selfish
propagation of interests of the stronger party in that contract. In a contract, people are morally
obliged to treat each other as equal and free to choose their own interests. Thus, Kant’s principle plays a
dominant role in safeguarding ethics in the contractual dealings of business operations, and has
particularly benefitted workers or employees in industries and business houses. Let us examine
Kant’s principle in view of trade unionism in industries:

A factory-worker joining a trade union is considered as having accepted to abide by the rules
and regulations of that union. Now consider the eventuality that the union has declared a
strike in the factory: (i) Can it force all the workers to join the strike? (ii) Is it morally right
for a worker to disassociate himself from the strike, on his own free-will, as he does not
believe in the cause, although the cause may further even his interests? (iii) Can the factory-
owner threaten to sack the worker who has joined the strike? Considering the four ethical
characteristics of a contract mentioned earlier in this chapter, if the worker has joined the
union with full knowledge and understanding of his rights and duties, and union regulations
state that all members should abide by its directions, then that worker is morally duty-bound
to join the strike—unless the strike is immoral or illegal, as per the utilitarian approach to
 Ethics in Business and Corporate Governance

justify an action. However, the worker can express his disagreement internally—and not
publicly—in a meeting with union leaders; but, otherwise, he is duty-bound to follow the
union’s decision. However, as per Kant’s principle, any individual cannot be treated as an
object incapable of making a free choice and should not be used as a mere tool to satisfy
other’s interests. This implies that people should not be treated as objects incapable of
choosing freely, and should not be exploited to satisfy the interests of others; all human
beings have equal dignity and they should not be treated as mere tools or machine or a cog
in the wheel to satisfy one-sided interests. Therefore, if the employee does not believe in the
cause for which the strike has been called and chooses not to join the strike for a reason that
he would apply equally to all those concerned, including himself, then he cannot be forced.
Similarly, the employer cannot threaten to sack the worker—by taking advantage of this
situation wherein the worker does not have the support of the trade union—in order to force
him to do a task beyond his contractual duty against the free will of the worker.
On the other hand, in consideration of the contractual ethics, the employer—after
agreeing to the rights of the trade union and recognising its functioning—cannot force an
individual worker, also a union-member, to return to work during the ongoing strike, nor
can the employer punish a few individuals who have joined the strike. What the employer or
management can do is to negotiate with (or take action against) the trade union with a view
to calling off the strike.

At times, however, problems arise with regard to the type of interest that entitles one to
‘moral rights’ as per Kant’s theory. In the earlier cited case of trade unionism, the union may
have moral rights to negotiate a fair wage for its members, but can the union also use moral
rights to negotiate a holiday allowance simply because it is given to senior managers of their
company? A company may refuse to discuss this interest of the trade union on the grounds that
the holiday allowance is a perquisite given to managers as incentive for superior performance,
but not to all the employees because the production bonus they are availing of is, itself, the
incentive and benefit for good work.Therefore, a trade union cannot interfere in the company’s
discretion about what to grant to the managers and how to get better quality of work from the
managers as long as these actions do not harm the workers. Thus, moral rights, as imperative
in Kant’s theory, should not be confused with bargaining power or as the doorway to forcibly
enter into a new contractual obligation. Kant’s basic aim was to bring uniformity and equality
in social and economic dealings in matters of moral rights and utility. Thus, for ethical fairness,
enforceable contractual rights and duties for a given performance should comply with Kant’s
approach to morality and equality of all parties in a contract.

2.5 JUSTICE, FAIRNESS AND CARE

The nature of ethics in business is embedded in the inherent concepts of rights, duty, care,
justice and fairness. Thus, the study of ethics, as applicable to a business or otherwise, should
simultaneously deal with both the approaches—it should not only obey the principles of rights
and duties, but also be just, fair and moral.
Justice, fairness and care can again attract legal or moral stands.The Constitution of a country
and its legal provisions and interpretations provide the umbrella of justice to common citizens.
 Principles of Ethics

Justice in civil society generally means legal justice, which is the right of any citizen of a nation.
Yet, there are some issues which are not included in the concept of legal justice but are considered
part of moral justice. For example, if a victim of a car accident on the road does not have ‘third
party insurance’, he or she may have to take on a legal battle to get compensation under the law.
However, the victim cannot be denied care and compensation under the convention of moral
justice. The question, here, is: Who would provide (moral) justice to the aggrieved party—the
offender, the state or any other agency? Ideally, the offender or his insurer should be made to
pay; otherwise, generally, the state or an agency such as an NGO can voluntarily undertake
such moral and caring work. Whatever be the case—legal or moral—justice can be ensured, if
required, by some kind of legal action in a civilised society. Law can enforce an expected justice on
moral grounds when the violation of justice is of serious nature and warrants taking up with law-enforcing
authority. This point is further illustrated with the following examples:

As reported in the news media, a well-known university in the country denied admission to
a student who had qualified in the entrance test conducted to assess suitability of candidates
for admission to the course. The student was superseded by another candidate who had
secured a lower rank in the same test. This was considered serious violation of justice, and
the matter was referred to the Calcutta High Court which ruled that the university must
provide admission to students in order of their merit—so as to maintain the structure of
egalitarian equality. In compliance with this court order, the rejected student was admitted
and justice was thus restored.
In another case, as per the result declared by the university, a meritorious student unexpectedly
failed in a subject that disqualified her for admission to a higher course. She appealed to the
High Court with the petition of re-examination in the said subject and permission to see the
mistakes she had made in her paper. After thoroughly going through the university’s processes
and procedures to correct examination papers, the court ruled in favour of the candidate and
ordered that she should be shown her paper—to ensure justice on moral grounds.

As a guiding principle, justice demands equality in treatment under similar circumstances.This implies
that every society or business must treat its members or employees in a just and fair manner,
i.e., they should be meted out similar treatment under similar circumstances. Discrimination
of wages for a similar job due to colour, creed or sex is considered unjust, and attracts criticism
for being immoral. In a business place, such a situation may be considered as serious injustice,
and can be taken up with the law-enforcing agency with a view to secure justice in the regard.
Similarly, knowingly asking people to work in an unsafe and hazardous environment is not just
or fair. For example, frequent mining accidents in the coalfields of east India occurring due to
unsafe mining practices have been severely criticised by all as unjust and unfair business practice
leading to the death and misery of mine workers. In fact, this is continuing due to an acute
shortage of employment opportunities in the concerned areas, and unfair business practices
of exploiting and forcing miners to work in hazardous and unsafe conditions. Such practices
in any business are totally unfair and unjust, and principles of business ethics forbid the same.
However, unlike laws, ethics have no teeth to bite with, unless a law-enforcing agency takes
note of the ethical and moral violation, and directs the offenders to restore justice and fairness
 Ethics in Business and Corporate Governance

in dealings. In the case of the miners, their management can be asked to strictly follow safety
rules during mining operations so as to minimise or mitigate their sufferings.The law-enforcing
agency can also direct the owners or management of the coal mines to explain reasons for the
failure of safety norms and to expedite corrective and preventive actions. Many social scientists
feel that what matters more than the utilitarian approach to rights and duties, is justice and
fairness of dealings in business operations. Disputes in industries and businesses are often more
involved with the question of justice and fairness than with maximum benefits or utility. And,
in the context of such issues, justice and fairness are often used interchangeably though the
objective—to secure justice—remains the same.
Stands of justice do not, however, override or diminish the importance of moral rights of individuals.
In fact, as discussed earlier, justice is often based on moral rights that accrue to an individual.
The law ensures that any individual participating in any social, commercial or business related
activity on his or her free will gets justice and equitable benefits. Meaning, while one has the
moral right to choose or participate in an activity, he or she can also claim justice and fairness
in the dealing, such as fair wages or benefits as per the share of his or her work. No one can be
forced to participate or perform in order to acquire or accrue benefits exclusively for others.
As an individual, one has the moral right to choose and pursue an activity, and he also has the
equal right to fair, just and equitable benefits. In business, this may imply that: (a) A person
engaged in a difficult, meritorious or hazardous job can ask for wages and benefits higher than
others; and (b) No one can seek equal benefits for all by citing ‘equality’. Justice is served by
‘equity’ of distribution of benefits and not by equal distribution—because all the employees do not
perform similar tasks in the course of a business. Justice demands that benefits and burden from his
or her pursuits or participation should be equitably distributed. This view of justice has important
implications in a modern business scenario in terms of satisfying the hunger for reward and
justice in areas of human resource management. As success in business is critically dependent
on human efforts and contribution, care must be taken to keep employees motivated by just
and fair wages and reward policy. In business, the spirit of justice in guiding a wage policy is to
ensure that everybody is paid equitably for doing similar kind of jobs. This would ensure that
a company does not have discriminatory pay structure for jobs of the same class or nature—
irrespective of the employee or worker. How, then, can the company be fair to a talent which
contributes more at work? It would be unfair to ignore his or her additional contribution or
higher burden. Let us elaborate on the answer, as follows:

The creation and protection of intellectual property is an important driver in the pharmaceutical
industry. Hence, a company in this business has to constantly motivate its employees in such
a way that their work leads to the development of new drugs and patents (intellectual rights).
Moreover, encouragement of such innovative work is important for the company to attain its
business goals. At the same time, employees who endeavour more to bring about new patents
have the right to benefit from their distinguishing work. Such expectations are just and fair.
Hence, companies would only be fair in instituting special rewards and schemes for all such
meritorious work.
 Principles of Ethics

Naturally, then, companies resort to different scales of payment or incentive schemes that
benefit those employees who contribute more than others in the job. But, to be fair to all, such
schemes should be just and transparent to all. In effect, every individual has the moral right
to justice and fairness in deals in an equitable manner. However, moral rights do not entitle a
person to ask for something that he or she is not associated with or performing for. This also
does not entitle a person to the moral right to refuse a job at the workplace—if he had chosen
to accept it with the full knowledge of what his or her role comprised. For example, it is not
within the moral rights of an employee to refuse to work in the night-shift, if he has knowingly
accepted the job involving night-shifts as a part of his employment contract. He is duty-bound
to participate in such work schedules unless the company willingly changes the duty pattern.
But, justice demands that he should be equitably and fairly compensated or benefited for his
participation in the night-shift as per company norms for similar work. These examples are a
few simple illustrations of the spirit of justice, rights and obligations in the workplace. More
detailed analyses of the same are provided in subsections that follow.

2.5.1 Justice
The analysis of justice and fairness is not a very straightforward exercise. Generally, justice refers
to fair treatment or punishment in accordance with the law or moral standards. And, in this
regard, the question or issue of justice can be divided into three categories: distributive justice,
retributive justice and compensatory justice.
Distributive justice is concerned with the fair distribution of benefits and burdens arising
from an act or situation, or owing to the participation of an individual or a group in some
activities, or due to some social, natural or accidental reasons. Application of distributive justice
is mostly concerned with cases of conflicting claims and demands on the society or the state or
a body, which cannot otherwise be easily settled to everybody’s satisfaction. As justice demands
equal treatment under similar circumstances, distributive justice attempts to ensure that benefits
and burdens are always equitably distributed.This can be explained with the following example
of compensation offered to accident victims:

In the case of compensation offered to the nearest relatives of all the victims of an accident
inside a factory, justice demands that the compensation is fair and equitable, based on the
company’s rules. The management may decide that the compensation to employees in the
managerial category is higher than that given to the factory labourers, but this should be
the norm and not an exception. Thus, relatives (or nominees) of all the accident victims may
not necessarily get the same amount in compensation as per companies norms, but justice
demands that norms are not changed from victim to victim in the same class or category of
employment. It is not a violation of justice if the management affixes two different norms
for two different categories of employees, but it cannot discriminate among the same class of
managers. The purpose of distributive justice is to ensure consistency in the way one should
treat similar situations.

This, however, leaves the question of how to decide who should get what. One may take
recourse in identifying certain characteristics to determine who should get what. For example,
 Ethics in Business and Corporate Governance

in the case of compensation to accident victims, the company norms may consider the average
earnings of each worker over the past 12 months to arrive at the compensation amount.
Rationalists may argue that the compensation should be based on the loss of future earnings
and not on the past, i.e., it should be based on some norm of computation of future earnings. A
company is free to choose its norms from among these alternatives, but there must be a rational
basis for its choice, i.e., the choice should be based on a principle or rationale that is fair and
just for all concerned. Fundamentally, distributive justice says that equals should be treated equally and
unequal should be treated unequally, and there should be consistency in the treatment. In other words,
individuals who are similar in all respects, vis-à-vis a given task, should be treated similarly (i.e.,
not differentiated or discriminated) for the distribution of benefits or burdens, even though
they may be dissimilar in other aspects of their life and living. Here is a case in point:

If the qualification and capability of a woman for a job are the same as a man’s, then there
can be no discrimination between the two. Similarly, individuals who are dissimilar in the
relevant respect for a job or benefit should be treated dissimilarly in proportion to their
dissimilarities. For example, the pay structure of office staff may differ from that of the
technical staff on the shop floor due to dissimilarity in the nature of their jobs, though all of
them may work for similar number of hours and may be similarly educated. Such a dissimilar
pay structure cannot be objected to on ethical grounds.

Distributive justice is commonly called for in business—in areas like employee gradation
and promotion, wage policy, eligibility for different types of perks, dealers’ commission,
dividend distribution, etc.—with a view to ensuring equality, uniformity and consistency in
operations. An important area of the application of distributive justice is the fixation of wages,
where an employer cannot discriminate if two persons with similar skills and experiences are
doing similar jobs and working for similar hours. The rule of distributive justice demands that
society and business should be consistent in the way they treat similar situations or two equal
parties. An example, in case of the latter principle, would be the sale of commodity goods on
a ‘first come first serve’ basis. This way, the shopkeeper ensures that there is no differentiation
among customers (all customers are equal to a shopkeeper) when it comes to distributing the
commodity till it lasts. Another similar example is the sale of railway tickets across the counters
or through the website of Indian Railways. The Railways follow the ‘first come first serve’
principle and all customers are treated equally and served as long as seats are available on the
desired trains.
An offshoot of the distributive justice is the question whether two persons are always equal.
This part of the analysis of justice, referred to as Egalitarianism, advocates adherence to the
doctrine of equal political, economic and legal rights for all human beings. This is an attractive
ideal from the viewpoint of a socialist society, and not following this rule may be considered
unfair and inequality in the society.Yet, it cannot be construed that all social benefits and goods
should be allocated to people in exact and equal proportion. Equality, in practice, means equal
opportunity to live and grow, which implies that individuals have to make or exert individual
effort to avail the same. Not offering opportunity for equal living and growth in a society is unfair and
injustice. This brings us to the relevant aspect of understanding distributive justice with regard to
 Principles of Ethics

distribution as per ability and efforts. Here, it must be recognised that all people are not created
equal in all respect, i.e., people will be difference with regard to qualities—ability, intelligence,
learning, attitude, etc.—which make them different in their ability to contribute in society.
Thus, social scientists argue that benefits and burdens should be distributed equitably, i.e., in a
just and fair manner in proportion to one’s ability and contribution for the well-being of the
society. Otherwise, society will suffer to the detriment of all. However, egalitarianism has been
the source of justice for the underprivileged in a society where the state or community takes
necessary supportive measures to allow every person the rights to a minimum standard of living
or behaviour in the society. Thus, in addressing distributive justice, equality in the distribution
of benefits and burdens should be considered to the extent possible and without affecting
the benefits that are (or could have been) accrued to others due to their superior ability and
contribution; otherwise, this system of distribution may put the society in jeopardy.
Retributive justice refers to the imposition of some demands or something given or
meted out as repayment for an act. In practice, retributive justice is generally concerned with
the justification of punishment and blame for a wrongdoing. However, this principle may be
extended to both reward and punishment for an act. Retributive justice demands that a ‘just action’
should be taken either as penalty or reward in a manner that deserves the cause for which the penalty or
reward is being meted out. It generally deals, in practice, with the conditions under which it is just
to punish a person for a wrongdoing.

For example, failing to attend to duty without prior notice may be wrong, but it would not
be just if the management suspends an employee for such isolated offence. However, if an
employee becomes a habitual latecomer or absentee, he or she may attract heavier punishment
like suspension of duty, etc., and that would be considered just under the circumstances.

This necessitates that, for the application of retributive justice, the seriousness of the
wrongdoing and the moral responsibility for the wrongdoing should be first established. Thus,
as per the principles of establishing moral responsibility, ignorance about the consequences of
one’s act or the inability to control the happening (the wrongdoing) may be excused under
retributive justice. It further implies that, in business operations, penalty and punishment for
non-performance must not be ad hoc; it should be just and proportional to the cause and
effect. Applying this logic to the case of absence from duty without prior notice, the absence
(i.e., the wrongdoing) has to be examined in relation to the cause of the absence and its effects
before meting out any punishment. Similarly, if an employee is sent out to draw some cash
from the bank and is robbed under life-threatening circumstances on his way back to office,
he cannot be held morally responsible for the loss, nor can he be punished for his failure.
Principles of retributive justice demand that before meting out any punishment, the company
factually determines that the wrongdoing has actually been done by the person concerned and
that he or she is morally responsible for the act. Thus, penalising a person or a company for a
matter on unclear and doubtful grounds amounts to injustice. Even if the wrongdoing is clearly
established, principles of retributive justice demand that the punishment be proportional and
consistent with either the past practice (of the company) or what is exactly necessary to prevent
 Ethics in Business and Corporate Governance

further occurrences. Thus, for similar offences, a manager cannot be lenient to an employee he
likes, and harsh to the others in the office—if he is to be just and fair in his dealings.
Compensatory justice is that which deals with the justice of restoration for being
wrongfully harmed by somebody else. A common example would be the case of ‘third party’
insurance of vehicle owners, which is meant for the wrongdoer as a means to indemnify the
harmed person. Here, the car owner has taken pre-emptive action by insuring himself or herself
against such happenings, thus ensuring that the principle of compensatory justice is upheld even
under the condition of inability of wrongdoer (to compensate the victim). In indemnifying the
harmed person, compensatory justice demands that he or she is compensated to the extent
of damages suffered. Justice in such cases demands the restoration of whatever one has lost
(or suffered) because of the person (or by his or her appointed or contracted agent) who has
caused the harm. Compensatory justice demands that a person who has done wrong should
restore or equally compensate for what has been lost or harmed. But not all losses can be
compensated, e.g., loss of life or reputation. In such cases, the rule of justice permits restoration
of material damages from such injuries or wrongdoing. However, some ethicists feel that a
person has the moral obligation to compensate a harmed person (victim) if the wrongdoing
is due to negligence or is wilful or voluntary, and the injury is directly caused by the action of
the wrongdoer. Approaches to compensatory justice are aimed at stopping wilful and deliberate
actions that can harm or cause injury to others, and thereby regulate the conduct of business
and personal actions that can affect the society. For example, under this rule of moral justice, an
employer cannot deny proper compensation to an employee who has suffered damage or loss of
life or has been disabled while on duty. It also covers the moral responsibility of an industry or
business to offer adequate and just compensation in case of failure due to negligence to protect
health, life and environment of the neighbouring areas, e.g., the gas leak at the Union Carbide
plant in Bhopal, or the pollution of Ganga river due to unregulated discharge of industrial
effluents by various industries located on its banks.
There are few other types of justice, like the justice of equality, justice based on contribution,
justice based on needs and abilities, and justice as fairness. All these deal with some specific
situations, but have important bearings on the issue of justice and fairness in practice. Justice
of equality states that every person working in a group should be given equal shares of the
group’s benefits and burdens. It applies to society, business and families. For example, as per
justice of equality, all employees working in a particular production-line should enjoy equal
incentive plans; or all customers should be charged the same price for a given product. In
the latter case, customers are considered an integral part of the company’s business since they
consume the produce as a group. However, the principle of justice of equality is criticised for
being unable to differentiate superior skills and talents of some individuals and to compensate
them as per their individual contribution (or potential to contribute) to the cause of society or
business. This is because, it has long been proved that people may differ in their ability, effort,
intelligence and creativity as well as in their needs and desires, all of which have an important
bearing on the social well-being or on the benefits of a business. It is functionally important
for a business to have opportunities to reward those whose efforts and contribution are greater
and this has been accepted as just and fair for successfully running a business. This concept
 Principles of Ethics

leads to the justice based on contribution, which states that benefits and burdens should be
distributed in proportion to what each individual contributes to the cause or action. This is an
important rider to compensate capable persons engaged in a business, but justice demands that
implementation of this kind should be impartial and fair. Thus, the principle of justice based
on contribution plays a significant role in affixing remuneration and incentives for executives
in industries. But, the critical part of this exercise is to measure and evaluate the ‘value of
contribution’ of an individual so as to be in keeping with the principle of ‘distributive justice’.
Companies frequently fail in maintaining impartiality and fairness in such measurements or
evaluations, leading to conflicts of justice in dealings. As a result, many argue that justice based
on contribution may be decided on the basis of the demand and supply of such persons or
products or services in the market, but this method relies more on ‘intrinsic value’ and not the
proven value. In many cases, after the utilisation of the person, product or service, the proven
value may differ from the assessed or intrinsic value, which invariably causes dissatisfaction
in the group or society and creates a sense of injustice in the distribution of benefits. Justice
based on needs and abilities is an old concept drawn from the socialistic approach to sharing
benefits in a society. According to this principle, the burden of work should be distributed as
per people’s ability, and benefits should be distributed as per people’s needs. The best example
of this approach is the typical Indian joint family system (read Hindu undivided family or
HUF) where few people of a family earn as per their ability and all the family members enjoy
their living as per their needs. However, in the face of competition, changing social pattern and
globalisation, this concept is losing its appeal except in the management of government and
public resources where ‘socialistic pattern of the society’ is still the guiding principle as it is in India.
The current trend in business is to rely more on the principle of justice based on the ability and
contribution rather than on needs and wants, except in the running of NGOs and government
organisations.

2.5.2 Justice of Fairness

Forwarded by John Rawls, this concept provides a modified but comprehensive approach to
distributive justice so as to take into account all the principles of justice discussed thus far. The
purpose of this comprehensive approach is to safeguard the interest of minimum standard of
living in a society and to fulfil basic needs vis-à-vis ability, efforts and contribution, and thereby
ensuring that all sections of the society or group have been treated fairly. Rawls proposition
comprises three basic principles: (1) principle of equal liberty, (2) principle of inequality, and
(3) principle of fair and equal opportunity.
The principle of equal liberty states that every person’s basic liberties must be protected
from the invasion by others and must be equal to those of others. For example, every shareholder
present at the general meeting is entitled to cast his or her vote to decide about certain actions
of the company; and, if the company takes undue advantage by stopping or ignoring such right
to vote, then it is unfair and unjust. The basic liberties include freedom of speech, right to vote,
right to live, right to personal privacy, right to hold property, right to get protection under the
law of the nation, right to choose one’s profession, etc. The long arm of this principle of equal
liberty reaches out to our personal lives and in business dealings. For example, this principle
 Ethics in Business and Corporate Governance

forbids forceful engagement to a job, trespassing into personal properties, invasion to privacy
of personal life, denial of rights to negotiate and contract on an equal basis, denial of rights to
fair trial, etc. The principle of inequality (also called the difference principle) prescribes that
though there could be inequality in a society, steps must be taken to improve the position of
the needy and helpless in society in order to maintain justice, fairness and welfare. If steps are
not taken to improve their lot, the society will be burdened—rendering everybody worse off
than before. Rawls prescribed that the more productive a society becomes, more should be
the benefits provided to its needy and disadvantaged members. This standpoint of justice is at
the core of good governance and corporate citizenship of a business or company. Companies
or corporate houses engaged in social service and philanthropic trusts are examples of this
principle, e.g., The Bill and Melinda Gates Foundation (one of the largest health initiatives in
India), J. N. Tata Endowment Trust (for meritorious scholarships for higher studies), etc. Many
ethicists claim that such a view to ensuring justice in society demands that corporate houses
or companies manage their business in the most efficient and effective manner in order to be
able to serve the causes of the poor and needy, thereby ensuring a healthy society which is not
unduly burdened. The principle of fair and equal opportunity prescribes that everybody
in the society should be given fair opportunity to pursue their choices, and to learn a trade
or develop skills to improve their contributions to the society. It would be unfair to decide a
person’s benefits as per his or her efforts, ability and contribution without such opportunities.
This stand on fairness is a significant pointer towards the expected role and responsibility of
government and business organisations either to create educational and training facilities for
their citizens and members or to take necessary actions for the upliftment of the poor, needy
and underprivileged members (through activities involving health care, primary education,
facilities of potable water, etc.). Let us examine this principle of fair and equal opportunity with
the help of a case discussed earlier:

If we apply this principle to the government’s initiative to provide special reservation, for
backward-class students, for admission to colleges for higher education, it may appear to be
a fair decision on the part of the government in order to uphold the principle of fair and equal
opportunity. But, when considered in totality, the move must also not infringe upon the liberty
of other students who seek higher education through merit or ability. Such infringement will
attract criticism about an individual’s rights to benefits from his or her ability to contribute.
One of the main aims of such rights is to enable individuals to choose, pursue and protect
their interests in a just and fair manner. Hence, those students who do not belong to any
backward class and who are prepared to avail the benefits of higher education through merit,
may feel that their rights to higher education is being curtailed in an unfair manner. In view
of this apparently conflicting approach, the solution to the problem of special reservation
seems not-so-straightforward, and needs careful assessment and applications with regard to
the principles of rights, duties, morality, justice and fairness.

However, if we consider that the purpose of advocating ethical behaviour in society and in
business is to ensure they are not burdened but that they benefit from an action, then it would
only be fair to seek an optimal solution to the problem—one that would maximise benefits
to the society at large. Also, distributive justice demands equality in treatment under similar
 Principles of Ethics

circumstances and consistency in the way similar situations are treated. From these standpoints,
one may argue that government must first create the conditions of similar circumstances by
providing specially aided, good primary and secondary education to the backward classes
before embarking upon offering them reservation in higher and professional courses, where
the ability and quality of outgoing students could seriously impact the ability of the nation to
grow in today’s competitive environment. At the same time, the ‘principle of inequality’ must
spur business houses and other members of the society to recognise their moral duty so as to
improve corporate governance that may give rise to inequality affecting the needy and helpless
people.This latter demand makes it obligatory for the government and corporate houses to take
on various developmental and improvement-oriented programmes in areas of basic needs such
as education, training, health care, poverty alleviation, etc.
Rawls’ approach to justice of fairness is considered both comprehensive and rational. He
prescribed the test of rationality of a principle as the one by which any self-interested group
or person would like to be treated and governed in the society without exactly knowing (i.e.,
being ignorant about) how it is going to be affected by that principle or how it would benefit or
be burdened from that principle. In other words, in order to be fair and rational, the principle of
fair and equal opportunity asks one to put himself or herself in the other’s shoe before judging
and deciding about an action. This type of self-examination will promote impartiality and
rationality in action by inducing an individual to think in terms of how good the action would
be for the others in the society or the group to which he or she is connected with. Impartiality
and rationality of approach are the hallmarks of Rawls’ principles of justice and fairness. Many ethicists
feel that this approach to determine fairness in decisions is hypothetical in nature, and cannot
always yield fairness and justice as people are inclined to think selfishly. To summarise, Rawls
pointed out that if we choose to treat others in the same way that we treat ourselves, or would
like to be treated, then that would ensure consistency and fairness in our dealings in society.This
principle applies equally to business organisations as well.

2.5.3 The Ethics of Care

Care for those we love and are concerned with, while working, living or doing business, is an
important element of good living, good citizenship and the general well-being of society. Care
is an age-old way to link people to people, to the organisation, and to society. Ethics of care
state that:
1. Each of us lives and exists in an environment of care and concern in the society, and we
should preserve and nurture these environments and relationships;
2. Each of us should exercise care for those with whom we are socially and otherwise
related by attending to their needs, well-being and desires as seen from their own
personal perspective, and by responding positively to the same so as to preserve the
values of those relationships;
3. Ethics of care is more than just following the moral principles discussed earlier; it
involves attending and positively responding to the well-being and welfare of those
persons with whom we share close and valuable relationships.
 Ethics in Business and Corporate Governance

Care may be a part of moral behaviour, but it goes beyond general moral principles to
encompass behavioural elements like compassion, concern, love and friendship. The ethics of care
stems from the sense of moral responsibility that we feel about towards family, relations, friends, colleagues,
society and our loved ones. It manifests in relationships, trust, teamwork and dependence in our dealings
and living in society. Ethics of care is essential to live well and prosper in the society and at
our workplace. For example, ethics of care—if not any other consideration—demands that an
employer provides a suitable job to the dependant of the employee who died while carrying out
his duty in the workplace and when there is nobody else to take care of the family he has left
behind. Similarly, ethics of care make it obligatory for a company to take the total responsibility
for the medical treatment of an employee who took ill due to the unhealthy work environment
(although he may have willingly chosen this employment). On the other hand, ethics of care
make it necessary for workers to take care of the employer’s property or the goodwill of the
company by behaving appropriately. An employer and employee have a valuable relationship,
and the principle of ethics of care demands that they show care and concern for the well-being
of each other. Here is an illustrious example of the ethics of care:

A fire that broke out during the annual celebration (of the birthday of its founder J.N. Tata)
at the Jamshedpur plant of Tata Steel, the flagship company of Tata Group, on 3 March
1989. An accidental but devastating fire engulfed some galleries reserved for employees
and their relatives to witness the celebrations. Flames spread rapidly through the wooden
galleries and children and women were trapped and severely burnt in the stampede that
followed. There were many casualties in the aftermath of this horror and devastation. Within
minutes, the entire management team and the employees got into action for the rescue
operations. Doctors arrived from the nearby company hospitals attended to the victims;
burn specialists were flown into town from all over the country and special medicines were
flown in from abroad for emergency treatment. The company left no stone unturned to save
the victims. After the initial shock and recovery period, critical patients were taken to various
burn specialty hospitals across the country on the aeroplane meant for the Chief Executive
of the company. The management extended full help and unlimited financial support to
ensure recovery of each patient. Special family cells were formed to visit and counsel burn
patients at hospitals and in their homes and to express solidarity and encouragement for
early recovery. Subsequently, jobs were offered to near relations of each of the deceased,
special air-conditioned residential accommodations were provided to facilitate recovery of
the surviving victims, continuing medical treatment at the best hospital in the country was
provided at the company’s cost as long as it was needed, compensations were paid to destitute
loss, and a rehabilitation training and programme was instituted for the long-term benefits of
surviving victims. All these efforts of the company were spontaneous—not demanded by its
employees or trade union—and was hailed by the community as most praiseworthy for the
well-being of affected employees and the community. Most personalities and social scientists
observed that these actions reflected the employer’s concern for care for the employees, and
were not merely guided by the need to fulfil moral or legal obligations. The spirit was to
respond positively to the needs and desires of the society at a time of distress, to preserve the
values of relationship.
 Principles of Ethics

This exemplary case stands out in stark contrast with the treatment meted out to the
victims of toxic gas leakage at the Union Carbide pesticide factory in Bhopal3, in 1984, when
thousands died and many more were incapacitated due to the poisonous gas. The battle for
fair compensation and proper rehabilitation of the victims is still ongoing—even after 25 years
of the accident. There are many other examples wherein the ‘ethics of care’ have been totally
disregarded while dealing with helpless victims of flawed operational practices. Ethics of care go
beyond the responsibility of legal obligations, to provide care for restitution, rehabilitation and
growth.
It should be noted at this stage that the ‘ethics of caring’ are primarily concerned with the concept
of ‘caring for someone’, i.e., not being concerned or caring for the self, but for the others in the
society or community. Many a time, we may be interested in caring about something that we
want to possess, or for someone whom we are personally interested in, for the sake of some
special benefits. Though this type of caring is also a way of life in society, the spirit of care in
the ethical sense, as it applies to business, is more about caring for someone else—which, in
turn, attracts two considerations: value and justice. The consideration of value is reflected in the
way we develop relationship with others. Relationships that are based on values command
duties of care, similar to those that are characterised by the virtue of love, concern, loyalty,
compassion or friendship. Such relationships are progressive for the benefit and well-being of
human society, and should be nurtured and maintained in our dealings with others through
caring and respect for values. Contrary to this approach, if a relationship is based on threat,
violence, dominance, etc., it does not command the ethics of care. The other consideration of
the duty of care is ‘requirement of justice’. In other words, if a person does something illegal
or unjust, then that person (or occurrence) should not be treated with the ethics of care. For
example, if an employee is involved in a fight with a colleague within the factory premises
(which is against company rules) and is badly hurt, he need not be shown any ethical care or
concern by the employer while dealing with his injury owing to indiscipline in the workplace.
Similarly, a person who has fraudulently cheated many clients cannot demand relaxation of
treatment (as per ‘duty of care’) from law-enforcing agencies on the grounds of old age or
infirmity. In business operations, ethics of care play an important role in maintaining a positive
work environment and good relationships, but this should not allow any scope for favouritism
or preferential treatment. Figure 2.3 diagrammatically illustrates ethics of care.
Favouritism or partiality is not uncommonly displayed by bosses in industries or businesses
towards certain persons of their choice with whom they share special relationships. This often
creates an unhealthy work environment or loss of moral of other employees in the group.
Though the boss may attach special value to some employees, the demand of justice says that any
special favours are unfair unless they are also making special contributions in similar work under
similar facilities and work environment. Similarly, some employees get differential treatment
from their bosses when it comes to dealing with indiscipline—and this is often justified as ethics
of care. What such examples bring to the fore is that behaviour as per the ethics of care may

3
http://en.wikipedia.org/wiki/Bhopal_disaster, accessed on 30 September 2011
 Ethics in Business and Corporate Governance

Ethics of Care

Moral responsibility + Feelings

Towards:

Society and locality

Family, friends, colle- Workplace and
-agues and relations enviroment

Outcome:
Interdependence and harmonious
Relationship, trust, teamwork living in society/workplace.

Figure 2.3 Ethics of Care: What it Takes and What it Gives

at times be in conflict with the demands of justice. Ethical principles in business operations
prescribe that such conflicts should be avoided in the organisation for greater benefits, though
there is no fixed rule to guide the company in resolving such conflicts. The only guidelines are
the rule of equality and the provisions of service conditions in accordance of which a manager
has to work with responsibility and accountability towards consequences of any action. Many
consider the care approach to ethical behaviour as bring feminist in nature, where moral issues
are seen from the angle of relationship and care, which is typical of feminine character. But,
when one examines various approaches available for dealing with moral issues, then caring for
someone valuable becomes a moral imperative either in our social life or in efficiently running a
business. Ethics of care help in fairly meeting the demand of justice and impartiality in dealings.
However, most ethicists agree that the application of ethics of care should not prevent or
hamper the management to suitably deal with important and critical employees (who could be
key to the company’s success) by showing enough care and concern, but the principle demands
that, in doing so, the company or the management should not demoralise other employees in
the organisation, i.e., care and justice should be balanced to efficiently run the organisation.
Thus, justice may take different dimensions in different circumstances; at times it may be
concerned with distributive justice—like the equitable benefits from an action, and, at other
times, it could be retributive justice that is concerned with repayment for an act (reward for
good work and punishment for poor work). For instance, a Sales Executive failing to meet his
order or sales target.Another form of justice is the distribution of benefits based on contribution.
Providing extra benefits to someone due to his or her extra contribution is not unjust as
long as those contributions are made in a positive sense and do not affect the fair interests of
others. For example, the payment of incentives for productive work as per work contribution
is an established practice in industries, and such incentive schemes cannot be questioned as
being unjust to others who do not get the same benefits due to differences in work or lesser
contribution. But, differentiating on the grounds of different incentive plans between two
 Principles of Ethics

groups working on similar jobs with similar outputs, but under two managers, is unjust and
can be taken as unfair and unethical. Characteristically, fairness and care are purely moral issues,
and are often subject to interpretation by the perceptions of people. Therefore, there can be
some conflicting views in a particular situation, but dealing with them in most balanced and
fair manner is important in business dealings, and the best way to do so is by being transparent,
consistent and ethical. For example, if an employee has worked with sincerity and for a long
time, is taken ill and hospitalised for a long period, then providing special leave or ex-gratia
payment to help him tide over the situation should not be considered discriminatory or unfair
to others. Similarly, if an employee dies or is incapacitated in an accident inside the factory, it is
morally fair for the company to take care of his family in a suitable manner. A company has the
moral responsibility to show care and concern for its employees who have served diligently for
years and their families. Absence of such care can demoralise people working in the organisation
and the company may not get the best out of its employees. Thus, ethical and moral concerns
of the organisation and its managers are of great consequence to the well-being and efficiency
of business. What has transpired from the discussions thus far in this chapter is that ethical and
moral issues are, in effect, concerned with the rights, duty, justice, fairness and care in dealing
with business situations.

2.6 JUDGING MORALITY AND ETHICS

Establishing the morality of an action or behaviour or a response by moral reasoning rests on
the principles of four types of moral considerations—namely, utility, rights, justice and care.
Each consideration has its own view of righteousness and individually points at an important
aspect of moral reasoning. But these considerations do not have a common stand and, as such,
may not lead to a common answer. Therefore, to decide what is ethically right, all four moral
considerations have to be taken into account. However, depending on the situation and purpose,
some of these principles may outweigh the stand of others in determining if an act has been
moral and ethical.Thus, the process of determining ethics of an action calls for judicious analysis
of facts (factual data and circumstances) in view of the aforesaid considerations. Decisions on
morality and ethics cannot, therefore, be based on any single consideration, because it is most
probable that no one stand would capture all the aspects of moral reasoning that one must take
into account to come to the conclusion if an act or response has been moral and ethical.
As far as utilitarian moral standards are concerned, they basically deal with issues of overall
social welfare and benefits, and are not focused on individuals or about how the benefits are
distributed. Interests of individuals are taken care of by rights (moral rights) as discussed earlier,
but it is not quite explicit how benefits and burdens are distributed. Moreover, moral rights
do not take into account the aggregate well-being of society. Moral rights are closely interlinked
with duties. To distribute benefits and burdens, one has to consider the reasoning for distributive
justice, but this ignores social welfare. The purpose of distributive justice is essentially to ensure
consistency in the way one should treat similar situations. There are other types of justice
—retributive justice, compensatory justice, etc.—but their scope is related to some special
situations. Ethics of caring, on the other hand, consider how those who we are close to, or the
 Ethics in Business and Corporate Governance

relationships that we value, can be treated differently to protect and preserve these bonds.
This, however, offers scope to partiality, whereas justice demands impartiality in action. Thus,
reasoning based on all the moral considerations may not lead to a single-point decision about
ethics. What would be necessary is the analysis of a situation or an event with respect to all
four types of moral considerations, though one or the other may turn out to be more relevant
and appropriate to arrive at a decision. This situation will call for careful analysis of facts and
factual happenings with respect to questions that concern all types of moral considerations.
These questions or probes must consider the utility and injury of an action, protection or violation of moral
rights and correlated duties of those who are affected by the decisions, whether justice is being meted out
with regard to distribution of benefits and burdens, and the scope of care for the well-being or mitigation of
the sufferings of individuals who should be cared for as per the rules of ethics of care. However, to arrive
at the correct decision on the morality of an issue or event, what is more relevant has to be
determined, i.e., all four moral considerations should not be treated as equally important, each
has to be assigned significance as per the importance of the specific situation. For example, in
dealing with social benefits, distribution of scarce resources, and public resource utilisation,
the theory of utility should be given more significance than others. Similarly, in the case of an
individual who is denied education or certain aspects of constitutional rights, priority should
be given to protect his rights, notwithstanding how others may stand to lose or get reduced
benefits by such an action. In fact, moral rights and justice occupy higher priority in arriving at
the morality or ethics of a decision; at times, though, one may be guided by the theory of care
in situations where close relatives or friends are likely to be affected by the decision. The latter
is particularly important when examining actions in a family-owned or privately-held business
during resource allocations or in dealing with close relatives or friends.
These considerations call for a fresh view of the cases citied earlier; each example can be
analysed with respect to the said four moral considerations so as to arrive a conclusion about
its morality and ethical correctness. Generally, there are three steps to ethical analysis, they are:
(i) gathering factual information which is relevant and appropriate to the case; (ii) analysing
facts using the norms of ethical reasoning of utility, rights, justice and care; and (iii) making
a judgment whether the act or decision is moral and ethical. Figure 2.4 represents a way of
looking at an issue with a view to judge morality and ethics.
Here, it should be noted that moral philosophers do not lay down any fixed rule to determine
the morality and ethics that can be applied uniformly; examples discussed earlier were only
to guide people’s thinking about morality and ethical correctness. The problem arises when
utilitarian considerations become a hugely dominating factor in an issue wherein some rights
have been infringed, justice has been marginalised or the ethics of care have been overlooked.
Take, for example, the case of acquiring agricultural land for industrial use. It is necessary to
evaluate the exact benefits and burdens of the utilitarian approach to this issue and the extent to
which it benefits the society in the long term vis-à-vis the extent of infringement of rights or
the demands of justice and care. In certain issues, the utilitarian decision may sufficiently benefit
the society or a larger number of people, which will justify overruling those rights that are in
conflict with the decision.This explanation is forwarded by sociologists in India who favour the
reservation of seats in educational institutions for the backward community. Similarly, hugely
 Principles of Ethics

1. Gather facts and information about the issue at hand. These should be factual
and relevant to the issue.

2. Apply moral standards: A. Does the action or decision maximise satisfaction of

all constituencies? [Utility]
B. Does it respect the rights and duties of individuals
affected or involved? [Rights and duties]
C. Is it consistent with the rules of justice? [Justice]
D. Is it consistent and in agreement with the
responsibility of care? [Ethics of care]

3. Decide on the weightage as per the situation—keeping in view that moral rights
cannot be taken away and justice must be equitable.

4. Apply moral judgment: If no on all standards, the issue is not moral and ethical.
If yes on all count, the issue is ethical and moral.
If yes on utility but no in moral rights, it is not ethical.
If yes on rights and justice, but no on others, it is ethical.
If yes on care only and no on others, it is not ethical.

Note: These relationships only offer a general guideline; exact judgment will depend
on the specific situation and weight of a moral consideration that the issue at hand
demands

Figure 2.4 Steps in Moral Judgment

beneficial utilitarian benefits may also allow some infringement into the principles of justice
or demands of care. Likewise, there could also be a situation when the consideration of justice
to a larger group may allow overriding individual rights, or when the demands of caring may
become more urgent and important than holding onto the principle of justice. The criteria of
judging ethics, therefore, still remain personal where an understanding of the moral standards and
moral reasoning can be the sole guiding factor, thereby mostly depending on those individuals
who are taking the actions or decisions. Thus, determining the morality and ethics of actions
in business depends on the concerned individuals—on their virtues and goodness of character
in dealing with people and problems. Not surprisingly then, the quality of business processes
largely depends on the quality of people an organisation harbours or promotes. Management
specialists emphasise that the purpose of studying business ethics is to develop better human
beings—with moral values and character—who are essential for the support of ethical business
practices and environment.

2.6.1 Ethics of Virtues

This brings us to virtue ethics.Virtue is a quality embedded in the personality of an individual,
and is expressed in his or her habitual behaviour. Therefore, understanding what constitutes
 Ethics in Business and Corporate Governance

virtue, and its expression in ethical actions and decisions, becomes an essential feature in the
judgment of morality and ethics. However, the ethics of virtue is neither an alternative to the
moral principles of utility, rights, justice and care, nor an additional factor in judging morality,
i.e., it is not a test for morality and ethics in the way utility, rights, justice and care are. Ethics of
virtue complement and add to utilitarianism, rights, justice and care by looking not at the actions people are
required to perform, but at the character they are required to have. It is not the performance that counts
here, but the quality and character required for the performance.The role of virtue is to provide
a distinctive insight into the ethical perspective of an issue. The theory of utility, rights, justice
and care approaches ethics through an evaluation of actions; whereas virtue of ethics facilitates
ethical behaviour and action through the characteristic behaviour of the decision-makers. Some
examples of virtue are: honesty, integrity, trustworthy, truthfulness, courage, etc. Unlike height,
beauty, health, intelligence, etc., virtues are not natural characteristics of a person; a virtue can
be developed and nurtured in a person through efforts and desire, and is expressed in his or her
general behaviour and habits.Thus, a moral virtue is an acquired quality that is praised and valued
as a part of a person’s character. It is indicative of good moral character. A person is said to have moral
virtue when he or she behaves habitually in the way that is valuable to the society, and he does
so with reasons, feelings and desire. For example, an employee with the virtue of integrity will
habitually behave so as not to allow any compromises in his duty and responsibility—not even
with the lure of personal gains—and will do so because he believes in the cause of integrity and
honesty at the workplace.Virtues are ingrained into one’s habits and behaviour; freak or random
displays of virtuousness, owing to lack of opportunity or under fear or under pressure, are not
considered as virtue; such forced displays of virtue do not serve any purpose of ethics.
Aristotle said that moral virtue is a habit that enables a human being to act in accordance
with the specific purpose of being human. In his view, the most distinguishing characteristic
of human beings is the ability to reason, which enables a person to lead life in accordance
with those reasons. This ability to reason enables people to make a choice—good or bad—
and to strike a balance by guiding him to act, behave, express or desire what is reasonable.
When this act of balancing is blended with moral virtues, the act or desire becomes more reasonable and
ethical. Ancient philosophy supports many views of virtue, but most philosophers held the view
that moral virtues enable people to follow reasons in dealing with their desires, emotions and actions, and
these reasons are based on the considered view of utility, justice, rights and care. Virtues are enablers for
dealing well with the social and personal duties and responsibilities. Aristotle held the view
that by articulating moral virtues, people articulate those habits and traits that allow them to
lead good and useful lives. From this standpoint, philosophers hold that there are four classical
virtues: courage, prudence, justice and temperance. Most virtues—sometimes called the value system
of a person—arise from these classical virtues. For example, courage is the mother virtue for
someone with honesty and truthfulness; integrity comes from prudence. Virtues like faith in
God, religiousness, philanthropy, charity, etc. are no doubt valuable in a society, but these are
more specific to a kind of living, and, when it comes to the practice of ethics, may not have
as much implication as classical virtues. For example, some religious practices may not preach
equal rights between men and women, but, nonetheless, possess and profess virtues of faith
and charity. Perhaps there is no simple way to classify all types of virtues; but, with regard to
 Principles of Ethics

ethics, there is no disagreement that moral virtues are dispositions that help human beings in
favourably and desirably coping with the situations of life. Some important ethics-related virtues
that make for a good individual or a successful manager are courage, prudence, wisdom, justice, fairness,
temperance and intelligence.
How, then, do virtues help in ethical behaviour and practices in business? As has been
mentioned earlier, virtues enable us to hold onto certain moral principles which are essential
to sustain an ethical society and business environment. For example, courage helps us adhere
to moral principles (what we believe is moral) even when the fear of consequences may tempt
us to do otherwise. The virtue of justice makes us hold on to all that is just and fair, even
under unfavourable circumstances. However, moral virtues and moral principles often serve
each other’s purpose, i.e., they act as trigger points for each other in developing the necessary
traits and virtues. For example, when one is guided by the moral principle of utilitarianism,
he is required to develop the virtue of kindness and generosity. Similarly, when guided by the
principle of justice, one is required to develop the virtue of prudence and wisdom. Thus, ethics
based on theories of moral principles and ethics based on moral virtues are complementary to each other. In
other words, ethics of virtues will not advocate an action that is not agreeable to ethics based on
moral principles.The difference is, ethics of principles manifest in actions and decisions whereas
ethics of virtues are primarily indicated by the disposition of character. But both address issues or
actions from the viewpoint of morals and principles so as to bring about equity, justice, fairness
and care. To be ethical in practice, individuals concerned with the authority and responsibility
of actions need to possess moral virtues that reflect their good feelings, fair reasoning, positive
deliberations and just action. Many management scientists claim that disposition of moral
virtues is an ingredient that is essential for ethical and effective management.
Thus, judging morality and ethics is not simply a linear equation of the principles of utility,
justice, rights and care alone. In fact, there is no fixed rule to arrive at a conclusion when an
action should be considered ethical. The judgment would depend on the situation, purpose,
extent of influence and impact on the society, and the weightage of moral standards one
attaches to the incident or action. It is in this context of the role of an individual’s approach to
ethical issues, that the moral virtues of that individual become important. Because, it is difficult
to completely take away the human and spiritual touch from the process of reasoning. Thus,
ethics of virtues make for the moral character required by an individual to act ethically. It must
also be appreciated that business relies on the individuals (e.g., Executive, Sales Manager, etc.)
for decision-making, while an individual is a product of his upbringing and religious beliefs
—upon which some of his or her virtues are built. As a result, the religious/spiritual belief of
managers and owners may lead to actions and decisions that otherwise meet the unwritten
ethical standards of the religion or local community.To summarise, while morality and ethics of
an issue can be judged by the conformance of actions to different moral considerations (utility,
justice, rights and care), the approach may differ based on the virtues and (religious) beliefs
of individuals taking the decision. As a result, the net effect of an action can have different
implications in different situations, societies, places and circumstances. This requires individuals
to reason, feel and deliberate to offset any imbalance or over-reaction pertaining to a situation
for the action to be ethically correct. This, in turn, calls for moral character and certain virtues
 Ethics in Business and Corporate Governance

so that the decision-maker gets a proper perspective of the situation and acts appropriately
and ethically. In this context, it is necessary to note that the values and virtues enshrined in
our country’s Constitution could be a source of ethical inspiration and decision, and they are:
secularity, social justice, tolerance, equal opportunity, equality of sex, and equality of cast, creed
and religion. A business should manifest these virtues and values in its conduct to be adjudged
as being ethical and fair.

Summary
1. This chapter aims to introduce ethical principles and dimensions with a view to bring about
awareness about tasks and responsibility.
2. The chapter discusses with examples the principles and elements of ethics and moral behaviour—in
terms of rights, duties, justice, fairness and care—to provide the general dimensions of ethical
issues.
3. It illustrates that most issues in business, pertaining to ethics and moral behaviour, arise from the
concept of rights, justice and fairness of dealings with different stakeholders. It emphasises that
‘ethics’ are embedded in the inherent concepts of rights, duty, care, justice and fairness, i.e., the
adherence of our decisions and actions to these principles is the measure of ethics.
4. The principles of ethics also require the application of moral reasoning to satisfy the guidelines of
rights, duty, justice, care and fairness of actions. Ethical practice of business must, therefore, ensure
reciprocal rights and correlated duties of parties involved in the business. Actions emanating from
such practice should also stand the test of justice, fairness and care.
5. The term ‘moral’ simultaneously incorporates ‘utility’ of an action in the greater interest of the
people. ‘Fairness’, closely associated to care, is an important criterion to decide if an action or
decision has been ethical.
6. There are four basic types of moral theories in ethical practices: (1) The utilitarian theory;
(2) Theory based on rights and duties; (3) Theory of justice; and (4) Ethics of care.These theories
have been discussed with illustrations so as to establish what is moral and ethical.
7. The basic approach of the utilitarian theory is to choose plans, programmes and actions of any
organisation with a view to produce the greatest net benefits for the greatest number of people
associated with the business—including the society. In the process to determine net benefits, all
the costs and benefits (or burdens)—financial or otherwise—should be taken into account. The
approach of utilitarian theory is to expand the scope of ethics and to safeguard society against a
partial view of the cost-benefit analysis.
8. The theory of rights holds that all people have some basic rights, and that these rights are
concerned with the power of an individual to choose, pursue and protect his or her interests. All
such rights are associated with correlated duties; when a right arises from some legal provision
or social convention, it becomes a moral right.
9. In business, ethics demand that all interested parties are given opportunities as per their rights and
duties. However, moral rights are not without correlated duties by the employees or members
of a society. The theories of utility, rights, duties and justice are the polar direction to judge the
morality of a decision.
 Principles of Ethics

10. The concept of utilitarianism has been discussed to determine the ethics or morality of an
action—be it in society, business or economics. Utilitarianism comprises: inclusiveness of all
stakeholders, the net-benefit concept, and the consideration of alternative that produces the
greatest sum total of utility. Inclusion of these features in the assessment of ‘utility’ adds great
value and sense of justice in determining ethicality of actions and decisions.
11. To overcome the limitation of utilitarianism in dealing with moral issues relating to rights and
justice simultaneously, ethicists also prescribe the ‘rule of analysis of utility’ which states that, in
order to determine if an action is ethical, one should not only consider the greatest amount of
utility, but also whether that action is required in keeping with the correct moral rules that should
be followed, including by one’s self. Correct moral rules do not support any activity that causes
or aggravates the sufferings of a large number of people, and which cannot be compensated by
financial benefits alone.
12. The process of determining ethics of an action calls for judicious analysis of facts (factual data
and circumstances) after considering: (a) the utility and injury of an action; (b) protection or
violation of moral rights and correlated duties of those who are affected by the decisions; (c) if
justice is being meted out with regard to the distribution of benefits and burdens; and (d) the
scope of care for the well-being or of mitigating the sufferings of individuals who should be
cared for as per the rules of ethics of care.
13. The chapter ends with a discussion on the role of ‘virtue’ in making an ethical decision; virtues
provide an ethical perspective to a given issue or situation. The theory of utility, rights, justice
and care approaches ethics by evaluating actions, whereas virtue facilitates ethical behaviour and
action through the characteristic behaviour of its decision-makers. Both are important while
arriving at a decision about what is moral and ethical in a given situation.

Key Words and Concepts

Ethical principles, utility, rights, duties, justice, fairness, care, theory of justice, ethics of care, utilitarian
theory, utilitarian principle, rule of utilitarian approach, virtues and values, rights of possession of
properties, utilitarian principle of judging ethics and morality, correct moral rules, rule-utilitarianism,
utilitarian moral standards, ethics of caring, virtue ethics, egalitarianism, distributive justice, moral virtue,
courage, prudence, temperance, nothing ethical about ethics, rewarded for failure.

Exercises
Check Your Progress
1. The subject matter of judging ethics in business is complex, approached not only by the reasonableness of
an action and moral reasoning but also by the ___________
2. The study of business ethics must examine how to determine that an act ___________
3. The utilitarian principle holds that an action is right from an ethical point of view if and only
___________
4. Correct moral rules cannot support any activity that ___________
 Ethics in Business and Corporate Governance

5. Every right of a person (or an organisation) is associated with the performance of certain ___________
6. Kant’s principles state that ___________
7. Justice demands ___________
8. ‘Ethics of caring’ is primarily concerned with the concept of ___________
9. Justice may take different dimensions in different circumstances; in one situation it may be concerned with
___________ and in another circumstances it could be ___________
10. Aristotle held the view that by articulating moral virtues ___________

Review Questions
1. Which elements of ethics should be examined to ensure ethicality of a decision or action?
2. Briefly outline the following concepts: utilitarianism, rule-utilitarianism, moral rights, contractual rights,
correlative duties, distributive justice, egalitarian justice, compensatory justice, ethics of caring, and ethics of
virtue.
3. Critically discuss the role and usefulness of the ‘utilitarian theory’ in assuring ethics and morality in the
society. What are the limitations of the utilitarian approach?
4. What do you understand by ‘correct moral rules’ as per the ‘rule-utilitarian theory’? Discuss the steps in
analysing whether a decision is fulfilling the correct moral rules.
5. Differentiate between ‘legal rights’ and ‘moral rights’. Discuss, with illustrations, how rights and duties
regulate our ethical behaviour in a group.
6. Critically discuss the concept of ‘justice of fairness’ as forwarded by John Rawls.
7. Justify the statement: for ethical fairness, enforceable contractual rights and duties for performance should
be read in accordance with Kant’s approach to morality and equality.
8. Outline the steps of ethical analysis while judging the morality and ethical correctness of an action with
reference to different ‘moral considerations’.
9. Many ethicists complain that ‘ethics of caring conflict with morality’. Do you agree? Elaborate your answer
with illustrations.
10. Discuss the implications and usefulness of ‘virtue ethics’ in ethical behaviour and practices in business.

Further/Suggested Reading
1. Ethical Theory and Business; Tom L. Beauchamp & N.E. Bowie (Eds.), Prentice Hall, New Jersey, 1979
2. A Theory of the Good and the Right; Richard B. Brandt, Oxford University Press, New York, 1979
3. Utilitarianism: For and Against; J.J.C. Smart and Bernard Williams, Cambridge University Press, London,
1973
4. Utilitarianisms and Beyond; Amartya Sen and Bernard Williams (Eds.), Cambridge University Press,
Cambridge, 1982
5. A Theory of Justice; John Rawls, Harvard University Press, Cambridge, 1971
6. Business Ethics; Thomas M. Garrett, Prentice-Hall, New Jersey, 1986
7. Immanuel Kant’s Moral Theory; Roger J. Sullivan, Cambridge University Press, New York, 1989
 CHAPTER 3
Law, Ethics and Business

To highlight the scope of and difference between law and ethics in

business
Chapter Objectives

To understand the role of ethics vis-à-vis law in business

To highlight and illustrate different ethical and legal issues in busi-
ness with regard to their internal and external environments
To demonstrate the compatibility of ethics with the purposes of
business
To discuss the role and scope of business ethics vis-à-vis business
operations
To discuss and establish the mode, modalities and responsibility for
ethics in business
To highlight the critical aspects of ethical decision-making in
business
 Ethics in Business and Corporate Governance

INTRODUCTION
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 Law, Ethics and Business

1
http://economictimes.indiatimes.com/news/news-by-company/earnings/satyam-to-shell-out-16-bn-for-raju-sonscompanies/
articleshow/3849039.cms, accessed on 30 September 2011
2
http://www.telegraphindia.com/1081218/jsp/business/story_10268480.jsp, accessed on 30 September 2011
3
http://www.livemint.com/2009/01/11223309/Satyam-shows-Bschools-too-nee.html, accessed on 30 September 2011
 Ethics in Business and Corporate Governance

of trusteeship (in conducting the business for and on behalf of its investors), and a complete
lack of ethical governance. Ironically, the basics of ethics were totally ignored by a company
that was awarded for good governance in the country. All controls, regulations and laws meant
for fair practices and ethical governance proved hollow when people managing the company
chose to be dishonest. Such failures, common in many parts of the business world, only go to
show that unless people behind the business are not honest, moral and ethical, no amount of
law and regulation can assure ethical business practice and governance. As against this backdrop,
it is essential that business process and practices must be morally correct, fair to the people
connected with it, adhering to legal requirements, and upholding certain ethical standards. If
business is seen as an economic instrument for a nation’s socio-economic development, then
that business has to abide by the law of that land as well as ethics; they are both relevant to
business for its long-term success and prosperity. While law is an old-established institutional
system of providing justice and fairness to people in society, interjection of ethics for fair-play
in business comes with training people in moral education, developing moral attitude and
obligations amongst people, promoting ethical culture, commitment and orientation in the
organisation, and establishing ethics and justice as ‘rights’ in the organisation.
The relevance and role of ethics in business and society, in addition to laws and regulations, has
long been recognised by society and the authorities. The history of development and progress
of business across the world shows that ethical crises have been at the root of all economic
downturn and recession. Business enterprises failed to create value in the system each time
they deviated from the path of ethics and ethical responsibility to their stakeholders and society.
The necessity of ethics and its role can, perhaps, be best summarised by following the words of
S.H.Venkatramani, a noted proponent of ethics in business: ‘At the end of the millennium, we
are back to basics. As society appears to be getting increasingly corrupt and criminal, many are
beginning to realise that you cannot aspire to create value without deeply cherishing a sense of
values.To add a lot of interest to your principal, you need to stick to your principles.To sustain your
competitive advantage in an increasingly competitive corporate world, you need character. Morals
are more important than money, materials, marketing and management. Hence, Indian business
houses are witnessing a resurgence of values and ethics that may, in the long run, help turn the
tide of recession, and lead to continuous growth’. He saw ethics as the saviour of business
from the cyclical and periodical falls that we often encounter, and hoped that resurgence of
ethics will change the future Indian business scenario.Yet, history of financial greed and breach
of ethics has repeated itself first Enron and then Satyam showing how deep-rooted the
vice is. Nonetheless, challenges of institutionalising ethics in business operations, alongside the
law, must be pursued with greater determination and vigour in order to ensure that business
enterprises can fulfil their social and economic roles of creating wealth and well-being of the
society and the nation.The purpose of business is to create prosperity of stakeholders and value
in our socio-economic system. In this endeavour, both law and ethics must play their specific
roles and support each other for fairness, morality and justice in the business dealings and
operations. This chapter, therefore, discusses the role of ethics vis-à-vis laws; special features and
ethic-specific situations of business; and the mode, modalities and responsibility for ethics in
business.
 Law, Ethics and Business

3.1 LAW AND ETHICS IN BUSINESS

In business it is often asked: Is it not enough that, to be ethical, people merely follow the laws? There
are numerous laws and regulations that govern the conduct of business, yet there are many
fraudulent practices and huge losses to public due to unethical business practices. Referring
to the earlier case, apparently SCSL had not followed rules and laws of business and, yet, was
awarded for ‘best practices’ in recognition of excellence in governance. It was not until 2008 that
its fraudulent manipulation of books of accounts and unethical business practices were made
public when the company tried to divert huge amount of money to other family businesses,
violating moral standards and ethical norms of business practices. Initially, public, investors
and the society were drawn to the affairs of this so-called reputed company that had violated
ethics in corporate governance. Law enforcing authorities and regulators stepped in and acted
soon thereafter; but it was too late to prevent the loss to SCSL’s investing public and to the
image of Indian business. Even in other corporate collapses of the past, unethical corporate
governance has been the primary signal to a possible scam and immediate trouble for investing
public. While the law may take its time to act, ethical failure in governance and management
immediately and seriously affect the market confidence, financial viability, customer support
and the company’s image at large. Laws are important regulators in business, but have their own
procedural limitations. Ethics, on the other hand, are a self-regulating mechanism based on
one’s moral values, moral principles, moral standards and a sense of moral responsibility towards
the others involved with the business. Ethics make for an instrument for successful management
of a business and for the well-being of its stakeholders and the society—both pillars on which
the business stands and operates. Ethics are applicable to business, regardless of whether the
business is big or small. There are many instances when the law alone may have been unable
to stop the damage to public or society, but, in some of these cases, the call of ethics have been
able to minimise or prevent the loss and suffering. This can be made clear through the simple
instance of buying household goods that we use in our daily lives. While this example may be
trivial in view of the larger national issues that a business can influence, it goes to demonstrate
how ethics in business dealings can bring happiness and satisfaction for all concerned—when
law is somewhat limited in taking action. The example is as follows:

A person, having relocated to a new city, went to a nearby white goods store to buy a
refrigerator. The dealer of that store was in a hurry to clear his stock, and sold him the
refrigerator knowing that it was defective. The dealer argued with his self that the product
was covered by a warranty and could be sent to the manufacturer for repair or replacement,
if and when the customer brought it back. The latter made his purchase in good faith, but,
on installing it at home, realised that the cross-flow mechanism of the refrigerator was not
functioning effectively. When the buyer complained to the store, the dealer expressed his
ignorance and offered to rectify the product under warranty.
The buyer was upset with the dealer’s attitude, and decided to take legal action against the
store. But, when the lawyer asked for proof that the dealer had sold the product knowing
it was defective, the dealer (falsely) stated that he was unaware of the defect in the product
when he had sold it. Furthermore, he offered to repair the refrigerator under the warranty.
 Ethics in Business and Corporate Governance

Here the law may appear helpless, considering that the buyer ought to have inspected the
product before purchasing it. And, to protect the buyer from any loss, the law of sale of
goods makes provision for product warranty.
However, what this system fails to note is that the whole process of claiming warranty is
not only inconvenient for the customer, but he also suffers the loss (of service related to the
purchased item) for that period—despite having paid for it in full. In such situations, the law,
especially consumer protection laws, offer scope for compensation and damage, although the
loss or suffering cannot be prevented completely.
In this case, only ethics could have prevented the suffering of the buyer. Ethics and ethical
standards of practice in the store would have prevailed upon the dealer who would then
have refrained from entering into such an unfair deal (when he knew that the product was
defective), wherein the customer suffered for no fault of his. The dealer’s sense of moral
responsibility and ethical standards could have stopped him from harassing the customers.
If moral guidance and ethical principles were upheld in this case (by stopping the dealer to
sell a defective product knowingly or making him to replace the defective product by taking
urgent measures), the outcome would have been satisfying and happy for both the buyer and
the dealer. In fact, dealer would have gained more by increased business due to ‘goodwill’
creation.

This scenario of customer sufferings is also common to India’s real estate sector, given the
customer enthusiasm for residential and commercial property, and the huge number of small
and big players in the field. Though there are laws to deal with crime and fraud even in this
sector, in most cases they are unable to stop or prevent the harassment of customers—unless
builders or property agents themselves choose to act ethically. Thus, at times when the law
alone is not enough to protect customer or public interest, the conjoined forces of law and
ethics yield better results. For ‘good effect’ on business and its clients, there is the need for
both law and ethics. Just as following ethics may not necessarily tantamount to obeying the
law, obeying or being guided by law may also not always be enough to be ethical in business
or dealings. With reference to the example cited in the earlier chapter, when the government
acquired agricultural land for industries, ethics and ethical duties called for more benefits for
the farmers than what the law would prima facie be satisfied with. Ethics and compliance to
ethical standards in business not only work to prevent damages to the interests of people and
society, by taking broader issues into considerations, they also help in furthering the interests of
business by creating goodwill and customer loyalty—which laws fails to do in many instances,
despite similar aim and intent.Thus, ethics can make very good business sense for well-rounded
success.
Ethics span wider social issues by addressing the (self-imposed) moral responsibility of an
action or decision taken either by individuals or a company.The ethical standards of an individual
are not established by any law-enforcing authority, but are arrived at by one’s own judgement
based on or guided by knowledge (understanding), logic, feeling, morality and conscience.
Characteristically, ethics are a self-evolving voluntary mode of moral behaviour in a society. If,
at times, the law and morality may coincide, then obligation to obey such laws becomes the
 Law, Ethics and Business

same as the obligations to be moral. For example, in business or in society, laws that prohibit
theft, fraud, murder, rape, etc. are legal as well as moral. However, law and morality do not—and
need not—always coincide. There are laws that have nothing to do with morality, on the one
hand, and then there are laws the violation of which hurt or affect moral standards (e.g. laws
against discrimination based on cast, gender, religion, colour, etc.). To elaborate this, we cite the
recent move by the Human Resource Department (HRD) Ministry of the Government of
India, to provide a quota of reserved seats for backward classes of society, for higher education.

India’s HRD Ministry drew severe criticism for the bill4 as it effectively allowed more than 50
per cent reservation of seats in colleges and other academic institutes, when considered along
with other such policies, thereby severely limiting the scope for meritorious students from
other classes of society. While many felt that it was not morally justified, the government, in
a bid to encourage and uplift the weaker sections of society, went ahead with the reservation
bill.

This move contradicts the law of equal opportunity to all (meritorious) students, and limits
the scope of their livelihood as per their individual natural potential. Hence, such a move can be
imposed by the government by means of the law (or by enacting one), but not by moral reasoning. Even when
certain special circumstances of the backwardness of a community are invoked, moral reasoning
will call for an inquiry about: (a) the evidence that such a move has helped the community in
the past; (b) the facts about other impediments to the progress of that community; (c) whether
the move will unduly damage the interests and rights of others affected by the decision and
its future influence; and (d) if the decision can be consistently applied to all cases. To morally
justify the actions, the reasoning of the government must be logical; evidences must be accurate,
relevant and complete; and the moral stand taken should be consistent with the social context
and the environment. The government also has to examine if the stand taken, or the law or its
enactment, will bring greater benefit to a greater number of people in the society, i.e., whether
the society as a whole and the nation would benefit by that action. Additionally, the process of
justification must also consider the elemental issues of ethics, namely: utility, rights, duties, justice
and care.
Therefore, at times, what the law intends to accomplish may not be justifiable with ethical
reasons. In contrast, the enactment of a law for the purpose of interpreting that law with regard
to a specific situation (in a court of justice) would uphold the spirit of natural justice and
moral philosophy of the law. While moral standards are not subject to authoritative sanction,
laws are subject to legal interpretations. In that, moral standards are flexible and subject to
good moral reasoning by the self or the person taking action. As has been mentioned earlier,
validity of moral standards rests on the adequacy of moral reasoning for an act in order to support them. If
one can ethically reason with the self and others for the actions taken, then his or her grounds
remain valid as ‘moral’ and will stand the test of ethical behaviour—provided the action was not
intended to harm the interests of others concerned. However, application of ethical reasoning to
4
http://en.wikipedia.org/wiki/Other_Backward_Class, accessed on 7 October 2011; http://www.petitiononline.com/noquota/, accessed
on 7 October 2011
 Ethics in Business and Corporate Governance

Ethics

Law Governance

Business

Figure 3.1 The Balancing Forces of Business: Law, Ethics and Governance

find whether a company (or institution) or its employees have violated moral standards, needs
further examination even with regard to the provisions and the role of law in the business
practice. In this respect, obeying the law of the land is a part of the test of moral standards.
Law, ethics and governance are the forces that keep a balance between legality, morality and
profitability of business objectives (Figure 3.1).
In the context of law and ethics in business, it is necessary to further examine: (a) how laws
act in business; and (b) how ethics help in conducting good business. As discussed earlier, the
law treats modern business organisations as ‘immortal fictitious persons’, who have the right to sue
and be sued, own and sell assets and properties, carry out business on behalf of others and self,
enter into legal contracts—all in their own name. Every country has laws to govern and control
the conduct of business.Yet, who should the law-enforcing agency hold responsible in case of
failure of compliance with these laws? The company is a ‘fictitious person’; hence cannot be
factually arrested or jailed for a crime. Therefore, both law and ethics take cognisance of the
person or group that acted in defiance of that responsibility. Generally, the chief executive of a
company or a key managerial authority, who has major control over the company’s activities, is
held responsible for any violation of law, unless the company has, in its memorandum, specifically
deemed any other person for that specific responsibility.The Companies Bill or Company Laws
governing the business affairs of a country often define a set of ‘key managerial persons’ who
are responsible for the company’s legal compliance. However, if there is strong evidence that
some other person, not included in that list but in an otherwise influential position vis-à-vis
the company, has propagated or caused the decision in violation of law or regulations of the
company, then the law will also act upon him or her. Let us illustrate this point through the case
of Union Carbide, in Bhopal:

When the ill-fated Bhopal Gas Leak tragedy5 occurred in 1984 in the manufacturing plant
of M/S Union Carbide Ltd.—a company incorporated in USA—its Chief Executive—though
a US national—was sued by the Indian court of law. [This industrial disaster was caused by

5
http://en.wikipedia.org/wiki/Bhopal_disaster, accessed on 30 September 2011; and http://www.icmrindia.org/casestudies/catalogue/
Business%20Ethics/BECG009.htm, accessed on 30 September 2011
 Law, Ethics and Business

the accidental release of large quantity of methyl iso-cyanate (MIC) from the Union Carbide
India’s pesticide plant located at the heart of Bhopal. The accident killed over 20,000 people
and blinded many more in the locality.] Likewise, when a worker dies due to an accident
inside the factory premises, because of company’s negligence, the chief executive of the works,
named by person, could be held responsible for the cause of the accident, provided, however,
that the company has not named anybody else for such responsibility. (In this context, it is
to be remembered that an organisation is treated by the law as ‘immortal fictitious persons’,
and it functions through the people it employs for specific purposes and accordingly
delegates responsibility and accountability. As a convention in business management, the
chief executive is the sole person to whom the owner or the board of directors delegate the
total responsibility for the operations, and CEO, in turn, may delegate some of the other
specific responsibilities down the line with accountability to some key managers].
However, in the Satyam case, though the managing director (MD) was present in the board
meeting, the decision to fraudulently bail out two family-run businesses by diverting SCSL
funds was the brainchild of Satyam’s promoter-chairman and his brother (MD)—despite
the reservations of other directors. On investigating, when strong evidences for scam and
fraud emerged against these two individuals (the promoter and his brother), the law was
quick in taking them into legal custody. The board had failed to prevent the fraud and was
immediately dissolved; and the conduct and role of other directors—including ‘employee
directors’ and ‘independent directors’—was further investigated.

Thus, the law is enforced in business by holding those individuals accountable who the
company has deemed responsible and accountable for its business; unless some other individuals
had deliberately and directly acted or colluded to cause the damage. In the case of Satyam,
many believe that the fraud could not have gone undetected and for such a long period of
time without the collusion of other authorities in the company or society. Accordingly, current
investigations are probing to identify such outside personnel so as to ensure appropriate legal
action.
However, in a standard business practice, it may be argued that the employee is hired to
further the cause or profit of the business. Hence, he or she should be loyal to the employer or
owner and abide by his or her directions. Here, only the employer or owner should be treated
as responsible for any accident or lapse. While it may be easier to trace the ownership in a
small and privately held company, it is not always easy to do so in a modern limited company
wherein the shareholders—often very large in number—are treated as true owners. Hence, in
the eyes of law, the person or persons responsible for directing and supervising the company’s work are made
responsible for the consequences of the company’s action. Despite this clarity of responsibility, one may
question: Should the employee be loyal to the employer and do as they are asked without any
considerations to legality or morality of an issue? Will a person bother about being legal or
moral in his pursuit for financial gains of the company? These are important issues in dealing
with business ethics and law, and should be critically examined and clearly understood before
proceeding further.
 Ethics in Business and Corporate Governance

3.1.1 Employer–Employee Obligations for Ethics and Law

Employees are duty-bound by an employment contract, to be loyal, obedient and maintain
certain confidentiality at work. Does this mean that an employee has to perform whatever he
is asked to, by his or her employer? The answer is ‘no’; it is not necessarily obligatory for the
employee to obey the command of the employer if that command is not reasonable, moral and
legal. Laws governing a company’s operations provide that, in determining whether the order
of the employer (or of the person commanding that service) is reasonable, the rules of ethics
as applicable to a business and profession should be considered. And if the job which he or she
has to perform is illegal, immoral or unethical, an employee is not duty-bound to do it. Thus,
in no event of business performance it can be implied that an agent or employee has a duty to
perform acts that are illegal, immoral or unethical. The manager’s duty to serve his employer is, then,
limited by the constraints of morality. This is an important ethical principle that influences both, the
reciprocal obligations of employee and employer, and their individual choices of behaviour in
business. Let us apply this principle to the example of managing a ‘Chit Fund’ to examine how
ethics can be influenced.

A large number of people lost their money due to failure of companies like the Sanchaita Chit
Fund6a (early 1980s) and Abhinava—a teak plantation6b business in the 1990s), although
these companies were (and are) established under the provision of laws. Such cases where
unsuspecting investors lose their life’s savings in chit funds or other dubious NFBC (Non-
Banking Financial Company) business are not uncommon in India. These companies advertise
in local dailies or appoint agents or managers in various regions of the country who make
door-to-door calls for investments offering attractive financial terms. Respective sales agents
convince people that their schemes are good investment opportunities. Often, as a ploy to
gain investor confidence, most of these companies actually deliver the promised terms or
returns—but only in the initial periods. Gradually, the companies start siphoning the funds
into other accounts—somehow escaping the scrutiny of the law—and thus start defaulting
on their payments. Then, as if overnight, the companies close the shutters across their various
sales offices and vanish from the market—causing huge losses to the investing public. Mostly
such scams go unchallenged in India because of procedural complications and delays in legal
matters; some investors who move the consumer courts get their money after a prolonged
legal battle, but it is usually too little and too late. Not surprisingly, resolutions in many such
legal cases are pending in many an Indian court even today.6a&b
However, such financial frauds are not confined to developing economies, but occur in every
society. Very recently, Japan, one of the world’s developed economies, reported one such
fraud engineered by a person named Kazutsugi Nami7—who set up a front company, L&G,
and allegedly defrauded 37,000 investors of up to ¥126 billion. In a country where interest
rates are abysmally low, his company lured the public by promising 36 per cent returns on
their investments. Although L&G ultimately went bankrupt, along with it also sank the
money of a large number of innocent investors.

6a
http://www.telegraphindia.com/1100910/jsp/nation/story_12919794.jsp, accessed on 15 November 2011
6b
http://www.icmrindia.org/casestudies/catalogue/Finance/FINC009.htm, accessed on 15 November 2011
7
http://www.guardian.co.uk/business/2009/feb/05/japan-kazutsugi-nami-ladies-gentlemen, accessed on 7 October 2011
 Law, Ethics and Business

These fraudulent activities were conducted despite the fact that the respective countries had
proper laws to administer business. The root cause of such immoral behaviour is the greed of
individuals to make a quick buck, as it were, at any cost—including gross violation of morality
and ethics. If people are made aware about the merits of ethical conduct, principles of morality,
and the freedom to choose one’s action under the obligation of ‘constraint of morality’, then the
possibility of such frauds would automatically reduce. In that case, the principle of morality would
have—at the least—placed as much onus on the agent or manager (put in charge of collecting
money from the people) as to think: (a) if the act is legal and moral; (b) about the choice of his
or her decision; (c) the moral consequences of his or her act; and (d) his or her moral responsibility
thereof. An awareness about the principle of moral constraint would have perhaps emboldened
some of the collection personnel to refuse participation in those schemes or choose (or at
least have the opportunity to choose) their own actions and make their investment deals more
transparent to the public by clearly stating the risks involved. Thus, the damage to investors’
interests could have been minimised—when the law alone was unable to prevent their loss in
time.
Another aspect of this principle is that it imposes the constraints of morality, i.e., an employee
cannot always plead ignorance for an immoral act and get away with such a deed.The principle
puts both the onus and the consequences of immoral acts on the doer—because, in such
situations, the principle of morality allows him or her to make a choice about the decision or
participation in such actions.
Business ethics decree that employers do not force their employees to do what they would
not agree to do if they knew that it was immoral or had immoral consequences.They should be
given the right to self-determine the morality of their tasks. If this process of self-examining what
is ‘morally right or wrong’ can be instituted in the thinking and working of the employees, that
may substantially minimise the risk associated with immoral and unethical activity in business
organisations, which are always set up under the provisions of some laws. This type of ethical
thinking and working is especially needed in the financial sector (banking, etc.) to prevent easy
fraud. In a developing economy such as India, characterised by rate of inflation higher than
that in a developed economy, there are many takers for attractive financial investments with
high liquidity. Hence, numerous investment schemes are offered in the market—attractively
packaged but with little credibility when it comes to the companies offering these schemes.The
companies are mostly established under the provision of laws. In such circumstances, what can
actually make a difference—between good and harmful practice (i.e., practice with intent to
cause harm)—are the ethical standards of a company’s business practice and the consciousness
of its employees about their moral responsibility to the public and society. Therefore, in order to
protect the society from such damage, it is necessary for ethics to join hands with the law. This exemplifies
the complementary role of law and ethics in maintaining fair business practices. In a business, all
employees and professionals have the right to choose their tasks from the viewpoint of morality
of the actions, and every business has the duty to ensure that no employee or professional
is forced to do a job against his or her own accord and moral conscience. An employee is
considered as being legally correct in going against the employer for a task that is immoral and
forced upon him or her.
 Ethics in Business and Corporate Governance

Generally, unethical jobs in a workplace are carried out with the help of professionals who
are experts in their respective fields. In order to minimise the hazard of such business practices
in society, many professional institutions and learning bodies enact their own codes of ethical conduct as
guidelines for their affiliated members (this aspect is more elaborately discussed under the heading
‘Professional Ethics’). The purpose of this extra-legal enforcement of such a code of conduct
is to ensure ethical practices in professional activities—making it explicitly clear that every
professional, engaged in an unethical activity, should bear the responsibility for failing to be
moral and ethical in his or her dealings. In other words, in business practices, professionals should
not allow their self-interest to override the moral issues of their actions. The Institution of Engineers
(India), Institute of Chartered Accountants of India, are some of the professional bodies that
have created their own codes of ethical practice, as have many other institutes that span the
work-areas of various business activities. Here, the idea is to make its members and followers
aware and responsible for ethical behaviour in their business or profession, in addition to their
solemn duty to abide by the law of the land. Thus, raising moral consciousness in a business
or workplace can drastically minimise the risk or damage—that can arise from their unethical
conduct—to people and society. In this context, with reference to the collapse of Enron, had
the auditors at Arthur Anderson behaved ethically and upheld the moral standards and code
of practice in auditing, as per the General Accounting Practice (GAP), in USA, and made
known the true financial situation at Enron well in time, the financial disaster could have been
averted.
As has been mentioned earlier, mitigating factors like uncertainty, difficulty, and minimal
involvement can—to a large extent—diminish a person’s legal and moral responsibility towards a
corporate act.Yet, at times, determining the degree of truthfulness of an employee’s claim may
be difficult because, more often than not, employees of large organisations follow documented
procedures in a bureaucratic manner, and work in tandem and lineage. This may camouflage
the ultimate outcome of an act as well as the person ultimately responsible for that act, due to
overlapping professional responsibilities in the given working conditions. To ensure that their
employees do not fall prey to any unholy alliances even under pressure, most big organisations
or companies establish and are governed by a ‘code of conduct’. These companies also provide
employees with appropriate channels to report illegal or corrupt practices.The code of conduct
issued by a company is equally applicable to all employees and clearly states what is expected
of an employee with regard to both legal and moral issues. However, in this case, any legal
examination to affix responsibility is neither easy nor fool-proof. In contrast, a clearly drafted
‘code of conduct’ and ‘code of ethics’ may greatly aid the cause by making employees conscious of
their moral and professional responsibility in addition to legal responsibility. Thus, employers
cannot take advantage of their employees to further any immoral act in the company; have the
responsibility of clearly guiding their employees about expected conduct and behaviour; and, in
case of any dispute, the employee’s action should be judged as per (a) the principle of constraint
of morality; and (b) factors of uncertainty, difficulty and minimal involvement.
However, in business, the primary role of law and ethics is to prevent and control illegal,
fraudulent and immoral acts, and not to find faults or loopholes in the law.Therefore, to further
strengthen the enforcement of laws and moral behaviour in the company or organisation, there
 Law, Ethics and Business

should be a system of internally auditing the individual and corporate conduct on a continuous
basis. Audit, when conducted with proper objectivity and sincerity, is an effective tool for
prevention and control. Thus, both employer and employees have the responsibility towards
the ethical conduct of business, and to understand the consequences of their participation in
any illegal and immoral act. Singularly, either the law or ethics may not always be adequate and
effective in preventing any wrongdoing in an organisation, but jointly they can. Compliance
with the law, along with conscious efforts made by individuals to maintain ethical standards
in business operations and dealings can certainly ensure fairness, justice and equity for all
stakeholders. The following section on ethics and law attempts to examine these roles further.

3.2 ETHICS VIS-À-VIS LAW

In the words of M.N. Siddiqi, an Economics professor at the Centre for Research in Islamic
Economics, King Abdulaziz University, Jeddah, Saudi Arabia, ‘Running parallel to the saga of
economic progress there is another thread, the ethical imperative of doing things in a manner
that does not harm others or violate social interests. Even though morality is a human need
in the sense that man’s felicity and ultimately his survival depends on ethical conduct, in
reality ethical conduct does not always prevail. Men misbehave. They act in immoral ways, one
harming other. Some violate public interest. Ultimately these end up harming themselves too.
This necessitated reminders and warnings and a reaffirmation of ethical conduct’. (Evolution
of Islamic Banking and Insurance as Systems Rooted to Ethics, in New York, April 26, 2000
by Prof. M.N. Siddiqi) Governing the misbehaviour of people—be it in society or in business
(the means to economic progress as meant by Prof. Siddiqi)—requires the institutions of laws
as well as ethics. Ethics and law are not mutually exclusive; one complements the other when it
comes to ensuring best practices in industries, business and professions. Together, they aim to
minimise wrongdoing and maximise benefits from the business. Hence, wherever needed, our
moral standards that determine ethical conduct are incorporated into the law. For example,
crimes, bribes, gambling, smoking, obscene behaviour, etc., all of which are considered to be
in violation of moral standards or can affect the morals of the society are covered by laws. The
law has many dimensions that have evolved over centuries; yet, what is more relevant to ethics
is the positivism of law, which implies that laws are made in accordance with socially-accepted
rules, and as long as it is just and fair to the society concerned, it is a valid law. The purpose of
legal positivism is to seek to enforce justice, fairness, morality or any other normative end of
the society.Thus, legal positivism allows people and society to differ from legal obedience if the
law is not fair and moral (i.e., ethical) to the society concerned. Therefore, it is no wonder that
ethics permit and encourage people in an organisation to stand up against a moral violation or
an act that is harmful to the society or is in defiance of the orders from superiors or the law.
Upholding ethical practices and moral standards in business are a type of proactive response
to the issues seeking justice, fairness and morality. Our sense of moral standard has often been
the source of shaping new laws in the society to prevent wrongdoing or protect us from it.
Thus, law and ethics have a close relationship, and it is agreed by all concerned that citizens and corporate
entities have a moral obligation to obey the law as long as the law does not require the person to undertake
 Ethics in Business and Corporate Governance

any unjust or immoral action in violation of ethical practice. This point can be explained through the
example of labour laws governing a factory set-up:

As per the labour laws, employees are duty-bound to discharge responsibilities assigned by
the employer and to obey the orders of superiors; any refusal to do so may be treated as
‘indiscipline’. The question here is, can a manager or supervisor force a labourer to work
in conditions that are extremely hot and humid and which may be injurious to health and
safety? If, in this case, a labourer or the labour union stops work in the factory, can the action
of that person or union be judged illegal? The answer is ‘no’; because, in the first place, it is
unethical for the company or its representatives to force workers to work in an environment
that is detrimental to health. Therefore, any denial to work in such conditions will not be
considered illegal or unethical.
Similarly, a superior cannot force an accountant (junior employee) to manipulate or understate
account-figures for personal gains, and the junior’s refusal to follow any such instructions
from the superior will be considered just and right. If, however, an accountant does comply
with such an unethical instruction based on his own choice, he will be held responsible for the
harm or damage caused by his immoral act, and will be subject to appropriate disciplinary
action as per the rules and provisions of the company’s ‘code of conduct’.

Ethical reasoning and morality allow a person to act against the ‘service rule of obeying the
superior’ or the law, if he or she has to do anything immoral in keeping with that rule. Conflicts
between the law and ethics are often taken care of by the judicious interpretation of laws—
when an attempt is made to examine not the explicit part but the implicit part of the law. Most
laws are subject to correct interpretations, and, when rightly interpreted by taking in view the moral aspects
and purpose, there is hardly any conflict between the law and ethics. Thus, moral justification and
professional ethics are to be considered while serving the orders of an employer (or superior);
in no event would it be implied that an agent or employee is duty-bound to perform acts
which do not stand the test of reasonability, morality or legality. As has been mentioned earlier, an
employee’s duty to serve his or her employer is limited by the constraints of morality.
The principle of constraint of morality not only applies to individuals or groups, but also to a
company and even to the government through its agents or principals. This is because laws and
ethical principles of business are the outcome of the chosen behaviour of individuals—who
may be the agents or principals acting on behalf of the organisation. Therefore, the action of
those acting on behalf of an organisation, either business or government, must stand the test
of morality if that has to be enforceable under the law. This principle of constraint of morality is
illustrated with the land acquisition case (cited in Chapter 1):

The law authorises the government to acquire land for a specific purpose which is also
beneficial to the society—e.g. setting up an industry, constructing a road, etc. But, to acquire
the said land, can the government affix its price arbitrarily? The answer is ‘no’; it must follow
the ethical rules of good reasoning to ascertain the land-price, which should be just, fair and
moral. An ethical examination of this issue should consider if the decision or action will lead
to losses to the rightful owners, hamper their long-term interests and impair the well-being of
 Law, Ethics and Business

the affected people. If the government fails in these tests of morality and ethics, people may
disobey the order (owing to the principle of constraint of morality) and approach the court
of law (authority) challenging the government order and seeking justice. It is then expected
that the deal is examined with respect to governing laws as well as moral practices, the latter
being concerned with protecting people from any harm to their rights, interests and well-
being in the society and their environment. Here, justice can be sought under the scope of a
public interest litigation (PIL), which examines the social and moral sides of the dispute—in
order to arrive at a well-balanced and satisfactory solution to the problem.

Thus, the law of the land may prevail as a deterrent for wrongdoing, but ethics stand as the moral
guard against what is unjust or unfair. Many a time, ethics may also hold a critical relationship with
the law (through legal applications), as a consequence of which, laws evolves continuously, in
trying to safeguard the society from wrongdoings and harm thereof. The PIL system is one
such example of applying legal provisions with a view to minimise harm caused to the society.
In India, environmental violations are frequently challenged in court under the scope of such
litigation in order to stop or mitigate the damage with special reference to the rights of the
people at large. This is more common in areas of environmental protection considering how
environment-related laws are still at a nascent stage and emerging in the global perspectives.
Similarly, many activists feel that consumer protection laws leave many aspects undefined.
Consumer courts are often guided by ethics and morality of issues in conjunction with the
laws; and consumer cases are often based on seeking moral justice rather than legal justice. Led
by moral considerations of the Land Acquisition Act, 1894, and owing to ethical loopholes
therein, the government introduced the Land Acquisition (Amendment) Bill, 2007, along with
the National Rehabilitation and Resettlement Policy, 2007, making it mandatory for parties
concerned to prepare an independent ‘social impact assessment’ where acquisitions involve or
are likely to affect 400 or more families in plain land and 200 or more families in tribal and hilly
areas. This is also an example of how ethics and the recognition of ethical duties can influence
legal changes or lead to the enactment of laws in a country.
Therefore, in order to ensure moral justice along with legal justice, a company or an
organisation (including the government) is bound by both law and ethics in its dealings. The
aim is to bring fairness and justice in (business) actions, and minimise damage to the society,
arising from inappropriate ethics or misconduct associated with such business dealings. Let us
consider one such example of both legal and moral bindings upon a company:

A company recruits a female engineer through an open advertisement, and appoints her at
a salary that is much lesser than other male engineers with similar experience and working
with a similar type of job responsibility. The company can, if challenged, legally justify this
action on the grounds that: (a) the offer is in accordance with their policy of open-ended scale
(with no minimum salary fixed); (b) it is the best they can offer as per their judgement; and
(c) the candidate is free to accept or refuse the offer. Apparently, this may be in keeping with
the law but, a deeper examination will bring up the issue of (gender) discrimination vis-à-vis
the salary and role in the company. Morally, the company would be unjust and unfair in thus
discriminating between jobs of similar skill and responsibility depending on the employee’s
 Ethics in Business and Corporate Governance

gender. To stop such unethical practices in industries, many developed countries (e.g. USA,
UK, etc.) call upon the employer to declare if they are an ‘equal opportunity employer’, and
legal action [e.g. US Equal Employment Opportunity Law (EEO)8] can be taken against such
companies for discrimination in employment. In fact, more and more countries are adopting
ethico-legal systems to stop such exploitation in the job market that harms the weaker section
of the society, as well as to support equitable social development. For example, the EEO
provision covers: discriminatory employment decisions, discrimination in compensation and
benefits, (sexual) harassment, and retaliation. The last area covered under EEO prohibits
employers from retaliating against employees because they have opposed any unlawful
discrimination or participated in a discrimination related proceeding.

In countries where there is no legal protection against discrimination, the ethics of the
managerial people and ethical standards of the company can help in ensuring balance between
fairness, justice and equity. Law is the primary regulator of a company’s affairs, but it necessitates
the support of ethics in business dealings to ensure fairness, justice and equity. Cited, here, is a
more common case in the area of consumer marketing:

A store advertises prominently in the local daily, the sale of household goods at a heavy
discount. On the day of the sale, after noticing that customers are coming in hoards, the
owner of the store tries to withdraw some items from the sale-list and to modify discounts on
some fast-moving items. Now, the question is: can he withdraw the items or drastically cut
discounts to take advantage of the situation? The law may not prevent him from doing so,
but ethically he cannot change the conditions under which his advertisement was printed and
as long as his stocks last. Moral standards demand that the store and its manger faithfully and
fairly serve the customers as per their promise, and that they do not take undue advantage
of the situation. For justice—from both ethical and legal points of view—the store can be
referred to a ‘consumer protection court’ on the grounds of non-compliance to its public
offer and the unethical act of unilaterally changing the condition for the sale.
Note: In today’s times, most ‘sale’ advertisements, to avoid such complications, include a
clause that the ‘offer is subject to some conditions’ or ‘conditions apply’. Such advertisements
forewarn that business operations are generally opportunistic in nature, aiming to make or
avail any scope for profit. In business practice, such situations further emphasise the need
for ethics in society—if the consuming public is to be protected from unfair treatment or
bargains.

The role of law and ethics is becoming increasingly important in India, for the safe conduct
of business in emerging industries, like the IT, pharmaceuticals, insurance, advertising and other
service sectors. For instance, companies in the IT and BPO (business process outsourcing)
sectors deal with large chunks of confidential data pertaining to their clients. Maintaining
secrecy and preventing unauthorised transfer of this data is one of the core requirements of
this industry. With more and more organisations—banks, insurance, credit card companies,

8
http://www.dol.gov/esa/ofccp/regs/compliance/posters/pdf/eeopost.pdf, accessed on 30 July 2009; http://www.dol.gov/compliance/guide/
discrim.htm, accessed on 8 October 2011
 Law, Ethics and Business

etc.—storing more and more data about products, customers, financial and sales records on
their computers, it is of utmost importance that all this information is handled with complete
security and confidentiality.There have been several instances of theft of personal data and fraud
in the BPO sector in India, raising many doubts about the reliability and quality of India’s BPO
services to the highly digitised western-world customers. Furthermore, the present state of laws
and law enforcement pertaining to this sector in India may not be effective enough to deal
with this type of crime and misdemeanour. Hence, in such industries, only the consideration of
moral and ethical principles (including the conduct of their employees) can prevent fraudulent
acts and protect client interest. Analyses of business processes of these service industries—BPO,
banking, insurance, etc.—strongly indicate the necessity for the management and employees to
abide by certain moral principles and ethical standards. Much like BPO and IT services, there
are many other businesses where law and ethics have to join hands to enforce good practices
in business dealings, especially in areas of finance (banking and insurance). The emergence of
many private insurers has increasingly emphasised the role of ethics felt in India’s insurance
sector, where people (insurance policy holders) share both risks and gains by joining forces. An
insurance company combines the risks of many people to enable each individual to enjoy the
advantage of the ‘Law of Large Number’9. However, in this distributive-risk-and-gain format
of insurance deals (policies), transparency and disclosure of risks and gains are prerequisites
for fairness—making such deals strongly dependent on the ethical conduct in this business.
Another such example, where the role of ethics becomes important is the area of new drug
development wherein pharmaceutical majors undertake trials upon ignorant human patients:

The law in many countries allows clinical trials of new drugs on human patients; there are
regulations to control this, the whole exercise can be fraught with danger and harm if not
guided and managed by the principles of ethics and moral responsibility. While these trials
are not simply the case of ‘law and order orientation’ as discussed earlier (Chapter 1, Section
1.3), they should follow the ‘universal ethical principles orientation’, i.e., the highest state of
ethical maturity and sensitivity to the moral issues of the trials (to be discussed in Chapter
4). Clinical trials must be conducted ethically after securing the free consent of the receivers
(of the trial). If the human body faces any risk or side-effect from the new drug, it must be
explained and tried only after the patient has completely understood and consented to the
same. Thus, the role of ethics along with the law is critical in such business operations in
order to minimise the risk and harm to people.10

More often than not, law and ethics have to come together to create and maintain a
harmonious society and for the optimisation of national resources that benefit society, people
and stakeholders of a business. At times, the law alone may be unable to bring out the best
solution—for which it is essential to examine the social and ethical issues involved with
the problem on hand. This may be made clear with the following illustration, concerning
government action, but nonetheless applies equally to business.
9
http://en.wikipedia.org/wiki/Law_of_large_numbers, accessed on 30 July 2009
10
http://www.bmj.com/cgi/content/extract/330/7506/1466-a, accessed on 30 July 2009; http://plato.stanford.edu/entries/clinical-research/,
accessed on 7 October 2011
 Ethics in Business and Corporate Governance

Consider what is widely held as a political move in India—the case of special reservation of
seats in places of higher education, for students from the backward classes. However, when
this matter was referred to court, the law held that this provision was justified in view of the
fact that the backward community is poorly represented in professional services, and that
the cause of this poor representation is a low intake of students from such communities by
institutions of higher education (vide Supreme Court judgment on Indian Higher Education
Bill–2006). The Supreme Court of India cleared 27 per cent reservation for the OBC (other
backward class) category in professional degree colleges like the Indian Institute of Technology,
Indian Institute of Management, etc. However, in passing the judgment, the Supreme Court
also took note of the ‘creamy layer’ present in these categories and excluded them from the
provisions of the reservation quota.
This may be the proper legal view, being the most visible and proximate cause, but an
analysis of the situation may reveal that the remote and connected causes—such as lack of
good primary education, motivation to change, lack of financial support, socio-economic
conditions, etc.—have a more critical bearing on a fair and just solution to the problem
pertaining to students from really backward classes. Going by the legal sanction of reservation
for all backward classes, there would be enough doubt left if the problem can be solved by
providing reservations and admitting a few more backward students out of turn to professional
courses. Many academicians and social workers have argued that this may also lead to
dilution of academic content and bring mediocrity into the output—a situation that may
gravely endanger the well-being of the nation in the present-day competitive global business
environment. If ethics are considered along with the governing laws, ethical reasoning would
take the total and broader social view of the situation, facts and the state of the problem in
order to do what is fair and morally justified. In other words, ethics would aim to examine:
(a) if any such move would cause any harm to others in the society and nation; (b) if the move
will produce ‘greater good for a greater number of people’ in the society; (c) if there could
be another solution to the problem (one with lesser damage to the interests of others); and
(d) if the decision is fair to all stakeholders without infringing the fundamental rights of any
individuals. These ‘ifs’ are based on reasoning to discover the ethics of the decision and as a
means to arrive at other alternative, potentially less damaging, solutions.
Note: Incidentally, because of the moral dissatisfaction owing to the reservation policy, the
Government of India is introducing special relaxation clauses and amendments to the Quota
Bill, from time to time, to constantly try and accommodate the just and fair demands of the
society at large.

The role of ethics (even in the aforesaid case) is to harmonise the outcome to bring about
fairness for all concerned.Thus, ethics and ethical considerations help to expand the scope of the
problem that may give rise to a better solution—in contrast to the efforts of law alone. Ethical
judgment, in such cases, may impose moral responsibility (i.e. ethical duty) on the government
to address the problem for fair and right solutions with minimum damage to the interests of
the others concerned. Ethical consideration is based on the broader spectrum of an issue, and makes
one seek all contributory causes or repercussions for an action. At times, the law may be constrained to
consider only the direct cause and consequence of the incident for judgment, but the spirit of
ethics will ensure that such judgments do not harm others in the society. Thus, law and ethics (i.e.
 Law, Ethics and Business

the ethical principles) often come together in protecting the fundamental and moral rights of citizens and
society in a country. There are many instances in India, of conflict between the executive body of
the government and the judiciary, in interpreting the provisions of the law, because in the light
of jurisprudence used by the judiciary, the moral view of an issue often plays the deciding role.
In India especially, the many PIL petitions seeking fresh judgment and mandate on pollution
and environment related issues are examples of how rules of ethics and moral responsibility can
serve society. Learning from these examinations of (moral) ‘cause and effect’, either from legal
or ethical point of view, allows for the development of the legal system in a country, or helps in
enacting additional laws (or amendments) to protect rights, duties and moral responsibilities.
Often, ethics work in creating a balance between legality and morality. A unique example of ethics
gaining increasing priority over the legal provisions, for such a balancing act in business dealings,
is the buying-and-selling of goods in today’s competitive marketplace. To settle any dispute in
the buying-selling contract, the law provides the traditional dictum of ‘buyers to be aware’, thus
calling on buyers to examine, inspect and satisfy themselves before making a purchase. But ethics
of business practices, on the other hand, require that the salesperson must truthfully describe
the product and disclose its service features to make the buyers aware about what exactly they
are buying or getting in return for their money. This approach helps to make the transaction
more transparent than what the law can ensure; it favours the customer in seeking a fair deal. As
such, in case of dispute, a consumer court takes into account such disclosures and transparency
in transactions, when announcing its decision. Ethics consider that buyers buy in ‘good faith’,
based on product disclosures, is better than having to inspect and satisfy oneself before the
purchase—it protects consumer interest by helping them make well-informed decisions about
the purchase. Since this ethical approach to selling goods favours customers and customer
satisfaction, it is universally preferred by retail chains and other such businesses where the
competition is severe because, customer satisfaction and customer loyalty matter the most in a
competitive environment for the success of business. Most consumer protection cases, therefore,
base their judgments on ethics rather than on legal conditions to ensure a fairer deal.
Thus, law and ethics are equally important to conduct business in a fair manner, and both
have a common purpose—to prevent wrongdoing in business and in society. In a country,
while the law is an administratively enforceable instrument for justice and fairness of decisions
and actions, ethics and ethical responsibility in the society, business and governance depend
much on institutional and individual awareness—supported by the quality of legal systems in a
country.

3.3 BUSINESS PHILOSOPHY, SYSTEMS AND ETHICS

A business philosophy, on the one hand, is created with a view to attain certain goals and
objectives, policies and programmes, on the other hand, are drafted in order to implement
the actions that are required to accomplish those objectives. Generally, policies are based on
the ideology of the organisation and its managers. Ideology, here, refers to a set of beliefs or a
train of thoughts shared by the members of a group or institution or company reflecting the
social needs and aspirations of individuals, common groups, cultural groups or employees and
 Ethics in Business and Corporate Governance

other stakeholders. Ideology often reflects the faith, behaviour, response, and actions of individuals or the
company as whole, and influences the policy-making processes and actions. A business ideology, therefore,
determines or guides the policies and actions with respect to issues internal as well as external
to the organisation, the latter pertaining to customers, suppliers, society and the government.
All these are, in turn, reflected in the systems that a company pursues by design and intention.
Therefore, the question: who designs and who pursues the systems, and with what purpose?
In short, who influences whom, i.e., does a business ideology shapes the manager’s ideology or
does a manager’s ideology shape the ideology of the business? In practice, it is observed that
there are some (natural) leaders who influence and shape the company’s business philosophy
and purpose, and there are others who follow the same.
A company is an ‘immortal fictitious person’ with responsibilities and liabilities for its policies
and actions, but these policies and actions are drafted by individuals who are functionally
related and responsible. Therefore, ideologies of the people at the top (i.e., managerial team)
greatly influence business decisions and, hence, the company’s business ideology. Among other
things that it stands for, a business ideology reflects the company’s perspectives about its ethical
responsibility and conduct. Not surprisingly, ideologies of the proprietor or the chief executive
of an organisation generally determine the company’s attitude towards its employee relations
(i.e. industrial relations) and social responsibility. If the ideology of these people at the top is
not ethical, it is likely that their actions may ultimately lead to some unethical or incorrect
behaviour and actions in the company—with disastrous repercussions in industrial relations
and for the well-being of the business. There are many instances of such disasters all over the
world, but the collapse of Enron (USA, 2001) and Satyam (India, 2008-09) stand out as classic
examples of bad ideology and immorality of a few individuals at the top. Naturally then, the
subject of business ethics places utmost importance on individual ethics, because it is (some)
individuals and their ideologies that are at the centre of a business system and its functioning.
The logical judgement about ethics in business therefore takes into account personal virtues and
ethical standards of individuals as well of business systems, processes and of the organisation as a
whole. However, the concern of business ethics, as a subject, is not to focus on ethical violations,
but to help in dealing with practical business problems that are related to specific duties and
responsibilities arising out of the total business relationship. Total business relationship is a concept
that would embrace both legal and ethical obligations along with contractual rights and duties. Like total
quality management (TQM), it is an integrated approach to business management involving the
maintenance of ethical standards in all policies, decisions, actions and relationships—with the
overall aim of helping the business achieve a superior performance. Therefore, business systems,
structures and goals must be designed to fulfil this total quality of business relationship.
Ethics in business operations can be examined from different perspectives, including: enterprise perspective,
employee perspective, perspective of its customers and the market it serves, and the social perspective. More
often than not, there will be ethical conflicts in serving these different constituents of business.
For example, the enterprise perspective of a business would aim at maximum returns for
the owners; employees would expect a fair share of the returns by way of increased wages
and benefits; customers would seek a quality product or service at lower cost; and the social
expectations would cover increased employment, better environment and higher spending on
 Law, Ethics and Business

social welfare. These conflicts in a business arise not only due to conflicting interests of its
various constituents, but also in terms of understanding the purpose of that business. If one
argues that the principal purpose of business is to make profit for its owners or shareholders,
then those activities and actions that—prima facie—decrease the profit by sharing it with others
would be inadmissible logic for running the business. But, if one cares to take a long-term view
of business interests, it would be apparent that even to make profits the business should adhere
to the principle of moral duties, because failure to hold on to moral duties and responsibilities
could lead to serious consequences, i.e., employee dissatisfaction or customer apathy. In other
words, continuously ignoring the interest of workers may lead to work stoppage; violation of
environmental norms may lead to cancellation of business licence or a heavy penalty; lack of
interest in development of neighbouring areas may lead to agitation by local people and loss of
image; and lack of adhering to promised standards of product features and quality may result in
customer dissatisfaction and apathy. Hence, today’s management experts believe that even for
the sake of making profits alone, it is more advantageous to adhere to moral rules and ethics
than to overlook them for some quick gains—because any failure to abide by ethical standards
could prove to be very costly in the long run. As has been mentioned earlier, ethics help to
harmonise and reconcile the conflicting interests of various stakeholders of a business, and help in arriving
at a satisfactory solution to the problems.
Figure 3.2 shows components of operational perspectives in ethical business practices,
which are also known to be the sources of ethical conflicts of interests in business.
Modern business philosophy argues that moral duties and responsibilities of business
organisations extend well beyond their owners or stockholders; more than just adherence
to the laws of the land, these duties extend towards all stakeholders who have any interest

Enterprise
perspective

Social Employee
perspective perspective
Business

Market Customers
perspective perspective

Figure 3.2 Components of Operational Perspectives in Ethical Business Practices

 Ethics in Business and Corporate Governance

in the conduct of the business—be it the employees, stockholders, customers, suppliers,

local community, government and the society in general. According to the modern business
management approach, stakeholders have the right to know how the business operates and to
participate in the governance process.This approach of moral duties and responsibilities towards
all stakeholders is ingrained in the modern concept of TQM—of which business ethics have
emerged as a part, demanding fair dealings in all business policies and activities for the total
satisfaction of all (employees, consumers, vendors, stockholders, society, etc.). Therefore, the
need to hold on to ethical standards becomes even more demanding in the context of global
business where, in addition to legal issues, ethical issues are also to be appropriately addressed in
view of different cultures, ethical standards and market behaviour. A case in point would be the
McDonald experience in India:

The media reported that McDonalds—the US fast food chain in India—was using some
animal fat product to create the special flavour in their food products. People of certain
religious faith found this highly objectionable and, if McDonalds was to successfully carry
on its business in a country dominated by that religion, then they would have to refrain
from any such practice. Furthermore, McDonalds displayed prominent notices at all its
outlets informing (potential) customers regarding the said animal fat content in their food
products; in fact, the company responded to the protests by placing advertisements in
domestic newspapers extolling its commitment to vegetarian food11. Had it not been for this
timely action, the breach of ethics thus committed would have had serious social and market
repercussions, affecting business at McDonalds.

In the pursuit of economic benefits, business operations cannot be separated from the influences of social,
political and cultural impacts—including that of religion. And these influences cannot be managed
by economic and legal actions alone; they have to be dealt with ethical considerations as well.
The essentiality of ethics in business and the impact of its failure on the success of a company
has become so great in the modern, consumer-driven business, that today’s business process
is described as the process of strategically and ethically managing and influencing the market and non-
market environments in order to accomplish the stated vision and mission of the company. Important areas
of business systems where ethics and ethical considerations play a critical role in formulating
the policies and action plans, are: corporate social responsibility (CSR), human resource
management (HRM), financing and accounting systems, environment management, product
development and sales and marketing policies. However, this does not exclude the need for
adhering to ethical standards in day-to-day dealings. The foundation for ethical behaviour in
business goes well beyond corporate culture and the policies of any given company; it greatly
depends on timely moral training of employees, on other institutions and on the environment
that affect an individual, the competitive business environment of the company’s business and,
indeed, society as a whole.

11
http://www.mcspotlight.org/media/press/mcds/reuters141101.html, accessed on 7 November 2009 and on 8 October 2011
 Law, Ethics and Business

In fact, ethics have become a valued business strategy, especially in competitive business
environments where the brand image of a company is largely influenced by its ethical business
practices. A notable example is the Tata Sons in India, established in 1868—a 142-year old
company, that stand tall today on its brand image. In the words of R. Gopalkrishnan12,
Director of Tata Sons, for entrepreneurs who don’t think they have time to worry about
ethics in the early years, that’s negligent if you intend for your company to be around a long
time. It’s like saying, ‘I don’t have time to shape my child’s character right now. I’ll do it when
he’s 20. The child’s behaviour is shaped by the first 10 years; so it is with a company, if the
company has to sustain for a long time. At Tata, the code of ethics is published in 15 different
languages. Every employee signs it every two years. More important, the company runs
almost 300 workshops a year where employees discuss the issues they face. “No great truths”
come out of this process, Gopalkrishnan said. “There’s no new enlightenment except in our
own hearts” as employees talk about how to apply these principles to real-world situations.
This is a process of moral training of people who associate and assist the companies to reach
to its brand image.
Therefore, in business, one thing that works all the time is ethics. The brand benefit for Tata
Sons comes because of its reputation for value-based approach to doing business. In essence,
ethics has been an important business strategy for Tata Sons since its inception. Throughout
its 142-year history, Tata Sons has come to be known as a company that can be trusted.

3.4 SCOPE AND ROLE OF BUSINESS ETHICS

Business ethics, as a subject, aims to create a deeper understanding of what is good and bad, what
is moral and immoral or what actions are right or wrong in the operations of a business with respect to its
customers, employees, investors, society and all other stakeholders—in order to protect them from harm and
damages to their interests. The subject not only covers traditional businesses, but also institutions,
service providers, society and an assortment of activities relating to consumers and users of
goods and services. Role and scope of business ethics has been discussed in Chapter 1, but
the subject matter is being repeated here due to its relevance in the context of law-ethics and
business.
Business ethics is concerned with the morality of actions in business operations, and deals
with: (1) rightful expectations of consumers, society, employees and other stakeholders; (2)
fairness in competition and advertising of goods and services; (3) social responsibility and care;
and (4) overall corporate behaviour in governance—with the ultimate aim of protecting people,
society and all direct and indirect stakeholders from damages. Some common examples of immoral
business practices in an economy are: bribery to manipulate business interests; manipulation of
market conditions for unfair practice or pricing; non-transparent business transactions; deficient
customer services; violation of environmental laws, etc. On the other hand, bribery, corruption
in public places, exploitations of labour market, unfair wage structures, unequal opportunity
based on colour, creed or sex, hazardous working conditions, unmindful destruction of ecology
and environment, etc. are a few of many unethical practices prevalent in business practices and
12
http://www.scu.edu/ethics/practicing/focusareas/business/gopalakrishnan.html, accessed on 8 October 2011
 Ethics in Business and Corporate Governance

industries. And, all these activities are primarily carried out by individuals—at times, acting
out of their own choice and, at other times, on behalf of the organisations they are connected
to. In either case, these non-moral actions in the course of business operations always hurt the
interests of others in the business cycle or the society at large. The purpose of ethics in business is
to protect these people and stakeholders from such unsuspecting damages to their interests arising from the
choices and actions of either the organisation or its employees. In the context of an organisation’s moral
behaviour, it should be noted that organisations are composed of human individuals who act
under certain relationships and circumstances in order to perform certain assigned or projected
activities and responsibilities for the propagation of business. Thus, the acts and choices of an
organisation originate from individuals who work for it, in the choices and actions of those
individuals. Therefore, it is these individuals who must be seen as the primary bearers of moral
duties and responsibilities to uphold business ethics.
It has been observed in all corrupt and failed business cases, discussed thus far in the book,
that it is only a few individuals at the top who have been responsible for ethical violations and
destruction of value in the business. Thus, ethics in business largely depend on the individual
characters and their honesty and integrity. But, there are also those instances when businesses have
been in trouble due to risky business models, unrealistic business targets, loose administration,
and slack regulatory controls—all of which are policy dependent. Therefore, judging ethics in
business would require an examination of: (a) How ethics and ethical standards of working for
individuals are introduced, maintained and managed in an organisation; and (b) How ethical
principles and ethical governance are factored into a company’s policies and programmes. Also,
for effective control over the ethical standards of business practices and governance in a country,
there have to be effective regulatory control over the conduct of business and profession. To
study business ethics and its practice, therefore, these features of business operations are to be
examined, along with ethical standards that have (or have not) been maintained and displayed
in different actions and behaviour of the company. This is the direct method to examine the
ethicality of actions or organisational behaviour.
But, business operations, which encompasses taking policy decisions, setting goals, and
deciding and pursuing a course in practice that will ensure the best results, involve a large
number functions, namely: organising, structuring, manning, systematising, administering,
controlling and managing. Moreover, business situations are not static—the course and conduct
of a business may change with the changes in circumstances, business environment and goals with
time, place and context. Some school of thought, therefore, suggests that since business ethics
encompass a wide variety of topics and situations, it is better to examine the subject of ethics
with the following classification: (1) systemic, i.e., issues related to systems of carrying out the
business; (2) corporate, i.e., issues of ethical questions raised about the way a particular company
decides its policy and operates; and (3) individual issues, i.e., ethical behaviour and ethical
questions about individuals within a company. It is argued that, often, business operations bring
about situations wherein decision-making involves a large number of extremely complicated
and interrelated issues that can cause confusion unless they are carefully sorted out at first, and
distinguished from each other. Such a situation has been illustrated in Chapter 1, depicting an
easily identifiable work-situation, and being repeated here:
 Law, Ethics and Business

A company official, operating in the eastern region of India, was asked at a very short notice
to go to Delhi to immediately renew an operating licence that was mandatory for safety as
per factory laws. The company had overlooked the renewal date and, hence, failed to do
the needful in advance—leading to this emergency. Considering one of the company’s mills
would have to be shut down without that operating licence, the officer was given the task of
getting it renewed with utmost urgency.
Immediately, the officer travelled to Delhi on company duty and met the respective authority
—who, he was made to realise, required some gratification, if the renewal was to be done
on priority basis. But, as a rule, his company did not allow for any gratis or bribes in order
to expedite any business related actions. The officer was therefore put in a situation where,
without gratification, no licence renewal could be transacted in a hurry. He conveyed this to
the bosses at the factory, but they too were helpless in meeting this demand due to company
policy. Finding no other way to expedite the renewal process, the officer adopted an indirect
method of pleasing the authority concerned. He invited the department-in-charge to a lavish
dinner—where he not only explained the urgency, but drew upon his sympathy for some
urgent action. He kept his boss informed about the same. While the dinner was a success, it
had cost the officer much more than the daily expenses he was entitled to as per company
policy. However, the officer spent the money at his own risk only to satisfy the urgent need
of his company.
On his return from Delhi, having successfully renewed the company’s licence, the officer
submitted the actual bills. The finance department refused to pay. The officer then withdrew
the initial bill and, as per his boss’ suggestion, submitted another bill—this time, citing the
same expenses but under different grounds, e.g., inflating his transport expenditure and
a few other entitlements. However, the company’s finance department held him guilty for
overstating the travel bills and issued him a show-cause notice for disciplinary action.

Now, the officer’s colleagues asked if the company was morally and ethically right in
punishing an employee who had only made sincere efforts to serve the interests of the company
—notwithstanding that he had legally violated the company’s travel rules. In this case, there are
elements of three types of issues: systemic, corporate and individual. These elements are: (i) the
officer did not manipulate the travel bill for personal gain; (ii) the company assigned a task to the
employee without providing the resources it called for; (iii) the officer acted as per the demands
of the situation in order to save his company from a loss (closure of a mill) that could have
cost jobs to many; (iv) the system did not allow for any relaxation in travel rules for uniformity
of application; and (v) the finance department scrutinised the officer’s travel bills focussing
more on ‘what rules state’ rather than on ‘exigencies for the organisation’s need or utility’.
Here, judging who is moral and ethical is a somewhat complex matter; instead, distinguishing
issues as per systemic, corporate or personal ethics can be helpful. In this particular case, the
officer cannot be held responsible for violation of individual ethics in discharging his duty. He
manipulated the provisions of the company’s travel policy and resubmitted his bill, but this was
not done with profit motive—it was only to get compensated for what he had actually spent.
The system (i.e., the company’s travel policy) should be transparent and uniform for all, and it
should be respected. Hence, the company is right to have rejected his travel bills and, at the same
 Ethics in Business and Corporate Governance

time, is also ethically right in not resorting to bribes, etc. Then, how can one operate ethically
within this system? It is the task of the management to provide resources for any job or official
deputation to the extent it is fair and just; and to that effect there should be provision and
management controls in business practices. In this case, it will be unfair and unjust if the officer
is punished for his action. Fairness and justice call for an examination of the motive behind
an act, and not only of the process in the act. In fact, many companies are found to be lacking
in systems that promote a good, transparent and ethical work culture. Morality and ethics
related to these distinguishable issues have earlier been discussed as general rules, but how do
we consolidate those moral and ethical rules with business-specific situations? This is the crux
of ethical business practices. Practitioners of business have to balance a decision or action by
considering ethical issues from various perspectives (as brought out in the officer’s case); ethics
are not an administrative tool but a template that helps to protect and propagate fair practices
and to ensure justice, fairness and care to all involved in the business process.
There is another, somewhat similar approach to looking at ethics and ethical practices in
business, but with more clarity. Practitioners of business ethics suggest that the best way to
consolidate and understand ethical issues and ethical practices in business would be to examine
ethics in relation to the ethics of business philosophy (i.e. principles and practice) and the ethics
of professional management in different areas of business operations. Ethical issues in these areas
of operations are by and large systemic and corporate, but do not altogether exclude individual
ethics in analysing cases. Why this approach stands out is because of its in-built character of
assigning responsibility to the company for structuring corporate processes and policies—with
an eye to what could be adjudged logical, ethical and fair to all stakeholders.The cases described
in the beginning of this chapter showed lapses in ethical structuring and policy formulation
leading to greed and risky financial measures and transactions. It is widely held that, in today’s
business, ethics are reflected in corporate governance (responsible for the organisation structure,
policy formulation, execution, monitoring and control); in CSR (which ensures integration of
social well-being into corporate goals); and in its systemic management (of people, processes
and outcome). The latter is also a part of corporate governance when considered in its totality.
Broadly, ethics in business practices involve: (a) ethics as applicable to business philosophy: namely,
corporate governance involving structuring, policy formulation, management, employee
relations, social justice, ethics in marketplace, environment management, etc.; and (b) ethics of
professional management: namely, ethics of human resource management, financial management,
engineering and new product development, sales and marketing, R&D, etc. Adhering to ethical
business philosophy and professional management is the responsibility of the company and its
management. In addition, there is also a need for professional ethics of individual professionals
engaged in different fields of business operations, e.g. engineering, accounts, human resource
management, sales and marketing, advertising, etc. (some of which are discussed in the next
chapter). Yet, at this stage, it must be emphasised that professional ethics are assuming an
overwhelming importance in business practices of today’s competitive and service-oriented
business environments.
Business ethics guide the applications of ethical rules and principles (discussed thus far)
within the context of commercial and business transactions—such as, relationships between
 Law, Ethics and Business

an employer and employee(s), and between a business and its customers, and a company’s
obligations to the society. Business ethics examine the various moral and ethical problems that
can arise in business operations, and help to understand and make specific judgements about
what ought—and ought not—to be done. Their main purpose is to guide business organisations,
in the light of ethical principles, in dealing with various practical problems in their operations,
and in conforming to specific duties and responsibilities that might arise due to the necessity
of being ethical or conforming to ethical practices as recognised by the society, government
and regulators. For example, attending to the distress of a loyal employee is considered ethical,
whereas violation of pollution norms, notwithstanding any compelling circumstances, does
not conform to the expected ethical practices. Hence, a company’s business practice must
cover a wide range of ethical issues, from employee welfare to environment protection and
development. However, any ethical binding or responsibility must not be seen as a restraining
factor in business operations. This is because the ultimate aim of business ethics is not to
withhold business operations (in economic terms), but to strengthen the decision-making
process and, in turn, minimise the damage from bad employee morale, poor market reputation,
lack of customer support, legal and social penalty, and other such consequences that may deter
the company’s economic progress. It is in the long-term interest of a company to be ethical in
its operations, management and dealings with the customers and society. The corporate world
abounds in examples wherein businesses had to be shut down owing to their unethical practices
(e.g., Enron, WorldCom and Satyam).
Many moralists tend to look at business with the suspicion that these institutions aim at
making money—even if by trampling humanity and violating ethics.The business world abounds
with examples where greed for greater profit has led to destruction of the environment (e.g.
destroying forests for wood), immoral business practices (e.g. selling adulterated foods), and loss
to stakeholders (e.g. company manipulating its accounts), among other harmful consequences.
But, those actions had mostly resulted in very short-term benefits to them, if any, and always
reminded the business professionals about the necessity to be moral in outlook and ethical in
dealings for long-term benefits of the business.
All moral philosophers advocate maintaining ethical standards—which is an age-old need
—in society and business practices. Yet, some also believe that business and ethics are at odds
and in contradiction with each other, arguing that, in business, determining and doing what
is practical (from the viewpoint of profits) and what is moral involves two different lines of
thought that cannot be reconciled. But, with the growth of industries and global business,
companies have redefined the aim and purpose of business—especially with regard to customer
satisfaction and customer support. In a competitive business scenario wherein customers (i.e.,
all stakeholders—consumers, investors, employees, suppliers, etc.) have the choice to decide
what they should buy and from whom or where they should invest, work or supply, the ethical
image of a company or business has gained importance. Planning business systems and strategies
in sync with ethical principles has become an essential requirement for the long-term survival
and benefit of business. There are plenty of examples to show that customers go where ethics
are. Thus, the business world is now faced with the challenge of tailoring their business models
and practices in a way that agrees with the principles of ethics. In an open and competitive
 Ethics in Business and Corporate Governance

market, ethics are not at odds with the purpose of business. With the increasing globalisation of
business operations, development of rapid communication avenues, surveillance of electronic and print media,
and stakeholders’ general awareness about the rights and duties of business, ethics in business operations
and management have become the benchmark of good governance and the hallmark of brand image and
success in recent times. Industry or business can no more deny moral rights to its employees and
customers, and cannot defy the moral responsibilities of protecting the health and environment
of the society in which it operates. A business has the ethical responsibility to its employees,
society, government and other stakeholders who are related to the well-being of the business,
because a business exists for the customers and society—and not vice versa. Many NGOs in
India are now successfully focusing on preventing ethical violations of duties and responsibilities,
especially in social services and social welfare measures of the business world.
In fact, ethical considerations often lead to optimisation of benefits of a decision, which
would have otherwise been considered as conflict of interests. In this context, illustration from
Chapter 1 is being repeated here to re-emphasise the point:

The demands for ‘festival bonus’ are not uncommon in India, nor are the instances of work
stoppage or strikes for the same. So, is bonus a ‘right’? In Indian companies, the system
of rewarding or gifting a bonus is based on the ethical principle of ‘care’ with a view to
help employees better celebrate a festival with some financial support. Generally, such care
displayed by the management in times of need, keeps the employees committed and motivated
to the cause of the company. The bonus system involves a company sharing the cash surplus
with its employees. However, some shareholders (who do not receive this festival bonus)
consider this system as wasteful and a burden on the cash-flow management, thereby limiting
the utilisation of company resources in profit-making activities—which remain the primary
purpose of their investments. From the perspective of shareholder interests versus employee
benefits, the system of ‘festival bonus’ may seem to be conflict of interests, but, a more realistic
analysis will show that this action is likely to lead to greater productivity and profitability
—through improved morale and motivation of employees. Thus, the act of giving festival
bonus may actually benefit both parties—employees and stakeholders—in business.

In this way, the ethics of care towards employees, in times of their need, can be viewed as a
good business strategy rather than as a conflict of interest. The latter view could, in fact, lead to
very short-term gains but greater losses in the long-run.Thus, reconciliation and harmonisation
of conflicting interests emerge as important roles and scope of ethics in business.
In view of the role and scope of business ethics discussed here, ethical issues in business
practices would involve the study of how the company: encourages individuals to maintain
ethical standards in business (‘Individual and Ethics’, Chapter 4); takes care of its consumers
and market environment (‘Marketing and Consumer Protection’, Chapter 6); encourages
standards of professional ethics (‘Professional Ethics’, Chapter 6); takes care of environment and
ecology related ethics (‘Ethics and Environment’, Chapter 7); and ensures quality of corporate
governance including CSR (Chapters 9 and 12).
 Law, Ethics and Business

3.5 BUSINESS SYSTEM AND ITS ENVIRONMENT VIS-À-VIS ETHICS

If ethics are so necessary for business, then where and how does one apply them? Business
is not operated from within a box, it concerns a variety of environments where each such
environmental condition can influence its outcome. Broadly, business operates in two kinds
of environment: the internal environment and the external environment (Figure 3.3). A company
cannot work in isolation of these environments, which often interact with each other through
the choices of actions of the people in the business. These factors are not independent; they
are interdependent for results. In the modern social and economic environment, the success
and well-being of business depend on how well the enterprise deals with factors and situations
arising from environmental influences. Hence, ethics in a business enterprise have to deal with
the totality of the environment in which it operates.
External environment
Internal environment
People/group

Environments Environments
Organisation Departments
/policies /functions

Processes/activities
Internal environment
External environment

Figure 3.3 The Internal and External Environments of a Business

Operation-wise, the internal environment comprises the company’s organisational structure,

policies and programmes, functions, people, processes and activities. A company has the
responsibility of designing and cultivating these internal systems and procedures that abide by the
governing laws and ethical principles in its functioning. Such internal systems are the outcome
of the choices of the company’s management, and are totally controllable by the company and its
management. Few examples of internal environments are: the ‘investment and monetary policy’;
‘reward and promotion policy for employees’, ‘purchasing policy’, ‘wage policy’, ‘safety and
environment regulations’, etc where policies and procedures are involved and they encompass
the interest of the investors, financiers, suppliers, employees and environment (pollution-
related). It is generally accepted that such internal policies, procedures and programmes are
fully controllable by the organisation itself. Compared to controlling the internal environment,
it is relatively difficult to deal with the external environment, which is not exactly within the
company’s control but influences its operations. Examples of external environment are: ‘market
forces’, ‘trade regulations’, ‘environment regulation’, ‘licences’, ‘trade unions’, ‘competition’,
‘advertising and promotion’, and ‘government, political and social environments’, among others.
 Ethics in Business and Corporate Governance

The approach to lawfully and ethically handle the external environment needs more cautious
and careful judgement, because the related issues can: (a) often encumber more than one factor;
(b) involve social and political interference; and (c) often result in serious repercussions on the
company’s business potential in the case of their failure. Therefore, for the success of business,
ethical principles and standards must be upheld in both internal and external environments
of its operations. The following sections of this chapter include a more detailed discussion on
business environments vis-à-vis ethics, the approach being to highlight the importance and
effect of ethics in different business environments and how they work.

3.5.1 Ethics in Business—Internal Environment

Every business has its own organisation structure, rules and regulations governing the conduct,
and policies and procedures for activities that are directed to achieve the company’s goals
and objectives. There are executives and employees who carry out these activities on behalf
of the organisation, and take decisions or cause to take decisions and actions. This chain of
command follows a hierarchical structure of authority in which orders and directives are passed
down for execution. Figure 3.4 shows (only partly) a representative structure of authority in a
manufacturing organisation.
Generally, orders from the superiors are considered binding on the subordinates as per the
company rules—but only insofar as the order stands the test of morality and reasonableness. If
an order is not moral and is likely to unduly harm the interests of others, an employee is not
ethically and legally bound to obey the same. This stand on ethics has been illustrated through
the example cited earlier in this chapter, of the officer doctoring his bills as per instructions
from his ‘boss’.Yet, despite such clarity pertaining to morality of an action and the consequent
harm, there are many instances of wrongdoing in business—either due to pressure from the

Managing Director

Dy. MD (Operations) Dy. MD (Marketing & Devices)

Vice President-1 Vice President-2

Divisional Manager Divisional Manager Divisional Manager

(Design & Development) (Production) (Supplises & Logistics)

Manager Manager Manager Manager

Supervisor Supervisor Supervisor Supervisor Supervisor

Figure 3.4 A representative hierarchical Structure showing the Reporting Relationship by ( ) and
Chain of Commands by ( )
 Law, Ethics and Business

superior or owning to the employee’s choice. The question is, if any wrong or harm is done
under such circumstances, then who is responsible for that act? And, if that act had been carried
out with the knowledge and consent of the superior as well as the subordinate, then who is
morally responsible? Here, given that a business organisation is an ‘immortal fictitious person’
in the eyes of law, responsibility for any illegal act must rest with some (real) individuals—e.g.
employee, agent, etc.—who have acted on behalf of the organisation. The law takes cognisance
of the individual(s) in the company as responsible for illegal, fraudulent or harmful acts. For
example, in the Union Carbide case, the head of the works and staff—behind the negligence
causing the gas leak—were held responsible and taken to court. Similarly, in the Satyam case,
the chairmen and directors along with two senior auditors of its audit firm (PWC) have been
taken into legal custody for alleged fraud and financial crime.
In India, when it comes to business ethics, there are regulators and government authorities
(e.g. Ministry of Company Affairs and Company Law Board) who intervene in the case of any
unethical practice or harmful consequences thereof, so as to check or correct the situation and
prevent further damage to the interests of stakeholders. Referring, again, to Satyam, as soon as
the financial scam came was reported, the government intervened and dissolved the existing
board of directors and barred them (including Satyam’s independent directors) from serving
elsewhere till their names were cleared from the scam. Other associated bodies like SEBI (The
Securities and Exchange Board of India) and ICAI (Institute of Chartered Accountants of India)
also moved in to identify personnel and professionals involved in the scam so as to take the
necessary action against them. As discussed earlier, the violation of ethics may not have strong
legal teeth—unless the violation is tantamount to crime under the provisions of criminal laws of
a country—but its effect can be damaging for both, the company and the individuals indulging
in such ethical misconduct.Violation of ethics can lead to loss of goodwill, customer confidence
and business, as well as to social protests, suspension (employees or business), debarment from
stock markets and stock trading (by the regulators), and withdrawal of financial support from
the financial institutions. Since these factors make for the lifeline of a business, any such loss can
deeply impact the sustainability of a business. Therefore, present-day business practices demand
equal attention to legal as well to moral issues of business. Promotion of good work culture,
transparency in business transactions, ethical corporate behaviour, and awareness of corporate
social responsibility are the focus of good corporate governance these days. The precise role
of ethics in business practices is to prevent and discourage employees from any wrongdoing
by way of immoral or corrupt acts—either in an individual capacity or while conducting the
company’s business. In short, the absence and prevention of such unethical practices is the
hallmark of good corporate governance in the company.
A salient feature of business is that it is not run or managed by one individual, but is managed by
the involvement of many who are linked with each other’s actions and outcome. This interlinking is
variously described or displayed as the functions of departments, teams, groups and suchlike.
Businesses are generally characterised by such joint actions or efforts, which are directed to
accomplish certain objectives. So, who should be held morally responsible for any unreasonable
or immoral act in the business? While law-enforcing agencies would name the officials or
employees responsible for that wrongdoing or harm to the employees and society, ethics and
 Ethics in Business and Corporate Governance

ethical practices have no such facility owing to their self-regulating nature. Considering the
importance of ethics and their effect on the well-being of business, the organisation must put in
place a mechanism to promote and control internal environments for a good and ethical work
culture. In compliance to this spirit, companies are required to set up internal mechanisms,
such as: ethics committee, ethics counsellor, promotion of code of ethical conduct, monitoring
systems for ethics, and company rules and regulations to deal with the violation of moral
conduct and ethics in the company. By and large, these measures are considered very necessary
for controlling and preventing unethical activities in the organisation.
No one can deny the necessity of a moral and good internal work environment for good
business. However, most business practices face various moral issues in their daily functioning
such as, favouritism, nepotism, bribery, dishonesty, indiscipline, misinformation, rumours,
insubordination, sexual harassment, undue punishment, etc. Most of these problems are born
of human nature and behaviour, and are frequently marked by self-interest, bias and greed.
Therefore, coordination of human conducts in business for ethical behaviour is very critical—
especially to promote a good internal environment. It must be recognised that business activities
are conducted by humans, and by the very nature of business models and processes, all human
activities are interdependent. A business can only exist or flourish if people involved in it join
in each other’s efforts and adhere to some minimal standards of ethical in consonant with the
demands of their surroundings (which includes society, public, governing machineries, laws and
conventions of the land). Most humans are also psychologically inclined to reap benefits from
an opportunity, leading to the situation where a group of people or few interlinked people
may connive to cause harm or commit a wrongful act in a business environment for personal
benefits. This type of act is against the very purpose of a business and its overall well-being,
and hurts the interests of all its stakeholders and the society. In such cases, moral responsibility
for the harm will rest with the people involved, if they have willingly participated in the
wrongdoing of their own accord. As per ethical principles, if someone is knowingly and freely
trying to effect a fraud or harm, then he or she is morally responsible for the wrong or injury
—regardless of whether the deed and or act was done (shared) with others. Thus, in business,
anyone who knowingly and freely participates in a wrongdoing is morally responsible for the
act, no matter if that has been committed with the help of others, and the individual(s) will be
punishable as per the rules of the company and norms of professional bodies concerned. In this
context, let us refer to a deal between a purchase manager and a supplier, as an example:

The purchase manager struck a deal at an unreasonable rate (overpriced) with a supplier.
His ‘boss’ knew about this deal and had verbally approved it, in exchange for some personal
benefits for both. When, later, the internal audit department learnt of this deal, the resultant
loss to the company (due to the deal) was investigated. The loss ran into several lacs of
rupees. The purchase manager pleaded that, since he had sanctioned the order with his boss’s
knowledge and verbal approval, he was not morally responsible. In turn, the boss maintained
that he was ignorant about the reasonable rate for that order, and had, therefore, trusted his
purchase manager’s decision as per company norms. The supplier, when questioned, said
that he was forced to provide certain favours and that the order (at his own price) was his
compensation for the same. Now, the question is: who is morally responsible, and to what
 Law, Ethics and Business

extent? The principles of ethics and moral reasoning say that both the purchase manager
and his ‘boss’ are equally responsible, although the supplier’s responsibility is somewhat
mitigated as he was forced to act, and did not have power to control the action. However, the
supplier is not fully excused from moral responsibility as he could have drawn the attention
of another authority in the organisation without falling prey to the profit-motive. Now,
compare this situation with the considerations of ‘bribe giver and ‘bribe taker’ in the eyes
of the law. The boss cannot plead ignorance because he is supposed to prevent any such
wrongdoing, as per company-delegated authority and responsibility, and should have made
the effort to know the implications of paying higher price (to the supplier). The purchase
manager cannot pass the blame onto his boss because it was he who initiated the wrongdoing
and acted knowingly and freely to cause the harm and loss, be it in collusion with his boss.
Thus, both the purchase manager and his boss are equally and fully responsible for the
harmful act and punishable (suspension, discharge or any other penalty) as per the company
rules.

The aim of ethics management is not only to clean the internal environment but also
build an environment that supports and promotes ethical conduct in all spheres of business.
The next logical steps for ethics management in a company would be to: (a) promote ethical
practices; and (b) enforce mechanisms to prevent unethical practice. If unethical practices are
allowed uncontrolled, despite the company knowing about them, then it is not in sync with
good corporate governance. Furthermore, corporate governance should focus on instituting
the required rules, regulations and control mechanisms in the company to ensure fair, moral
and just business operations. Generally, companies attempt to prevent corrupt and unethical
practices through internal rules, regulations and punishments, which are a part of their corporate
governance mechanisms. Yet, it may not always be possible to prevent some immoral acts in
business. Hence, what is being increasingly realised is the importance of promoting a culture
of ethics and positive attitude in the company’s internal work environment so as to maintain
ethics in business processes and practices. Therefore, many companies are appointing ethics—
specific committees or designating ethics consultants—to promote ethics on the one hand,
and to monitor and control unethical and on the other. These measures not only apply to the
conduct and behaviour of individuals (employees), but also to the process of operations, product
development, market offerings, and any other business acts that may be likely to affect employee
and customer morale.
The spirit of business is to serve its stakeholders (any party that has interest in the business)
with fairness, equity and (moral) responsibility. Therefore, business processes and practices must
be morally acceptable and beneficial to all stakeholders. Failure to check corrupt and unethical
act within a business works like a virus, destroying the business no matter how strong the
company may be financially or technically. Businesses should not be run for ‘profit at all cost’,
because such mottos always pave the way for unethical business motives and practices, which
are not good in the ultimate analyses of the business. Of the many related examples in Indian
business, the most recent one is the Satyam scam—wherein the company had been indulging in
unethical practices for quite a long time. Apparently, it had procured IT-service contracts from
the World Bank (WB) for several years, using unfair means and corrupt practices. As a result, this
 Ethics in Business and Corporate Governance

august global financial body had barred SCSL from seeking WB business since 200413, which
had somehow escaped public attention in India. Such a disclosure, at a time when Satyam was
making headlines for all wrong reasons, caused further panic among the investing public and
led to rapid erosion of confidence in the company’s business. If the people who run a business
are driven only by self-interest and profit motive (as it seems in the case of Satyam), then it
will certainly collapse in the long run. Take, for instance, the near collapse of many financial
giants (Lehman Brothers, Citibank Inc., etc.) in the US in 200814 due to sub-prime deals.
Highly profit-driven companies are often known to cut corners, when it comes to business
ethics, endangering the risk and stability of the business. In India too, examples wherein ethics
have been compromised are many, especially in areas of emerging businesses e.g. stock market,
contract manufacturing and IT-related services. These, being new and fast emerging areas of
business, do not have adequately developed laws and governance mechanisms to control or
prevent frauds and unethical acts. And, especially when it comes to dealings with stock market,
BPO and call centre customers, the necessity to promote internal business environments and
adhere to ethical principles and moral responsibility is being increasingly felt. In fact, the quality
of business practices in these sectors depends more on the ethics and moral standards being
followed therein. The greater the dependence of business on customer confidence, the more
critical is its need for ethics and ethical governance. In this context, business ethics not only
cover the people within the company, but also span the processes of carrying out its business
and management attitude. An example in this regard would be the recent warning issued by
the World Bank to some IT-companies in India, regarding the questionable process of their
acquiring or seeking new business.
All the discussions thus far drive home the point that business cannot survive in the long
run without ethics; and ethical practice must include the ethics of employees, processes and
products. No doubt business enterprises are critically dependent on the quality of human
behaviour, but they have to be equally careful about the products they offer and the processes
they follow, all of which are totally under the control of the company. A product that is unsafe
for consumption or use must not be designed or marketed for profits.Take, for instance, the US
ban on toys made in China in 2006-0715, and the ban imposed by India on all imports of toys
from China for six months in 2009. The ban was implemented on the grounds of ‘public health
and safety’, as the toys contained toxic materials. It is certainly the ethical responsibility of the
manufacturers to ensure that the product(s)—be it a toy or any item of domestic use—does not
harm its users. Similarly, there could be industrial processes that could be endangering the safety
and health of workers. Business ethics demand adequate protection of employees working
in such hazardous areas, if the process cannot be made better and safe. Aiming at protecting
the customers, employees, society and all the others involved with the business is not only in
keeping with the moral responsibility, but also serves the interests of the business in the long
13
http://www.foxnews.com/story/0,2933,470964,00.html, accessed on 8 October 2011; http://en.wikipedia.org/wiki/Financial_crisis_
of_2007, accessed on 8 October 2011
14
http://edition.cnn.com/2008/BUSINESS/09/15/lehman.merrill.stocks.turmoil/index.html, accessed on 2 August 2009 and 15
November 2011
15
http://www.indopia.in/India-usa-uk-news/latest-news/36230/International/2/20/2, accessed on 4 August 2009
 Law, Ethics and Business

run. Therefore, promotion of internal environment of ethics is not only about employees and
employee conduct, it is also about ethics in planning, processes, products and marketing. The
failure of a business to comprehensively address the ethical issues in its internal environment
may turn out to be a serious threat to the success of the business.
At times, it is questioned if the ethical considerations in running a business are consistent
with its purpose—which is invariably the profit. Although no study has been conducted
pertaining to this aspect of business strategy, there is ample evidence that companies pursuing
unethical business practices for profits often face many difficulties in their operations and with
the customers. In fact, many have even shut down business owing to failure in upholding ethics
in their business operations. The closure of many co-operative banks in India, and the US-64
controversy16 at the Unit Trust of India (UTI) in 2000 are the examples of this hypothesis.
UTI—the largest and most trusted name in the mutual fund business in India—had landed
into trouble due to the non-transparent and unethical business dealings by a few individuals of
the company who were driven by the opportunity of high margins. While profit and return on
investment are important parameters in business, these must be earned or achieved by ethical
means for the sustainability and long-term well-being of the business. Lack of ethical practice
in business has invariably led to one thing—loss of customer confidence, which resulted in
the decline or closure of business. In this competitive age, customers are the most critical
component of a business, and if they lose confidence, it becomes impossible for the business to
survive. One of the primary roles of ethics in business and corporate governance is to win the
confidence of customers and investors of a business and to assure them of fair play in protecting
their interests.

3.5.2 Ethics in Business—External Environment

The other important factor for the success and well-being of a business is its ‘external
environment’; the success of a business considerably depends on how effectively the company
deals with the same. Some important components of external environment are customers,
suppliers, society, locality, government and municipalities, social and political conditions of
the place where business is to be conducted, etc. Dealings pertaining to these components
are as critical as the governance of internal processes and procedures in business. In effect, at
times, external environment may impact the company’s business prospect much more seriously
than its internal environment. Here are some such examples: a dispute with the trade union
may cause stoppage of production (operations) in a factory for a long time; violation of the
pollution norm may bring about the closure of a factory (by the Pollution Control Board);
and an alleged breach of contract in the market may lead to long legal battles and cause loss of
revenue, reputation and brand image. Similarly, a tussle within the locality and society where
the company proposes a new business may lead to undue delay in project implementation and
heavy cost overruns. These external issues—often very critical to the company’s functioning—
are difficult to handle as they are not actually under the company’s control.Yet, because of some
urgency involved or difficulties encountered in such cases, business practices tend to settle such
issues by resorting to non-ethical means (bribing, influencing, threatening, seeking political
16
http://www.icmrindia.org/casestudies/catalogue/Finance/FINC003.htm, accessed on 4 August 2009
 Ethics in Business and Corporate Governance

backing, etc.)—although such non-ethical practices may often complicate the issue. Here, Tata
Motor’s proposal to acquire land and set up an automobile factory at Singur, in West Bengal, is
a case in point:

During 2006-08, Tata Motors had contracted with the West Bengal Government for the
acquisition of approximately 1000 acres of industrial land at Singur to set up its prestigious
small car factory17. At first, some landowners and farmers resisted in handing over their
land due to inadequate price (as per their estimate). Somehow, the problem dragged on and
a few other resistance groups cropped up to take advantage of this discontent of farmers
and the adverse sentiment brought about by police action (on the protestors). Second, as
this was a politically sensitive state, some political parties joined the farmers’ resistance, and
the movement against the land acquisition was blown up out of proportion. Meanwhile,
the company had already started building its factory and, hence, work at the construction
site was frequently disrupted by political agitations against the land acquisition. Although
this agitation was directly affecting the construction of the automobile factory, delaying
project implementation, and pushing up the project costs, the company chose to leave the
solution to the state government. The latter, it appeared, preferred to take a more legal view
of the acquisition action rather than applying ethical and moral considerations of adequately
compensating, resettling the affected farmers and working out a satisfactory solution for
the farmers. Later, when the agitation and discontent was spreading fast, the government
revised its compensation (three-fold value per acre of land); many farmers considered this
inadequate because of the rapid appreciation in the value of free land in that area. Further
encouraged by the political activism against the project, agitating farmers—expecting a more
profitable deal under pressure tactics—resorted to a blockade at the construction site (where
their lands were already barricaded to form a part of the project), knowing that the project
would not be viable without this blocked portion of the land. Finally, the agitation—now
led mostly by political activists—had gone so beyond the control of the government or the
farmers (who had lost their land) that Tata Motors, promoter of the small car project, was
totally discouraged by the situation and the resulting environment, and withdrew the project
from Singur.
Note: The brief description of this serious issue does not represent the entire facts or case
history.

The matter went out of the hands of the government and the company, despite being
legally correct (as per a Calcutta High Court judgment on this case instituted under PIL),
because of the use of force and violation of moral rights of the farmers. A general view of
the case has been that the authorities failed to handle the case effectively and ethically. Many
apparently felt that the company, Tata Motors, did not manage the external environment of the
project effectively, leaving that onus on the state government. As per news reports, failure to
manage this external situation had cost the company a huge loss (over Rs. 300 crore) in direct
expenditure incurred to relocate the project to another state and the delay in implementing the

17
http://en.wikipedia.org/wiki/Singur, accessed on 2 August 2009; http://en.wikipedia.org/wiki/Singur_Tata_Nano_controversy, accessed
on 8 October 2011
 Law, Ethics and Business

project at the new site. Moreover, due to the delayed launch of the product, the project viability
became questionable—at a time when the automobile market was already shrinking due to
the global financial meltdown and the consequent effects on industries, consumer spending
and global business. Analyses of detailed situations and efforts to resolve the issue might bring
out many other angles to the problem, but from the business point of view, consideration of
ethics and moral responsibility from the very start (negotiation with the farmers) could have
reduced the degree of conflict and impact of consequent damage. It is generally believed that
ethical consideration of the issues involved, decisions based on ethics and their beneficial effects
on concerned people can largely reduce the conflict of interest between the parties, even in a
politically sensitive external environment.
The Singur case underlines the importance of managing the external environment in
business, which is not under the regulatory control of the management but is influenced by the
social, political and economic environments of the issue. The failure of Tata Steel’s Gopalpur
project in Orissa, India, during mid-1990s is another example. The project did not take off
due to problems (land acquisition and resettlement) which could not be effectively resolved. A
similar instance is POSCO Steel, a company that is struggling since 2005 to set up its proposed
20 million ton steel plant in Orissa due to various external factors and environment18. Thus,
there are many examples of industrial projects that were shut down due to failure in managing
their external factors, especially with regard to social and ethical problems. Many agree that
if these problems had been considered by taking into account the moral issues involved and
moral responsibility for fair and just solution, the issue could have been satisfactorily resolved
despite social or political agitations. This view is supported by the fact that POSCO’s recently
reported move—to institute a socio-economic study and development plan of the proposed
region of the factory—has turned the public opinion largely in its favour.Thus, the influence of
external environment on business is not restricted only to social or political issues, it is equally
prevalent in other areas of business, notably in matters of managing competition—either in
procuring business orders or securing resources for the business. Unfair means and unethical
practices to overcome competition in the market are often fraught with the danger of losing
the business permanently or losing the goodwill and respect of society. Tall standing companies
such as TCS (Tata Consultancy Services), Infosys and Wipro—known for their transparent and
ethical business practices—bear the testimony of gain wherein ethics are held high in business
practices. Another area of importance for ethics in India is the fast growing pharmaceutical
industry where many cases involving the violation of intellectual property rights (IPR) are
pending in different courts in India and abroad, especially in USA. Although (apparently) the
violation of IPR happens due to the internal decisions of a company, it actually takes place in
an external environment. Not so long ago, Ranbaxy, the reputed Indian pharmaceutical giant,
was hit hard in the USA due to many drug related IPR violations—leading to a sharp fall in its
stock price and loss of goodwill (ref: http://www.financialexpress.com/news/fda-bans-30-ranbaxy-
drugs-rules-out-fresh-approvals/362765/0, accessed on 30.08.09). In July 2008, Ranbaxy was even

18
http://www.hindu.com/2006/06/23/stories/2006062302331300.htm, accessed on 30 July 2009; http://sanhati.com/articles/2170/,
accessed on 8 October 2011
 Ethics in Business and Corporate Governance

accused of selling adulterated drugs in USA, a charge which the company contested as a plot
to scuttle its deal with the Japanese pharmaceutical major Daiichi Sankyo. The complaint cited
non-adherence to process discipline and hygiene in some of its manufacturing plants in India.
Reportedly, this troubled situation has forced Ranbaxy to be bought out by Daiichi Sankyo
and agreeing to working as a minor partner in the vast generic drug market in order to protect
their international business. The Ranbaxy example goes to show how critical it is to manage
the external environment in the modern competitive business, especially with regard to ethical
conduct of business. Most of the onslaughts in the competitive and international business come
from the failure of ethics in business practices. Concerned by the increase in violations of IPR
and ethics in India’s pharmaceutical business (e.g., sale of spurious drugs) and the probable fall-
outs, the government has been forced to enact a law making the production and sale of fake
drugs a non-bailable offence in the country, with life imprisonment and fine up to Rs.10 lac
for those found guilty.
Therefore, all business executives, particularly those dealing with the external environment,
should be: (a) fully aware of their moral responsibility to the market, society, locality and
environment; and (b) fully committed to ethical business practices. Such awareness comes
from the organisation’s work culture, values and emphasis on ethics. The responsibility of
institutionalising ethics in work culture and business dealings certainly rests with the organisation
and its management—who are, for the stakeholders,‘trustee of their interests’. Making employees
aware of their moral and ethical responsibilities in the operating environment is becoming
increasingly important with the globalisation of business. As management consultant and India
chief of Boston Consulting, Arun Maira, summed up: ‘Effective and ethical engagement with
civil society would make businesses and MNCs (multinational companies) more sensitive to
their environments and better corporate citizen wherever they practice’. In modern businesses,
ethical practices are a key determinant for good corporate governance and citizenship.
The ethical issues of business in dealing with the market, consumers, the environment and
ecology—which are components of its external environment—have even wider implications.
The ethical behaviour of an organisation in these external but integral aspects of business
operations is seen as most critical for its success. In the competitive business environment,
companies tend to manipulate market demands and pricing with curtailing and controlling,
unfair distribution practices, exaggerated benefits vis-à-vis cost, and unfair inducements for
purchase. In most cases, these have been proven to be short-lived; market and customers want
a long-term relationship that is cemented with ethical standards in running the business.
Every company has moral obligations to serve the market and the constituent customers with
honesty, integrity and transparency. Customers invariably go to where the business is honest
and transparent; where companies provide exactly what they claim. As discussed earlier, the
true colours of a business are reflected not only in its adherence to laws but also in how it
upholds moral responsibility for any consequences of the business and how ethically it deals
with customers.
Let us examine the aspect of environment management and protection as a moral responsibility
of modern business. Many green-field industrial projects have faced serious objections or
protests from the society for environmental reasons. Environment protection is one of the most
 Law, Ethics and Business

morally challenged areas of operations in industries; managing this external factor of business
is crucial to the society. Though most countries have enacted laws to protect the environment,
several evidences of environmental pollution and damage emerge regularly from all around the
world—in violation of those laws (or some loopholes in the laws). The most jarring case being
of automobile pollution, as illustrated here:

Almost all the developed countries including India now require that motor vehicles comply
with the laws of emission standards, because of the effect of vehicle emission on atmospheric
pollution and global warming. In some parts of the developing world, fume suppressant
chemicals are added to the engine so as to suppress the smoke, which is considered the
symbol of pollution. This suppresses black fumes and thereby gives an impression of reduced
emission from the engine; however, it is also reported that this system is not an approved
means of motor pollution control as it does not improve the combustion of the fuel. Thus,
reduced emission may be an apparent compliance to the law, but it only gives rise to another
possibility of pollution from the chemicals used as suppressants. The objective of emission
standards is not to suppress smoke but to eradicate harmful effects of the emission from
engines; therefore, the use of smoke suppressant is eyewash and morally wrong. In addition,
the suppliers of smoke suppressants have the moral responsibility to check and ensure that the
combustion products of these chemicals do not further damage the environment. However,
the latter moral responsibility can be adopted only through the ethical principles of those
who provide that technology (chemical suppressants for motor engines). Meaning, they have
to feel duty-bound to the society to also examine the morality of their action and its effect
on the environment.
For instance, in Kolkata, an Indian city which is highly congested with old and fuel inefficient
cars, environmental pollution due to two and three wheeled vehicles is said to be causing
a high incidence of bronchial problems (especially in newborn babies), and cancer (of the
larynx). It is, therefore, the moral responsibility of city administrators, the government and
technology providers to act together to stop further damage to the society from environmental
pollution. Responses to moral duty and responsibility can arise only from a sense of ethics and
morality rather than from the urge to avoid legal embarrassment. Law alone cannot address
the problem effectively. In fact, it has been reported that, despite many court directives (up to
December 2008) to the concerned authorities, administrators have failed to effectively curb
pollution in Kolkata. Incidentally, this city is no exception to the pollution problem, most
cities across the world are subject to vehicle emission in varying degrees—Beijing, Rio-de-
Janeiro, Delhi, and Mumbai being some other cities with high population density and, hence,
high vehicular congestion.
[Note: This case is adapted from the article on two-wheeler pollution in the city, published in The
Telegraph, Kolkata, 23 November 2008 and 9 January 2009: ref: http://www.telegraphindia.
com/1090109/jsp/frontpage/story_10365206.jsp, accessed on 14 October 2011]

It is not the factory operations alone that are polluting the environment, even the products
they manufacture are perpetually causing environmental damage. Motor vehicles, refrigerators,
air conditioners, power generators, chemical fertilisers, electronic scrap, and plastic bags are
just a few examples of production processes that pollute. They may be essential for modern
living, but manufacturers or producers of these products have the moral obligation to ensure
 Ethics in Business and Corporate Governance

that their products are eco-friendly or made to cause minimum environmental damage. The
ethical consideration of protecting the environment should be a part of the focus of technology
research and development in modern business (more on this has been discussed in Chapter 7).
The problem of industrial pollution spreads from land, water and air, to ionospheres; though
origins may be varied, the effects could be devastating. This multi-dimensional problem has to
be viewed by industries and commerce not only in terms of laws but also in terms of moral duty
in order to recognise the responsibility of preserving the ecology and environmental systems.
Often, laws are enacted as after-effects of the consequences, but, in that time, the damage to
humans and non-human beings has been done. For example, dumping huge amounts of toxic
waste (e.g. discarded computers) on coastal seabeds has endangered marine life and ecology. In
such cases, the law is of little help, but sense of ethics can act as a moral guard for leaders and
other people in organisations to think proactively and initiate no action that can potentially
damage the environment. Where the law flounders, ethics can work wonders. Thus, ethics in business
and industrial operations are an essential factor for the prosperity of the society upon which
all businesses ultimately depend. The significance of ethics in business, and the impact of their
failure on the success of a company have become so great in today’s consumer-driven market
that business leadership is being described as the process of strategically and ethically managing and
influencing market and non-market environments in order to accomplish the vision and mission of the
company.

3.6 RESPONSIBILITY FOR ETHICS IN BUSINESS

If managing ethics in both market and non-market environments is a strategic necessity today,
then who is responsible for institutionalising ethics and administering ethics in the organisation?19
There is no ambiguity about the responsibility of law in a business enterprise. Law and legal
compliance is the responsibility of the company who manages the legal affairs through a team
of in-house as well as external professionals (e.g. lawyers). While a company may have to bear
the consequences of legal violations for all practical purpose, the responsibility of maintaining
law lies with individuals who are made responsible and accountable for their actions based
on the authority delegated to each. However, for ethics, there is no line of authority and
responsibility; except that everybody in the organisation recognises the need for it. So, who
should be responsible for ensuring that all members of the organisation follow the moral
standards of behaviour in their dealings within and outside the company? An organisation
comprises different layers of management with different responsibilities. Then there are vertical
structures within a company that are responsible for specialised functions and processes—e.g.
design and development, planning and manufacturing, shipping and marketing, finance and
accounting, etc.—which are carried out by people with different attitudes, perceptions and
value systems. How, then, can ethics be coordinated and integrated into the business process in
such a diverse working environment?
19
While this aspect of ethics management can be left to another chapter, it is discussed here to clearly establish the way ethics
work (or could be made to work). Next chapter onwards, discussions will be focused to critically analyse and illustrate applications
of ethics in business processes, practices, professions, governance and environment management, as well as related outcomes, to
demonstrate the benefits of ethics and the hazards of related violations.
 Law, Ethics and Business

It is widely accepted that, like management processes, ethics and ethical standards in an
organisation have to be built into the work culture, propagated by the leadership, practised by
way of ‘leading by example’, maintained and audited for adherence, and coordinated among
people and functions as basic requirements for all employees. Leaders and managers have the
responsibility to create a work environment and work culture that foster ethical practices;
everybody in the organisation has to be in sync with ethical standards and practices, otherwise
ensuring ethical behaviour among all the employees in a big organisation would be difficult.Yet,
the question remains: who is responsible for ethics, the company or the concerned employee?
It has been mentioned earlier that, in a business, the ethics of an individual is the responsibility
of that individual himself or herself. In other words, the unethical act, if any, should be done on
his or her own accord and should not have been forced upon that employee. Yet, often, many
activities in an organisation are collective wherein people work as group, and the products or
results are the outcomes of such joint efforts. In such cases, if anything serious goes wrong
and is morally incorrect, then who should be held responsible—the group or an individual?
And, what should be the overall role of the organisation in ensuring ethics? Here, it may be
beneficial to re-examine afresh the issues involved and the methods of institutionalising ethics
in an organisation.
Industry today is equipped with modern quality management systems in order to ensure
quality in total business practices; quality systems such as ISO-9000 and TQM practices are
especially designed and directed to institute quality in all business operations.With these quality
systems, a company aims to ensure that its customers get what they want (i.e., satisfy customer
needs and expectations). In turn, to ensure this outcome from the business, these systems
demand fair, transparent and value-based approach to management with a focus on customer
satisfaction and customer loyalty. The term ‘customers’, with reference to quality systems in
modern business, refers to all those with interests in the company’s business—e.g. shareholders,
employees, suppliers, customers, society, etc. Any loss or damage whilst protecting the interests of
its stakeholders is taken as a failure of the total quality practice; the company is then required to
strengthen these areas with new initiatives and corrective actions. A closer view of any of these
total quality systems shows that: (a) the system has to have enough elements of ethics built into
the systems to ensure protection of customer interest; and (b) designing, adopting and managing
the system is the responsibility of the top management in the company.This, however, does not
absolve an employee from the responsibility of following the implemented system in the true
spirit of quality. Thus, if an employee violates the established systems or standards of practice,
the responsibility for the consequences rests with that employee and disciplinary action may be
taken against him or her. However, if the violation has been forced upon the employee by the
management or a superior authority, then the responsibility rests with that person or body who
ordered it. The ‘total quality’ system, therefore, has striking similarity to ‘ethics management’
in a company—both include the responsibility of individuals and authority. It is this likeness
between quality and ethics in business that has prompted the concept of ‘total ethical practice’
(TEP) in keeping with the aspects of TQM.
Ethics can, however, be best integrated with thoughts and actions of business executives
through ethics education in all business programmes. To quote a management expert, ‘ethics
 Ethics in Business and Corporate Governance

have to be interwoven into both undergraduate and graduate courses, besides the requirement
for mandatory classes on ethics. Like with any other practice, the ability for ethical decision-
making improves with implementation. And, like any other subject, ethics cannot be taught
in the classroom alone; companies and organisations owe it to their stakeholders to create a
culture of principled decision-making.This requires a genuine and sincere focus on: appointing
the right people; ensuring a strong tone at the top (as well as in the middle and at the bottom
rung of employees); establishing a meaningful code of conduct and educating employees about
what it means for each one of them; giving information about the laws that apply to particular
work areas and employees; training in general ethics; enabling the reporting of wrongdoing in
an independent and safe way; handling ethical lapses with discipline; and establishing strong
controls, risk management practices, regular surveys and assessments.Though long, this list sums
up the needs and methods of ensuring ethics in business.
The practice of ethics in business is closely intertwined with the work culture and attitude
of the people in the company. In corporate structures, a large number of people carry out
activities in adherence to certain systems and procedures, and as a part of their individual job
responsibility or as per instructions given to them (but leaving scope for individual behaviour).
Thus, responsibility for ethical behaviour basically rests with the company’s employees,
while the company is responsible for (a) promoting systems and culture of ethics in the
work environment; and (b) not promoting or abetting or aggravating those immoral acts or
wrongdoings that are within its jurisdiction. In fact, the company (or its leaders) should take the
initiative to introduce and cultivate ethics as a serious driver of business, taking the first step to
formulate an ‘Ethics Statement’ which may be in line with its ‘Quality Statement’. This statement
must then be communicated to all employees, and publicised widely so as to promote strict
adherence by all without exception. Many companies also appoint an ‘Ethics Counsellor’ or an
‘Ethics Committee’ to promote ethics in the workplace and to monitor any violation of ethics
in its business practices. More significantly, the primary purpose of an ethics committee is not
to punish people for violation of ethics, but to make them aware of the importance of ethics
and to prevent any indulgence of unethical practices within the company. Given the serious
impact that any violation of ethics has on the overall business, ethics committees are often
empowered to directly report such violations to the highest authority (e.g. board of directors).
However, it would be morally incorrect for any company to take action against any employee
without clearly defining and communicating the desired standards of behaviour in various
areas of his or her responsibilities. Hence, companies are also required to establish—and make
known to all employees—the acceptable ‘standards of ethical behaviour’ in different areas of
business, like sales and marketing, accounts and billing, contracts, recruitment, appraisals, quality
certification, after-sales service, workplace conduct, conflict resolution, environmental action,
handling of physical and intellectual property, etc. To deal with any violation of such standards,
the company must appropriately prepare or upgrade its standing rules and regulations.The spirit behind
this modern business approach to ethics is not to punish people as a post-fact incident, but to
prevent violation of ethics through awareness building, training and an ethical work culture.
The purpose of ethics in business is to provide its people with the moral power to prevent any wrongdoing.
 Law, Ethics and Business

And, people are morally bound to exercise this privilege in both internal and external environments for
effective discharge of duties and responsibilities.
An employee may fail to adhere to ethical standards of behaviour under different circumstances.
While evaluating responsibility for a violation of ethics and its consequences, the process of
moral reasoning should first ask if the omission was intentional or done under instruction from
a higher authority20, or if it was due to inability or, simply, a mistake. Here, if the concerned
individual knew that the act was morally wrong—even if he or she was following the orders
of a superior—then the individual cannot absolve himself or herself from that responsibility
(of violating ethics). This is because that individual had the right to judge if the order of
the superior was ethically and morally reasonable, before accepting and executing the same.
The refusal of an order to commit an illegal or immoral act is perfectly acceptable under all
service conditions; however, in cases where such an act is wilfully done—with or without the
instruction (or co-operation) of a higher authority which is not legally or morally correct—
both the individual and the authority are held responsible. For example, if a pharmaceutical
company is manufacturing spurious drugs and a salesman is knowingly selling it, then both the
manufacturer and the seller are responsible for the violation of law as well as moral standards
and are both responsible for the consequences and damage caused by the action. On the other
hand, if the salesman had no knowledge about the spuriousness of the drug, and his violation
was unintentional and of his own accord, then the manufacturer is solely responsible. However,
at the same time, the salesman has the moral obligation to know (learn) about the product he
is dealing with, and must make reasonable efforts to know about it. Thus, the responsibility of
the salesman cannot be totally mitigated or excused on the grounds of ignorance.
At this point, it may be remembered that both the management and the employees of a
company have the moral responsibility to conduct business ethically. The management has to
institute systems, procedures and methods to ensure and monitor ethical conduct of business
operations, and the employees have to apply moral principles in carrying out their activities
and responsibilities.Yet, the foremost important factor is the honesty and morality of individuals
involved with the business. In a business, if individuals are intent upon behaving unscrupulously
and damaging the interests of others, then the company can do very little to stop this violation
of ethics—despite having laws and regulatory bodies. Referring, yet another time to the Satyam
case, the staggering losses to the stakeholders had been brought upon by a few unscrupulous
individuals at the top who had meticulously planned this scam well before the execution.
Apparently, laws and regulations governing the business were not only brushed aside with the
help of other willing individuals, but they also failed to detect the fraud before the damage was
done. Satyam is a classic case of how human dishonesty and immorality can hurt a business, the
society and the nation. It is a challenge for modern society and business regulators to check and
control such violations of morality and ethics carried out by unscrupulous individuals. While
many feel this is best done through training (in moral behaviour) and by promoting a good
(moral) work culture in the company where the top management leads by example. As stated
earlier, where the law flounders, ethics work wonders.
20
Here, ‘authority’ refers to a superior in the line of authority and responsibility, be it the immediate boss or go up to the chief
executive of the company.
 Ethics in Business and Corporate Governance

3.7 ETHICAL DECISION-MAKING IN BUSINESS: ISSUES AND WAYS

Response to ethical responsibility in a business is best reflected through the quality of ethical
decisions in the business. Ethical decision-making in business is no doubt a complex job, but
it is very much essential. The complexity of modern business environments, the plurality of
society, and diverse attitude and interests of people associated with businesses complicate ethical
decision-making in business. Conflicts relating to ethical business practices arise from perceived
privileges and rights of individuals working in a business, obligations and responsibilities of the
business vis-à-vis its different stakeholders, traditional corporate motive of profit maximisation
and distribution between a few people, and the increased pressure of social responsibility. The
ethical dilemmas arising from these conflicts hinder the resolution of ethical issues facing a
business. The necessity of ethically responsible business operations and practices is widely
acknowledged. But opinions vary about what these practices are, their exact shortcomings
and what they should be. As such, ethical decision-making in business is often masked with
difficulties, complexities and some degree of confusion. The purpose of this section is not to
discuss again the ethical decision-making steps, but to highlight various issues confronting
ethical decision-making in business and deliberate ways and means to resolve them.
The ethical decision-making, ethical dilemmas and their resolutions has been discussed
in Section 1.6. The process of ethical decision-making discussed there, which is applicable
to business situations and environment, is not different from the process of making decision
under ethical dilemmas. They all shall be guided, at least theoretically, by the ethical principles
mentioned there that is, by referring to the utilitarian approach, the rights approach, the fairness
approach, the common good approach and the virtue approach. Steps for analysing the issues
involved in ethics or ethical dilemmas would also remain valid as discussed in Section 1.6. What
relatively makes ethical decision-making difficult in business situations is not the process but the practice.
The central questions in the practice of ethics and ethical decision-making in business are:
(a) Who are responsible for ethics in an organisation?
(b) What sort of commitment to ethics and ethical standards those people have?
(c) What is the extent of freedom they have for decision-making?
(d) What are the constraints they face in the organisation—either imposed from outside or
in the natural course of their duties?
These questions crop up because of the fact that organisations act, in practice, only through
those who have the responsibility and authority to act for it. Hence, the individuals who can act
for an organisation have to assume the moral responsibility for ethical decision-making. Their
ethical commitment, perceived notions and fairness, job conditions and constraints and, above
all, their freedom to act, if they want to, under a given situation come into play in the game of
decision-making in real-life business situations.
Therefore, central to ethical decision-making in business is the corporate structure that empowers
individuals to act as ‘free moral agents’ for ensuring ethics in the workplace and in all business transactions.
Unfortunately, in the present corporate structure, managers or common managerial levels are
not ‘free moral agents’, meaning that they are mostly not free to take any moral stand or
ethical decision even if they want to. This lack of moral responsibility in an organisation stands
 Law, Ethics and Business

in the way of consistent ethical decisions. Today’s organisations are, perhaps, more concerned with
the rationality of a decision rather than its ethicality, and rightly so, especially from the strategic
management point of view. But, why rationality and ethicality cannot be combined in a decision
or strategy? Are they very different in their objectives? They are both based on the rationale
of reasons and principles, justifying a decision. The process shift required to combine ethics
with rational decision-making by managers is not much either. Along with the factors of ‘risk,
cost, timing, and resource limitation’ considered for analysing strategic alternatives, ethical imperatives or
compliance with ethical standards also need to be examined to arrive at the best solution. Even for strategic
decision-making for the external environment of business (e.g. for the market, competition
and regulations) ethical consideration and direction are important for consistency, acceptability
and success. Examination of ethical standards and morality of actions have to be part of the
decision-making system of business organisations if they are sincere about ethics in business.
And, accordingly, corporate structures and systems for decision-making have to be designed
and incorporated in day-to-day practices. Ethics is no longer an optional requirement to run
a business for growth and sustainability, rather ethics has to be a part of the business. If it is so
then ethical decision-making (i.e., ensuring that a decision meets the expected ethical standards
and fairly addresses the moral issues involved in the concerned case and actions) turns out to be
a ‘critical success factor’ (CSF) for any business.
There are few suggestions as to how ethical decision-making in an organisation can be
formally structured and improved, namely:
(1) The Agency theory21 recommends the induction of a professional ethicist at the board
level, who should promote, monitor and control ethics and ethical standards of corporate
actions and decisions. In the corporate structure, the board is the head of operations.
It represents all stakeholders, including shareholders, employees and others related to
the corporate ownership and functions. Hence, a professional ethicist at the board level
might make sense for effective control of ethical standards in the company. But, effective
control from the top means limiting the decision discretion of shop-level managers,
which creates conflicts and very much lessens the ‘moral responsibility’ of managers in
the organisation. However, some experts feel that such a position at the board level can certainly
monitor and mediate conflicts between profits and ethics in the corporate vision and purpose thereby
minimise ethical disparities in the corporate work culture.
(2) Another suggestion is the ‘shareholder referendum’ for approving controversial decisions.
But this method is fraught with lots of limitation due to regulations permitting varieties
of shareholding patterns. Besides, a large number of shareholders remain non-responsive
to such questions. Similar to this referendum type approach, many companies are
nowadays posing important ethical issues in some kind of ‘open dialogue’ to their
senior executives to elicit their views and new directions. This approach leads to two
effects: one, it increases the awareness of executives about ethical issues confronting the
organisation; and two, the executives’ increased commitment to decisions arrived at by
such process.

21
http://www.questia.com/googleScholar.qst?docId=5000143737, accessed on 28 September 2011
 Ethics in Business and Corporate Governance

(3) Other approach could be a two-step approach: (a) first controlling ethical discipline
in the organisation through standing rules and codes of behaviour for articulating
the character or good habits that employees should acquire and display, and then
(b) introducing system of solving ethical conflicts of decision and action through the
principle of normative ethics. Such an approach will help establishing general moral
standards in the organisation, guiding the people in the organisation how to judge right
from wrong, or good from bad, and how to live moral lives.This may involve identifying
duties that we should follow or the consequences of our behaviour on ourselves and
others. Finally, the decision should be based on the theory of the greatest good for the
greatest number as far as possible within the moral jurisdiction of the authority and
the normative approach. The normative approach implies ethical behaviour centred on
the rights of others and follows the Golden Rule22. This approach to ethical decision
making allows considerable discretion as it relies on value-based beliefs and attitudes.
In the ultimate analysis, ethics are value-based and stem from socio-economic consideration
of the well-being of all stakeholders. Corporate engaged in business must appreciate this aspect
of ethics while developing the framework for ethical decision-making, otherwise there will be
conflicts from within. A major challenge in ethical decision-making is how to overcome the
complexity arising from the issues concerning different stakeholders. Any approach to ethical
decision-making in business must take into account the interests of its stakeholders and other
legitimate beneficiaries. An illustrative view of business and its stakeholders is presented in
Figure 3.5.

Society

Employee Business Shareholders

Environment

Figure 3.5 Stakeholders and Beneficiaries of Ethical Decisions in Business

(These stakeholders are not ‘either/or’; they are together.)

22
http://en.wikipedia.org/wiki/The_Golden_Rule, accessed on 16 November 2011
 Law, Ethics and Business

The model, shown in Figure 3.5, envisages the necessity of taking business decisions keeping
in view what is ethical for all the stakeholders (that is, the company’s shareholders, society,
employees and the environment). Legitimate and moral considerations of society, environment
and employee welfare, which should also protect the interests of shareholders, should be the
cornerstone of ethical decision-making.
Corporate governance, which is the framework of decision and direction in a business, is often
tilted towards shareholders’ interests. However, this skewed approach of corporate governance
is not considered appropriate in today’s business environment if a business has to ensure growth
and sustainability in the long run. Business decisions should be ‘checked and balanced’ for all
stakeholders rather than focusing solely on profit maximisation for shareholders. There is a
need to give space to decision makers who allow social, employee and environment contexts in
the decision-making process. Ethics do not, and need not, present profit as the dirty word of business.
However, we should appreciate the fact that profit could be the aim of good corporate governance, the
ultimate outcome would depend on the ethicality of business aims and actions. If the business aim is
ethically wrong, its decision-making system will also be faulty. Here, we are not talking about
the legality of business objectives, but their ethicality. If law is the man-made ‘deity’ for common
worship, life into the deity comes from ethics. Ethics, and the sense of respect for ethics, establish
the social-view into the governing laws by sensitising the laws with social and environmental
necessity. When law and ethics combine, their formidable force helps create a good and healthy
society. Then business being a part of this society is expected to be functioning ethically. For
prosperity and growth of business, we require both law and ethics. But obeying law or deciding
about the legality of an action is easier than deciding whether the action has been ethical.Those
taking ethical business decisions must ensure that their decisions should not harm the interests
of some stakeholders of the business. Because serving the interests of a particular section of
business stakeholders is not an ‘either/or’ choice. The interests of all stakeholders need to be
served together. All business decisions should be ‘checked’ on the basis of this approach and
‘balanced’ by ethical principles and practices.
In view of the above discussion, the ethical decision-making system of a business has to be
a well thought out structured framework to ensure ethical consistency of decisions. To put in
place such a system, from the ‘agency theory’ may be followed or an ‘ethics officer’ may be
appointed at the top. The ‘ethics officer’ should frame, direct, monitor and guide the efforts to
make the organisation an ethical workplace. Ethics and ethical filters should be used to ensure
integration of profit maximisation and social welfare maximisation.Two key considerations must
be included in the ethical decision-making framework: (a) There must be a clear understanding
of what constitutes acceptable ethical behaviour, and (b) There must be an effective mechanism
for ensuring that the company follows ethical practices. Without ethics and an all-inclusive
governance process, businesses are likely to take a turn to a blind alley. Therefore, to infuse ethics
in its business operations, an organisation requires a built-in framework of ethical decision-
making. Such a framework should be appropriately designed, structured into the organisation’s
hierarchy, communicated widely and dedicated to all concerned by the top management (e.g. the
board). This would ensure consistent growth and long-term sustainability of the organisation’s
business. Remember, ethics is the sole saviour of business in the long run.
 Ethics in Business and Corporate Governance

Summary
1. The chapter aims to develop: (a) interrelationships among law, ethics and business; (b) the role of
ethics in different business environment; and (c) the responsibility for ethics in business.
2. The chapter discusses the scope of law and ethics in business and offers examples to show that,
while both are required to regulate and control ‘good behaviour’ and ‘good effect’ of business,
ethics often go a step beyond laws by encompassing wider social issues involved with or affected
by the acts or decisions. It also points out that ethics and compliance to ethical standards in
business not only work in preventing damage done to the interests of people and the society (by
taking broader issues into considerations), but also help in furthering the business interests (by
creating goodwill and customer loyalty).
3. Ethics cover a wider range of social issues by referring to (self-imposed) moral responsibility of
actions or decisions, either as individuals or as a company. Ethical standards of an individual are
not established by any authority but are set by one’s own judgement based on knowledge (or
understanding), logical reasoning, feeling, morality and guidance of the conscience.
4. In many cases, law and morality may coincide and the obligation to obey laws becomes the
same as the obligation to be moral. Similarly, to be moral and ethical, one has to obey the laws.
Throughout the chapter, there is an emphasis on the complementary role of ethics and law. Since
implementation of laws and institution of ethics and ethical governance is primarily ‘person
dependent’, the chapter elaborates the role and responsibility of individuals vis-à-vis their official
and business roles in maintaining law and ethics in the organisation.
5. Business organisations are set up in keeping with laws and these laws permeate all business
activities. Business being ‘an immortal fictitious person’, the approach of law in dealing with a
typical business situation has been outlined and illustrated in terms of the responsibility of its key
personnel (top management) and various regulatory mechanisms of law vis-à-vis ethics.
6. It has been established that if the process of self-examination can be instituted in the thinking and
working of employees in business—to determine what is ‘morally right or wrong’—it may help
to drastically minimise the risks associated with immoral and unethical activities in business.
7. Law and ethics have to join forces to best harmonise and optimise benefits to the society, people
and stakeholders of a business. At times, law alone may be unable to bring out the best solution
—for which it is necessary to examine social and ethical issues involved with the action or
problem. This is particularly true for emerging areas of modern business, such as IT services,
BPOs, financial institutions, advertising, etc.
8. Business is not run or managed by one individual, it involves many individuals who are linked
with each others’ actions and their outcomes. Hence, the responsibility of ethics in business
actions requires further clarification. If any unreasonable or immoral act occurs in a business,
then law-enforcing agencies may need to name the officials or employees responsible for that
wrongdoing or harm to the employees and society; ethics and ethical practices, on the other
hand, have no such facility owing to their self-regulating nature.
9. Good corporate governance calls for the prevention of fraud or damage to the interests of
stakeholders. Therefore, the organisation must have a mechanism in place to promote and
control its internal environments for a good and ethical work culture. In compliance to this
spirit, companies are required to set up internal mechanisms such as an ethics committee,
 Law, Ethics and Business

ethics counsellor, promotion of the code of ethical conduct, monitoring systems for ethics, and
transparent rules and regulations in order to deal with violations of moral conduct and ethics.
10. Business operates in two kinds of environments—internal and external. A company cannot
work in isolation of these environments, which often interact with each other through the
actions chosen by those people who are involved with or run the business. These factors are not
independent; they are interdependent for results.
11. The success and well-being of business in modern social and economic environment are
dependent on how well the enterprise deals with these factors and situations arising from. This
chapter attempts to describe, illustrate and discuss the features of business environments and
highlights the significance of effectively dealing with the same.
12. The necessity of ethics in business—a subject that will come up time and gain in this book—has
also been discussed in this chapter. It has been emphasised that like management processes, ethics
and ethical standards in an organisation have to be built into its work culture, propagated by the
leadership, practised by way of ‘leading by example’, maintained and audited for adherence, and
coordinated among people and functions as basic requirements for all employees. Ethics are an
essential ingredient of good governance, and good governance, in turn, is essential for the long-
term success of business.
13. Finally, issues and ways of ethical decision-making in business have been critically discussed
and few methods of structuring the decision-making system, including a model of inclusive
decision-making, have been discussed. It has been pointed out that business decisions should
have checks and balances to serve the interests of all business stakeholders instead of focusing
solely on profit maximisation for shareholders. There is a need to give space to decision-makers
who allow social, employee and environment contexts in the decision-making process.

Key Words and Concepts

Law, ethics, business, controls, regulations, morality, fairness, scams, employer-employee obligations,
legal view of business, moral responsibility, moral constraint, land acquisition, Government, social
justice, public interest litigation (PIL), anti-trust, cause and effect, ideology, marketplace, environment,
corporate social responsibility (CSR), systemic, code of conducts, code of ethics, GAP of USA, internal
environment, external environment, violation of IPR, ethics committee, ethics counsellor, board of
directors, responsibility for ethics in business, toxic wastes, environmental damage, pollution, total quality
management (TQM), total ethical practice (TEP), ethical decision-making.

Exercises
Check Your Progress
1. The history of development and progress of business across the world shows that ___________
2. The purpose of business is to ___________
3. For ‘good effect’ on both business and its clients, there is a need for ___________
4. Obeying the laws of the land is a part of ___________
 Ethics in Business and Corporate Governance

5. The law treats the modern business organisation as ___________

6. In the eyes of the law, ___________ are made responsible for the consequences of a company’s action(s).
7. To strengthen the enforcement of laws and moral behaviour in an organisation, there should be a system of
___________
8. There is ample evidence that companies pursuing unethical business practices for profits are often faced
with ___________
9. Ethics in business cover not only the people of the company, ___________
10. In business, the external environment is ___________

Review Questions
1. Discuss the relevance of ethics vis-à-vis law in business.
2. Despite the fact that business is treated as ‘immortal fictitious persons’ and cannot have its own feelings,
how are law and ethics applied to business.
3. Critically discuss how uncertainty, difficulty and minimal involvement can diminish a person’s legal and moral
responsibility.
4. Discuss with illustrations: ‘The employee’s duty to serve his employer is limited by the constraints of morality’.
5. Justify the statement: ‘Ethics stand as the moral guard against what is unjust and unfair’.
6. Compare and contrast the management of ethics in the internal and external environments of business.
Why is the ethical management of the external environment often regarded as the ‘controlling factor’ for
success in a green-field project?
7. Develop a model of ‘ethics administration’ in a company of your choice based on the understanding of how
law, ethics and ethical governance work in business enterprises.
8. ‘Effective and ethical engagement with civil society would make businesses and MNCs more sensitive
to their environments and better corporate citizens wherever they practice’: Justify the statement with
illustration.
9. ‘Ethics help to harmonise and reconcile the conflicting interests of various stakeholders in a business’:
Justify the statement and illustrate your answer with examples.
10. What should be the aim while establishing ethics in a business? List a few important concerns of business
ethics in practice.
11. Critically discuss who should be responsible for following ethics in business and what care should be
taken in ethical decision-making in practical business situations. Why the (natural) environment protection
should be part of the ethical decision-making system?

Further/Suggested Reading
1. The Concept of Law; H.L.A. Hart, Clarendon Press, Oxford, 1961
2. Natural Law and Natural Rights; John Finnis, Clarendon Press, Oxford, 1980
3. A Pragmatic Approach to Business Ethics; Alex C. Michalos, Sage Publications, Thousand Oaks, 1995
4. Morality and Business; Henry J. Wirtenberger, Loyola University Press, Chicago, 1962
5. Business Ethics: Concepts and Cases (6th ed.); Manuel G.Velasquez, Pearson Education, New Delhi, 2002
6. Corporate Communication—The Age of The Image, S.H.Venkatramani, Sterling Publication, New Delhi, 1998
7. Management Principles & Practice; S.K. Mandal, Jaico Publishing House, Mumbai, 2011
8. Business and its Environment (3rd ed.); David P. Baron, Prentice Hall, New Jersey, 2005
 CHAPTER 4
Ethics: Individuals and the
Organisation

To outline the nature of an organisation and how organisational work

Chapter Objectives

culture can influence the ethical behaviour of individuals

To discuss the rights and obligations of individuals in the
organisation
To discuss ethical behaviour of individuals vis-à-vis ethical responsi-
bility in the organisation
To discuss different facets of ethical issues in human resource
management
To discuss cases of individual ethical violations and their effects in
order to bring out the importance of individual ethics for the success
of business
 Ethics in Business and Corporate Governance

INTRODUCTION
ance
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Eth ics in usi sa orp
Eth s in B usines and C
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Eth ics in usines
th
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1
http://news.bbc.co.uk/2/hi/business/1780075.stm and http://www.time.com/time/specials/packages/article/0,28804,2021097_202326
2,00.html, accessed on 8 October 2011
2
http://news.bbc.co.uk/2/hi/business/7818220.stm and http://www.nytimes.com/2009/01/08/business/worldbusiness/08satyam.html,
accessed on 8 October 2011
3
http://en.wikipedia.org/wiki/Stanford_Financial_Group, and http://www.chron.com/business/article/Billionaire-Houston-firms-accused-of-
shocking-1670255.php, accessed on 8 October 2011
 Ethics: Individuals and the Organisation

Thus, it is the individual and the individual alone who is at the centre of each financial
fraud—bringing misery and losses to thousands of investors, employees, service providers and
the society. In the business world, stories of such known colossal scams are aplenty, demonstrating
how real health and sustainability of an organisation depends on the individuals running it and
from whom the powers and actions emanate. Howsoever prosperous the business may be, if its
functionally important individuals are devoid of ethics and are bent upon making money for
themselves at any cost, the business organisation as well as the livelihood of employees, investors,
public and the society are put at great risk. Preventing this kind of victimisation of unsuspecting
customers, stakeholders and the society by such unscrupulous individuals in different fields of
business is the challenge to governments, regulators, management experts, moral philosophers
and ethical protagonists.
The importance of individual ethics and the role of individuals for the success and well-
being of a business were discussed in the previous chapters: Chapter 1 took into account the
issue of morality and moral standards of individuals for ethical behaviour; Chapter 2 threw light
on the principles of ethics (rights and duties, justice, fairness and care) that are integrated and
reflected in an organisation’s work and work culture by the action, participation, behaviour
and motivation of individuals through whom a company’s actions flow; Chapter 3 pointed
out the role and responsibility of individuals in establishing and maintaining legal and ethical
compliances with a company’s work. Furthermore, Chapter 3 goes on to discuss ethical issues,
tasks and practice of business ethics by referring to a business as ‘an immortal fictitious person’
(because, unlike a mortal person, a business cannot sense, feel and judge ethics—unless the
individuals running it take that onus upon themselves). And, within the framework of this
individual responsibility, the latter chapter also discusses the need and means for an ethical
business practice.
Thus, considering the fact that individuals play a very pre-eminent role in the ethical conduct
of business—whereby the interests of its stakeholders and the society is maintained—this chapter
is designed to re-emphasise and further elucidate the role and responsibility of individuals with
special reference to the internal nature of a business organisation and its business.

4.1 ORGANISATION AND THE INDIVIDUALS

To know about the expected ethical behaviour of individuals in an organisation, it is necessary
to understand what an ‘organisation’ is. It could refer to as ‘rational organisation’, ‘political
organisation’ or the ‘caring organisation’ or a combination of all these.
 Ethics in Business and Corporate Governance

Rational organisations are those wherein the activities of a number of people are
coordinated for the accomplishment of some common explicit purpose or goal, through the
division of labour and function along with a hierarchy of authority and responsibility. However,
the goal directed and structured organisation of business firms are though near ideal, but seldom
do such ideal business firms exist in practice. Unfortunately, organisations are often embroiled
in controversies involving unfair resource allocation, arbitrary treatment of superiors, politics of
promotion within the company, extra-constitutional force of some individuals, and controversies
over the path and goals of the company, etc. Therefore, it is quite common that companies, in
their functioning, generally focus less on rational aspects and more on political features.
Political organisations, unlike the rational model, seldom look merely at the formal lines
of authority and communication within the organisation. They do not behave in a purely
rational way and do not accept that rationality is sacrosanct in achieving the business goals and
objectives. These organisations view business as a system of competing power and formal and
informal lines of communication for coalitions. In this regard, Figure 4.1 offers a schematic
example of the coexistence of rational and political organisational structures.

Rational Organisation Structure

President
Head (President)

VP-Operations VP-Marketing VP-Services

Vice-President

Divisional Managers

Departmental
Managers
1 2 3
Political organisation set-up within a rational structure

Figure 4.1 Illustration of the Coexistence of Political and Rational Organisation. Political organisation
(as indicated by numeral 1, 2, 3 etc.) are often an informal group within the rational organisation
that influences the decisions of an organisation.

Thus, both organisational concepts can exist within the same company, i.e., there is an
interplay of the characteristics of both rational and political natures in the behaviour of its people
or employees.Yet, while they can coexist, it is the dominant group that rules the nature of the
organisation. In a rational organisation, the goal is defined by the top management which assumes
that it has the right to make such decisions. And the people down the line, in this organisational
structure, are driven to achieve this goal by the duty-responsibility-accountability relationship. On the
 Ethics: Individuals and the Organisation

other hand, in a political organisation, individuals are seen to form groups and coalitions to
bargain and compete with other groups for more power, resources, benefits, etc. As a result,
goals in such a set up are those that are established by the power centres; the goals may not be
aimed at as in the rational organisational goals such as productivity, cost efficiency, marketing,
etc. Government offices, public sector companies, and professionally managed private sector
companies are generally rational in approach, though there are also some influences of political
grouping in these organisations. Many family-run businesses and not-so-professionally-managed
small and medium sized private sector companies resemble—more or less—the political
model.
Caring organisations are not focused to the pursuit of profits and personal gains, but
are involved in caring for those for whom the organisation has been designed, with whom
it interacts, and the people in the organisation itself. For example, NGOs, a trust or society
constituted for a particular cause, voluntary organisations, and those where caring for all those
connected with the business are seen to be important, e.g., microfinance groups. In a caring
organisation, the employers may grow closer to their employees and seek the ways to serve
and care for whom they exist, e.g., employees, customers, society, stakeholders, etc. Here, let us
examine the case of a sudden decline in business due to bad market conditions and the resulting
need to cut production level.

In this case, a political organisation may try to terminate the employment of some people
working in the department most affected by the slowdown, if they are not protected by
service contracts. In contrast, a rational organisation may only reduce work-shifts and
redistribute manpower to accomplish the target of revised output—thereby decreasing the
scope of earnings for individual employees but protecting their jobs. Quite distinct from
the approach of the previous two models, a caring organisation may take people out of the
affected department and enrol them in a programme with a view to re-train or upgrade their
skills without terminating employment or compromising their wage-earning opportunities.

While this example illustrates different approaches, different organisation models can also
bring about variation in organisational practice. In other words, there may be very few or no
organisations that are purely caring, although this approach may make immense sense in a
competitive environment with growing social demand. Contrary to what people fear, this type
of approach to business or activities is not self-destructing, but is constructive and conducive
to growth. Here, growth refers to the overall development of the business environment and
the well-being of society, both of which are essential to support the growth of business in a
country. In fact, in today’s knowledge-driven business, human capital is becoming the most
critical resource for survival and growth. Hence, in knowledge-based industries like IT, R&D,
financial management, etc., companies are adopting more and more hybrid organisational
structures and work cultures by combining the positive characteristics of rational as well as
caring approaches.
In practice, caring means developing relationships with customers, suppliers and employees,
seeking to develop and improve the well-being of those whom the organisation serves or is
 Ethics in Business and Corporate Governance

served by. This is true for professional practitioners like salesmen (marketing), doctors (medicine),
lawyers, accountants, social workers (NGOs), etc. This type of organisational culture cannot be
solely described as rational (where contractual model outlines the approach) or political (based
on the notion of power that can be applied within moral limits). Perhaps, this caring approach
can be best brought about by developing a culture of care in the organisation, where issues are
addressed keeping in mind moral reasoning and ‘ethics of care’.
In caring organisations, trust develops between interacting and connected people as (each)
one sees oneself as interdependent. In a rational model, ethics focus on the contractual obligations
of the employer and employees, whereas in a political model, the central ethical issues are
guided by the constraints of morals or laws of the land (whichever allow the maximum use
of power to enforce a decision). For example, in a political organisation, if an employee meets
with an accident while at work, the company will try to compensate him only to the extent
that is dictated as per the law or by a political force (e.g. trade union); the company may totally
overlook the ethical part of its obligation arising from ‘duty of care’. The political approach
of an organisation is through consolidation of power and influence through coalition. Most
employer and employee rights (right to punish, union rights, right to organise, right to fair
wages, etc.) in a political organisation are brought about mainly through the bargaining power
of individuals—without the presence of most elements of rationality. Thus, moral and ethical
issues of individuals in an organisation are influenced by, and dependent on, the nature of the organisation
and its work culture. Many experts, therefore, feel that for ethical conduct in business, there is
a need to change (or transform) the organisation’s character and style of functioning through
a blend of rational and caring approaches. In fact, in present-day business organisations, this
change is being led by the practice of and development in ‘human resource management’.

4.2 RIGHTS AND OBLIGATIONS OF INDIVIDUALS IN THE ORGANISATION

Rights devolve from the top in the organisation where power rests. Therefore, to understand
individual rights, it is necessary to first understand how the organisation is functioning in that
specific context. In an organisation, (1) top management constitute the centralised decision-
making body; (2) these managers assume (or are delegated with) power with decision-making
authority that allows them to enforce managerial decisions to hire, fire, promote, demote,
reward, punish, etc.; (3) decisions of these managers determine the benefits, status, freedom
to communicate, freedom to interact among the employees, work environment, etc.; and
(4) these managers distribute economic benefits and rewards through an authorised power
structure and the informal power they hold, and thereby they effectively share and control
the power that matters to govern the employees. This ‘flow of power to govern’ is also true
for government organisations, but in government or public sector organisation this power mostly comes
through ‘consent’ and not ‘ownership’ as in private sector business, because, with reference to Indian
public sector companies, government organisations are established by the Parliament (a body
of representatives elected by the public). Hence, there is a limit to the power and delegation (of
power) in government controlled organisations; things happen only through the consent and
approval of the designated approving authority who, in turn, follows the guidelines or rules
 Ethics: Individuals and the Organisation

governing his or her employment duties and rights. In the privately run corporate sector, top
managers rule as per the organisation’s authority and responsibility chart—which is also the line
of command accepted by the employees as per their employment contracts. It is understood
that they (employees) have freely chosen to work under that system and that it is their duty to
obey and follow the line of command. Another superimposing factor in this power structure is
the trade union which, in most government and private organisations in India, plays a powerful
role in influencing employee rights and obligations. Thus, in a workplace, an individual’s rights
are mainly moral and contractual, the usage of which is influenced by the outcome of his or
her interactions as per the power equations within the organisation and the laws governing
the same. The nature of the organisation and its power-mix greatly influence the rights and
obligations of its employees and the individual behaviour in the organisation.
The rights of individuals are also intricately joined with the duties, be it a contractual obligation or
one that is mutually understood. The main moral duty of an employee is to work as per this
obligation, to achieve the tasks assigned to him or her and to avoid activities that may harm the
goals of the business. Any deviation from the contracted or mutually understood duties would
be wrong and judged as unfair (unethical) to the organisation—provided the work assigned
to that individual is not illegal or immoral or hazardous for the self or society. However, if the
individual were to lose some regular benefits (bonus, increment, wage hike, etc.) due to this
wrongdoing, then the organisation cannot be called unfair. Individuals in an organisation have
the right to these benefits as long as they perform their duty (either contractual or mutually
understood) to the best of their abilities. Let us study this vis-à-vis the scope of employee duty
and failure thereof:

A marketing employee is duty-bound to work, explore and enhance the sale of products of
his company. If he does not put in his best efforts to improve sales or achieve a reasonable
target, then he is considered as failing his duty. And, as a consequence, he may lose some
benefit or is punished for continual failure, the company cannot be blamed for wrongdoing
and the individual has no right to claim those benefits.
Similarly, for a factory worker, it may be mutually understood that his duty includes taking
care of the machine tools that he uses to work on regular basis. But, if he intentionally
neglects that duty causing damage to the tools and, also, frequent stoppage of work due to
this negligent act of his, then he is failing in his duty and has no moral right to be protected
from punishment. The company, too, would do no moral wrong in punishing him. Now,
consider that the worker approached the trade union for protection, and the union used its
‘political power’ to protect him from the organisation. This act of the union can be termed
unfair and unethical as it may damage the discipline on the shop-floor or may also seem
partial and unjust to other workers.

In other words, if individuals in an organisation enjoy certain rights, they are also bound
by duty. Rights and duties (‘obligations to perform’) are, thus, reciprocal. Thus, for individual
behaviour to be ethical, there should be a fair balance between rights and duties in an organisation.
 Ethics in Business and Corporate Governance

In many organisations, it is not uncommon to find either the work environment and facilities
or the work contracts unfairly favouring the management; such companies are often faced with
the chronic problem of work stoppages or lower productivity. Organisation structure, balances
in reciprocal rights and duties, reward and punishment policy, and transparency and uniformity
of rules and regulations greatly influence both individual behaviour and ethics in a company.
Figure 4.2 shows the relationship between individuals and the business, which is driven by
the self-perceived interests of both parties but bound by ‘correlated duties and responsibilities’
to each other.

Interest of the self Interest of profitability

Interest of the group Interest of functional
Interest of the society Correlated duties discipline & order
& responsibilities Interest of growth and
sustainability

Individuals Business

Figure 4.2 Relationship between Individuals and the Business

Some common examples of unethical behaviour of individuals in a business organisation are:

negligent and fraudulent practice, false or misleading reports and data, theft, discrimination and
unfair practice, wrong communication and harmful campaign against others in the company,
eliciting undue benefits or advantage by coercing others, etc. Such behaviour of the individuals
concerned is unacceptable and unethical; employees at all levels are obliged (duty-bound) to
the company to behave ethically as a part of their contracts and the relationships outlined by
what is commonly called the ‘law of agency’4. Law of agency specifies the legal duties of employees
(agent) towards their employers (principals) and prohibits the agent (employees) to act in conflicts of interests
with those of the principal (employer). Here, employer means the company and not an individual
who appoints a person on behalf of the company, and interest means interests of the company
with respect to its goals and activities designed to achieve those goals and not personal interests.
However, the law of agency appears to be silent about principal’s duty and responsibility. Hence,
in India especially, the Industrial Disputes Act, 1947 and other labour laws have been enacted
to protect trade union rights and the rights of individuals in employment. These laws are quite
explicit about the duties and obligations of employees and employers as well. It would be
unethical for the employers to punish or retrench or shut shop (i.e., closure of the factory or
the company) without giving the employee concerned an opportunity to defend himself or
herself or proper notice or compensation, just as it would be unethical for the employee to stop
work, abstain from duties without notice or permission, wilfully damage tools or equipment,
consume alcoholic drinks in the workplace, or indulge in violation of the standing rules of the

4
http://en.wikipedia.org/wiki/Law_of_agency, accessed on 10 October 2011; and http://www.britannica.com/EBchecked/topic/8976/
agency, accessed on 10 October 2011
 Ethics: Individuals and the Organisation

company, among other misconducts. Notwithstanding these regulations and obligations, there
are plenty of instances in India wherein both parties in the contract of employment (employer
and employees) violate ethical relationships or indulge in unfair and unethical practices (using
respective power equations). A company is ethically bound to pay fair wages to its employees
(including temporary workers), provide healthy and safe working conditions, allocate jobs as
per individual skills and capability, and to not (knowingly) engage or exposing an employee
to hazardous or high risks jobs. For example, engaging a mason in a high-risk job at the
construction site of a high-rise building (as is prevalent in India) without insurance cover and
adequate safety measures to prevent accidental fall from a height, is unethical—although the
mason may have opted to do that job knowing fully well that such protection is not made
available. Similarly, employing child labour in industrial jobs so as not to pay the full wages is
unethical and illegal in most developed countries, including India, but this law is being violated
either unethically or owing to places of power.
Thus, in business, ethical behaviour and the obligations of individuals are mutual relationships
based on the model of organisation, the law of the land, contractual duties and obligations, work
environment, and codes of general ethics that are acceptable as moral and rational to general
public. At times it has been observed that unethical behaviour of the management often leads
to irrational behaviour of employees, which may be construed as unethical. Similarly, militant
trade unionism also leads to the management acting irrationally and unethically. Just as the
management has the right to freely associate with the others in the organisation and exercise its
power to run the business, with a view to accomplish morally justified business goals, even the
workers have the right to freely associate with each other and to form and run a ‘trade union’ to
accomplish their morally legitimate interests. Going beyond morally legitimate interests could
be unethical or may lead to unethical actions and responses in an organisation, which may
then call for dispute resolution mechanism invoked either by the organisation or in the court
of law. To make its ethics work, an organisation has to promote and protect morally legitimate
interests of individuals; otherwise, the organisation will be riddled with conflicts of interests and
a general lack of the sense of duties, direction and responsibility. Pursuing personal interests by
taking advantage of power structures either of the management or the union is very common
in Indian industries, and is a major source of violation of ethics in governance. An organisation’s
work culture is, therefore, largely responsible for the overall ethical climate in the workplace,
which ultimately influences the ethical behaviour of individuals.
The ethical behaviour of individuals can also be influenced by the organisation’s (business)
goals. It is not that business always has socially beneficial goals or non-harmful goals. A few
examples of harmful goals are: manufacturing hazardous materials (e.g. asbestos), increasing
pollutions for cost cutting and profits, manufacturing spurious drugs, etc. Ethicists claim
that, in such cases, it is the duty of an employee not to cooperate with the organisation.
Such an understanding of ‘goal-means and ethics’ by individuals and their correlated duties
and responsibilities go a long way to ensure ethics and ethical standards in the organisation.
Sometimes, goals are not clear and can be deceptive, and this can put individuals in a moral fix
when it comes to performing their duty. Let us consider one such case of a closed industrial
unit:
 Ethics in Business and Corporate Governance

An industrial unit, in eastern India, had been closed for over three months, under the ‘Notice
of Suspension of Work’5. A reputed brand-name in its line of work, the industry had been
plagued by the mismanagement of its successive owners and was, ultimately, referred to BFIR
(Board of Financial and Industrial Reconstruction). The then presiding management had
taken over from the BIFR owing to the initiative of the government which was keen on the
industry operating in its earlier glory and had made necessary financial arrangements for the
same. The management ran the company for few months, but soon dispute started surfacing
with the workers and their unions. The unions raised question about the management’s
intention to increase production and, in doing so, to offer the workers a chance to earn more
and with greater motivation and commitment. The management, citing poor demand for the
company’s products, displayed its reluctance to increase production and took no action to
improve product quality either. The factory continued to run in a half-hearted manner and,
when questioned about it, the management cited lack of fresh capital to upgrade the unit.
It then proposed to the government that the excess land around the mill be changed from
‘industrial’ to ‘commercial’ in order to facilitate the use of that land as commercial realty
projects to raise extra capital for factory upgradation. Both, the union and the workers
sensed mischief here—fearing that the owner would shut the factory to gradually convert
all land into a more profitable realty business—and objected to that proposal. This led to
further deterioration of the situation in the unit: many employees were laid off, production
was cut further, followed by the management defaulting in PF (provident fund) payments in
its employee accounts. Workers and the union started agitating in front of the factory gates,
leading the management to declare ‘suspension of work’ till further notice—on the condition
that no further talks or negotiations would be held unless the workers rejoined their duties.
The management alleged misconduct of the workers, failure to report to duty as per schedule,
and violation of service contracts. The workers, on the other hand, alleged management
neglect in terms of running the unit, unfair treatment to employees, and hidden agenda to
convert the factory land into more profitable realty projects. The government appealed to
the workers to report to duty without further delay in order to save the unit, but the workers
were undecided about this (duties to obey orders) as they doubted the management’s ultimate
goal. Here, again, owing to the pressure from both the management and the power centres
in the deal, the workers were divided! They were in a moral fix to judge about what was the
right thing for them to do: to cooperate with the management or not.

Thus, duties and responsibilities are also dependent on the purpose, goals and means of
business in an organisation where choices of the individuals could be guided by their moral
understanding and moral reasoning. In this context, an organisation ought to be transparent
and ethical in order to avoid conflicts in business and management processes. There may be no
ideal solution to all the problems in business, but ethics and ethical approach to governance can
certainly strike a balance for the best results. Educating individuals about the merits of ethics,
making people in the organisation aware of their duties and responsibilities, installing a transparent
process of decision-making and administration, and firmly and uniformly drawing the line that

5
http://www.articlesbase.com/real-estate-articles/real-estate-prop-for-dunlop-103599.html, accessed on 10 October 2011
 Ethics: Individuals and the Organisation

separates morally legitimate rights and those that are unethical have been recommended by
management experts to assure ethical duties and responsibility in the organisation.

4.3 ORGANISATION AND THE RESPONSIBILITY FOR ETHICS

While ethical responsibility in business has been discussed in Chapter 3, the aim here is to
identify how organisational nature (its character and culture) as well as behaviour influence
individual ethics, and how to ensure proper ethical behaviour in the organisation. However,
for ethics, there can be no ‘single point of responsibility’ in the functioning of a business; it is
the joint and interdependent responsibility between the organisation and its employees. An
organisation has the responsibility to draw the individuals into a culture of ethical behaviour
by demonstrating its ethical character and ethical functioning, while the individuals in the
organisation have the responsibility to obey the moral and contractual standards of behaviour
and not to indulge in immoral, unfair and unjust activities. Let us understand this by exploring
the subject further.
An organisation, to run its business smoothly, requires the help of ethics—or absence of
unethical behaviour and practice, as the case may be. But, people in all ranks are sometimes
guided (or motivated) by their own (personal) interest first, giving rise to unethical practices
and behaviour in the organisation. Presence of different formal and informal power groups
and their influences make the situation even more difficult to ensure total ethics in business.
Therefore, limiting the abuse of power and minimising ethical conflicts in organisations has been a critical
concern of social scientists and business managers. An organisation consists of different layers of
people and management with different responsibilities. If all its members follow the moral
and contractual standards of behaviour in their dealings within and outside the company, then
violation of ethics would be minimal. In view of this, companies formulate codes of conduct
at work, service regulations, dispute resolution procedure, authority and responsibility chart,
etc. to prevent and deal with any occurrence of unethical behaviour and practice. Yet, even
adherence to these practices in organisations has been unable to stop unethical practices. So,
what else can be done anew to improve the situation? Management experts talk about not
only the presence of ‘code’, but also the actual display of ‘conduct’ with individuals of the top
management ‘walking the talk’. They argue that ethics is a top down process, and commitment
to ethics must start at the top. Like, for instance, installing systems of ethical governance and
conduct—including monitoring and controlling—is the organisational responsibility of the
board or trustees or the promoter. Most ethical conflicts in business originate from the lack of
clarity in ethical governance and transparency in practice. If the top management is committed
to ethics in governance, the rest of the systems and people fall in line with ethical practice—with
a few exceptions, owing to the ‘effect of masses’ (there are bound to be a few bad individuals
in the organisation). The organisation is responsible for ensuring that these few exceptions
are not at the top from whom the company’s decisions and actions flow. Notable examples in
this context could be Enron and Satyam, which have been discussed and referred many times
already, where businesses had to be shut down due to unethical actions of the proprietor or the
promoter.
 Ethics in Business and Corporate Governance

Limiting the abuse of power (through political behaviour) and minimising ethical conflicts
in the organisation is critical to good governance. Political behaviour in an organisation can be
truly abusive and obstructive to ethical governance. In fact, there may be very few organisations
that are totally pervaded by the culture of political behaviour; but, no organisation is totally
free from it either. Therefore, the question is: In these organisations, are individuals and their
interests treated as per their moral rights? Many a time, in such organisations, political tactics
are used as means to achieve certain goals that favour a few individuals and work against the
rightful interests of others. There could, indeed, be an argument about the overall ‘utility’ of
these goals—from the point of view of their benefit to the business and society—but ‘the
means’ of attaining these goals cannot be considered ethical if they are not rational and fair to
all. Hence, such behaviour and flow of power is not good when it comes to creating a condition
of ethical governance. Let us examine this case through voluntary retirement scheme6 (VRS)
that was practised by organisations in India at one time.

Until some years ago, VRS was a viable option during the downturn of a business, wherein
many organisations sought to reduce its employee strength, through VRS—an option which
had approval of the government and regulators. This scheme—though called ‘voluntary’—
was not entirely voluntary in practice, and all such schemes were implemented with a target
of retiring a certain number of employees within a time-frame. However, considering those
workers who opted to retire received financial compensation based on the duration of their
service, many businesses preferred to force ‘voluntary retirement’ on those in the organisation
who had not been in service for too long. While many agreed that VRS was beneficial to those
organisations that aimed at cutting costs and could even ultimately benefit all the employees in
the long run, it was very hard on those who were being retired—especially if they were young,
with family commitments (it would be difficult to find alternate employment in a bad market
scenario). Also, given their small service period, the compensation amount would be far less
and not enough to support another venture or foray. Hence, moralists in the organisation
argued that the scheme should actually be offered to all on a voluntary basis and people
should have a choice (whether the scheme would benefit each one in his or her own set of
circumstances). Yet the organisation would not relent due to: (a) the numerical target of VRS
which might not be met if left totally voluntary; (b) the high cash outflow if senior workers
were to avail the scheme; and (c) loss of experienced hands from the organisation that might
pose a problem when business would start looking up in the future. Hence, the management
enforced the issue with the help of a few powerful individuals in the trade union, and there
were an atmosphere of gloom in the organisation. Young employees who were forced to opt
for VRS said that the organisation was unethical and lacked the virtue of care.

Thus, a scheme considered beneficial by the majority can be the cause for ethical disturbances
in the organisation—if not implemented with care and concern for individuals—and can lead to
low morale amongst employees. In such cases, better results may be obtained if the organisation
is not led by ‘power to act’ but by the ‘virtue of the actions’.

6
http://www.hindu.com/2003/12/26/stories/2003122606640400.htm, accessed on 10 October 2011
 Ethics: Individuals and the Organisation

Figure 4.3 shows the areas of concern for ethical practice for creating an organisation where
results are obtained not by ‘power to act’ but by ‘virtue of the actions’.

Ethical quality of leadership

Ethical Ethical standards of strategy and objectives

practice Ethical human resource management

Culture of ethics in inter-personal and

inter-departmental transactions and interactions
Ethical Ethics of product design
practice Ethical process design & planning

Ethics of marketing & consumer services

Integration of ethics in entire process-chain of delivery
Ethical
Ethical responsibility for social and environmental
practice
well-being

Figure 4.3 Areas of Concern for Ethical Practice

Organisations are structured for the delegation of power and supervision of work, and
are run by people with different attitudes, perceptions and value systems. Harmonising these
elements of human characteristics in the organisation and directing and coordinating them
for better goal-management are, therefore, a major concern of good leadership and ethical
management practice. Like operational processes, the process for management of ethics and
ethical standards in an organisation has to be built-in as a work culture, propagated by the
managers who ‘lead by example’, maintained and audited for adherence, and emphasised as
a basic requirements for all employees. Leaders and managers are responsible for creating an
organisational environment and work culture that foster ethical practices that are to be followed
by individual employees. Everybody in the organisation has to be attuned to ethical standards
and practices; otherwise ensuring ethical behaviour of large number of employees in a big
organisation would be difficult. Yet, the question remains: who is responsible for any violation
of ethical standards—the organisation or the (concerned) employee? While this has already
been answered, in general, in Chapters 1 and 2, the aim of discussing it here—from the point
of view of an organisation’s nature, character and means of accomplishing goals—is to show that the
organisation’s ‘path–means–and–goal’ have an important bearing upon the way its individuals behave.
Often, activities in an organisation are collective (people work in or as a group) and it is,
therefore, not easy to single out an individual responsible for an unethical act. In such cases, the
organisation’s responsibility is to clearly identify the role, responsibility and resources required
by any individual to match the organisation’s stated goals and ethical standards. However, where
there is teamwork involved, identifying individual responsibility for unethical act (which at time
may be unintentional) may be difficult. This has to be secured by clear identification of each
individual’s role and responsibility of carrying out the assigned tasks within the ethical standards
 Ethics in Business and Corporate Governance

of the company. If this responsibility and the consequences of fulfilling or not fulfilling it are
clear in a team, individuals are likely to behave more conscientiously and ethically. Violations
of ethical standards in a work-group are associated more with the way the organisation works
and uses power than with the individual’s own choice. One of the purposes of establishing the
‘ethics policy’ and ‘ethics management mechanism’ in the organisation is to bring transparency
in what it needs (ethical standards of behaviour) for its justifiable goals and what is ‘moral’
and ‘fair’ for its people. Despite such transparency, there could still be instances when certain
individuals—or the organisation itself—may indulge in immoral or unethical acts. For this very
reason, ethics management mechanisms provide the people of the organisation with the moral
power—more commonly known as ‘whistle blowing’—to prevent such wrongdoings.The term
‘whistle blowing’ refers to attempts made by an individual or member of the company to alert
or disclose about the wrongdoings in or by the organisation. Many believe that such a practice
can give rise to more unethical acts than it can stop, because, in the guise of whistle blowing,
people often take recourse to personal complaints (even on flimsy grounds) against those who
they think pose a threat to their own interests. Hence, whistle blowing has to be practised
with caution and discretion so as to harm—even unintentionally—neither the fairness of this
practice nor the rights of others. Complaints and whistle blowing may not be valid or sufficient
caution against unethical dealings, but such systems are necessary as a ‘psychological brake’ for
unethical acts and deeds in the organisation. Anonymous letters about alleged wrongdoings of
colleagues and superiors in business are some common examples of such use—or abuse—of
whistle blowing.
Notwithstanding an organisation’s stand on ethics (as discussed earlier), it is evident that an
individual in the organisation cannot totally absolve himself or herself from the responsibility
of an immoral and unethical act (either committed by the individual or known to have been
committed by others in the organisation). An individual has the moral responsibility not to
participate in any unethical and immoral act by choice or even by coercion. He or she is
morally required to try to prevent or protest against such activities by using the organisation’s
channel of communication. Failing this, he or she may also be held responsible for the damage,
if the consequences are grave. For example, if the salesman of a pharmaceutical company learns
about the spuriousness of a drug being marketed by his company, he should not knowingly
participate in promoting it; this would be his moral duty towards protecting the unsuspecting
consumers. If as a consequence of using such drugs, someone suffers serious side-effects, then
the salesman could be held responsible for this immoral act along with his employer (the
organisation). However, as stated earlier, his responsibility in the eyes of the law can be mitigated
to the extent that he had been used merely as instrument and not as an individual—if that
act was forced upon him by others in the company or its management. One may argue that
a person’s responsibility—in unwillingly cooperating with others in a wrongdoing even if
through minimal involvement—should not be taken as his or her failure to protect ethics or act
ethically. Factors leading to the actual performance of the wrongdoing should be determined
so as to mitigate the individual’s legal and moral responsibility. However, it should be kept in
mind that an employee or professional (e.g., chemist, doctor, salesperson, software professional,
 Ethics: Individuals and the Organisation

etc.) are morally duty-bound to prevent a wrongdoing, and cannot plead innocence on the
grounds that their involvement was minimal or that they were used as mere instruments,
especially when the wrongful act has serious consequences in the eyes of the law. In practice,
more serious the effect of a corporate wrongdoing (e.g., adulteration of baby-food, sale of
spurious drugs, extortion of money, etc.), lesser the consideration or weightage of factors like
pressure, uncertainty, compulsion and minimal involvement as factors that could mitigate the
responsibility of an individual.
In terms of the responsibility to establish ethical norms and standards in an organisation,
many social scientists observe that companies often tend to camouflage their purpose and aim
as ethics in their programmes. The ethics programme of such organisations focus more on
external obligations like CSR, environment compliance, corporate donations, etc., rather than
on addressing their internal systems and procedures of governance. They often overlook the
effect of their own internal mismanagement of ethics in terms of job discrimination, product
and service quality, advertising, marketing, financial accounting, etc. They contest that business
organisations have to aim at maximising profits, which automatically makes it mandatory that
all internal systems are put into order as per the organisation’s goals and objectives. Therefore,
the focus of their ethics policy and ethics management is more on external commitments than
on their internal systems. Thus, ethics and ethical responsibility often take the shape of external
social vision that many companies offer outwardly; but the ethics of delivering quality products,
services, and customer care among other things affecting the internal operations of their business
go unattended. However, the general view of ethics and ethical practice is to take responsibility
for morally right services to all stakeholders—be it customers, employees, shareholders,
government, society or the public at large—who are affected or influenced by the company’s
business. In this chain of activities, people (employees) and processes (internal systems) of an
organisation are an integral part of the whole system; part fulfilment of responsibility in one
area cannot possibly fulfil the need in other areas. Hence, an organisation has the responsibility
of designing ethical policy and programmes with a holistic view such that they serve and
complement each part of the business organisation. Individuals, in turn, have the responsibility
to follow and abide by the policy direction and programmes in their respective areas of work
and responsibility. Some examples of organisational areas, where work related to ethics and
ethical standards assumes importance, are: human resource management, fair wages, promotion
policy, code of conduct in service, vendor and supplier development, investor care, customer
services, product and marketing practices, pricing and advertising, accounting, pollution control
and environment management, etc. It is the organisation’s responsibility to maintain ethics and
follow ethical principles while carrying on its varied activities, such as: arriving at goals and
objectives, processes and parameters, products and service packages for customers and investors
respectively, and drafting policies and programmes in general. In the management of ethics,
the critical denominators are transparency (in communication) and morality (of treatment to
stakeholders). In matters of ethics, both the management and the employees have to work in
resonance; the former has to set goals, facilitate and help, and the latter will obey and operate
with commitment.
 Ethics in Business and Corporate Governance

An organisation’s role and responsibility, when it comes to establishing ethical standards,

can be best illustrated with reference to the practice Honeywell Inc of USA. According to an
earlier report: Honeywell recognise that they cannot have a set of business practices for each of
the 95 countries where they do business. They believe that only one formula works—ethical
behaviour—all the time at all places. In doing business globally, Honeywell employees are
required to comply with all applicable (US and foreign) laws and regulations. Compliance with
such laws, as well as company’s ethical standards, is required even if that would place the company
at a competitive disadvantage. At Honeywell, every employee is made to read the Code, as well
as discuss, understand and apply it. Every leader is expected to help his or her team understand
and follow the code. He or she also must provide ethical leadership by personal example and
set the standard for ethical performance, helping employees when they have ethical questions
on the job. If an employee for some reason cannot get help from management, Ethics Officer
is available for counsel to anyone, anywhere at Honeywell. Employees of Honeywell recognise
integrity as their number one of core values, which serve as the framework for decision-
making by employees worldwide. To maintain company-wide integrity, each employee is held
accountable for understanding and practicing the Code of Ethics and Business Conduct, which
helps them make decisions about: doing business with customers, suppliers, and the government;
competitors; employee responsibilities; international issues; media relationships; environmental,
health, safety and quality issues; and taking action on ethical concerns. They translated their
Code into six languages and distributed it worldwide, so that wherever an employee works in
the world of Honeywell, one common set of business principles is understood and practiced
by all. Honeywell also have a ‘Honeywell Ethics Hotline’ that employees can call anonymously
with questions or concerns about ethics policies, or to report suspected violations of the Code
without fear of retribution.”7

4.4 ETHICAL ISSUES IN HUMAN RESOURCE MANAGEMENT

In today’s business environment, employees are the most valuable part of resources required for
doing good business. Their attitude, their ethics and their motivation impact business processes
and performances in most significant ways. The ethics governing human resource management
(HRM) in an organisation have two main facets: (a) the way an organisation treat its people, that
is employees, and (b) the way the employees behave in the organisation and treat its customers,
suppliers and other stakeholders of business. However, ethical issues related to these two facets of
the human resource management function cannot be separated from each other. In this chapter,
an attempt will be made to highlight the ethical issues concerned with how an organisation
treats its employees with regard to rights, duties, fairness, justice, transparency, equality and
care. The ethical imperatives of the profession of human resource management—where both
HRM professionals (employees) and organisational policies and directives are involved—will be
discussed in Chapter 6, ‘Professional Ethics’.
Common ethical issues concerning employees in the context of human resource management
may arise from:
7
http://www.cebeglobal.org/index.php?ceos-corner/comments/ethics-as-a-valued-business-strategy, accessed on 29 December 2011.
 Ethics: Individuals and the Organisation

• Nature of employment contract offered to employees

• Nature of work conditions and environment with respect to employee safety and
health care
• Discrimination in jobs due to supervisor’s action and preference
• Lack of equal opportunity, that is discrimination due to race, gender, colour and
creed
• Remuneration criteria and discrimination
• Ethics of hiring—temporary and permanent hands
• Ethics of retrenchment and layoffs
• Performance appraisal and performance measurement

The human resource is considered the engine of an organisation. Hence, in a competitive

business environment, most organisations try to take care of their employees in a fair and
equitable manner to make them happy and motivated. If what is stated is the real situation, there
will not be many ethical problems regarding human resource management. But the situation at
the ground level is rather contrary. The ethical issues relating to human resource management
are plenty. Issues arise because human beings are very sensitive to their surroundings and
environment and highly concerned about their rights or deprivation and fairness or partiality
of treatment. Apart from human sensitivity, an organisation’s HR or personnel management
policies may also give rise to ethical issues. Among such HR policies are: 100 per cent hiring of
managerial hands from outside and cadre-based promotion (e.g., cadre based on the management
trainee scheme and cadre based on non-management trainee scheme). Implementation of these
policies may make one or the other group of employees feel deprived of equal opportunities.
However, ethics are not to satisfy all; their purpose is to ensure fairness of deals and justice.
Management experts believe that the attitude of a business towards its employees acts as ‘litmus test’ for its
ethical character.
It is expected of an organisation to follow clearly laid down transparent and ethical selection
and hiring policies. By and large, the relationship between an organisation and its employees is
based on the employment contract offered on selection. Therefore, the employment contract
should clearly state not only the terms of employment and emoluments but also the reasons
such as misconduct, inefficiency and the company facing an emergency situation that will
terminate the contract as well as the employee’s entitlement of separation compensation, if any.
However, while the contract terms are legally binding, ethics are not enforceable by someone
outside the organisation. Therefore, often organisations are seen to be covering the ‘minimum
legal requirements’ of an employment contract, keeping flexibility for themselves and leaving
many grey ethical areas for their employees. For example, the manner of deciding the variable
pay component of emoluments may not be clear or transparent. Or, the entitlement to facilities
and other perks could be left unclear. An ethical organisation has to demonstrate through self-
regulated actions that it is fair to all, just to the aggrieved, and equitable in practice.‘Equitable’ does
not necessarily mean ‘equal to all’; it implies one’s entitlement to gains and rewards according
 Ethics in Business and Corporate Governance

to one’s share of contribution, quality, ability and responsibility. As gains and rewards should be
equitable, punishment and deprivation of benefit should also be equitable.
Remuneration and perks constitute another ethical issue in HRM. An organisation should
follow the rule of fairness and equity in deciding the remuneration and perks of its employees
if it wants to to be judged ethical. None should be discriminated with regard to remuneration
and perks for which he or she meets the eligibility criteria as per the company’s policy of
compensation packages for employees. However, this does not give someone the right to
claim remuneration equal to a person of higher capability, performance, and experience. The
ethics of fairness demand that the company’s compensation policy should be open, transparent
and equitable so that people know what they can benefit from, where and how. An ethical
remuneration policy may allow special rewards for to those who have contributed to the
company’s long-term goals by hard work or by meritorious achievements. Such provisions
should be transparent and made known to employees, and should not be left at the discretion of
the management. Any unfair action in this regard will spread discontent and disenchantment in
the organisation and may even demoralise employees. Ethical acts by the organisation to treat its
employees fairly and equitably as per their terms of employment, skills, ability, contribution and
special achievement provide the much-needed ‘safety-net’ for employee retention. More than
any other administrative measures, ethics in HRM help motivate employees and create positive
work culture in the organisation.
From the social well-being point of view, ethics make organisations to offer equal opportunity
in employment and career progression.Though the ethical issue of equal opportunity in employment
arose from social considerations, it has now proved to be a very good means of serving the
organisation’s need for high-calibre talent pool. Examples of many women chief executives
steering various national and multinational companies today are a testimony of this fact.
Avoidance of discrimination in hiring on the basis of race, gender, colour or creed has proved
extremely beneficial for globalisation of business and availability of highly creative talents of
different races and creeds globally. Encouraged by the benefits accruing from a workforce
raised by following the ethic of equal opportunity, many companies put up the note of “equal
opportunity employer” in their recruitment drives.
Discrimination can be in job allotment too due to a supervisor’s preferences and prejudices. For
example, a person can be insisted upon to work in night shift day after day out of turn without any
justifiable emergency. This is unethical, as it denies equal opportunity to the person concerned.
The cause for such discriminatory action is often rooted in the prejudices or preferences of
the supervisor or the administrator. This is widely acknowledged as an important ethical issue
in many small and medium organisations that are run by non-professional managers. Any
discrimination divides the people (employees), weakens the organisation’s cohesiveness and
team spirit, and may even lead to disruption of work—all this happens due to the organisation’s
failure to uphold ethical standards.
For good work output, we need good working conditions and environment. Working conditions
should be safe to work, free from health hazards and hygienic, and should delight the employees.
It is the ethical responsibility of the organisation to provide good and safe working conditions
 Ethics: Individuals and the Organisation

so that its employees are not put to any risk of accident or health problem. This ethical issue is
largely prevalent in the unorganised sector and also in many small and medium manufacturing
companies. Though there are some legal remedies for any accident at workplace, ethics relating
to working conditions are aimed at preventing such happenings and the resultant misery of the
affected employee.
Employees get more deeply hurt due to the ethical issue of retrenchment and layoffs than any
other ethical issue. Apart from creating financial worries, the retrenchment and layoff issue
may also create psychological and social problems for the concerned employee. Retrenchment
deeply impacts the employee morale. Therefore, the organisation has the ethical duty of
minimising the adverse effects of retrenchment if it cannot be avoided. Retrenchment, layoffs
and voluntary retirement might be an organisational necessity at times, but the ethical challenge
for the employer in such cases is to ‘sweeten the bitter pill’ to lessen the harm to the concerned
employee, especially psychologically and socially. However, this ethical issue might not arise if
an employee is retrenched for some criminal offence.
Retrenchment or termination may be applied to two categories of employees—one temporary
and the other permanent. Ethics of dealing with employees and employee-related issues apply
to both categories.The difference between the two is that the temporary staff is psychologically
prepared to leave as per terms of their recruitment, but permanent employees expect to work
for long under the guidance, care and training from the employer. The organisation has the
responsibility to make adequate efforts to train, guide and develop a permanent employee, failing
which the question of retrenchment arises. The organisation is not legally bound but ethically
expected to train and develop employees into permanent workforce. Hiring temporary staff
for a non-permanent job is legally permissible and does not conflict with the ethics of hiring.
But, questions are raised when the organisation tries to get permanent jobs done by hiring
temporary people, which is tantamount to depriving the concerned permanent employees of
some benefits. This is where the ethics of rights, duties and fairness come into play. Here the
question raised is: Can the organisation hire temporary hands when the jobs to be performed
are perennial and permanent in nature? The ethical answer is obviously no because in this
case hiring temporary staff is not only unfair but also discriminatory and prejudicial to legal
provisions. The prevailing high unemployment in India might help the organisation get the
desired temporary staff, and its action can even escape the legal eye, but ethically it is not
correct. It is only exploitation of an unfortunate situation. And, exploitation in a society or
organisation is neither fair nor right.
Finally, let us focus on the issue of performance appraisal in the organisation, which is used to
reward or punish the employees. Performance appraisal is often a cause of heart burning among
the employees because of its non-transparent nature and adoption of improper evaluation
modes. It is prone to biased performance evaluation that may not fairly assess one’s performance
in the relevant context. Many employees think the evaluation process is faulty and unfair to
them. Actually, the balance of the process heavily tilts towards the management’s advantage. It is
quite possible that the management may deliberately scale down an employee’s performance to
 Ethics in Business and Corporate Governance

deprive him/her of some benefits or punish him/her.The ethical issues directly related to performance
appraisal are ‘fairness’ and ‘right to defend’. There is also an important indirect issue concerning
appraisal: Does the management ‘take care’ to monitor, train and counsel the employees to
enable them overcome their shortcomings and enhance their performance?
Organisations have the right to recruit anyone into their employment, but they also have the
responsibility of caring the employees once they join them. Employee caring means concern
for the employee well-being, which would reflect in the organisation’s efforts to counsel, train
and develop an employee for better performance. In the absence of organisational caring, the
year-end performance appraisal cannot be a proper measure of an employee’s performance
because he/she was not given an opportunity to improve and contribute to the organisation’s
overall performance. In other words, the employee was deprived of ‘equal opportunity’ to
excel.
It is generally observed in organisations chances of ethics violation are more in the case
of ‘white-collared’ jobs than the ‘blue-collared’ ones. This is because the blue-collared jobs
(primarily shop-floor jobs) mostly fall in the organised domain of trade unions, which symbolise
the collective ‘bargaining rights’ and employee protection from ‘injustice’.Though trade unions
are also not truly free from unethical activities, they are seen as the guardians of the rights of
their members, that is, blue-collared employees. The white-collared employees are mostly part
of the service sector of an industry and are often left out of the scope of trade unions. They do
not enjoy the collective bargaining rights or protection from injustice, if any, by trade unions.
Hence, they are the weakest link in the management of ethics in the organisation. Therefore,
violation of ethics in case of white-collar employees is not that uncommon.
Today, the human resource management function of organisations is often seen going out
of the way to attract best talents from the market by offering lucrative terms of appointment.
At times, the HRM ignores ‘home-grown’ managers and employees for better openings in the
organisation, thus denying them a fair chance to prove their hard-earned skills and capability.
This action also often poses the problem of the ‘cultural mix or integration’ due to cultural
differences. Differential treatment given to the new recruits and the conflicts in work culture
often precipitates ethical issues like unfairness and discrimination. As the new recruits mostly fill
the openings at senior levels, it is necessary for the organisation to exercise caution to ensure the
cultural integration and harmony in the team of managers. Transparency in recruitment, open
discussions about necessity, assurance of fair play to existing employees while filling competitive
openings, and commitment to further development of meritorious managers are few of the
steps that can mitigate such conflicting situations.
In today’s business environment, ethics should be a strategic measure to optimise the ‘internal
strength’ of an organisation by reinforcing the motivation and skills of employees on the one hand, and
maximising ‘external gains’ by building a ‘brand image’ that epitomises ‘good ethical standards’ on the other.
In this regard, consider the example of the Tata Group of companies, which are known and
well recognised across the industries for their harmonious and ethical management of human
resources. It is widely accepted that one of the pillars of the Tata brand is its ethical standards
 Ethics: Individuals and the Organisation

of human resource management. The desired focus on people management and employee
development for career growth is the hallmark of the Tatas. Therefore, the employee turnover
in Tata organisations is much lower than the national average. Following good ethical standards
in human resource management are, thus, a strategic advantage—not only for developing the
quality of workforce but also for the continuity of the desired management culture and for
avoiding the high cost of employee attrition.

4.5 CASES OF ETHICS VIOLATION AND RESPONSIBILITY

The problem of ethics in a business-place, be it individuals or the management, are so widely
dispersed that every organisation is faced with many such issues everyday. It may start with
something as simple as a worker reporting late for duty with the indulgence of his supervisor and
go on to something as serious as manipulation of accounts or dividend stripping by the board or
owner in a way that harms the investing public. Consequences of such unethical acts also vary
to a very great extent, ranging from affecting the morale of fellow-workers to affecting the
pockets of investing public, not to mention the brand image. Whatever be the case, this attitude
(of permitting any unethical practice inside the organisation) is contagious and, hence, must
be nipped in the bud.Yet, completely eliminating unethical acts would be virtually impossible,
because it is not the company’s system and policy of work that really matter in this regard,
but the attitude, education, culture and value system of people at all levels that is important
to maintain ethics in the organisation. Educating people at all levels in a business-place would
be a big stride forward in ethics management. If the top management is open to listening,
sympathetic to some causes of failure, keen to resolve employee and customer issues with
transparency, sincere to promote teamwork, careful of not indulging the power of politics, and
lead by example, then a culture of ethics and honesty is created in the organisation. And, it is in
such a work-climate and culture that most people learn to be ethical in dealings and acts.This is
why ethics is said to be a cultural part of the organisation; ethics should flow from the top, and
be deployed not by actions but by transformation, i.e., transformation of attitude for a culture
of being fair and moral. Examining, across this chapter, cases of ethical and moral violation in
an organisation may help clarify the issues better.

A worker’s leave application for his daughter’s marriage, which was organised out of town,
was rejected. The manager’s refused on the grounds that work would suffer in his absence
for two weeks, and, instead, granted the worker only a week’s paid leave. At the end of the
sanctioned period of leave (i.e. a week), from the venue of his daughter’s marriage, the worker
sent a ‘medical certificate’ to the manager stating that he had been taken ill and was advised
a week’s rest. On his return to the workplace exactly after two weeks, the manager did
not allow him to rejoin duty immediately. The worker produced his medical certificate, to
 Ethics in Business and Corporate Governance

explain the delay and continuation of leave, but the manager refused to accept the certificate
and called it false. Instead, he issued a show-cause notice to the worker for failing to join his
duty on time.
Once the notice was served, the worker took shelter under the workers’ union, which
in turn invoked the politics of power rule to settle the issue in the organisation. Union
officials charged the manager as being inconsiderate and partial, and demanded withdrawal
of the show-cause notice. According to the union, the manager had been ineffective in
handling the shop-floor situation with a proper contingency plan, thus, allowing production
to suffer—affecting the interests of all workers (in terms of earning production-bonus). The
matter was taken up with the top management (hierarchy) of the organisation; and finally,
the union got its way in view of limiting further damage.The worker was taken back to duty
with retrospective effect and pay.
Note:This case is illustrated from the author’s (industry) experiences and may not bear exact similarity
to other people, places or practices.

Although common in an organisation, such a situation is needless and contrary to the culture
of ethics. Ethically, the manager should have displayed ‘ethics of care’ in granting two weeks’
leave to the worker, which is not too long a period. Managers do have the responsibility
of keeping a second or contingency plan ready for such occasional demands—considering a
worker can fall sick or meet with any accident or need emergency help. On the other hand,
the worker was morally wrong in extending his leave on a false pretext (medical certificate), if
that was the case—yet, the manager could not reject the medical certificate outright, without
further referring to the opinion of another doctor or perhaps the organisation’s in-house
medical officer. The union was duty-bound to protect its member(s)—presuming that the
medical certificate was genuine unless proven otherwise. The consequent power play game in
the organisation further vitiated the ethical work culture. Thus, a simple case—that could have
been handled better using ‘ethics of care’—became a point of conflict and power-play between
the union and the management.
Ethics provide that one should be fair in ones dealings, act in sync with the company’s
interests, and respect values (like honesty and integrity). There should be an environment of
mutual respect and care in the organisation. However, the following questions arise: (1) In
the first place, was the manager fair in not granting two weeks’ leave for an important social
occasion like a daughter’s marriage?; (2) Did the company practice a ‘leave plan’ scheme for
workers where an individual can indicate and inform about his plan to go on a long leave?;
(3) Was the doctor morally right in issuing a supposedly false certificate?; (4) Was the manager
right to issue a show-cause notice rather than listening to the worker about his real problem?;
and (5) Was it not the manager’s responsibility to arrange for an alternative work arrangement
on his shop floor if a worker genuinely requires leave for a special reason or due to sickness?
In fact, there can be numerous inquiries about this case in order to determine who is or are
responsible for the situation. Had the company run a ‘leave plan’ scheme for each employee
and conveyed to each the need to adhere to the leave schedule as planned, for the sake of its
 Ethics: Individuals and the Organisation

own interests, then the said worker would perhaps not have asked for long leave, or would
have managed with a week’s leave, or might even have rescheduled the marriage date or venue
to suit his leave plan. If so, then who is responsible for failing to provide an alternative and
allowing the company’s work to suffer? Is it more important to manage a workplace as per the
company’s ‘rule by books’; or should the company give preference to promoting a good work
environment of trust, care and cooperation and, thereby, employee motivation?
Notwithstanding all such questions, one action leads to the other in the chain of events,
just as more ethical and moral questions arise: If the manager was ‘caring’ and sympathetic
to the cause of the worker and keen to resolve the issue and its effects before the roll-out of
consequential actions, the company would not have suffered from this conflict at all. A worker
has the right to take leave, but with the permission of the supervisor.The manager has the right
to issue a show-cause notice for a wrongdoing, but after understanding the situation and the
cause. It is also the manager’s responsibility to be rational and caring; he cannot over-react to a
situation and refuse to accept the worker’s medical certificate without a valid reason. Medical
practitioners are supposed to act as per the ethics of their profession, and any authority cannot
overrule a doctor’s certificate without investigating further or by presuming that he has acted
against his ethics. In the eyes of the law, the medical certificate is to be considered a statement
of fact unless there is proof to the contrary. And if, in such a case, help is sought from the trade
union, then it is the latter’s duty to defend its members based on evidence (here, the worker’s
medical certificate). Lawfully, perhaps no one can be unequivocally blamed in this case, although
it appears as if the employee violated moral standards with the help of a doctor. Yet, one may
argue that the violation was forced upon him by the uncaring attitude of the manager.
The primary responsibility of this conflict may, therefore, rest with the manager who could
have been rational and caring in his approach from the beginning. Thus, ethical and moral
practices in business cannot be by the rule-book alone, they have to be brought about by the
morally guided involvement of those very people who are behind the process of creating an
ethical environment in the organisation. Employees should be trained, educated and changed to
effectively handle a situation before any damage is done.Thus, the organisation is responsible for
introducing systems and promoting ethics in all business dealings so as to prevent unnecessary
conflicts of interest and allowing scope for the politics of power plays which ultimately hurt
everybody’s interests. Blaming one another is not the purpose of ethics management, but
preventing and eradicating unethical behaviour in the organisation is. A focus on highlighting
responsibility for ethics should begin here.

As per an Economic Times bureau report titled, ‘Insurers will cover you with whistle-blower
policies’8, Mr. Malhotra (name changed), a finance executive with an MNC operating in
India, lost his job for refusing to reimburse a sheaf of false bills forwarded by his managing
8
http://articles.economictimes.indiatimes.com/2009-03-18/news/28461472_1_whistle-blower-d-o-policy-hdfc-ergo, accessed on 10 October
2011
 Ethics in Business and Corporate Governance

director. He could not muster enough courage to draw the attention of the company’s board,
because he knew it could lead to a protracted legal tussle and he didn’t have the resources
to sustain a legal battle with its erstwhile employer. The article then goes on to mention the
multitudes of such unsung-heroes-turned-victims who remain disillusioned. A top insurance
executive adds, “People seldom come to the rescue of an employee who blows the whistle. If
anything, he attracts retaliatory action from the management by way of law suits” observed
a top insurance executive who were planning to come out with an insurance scheme of
‘whistle-blower insurance’ to help such victims of falsehood.

This is a classic case of a situation in which, if the management intends to cheat, no tightening
of rules or introduction of a system can correct it. The responsibility to stop wrongdoings in
an organisation, therefore, rests with its management and its willingness to hold on to ethical
standards at any cost. If ethics have to play their role in the organisation, then individuals
must have trust and faith in the management’s intention and commitment to ethics. Quite
like the incidence of ‘whistle-blowing’ in the earlier example (which did not work because
the employees feared the management’s retaliatory action), the system would be a toothless,
ineffective tool if not supported by actions and commitment. Examining this situation in the
context of the Satyam scam in India, would make it clearer why some senior employees and
even independent directors apparently fail to stop the ongoing wrongdoings in the company
and for so long. The major responsibility for the success of a system to check and prevent
wrongdoing rests with the management’s commitment to ethics and in the manifestation of the
same uniform action across the organisation. The top management is responsible for creating a
culture of ethics and honesty, and to lead by example for others to follow. While many Indian
companies now have the whistle-blowing system in place to check corporate wrongdoings,
few are truly effective. However, with professional bodies (like chartered accountants, and other
regulators of busines) becoming increasing aware of their (legal and other) responsibility, media
penetration and social reactions, unethical actions of such unscrupulous individuals at various
levels of the organisations appear to be on the decline.

India’s apparel industry employs females and children (below 14 years of age) for cheap labour
to stitch and prepare garments9. These workers—including the so-called Zara-workers of
India—are generally paid wages lower than what is stipulated; their workplaces are congested
and unhygienic. The primary purpose of such centres is not to provide employment but
to exploit sources of cheap labour. Ironically, most of these industries supply readymade
garments to MNCs with branded stores across the globe—even if child labour is banned in
their home countries (where they are headquartered). The respective governments of these

9
http://www.globalmarch.org/worstformsreport/world/india.html, accessed on 10 October 2011; http://www.ilo.org/legacy/english/regions/
asro/newdelhi/ipec/download/southasia.pdf, accessed on 10 October 2011
 Ethics: Individuals and the Organisation

MNCs prohibit the import and purchase of goods from manufacturers who employ child
labour.Yet, this practice is rampant in most developing countries like India, Bangladesh, Sri
Lanka, Pakistan and many African and Latin American countries, wherefrom high-waged
developed countries (like USA, Canada, Britain and the EU countries) are increasingly
outsourcing for cost-effectiveness. The giant corporations which buy this cheap material
take no measure to check the widespread use of child labour in these industries; they seem
more interested in maximising profits rather than in complying with laws and ethics. Not
surprisingly, this practice continues unchallenged with perhaps an occasional furore created
by the media.

The questions pertaining to such rampant unethical behaviour are: (1) Is the use of underpaid
and child labour (which is illegal in many countries) ethical in gaining economic advantage?;
(2) Should the corporate ethics policy remain silent about such unfair practices and continue
to enjoy the economic benefits thus reaped?; (3) Is it ethical that parents allow their children to
work as industry labour—knowing fully well that it is illegal and that they are being exploited?;
and (4) To what extent are the children, themselves, responsible for violating the law in being
thus employed?
These issues address the very root of many evils in this economy-oriented materialistic
world.To begin with, social scientists would say that only legal prohibition of child labour is not
the solution, some of the necessary prerequisites to eliminate this evil can be listed as: overall
economic development that reaches the weaker sections of society, proper schools and other
facilities for children, awareness (campaign) about child labour, and incentives to parents who
send their children to school. While some others believe that these MNCs should stop buying
from such centres in order to discourage unethical practices like child labour, the general public
and a few parents may argue that there is nothing wrong if their otherwise unoccupied children
work in such centres to earn a few economic benefits for their families. However, will the
children not learn about the value of labour and, perhaps, even the joy of earning?
Each one will have his or her say in the matter. The government officials say that it is illegal
for children to work for wages; that they should instead go to schools (where education is free);
and that parents are responsible to comply with these regulations. An NGO working in the area
of child development may say that banning child labour, facilitating schooling, and motivating
parents and children (with regard to the benefits of education) can make them more self-reliant
and better off in life.Yet another group may say that the root cause of this evil practice is socio-
economic inequality in society and what matters to these people is the struggle for existence
(and not adherence to ethics and laws). Therefore, it is the responsibility of the governments to
deal with this inequality and make the society, at large, aware that children must go to schools
for education and better health—this alone can bring ultimate economic benefits to a society.
Yet, the real responsibility and solution for such social evils remains elusive.
 Ethics in Business and Corporate Governance

‘Earth provides enough to satisfy every man’s need, but not everyman’s greed’, Mahatma
Gandhi had said. Perhaps working with this realisation and philosophy can, at least partly, address
the root cause of this problem. It is the combined greed of organisations (MNCs dealing in
apparel industry products), the greed of owners (manufacturing centres), and the greed of
parents (of child workers)—to earn more at the cost of health and education of children—that
is at the root of this evil. Their greed breeds unethical practices and harms the society in more ways than
what they get or give back to the society. Government laws and regulations can ban the engagement
of child labour, but cannot stop the practice unless the perpetuators of this evil regulate
themselves. Surely governments cannot stop at enacting the laws; they must also consider it
their fair, sovereign and moral responsibility to ‘open the gates for alternative development and
engagement’. The issue strikes deep into the way we do business for economic advantages and
make profits by overruling the dictates of ethics and morality.The responsibility for such ethical
failures, therefore, rests not only with all organisations (which overlook such evils) but also
with the outsourced parties involved in this chain of business. Understandably, the fault of the
children and their parents stands mitigated by circumstances and the country’s socio-economic
environment. It may seem too little and too late, but recent reports indicate that—in response to
social and governmental pressure—some MNCs are taking action against the practice of child
labour engaged in the manufacture of their products. In short, if organisations do not have the
moral will to go beyond the profit motive, then such wrongdoings cannot be eradicated from
society.

Professional and individual ethics involved in India’s health care business and services often
face severe criticism. Newspapers of eastern India (especially The Telegraph, and The Times of
India, Kolkata) frequently report of medical negligence and consequent death or disability of
patients, owing to the poor state of health care services in the region. Furthermore, the media
often refers to cases of medical negligence; unethical treatment; prescription of unnecessary
drugs and diagnostic tests; and authorities (of private hospitals and nursing homes as well
as government run health centres) aligning with chemists and pharmaceutical companies
for unscrupulous gains. Health care centres and nursing homes allegedly charge more than
the package-deal negotiated for the treatment, and harass patients and their relatives by
taking advantage of their helpless situations. When it comes to the economically weaker
sections, cases of medical negligence and harassment of patients are even more frequently
reported, as are incidents of patients and their relatives vandalising hospitals and nursing
homes, and assaulting attending doctors. In turn, as retaliatory action, doctors go on mass
leave or strike, altogether depriving them of the services of that hospital/nursing home.
However, actions and counteractions rarely resolve the problem; and recourse to consumer
grievance cells and other forms of legal justice only reduces it to an extent. Ethics of public
behaviour, professional ethics and the teachings of medical jurisprudence are thus violated
with a vengeance and without any check or correction. Social scientists desperately ask as
 Ethics: Individuals and the Organisation

to who is responsible for mending this situation: the people who go to health care centres
for treatment, the owners of hospitals and health care centres, the doctors and service staff
attached to these units, the chemists and diagnostic centres who are known to be influencing
such unethical practices, or the government?
Note: This case narrates the author’s impressions based on media reports of medical negligence
(especially in isolated parts of East India), and does not represent the health care scenario
across India. Nonetheless, the case aptly describes the nexus between various sections of a
business (health care services), and the unfair and immoral behaviour of a few individuals
therein, which cause misery to many.

It would, however, be wrong to conclude that most doctors and medical professionals are
involved in unethical practice; in fact, over 80 per cent of such professionals abide by the
ethics of their profession, and only 20 per cent or less follow unethical practices that lead to
complaints related to health and society. Similarly, most patients and their relatives do not
resort to vandalism when aggrieved; only a few display such aggression. Hence, like most other
ills in the society, the problem of negligent medical treatment is also caused by a ‘few’ who do ‘vital’
damage to the civil structure of the society. Certainly, aggrieved patients cannot take the law into
their hands and nor can they retaliate to health care professionals with acts of vandalism or
harassment. Why, then, do they behave this way in an otherwise lawful and peaceful society?
Here, again, what is brought to light is how individuals who are forced or denied their moral
and rightful treatment take recourse to power and politics—and remain morally and ethically
responsible for misbehaviour and damage. The doctors may excuses themselves on the grounds
of work pressure, hectic schedules, patient overload, lack of facilities, etc.; nonetheless, they are
responsible for negligence in treating patient that might have led to suffering, disability or death.
A doctor can refuse treatment under pressure, but if and when they do treat a patient it must be
to the best of his or her abilities and as per the medical code of conduct and ethics. This stand,
however, does not absolve any doctor from the responsibility of treating an accident victim
or a patient in emergency circumstances. In other words, such a refusal by a doctor would be
considered highly immoral and unethical. And, while it is common in medical practice for
an attending doctor to refer his patient to another specialist (if necessary), this should only be
done after preliminary life-saving or emergency treatment (if required) is given to that patient.
Keeping a patient waiting too long for treatment, or hampering urgent patient discharge to
another hospital or specialist is unethical and unacceptable as per the medical code of conduct.
Medical professionals are morally and ethically bound to treat patients especially when that is
necessary to save life. Furthermore, as per rules of their profession, while the doctor can charge
fees for any service or treatment provided, it is unethical to claim payment for any false or
unnecessary services.
Each of us has the right to choose one’s profession or work, but not the right to cause injury
or unnecessary suffering to others (even if by negligence). Doctors and health care centres do
not have the moral right to join hands with each other or with chemists or other suppliers to
exploit a patient or situation (like providing emergency medical service or treatment). Such
 Ethics in Business and Corporate Governance

covert or overt actions of doctors or health care units are immoral and unethical, and the doctor
or the unit involved would be held responsible for the respective action. As in the earlier case,
the greed for easy money by unethical means is the root cause of such social ills and violation
of medical ethics. Negative media exposure, social condemnation and exemplary punishment
and penalty by legal and consumer interest protection agencies or authorities can deter such
practices. The role of the government to provide fair, easy and adequate medical services to all,
especially the weaker section of people, can go to a long way in minimising this health care
problem; ultimately, the government and administration are responsible for building adequate
infrastructure and efficient health care facilities for all. Any shortfall in this basic right of citizens
is most likely to aggravate both medical and social ills, and, under such circumstances, the
government as well as the officials entrusted with the job of providing medical facilities remain
responsible for the resulting moral and ethical chaos.
Discussions thus far drive home the point that, while an individual remains responsible for his
or her (role in) actions that violate ethics, equally responsible are the companies, establishments
and governments whose acts cannot be morally justified and are ethically incorrect, or which
create the cause for violation of ethics. Some of the reasons that lead to unethical behaviour
of individuals are: unfair rules and regulations, discriminatory attitude and actions of a few
powerful individuals, politics of power in business and society, shortage of critical resources and
facilities, greed as motive in governance and management, and absence of serious punishment
and penalty for violation of ethics. The theft of personal data in a BPO company in India’s IT
industry is a case in point that absence of stricter laws and moral training of individuals can
create problems. Thereafter, India’s BPO service providers drew a lot of criticism from across
the world about the ability and quality of their services, considering that data compiled by
credit agencies or banks is to be kept strictly confidential owing to the high risk of misuse and
potential damage to clients. It has been found that while BPOs are responsible for storage and
management of such data, it is their employees who are involved in serious data-related frauds.
These thefts constitute violations of right to the privacy of individuals who, in the case of
BPOs, are mostly residents of other (economically developed) countries.
In India, most perpetrators of this crime go unpunished—or, perhaps, they may lose their jobs
when their wrongdoings are detected. This is of course not enough nor an effective deterrent
for such crimes. Therefore, BPO companies are now looking for a watertight system to protect
the data and information of their clients—an issue that has become very sensitive when it comes
to the industry’s future business prospects. Yet, many feel that watertight systems and stricter
laws may help minimise the crime, but more effective means would be adherence to stricter
ethical codes in workplaces, compulsory ethics training, and monitoring of individual conduct.
It has been proven time and again that where greed guides the actions of individuals, system
implementation can do very little to prevent wrongdoing—unless the individuals involved
were to undergo some internal changes. Hence, perhaps, the solution lies in shaping moral
values and moral standards of individuals in the society, and transforming them to individuals
of high moral standards. Many ethicists claim that ethics-and-individuals issue is not the same
as ‘chicken-and-egg’; for ethics, it is the chicken-first situation, because ethics have to nurture,
bear and breed morally healthy individuals who would abide by ethics and morality. The task
 Ethics: Individuals and the Organisation

of the society and business—which is an integral part of modern society — is to create an

environment and value system that promotes better individuals and an ethical work culture in
the first place. Unfortunately, today’s materialistic society, in its urge to prosper faster than ever,
is failing to address this issue—and this is evident in the increasing number of unethical acts
across all spheres of work and life, be it in society or in business.

Summary
1. The chapter outlines the nature of an organisation, how it works and how its work culture
influences the ethical behaviour of its individuals. In the course of discussions, rights and
obligations of individuals have been reiterated within the framework of ethical responsibility.
2. The chapter attempts to establish the specific role and responsibility of an organisation with
regard to the ethical behaviour of its individuals, and illustrates the same through case analyses.
Furthermore, the role and responsibility of individuals have been discussed with special reference
to the internal nature of the organisation and its work culture—because individuals play a very
pre-eminent role in the ethical conduct of business, whereby interests of its stakeholders and the
society at large are maintained and sustained.
3. It has been emphasised that the understanding of how organisations generally work must be
appreciated so as to understand the behaviour of its individuals. An organisation can be rational,
political or caring or a combination of these. In rational organisations, activities of a number of
people are coordinated with a view to accomplish a common, explicit purpose or goal through
division of labour and function, and through a specific hierarchy of authority and responsibility.
Although almost ideal, this goal-directed and structured organisation of business seldom exists
in its true spirit in practice.
4. Organisations are often embroiled in different types of controversies involving their administration
(management), and the means and goals of the business. Therefore, companies may focus less
on rational aspects and more on political features. The chapter also elaborates the effect of the
same.
5. An organisation’s work culture—rational vis-à-vis political model—has been pointed out.
Political organisations do not have a purely rational approach, and do not accept that the
rationality—designed to achieve goals and objectives—is sacrosanct in running the business. A
political model views the organisation as a system of competing power and formal and informal
lines of communication for coalitions to reach to pre-set goals—giving rise to the scope for
more wrongdoings and irrational behaviour, as compared to a rational model.
6. More commonly, a mixed model of organisation exists within a company and the dominant
group or mode rules the ethical nature of that company. In a rational organisation, people
down the structures are driven to achieve the goal by a duty-responsibility-accountability relationship.
In a political organisation, individuals form groups and coalitions with a view to bargain and
compete with other groups for more power, resources, benefits, etc.
7. In a caring model, employers may grow closer to their employees and seek ways to serve and
care for whom they exist (i.e., employees, customers, society, stakeholders, etc.). However, not
all businesses care for employees or stakeholders; hence, organisations vary in their character and
nature, which influences the behavioural patterns of their individuals.
 Ethics in Business and Corporate Governance

8. Ethical behaviour of individuals in an organisation has been discussed vis-à-vis organisational

character. In business, ethical behaviour and obligations of individuals make for a mutual
relationship based on the organisational style, the law of the land, contractual duties and
obligations, work environment, and the codes of general ethics (that are acceptable as moral and
rational to general public).Therefore, the work culture is largely responsible for an overall ethical
climate in the organisation, which ultimately influences the ethical behaviour of individuals.
9. The organisation is responsible for promoting and protecting morally legitimate interests and
goals of the business, where individuals can work with clarity of purpose and direction of
ethics.
10. Pursuing personal interests by taking advantage of power structures either of the management or
the union is very common in industries, and a major source for violation of ethics in governance.
An organisation has the responsibility to draw individuals into a climate of ethical behaviour,
by demonstrating its ethical character and ethical functioning. In turn, the individuals have the
responsibility to obey the moral and contractual standards of behaviour. The ‘path-means-and-
goals’ of an organisation have an important bearing upon the way individuals behave within the
organisation.
11. Analyses of ethical situations in organisations bring out time and again the necessity for an
organisation to be fair, moral and ethical not only in dealing with its employees and systems, but
also in setting ethical and legal goals and purpose of the business.
12. In today’s business environment, employees are the most valuable part of resources required for
doing business.Their attitude, their ethics and their motivation impact the business processes and
performances in most significant ways. Owing to the increasing employee importance, the human
resource management (HRM) has become one of the most critical functions of an organisation.
It has necessitated strict adherence to consistent ethical standards in HRM practices. Ethics are
also considered a strategic measure for optimising the ‘internal strength’ of an organisation by
reinforcing the motivation and skills of employees on the one hand, and maximising ‘external
gains’ by building a ‘brand image’ that epitomises ‘good ethical standards’ on the other.
13. Many ethicists claim that the ‘ethics-and-individuals’ issue is not the same as ‘chicken-and-egg’;
for ethics, it is the chicken-first situation, because ethics have to nurture, bear and breed morally
healthy individuals who would abide by ethics and morality.. And finally, the chapter refers to
various cases to illustrate how the task of the society and business—which is an integral part of
modern society—is to create an environment and value system that promotes better individuals
and ethical work culture in the first place.

Key Words and Concepts

Rights of individual, regulators, moral philosophers, ethical protagonists, rational organisation, political
organisation, caring organisation, duty–responsibility–accountability relationship, duty of care, ethics of
care, human resource management (HRM), flow of power, law of agency, child labour, ethical responsibility,
effect of masses, utility, ethical standards, path–means–and–goal approach, socio-economic environment,
whistle-blowing, whistle-blower insurance.
 Ethics: Individuals and the Organisation

Exercises
Check Your Progress
1. An organisation could be classified as ___________
2. Rights of individual are ___________
3. People down the structures in an organisation are driven to achieve their goal by ___________
4. Like operational processes, process for the management of ethics and ethical standards in the organisation
have to be ___________
5. The caring model is not based on ___________ but on caring for those for whom the organisation has
been designed, with whom it interacts and the people in the organisation themselves.
6. One of the purposes of having an ‘ethics policy’ and ‘ethics management mechanism’ in an organisation is
to ___________
7. Law of agency specifies that the ___________
8. Governments cannot always stop at ‘bottling up the practice by laws’; they must ___________
9. The ethical issues concerning the employees in human resource management arise from___________
10. Ethics could be a strategic measure to optimise the ‘internal strength’ of an organisation by___________

Review Questions
1. What are the types of organisational nature that we generally come across? If you were in an IT-enabled
business organisation, what type of organisational nature and work culture would you prefer? Justify your
answer.
2. Describe a generalised pattern of the ‘flow of power’ in an organisation. How does it influence individual
behaviour in the organisation?
3. ‘Moral and ethical issues of individuals in an organisation are, thus, influenced by and dependent on the
nature of the organisation and its work culture.’ Justify this statement. If possible, illustrate with an example
from the business world.
4. ‘Law of agency specifies the legal duties of employees (agent) towards their employers (principals) and
prohibits the agent (employees) to act in conflicts of interests with those of the principal (employer).’ To
what extent, does this type of legal stand help or vitiate the atmosphere of ethics in an organisation?
5. Critically discuss the statement:‘Ethical behaviour of individuals can also be influenced by the organisation’s
(business) goals.’
6. How do the following influence an individual’s ethical behaviour in the organisation: ‘code of conduct and
service rules’, ‘ethics policy’, and the organisation’s ‘path–means–and–goal’ equations?
7. Briefly discuss how Honeywell’s Code of Ethics and Business Conduct helps ensure ethics in their global
business practices? List four important aspects of their ethical approach to business.
8. Discuss with illustrations: Why should ethics start at the top in an organisation?
9. ‘Everybody has the right to choose one’s own profession or work, but does not have the right to cause
injury or unnecessary sufferings to others by his or her action or negligence.’ Critically discuss this statement
with reference to some cases you know of.
10. ‘Greed breeds unethical practices and harms the society more than what the organisation gets or gives back
to the society.’ Discuss this statement with some examples.
 Ethics in Business and Corporate Governance

Further/Suggested Reading
1. Ethical Theory and Business (6th ed.); Tom L. Beauchamp and N.E. Bowie (Eds.), Prentice Hall, New Jersey,
1979
2. Business Ethics—Concepts and Cases (5th ed.); Manuel G.Velasquez, Pearson Prentice Hall, Delhi, 2002
3. Philosophical Issues in Human Rights—Theories and Applications; Patricia Werhane, A. R. Gini and David Ozar
(Eds.), Random House, New York, 1986
4. Whistle-Blowing: Loyalty and Dissent in the Corporation; Alan F. Westin, McGraw-Hill, New York, 1981
 CHAPTER 5
Ethics in Marketing and
Consumer Protection

To highlight the issues of ethics in marketing and their scope and

coverage
To emphasise the importance of consumer protection in marketing,
Chapter Objectives

and identify the ethical shortcomings and the responsibility in con-

sumer protection
To discuss the scope and span of consumer protection, its necessity
in a developing economy and its ethical implications for the society
To describe some approaches to consumer protection in marketing
from ethical standpoints, and illustrate their working
To discuss the ethical challenges in the marketing practice and their
implications
To highlight some ethical issues concerning the present-day Internet
marketing
To discuss how ethics can help in managing competition in the
marketplace
 Ethics in Business and Corporate Governance

INTRODUCTION
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1
Tobacco Industry used Cigarette menthol to recruit new Adolescents and Young Adult Smokers: Internal industry documents,
independent lab tests, and survey data reveal strategy, Robin Herman, Harvard School of Public Health, July 16 2008. Ref: http://
news.harvard.edu/gazette/story/2008/07/tobacco-industry-used-cigarette-menthol-to-recruit-new-adolescents-and-young-adult-smokers/,
accessed on 11 October 2011
1a
http://www.time.com/time/business/article/0,8599,1998055,00.html#ixzz1bHstr2zR, accessed on 20 October 2011
 Ethics in Marketing and Consumer Protection

There are many instances of unsuspecting consumers being unfairly treated or fraudulently
exploited. Case I represents an unethical practice in consumer marketing, and Case II represents
a new type of fraud—the cyber fraud—where a false product is marketed by taking advantage
of the helplessness of computer users, faceless transaction through the Internet and ineffective
cyber laws and cyber administration. Internet marketing and frauds are now rising alarmingly
every year. Apart from the fraudulent product marketing, described in Case II, nowadays it
is quite common to receive calls or emails from the marketing personnel of financial, realty
and consumer services companies offering apparently fair deals—with riders and conditions
intricately woven into their offers, hiding the real purpose of the deals being offered. Furthermore,
most of these deals favour the sellers in case of any default or damage, leaving consumers in the
lurch. All these are happening in the market due to the nexus between unethical businessmen
and ready-to-cooperate corrupt officials. Some may argue that it is a marketing person’s job
to market a product and enhance the market share and consumer base of his/her product, and
the marketing person is not supposed to do social work. But, does that mean he or she has to
adopt unfair means and methods to do his or her job? Gaining market share and making profit
by any means is neither good governance nor ethical nor sustainable. Such frauds or unethical
practices either get revealed or punished by legal authorities or the customers run away from
the organisations indulging in such unethical practices. Marketers have the responsibility to
protect consumers from deceit and harmful effects (if any) of the products and merchandise
they market. This is necessary to keep the market as a place for fair play where consumers
get what they are promised in exchange of money they are asked to pay. Marketing (i.e., the
process and people involved in marketing) has to balance between profitability and morality.
 Ethics in Business and Corporate Governance

The norm of faithful ‘disclosure’ about the product (quality, quantity and character) must
be adhered to in marketing—be it the customer-interfaced marketing, direct marketing or
Internet marketing. Case I demonstrates that the focus is still on increasing revenues at any cost;
‘consumer protection’ is a mere cliché in marketing campaigns. Nonetheless, if we believe that
ethics are essential for sustainable business then ethics have to be deep-rooted in all business
practices including marketing. Marketers have to own up the responsibility for adhering to
ethics in the marketplace and play a more effective role than what the current experience about
their experience shows. Since the marketing personnel are in the forefront of a company’s
efforts to reach out to consumers, they are in a better position to control and enforce ethical
conduct in business by interfacing with the company’s management on the one hand and its
consumers or users on the other. Protecting the interests of clients should be their ethical goal;
they must appreciate that their interest in consumer protection would be reciprocated in their
and the company’s well-being through consumer patronage.
Marketing is uniquely placed as the face of a company through which it contacts and
conducts business with its customers or consumers. (Incidentally, many do not regard customers
and consumers as the same thing—consumers are statistics while customers are faces. But, in
fact, there is a face behind every consumer). To most customers, it is the marketing wing of
a company that represents the whole company and its work culture. Marketing is responsible
for being faithful and ethical in dealings with customers. The marketing people are, in fact, the
custodians of customers’ interests. Central to modern management and marketing practices
is the concept of customer satisfaction and customer retention—a dual objective that can be
achieved only through ethical marketing practices. This chapter discusses various important
aspects of business and business ethics, with an emphasis on need–means–and–methods to
ensure ethics in marketing and consumer protection.

5.1 ISSUES OF ETHICS IN MARKETING

Market is the place where people interface and interact with a company’s people, products and
services. Market is the first link of consumers with the company, and ‘marketing ethics’ is the
bond that binds the market with the consumers.Therefore, understanding the issues of ethics in
marketing is of paramount importance for marketing professionals. Marketing ethics deal with
the following:
(a) The ethicality of products and services being marketed
(b) The ethicality of the process and means of marketing
(c) The ethics in advertising and product promotion
(d) The ethical conduct of marketing personnel
(e) The ethicality of marketing goals and targets
(f) The ethical responsibility for the sales made
Marketing is about creating a condition where people willingly buy what they want for
fulfilling their legal, moral, psychological and intellectual needs. Therefore, personal ethics of
marketing personnel and ethical imperatives of the marketplace are integral parts of marketing
 Ethics in Marketing and Consumer Protection

operations. The ethical issues of marketing operations arise out of product offerings, pricing and price fixing
mechanism, marketing process, marketing channels, services and contractual obligations. The aim of ethics
in marketing is to protect and promote the interests of consumers and thus win the customer
confidence and perpetuate the legitimate gains for business. Ethics in marketing is, therefore,
a strategic game for ensuring profits and sustainable growth by balancing ‘profitability’ with
‘morality’.
The issues of profitability are well-established in the arena of traditional ‘business management’,
but the understanding of the ‘issues of morality in business’ is still vague and varied. Following
morality in business is generally treated as ‘ex gratia’ to customers and consumers at large.
Marketing being largely responsible for generating revenue for the company, the marketing
people are sometimes tempted to resort to unethical means to maximise revenue or to meet
inflated sales targets. Unethical product promotion, non-transparent sales and service conditions,
false and misleading advertisements, and predatory pricing with conditions attached are some
examples of unethical marketing drive. The issue of morality in business is getting further
complicated due to the misuse by some unscrupulous people of the otherwise well-meaning
communication and information technologies. Today these technologies are being increasingly
used in cyber-marketing, direct marketing and e-commerce. Developments of communication
technology and information technology have changed the face of marketing—both for better
and for worse. The flip side of these technologies is that using them it is easier to deceive
customers if one wants to. For example, ‘mass marketing frauds’ have been a serious concern in
today’s technology-driven markets globally.1b The Internet, which is being increasingly used
for product promotion and marketing, is largely a ‘boundary-less network’, which makes it
difficult to establish the ownership and responsibility for the contents and offers made through
it. Hence, the Internet has emerged as a convenient means for unethical marketing. As today the
Internet is a fundamental component of the civil society, marketers cannot escape their ethical
responsibility while using this revolutionary communication medium for advertising or selling.
Ethics of marketing must also apply to the cyber or Internet marketing in the same way as they
apply to traditional marketing in the civil society.
The use of the communication and information technologies in marketing has thrown up
several new ethical issues. Some of these issues are listed below:
1. False and misleading product advertisements in electronic and cyber media.
2. Exploiting social paradigms for market promotion (e.g., promotion of fairness creams
for dark-complexioned females through TV advertisements).
3. Predatory pricing by the big and mighty organisations to wipe out competition in the
market.
4. Surrogate advertisements. (These are used to promote alcohol and cigarettes whose
advertising is banned in India.)
5. Intrusive service promotions, compromising the confidentiality of company-client
relationships and violating the privacy of customers (e.g., freebies and add-ons offered
by telecom and Internet service providers for collecting personal data).
1b
http://www.fbi.gov/stats-services/publications/mass-marketing-fraud-threat-assessment, accessed on 7 October 2011 on Mass Marketing
Fraud.
 Ethics in Business and Corporate Governance

sensitivities.
With the global reach of business, the last mentioned issue of national, local and cultural
sensitivity has assumed greater importance, and it requires careful handling by multinational
companies when they launch marketing drives for new products or services. For example, in
India, no marketing advertisement is permitted which derides any race, caste, colour, creed and
nationality.2
Marketing as an organisational mouthpiece has to own up the ethical responsibility in
these areas of activities and stop indulging in unethical practices despite the tempting ease of
exploiting the market through electronic-media advertisements or Internet-based marketing
channels. The ethical issues in marketing are illustrated in Figure 5.1.

Ethical lssues in Marketing

Relate to 5-Ps:

Process Promotion People

Products Price (of (of (consumer
marketing) products) protection)

Figure 5.1 Ethical Issues in Marketing

Apart from special ethical issues in marketing arising from mass-media advertisements and
Internet-based marketing channels, the fundamental issues of ethics in marketing can be related
to 5 Ps of marketing, as described below:
• Products: Are the products ethically right for the consumers and beneficial to the
society?
• Price: Is the price commensurate with value (utility) it offers? Is it fair and
competitive?
• Promotion: Do the promotional features give a truthful presentation of the products
on offer? Is the promotional campaign exploitative of the consumers’ ignorance or
social customs and myth?
• Process: Is the marketing process ethically right and legal? (The process also includes
the ‘place’ through which marketing is effected, for example, the marketing channel,
logistics, etc.)
• People (Consumers): Does the marketing effort harm or hurt the consumers, the
competitors or the society in any known or unknown manner?

2
http://www.ddindia.gov.in/Business/Commercial+And+Sales/Code+for+Commercial+Advertisements.htm, accessed on 12 October
2011
 Ethics in Marketing and Consumer Protection

Ethical violations in each of these areas can be cited aplenty,3 even in large multinational
companies, but that is not the scope of deliberation here. The purpose of this deliberation is to
introduce the readers to various sources of ethical concerns in marketing operations. And, some
of these concerns will be addressed later in the chapter.
The purpose of identifying the sources of ethical issues in marketing is to find ways and means
to correct them, as far as possible. The strategy of ethical marketing to gain market leadership
will fall flat if we fail to effectively build ethics into our organisation’s work culture and in the
marketing policies and programmes. And, for implementing ethics in marketing operations,
we need to bring about a change in the mindset of marketing personnel. They should shift
from the traditional marketing approach of ‘profitability’ to the ethical approach of ‘profitability
with morality’. The marketing personnel need to have a sense of ethical responsibility towards
their customers and consumers. This requires identification of ‘gaps and fillers’ in organisational
systems, culture and commitments to ethics by examining the relationships between the
fundamental issues of ethics in marketing (i.e., 5 Ps as mentioned above) and the organisation’s
ethical culture and marketing functions. Broadly, relationships among these fundamental issues
can be related to:
(a) The organisational and corporate culture for ethics
(b) Industry practices and the business environment
(c) The marketing personnel’s moral standards and commitment to ethics
(d) The social and consumer culture as reflected in the marketplace.
These are, in fact, the ethical attributes of a company, and their quality largely influences the
ethicality of the company’s marketing approach for product promotion, pricing, advertising
and channelling the products to consumers. It is essential for the marketing personnel to be aware of
the various issues that can cause conflicts between profitability and morality of their actions. It should be
recognised by the marketing group that consumers and the society have the right to be informed, the right
to be heard, the right to choose and the right to safety and protection from harm. Any shortcoming,
violation, infringement or denial of these rights would be termed unjust and unethical. Since
marketing is a process that directly interfaces with the consumers and the society, the marketing
personnel have a direct responsibility to respect and honour the consumer rights.

5.2 IMPORTANCE OF CONSUMER PROTECTION

A product is a product if it has a market, i.e., a consumer. Hence, the end of a business process
can be described as: ‘selling of the product in a market to a consumer, realisation of money for
the sale, guiding the consumer for safe and trouble-free usage through product demonstration
or a product manual, and servicing the product as promised in the sales brochure or sale
contract’. In earlier chapters, we have mostly discussed the ethical and moral issues relating
to functions within the organisation (i.e., of employees, managers, management, agents, etc.)
and their impact on the individuals, local people, the society or environment. Role of ethics

3
http://www.thefreelibrary.com/Direct+Marketing+Association+Cites+Five+Companies+for+Ethics...-a085887536, accessed on 11
October 2011, and http://www.customerthink.com/blog/pfizers_ethics_violations_hurt_all_of_us, accessed on 11 October 2011
 Ethics in Business and Corporate Governance

in the marketplace—manifested through the marketing and servicing personnel or the organisations
itself—in producing, selling and protecting the consumers is as important as ethics within and inside the
organisation. Significantly, ethics are even more important when the products marketed are for
children or those that may adversely affect the health of citizens. For instance, in Case I, were
the cigarette companies being ethical in altering menthol level of cigarettes with a view to
hook (unsuspecting) young smokers? Who should protect the consumers against such dubious
business practices to perpetuate sales?
Surely, the objectives of business are not limited to making profits, but also go beyond in
contributing to the well-being of the society and the nation. Consumers are a part of the
society that supports a business; ‘a business exists for the consumers and not vice versa’, goes
a popular saying. Therefore, protecting consumers from harm and damage is, in fact, a part of
marketing responsibility—though the related policy decisions could originate from some other
corner of the business organisation.
Consumers are not a homogeneous mass; they can be grouped into many segments across
many strata.All unfair and unethical marketing practices may not harm all the consumers equally
adversely. For example, unethically marketing a consumer durable (e.g., car or refrigerator) may
lead to difficulties for the customer, but the unethical marketing of a spurious drug or food
product can cause the death of a child. However, this does not allow, even in principle, any
dubious or unethical marketing in any field of business for any kind of product, because that
would violate the basic rule of marketing—customer care and customer satisfaction. This is
especially true for children and other weaker sections of the society who would suffer the most
if the consumable products did not meet ethical standards and quality requirements. Children
need special protection as consumers, from the ill effects of consumables (product quality). Can
a company market a health drink for children, laced with an addictive drugs (howsoever small
in quantity) to build preference for the product vis-à-vis the competition, and still claim to be
ethical? Can a medical practitioner prescribe use of unnecessary medicines or an overdose of
steroid while treating a child? (Here, ‘patient’ is viewed as a consumer of medical services.) One
may argue that it is for the country’s regulatory authorities to oversee such unethical acts and
crimes, but then, that is also true for most other unethical work and issues.Yet, so many people,
professionals and businessmen are flouting these norms and rules for the sake of greater market
penetration and profits. Adulteration and other such unethical marketing practices are not
uncommon in developing countries, including India; numerous children suffer from permanent
health damage due to spurious foods and drugs. In fact, there are companies manufacturing toys
using toxic material—unmindful of how harmful they can be for a child. Let us view one such
example:

When, during 2007–08, the health of many children suffered neurological damage and death,
after the use of toys made in China and imported by the US, several consignments of these
toys had been recalled.4 They were found to contain toxic material (like lead paint), which
is not only harmful for children but is also banned in the US. In fact, the production head

4
http://www.foxnews.com/story/0,2933,293054,00.html, accessed on 4 August 2009, and http://www.superiorinvestor.net/stock-market-
forums/postt5946.html, accessed on 12 October 2011
 Ethics in Marketing and Consumer Protection

of one such Chinese toy manufacturing company even committed suicide owing to his sense
of morality and wrongdoing. The huge amount of complaints of sickness and side-effects
amongst children, and the social pressure created by this issue forced the US government
to intervene—whereby thousands of toys were withdrawn from stores across the US and
destroyed. Import of such items from China was banned until further investigation and
correction. On the flip side, in India, the sale of such harmful toys and games continues in
roadside shops, with manufacturers continuing to produce such items, and sellers selling them
unmindful of the seriously damaging side-effects in children. Worse still, parents continue to
buy these toys—equally careless about how harmful toxic material can be for children.

While India, too, banned the import of children’s toys from China much later (after the US
did), other such violations continue unabated in the country. So, where does the buck stop? And
who is responsible for this unethical act? If rules, regulations and laws were able and sufficient
to prevent such harmful practices, there would be no need for moral teachings, codes of moral
conduct, value-systems, social strictures and pressure, and, above all, ethical principles in business.
Most countries may have instituted rules, regulations and laws for progressive or punitive action,
but these are also violated by individuals driven by greed and profit. Rules, regulations and laws
are external to an individual, but ethics and morality are internal to him or her—exerting an internal
force for self-correction and self-regulation, and thereby making one think and act conscientiously and
harmlessly. Hence, discussions about ethical issues and moral responsibility in the marketing of
consumables and other products are necessary for understanding the ethics of business in the
marketplace. Marketing toys or foods harmful to children would be ethically wrong, regardless
of whether the country has any regulatory direction to that effect.
Individuals or a company marketing such products to child consumers or sick people must be
doubly careful and self-regulating; ethics in a marketplace cannot be regulated by rules and laws
alone; they have to be inculcated in the organisation by a principled approach to business, moral
attitudes and commitment to ethical governance. Individuals engaged in marketing should be
encouraged and empowered to be moral and ethical in their dealings—as a priority over profits.
Consumers are not simply statistics; there is a face behind every consumer who has his or her
own needs and requirements which should be fulfilled by ethical means if the business aims to
progress and grow in a competitive environment.

5.3 WHO ARE CONSUMERS? WHAT DOES CONSUMER PROTECTION MEAN?

Consumers are those who buy and use products with the intention of fulfilling their basic, self-
perceived or introduced needs. For example, foods and beverages are a basic need; refrigerator
or television is a self-perceived need; fashion and toys are an introduced need. Consumers buy
with the belief that these goods or consumables would fulfil their needs; they have right to be
protected from any deviation, if it exists. It is necessary to declare the date of manufacturing
and expiry (of the product), major ingredients, precautions about any harmful effect, weight
and maximum retail price (MRP), methods of preservation or storage, etc. for all consumables,
in keeping with the consumer protection laws or similar regulatory enactments in a country.
The idea, here, is to protect consumers by giving them correct and complete information,
 Ethics in Business and Corporate Governance

thereby making them aware about the products they buy. Yet, it is not uncommon in Indian
cities and towns to come across pouches of milk or some soft drink being sold to unsuspecting
customers even after the product has crossed its expiry date (or ‘best for use before …’ date).
Most of these products are made by reputed companies, and distributed in the market by their
sales personnel or direct selling agents. Shops and distributors of such consumables are so
concerned about meeting their sales targets and clearing their stocks that they neglect to return
old stocks to manufacturers or to inform buyers about the same. An unsuspecting buyer using
some such products may suffer from vomiting or flatulence or a more serious ailment—and the
damage is far worse in the case of children. There should be a system whereby distributors or
manufacturers either recall or withdraw such products from the market, but this is often missing
in the marketing system. As a result, buyers get a product that they did not want, children (the
consumer) get bad health and producers make undue money. How a society deals with this?
Ethics of consumer protection and marketing should address such problems.
There are numerous complaints5 filed against defective products being marketed to
consumers—be it consumables like food and drugs or consumer durables like refrigerator,
television, car or washing machine. While it may be argued that consumers are educated and
informed enough to make their decisions and choices in buying what they want; yet, this
remains a difficult proposition in a society where most people are in no position to gather all
relevant and factual information about a product or to understand the implications of its usage.
In a country like India, for instance, where consumerism is still in its nascent stage, and where
consumer protection systems and methods are evolving through experiences and grievances,
manufacturers or marketers have the responsibility of strictly following the norms—related to
the sale as well as after-sales services of their products—in accordance with professional, national
or international standards and laws governing that product type. Competitive advertisements
and different kinds of sales promotions that may confuse the consuming public (and thereby
induce them to buy an unsatisfactory product) should be self-regulated and ethically censored
by the industries themselves. This, however, cannot stop a producer from producing goods
that have a market, unless the goods involve some banned material that is unsafe for consumer
health or environment (e.g. chlorofluorocarbon in refrigerators or air conditioners), or violates
(human or environment) safety norms. In the production and marketing of consumer goods, it
is not the price or profit but the means and methods of marketing and selling the products to
consumers that is the concern of ethics and ethical practices. These consumer products can be
foods, drugs, beverages, chemicals, electrical or electronic goods and consumer durables among
others, but the marketing rules—of fairness, transparency and ethics—remain the same for all
types of consumers. To cite one case of manufacturing negligence in electrical appliances:

In the case of a short-circuit fire that considerably damaged a house, apparently, the
domestic ‘power inverter’ was found to have violated the safety norms required in electrical
back-up systems of its kind. For the same, the customer (whose house had caught fire) was
awarded suitable compensation (Rs. 2.5 lac) by the Delhi State Consumer Disputes Redressal

5
http://en.wikipedia.org/wiki/Consumer_protection, http://www.ccccore.co.in/, and http://www.consumer-voice.org/consumerlaw.asp, accessed
on 31 July 2009
 Ethics in Marketing and Consumer Protection

Commission.6 This cannot be ruled out as an isolated, freak case; in fact, in 2008, the Delhi-
based consumer organisation—Consumer Voice7—had tested nine brands of inverters sold
in the market and found that none of them met the quality standards set by the BIS (Bureau
of Indian Standards), nor had they secured the mandatory ISI (Indian Standards Institution)
certification. It was found that these products did not meet even the minimum safety
standards, and, yet, were being sold largely due to the ignorance of consumers and unethical
business practices of marketers. If we, in India, had a Consumer Product Safety Commission,
as they do in the US, all such products (which did not adhere to safety requirements) would
have to be recalled from the market, investigated for the fault, corrected and re-tested for
certification before they were allowed to be sold in the market again. And, no plea related
to the ‘own free choice’ of consumers would stand in the way of awarding product failure
liability—which also works as a deterrent to such unethical practices.
In summary, the aforesaid case illustrates total violation of ethics in the marketing of a
product that, in turn, also violated the moral responsibility of guarding (or assuring) the
safety of consumers.

The list of defective or inadequate products being sold in the country would be very long—
despite the many regulatory checks and controls. Not only that, consumers seeking ‘after sales
service’ often get a raw deal, no matter how essential regular servicing may be for the functioning
and safety of their products. Consumers can be careful but cannot be experts in the respective
fields to know what he or she should get or is getting into. There have to be well-established
consumer protection bodies as well as well-thought-out campaigns for consumer awareness
in the country, to work as a deterrent for fraudulent and unethical marketing. However, ethics
experts believe that what is needed is a change in the attitude of businesses and a sense of moral
duty towards consumers at large.
Many claim that unethical practices in marketing arise from a shortage of the right goods
at the right time—as compared to their respective consumer demands. Furthermore, when the
market behaviour is price-sensitive, some manufacturers tend to take advantage of lower pricing
by offering products that are inadequate in quality and safety. Hence, consumer protection and
consumer safety in marketing goods and services are best served in a ‘free market’ condition
—where sellers respond to consumer demands and expectations with open and ethical minds.
So, while consumers have the responsibility to indicate their preferences (e.g., fuel efficiency
of a car) and pay the price willingly, the sellers are responsible for understanding customer
needs and requirements and selling accordingly. The driving force behind ethical behaviour in
a free market is the force of competition; if a customer is not satisfied with the product of one
manufacturer, he or she may go to another one, competing in the same market and offering
an alternative product. Thus, the seller or salesman of the former product, who lost a customer
due to the inability of his product to fulfil specific requirement(s), would do well to advise

6
http://delhistatecommission.nic.in/, accessed on 29 October 2009
7
http://www.consumer-voice.org/index.asp and http://www.consumer-voice.org/sitesearch.asp, accessed on 29 October, 2009 (refer to
Consumer Voice magazine, 2008 issue)
 Ethics in Business and Corporate Governance

his company about modifying or improving that product, thereby leading to the creation of
a newer, better product option for the customer(s). Thus, for a truly free market situation, not
only is the cardinal rule of listening to the ‘voice of the consumer’ fulfilled in a business, but the
customers are also enabled to buy only those goods which they want, without loss of value. So,
do ideal free market conditions exist in practice—where marketers and consumers are mutually
dependent so as to satisfy each others interests? Indeed, to bring about such a win-win situation
in the marketplace, both marketing personnel and individual buyers have to display high moral
standards and strict ethical behaviour.
Certain features and qualities of most products endanger safety during their usage. A few
examples of such product features are: chemicals and chemical ingredients in drugs, foods and
paints, and plastics and polymers used in children’s toys and garments. Similarly, the quality of
electrical appliances, cut-off switches in electrical switchboards, heating and cooling mechanisms
in engines, etc. are a few critical features for safe usage. Nowadays, in most countries, both the
government and standardisation procedures try to safeguard consumers with regard to these
features through affixed regulations and standards. Consumers are advised to buy and use goods
that adhere to these predetermined quality and safety certifications, in order to protect their
interests. In a free market, these regulations could follow the minimum standards of quality
and safety needed in products—and not necessarily the ultimate, in case the consumers want
products of better quality and higher safety. However, in a free market, many manufacturers
go far beyond these basic specifications to cater to consumer choice. In a free market, consumers
are the principal factor that determines what to market, how, where and at what price, but such consumers
must also be able to identify what to buy and use. They have to be educated enough to know what
they want and why they want it. Thus, consumer education plays a big role in a free market
society for effective consumer protection. Establishments like consumer counselling forums,
consumer protection courts, and consumer grievance cells operated by the government or by
independent (NGO) agencies, educate consumers and help eradicate their problems. Company
brochures and offer documents, online information (Internet) and product data also guide and
serve the consumers and protect their interests. As per legal and constitutional provisions in
India, everybody has the right to information about the product and services as per interest. Yet,
crux of the problem is the voluntary disclosure of information and data by the manufacturers,
their marketing personnel as well as the consuming public. Ethics demand that a company
should disclose the essential features and safety measures of a product for consumption or use,
but that may be on inquiry (from a potential buyer) and may not be voluntary (except to the
extent of being advertised). Thus, there is a gap between what marketing does and consumers
want; a gap that could be filled by consumer education, awareness, information flow and the
transparency of marketing personnel. It is especially urgent to attend to this gap in India, where
consumerism is rapidly growing, to prevent widespread discontent, dissatisfaction and despair
of a huge consumer population in both urban and semi-urban society (consumerism has yet to
significantly reach India’s rural areas).
Experts claim that the full benefit of free market can be obtained only when market—
including consumers—fulfil the following characteristics: (i) there are numerous buyers and
number of sellers to promote a competitive marketing situation; (ii) everyone can freely enter
 Ethics in Marketing and Consumer Protection

and exit the market (and has access to goods and articles to sell and buy); (iii) everyone has
correct and complete information about the products; (iv) the product from a manufacturer
is similar, i.e., there is no variation in either quality or price from store to store; (v) all buyers
and sellers are ‘rational utility maximisers’; (vi) the goods have no external or hidden costs; and
(vii) the market is not controlled by any authority nor curtailed by a group of manufacturers.
However, the third point in this list (correct and complete information) and the fifth (consumers
are rational individuals who maximise the utility and satisfaction from the goods they buy) may
not exactly be tenable in practice. Furthermore, there are variations in practice of free market
conditions relating to characteristics (iv), (vi) and (vii) in the earlier list. Such free market
deviations and variations make it truly difficult to follow ethical transactions in the market.
Most manufacturers, though quite knowledgeable about their products (e.g., an automobile
manufacturer), are reluctant to disclose all safety and defect related information (including
feedback from the market) to customers owing to the fear of complicating sales. Consumers, on
the other hand, may not be able to collect all relevant information as that could consume time
and money. Not to mention, a consumer may not be able to fully appreciate what he or she
is buying (meaning, the consumer may have product-relevant information, yet he may not be
an expert to appropriately interpret that information). Therefore, dissatisfaction about buying
a product may still persist. In this way, the solution to the problem of ethical marketing and
serving the consumers, even in a free market condition, remains elusive.
Without probing into the assumption that sellers (marketers) are ‘rational utility maximisers’,
let us examine if the consumers are that way too. One view—challenging that consumers are
always rational in approach and maximise the market opportunity to utilise and be satisfied
with their purchases—assumes that consumers are (a) ‘budget minded’ individuals who can
think well ahead, and are able to wait for the right buying opportunity; and (b) individuals with
well-defined and consistent product preferences that are based on knowledge and information,
and are clear how their choices will affect their preferences. Unfortunately, consumer behaviour
in the marketplace suggests otherwise; in that, consumers, in buying the product(s), are often
irrational and inconsistent in both their choice and their judgement (i.e., if the product use
or function will meet their expectation). This is because consumer judgements are based on
what they deduce from a set of data, information and behaviour and the probability thereof.
And, in such cases, when the probability goes astray due to reasons that vary from self-belief or
individual notions, to casual approach in arriving at an estimate, and generalisations based on
small sample findings or inadequate data. Consumer research has often shown that people are
irrational and inconsistent when it comes to weighing choices based on probability (vis-à-vis
future estimation) and payoffs (vis-à-vis value for money).As a result, we often underestimate the
risks involved in our actions as consumers of certain types of foods, drugs, cigarettes and many
other products that may damage our health and well-being. The printed warning, ‘Cigarette
Smoking is Injurious to Health’, on every pack of cigarettes is a directive to protect consumers
from the irrational evils of smoking. Similarly, there are warnings raised about consuming
some food products or ingredients and the indiscriminate use of drugs. “Yet, many consumers
disregard such warnings and continue making irrational product choices—casually and without
thinking about the consequences (of product usage).”
 Ethics in Business and Corporate Governance

Therefore, it is also up to the consumers to be careful (in selecting and purchasing the
product) and act rationally so as to protect their own interests.
In protecting consumer interest, manufacturers or marketers have an even bigger role to
play because it is they who are best acquainted with the nature of the product (i.e., if it has any
harmful feature or effect) and who can best inform the consumer about product usage (i.e.,
applications or precautions). Many a time, manufacturers or marketers are not really serious
about protecting the interests of their consumers, especially if they have to do so at the cost of
their business. Here, we consider one such example:

Printing the statutory warning that cigarette smoking is injurious to health is a mandatory
requirement, which cigarette manufacturers follow. But, do they really mean to caution
people and deter them from smoking? Or are they merely complying with certain regulations,
oblivious of the effects of smoking? Nonetheless, such regulatory moves8 to caution consumers
may lead to some fall in cigarette sales, which may force the manufacturers to find ways by
which to reduce the harmful effects of nicotine intake from cigarette smoking. One such
attempt in this direction is the ‘tipped cigarette’, although its benefit has been very small. On
the other hand are some unscrupulous cigarette manufacturers who even go to the extent
of manipulating menthol levels in cigarettes to get youngsters addicted to smoking (refer to
Case I in this chapter). As cigarette smoking continues, thousands of smokers are meeting
untimely death, not to mention how passive smoking is affecting children and rendering them
deficient in many ways. Cigarette manufacturers—unmindful of this damage to individuals
and society—continue to expand their businesses; their advertising budgets go higher as they
continue to promote their products. The warning signs on the packets are merely symbolic
compliances with the law, and mean nothing more to cigarette manufacturers in terms of
protecting consumer interest.

Then there are those manufacturers or producers who aggressively promote their products
in the marketplace—knowing fully well that their products could be harmful (not beneficial)
for users. Some such potentially harmful or not-so-beneficial products being promoted in the
country are many types of cold drinks, cosmetics, electronic products and the so called ‘ayurved
and herbal’ products. Reports of fraud are also being reported from the emerging fields of
biotechnology and hybridisation. Take, for instance, the recent reports about Indian farmers
being duped into buying low quality ‘hybrid’ seeds as high-yield, fast-growing seeds; let us view
the example as follows:

According to a news report (The Telegraph, Kolkata, 21 October 2008), a Hyderabad based
company sold a certain variety of rice seeds to some farmers in a remote area of West Bengal,
in India, claiming that it was a fast-growing, high-yield variety. While the seed manufacturer
had said that the crop would be ready to harvest within four months, the farmers found that
it did not flower even after six months. Finally, farmers had to destroy that crop to make the
land available for another type of cultivation. Thus, they not only lost the yield from their

8
http://www.druglibrary.org/schaffer/LIBRARY/studies/nc/nc2b.htm, accessed on 30 July 2009
 Ethics in Marketing and Consumer Protection

land but also failed to repay the bank loan they had taken to cultivate their land. As per the
same report, this had created serious repercussions in the area, with some farmers having
planned to take the seed manufacturer to court in order to recover their losses.

Unsurprisingly, every year hundreds of farmers commit suicide due to crop failure and
the financial burden on their families, considering they are mostly marginal farmers surviving
on the fortune of good yield. While such violations amount to crime against humanity, such
situations in society gives rise to the eternal question: Where does a manufacturer’s duty to
protect consumer interest begin, and where does the consumer’s duty to protect self-interest
end? Issues related to consumers and consumer protection, therefore, need to be examined
further from the standpoint of ethical principles and approach.

5.4 APPROACHES TO CONSUMER PROTECTION

Experts approach consumer protection from three different angles, namely: (i) The ‘contract
view’ of duties to consumers in business; (ii) The obligations for ‘due care’ in business dealings;
and (iii) The ‘social costs’ view. The contract view places greater responsibility on consumers,
but the views pertaining to due care and social costs place considerable responsibility on
manufacturers and marketing. A brief discussion of these views is necessary to better appreciate
consumer rights vis-à-vis manufacturers’ (or dealers’) responsibility.
(i) The Contract View
According to this view in business, relationships between customers and suppliers are essentially
contractual in nature, whereby the supplier’s moral duty is created by the contracted terms. Let
us elaborate with the example of buying a refrigerator discussed in Section 3.1. Here, as per the
contract relationship, a customer voluntarily enters into a sale contract with the supplier (dealer)
to buy the refrigerator —after its features, characteristics and quality have been made known
to the customer. The dealer knowingly and freely agrees to give the consumer that product
whose characteristics are now known. In turn, the consumer freely and knowingly agrees to
pay the agreed price for that product (refrigerator). According to this virtual agreement, the
dealer has the ‘duty’ to provide a product with those characteristics that are made known and
the customer has the ‘correlative right’ to receive a product with the same characteristics after
the payment of the agreed price. What, then, can go wrong in this contract? Rather, such a
contract is morally correct if:
(A) Both the parties in the contract have full knowledge of the nature of the agreement
they are entering into and its binding conditions;
(B) Neither party in the contract has the intention to misrepresent facts to the other party;
(C) Neither party in the contract is forced to enter into the contract under duress or undue
influence; and
(D) Both parties in the contract have sufficient knowledge and information about the
product being offered (sold) and accepted (bought).
Therefore, if the consumer has not received the right product (refrigerator), which is tested
and trouble-free, and if the dealer has not intentionally (with prior knowledge) despatched
 Ethics in Business and Corporate Governance

the wrong product, then the customer can only claim replacement of the product—and not a
refund (of money) nor exchange (for another brand or model of the refrigerator). However, in
this case, the manufacturer is apparently guilty of selling the wrong product to the dealer—in
clear violation of the manufacturing and testing process, and the mandate of quality standards.
Here, the consumer claims a refund or exchange, only if the dealer cannot replace the sold
product (with another one that is tested and certified). Because, as per contract condition D,
the contract is vitiated by the dealer’s failure to supply the right product, with the assumption
that, in the first place, the dealer had no (sufficient) knowledge about the product being offered
(sold). As a result, the customer is free to ask for a refund or replacement as per his or her choice
and at the applicable price.
Thus, the contract view lays four moral duties upon the business: comply with the terms
of the sales contract; make full disclosures about the nature of the product; avoid intentional
misrepresentation; and prevent the use of undue influence or duress. Thus, by acting in
accordance with these duties, a business (run by a dealer or manufacturer) recognises the right
of a consumer to be treated as a free and equal partner in the contract. This implies that any
affirmation of the fact or promise made by the seller to the buyer, relating to the goods and service, becomes
part of the basis of the bargain, and creates an express warranty that the product shall conform to that
affirmation or promise. While this should be the moral condition, there are many violations of
this contractual understanding and obligations, especially in the case of consumer, financial and
insurance products.
In modern retail, some may argue that manufacturers of consumer goods seldom enter directly
into any contract with the consumers; the retailer or the dealer is responsible for the contract.
Then, how can the manufacturers have contractual duties towards the consumers of their
goods? Yet, there is no denying that manufacturers describe and advertise their product through
various media. They also describe to their dealers about the quality and testing procedures for
their product and explain that it is certified for use. Therefore, these advertisements, procedures
or descriptions in this regard should act as promises—made to prospective buyers—of those
characteristics and attributes of the product that are advertised.The ‘tested’ or ‘certified’ markings
should further guide the dealers to corroborate the quality and character of the product in
leading consumers to buy it. Thus, retailers or dealers serve as conduits for manufacturers (and,
hence, the products) in the chain of manufacturing and marketing a product. By this chain of
events, manufacturers forge a virtual contractual relationship not only with the retailers or dealers but also
with the ultimate consumers of the products. As a consequence, a contractual relationship created by
the manufacturer through advertisements or otherwise, creates an ‘implied warranty’ obligation
and duty towards the ultimate consumers, which has to be fulfilled. Any failure in this regard
would constitute incompliance to the contractual obligation, and the customer would be right
in seeking appropriate redressal.
According to contract view, the most important moral duty of a business is to provide
consumers with products and services that live up to the company’s claims made either through
media (advertisement, brochure, etc.) or by the sale contract. The sellers are also duty-bound
to fulfil any implied claims that the company or its representatives make about the product
at the time of the sale. The case of ‘high-yield, fast-growing seeds’ cited earlier is an example
 Ethics in Marketing and Consumer Protection

in this regard; it was the manufacturer’s duty to abide by the promise made to the farmers, as
inducement to buy (i.e., the crop would be ready to harvest in four months).
In general, a product or service is offered in terms of four variables: reliability, maintainability,
safety and service life. Products should perform in keeping with these predetermined or promised
expectations of consumers. Manufacturers have the duty to satisfy consumer expectations in
order to protect consumer interest. Here:
Reliability refers to the probability that a product will function as the consumers are led
to expect it to function. If the product does not function in that way, the producer is duty-
bound to rectify or replace the product, generally within the warranty period. For example,
if a consumer buys the refrigerator expecting that it will keep vegetables fresher than other
refrigerators because of its ‘cross-flow’ feature (as shown in the sales promotion campaign) and
it fails to do so in reality, then the dealer or manufacturer has the duty to change the refrigerator
or rectify the feature within the guarantee period. And it would be the same case with any
other product—be it a car, washing machine or television. In countries where consumer
protection laws are very strict or harsh, it is not uncommon for products to be ‘recalled’ from
the marketplace on reliability grounds, i.e., for probable malfunctioning.
Maintainability relates to the ease with which a product can be repaired and retained in its
working condition without much loss of efficiency. Many car manufacturing companies give
a spare parts replacement warranty for a stipulated period or mileage in order to maintain the
expected performance of their product (car). This practice is also prevalent for a few other
products, like electronic goods. But, in the fast-changing electronic goods market, parts of old
model are not available as the respective features become obsolete, and, hence, it is not possible
to maintain the product.Thus, unsuspecting consumers who are happy with the product quality
and performance for the first few years, find themselves in a bind of having to scrap an otherwise
desirable product.Today’s marketplace, with its rapidly changing product models and features, is
so dynamic that consumers are often toeing this line as fate accompli. However, the manufacturer’s
duties (towards consumers) still calls for the responsibility to either design products with high
degree of reliability (so as to minimise the scope for the failure of the product or its parts), or
ensure the supply of its spare parts in the market for a minimum period (say 10 years) after
launching the product.
Safety is perhaps the most critical requirement that must be guaranteed in a product. Product
safety refers to the risk associated with using a product (in a way that could be detrimental
for the consumers or the environment) which should be ‘acceptable’ or ‘reasonable’. Arguably,
the usage of most products lends scope to some type of risk or injury, but this too should be
established by the manufacturers and made known to the buyers. In other words, consumers
should be able to buy goods with known levels of risks along with a prescribed measure of
precaution that would minimise its ill effects. Failing this condition would amount to violation
of moral duty in marketing a product. If manufacturers or dealers themselves do not know
about the safety hazards associated with the product, marketing ethics would call for sufficient
efforts to know about the safety hazards and possible precautions. For example, a manufacturer
of a critical drug for AIDS must be aware of the quality of chemical ingredients being used and
their possible effects on human body. This drug manufacturer is duty-bound to seek approval
 Ethics in Business and Corporate Governance

from a competent drug control authority in the country who would best know the ill effects
of variation in chemical quality. Similarly, while marketing their products, manufacturers must
disclose the risk and side effects involved in using the drug with appropriate signs and symbols,
if any, along with other precautionary measures. Any failure in taking such precaution may
further complicate the health of an already sick person, which would constitute violation of
ethics and moral duty in the business.
Service life refers to the time period in which the product functions with the normal wear
and tear in sync with the service conditions and precautions mentioned in the product brochure
or sales communication. Claims about the service lives of products have to be fulfilled by the
manufacturers. Manufacturers have the duty to clearly specify the method of using the product
for effective service and expected service life; consumers have the duty to use the product as
per the instructions. Nonetheless, like maintainability, the expected service life of a product
often gets reduced with usage. These products cannot be restored to their former service due
to obsolescence in the marketplace. This happens in almost all the areas of marketing consumer
durables, as product features are ever-changing—even in cosmetic or stylistic aspects—and, as
a result, replacement for worn out parts of earlier models are unavailable, making the product
redundant. Nowadays, manufacturers focus on adding new products to the market rather than
on serving existing buyers with features that ensure the projected service life.The most obvious
example, here, is the maintainability and service life of personal computers (PCs), wherein
every part of the product is fast becoming obsolete. As a result, many individual PC users (who
would otherwise keep using the older models for longer service life), are being forced to change
both hardware and software to keep up with product availability, latest facility and market
dynamics.
Thus, the ‘contract view’ requires that manufacturers are aware of certain duties and
responsibilities involved in ensuring that the selling and buying are both fair and just. Consumers
may not be truly equal in a contract, because they cannot possibly be as knowledgeable as the
manufacturer with regard to a product or service and its final utility and safety. Moreover,
consumers do not have the time and opportunity to find out the actual details pertaining to
product utility and safety. Therefore, success of the contract view approach in consumer protection lies in
manufacturers and sellers being true to their contentions about a product and its utility and safety, without
circumventing the deficit in it. In fact, the equality assumed in contract theory is more an exception
rather than the rule. As a consequence, consumers in most countries continue to suffer even in
free market conditions.
(ii) The Due Care View
In this view, consumers and manufacturers are not equal; consumers are vulnerable to harm
caused by manufacturers’ actions based on the opportunity provided by their knowledge and
expertise about their products, on the one hand, and the consumers’ lack of knowledge and
acquaintance with the products on the other hand. Thus, in the marketplace, manufacturers are
in more advantageous position than consumers. Hence, ethical principles of business demand
that manufacturers or sellers have the duty to take care of the interests of consumers by not
harming their expectations about the products. Here, the doctrine of ‘buyers beware’—applicable
 Ethics in Marketing and Consumer Protection

to the contract view—is replaced by ‘sellers take care’. Due care, in effect, not only makes it
obligatory for the manufacturers to ensure that buyers get the goods and services that live up
to all the explicit and implied product claims, but also makes it their duty to exercise care so
as to prevent harm or injury by the products. For example, ceiling fan manufacturers not only
have to ensure that the fan delivers and circulates air (as claimed or implied in their sale deal),
but also have to ensure the right mechanism so that the fan blades do not work loose causing
any accident or injury. Thus, the theory of due care involves the manufacturers in all stages of
product development (from design to final testing to marketing) with a view to ensure product
quality, reliability and safety for consumers. Failure at any or all steps would mean a breach in
the moral duty to exercise ‘due care’, notwithstanding that a seller may have insisted and a buyer
may have accepted a ‘disclaimer’ excusing the manufacturer from any such liability. Due care
is based on the principles of ‘relationship of dependence’; in this regard, the ethics of care impose
the condition that manufacturers have a special relationship with their consumers (to ensure
that enough care is exercised to meet a particular customer’s needs at the time of offering the
product), and also safeguards a third party from any ‘harm’ arising from product usage. A simple
example would be the electrical ‘doorbell’—it should not only meet customer requirements in
terms of design and sound, but should also be shockproof so as not to harm a person visiting
the consumer’s house.
‘Due care’ approach to serving the consumer interest is solidly based on several ethical
perspectives, and enumerates that: (i) Manufacturers or dealers or agents have the duty to
carefully examine the specific needs and expectations of a vulnerables (buying) party; (ii) Due
care is based on the ethics of care, which makes it mandatory to fulfil the condition (i) such
that selling and buying goods and services in marketplace becomes an explicit moral duty; and
(iii) Due care is also in line with ‘rule utilitarianism’, and, if accepted and followed in marketing
and selling, ensures the welfare and well-being of all. These enumerations of due care make the
manufacturers responsible for: (a) designing the product or services using the latest technology
to make the product less liable to harm or injury; (b) care and control during manufacturing
with the help of known techniques and technology to prevent defects (or liability); and
(c) information about product disclosures made with labels, notices or instructions on the
product that warn consumers of dangers or precautions (if any) involved in usage. The due care
view not only applies to manufacturing, but also to services. A classic case of due care in services
was the recent directive of an Apex Consumer Court in India regarding the quality of potable
water supplied by civic bodies (The Telegraph, Kolkata, 4 August 2008). In its directive, the
court observed that it is the responsibility of the civic body of that regions to supply drinking
water suitable for the civic population; citizens may claim compensation if they suffer due
to poor quality water (causing diseases). Therefore, ethics in business and administration, and
ethical responsibility for the consumers at large, are not only confined to business but are also
concerned with civic administration and care, which are generally run by elected government
administrative bodies.
The due care view, therefore, seems to be the answer to today’s customer dominated markets
where success of a business depends on customer satisfaction measures. However, it has few
limitations as well. It is difficult to draw a line or quantify—when or how much ‘care’ is enough
 Ethics in Business and Corporate Governance

—as the measures are mostly qualitative in nature. Also, it is not clear how far a manufacturer
should go to determine the needs and requirements of a customer and what would really satisfy
consumer needs and expectations. It may be that a manufacturer genuinely fails to discover
the needs of a customer and sells him a product to the contrary. Generally, in a free market,
customers make the buying decision based on the sellers’ description and information about
the product. But, a customer may not be appreciative of all the information shared during the
deal and may go by other reasons to buy sub-optimal goods—for which manufacturers often
decline responsibility later. In such cases, although the consumer undoubtedly has the right
to choose what he wants to buy, the due care approach obliges the seller to caution the buyer
about product deficiency, if any.
(iii) The Social Costs View
This is another way to approach how manufacturers discharge their duties and responsibilities
towards consumers and other public. According to the social costs view, a manufacturer should
pay for any damage or injury sustained by a consumer or public owing to any defect in the
product—despite the fact that the manufacturer had exercised all due care in the design and
manufacture of the product, and had taken reasonable measures to warn users of any possible
danger (in keeping with the due care approach). The aim of this approach to consumer
protection is to ensure that manufacturer do not escape or evade their responsibility in the case
of any harm or damage to consumers (arising from defective product), howsoever unforeseen it
would have been at the start. This approach is also based on the ‘sellers take care’ doctrine and
forms the basis of legal liability founded on utilitarian logic.
Incidents of social costs are aplenty, especially in America and Europe where consumer
protection laws are very harsh for ill-designed and badly manufactured products and the
consequent product liability. Some such examples are: failure of safety mechanism in a car,
accident inside aeroplane due to faulty design of interior utility space, malfunction in household
appliances, etc.With increasing mechanisation and automation of products (goods and services),
there is an urgent and critical need to safeguard consumers and society from possible damages
and sufferings caused by product failure. Not only are marketing ethics more stringent in these
countries, even the laws governing social justice are quite specific about dealing and estimating
consequential damages.As a result of this approach, all manufacturers are extremely meticulous in
designing their products and equally conscientious in marketing. However, very few developing
economies can boast of such effective consumer protection laws and measures; hence, in less
developed countries where the ‘social costs’ are relatively low, businesses or manufacturers tend
to make certain compromises and adjustments while designing, manufacturing and marketing
their products. For example, in India and other developing countries, car manufacturers can
easily market even those models that do not have ‘minimum crash test’ safety or are not fitted
with ‘airbags’ to protect the driver and passengers in the case of accident. This is a serious
compromise, where car companies compromise passenger safety, due to the lacunae in laws
and governance. Similarly, drugs manufacturers and marketers in India freely sell their products
over-the-counter without adherence to safety standards. In all such cases, manufacturers are
oblivious of their duties and responsibilities to the public and society. However, this situation is
 Ethics in Marketing and Consumer Protection

rapidly changing in India, owing to increasing consumer awareness and stricter implementation
of consumer protection laws. A case in point, discussed earlier in this chapter, is the judgment of
a Delhi court favouring the victim of the faulty ‘power inverter’, ruling that the manufacturer
pays compensation to the consumer.
According to proponents of the social costs view, this social and consumer protection initiative
will lead to more efficient product development and effective usage of society’s resources;
hence, it will benefit business as well as consumers. Businesses will be forced to factor-in all
actual and probable costs (including that incurred on product failures), thereby leaving no
scope for any hidden costs or overpricing. This approach will also make manufacturers more
careful in designing, manufacturing and marketing their products—to avoid the burden of
failure and social costs—which will greatly motivate technological advancement and discovery.
Furthermore, with the application of social costs, manufacturers will now distribute the cost
—incurred on product development or defect elimination—to all consumers alike, through
built-in pricing, without a few unfortunate consumers being burdened with these otherwise
unexpected costs. Thus, this view lays overall importance on the utilitarian assumption that
the society’s resources must be efficiently used or employed so as to secure maximum benefits
for people. This approach leads to the charter that it is the manufacturers’ duty to protect
the consumers and society from costs arising due to product defects or deficiencies, even in
the absence of intentional negligence or contractual relationship (between manufacturers and
consumers). But, is it all that fair to manufacturers who could not have foreseen the problems
nor could have eliminated them from their products? Does the provision of social costs violate
the basic rule of compensatory justice? Nonetheless, the utility of this view in protecting
consumers from unforeseen damage or injury goes a long way in helping the society in broad
terms; making the producers of goods and services a bit more mindful of ‘product effects and
liability’; and promoting a business culture of sharing such costs with insurance or other fair
methods rather than the affected consumer or society member having to suffer it alone.

5.5 MARKETING AND ETHICS

Marketing ethics should be guided by the principles of ‘consumer protection’ as discussed
in Sections 5.3 and 5.4 of this chapter. However, for a clear understanding of ethics vis-à-vis
marketing, it is necessary to examine few market characteristics and how the rule of ethics can
be effectively applied to those market situations.
The primary characteristic of an organised and ‘free market’ is the presence of competition
in the marketplace. Lack of competition or any anti-competitive elements posed by a few
manufacturers would only encourage unethical marketing practices and violations of consumer
protections duties. It may not be out of place to recall that towards the end of the 1990s, when
steel prices were falling in India, news reports alleged ‘price carteling’9 by some leading steel
producers in the country.
9
Carteling is collective price fixation, by which business enterprises restrain the growth of a competitive marketplace. Business
associations such as those of the gas dealers, airline operators, brick factories, air travel syndicates, etc. either fix the rates or bottom
line prices, and no one affiliated to the association dares to violate the rule. Refer to: http://www.gera.in/site/show_news/165/;
http://www.moneycontrol.com/news/economy/steel-prices-down-by-18-sail_336697.html, accessed on 21 October 2011
 Ethics in Business and Corporate Governance

economy of India, those companies were trying to avoid price competition by curtailing it,
thereby depriving the consumers of the benefits of a free market. Instead, what was expected
from such a market was value-addition to products and holding the price realisation level in a
competitive marketplace. Since the opening up of the Indian market and the global economy,
many regulatory measures like ‘competition law’, ‘anti-dumping law’, ‘law against restrictive
trade practices’, etc. have been introduced to curtail or prevent such unethical marketing
practices in order to protect the interests of the consumers and the nation.
It must be appreciated that the key factor for a successful business is its ability to compete
in the existing and emerging markets without recourse to any unfair, immoral and unethical
actions. The moral aspects of a free market system call for the production and distribution of
commodities in a way that are just, maximise utilisation of resources and money for real value
creation, and maximise economic utility for consumers and society. As is pointed out in Sections
5.3 and 5.4 of this chapter, a true free market situation seldom exists. It is not uncommon
that sometimes a few players in the market join hands, lobby to authorities, and use their
combined power to fix prices or to ascertain the availability of a commodity or service. This is
unethical marketing by any means and against any fair trade practice. Such situations exist not
only in national level operations, but also in international trade where free market is distorted
by the protectionist attitudes of giant multinationals or the ruling governments. An example
of international trade carteling is the yet-to-be-resolved dispute of the Doha Agreement10
for free trade amongst nations; countries who are parties to this agreement are still defying
and continuing with protectionist measures and anti-dumping laws. Instead of promoting and
strengthening a free market and fair business practices, governments of these nations themselves
are posing barriers to the actual implementation. Analyses of various WTO (World Trade
Organisation) reports, such as the Doha Development Round10 and G-2011 meetings show
that governments themselves fail to act fairly when it comes to trading with other countries. Thus, fair trade
and truly ethical marketing practices are seldom observed in international business, even though
all countries swear by ‘equal opportunity for growth’, ‘fair trade practice’, ‘customer satisfaction’
and ‘consumer protection’ in their mission for international trade and cooperation.
It is generally believed that ethics are more closely adhered to in perfectly competitive markets,
wherein no buyer or seller has the power to significantly influence prices or exchange mode
at which goods are being exchanged (Figure 5.2 illustrates the typical ‘demand-supply’ curves).
In such a demand-supply balanced market, buyers and sellers are equal in power to prevent
or deny any force upon each other in terms of buying or selling. Another condition of such
markets is the freedom from imposition of any external regulations on price, quality or quantity.
However, such markets always witness ‘demand-supply’ equations to affix or contract the price
and quality, which adversely affect the buyers and raise questions about marketplace ethics.

10
http://www.wto.org/english/tratop_e/dda_e/dda_e.htm, and http://en.wikipedia.org/wiki/Doha_Agreement, accessed on 29 October
2009, and http://en.wikipedia.org/wiki/Doha_Development_Round, accessed on 29 October 2009
11
http://www.g20.org/about_what_is_g20.aspx, accessed on 29 October 2009, and http://en.wikipedia.org/wiki/G-20_major_economies,
accessed on 12 October 2011
 Ethics in Marketing and Consumer Protection

High Demand High Supply

300 Surplus area

Prices per Ton Loss

(Rs.)

Profit Opportunity E
100

Shortage area
Low Supply Low Demand
Quantity Produced

Figure 5.2 A Schematic Demand and Supply Position with Effect on Prices and Profits [In this figure, E denotes
equilibrium point where demand equals supply, and in this condition, seller and buyer are in equal advantage. But,
for low supply, price will be pushed up allowing higher profit opportunity. Similarly, for high supply, price will be
pushed down due to opportunity loss.]

Here, the ideal solution is to have a perfectly balanced and ‘equilibrium’ market where ‘every seller finds
a willing buyer and every buyer finds a willing seller’. Only such a market condition will truly satisfy
the ethical and moral criteria of justice, utility and rights.
However, such an ideal market condition hardly ever exists because the market in general is
moved by the ‘demand and supply gaps’. Conventional ‘supply-demand curves’ analyses predict
that, in a perfectly balanced, free market situation, the prices, quantity supplied and quantity
demanded all tend to move towards the equilibrium point where the deal would be fair to
all. However, if the supply is less than the demand in the market, consumers will be willing
to pay more to get the product (in short supply) and vice versa, i.e., pay less when the supply
is more than the demand. And, very often, the market is dominated by imbalances of supply
and demand — arising from natural distribution or artificially created crises — which provide
opportunities for unequal bargaining power. In fact, many a time, the market is manipulated by
the manufacturers’ lobby or body to create such situations for extra profit, and consumers have
to pay more for goods and services made available under these market conditions. In developing
economy, like India, such instances of manipulation in the marketplace are plenty, often leading
to an inflationary trend in consumer goods pricing.
An example at hand is the rise in steel prices in India, continuously during April—July 2008,
although the country’s annual steel production exceeds its actual demand—thus, defying the
‘demand-supply’ rule. The reasons could be an increase in the country’s export (of steel) or
decrease in imports or both, or it could even be some price cartel at work. In such cases, the
government of some countries (as in India) tends to regulate or control the market price of
such goods by curbing certain types of trading via special notification. This may be deemed
as anti-free-market practice, but is necessary to protect the greater interests of consumers and
the national economy. Thus, we come back to the concept of either self-regulating or getting
a regulatory market-force to ensure ethical and moral rights, utility and justice for consumers.
However, in this context of free market economy, it should be noted that ethics should not only
be factored into the government’s economic policy (or measures), some other overriding factors
 thics in Business and Corporate Governance

should also be considered for the overall improvement of the national economy and well-being
of its population—both of which are subjects of micro and macro economic principles and
practices.
The greatest danger to consumer rights is the loss of free market and the emergence of a
monopoly market, directly or indirectly. In the latter, a single seller controls the market demands
and prevents new sellers to enter the market segment.The monopoly business or firm is, therefore,
able to fix its output to less than the equilibrium amount and, thereby, create a very high
demand situation that allows the firm to make an excessive profit (Figure 5.3 depicts a typical
monopoly market condition). In fact, monopoly markets leave most consumers aggrieved and
unfairly treated, though they would have little choice as consumers to go elsewhere, i.e., this
market will promote unethical practices in the marketplace. If other manufacturers are allowed
to enter and do business in this short-supply market, it would bring about a rise in supply and
drop in prices. This, in turn, would allow the consumers to have fairer and more just deals.
Many economies, especially the developing ones, try to regulate this monopoly market in a
manner that restricts the opportunity to make very high profits and restores some fairness and
justice in buying the concerned goods in a monopoly market.

500 Demand Supply

Price 300
Operating area
in monopoly
market
100 Shortage area
E
Quantity

Figure 5.3 Illustrative monopoly market condition where shortage is created by controlling quantity at a level
less than E, the equilibrium quantity. The monopoly firm, however, has to calculate the price-amount ratio that will
secure the highest profit under a given market condition.

In India, examples of such activities to protect consumer interest, especially in terms of

prices, could be seen in the pre-economic-reform days of 1970s and 1980s when there were
government control on prices and price escalations of certain utility products, like steel,
automobiles, fertilisers, etc. The situation has now changed with the opening up of economy
and globalisation—eradicating the era of totally monopoly market. However, in practice,
many markets are now dominated by few big players, which are suspected to be causing some
degree of distortion in the competitiveness of market structure. This is called oligopoly market
condition, wherein players of a particular market segment often tend to fix process for profits
by restraining competition amidst them. In India, this is seen in the steel and metal sectors
where companies sometimes join hands and fix prices (to be charged to consumers) for higher
profits. This is not an ethical marketing practice from the standpoint of consumer protection,
although such a move could be justified from the company’s point of view of increasing EPS
 Ethics in Marketing and Consumer Protection

(earning per share) or EVA (economic value addition). Many now believe that the derailment
of business results and the global financial meltdown in late 2008 was brought about by the
obsession with the practice of increasing the EVA at any cost as a means to grow and prosper.
If companies are guided by the interests of shareholders alone (i.e., as if they were the only
stakeholder in the company), then many unethical actions are triggered from time to time to
keep the promoters and shareholders happy. Some typical actions of such unethical actions are:
price fixing, manipulation of supply in the market, tying arrangements, retail price maintenance
agreement, price discrimination, etc. None of these actions are acceptable as ethical; yet this
type of ‘tying and doing’ business in an otherwise competitive and free market is evident the
world over. This goes to show that companies need to have other social goals—and the right
type of goals—to be fair and ethical in business.
Another important market power that aims to protect consumers is the ‘antitrust’ view
of business.12 As against monopoly or oligopoly market, this view implies the necessity for
competition to protect the trust of consumers. The antitrust view opposes the concentration
of business power through mergers and acquisitions, so that companies can exercise market
dominance (e.g. power to decide prices, etc.) with immunity. Since the concentration of
business power may not promote price or service competition in that market segment, it is
likely to harm the interests of consumers at large. Antitrust view recommends breaking up of
big companies into smaller units so as to promote competition amongst highly concentrated
companies. For example, in the current Indian scenario, antitrust view can be applied to the
telecommunication industry, where strong lobbies comprising few large companies control large
bands of telecom spectra. The government is trying to break into this by allotting spectrum to
other companies so as to promote competition in price and service quality so that, ultimately,
consumers can benefit from this basic infrastructural facility. However, there are opposing views
that large-sized and large-scale operations are more economical and beneficial for growth of
the business—ultimately benefiting the consumers. Some even advocate effective regulations
to control the market behaviour of such large companies without breaking them up and losing
the advantage of scale of operations. In India, there are quite a few regulatory bodies—like the
Company Law Board, Security Exchange Board of India, Foreign Direct Investment Board,
etc.—which regularly examine such proposals (of business concentration through mergers and
acquisitions) and examine the business as well as consumer-oriented aspects in these proposals.
The antitrust policy seeks to promote price competition, high output, better efficiency and
innovative approach to business. Owing to its merit and ethical character—in terms of consumer
protection and balancing the market dynamics for growth—the antitrust mechanism in business
regulation is being widely held as essential for ethics in marketplace.
To summarise, the need for ethics in marketing and marketplace is beyond question; the
question is, how can ethics be ensured and consumer interest be protected in the marketplace?
There is no doubt that there are many internal and external factors that influence business
behaviour; yet, modern business management theories place primary focus on consumer

12
http://www.hindu.com/businessline/2000/04/24/stories/042439an.htm, accessed on 12 October 2011
 Ethics in Business and Corporate Governance

protection and customer satisfaction for profit and sustained growth. Ironically, many a time,
unfair and ambitious business goals or financial targets take the business away from the ethical
path and behaviour in the marketplace. Hence, there is a need to regulate the business and the
market for fair and ethical practices and, thereby, protect consumer interest. However, consumers
are best protected in a truly free market situation, which seldom exists in its true spirit. A
free and competitive market environment promotes fairer market practices and consumer care,
where consumers can have their rightful choice. Today, most parts of the world are witnessing
economic development by adopting the free market approach—thus lending those advantages
to the consumers that they did not have earlier. In India, the evolution of retail chains and
shopping malls and the growing consumerism are an example of how business and marketing
strategies are re-orienting in an open and competitive market where consumers are getting
better deals and the companies are also increasing their market-share and profit.
As consumers press for wider choice, competitive prices, transparent dealings, and ethical
practices in buying and selling, companies, especially the big ones, are evolving their own
marketing strategies in the growing consumer dominated markets to make higher profits.
Ethics are not against profit-making, but talk about the ways and means to make that profit;
making higher profits and ethics (in marketing) are not necessarily contradictory to each other.
The real challenge for a business is to grow in a competitive market by ethical means. This
chapter, through various discussions and illustrations, shows that to make more and sustainable
profits, a business has to earn the confidence of the consumers with an ethical work culture
and transparent dealings. It is no wonder, therefore, that modern management systems place
overwhelming emphasis on customer satisfaction and continuous improvement in business
processes for success. Modern business treats customers and consumers as an integral part of
the business, and most business strategies start with the planning of how to protect consumer
interests and win customer confidence. This is evident in the practice of TQM, which has
become an indispensable instrument for success in business in the present-day competitive
market.
TQM is totally focused on both, customer satisfaction and continuous improvement of
products and services as a means to success in business. It is being adopted by one and all
industries as a strategic tool in global competitive markets. Awakened by the success of TQM, in
changing the face of business in a competitive market, management experts are now promoting
TEP (total ethical practices), a concept in line with total quality practice. The aim of TEP
is to restore the confidence of people in a business as an ethical institution, which has been
regarded by modern society as an institution of economic well-being in a country. Restoration
of the image of business as an ethical institution through TEP has become necessary due to
some image loss in recent times due to the turmoil of economic meltdown and down-turn of
business arising from many ethical lapses. Ideally, such a system (i.e. TEP) has to work on self-
regulation rather than external regulation and control that we have been discussing so far in
assuring ethics in business and marketing. Business enterprises have to be aware of their moral
and ethical responsibilities, have to be self-regulating in their approach to setting business targets
and goals, and have to be committed to the principles of ‘due care’ for consumer protection and
‘social cost’ to marketing by upholding the principle of covet vendor.
 Ethics in Marketing and Consumer Protection

5.6 ETHICS IN MARKET PLACE UNDER MONOPOLY

AND MONOPOLISTIC COMPETITION
The biggest challenge to ethics in marketing comes not from competition in the market, but
from the monopoly and monopolistic competition in the marketplace. Competition is the
product of free market economy and is good for the overall health and growth of business;
it is a positive development for business and encourages ‘fair play’ in the conduct of business
and its governance. But, in reality, competition has been found to be breeding many unfair
business practices to circumvent true competition. One such unfair business practice is
monopoly. Monopoly refers to the situation where a single firm is the only player in a business
segment, competition is nonexistent, and the power to dominate and manipulate the market
is concentrated in a single firm. This closed system may result in the restrained product supply
in the market and artificial high prices, harming the interests of consumers. The concept of
‘fair price’ for consumers or ‘fair return’ for investors—the principal purpose of corporate
governance—gets lost under the monopolistic system of business.
In fact, in today’s fiercely competitive market, there is hardly any ‘perfect competition’. Instead,
we observe many business practices that prevent competition. Economists have termed these
business practices as monopolistic competition, oligopoly, or monopoly. Through these practices, some
business concerns try to dominate the market and maximise their market share and profits
in an otherwise competitive market, thereby breeding unethical marketing practices. Under
the monopolistic competition, many sellers offer differentiated products—products that differ
slightly but serve similar purposes. By making consumers aware of product differences, sellers
exert some control over price. This is evident in the present market of all consumer products,
especially in electronic and entertainment business. In an oligopoly, a few sellers supply a sizable
portion of products in the market, thereby exert some control over price. But as their products
are similar, so when one company lowers prices, others follow. This is evident in the marketing
of household goods and consumables.
In a monopoly, there is only one seller in the market and the single seller is able to control prices.
However, under the present economic system and marketing environment, true monopoly
hardly exists; it shows up in two other forms: natural monopoly and legal monopoly. Natural
monopolies include public utilities, such as electricity and gas suppliers.They inhibit competition,
but they are legal because they are important to society and backed by the government policy.
In exchange for the right to conduct business without competition, they are regulated by the
government. For instance, they cannot charge whatever prices they want; they must adhere to
government-controlled prices. As a rule, they’re required to serve all customers, even if doing so
is not cost efficient.A legal monopoly arises when a company receives a patent or some intellectual
rights, giving it exclusive use of an invented product or process for a limited time, generally
twenty years or so. Such examples are prevalent in modern pharmaceutical industries.
Now the question is how these variants of monopoly influence the marketing policy and
ethics. In general, monopoly market practices are considered anti-competitive because they
can form a cartel to fix or manipulate prices, can control supply, arrange tie-in schemes, or
 Ethics in Business and Corporate Governance

anything that is against free market. Furthermore, monopolies foster distributive inefficiency,
and the demands of customers or the society are not served well. Monopoly conditions
remove competitive pressures. There is no urge to market value-added products or introduce
technological competence to lower production costs. Finally, monopoly conditions do not
safeguard well the economic liberty as is possible in an open competition environment. Because
sellers are not free to enter the market, and buyers buy overpriced products under duress in the
absence of alternative vendors.Thus a monopoly or its variants can cause market distortion and
give rise to many ethical problems related to serving the consumer needs. Anti-competition or
monopolistic business practices can have three concerns relating to governance and ethics, as
described below:
1. Restriction of free trading and competition between businesses, including the repression
of free trade caused by cartels.
2. Abusive and anti-consumer behaviour by a firm dominating a market or trying to
take a dominant position in the market by anti-competitive practices. Anti-competitive
practices may include predatory pricing, tying, price gouging, dumping, refusal to deal,
etc.
3. Mergers and acquisitions of large corporations, including formation of joint ventures,
by transactions that can threaten the competitive process.
Competition and competitive marketing are essential for providing a fair market opportunity
to customers and consumers. Any departure from this would not be good for consumer
protection. Consumers would be losers in the absence of market competition. Monopolistic
systems are also notorious for violation of ethics to retain market power and privileges. The
system is contrary to innovation and product development—the backbone of modern day
consumer-driven market and economic growth. Consider, for example, unique products like
iPhone, iPad, Galaxy and other tablet phones and pads that are streaming into the market
to consumers’ delight. These products evolved due to competition among electronic goods
manufacturers supported by software developers. The world would have been a great loser (if
not sufferer) without such communication devices that are so essential for modern living.These
are no doubt products of competition and competition-led innovations. Thus, the absence
of competition (i.e., the presence of monopoly) in a market is not fair to consumers and the
society. Competition, which is the opposite of monopoly, is essential for consumer-friendly
fair market practices, characterised by marketing ethics and drive for consumer protection.
Monopoly, on the other hand, causes price rise, decrease in quality, and redundant products—all
these go against the interests of consumers, a state responsibility for good governance.
Monopolies lie at the other end of the spectrum of ‘fair business’ that perfect competition
promotes. A perfectly competitive market should: (a) satisfy certain degree of fairness in pricing,
(b) utilitarianism in demand and supply (by optimising distribution and use of resources and
goods), (c) improve quality and value-chain, and (d) satisfy certain kinds of moral rights in buying
and selling. Competition provides advantages to consumers—they get the opportunity to buy
what they want, from whom they want, at a price they are willing to pay, and at conditions that
assure intended uses and services. Thus, perfect competition blends fairness in the market, open
 Ethics in Marketing and Consumer Protection

and transparent transactions, fair market opportunities, and healthy competition for innovative
products and services. Any deviation from perfect competition—either by arrangement among
marketers or backed by government policy—tilts the market unfavourably against the consumer
interest and ethical business practices. Hence, there are laws and rules for protecting consumers
and investors from possible abuses through monopolistic market conditions. Among these
laws are ‘Competition Law’, ‘Anti-Trust Law’ and ‘Monopoly and Restrictive Trade Practices
Act’. Conforming with these laws forms part of the legal, ethical and governance system in a
country.
Monopoly is not totally avoidable in a country, especially India where infrastructural projects
like power, energy and few core sector industries are deliberately controlled through ‘public
sectors’ in a near-monopolistic way, backed by the government policy. This situation also exists
in many other developed countries, including USA, but to a limited extent. But, the issue about
monopoly remains the same: Are they efficient to serve their stakeholders, fair in dealing with
the customers, responsible in management? The argument that anti-competitive practices (like
monopoly or oligopoly) have a negative effect on the economy arises from the belief that a
freely functioning efficient market economy, composed of many market participants—each of
which has limited market power—will not allow monopoly-like market manipulation to earn
profits. As a consequence, in a market that is free of monopolistic practices (i.e., a competitive
market), product prices will be lower, and the market behaviour will be more responsible and
ethical to keep customers happy.
However, it is also true that the marketplace realities are sometimes more complex and
different than what theories of competition would suggest. For example, questions may arise:
Who would invest in very large core sector projects in a developing economy, involving high
risks to the huge capital investment? How can a business achieve economies of scale to remain
effective and profitable in a developing market? How to attain levels of operational efficiency
by technological and economic amalgamation that otherwise might not be easily possible to
attain in a competitive market? There are undoubtedly industries (e.g., infrastructure projects,
airlines and pharmaceuticals) in which the level of investment is so high that only extremely
large firms, which are quasi-monopolies in some areas of their business operations, can survive.
Many governments regard these market situations as natural monopolies. It is believed that the
government’s inability to allow full competition in highly capital-intensive industries could be
balanced by government regulations aimed at preventing these industries from exploiting the
market opportunities at their will. Despite such controlling mechanisms, monopolistic businesses
are often found to be flouting the laws and rules or functioning in a style as if they should not
(or need not) be bound by any restraining regulations.This monopolistic behaviour is rooted in
their feeling that they are entitled to their monopoly position in such businesses by fiat. This is
true in case of large monopoly businesses in government-marked niche areas (e.g., gas supply and
energy in India). Monopolies in a market can be established by the government policy (natural
monopoly), by intellectual power (legal monopoly), for serving business interests of competitors
(monopolistic competition), or by ‘mergers and acquisitions’ (M&A), a market opportunity-driven
business strategy. In India, monopoly or near-monopoly was born in specific business areas,
 Ethics in Business and Corporate Governance

backed by government policy, as a measure to drive growth in these areas such as power, energy,
telecommunication and steel. However, since 1991 after liberalisation of the Indian economy,
these monopolies are being gradually opened to private players. A monopoly is generally
coercive and violative of ‘market ethics’, especially when it actively prohibits its competitors to
enter the business by using unholy business alliances or by market or regulatory manipulations.
Monopolies can act as business monsters, flouting rules, regulations and market ethics. Such a
scene was evident in India prior to the economic liberalisation (especially in the 1960s through
1980s), when many dominant monopolistic businesses, based on the ‘licence and control’ regime,
took the country for a ride by creating artificial shortages or underselling, selling sub-standards
products, and not adequately protecting the users and consumers with services or warranty.
Near-monopolistic or monopolistic industries in India prior to the economic liberalisation
included automobile, telecommunication, power and energy. Though the picture has changed
for better in India since the mid-1990s, history of these business segments prior to liberalisation
provides examples of how damaging the monopoly or monopolistic competition could be
by fostering distributive inefficiency, removing competitive pressures that ordinarily drive the
business for increased productive and other operational efficiencies, and not safeguarding well
the consumer interest and market liberty. Therefore, minimising monopolistic businesses and
disciplining them (as regards ethics and governance) has been a challenge to governments and
regulators.
To rein in the monopolistic business that became prominent in India due to socio-economic
compulsions, the government enacted the Monopolies and Restrictive Trade Practices (MRTP)
Act in 1969.13 The MRTPAct deals with ‘monopolistic trade practices’, ‘unfair trade practices’
and ‘restrictive trade practices’. It defines what should constitute unfair practices in each of
these fields. The Act established the Monopolies and Restrictive Practices Commission as
an oversight and regulatory agency for ensuring equity and fairness in the marketplace. The
MRTP Act aimed at preventing concentration of economic power and dominance in few
hands to avoid damage to the consumer interest and market dynamics. The MRTP Act was
further supported by The Competition Act, 2002 (amended in 2007) to regulate and restrict
monopolies and unfair competition in business. Holding dominant position (e.g. RIL for gas
and refinery business) or monopolising a market (e.g. Coal India Ltd.) is not considered illegal
in itself. These are monopolies as sanctioned by the State to draw (or provide) investment in
risky ventures or to enlarge domestic interest. Therefore, the issue of such ventures, which
often dominates the market, is not the legality of their existence but ethics and fairness in their
market behaviour and discipline in corporate governance practices, protecting the interests of
all stakeholders.
For this reason, most countries have ‘competition law14&15 and competition regulators to
prevent anti-competitive practices. So deep is the spread of unfair practices indulged in by
monopolistic businesses in many countries that most governments have enacted strict ‘anti-trust
13
http://www.tax4india.com/indian-laws/consumer-rights/mrtp/mrtp.html, and http://en.wikipedia.org/wiki/Competition_law, acc-
essed on 12 November 2011
14
http://en.wikipedia.org/wiki/Competition_law, accessed on 12 November 2011
15
http://www.indiajuris.com/comlaw.pdf, accessed on 12 November 2011
 Ethics in Marketing and Consumer Protection

laws’, ‘competition laws’ and ‘consumer protection laws’

control unfair trade practices. Notable regulators in India are SEBI, RBI, the Department of
Commerce, the Department of Company Affairs different consumer councils and forums in
addition to law courts. These regulators do not aim to restrict or curtail market opportunities;
they aim to create an atmosphere of positive competition in the country, which is fair and
moral to all concerned. Managing competition or monopoly calls for lending positivism to
business processes and competition, ethical understanding of the market, and strong consumer
protection laws in the country to solve problems arising out of market dynamics and forces
of competition. Cartelling or collaborative-marketing—a character exhibited by organisations
with non-competing attitude—does not spell good standards of ethics or governance.
A recent study undertaken by the American Antitrust Institute16, a think tank based in
Washington DC, concluded that competition laws and policies play a small role in business
ethics if the ethical management of competition is not appreciated or integrated in the corporate
governance strategy. The study recommends the need of, what it calls, ‘ethics of competitive
strategy’ for ethical decision-making in dynamic and innovative market conditions.
This is a reminder that it is not the type of business—monopoly or otherwise—that can
herald ethics in business; it is the wisdom and will of the corporate bodies to integrate the
strategy of ‘ethics in managing the competitions in the marketplace’. The best way to address
the marketing issues of any business is the ethical way that connects the ‘customers–business–
society’ in a bond of ‘growth and sustenance’ for each other. The marketing strategy and ethics
are not separate; ethics stand as the reinforcing bars of a strategy—comparable to the concrete
beams supporting a building. Better we weave them together, better would be the strength
of the strategy—be that for managing or governing a competitive business or a monopolistic
business. Ethics do not choose between ‘black and white knights’ or between ‘competitive and
monopolistic businesses’. Both types of business have to follow same rules of ethics and same
goal to reach—that is sustainable growth.

5.7 ETHICAL ISSUES IN INTERNET MARKETING

As stated earlier, a very fast growing area of marketing is the Internet marketing where goods and
services are offered on the Web.The Web-hosted domains advertise and describe the products or
services and offer terms of sale or use to public at large. But, the system is ‘faceless’. It carries out
transactions by ‘routing through invisible electronic communication channels’, that is, data and
money for transactions in goods described on a company’s website is transferred electronically.
The Internet has become an essential means for communication and transactions—both
commercial and social—in modern business and society. But the Internet-based marketing
raises the question about the transparency of information, moral and legal responsibility of the
offers, mechanism of consumer or customer protection, and quality of regulatory controls. The
Internet-based marketing system process could be open to fraud, violation of legal limits and
ethical responsibility, as the system is faceless and driven by the motive of earning ‘easy money’
16
‘Dynamic Competition and Business Ethics’, Journal of Business Ethics, Vol. 50, Issue 2, 2004; Refer to http://cat.inist.fr/?aModele
=afficheN&cpsidt=15676032, accessed on 6 September 2009 and 11 November 2011
 Ethics in Business and Corporate Governance

by facilitating maximum reach to the market with minimal commitment to buyers. In this
system, buyers are just a set of data rather than customers in real sense of the term. As is evident
from Case II, described at the beginning of the chapter, the ethics violation in such faceless
marketing system is very high, especially due to the extreme flexibility and manipulation-prone
nature of the Internet-based transaction processes. The Internet-based mass market frauds cited
earlier under footnote 1b are the examples of legal and ethical violations perpetrated through
Internet marketing.
Ethics foster a relationship based on moral behaviour between two or more parties, agencies
or entities, who stand to gain either by getting protected from harm or by benefitting from
the exhibited moral standard or behaviour. The strength of morality-based relationship lies
in understanding each other’s needs and concerns, which is the binding force of ethics in
marketing. This ethical bond is apparently absent in the faceless Internet marketing. Such a
situation makes the Internet a vulnerable and non-transparent place for marketing where the
buyer-seller relationship could not be trusted blindly. Because the claims made about the quality
of goods and services offered on a company’s website could not be easily verified. Therefore,
this source of marketing often comes under serious scrutiny for legality as well as for ethics.
This, however, does not mean that the present social and economic order can (or should) bypass
this source of marketing. The Internet marketing is here to stay with us for long and grow. The
challenge is how to make this important and emerging medium of doing business transparent
and trustworthy, which is consistent with the moral principles of ‘telling truth’ and ‘doing no
harm to others’.
In the 21st century, we are in an ever-changing realm of technological developments and
their applications. The Internet marketing is an important part of this realm. The Internet
marketing is conducted in many forms, for example, simple E-mail marketing, mobile marketing,
Web-based search engines for advertisement, brand building, product promotion and product
selling, social media marketing for reaching out to special social segments of customers and
acquiring new business, business-to-business (B2B) transactions, business-to-clients (B2C)
transactions and e-commerce. The scope and opportunity is vast. But is the Internet marketing
well regulated, well conducted, self-disciplined or always well intended? The answer is no, as is
apparent from the large number of complaints of cheating and frauds being registered daily by
the authorities of cyber crime departments.17 The problem is more acute with the advertising
and marketing domains hosted by individuals or small ‘one-time’ groups, and mobile or e-mail
based marketing.
The ethics scenario in case of company-hosted B2B or B2C is not grim, as there is a good
degree of trust and responsibility between the companies or parties doing these transactions.
Their processes are more regulated by laws though there are still security and privacy concerns
associated with e-commerce. But, a major challenge to ethics comes from websites and domains
hosted by individuals or small groups to exploit the benefits of the Internet to serve their
nefarious ends.The violation of ethics by these entities occurs in various forms such as disregard

17
http://www.complaints-india.com/newsdetails.html, accessed on 20 October 2011
 Ethics in Marketing and Consumer Protection

of social contact protocol and privacy in wireless transmission of mails from cell phones and
other communication devices, penetration of unsolicited visual advertisements and objectionable
videos for exploiting the children and young, and duping the seniors with false promises.
The Internet’s colossus marketing power will affect more and more lives than ever before,
mostly benefitting the society and the business at large. But the Internet benefits bring with them
serious threats to privacy, security, stability and safety of the society as well as of users. Because
the Internet tools developed for faster communication in social and business domains are being
increasingly used for data thefts, crimes of international magnitude, terrorism and smuggling,
imitating and infringing copyrights and alluring and defrauding masses. Unscrupulous people
misguide the Net surfers by posting misleading information on the Internet or lead them to
dubious search engines to serve their ulterior motives. These means are being increasingly
adopted globally as methods of marketing with the objective of either promoting fake
business or for earning quick bucks. Therefore, a big chunk of Internet marketing methods are
questionable on the grounds of legality and ethics. For buyers, the best safeguard against online
duping centres on the doctrine of caveat emptor. The basic premise of this legal doctrine is that
buyers beware of what they are buying, that is, buyers buy things at their own risk. In other
words, it is the buyer’s responsibility to make sure that the product or service being bought on
the Internet suits his/her needs and that he/she has checked the product or service for defects
or deficiencies. But, does the online purchasing affords the opportunity for prior checking of a
product or service? Or, does the product or service come with a built-in vendor return policy
or warranty settlement scheme? Is the process transparent enough to allow the buyer to know
that the terms of purchase meet his/her needs?
Internet marketing methods should satisfy these queries of legal provisions, if the marketing
methods are to be considered legally correct. Like traditional marketers, Internet marketers
have to accept the responsibility for the consequences of their activities. They must make every
effort to ensure that their decisions, choice of actions and recommendations actually serve and
satisfy all relevant private and public bodies: the buyers, users, organisations, governments and
the society.
Ethics is about being fair and just, and morally responsible for one’s actions and their effects.
And, ethical means being transparent in deals, right in decision and action, and not causing or
being responsible to cause any harm to others.Therefore, ethics in Internet marketing, which is a
public domain, have to fulfil these aspects of ethical and moral responsibility in communications,
transactions and deals. Aspects of ethics and ethical issues in computer and information
technology have been discussed in detail in Chapter 8 under the contemporary developments.
The aim of present deliberations is to highlight special nature of Internet marketing and ethical
responsibility therein. For Internet marketing personnel, the code of ethics recommended by
American Marketing Association (AMA)18 and the Australian e-Marketing code of practices19
could act as guiding principles.The important points of the AMA recommendations on Internet
marketing ethics are grouped under four headings, as described below:

18
AMA Code of Ethics: http://www.helleniccomserve.com/marketingcodeofethics.html, accessed on 20 January 2011
19
http://www.acma.gov.au/WEB/STANDARD/pc=PC_310326, accessed on 20 October 2011
 Ethics in Business and Corporate Governance

1. General Responsibilities:
• Compliance with professional ethics of marketing: avoiding harm by protecting
rights to privacy, causing no harm knowingly, and caring for customers.
• Adherence to all applicable laws and regulations to ensure that Internet marketing
is not illegal in any way.
• Honesty, fairness and transparency in dealings and deals, and taking moral
responsibility for actions.
• Respect to the rights and duties of parties involved in marketing transactions.
• Disclosure of risks and responsibilities in the uses of products and services being
marketed online.
• Organisational commitment to ethical Internet practices and communication of
ethical codes to all concerned with Internet marketing on behalf of a company.
2. Privacy: The information collected from customers should be confidential and used
only for expressed purposes. All data, especially confidential customer data, should be
safeguarded against unauthorised access. The expressed wishes of others should be
respected with regard to the receipt of unsolicited e-mail messages.
3. Ownership: The information obtained from Internet sources should be properly
authorised and documented. The information ownership should be safeguarded and
respected. Internet marketers should respect the integrity and ownership of computer
and network systems.
4. Access: Internet marketers should treat access to accounts, passwords and other
information as confidential, and only examine or disclose such content when authorised
by a responsible party. The integrity of others’ information systems should be respected
with regard to placement of information, advertising or messages.
Despite these codes, Internet marketing is fraught with the danger of losing personal data
and privacy, scams and exploitations, unsolicited illegal business proposals and offers, and

Ethics and
Competition Ethics Policy Moral Ethicality of
Consumer = Ethics in
in the of the Standards Marketing
Preferences Marketing
Market Company of Marketing Targets
Personnel

Figure 5.4 Drivers of ‘Ethics in Marketing’

 Ethics in Marketing and Consumer Protection

marketing of harmful and indecent products and services. However, it is strongly felt that codes
and regulations alone cannot prevent frauds and scams on the Internet. What more is required
is the ethical self-regulation by the marketers, the discretion exercised by the buyers, and the
technological deterrents of Internet misuse. The growing reach and expansion of the Internet
has been throwing up many challenges to the society.To cope with these challenges successfully,
we need to fall back upon ethics and ethical standards.
Figure 5.4 illustrates the factors in the build-up of ‘ethics in marketing’.

Summary
1. Various discussions and illustrations in this chapter highlight the sources of ethical issues in
marketing, needs and means for dealing with them, especially for consumer protection, and
describe some approaches to consumer protection from ethical standpoints and justifications.
The focus of discussions is to establish the need and necessity of ethics in marketing, not only
for serving the consumers but also for ensuring the achievement of the very purpose of business,
which is profitability and sustainability, by balancing ‘profitability’ with ‘morality’ of actions.
2. The chapter highlights various ethical issues of marketing and elaborates the special nature
of consumers. The consumer needs and the ethical responsibility of marketing for protecting
the consumer interest vis-à-vis the market environment have been discussed. It highlights the
basic consumer protection approaches, their intrinsic merits, and how business can fulfil those
responsibilities and marketing obligations.
3. What has been continuously emphasised in this chapter is that protecting consumer interests and
satisfying customer needs makes the best business sense in an open and competitive market. It has
been shown that ethics and ethical standards in business dealings, especially in marketing, are the
most effective means of ensuring customer confidence and consumer protection. On the other
hand, gaining market penetration and making profit by any means is neither good governance
nor ethical.
4. Marketers have the responsibility towards customers to protect them from deceit and harmful
effects of the products and merchandise they market. Marketing practices should adhere to the
norm of faithful ‘disclosure’ about the quality, quantity and character of the product.
5. If ethics have to be deep-rooted in the company’s business practice, its marketing has to play a
more effective role than what our present experiences show. Since marketing personnel are in
direct contact with the consumers, they are in a better position to know customer needs and
demands, and can enforce ethical conduct of business by interfacing between the company’s
management and its consumers.
6. The ethical goal of marketing should be to protect the interests of customers. Marketers must
appreciate that their interest in consumer protection is reciprocal to the well-being of their
companies and themselves. Ethics in the marketplace, reflected in the marketing and servicing
personnel or the organisation itself (in producing, selling and protecting the consumers) are as
important as ethics within and inside the organisation.
7. If marketing does not follow or adhere to ethics and ethical standards of dealings, all the benefits
of ethics in the company’s internal processes and governance will come to mean nothing.
 Ethics in Business and Corporate Governance

8. In a free market, consumers are the principal factor that determines what to market, how, where
and at what price; but, such consumers must be able to identify what to buy and use.
9. The chapter lends an insight into general approaches to consumer protection, their merits and
benefits with regard to consumer rights and manufacturers’ responsibilities. In this context,
‘contract’, ‘due care’ and ‘social costs’ views have been discussed to show that modern business
philosophy needs to adopt more from the due care and social costs approaches to effectively
protect consumers from the ills of self-serving markets with unfair and unrealistic goals and
financial targets.
10. The contract view is no doubt a basic approach to the marketing of goods and merchandise,
but that alone cannot win the confidence and satisfaction of consumers. This point has been
illustrated with few examples and modern marketing trends.
11. The ethical necessity in the marketing practice, including Internet marketing, has been outlined
and critically discussed. Ethical issues of free market conditions vis-à-vis market moved by the
demand–supply gap have been discussed. Various forces that control the market and ethical
imperatives have been highlighted. Characteristics of Internet marketing—an emerging force in
modern markets—have also been discussed and its ethical responsibility highlighted.
12. The other driver for marketing ethics (or lapses of ethics) is the market competition. Today’s
marketing is more about managing competition than selling products and services.The compulsion
of managing competition in the marketplace is giving rise to many unethical marketing practices.
Competition is an outcome of free market economy. Therefore, competition should be viewed
as a positive force of business. A perfectly competitive market should satisfy: (a) certain degree of
fairness in pricing, (b)satisfy utilitarianism in demand and supply (by optimising distribution and
use of resources and goods), and (c) satisfy certain kinds of moral rights in buying and selling.
The role of ethics in competition management is to ensure that these characters of competitive
market are honoured and respected and thereby ensure market leadership in the respective field
of business. In view of these moral and ethical stands, the influence of monopoly, monopolistic
competition and other variants of monopoly on the market and marketing issues have been
discussed. It has been concluded that it is not the type of business—monopoly or otherwise—
that can herald ethics in business; it is the wisdom and will of the corporate bodies to integrate
the strategy of ‘ethics in managing competitions in the marketplace’. The best way to address
the marketing issues of any business is the ethical way that connects the ‘customers–business–
society’ in a bond of ‘growth and sustenance’ for each other. The marketing strategy and ethics
are not separate; ethics stand as the reinforcing bars of a strategy—comparable to the concrete
beams supporting a building. Better we weave them together, better would be the strength
of the strategy—be that for managing or governing a competitive business or a monopolistic
business. Ethics do not choose between ‘black and white knights’ or between ‘competitive and
monopolistic businesses’. Both types of business have to follow same rules of ethics and same
goal to reach—that is sustainable growth.

Key Words and Concepts

Consumers, marketing, ethics in the marketplace, voice of customers, consumer protection, manufacturing,
contract view, due care view, social costs view, reliability, maintainability, safety, consumer services,
relationship of dependence, demand and supply gap, equilibrium market, monopoly market, utilitarian
 Ethics in Marketing and Consumer Protection

logic, oligopoly market condition, earning per share, economic value addition, competition law, anti-
dumping law, law against restrictive trade practices,TQM,TEP, social cost, covet vendor, free market, free
trade, Doha Trade Agreement, WTO, self-regulation, antitrust view of business, competition, total ethical
practice, ethics of marketplace, marketing ethics in monopoly and monopolistic competition, oligopoly.

Exercises
Check Your Progress
1. Marketers have the responsibility to protect consumers ___________
2. Rules, regulations and laws are external to an individual, but ethics and morality are ___________
3. The main driver of ethical behaviour in a free market is ___________
4. The main driver of the concept ‘rational utility maximisers’ is ___________
5. As per the ‘contract view’ of business, the relationship between customer and supplier is ___________
6. Ethical principles of business demand that manufacturers or sellers are duty-bound to ___________
7. ‘Social costs view’ holds that ___________
8. It is believed that ethics more closely adhere to ___________ markets.
9. The aim of ethics in marketing is to balance between ___________
10. Competition is the product of ___________

Review Questions
1. Critically discuss the view that ‘a marketing person’s job is not to care for the customer, but to increase
market-share and profits’.
2. Discuss the importance of ethics in the marketplace with reference to a few illustrative cases.
3. Outline the ethical responsibility of a marketing person in marketing consumable products.
4. List out the characteristics of a free market, and discuss why it favours consumers in protecting their rights.
Is India a free market economy?
5. Critically discuss the merits and limitations of the ‘contract view’ approach to consumer protection and the
marketing responsibility thereof.
6. If you were made responsible for consumer protection in the marketing of a consumer durable product,
then what would be your strategic approaches to ensure consumer care and to win customer confidence in
the marketplace?
7. Discuss the characteristics of a perfectly competitive market and its merits for protecting consumer interest.
How can marketers manipulate a competitive market, to the disadvantages of consumers?
8. ‘Making higher profits and ethics in marketing are not necessarily contrary to each other.’ Discuss a
marketing strategy in any area of product category that supports this view.
9. Briefly discuss the concepts of: ‘antitrust’, ‘covet vendor’, and ‘anti-dumping duty’ in relation to consumer
protection mechanisms.
10. ‘Today’s marketing is more about managing competition than selling products and services’. Critically
discuss this statement and establish how ethics can help in managing competition.
11. Critically discuss the ethical issues of the monopolistic market and suggest ways to balance ethics with
business objectives in the monopolistic market.
 Ethics in Business and Corporate Governance

Further/Suggested Reading
1. Practical Ethics (2nd ed.), Peter Singer, Cambridge University Press, Cambridge, 1993
2. Business Ethics, Thomas M. Garrett, Prentice-Hall, Englewood Cliffs, 1986
3. Marketing Management (Millennium Ed.), Philip Kotler, Prentice Hall, Upper Saddle River, 2000
4. Business Ethics — Critical Perspective on Business and Management, Alan R. Malachowski (Ed.), Taylor &
Francis, London, 2001
5. Total Quality Management — Principles and Practice, S.K. Mandal,Vikas Publishing House, New Delhi, 2005
6. Economics, Ethics and the Market: Introduction and Applications, John J. Graafland, Routledge, New York, 2007
7. Business Ethics: Concepts and Cases (Ch. 4), Manuel G.Velasquez, Pearson Education, Asia, 2002
 CHAPTER 6
Professional Ethics
To highlight the importance of professional ethics in business and
Chapter Objectives

society
To describe the role and responsibility of professionals in the society
and business
To illustrate the hazards of ethical failures in profession, business
and society
To discuss ways and means of regulating and promoting professional
ethics
To highlight the dependence of social well-being on professional eth-
ics and moral standards
 Ethics in Business and Corporate Governance

INTRODUCTION
ance
ern ce
Gov ernan
ate
por Gov nance
Cor orate over nce
s and Corp ate G erna
nes d or ov nce
usi ess an Corp ate G erna
B
in usi
n
an d p or Gov
ics B ness nd Cor orate
Eth ics in usi sa orp
Eth s in B usines and C
ic B s
Eth ics in usines
th
E s in B
ic
Eth

1a
http://economictimes.indiatimes.com/news/news-by-industry/media/entertainment-/entertainment/celebs-too-may-face-heat-over-misleading-
ads/articleshow/3855032.cms, accessed on 22 November 2011
1b
http://lawmatters.in/content/celebrity-endorsements-liability-ratcheted-up, and http://www.mondaq.com/article.asp?articleid=77452,
accessed on 13 October 2011
 Professional Ethics

The two cases highlight two issues: (a) professional practices are not transparent and they are
open to malpractices; and (b) there is an urgent need for reinforcing existing laws and regulations
to protect the public and investors from possible loss and harm from dubious professional
activities. To recall the case of the celebrity endorsement of a brand of cold drink made by an
MNC in India (refer to Chapter 1), the celebrity endorsed the product for a huge sum, despite
having information about the alleged pesticide content in the product and its ill-effects on the
health of children. This was judged as immoral, because the celebrity did not follow the generally
accepted moral standards expected of his position that called for the full knowledge and understanding
of the product and the consequences of its use. Apparently, the celebrity compromised his or
her position for monetary gain, neglecting to consider the damage to society. This is considered
morally wrong and unbecoming of a celebrity position, which includes professionals such as
actors, writers, artists, etc. who are expected not to act exclusively for personal financial gains
but to also act responsibly for the well-being of the society. Financial wrongdoings by accounts
professionals were at the root of the Enron scandal in the US as well as the Satyam scam in India
(refer to Chapter 4, Case I). Accountants and auditors, in both cases, had compromised their
positions by not checking the validity of financial data claimed to have been provided to them
by the respective managements, which, in turn, helped the companies to fudge their accounts. It
is immaterial if their actions were intentional or out of neglect; the fact remains that they failed
to perform their moral and professional duties. Ethically, a celebrity or a professional cannot
exploit his or her privileged position or neglect moral and professional responsibility.
Figure 6.1 illustrates the flow of ethical responsibility of professionals for the society,
consumers, business, profession and the government.
2
http://epaper.timesofindia.com/Repository/ml.asp?Ref=RVRELzIwMDkvMDMvMTkjQXIwMDEwMQ==&Mode=HTML&Locale
=english-skin-custom, accessed on 13 October 2011, and http://www.icai.org/news.html?news=2748, accessed on 13 October 2011
 Ethics in Business and Corporate Governance

Ethical Responsibility of Professionals

Professional codes & conducts–as
prescribed by Regulatory restrictions and disciplines
the respective
organisation and institutions

To: Business, Profession and Government

Holding to the Holding to Holding to Conforming to Self-regulation as
principles of professional professional government rules per call of the
business integrity ‘codes and regulations profession
ethics of conducts’ and nation

To: Society, Individuals and the Customers

Keep upto ethical Protect individuals & Self-regulation as per

Respect to social and
standards of the customers from harm call of the duty and
environmental rights
society and locality and harassment ethical responsibility

Figure 6.1 Flow of Ethical Responsibility of Professionals for the Society, Customers, Business, Profession and
the Government

Many may claim that such ethical issues in professional activities can be best served by
self-regulation—in terms of what is right or wrong—as is the practice in many professions
such as finance, medicine, legal and advertising. This approach, advocated earlier in this
book, is a measure to protect the society from unethical professional activities that have
always existed. Yet, self-regulation has prevented neither accounting nor medical malpractices
(especially in India)—caused by professional negligence or fraud.While several explanations and
pleas of ignorance came forth after the scam and the consequent damage had been discovered,
but such malpractices continuing unabated till date. Arthur Anderson (auditors to Enron) said
to US congressional committee that Enron had not given them the complete information
and so its auditors had missed the large-scale manipulation of Enron’s profits over the years.
Price Waterhouse Coopers (auditors to Satyam) had similarly cited the unreliable information
provided by the Satyam management. What either party had overlooked was that each had
failed to do its moral and professional duties that called for checking and truthfully certifying
the audited accounts, so as to protect investors and stakeholders from any misinformation and
damage to their interests. They had been paid for this job, and neglecting or failing to do that
job is a moral failure. Hence, they were guilty of professional misconduct and negligence. They
have failed to adhere to their moral responsibility and duty—to prevent financial wrongdoings
in the company—for which they had been appointed and paid. At the G-20 meeting3 of world
financial powers in London in 2009, world leaders advocated stronger regulations and concerted
efforts by all countries to prevent future financial misadventures and economic crises.Today India
3
http://en.wikipedia.org/wiki/2009_G-20_London_Summit, accessed on 13 October 2011
 Professional Ethics

is a strong economic force in the world but has weak regulatory control over its financial market
and business—which explains its stock market and financial scams at regular intervals. Ironically,
in India, the rules hitherto allow penalties levied only on individual members of a profession
and not on the company that employs them and colludes for the fraud. Reinforcement of rules
and regulations, as mentioned early in this chapter, are perhaps a belated attempt in India to
create more deterrents for companies which force their professionals, or for professionals who
willingly collude with their companies, to commit the fraud or wrongdoing. What can be
concluded from the recent cases of fraud is that, in order to stop financial crimes, professionals
responsible for checking the rightness of actions must be self-motivated and self-regulated
to stop frauds. This is where education about ethics and ethical codes of professional bodies
can help.
Financial crimes and wrongdoings in business hit the market and investors the hardest.
Hence, the conduct of (accounting) professionals gets the highest priority in discussions on
professional ethics. However, in modern society, advertising and media reporting also play very
powerful roles in shaping marketing opportunities, consumer buying, social behaviour and
attitudes. This necessitates a closer look into the way business is holding on to ethical standards,
and enforcing regulations to control the damages arising from the unethical behaviour of these
professions and professionals.This chapter attempts to highlight the duties and responsibilities of
professionals and the necessity for professional ethics for the healthy growth of business. For the
sake of clarity, ethics of individual professions have been discussed with reference to the code of
ethics and conduct of the profession as prescribed by the governing and regulating bodies, like
the ICAI, Indian Medical Association, Institution of Engineers (India), etc. Areas of professional
ethics have been chosen by considering the spread of activities in an organised business, such as
finance and accounting, advertising, marketing, human resource management, production and
product management, etc. Professional ethics of the emerging market and media, which are
assuming greater importance in this age of electronic information and communication, have
also been included to make the chapter more comprehensive.
In this context, ethics of individuals (some of whom may be professionals) in a business have
been discussed in Chapter 4. The rules and principles of individual ethics are equally applicable
to all professionals in general, because, in an organisation, professionals are individuals first
and then professionals. What this chapter intends to discuss is the role and responsibility of
professionals, in specific functional areas, with a view to maintain ethics in their respective fields
of activities.
Comprehensive discussions on ‘professional ethics’ covering all professions are not within
the scope of this book, which primarily intends to introduce the concept and role of ethics in
business practices and governance. Nonetheless, the impact of ‘professional ethics’ on business is
so overwhelming that it cannot be totally overlooked here. Hence, discussions on professional
ethics of some important areas of business have been included to aid the understanding of roles
and responsibilities of professionals in maintaining moral standards in professions, business and
governance.
 Ethics in Business and Corporate Governance

6.1 INTRODUCTION TO PROFESSIONAL ETHICS

Professional ethics refer to the moral standards demonstrated by the professionals working in
the business of managing, promoting, marketing or developing (products). Not all professionals
work in business or business related activities; there are many recognised professionals in
society—Chartered Accountants, lawyers, doctors, actors, reporters, etc.—who more often than
not work in their individual capacities. Wherever they may work, and in whatever capacity,
the morality of their actions and behaviour has a profound impact on the well-being of the
society—business being a part of it. And, just as the presence of moral standards and ethical
sense in their work can benefit the community, business and the society, similarly, absence of the
same can also harm society. To safeguard against this possibility, the society and the concerned
government are careful to regulate and modulate the behaviour of professionals—with the
laws of the land and the rules and regulations of various professional bodies—with the intent
to promote fair practices and moral standards in professional behaviour. In today’s scientific
approach to management, professionals are generally considered the backbone of business and
industries; they lead the way strategies are formulated and business is conducted. If the involved
professionals are honest, moral, respectful to human values, and courageous in standing against
any wrongdoing, businesses automatically become ethical and true to meeting their social
responsibility and obligations.
While the concept of standards of behaviour expected from the professionals in a society is
age-old, the necessity to reaffirm the principles of moral conduct in their behaviour has gained
importance in today’s larger context of business relationships, global economy, communication,
and migration of people from one part of the world to another. In the business world,
professional ethics hold more focus and attention than ever before—especially in view of the
series of business scandals referred to in earlier chapters. Awakened by their impact and the
roles of professionals therein, governments, regulators and professional institutions the world
over have become more aware about the necessity of introducing stricter ethical standards in
the functional areas of various professions. While the impact of the numerous ethical violations
and infringements of moral duties and rights in all professions all over the world in the past
remained mostly localised, it is now affecting lives in other nations with economic globalisation,
free trade, and revolution in electronic media linking the financial and economic systems of
different countries. For example, the aftermath of the subprime crises in the field of housing
mortgages that began the financial meltdown in USA and Europe in 2008, soon engulfed
many other countries in other parts of the world, like India and China, and put them into great
economic difficulties. In fact, the world economy is still reeling in the aftermath of an economic
downturn which was largely believed to be the creation of bankers and finance professionals—
given their greed and reckless business strategies (to make a quick buck as it were), overlooking
their moral responsibilities towards the investing public and society at large.
In India, there have been two directions to remedy the damage: (i) the government and
regulatory authorities (SEBI, RBI, Department of Company Affairs, etc.) enacting new
laws and reinforcing existing laws and procedures, on the one hand; and (ii) the professional
establishments and institutions (IMA, ICAI, Institution of Engineers (India), etc.), under which
 Professional Ethics

professionals conduct their respective practices, incorporating minimum ethical standards for
their members. However, for regulatory measures to be effective, the control of monitoring
regulators is necessary in promoting and administering ethics in professional activities and the
commitments of doers (professionals) to ethics. This is a difficult task when one considers the
bias and political nature of human beings; not surprisingly, in India there is practically no instance
of professionals being hauled up and punished for their wrongdoings, or of legal testimonies
against fellow professionals. Though standards and rules of many professional bodies have legal
sanction, very few individual professionals have been punished for carelessness, involvement or
abetment in a fraud. Hence, many feel that it is not the acts and regulations that are effective
in inculcating professional ethics and standards of behaviour in professionals, there has to be a
change of heart and attitude in individuals—something that can be brought about by ensuring
that ethics is a part of the academic programmes of professional institutes. To make the society
ethical, individuals have to be moral and value abiding; when individuals are wiser about ethics
and their effect on society and business, self-regulation in professional activities becomes easier.
To maintain ethics in professional activities and services, there is no better regulation than
what can be exercised by professionals themselves; this is self-checking and self-correcting on
real-time basis—with a consciousness of what is wrong and right, what is moral and fair.
In our earlier discussions, we have seen how at times an organisation itself forces individuals
(in this case, professionals) to do what is unethical or immoral. For instance, if the top executive
wishes to manipulate the company’s accounts, individuals may not be able to stand up to
the pressure—though a professional can rightly refuse participation in that unethical work.
Individuals mostly succumb to or willingly work under pressure from the top management in
such situations (like at Enron or Satyam). Therefore, managing professional ethics is not only
the concern of individual professionals or professional bodies, but also of the organisations as
represented by its top management. For professionals to be ethical, organisations must provide
them with an honest work environment and ethical working platform. Organisations must
hold on to principles of business ethics and demand ethics in the professional discharge of
the duties of their managers. In the Enron case, the company had wilfully misrepresented its
financial report through ‘creative accounting’ with the help of its auditors who were supposed
to prevent such misrepresentation. In the Harshad Mehta-led stock market scam4 of 1992,
which rocked and plunged the Indian stock market into a long gloom and recession, it was
also observed that many members of the top management of several companies and financial
institutions were involved and had willingly joined hands with the fraudsters to manipulate
the stock prices. In both these cases, organisations (as represented by their top managements)
had been the root-cause for ethical misconduct and fraud. One of the objectives of the study
of business ethics as subject in academics would be to embolden professionals by imparting
knowledge about moral principles, moral reasoning, moral rights, and morality of actions and
behaviour necessary for the well-being of society, business and self. Throughout the history
of social development, every society depended on the high moral standards of individuals,
professionals, philosophers and artists who stood up against the many odds and adversities of

4
http://en.wikipedia.org/Harshad_Mehta, accessed on 13 October 2011
 Ethics in Business and Corporate Governance

their time to take the society forward. Similarly, modern society expects its professionals to
stand up to the odd pressures—perhaps of different kinds—and hold on to high moral standards
in their professional discharge of duties. Many past and recent happenings in the business world
and their impact on the nations’ economy and society establish beyond doubt that professional
ethics is crucial for the sustained growth of business and society anywhere in the world.
The involvement of professionals and the role of professions is overwhelming in business;
not restricted to direct functional areas alone, it spans areas such as accounting, finance,
product engineering and development, HRM and marketing. Moreover, professional expertise
and professionalism in running a business are also required in all related fields (such as legal,
advertising, publicity, etc.). And, since business is a socio-economic institution, business and
business environment are greatly influenced by the overall professional behaviour in the country,
including media reporting and editing.This chapter, therefore, proposes to discuss some specific
issues and guidelines of professional ethics in relation to the functional areas of business as well
as other supporting professions (like advertising, media reporting, legal, medical, etc.), which are
a part and parcel of total business environment and opportunities.

6.2 ETHICS IN PRODUCTION AND PRODUCT MANAGEMENT

Production management comprises supervising and managing a set of predetermined processes
and activities, being carried out by people with the help of certain tools and equipment, for
the outcome of some marketable products. In such a set-up, there are two sets of ethical issues:
(i) ethics relating to the conduct of the process where people are involved in working with
machines or equipment in a given environment; and (ii) ethics about the uses and utility of the
products concerned. Since production management is a professional discipline with specialised
knowledge and skills, it would be worthwhile to discuss these ethical issues under professional
ethics. With reference to the former ethical issue, ethics in production management, therefore,
include care about safety, health hazard, reliability, pollution, contamination, adulteration, waste
generation, etc., while the latter ethical issue implies that management is ethically duty-bound to
ensure that the production process and the product does not cause any harm to the employees,
consumers or the locality (in the way of environmental pollution, health hazards, danger in
handling, safety, consumptions, utility etc.).
Therefore, it is necessary that professionals engaged in managing product development, product
design, process planning and environment control are (made) aware of the shortcomings of their
processes and products with regard to safety in use and practice, health hazard in the process and
handling, need for pollution control, environmental damage, utility value, etc. while discharging
their duties and responsibilities. Important production related ethical areas are: (a) defectives,
adulteration and inherently addictive/dangerous products for use and safety of the consumers
(refer to Case I in Chapter 5); (b) pollution, emission and dust generation in the production
processes; and (c) ethical problems arising from new technology (e.g. genetically modified foods,
seeds, etc.).There is always the possibility of some danger of defect or deficiency in any product
or production process—and it may be difficult to define the degree of permissibility in all such
cases—but the principle of ethics demands that it should not be intentional. In other words, the
 Professional Ethics

organisation, its management or its professionals should not act with the prior knowledge of
that defect being harmful to health, hygiene or safety of the consumers (users). There are many
cases to the contrary, one such example of production ethics is as follows:

Pan Bahar, Pan Parag, Tulsi, etc., are all brands of chewing tobacco products that are
addictive and dangerous to health, but are widely advertised and consumed by large number
of people across the towns and villages of India. There have been many protests by the NGOs
and health activists, but without any long-term effect. There is no common law banning the
marketing of such products (excepting near schools and colleges), nor any quality standard
for minimising the ill effects of these products. Only some state or locality-wise action is
taken by banning product display or advertisement, which is not enough. The manufacturers
and sellers of such products are doing good business and the consuming public is continuing
to suffer. This is not ethically correct. The ethics of business demand that producers of such
products, if they want to continue in this business, self-regulate the quality and bring about
suitable adjustments or modifications in the product to minimise the risk or damage to
consumers.

It is unethical business if a manufacturer is intentionally producing harmful products and

marketing them despite public outcry. Ethics of production would require making such products
least harmful—even if selling the otherwise harmful products might be legally permitted.Thus,
the business of producing depends on the ethical principles of manufacturers on the one hand,
and general perceptions about acceptable levels of risk in using these products on the other—
which may ultimately force the producers to think ethically enough to make harmless products
(or at least those with minimal harmful effects). Here, tobacco products such as ‘pan masalas’ and
cigarettes are a case in point.
So, does this mean that a (production) professional should not work for companies that
manufacture harmful products? Ethics do not stop a professional from choosing jobs or line of
work, but they do forbid one to act in way detriment to the interests, health, safety and welfare
of employees and consumers alike.

Referring to the earlier example of the production of ‘Pan Parag’, it would be unethical for
the production manager to force an employee to work in the mixing room without adequate
safety measures—i.e. working without masks or handling the mixture without gloves.
While the former could pose a serious health hazard owing to continuous inhalation of fine
tobacco dust, the latter could lead to contamination of the product posing a health risk to
the consumers. Thus, the action (or negligence) of the production manager can affect the
interests of people involved in the manufacturing process as well as those using the product.

Such actions (or the absence of positive actions) that let some damage happen to incumbents
(employees or consumers) would be construed as unethical. The ‘Pan Parag’ example goes to
illustrate that, in ethical conduct of the profession, it is not the choice of profession but the way
in which a professional responsibility is discharged that matters. Ethics and morality demand
 Ethics in Business and Corporate Governance

that professionals involved in a business should not knowingly participate in activities that could
harm the interests of consumers, employees or the environment.
Understanding the role of ethics, and regulating oneself in the profession, has gained
importance with the growth of service industries like hospitality, health care, tourism, facility
management, etc. In the service sector, products are designed or produced by experts and
professionals like chefs, doctors and nurses, tour-operators, tour planners, etc. for the facility,
utility or consumption of consumers. These professionals must be aware of the rules of ethics
in their operations and in the delivery of products and services; they have ethical duties and
responsibilities towards their consumers who depend on the good sense and dutifulness of such
service providers, directly or indirectly. For example, quality of food, not only in its taste but also
hygienically, will depend on the hygienic environment and habits enforced by the chief chef
in the kitchen of a food outlet or hotel. If the chef makes any compromise, it could endanger
the hygiene and quality of the foods being served to and consumed by the customers, and may
even cause illness.The chef ’s action thus has the potential to harm the health of the consuming
public, and, therefore, it is best when these professionals are guided by ethical duties and
responsibilities of their respective profession so as not to harm the consuming public. Similarly,
doctors and nurses engaged in the health care services have ethical duties and responsibilities
towards their patient so that their health does not suffer any further, owing to delay in treatment
and inadequate nursing among other things. In this context, it should be understood that such
professionals are engaged in producing and managing those kind of services and products that
have a customer, have attached value for the customer, have a price to be paid (for their service
or product), have to deliver quality as promised or understood, and have to deliver on time.
If the concerned professional indulges in any deficiency of service or product, willingly or
unknowingly, then it is termed unjust and unethical—no matter if that deficiency had earned
any personal gain for that professional.
With the technological advancement, duties and responsibilities of professionals engaged in
different fields of consumer production are becoming increasingly important. For example:

The recent trend to produce hybrid fruits and vegetables is believed to have some side-effects
and may be considered undesirable. But, there is no denying that the technological development
and production is deemed to be necessary if we are to cope with the increasing demand on
food grains and consumables owing to the population explosion in some parts of the world.
Hence, what should be the direction of ethics—feeding the mouths of hundreds of people or
side-stepping technological advancement due to some possible side-effects?

Ethics are not against technology; they are, in fact, concerned whether that technology brings
more misery than good to the society. If hybridisation of agricultural produce brings appreciable
benefits to consuming masses in a country, then it could be ethically supported—although with
words of caution to the consuming public, about the possible side-effects. It would then be left
to consumers themselves to choose—as is the case in the health-conscious western economy.
In a similar analogy, the production of mass destruction weapons could be ethically denounced
as the technology employed is designed to do more damage to the society than good (through
 Professional Ethics

generation of employment and wealth). The touchstone of ethical judgement is to question

if, in the ultimate analysis, it is good for the consumers, employees, society, or public at large?
Production professionals should thus examine issues from the angle of ethics, and introspect
about its good and bad effects. The need for ethical discipline and governance arises due to the
fact that there are elements of conflicting interests in business amongst the partners of business
processes (e.g. owners, investors, employees, consumers, government, society, local bodies, etc).
Thus, ethics can provide the just and fair path for progress in such conflicting situations.

6.3 ETHICS OF MARKETING PROFESSIONALS

Marketing ethics, discussed in the earlier chapter, may not be enough to understand how
they concern marketing professionals as well. This requires some profession-specific discussions
and reinforcement of thoughts on professional responsibility. To begin with, all marketing
transactions with customers are carried out through the interface of marketing professionals.
Therefore, dealings of these marketing professionals are a critical indicator of ethical standards
in the business. These professionals not only have the responsibility of their own ethical
behaviour, but also of building a good name and goodwill for the organisation. One may argue
that a marketing professional is only an employee, and that his or her activities are controlled
and regulated by the employer. Hence, the company’s adopted means and ethical standards in
marketing may not be any different from his or her exhibited ethics as a professional. But, rules
of ethical behaviour demand that, as a professional, a marketing person also has his or her own professional
discipline and commitment to ethics.These ethical standards should apply to the customers and people they
serve, as much as to their professional behaviour within the organisation. As in the case of employees,
professionals neither have to accept any kind of task or assignment nor do they have to be
forced by the authorities of the organisation if that task or assignment is not moral. Professional
code of conduct and moral conscience should be the balancing factor in the performance of
an assigned duty. It should be noted that marketing professionals may be directly accountable
to their companies, but they are equally responsible for the morality of their actions and ethics
in the marketplace. Ethics in marketplace are essential for fair deals and winning customer
satisfaction—both of which go on to secure the ultimate success of a business. The impact of
falsehood and deliberate misstatement by a marketing professional can very adversely affect the
long-term business prospects. Marketing professionals have the responsibility to be ethical to
their customers and society in order to make for better business environment and growth.
Ethics of marketing professionals cover the ethical issues in relationships between the
company and the marketing persons, as well as their customers—including the public as potential
customer. In other words, ethics are more like a service transaction with a ‘customer-supplier relationship’
between the company and the marketing person on the one hand, and the marketing person and the
customer on the other; this relationship aims to fulfil each other’s needs and expectations. If this is
the platform on which marketing professionals have to work, then they have to be careful not
to lend their weight or support in hurting the interests and well-being of customers. They have
to be mindful about their ethical duties and responsibilities in the marketplace. Referring to the
sale of spurious drugs in exchange for a hefty commission, no ethical and moral professional
 Ethics in Business and Corporate Governance

can undertake such a criminal task, no matter how handsome is the reward. Ethical standards
of a profession prohibit professionals from seeking gains only for themselves, their actions must
safeguard the interests of society, consumers and the public—all of whom they are supposed to
be serving as professionals.Thus, holding on to ethics and morality in a profession is a dual task,
asking for fair and just service to both the company and its customers.
On the other hand, marketing is not merely campaigning or providing information or selling products
and services; it is about marketing the ‘value of a product’. As per modern management principles,
marketing is the value that a company offers through a product, which its customers buy at a
price. Similarly, selling is not delivering a product and collecting money; it is about delivering
the correct product (characterised by the value proposed by the makers) at right time for the
right price. The ethics of marketing professionals comprise sharing information and data about
a product in the most transparent manner so that the customer can judge for himself what
he or she is buying. Misleading product advertisements, price fixing, operating a cartel, price
discrimination, black marketing, etc. are ethical offences. Some of the most rampant violations
of ethics take place in the field of (product and sales) advertising, and this needs to be regulated
in order to avoid misrepresentation. In this context, both marketing professionals and advertising
personnel are responsible for ensuring adherence to ethical conducts and rules protecting
consumer interest. Developing countries have rather slack laws when it comes to protecting
consumers against false or misleading product features, compared to developed economies
where product liability and deficiency can lead to heavy penalty and punishment.Yet, from the
professional viewpoint, it is immaterial whether the law is slack or stringent; ethics demand that
marketing professionals do not misrepresent or misguide the buyers for personal gains, such as
higher commissions, promotions or other rewards. Unlike accountants, marketing professionals
have no chartered association of their own; they are included amongst management professionals.
Hence, they should follow the ethical code of conduct of the company management they serve.
As such, their activities should be monitored and overviewed by the ethics committee or the
ethics counsellor of the company. Operating within the boundaries of their company’s ethical
norms brings certain limitations to the role of marketing professionals.Yet, as individuals, they
are free to raise their objections or deny any unethical task or assignment, which might be
acceptable in the eyes of the law and social justice.
The advent and advancement of Internet marketing and E-commerce has lend even greater
importance to the role of marketing professionals and their ethical behaviour.Access to electronic
(digital) data and personal information associated with such transactions is a potential source
of misuse that can cause loss or suffering to customers and the public. In fact, expansion of
IT-enabled services has opened up tremendous possibilities for online marketing. Such services,
however, call for more stringent laws and regulations in view of the enhanced ethical and moral
responsibility of marketing professionals as the custodians of customer data and information.
Companies dealing with E-commerce will have to train their workforce to maintain the ethics
of custodianship—so that people working in E-commerce must not cross the ethical lines. At
this juncture of India’s E-commerce revolution, many believe that the regulatory bodies like
NASCOM should take initiative to formulate a code of conduct and ethics for the work areas
 Professional Ethics

of E-commerce and BPO—both of which deal with the confidentiality of data and information
of a large number of customers. Moreover, as more and more people partake of these new
channels of marketing, there should be stricter laws to prevent cyber fraud along with effective
regulation to control unethical conduct of business by professionals in these fields. Examples of
such newer areas of marketing include: television marketing, E-commerce, telemarketing, BPO
services, etc. Furthermore, with the growth of telecommunication and electronic marketing,
the role and responsibility of marketing professionals are becoming even more significant to
the good health of business. However, despite all the regulations and legislations a country may
have, to control any wrongdoing in any marketplace, the ultimate solution rests in the character
and moral standards of the individuals who are in the profession of marketing.

6.4 ETHICS IN HUMAN RESOURCE MANAGEMENT

The role of human resource (HR) professionals is becoming increasingly pivotal in management,
more so because of the growth of the service industry and the consequent dependence on a
‘knowledge-based’ workforce. HR professionals are entrusted not only with the recruitment of
the right type of people, but also with the task of motivating, training and empowering them—
with a broader view to create an organisational environment of honesty, equality and fairness.
Traditionally, ethical issues concerning HR professionals pertain to interactions between
the company and its employees, e.g. propagating and regulating rights and duties between the
employer and employees. Commonly observed unethical practices in the areas of human resource are:
discrimination by sex, creed and religion; unfair employment contract; pressure tactics in the workplace;
favouritism; matters promoting occupational health hazard; biased performance assessment; disinformation
by the managers to serve special interests; etc. Even today, industries suffer huge losses due to
unethical HR practices such as strikes, low productivity and damage to assets; the losses are
even more pronounced especially in traditional or small industries (e.g. jute mills, sugar mills,
metal foundries, etc). Although the management of an organisation often promotes violation
of ethics in HR practices, HR professionals—e.g. personnel managers and accountants—can
still play a very important role in curbing this tendency of the organisation. More recently, in
India, the Society for Human Resource Management (SHRM), and the National Institute of
Personnel Management are taking steps to reinforce ethical practices of their affiliate members,
through measures such as ethics training. With the roles of HR professionals expanding in
today’s industry, the importance of ethical standards and practice in this profession is becoming
critical to draw and retain the best talent in their sector. Today’s service industries are so
dependent on the quality of people they employ and retain that HR has taken centre stage
in the management of many a company. But, are these HR professionals holding on to the
ethical standards of the profession? A review of the performance appraisal function of most
companies would reveal that employees are generally very dissatisfied with the role of HR
professionals. More often than not, the HR personnel act as a tool in the hands of management
to perpetuate the exploitation of workers. The frequent notices of shut-down and re-opening
in many jute and textile mills, affecting the livelihoods of thousands of employees, are proof of
this observation. Although such conflicts stem from many sources, the most important of these
 Ethics in Business and Corporate Governance

is the management itself, suggested a 2003 study, conducted by SHRM and the Ethics Resource
Centre.5 Going by almost half the respondents of this study, the most commonly cited source of
pressure to compromise ethical standards was the ‘need to follow boss’s directive’, followed by
‘meeting overly aggressive business objectives’ and ‘helping the organisation survive’.
In modern competitive industry, the quality of employees is the main resource of a business
and instrumental in its success. So, while ethical issues concerning HR professionals may be
confined to the organisation, their effects can be far-reaching. Employees are the customers
or clients of HR professionals, and it is the responsibility of HR professionals to satisfy them
with fair and just actions. Like other professions, HR personnel have to resist unethical actions
in the organisation, and should not succumb to pressure; they also have to be responsible for
adding manpower value to the organisation and promoting ethical standards for the success of the
organisation. SHRM recommends the following principles to guide the code of professional
conduct and ethics amongst HR professionals:
1. Adhere to the highest standards of ethical and professional behaviour.
2. Measure the effectiveness of HR in contributing to or achieving organisational goals.
3. Comply with the law.
4. Work consistent with the values of the profession.
5. Strive to achieve the highest levels of service, performance and social responsibility.
6. Advocate for the appropriate use and appreciation of human beings as employees.
7. Advocate openly and within the established forums for debate in order to influence
decision-making and results.
SHRM also expressed that (i) HR professionals are expected to exhibit individual leadership
as a role model for maintaining the highest standards of ethical conduct in the company;
(ii) they must be ethical and act ethically in every professional interaction; and (iii) they should
be ethically responsible for promoting and fostering fairness and justice for all employees in
the organisation. These aspects of the conduct of HR professionals are necessary to create
and sustain an environment that encourages all individuals in the organisation to realise their
fullest potential in a positive and productive manner. SHRM further recommends that HR
professionals should not engage in activities that create actual, apparent or potential conflicts of
interests in contradiction to the aforesaid ethical and professional standards.These conditions of
behaviour imply that HR professionals should:
Refrain from using their position for personal, material or financial gain or the
appearance of such;
Refrain from giving or seeking preferential treatment in the HR processes; and
Adhere to and advocate the use of published policies on conflicts of interest, and conflict
resolution, within the organisation.
These SHRM recommendations leave no ambiguity in the ethical role of HR personnel in
an organisation; it is expected that they adhere to this set of professional conduct and ethical
5
http://www.allbusiness.com/human-resources/employee-development-employee-ethics/394111-1.html, accessed on 7 August 2009; http://
www.allbusiness.com/public-administration/administration-human/185949-1.html, accessed on 14 October 2011
 Professional Ethics

standards. Significantly, HR professionals are not to lend themselves to any (creation of) divide
and conflicts amongst employees, not even under pressure. Morality, justice and fairness must be
seen in their actions, decisions and in the implementation of HR programmes.
In practice, though, there are frequent departures from the recommended behaviour, especially
in a country like India where there is acute shortage of employment and all employers are
not necessarily fair and just to their employees. Most HR personnel in India might confide
that, under the business systems and practices prevailing in India, being ethical does not pay
at all. There are instances of victimisation and harassment of employees without any reason,
or exploitation with the lure of benefits and promotion for the personal gain of others. HR
personnel may not have been involved in all such cases, but, at the same time, they have not
discharged their professional responsibility in those cases either. Such indifferent HR practices
(indifferent to the cause of their customers, i.e., the employees) may bring about a high level
of employee dissatisfaction—which goes against the long-term interest of the business. HR
professionals must be fair and just in discharging their professional duties to employees who are
their recognised customers, if not for the sake of the organisation, then for the shake of their
own professional conduct.

6.5 ETHICS OF FINANCE AND ACCOUNTING PROFESSIONALS

One of the critical areas of business where ethical violations are frequent is finance and
accounting. Many a company have indulged in misrepresentation of facts by doctoring its
accounts in some unconventional way—while staying within the bounds of the prevalent
accounting system—such as inflating the earnings, providing misleading financial statement, etc.
Fraudulent manipulation of financial markets and stock markets are other examples of unethical
business practice executed or aided by highly skilled accounts professionals. Considering that the
impact of financial frauds can be very severe and can cause loss of benefits to many individual
stakeholders of the company, ethics of business accountants are an important issue. As these areas
call for high levels of skill and competency, the compliance to ethical rules and obligations lies
mostly in the hands of certified professionals like chartered accountants, auditors, etc.Therefore,
professional bodies like the Institute of Chartered Accountants of India and the Institute of
Cost Accountants have since formulated their code of ethics6 that is mandatory for practicing
in their respective fields of work. In order to ensure adherence to ethics in this profession,
more transparency and disclosures—in accounts and related information on risks, sources of
income and revenue, compliance to regulatory provisions, etc.—are being called for in general
accounting practices.
Ethics in accounting has become even more important with the growth of international
trade, as a result of which countries engaged in mutual business are seeking adherence to
globally accepted accounting norms in order to check and prevent fraudulent and unethical
accounting practices. In view of this, ICAI has now mandated that Indian accounting norms
must converge with the International Financial Reporting Standards (IFRS) by 2011, to ensure

6
http://www.cvc.nic.in/codeethics.pdf, accessed on 17 August 2009
 Ethics in Business and Corporate Governance

better disclosure norms and prevent profit book frauds. However, it is no guarantee that all
accounting frauds will not occur after the adoption of IFRS norms; they would only become
a bit more difficult. Hence, the need for change in professional attitude and ethical conduct in
this coveted profession still remains uppermost for the safety of investors, employees and society.
Again, statistically—following the 80–20 rule of Pareto’s law7—it is not the majority but only
a few professionals who are the cause of such complaints and ethical problems. Nonetheless,
accounting is a core function in business, and ethics in accounting is a critical factor for the
success of any business. Hence, ensuring ethical accounting practice is a core requirement of
good corporate governance.
Financial fraud involving accountants and auditors is not uncommon in any country. The
series of accounting scandals reported in the US during 2001–02 was mostly due to the
complicity between the accused corporate heads and their accountants—including external
auditors. Similarly, unholy alliances between corporate heads and the company auditors are
emerging from the investigations of the massive accounting scam at Satyam in India during
2008–09. Financial irregularities worth Rs. 70 billion have depleted corporate funds that
rightfully belong to Satyam’s shareholders, investors, employees and clients. This, in turn, has
not only damaged the interests of the company’s stakeholders, but has also been a big blow
to the country’s business morale. What is ethically unpardonable is that the very professionals,
who were trained to detect and prevent such frauds and scams, became partners in the crime.
The governments in many other countries have ‘oversight agencies’ to check and control financial
irregularities, but what is most required is professional integrity, and ethics of honesty and
trustworthiness. Alarmed by the increasing manipulation of the books of accounts, ICAI
has drawn up an elaborate list of rules and conducts for professional practices of chartered
accountants in India to promote the ethical culture of: Service before self and extending beyond
the legal requirements. The institute aims to promote this motto as ‘mission’ of the accounts
profession.
To promote ethical work culture amidst practicing accountants, ICAI also prohibits its
members from pursuing another profession, soliciting clients, taking financial interests other
than fees, and writing of books of accounts of the auditee-company in order to prevent conflicts
of interests that may lead to violation of conduct. The purpose of such codes of ethics is not to
restrain an accountant’s practice but to remind him that he is morally responsible for preventing
or minimising damage to the society, clients and government. Ethics in financial audit have
become so important (due to the potentially hazardous impact on the business and investing
public) in the global business that most developed countries, including the European Union
(EU), have now made it compulsory that: (i) countries must have an oversight office or an
independent review board; (ii) auditors of firms seeking to do business with the EU or listing
themselves at stock exchanges must be registered in the country; (iii) audit firms must have a
website wherefrom all details and ‘sensitive’ information (income, percentage of revenue coming
from auditing, policy of remuneration of partners, etc.) can be obtained; and (4) the audit practice
must conform to a recognised accounting and disclosure practice (e.g., GAP, IFRS, etc.). The
7
http://management.about.com/cs/generalmanagement/a/Pareto081202.htm, accessed on 13 October 2011
 Professional Ethics

purpose of such safeguards is not to prevent doing business with unethical professional practices,
but to prevent any hazardous effect arising from the same. In business, the fallout of unethical
financial and accounting practices has widespread influence on business climate, potentially
damaging the interests of the nation’s overall business environment in addition to damaging the
interests of a large group of consumers, employees, and small (retail) shareholders. Hence, every
country has its own regulations and laws (e.g., the Income Tax Laws, Company Board Laws,
SEBI regulations, etc.) to regulate the practice and prevent wrongdoing.Yet, financial scam and
frauds occur at frequent intervals in all countries, necessitating intervention or support from
ethics and ethical standards of professional practices, which are in addition to the regulatory
norms of aforesaid bodies and come under the ambit of institutional controls.
Another example of financial fraud and violation of ethics is the sudden closure of many
NBFCs (Non-Banking Financial Companies) in India, which affected thousands of depositors
and resulted in the loss of millions of Rupees of public money.8 This happens every now
and then in every part of India, despite strict Reserve Bank of India (RBI) guidelines and
regulatory provisions. The country’s financial history is dotted with such scandals beginning
with the closure of ‘Sanchita Chit Fund’ in early 1980s in West Bengal, to the recent warning
by RBI to a very large and organised NBFC company in Lucknow. Such financial scandals due
to non-ethical means of doing business have all coerced, duped or induced the unsuspecting
investing public; they have manipulated the business process so as to divert money to other
funds so that investing public cannot claim any residual benefits from the leftover assets. Thus,
the ways many of these NBFCs violated laws with the intent of duping the investing public, are
proof of bad business practices; and, frequently, these cases have been perpetuated with the help
of accounts and finance professionals. Very often, accountants are found to be willing partners
and facilitators to such game-plans.
Ethics in accounting are critical for a country’s economic progress, because money and
money management is the key to all economic development and business enterprises. The
impact of these professional ethics go well beyond the scope of business operations—it harms
a nation’s capability to foster the economic well-being of its people, and hurts the pockets of
many pensioners and old people, affecting their livelihood and health care. Hence, professional
ethics of accounting professionals are critical for a nation’s economic progress, the health of its
financial markets and the confidence of other countries in its financial and governing systems,
to protect the welfare of public and the society. Experience has shown that the system of
rules, regulations and controls through codes of conduct may not always be effective enough;
accountants have to be moral, courageous and self-regulating to ensure ethics and prevent
wrongdoings in their profession. Unless professional accountants themselves rise up to the
challenges of ethics in their profession, no amount of legislation or ruling in this direction
would serve the purpose.

6.6 ETHICS OF ADVERTISING

Advertising is a means to provide information about products and services to consumers. It
comprises two parts: (i) designing information; and (ii) delivering or advertising that information
8
http://www.indianexpress.com/ie/daily/19990528/ iex28060.html, accessed on 13 October 2011
 Ethics in Business and Corporate Governance

for public utilisation. Both these are achieved through advertising firms and professionals
specialising in client servicing, copywriting, visualising and advertising through select media.
Advertising is a big business in this age of promotion and marketing; companies are making
huge investments in their annual advertising budgets. In a recent example, the telecast rights
for the Indian Premier League cricket matches were sold for a huge amount and so were the
advertisements therein. Advertising is very expensive; it does not come free to consumers as
generally appears to be. In the end, advertising costs are covered by the prices consumers pay
for the goods and services they buy. Hence, it is natural for consumers to question what they
get for the money they contribute to advertising. In that, are the companies (making products
or services) or advertising agencies fair, just and ethical to consumers affected and influenced by
the advertisements? Let us review this by analysing some advertising myths9:

Advertising is a means to market promotion and reaching out to customers, but there are
some things that advertising, by itself, cannot do or provide to customers. Let’s dispel a few
of the most common misconceptions. Advertisements are not always about the best product,
nor truly represent a product quality that meets a customer’s needs. Most of the time, it
makes customers buy that they should not. Advertising also do not necessarily provide all
relevant information that one should have for making a buying decision. Yet, advertising is
the most important means to promote a product in a competitive market. Most people agree
that advertising brings competitiveness, which favours the customers, but most consumers,
on the other hand, have little market knowledge outside the advertised information
(without market research report) to know where to get the best-value product. Thus, buying
through advertisement is fraught with some risks to consumers. Hence, it is quite common
that consumers mostly rely on the word of mouth of someone they know for making a
buying decision; though they are indirectly paying for the advertisement costs. Nonetheless,
advertising has been firmly established as a primary mode of marketing promotion, and few
can think outside of it. And, with the advancement of the Internet as a channel for marketing
and commerce, advertising is taking the centre stage of consumer marketing.

Companies claim that basic function of advertising is to provide consumers with ‘information’
about the products and services available to them, which is beneficial to both the suppliers
and the consumers of goods. The benefits of advertising should be looked into from the viewpoint of
information supply chain. Proponents of ethics in advertising claim that the information thus put
across to potential consumers through advertising is not neutral, and hence is unfair to them.
Nowadays there are supplementary agencies that attempt to measure the gain and loss from
advertising efforts of a company and the effectiveness of the company’s advertising agency in
bringing home increased profits. But, ethics of advertising are not only about the gain or loss from
advertising; they are also about the correctness, appropriateness, openness and fairness of the content of an
advertisement in relation to its recipients, customers or the society at large. Is it ethical to advertise ‘hair
oil’ claiming that the oil cures hair loss and turns grey hair into black within 14 days? Yet, this is
happening in the country’s advertising world and with very little protest. Such unfair ads have
9
http://www.smallbusinessnotes.com/operating/marketing/advertisingmyth.html, accessed on 13 October 2011; and http://www.bazaarvoice.
com/resources/stats, accessed on 18 February 2010
 Professional Ethics

penetrated the market so much so that, from time to time, the Government of India has to crack
the whip on erring advertisements that are very unfair and misleading. Let us consider one such
instance:

As reported in The Telegraph, Kolkata, 22 February, 200910, the Health Ministry in New
Delhi declared that the ‘advertisements that promise to make one fairer within weeks are
misleading’ and wrote to the Ministry of Information and Broadcasting to take action against
campaigns that make such claims. It declared, ‘Fair is fine, but promise is foul … this needs
to stop. They cannot say within one week you will be white…’. The Ministry, along with
ASCI and other advertising agencies, media and associate professionals, planned to crack
a whip on erring advertisers, it was reported, ‘The concerns raised by the Health Ministry
are genuine. There are so many ads, both in print and on TV, which could mislead the
consumers. We are in touch with various bodies, including ASCI, to bring out a procedural
code to make advertisers more accountable,’ a Ministry official told the newspaper. ‘The
ministry is also thinking of coming out with a campaign to encourage viewers to send their
grievances to these commissions if they find any advertisement offensive’.

Dishonest and misleading advertisements have become so common that Consumer Protection
Councils are now flooded with complaints regarding their deceptive nature. Consumers must
be protected from such deceit; they pay for the cost of advertising with the products they buy,
hence, can ethically expect to get some worthwhile return instead of misleading and harmful
advertisements. How many consumers get the correct information about a product advertised
on television? How many consumers can really filter useful data and quality parameters from,
say, a car ad? How many consumers get guidance about true product quality and usage tips from
a skincare product ad? If the answer to these questions is ‘very few’, then why should the large
majority of consumers be subjected to pay for the cost of advertising if it is not adding any
value to their purchase? If advertisers are in the business of making money through services to
readers and consumers, then they have the professional responsibility to be honest and fair in
their creation and representation.
Many claim that advertising (electronic and print) is necessary to reach out to the masses and
trigger a thought about buying a product; the rest of the buying business should be completed
through other ‘search’ methods. Search methods would include contacts, user experience,
Internet surfing, questions and verifications, inspection and demonstration, etc.This sounds fair,
but then, in the first place, why are advertisements created in a way that is more misleading than
leading? If we take a page from the TQM book in the advertising business (surely advertising is
a business by its merits and deeds), then who are the customers of their advertisements and how
do they propose to serve those customers in all fairness and to their satisfaction? A company
intending to advertise its product for sales promotion generally leaves the imparting of details
to the creation of the ad agency; it is the overzealous approach of the ad agencies to satisfy their
clients (companies) that often lead to an overkill in the ad. In this context, there is a serious need
for self-regulation and self-restraint to keep this profession free from unethical practices. Ethics
10
http://www.telegraphindia.com/1090223/jsp/nation/story_10577464.jsp, accessed on 13 October 2011
 Ethics in Business and Corporate Governance

are not against reaping benefits from a profession, but are against reaping benefits by unfair and
misleading means and creations.
Figure 6.2 depicts the ‘Golden Rules of Advertising’ Ethics, which have considerable influence
on the society and consumers.

Golden Rules of Advertising Ethics

Avoid
promotion
Ensure that Ensure
Ensure of product
Safeguard advertisements fairness of
truthfulness hazardous or
against are not competition
and honesty of harmful to
misleading offensive to and
representation society,
advertisement caste, religion, adherance to
particularly
colour or creed social welfare
to children
and minors

Figure 6.2 The ‘Golden Rules of Advertising’ Ethics

There are numerous examples of print and electronic ads wherefrom potential consumers get
very little, but for which they indirectly pay. It is generally acknowledged that advertisements
often do not really include objective information for consumers for the simple reason that
primary function of an ad has come to be ‘not that of providing unbiased information but glorifying
product information’. If the task of advertising is viewed in terms of a ‘buyer-seller’ relationship,
then it can be defined as a kind of commercial communication between a seller and potential
buyers (customers). Hence, ads can be looked at as: (a) a publicly addressed communication to
masses; and (b) created with the intent to induce several members of its audience to buy the
seller’s products. This view of advertising raises the following ethical issues:
(i) The social effect of advertising, arising from the view that advertising, being a publicly
addressed system for specific commercial communication, would have widespread effect
on the masses and society;
(ii) Advertising is a means to create consumer desires to buy a seller’s product; and
(iii) The effect of advertising on consumer belief, in that the product is a means of satisfying some
desire of the buyer.
The social effects of ads have many ramifications; often, people find the visuals in ads as being
tasteless, disgusting and even vulgar at times. For example,TV ads for some brands of toothpaste,
undergarments, over-the-counter pharmaceutical products, birth control products, etc. take
frequent recourse to irritating and aesthetically unpleasant displays to make the advertisement
effective. Many viewers consider this unwarranted and catering neither to good taste nor to the
healthy growth of society. No doubt, not all ads are tasteless or vulgar, but the effects of tasteless
and unpleasant displays, even if comprising a small portion of the total ad outlay, can cause
psychological effects on simple-minded advertisement-believing public and society, especially
children. Another aspect of advertising in general is that they are made to propagate or promote
materialistic values and ideas about how to be happy or different or distinguished in the society,
 Professional Ethics

most of which is not a true representation of reality. This leads people to overlook their basic
needs and requirements, and influences them to believe in the ad-up utility of things—and, thus,
they spend money to fulfil those needs instead of the basic ones. As a consequence, an imbalance
is created in the spending patterns of the people in society diverting the resources from creating
happy living to raved-up living.
Critics also claim that advertising leads to wastage, because a large number of consumers still
depend on the ‘word of mouth’ mode of buying.11 They observe that the cost of advertising
does not—in any way—improve or add value to products; it is spent on persuading people
to buy instead of on making the product of that quality and value which to speak about
for buying. Thus, advertising can divert resources away from hardcore research and (product)
development (to add value to the product); instead advertising encourages expenditure on
creating a socio-psychological desire in the minds of the masses for the sole purpose of ‘ensuring
that people buy what is produced’. Critics claim that this is an easy means to create a market,
which may adversely affect the long-term growth of technology and industry. Renowned
economist John Kenneth Galbraith12 in his book—The New Industrial State—had implied that
advertising is a means to shift the focus of decision, in the purchase of goods, from the control of
consumers to the control of firms. If this is correct, then advertising is an instrument to manipulate
consumers, which violates the individual’s right to choose for the self. By this contention, it is
an unethical means for the end results and purposes of the producers (companies). However, it
is unclear if this view of advertising can be extended to all advertisements. Is it always possible
for advertisements to manipulate psychological desire and individual choice? Proponents of
advertisements say that the purpose of advertising is not to limit consumer choice, but to open
up the opportunities of choices in a free and competitive market. Consumers need to exercise
caution, and to distinguish and choose the good (for the self) from the bad.This is a fair view of
the purpose of advertisements, and advertisers must adhere to this view and work transparently
and consistently towards achieving the same.
Many proponents of advertising also caution that the deceptive nature of contemporary ads,
especially in the electronic and Internet media, cannot be totally ruled out. Ads, being a form
of communication, can be as truthful or deceptive as any other form of communication, if not
treated with care and caution. ‘Consumer beliefs’ must consider this general characteristic of
this type of communication, i.e., not to take advertised communication at face value but to
accept it upon verification. There are numerous instances of deceptive ads in all kind of media,
which include: false claims, padded up testimonials, failure to disclose possible shortcomings or
side-effects of a product—either of which could be potentially harmful—and offering product
‘guarantee’ along with the fine-print that ‘conditions apply’. Deception in advertisements has
been ethically condemned on the grounds that it violates the consumer’s right to choice and
fairness, and offers less utility than as perceived from the promises or claims made in the ad. Let
us consider the false advertising pertaining to the realm of higher education in India:

11
http://en.wikipedia.org/wiki/Word_of_mouth, accessed on 13 October 2011
12
http://www.lewrockwell.com/rothbard/rothbard189.html, accessed on 18 August 09; and http://en.wikipedia.org/wiki/John_
Kenneth_Galbraith, accessed on 13 October 2011; and www.proppi.uff.br/.../V.8_N.2_MEMORIA_J.K_GALBRAITH.pdf,
accessed on 14 October 2011
 Ethics in Business and Corporate Governance

With the increasing spate of false advertisements in matters of higher education13 and
educational institutions, and complaints arising from such misleading information, the Human
Resource Development (HRD) Ministry, Government of India, and a perplexed University
Grants Commission (UGC) are rushing to clarify through public notice the status of such
questionable institutions with respect to AICTE (All India Council for Technical Educations)
approval. The problem is that the claims, despite being inaccurate and misleading, are not
always actionable in the court of law—as of now—in India. A recent news report (The
Telegraph, Kolkata, 5 April 2009) talks about repeated advertisements in print and on TV
where a private university (name withheld) claims it is rated the best in its category, and
that it is recognised by the UGC, the country’s apex higher education regulator. In reality,
UGC has not inspected the university; in fact, UGC official say that the varsity physically
prevented them from examining the claims. Claims and counter-claims continue in this
regard, as both parties cite some court rulings or the other. Yet, in the present frenzy of
higher education in India, the fact remains that students are enrolling in such sub-standard
courses and institutions. To help these students, UGC clarified that prospective students
should at least find out if they are seeking admission to a UGC-inspected institute, and if
their technical course is AICTE-approved. If students find that the university is evasive in
handling these queries, they should contact the UGC to crosscheck the antecedents of that
particular university or insitution.

This is a typical case of how advertisements can affect the morale and future of students—who
are the very future of the nation. Persons, institutions, companies or ad agencies indulging in
such misleading and deceptive advertisements are certainly not moral or ethical. They have
overlooked their responsibility to the society—to allow or facilitate individuals to choose what
is right for them by providing a truthful picture and correct information. Manipulation of
information to falsehood is not ethical advertising; advertisers (copywriters, producers, media)
should not tailor any content with the intent to make an audience or public believe something
that is wrong or false.That would tantamount to lying, which is unethical. But, in the backdrop
of competition and materialism, advertising is—and will remain—a recognised means for
product promotion; in a free market, neither can advertisements do without consumers, nor
can consumers do without advertisements. The ethical and moral issues raised by advertising
and advertising practices are rather complex due to several unclear effects. Nonetheless, it is
certain that advertisement and advertising ethics do have effects on individuals and the society
in their free choice, desire about what to buy, buying, and the belief that they have bought what
they wanted to buy. Advertising professionals have to self-regulate their conducts and creations
in order to help the society for realisation of this utility goal. Certainly, not all advertisements
are wilful misrepresentation or all advertisers are unethical. Advertising world is also evolving
itself to the necessity of free-market conditions and glory of ‘total quality’. If some advertisers
fail to give true and neutral information or communication about advertised products, buyers
have to use their alternative sources of information, discretion and judgement for buying in

13
http://pd.cpim.org/2009/0621_pd/06212009_11.html, accessed on 18 August 2009; and http://www.ncte-india.org/M.%20
Anandakrishnan.pdf, accessed on 13 October 2011
 Professional Ethics

this materialistic and competitive world, which will destroy the very purpose of this profession.
‘Internet’ and internet sites are fast emerging as one such alternative source.
In recognition to this present state of advertising ethics, Advertising Standards Council of
India (ASCI) a self-regulatory body of advertisers, ad-agencies, media, and associate professionals,
are planning to check the contents of advertisements and crack whip on erring advertisers.

6.7 ETHICS OF MEDIA REPORTING

Ethics of media reporting is, perhaps, best reflected in the statement of a senior journalist
who said: ‘Journalism occupies a special position in the society because their role and function
influences the masses, but he cautioned that they need to subscribe to a code of ethics in the
course of their professional duties.Truth, objectivity and privacy are some of the issues that must
be carefully pursued’. In today’s world of mass communication, there could not be anything
more important than ethics of the media reporting professionals.
Media reporting has primarily two parts in its functioning: (1) one is journalistic in
nature—reporting (and sometimes analysing) the happenings and trend of happenings in various
fields of interests like Social, Political, Economical, Environmental, Educational, Historical,
Cultural, Sports, etc. and (2) the other part is to carry advertisements or personal information
as communication to public or select group of readers or viewers. Ethics and ethical rules apply
to both these areas. Media functioning as carrier of advertisement closely related to ethics of
advertising, where a part of the responsibility for truth in advertising rests with media that
carry the advertisements. Media should not knowingly lend support or cooperate with the
advertisers for advertisements that are intended for misleading the public or society. For example,
a Calcutta TV channel is seen routinely putting up with advertisements that declares: “studying
in X-institute (naming avoided) means sure job in Government Organisation” or another one:
“so and so Institute (which is yet to be fully launched) is the leader in giving birth to twenty
first century leaders of the nation”.
These are obviously false claims; meant to attract more admission of students to these Institutes
by making attractive but false promises, and the media is apparently willingly cooperating
with the advertisers for creating the ‘desire and belief ’ (as discussed in Section 6.6) in certain
section of viewers. The concerned Institutes may claim that they believe in what they have
advertised, and they will work for fulfilling the promise, but can the media accept the contents
of advertisement that are most likely to mislead the society and children? Very often a trend is
being observed now in the Indian news-media to insert a disclaimer at the bottom of the page
declaring that newspaper is not responsible for any accuracy of information and readers are
advised to verify the contents.This may help the media to defend itself from any law suit, but it
cannot absolve the media from moral responsibility, because the media is placed in a responsible
position by the society to project truth and facts for general consumptions. Therefore, ethics
and ethical duties demand that media take steps for ensuring that contents of advertisements
are not (altogether) false or misleading. In this regard, it is not enough for the media to depend
on the submitted texts and materials by the advertisers; they have the responsibility to verify
with reasonable efforts and care before lending their names into the advertised messages. In print
 Ethics in Business and Corporate Governance

media, a small print declaration is now sometime seen to be added to inform people that media
concern is not responsible for the contents of an advertisement and readers are advised to verify
the truthfulness of contents before acting on the information.
Media has the ethical responsibility to stop or minimise the damage that an advertisement
can cause to the interests of public or viewers or the society. There are numerous examples
of electronic and media advertisements that we come across daily in TV, Internet,
telecommunications, etc. which are far from truth and mostly misleading. In this age of
communication via the recognised routes of media—that are growing everyday with the
advancement of electronic and communication technology—we are often left with more of
junk information than useful information. Yet, a society critically depends on such media for
receiving communications without which our life will be totally bottled-up and stagnant. Does
this mean that media can take full advantage of such situation and choose to fail to protect the interests of
public and the society? A look into the code of conducts and ethics in journalism to which all such
media activities centres around would reveal that it is certainly not so. The journalistic codes
insist for adherence to some basic moral and legal duties in order to bring more credibility,
honesty, truthfulness and fairness in reporting and contents of communication. However, many
also insist that applications of journalistic codes are primarily intended for reporting, editing
and analysing of news items, and not exactly for media advertising. The latter is still a grey area,
which is evolving through the advertising ethics and regulations (as discussed in the previous
section in this chapter).
Need for code of ethics in media was first recognised in USA when they formulated a code of
practice for American Society of Newspaper Editors in 1926. Society of Professional Journalists
code of ethics originated from this document and had undergone number of revisions in
subsequent years. Ethical codes of the Society of Professional Journalists are based on the belief
that public enlightenment is the forerunner of justice and the foundation of democracy in the
media. The duty of journalists is to further those ends by seeking truth and providing a fair
and comprehensive account of events and issues. Professional integrity and ethical behaviour
are said to be the Society’s principles and standards of practice. The highlights of the codes for
journalism14 are:
1. Seek truth and report: Journalists should:
Test the accuracy of information from all sources and exercise care to avoid
inadvertent error. Deliberate distortion is never permissible.
Diligently seek out subjects of news stories to give them the opportunity to respond
to allegations of wrongdoing.
Identify sources whenever feasible. The public is entitled to as much information as
possible on sources’ reliability.
Always question sources’ motives before promising anonymity. Clarify conditions
attached to any promise made in exchange for information. Keep promises.

14
http://en.wikipedia.org/wiki/Journalism_ethics_and_standards, accessed on 14 October 2011, and http://en.wikipedia.org/wiki/Media_
ethics, accessed on 14 October 2011
 Professional Ethics

should be labelled and not misrepresent fact or context.

Distinguish news from advertising and shun hybrids that blur the lines between the
two.
Recognise a special obligation to ensure that the public’s business is conducted in
the open and that government records are open to inspection.
: Journalists should:
Show compassion for those who may be affected adversely by news coverage.
Use special sensitivity when dealing with children and inexperienced sources or
subjects.
Be sensitive when seeking or using interviews or photographs of those affected by
tragedy or grief.
Recognise that gathering and reporting information may cause harm or discomfort.
Pursuit of the news is not a licence for arrogance.
Recognise that private people have a greater right to control information about
themselves than do public officials and others who seek power, influence or attention.
Only an overriding public need can justify intrusion into anyone’s privacy.
Show good taste. Avoid pandering to lurid curiosity.
Be cautious about identifying juvenile suspects or victims of sex crimes.
Be judicious about naming criminal suspects before the formal filing of charges.
Balance a criminal suspect’s fair trial rights with the public’s right to be informed.
 Ethics in Business and Corporate Governance

3. Act independently: Journalists should be free of obligation to any interest other than

Avoid conflicts of interest, real or perceived.

Remain free of associations and activities that may compromise integrity or damage
credibility.
Refuse gifts, favours, fees, free travel and special treatment, and shun secondary
employment, political involvement, public office and service in community
organisations if they compromise journalistic integrity.
Disclose unavoidable conflicts.
Be vigilant and courageous about holding those with power accountable.
Deny favoured treatment to advertisers and special interests and resist their pressure
to influence news coverage.
Be wary of sources offering information for favours or money; avoid bidding for
news.
4. Be accountable: Journalists are accountable to their readers, listeners, viewers and
each other. Journalists should:
Clarify and explain news coverage and invite dialogue with the public over
journalistic conduct.
Encourage the public to voice grievances against the news media.
Admit mistakes and correct them promptly.
Expose unethical practices of journalists and the news media.
Abide by the same high standards to which they hold others.
These codes of conducts are aimed at comprehensively covering all aspects of media reporting where
thoroughness, honesty, fairness and accountability are the cornerstone of journalism. If media reporting
follows these rules and ethics, there would be little dispute or debate about the ethics of media.
Unfortunately, there are violations of ethical standards and instances of siding with parties of
influence, power and politics to promote some direct or indirect gain. The situation is equally
disturbing in both national and international coverage of information and communication.
Recent instances of biased and partial journalism include the international coverage of Iraq
War, highlighted as the ‘war on terror’; the efforts of rich nations towards poverty elimination;
violation of human rights, etc. Journalism must be responsible to promote a fair and unbiased
understanding of the subject of media coverage. In a growing economy and evolving society
like India, biased and distorted media coverage of political, legal and economic issues are
increasingly creating more of divide than unity in terms of public opinion and views.This type of
journalism has harmed the greater interest of the society and precipitated many conflicting and
complex issues rather than bringing about a solution. Many believe that increasing complexity
of political, social, and economic problems and issues in India are due to failure on part of the
media to take a fair, just and objective stand on those issues. Media could be a business of its
own, but it must not focus on serving the opportunity for financial and other gains at the cost
of responsible journalism. Recognition of journalism and the power in the hands of journalists
 Professional Ethics

must not bring about any harm to the nation or promote conflict in the society or divide the
nation in any way.
With the increasing penetration of media—both print and electronic—into our lives and
living, responsibility, accountability and ethical conduct have assumed much greater importance
than what appears. Good taste; objectivity in reporting; compassion and respect for the privacy of
those who may be adversely affected by certain news coverage; ensuring accuracy of information;
recognising special obligation to public and society; and remaining free of activities that may
compromise integrity or damage credibility are a few important guidelines for fair and ethical
media reporting. In today’s world, no society can progress without the support of effective and
fair media and media practice. The impact of media reporting is so high that this is even called
the ‘fifth power of a state’; the country, therefore, needs an ethics conscious media. This can be
promoted more by self-regulating the journalistic approach and coverage in adherence to the
journalistic code of conduct—rather than by imposing external controls, censors or criticisms.
The SPJ advocates a novel way of self-correction: to encourage the public to voice grievances
against the news media. The examples of this practice and expression are often manifested in
the news-media through the ‘Letters to the Editor’.
Yet another area of concern in a society relates to pictures, depictions and ‘shows’ shown
on TV, which are generally believed to be in bad taste for the viewing of children and some
other weaker groups of viewers. We might argue about the purpose of such shows and about
the entertainment needs of target viewers, but the media cannot harm the interests of some
underage or weaker sections of society while serving the others. It has the added responsibility
of not exploiting the social or economic divide between people and the society. Media is not
necessarily restricted to particular viewership or readership; it being an open communication
system, is generally open to all. Hence, many expect that media, providing such shows and
pictures, should behave in an ethical and responsible manner in the context of a nation, region
or the community it serves. Media is as an institution as academic institutions when it comes to
spreading knowledge, information and nation-building thoughts and ideas. Journalists should
bear this fact in mind and accordingly strategise their media reporting and catering to public
at large. Any irresponsible and unfair means to provide information and communication, or
tailoring programmes and coverage to cater to the special needs of some viewers for commercial
gains will be unethical. And, while pornography would undoubtedly bring added viewership
and increased advertising rating for the channel that airs it, this would be highly unethical (and
illegal in many countries). In India, the rapid addition to TV channels and their programme
content draws a lot of criticism for partial, bias and tainted shows. People have every reason
to voice their concern against such uninhibited and unethical shows and displays for general
viewing. It would be futile to argue or take a stand (‘viewers be aware’, ‘lock your channel’,
or ‘consumers to choose and view’); what matters in a developing and socially heterogeneous
country like India is the spirit of moral duty and ethical responsibility to the society and public
at large. Ethics are not an external regulation; they call for self-consciousness and self-regulation
about what is moral, fair and just so that the wellbeing of society or individuals is not harmed
in conducting business and affairs of a state.
 Ethics in Business and Corporate Governance

6.8 ETHICS OF HEALTH CARE SERVICES

Health is, indeed, wealth. Health of people is the primary indicator of good governance of the
country and well-being of its society. As per Article 25 of the Universal Declaration of Human
Rights15, everyone has the right to a standard of living adequate for the health and well-being
of oneself and one’s family, including food, clothing, housing and medical care and necessary
social services. In the modern world, health care is regarded as a basic necessity of the people,
and every State has the responsibility to work towards that goal. In recent years especially, the
importance of health care has increased many-fold owing to the effect of socio-economic
pressures and the stresses of modern industrialised lifestyles on the population. Increasing
demands on health care services, and the need to make quality services available to the masses,
has compounded the issue of ethics in health care and medical services. The problem is even
more pronounced in the countries of the developing world which face acute shortages not only
of quality services but also of qualified professionals.
The necessity to hold on to certain basic ethics in the medical profession is not new, it has
existed since the beginning of human civilisation and medicinal practice.‘Charaka Samhita’16, the
ancient philosophy of Charaka, prescribes an elaborate code of ethics for medical professionals. It
states: ‘He, who practices not for money nor for a price but out of compassion for living beings,
is the best among all physicians’. However, with the evolution of society, science and statehood,
it is widely believed that health is a fundamental right of humanity, and the responsibility lies
with the State to promote, govern and assure good and ethical medical services to its people.
The right to health brings on the issue of ‘distributive justice’ in managing and administering
health care services. Thus, the implied principles of health care services include the ethical
principle of care, and making available an acceptable and affordable service to all at right time
and in the right manner that assures safety, care and dignity of people receiving the service.
Health care should be recognised as a basic responsibility of the state, and the organisation
providing health care services should be appropriately regulated and controlled by the state.
It must be recognised that health care is a team-based activity where doctors as well as the
supporting staff (including theatre and cleaning staff) should work with an ethical mission.
Hence, like all other professional services, health care services also require a regulatory
approach to the ethical issues of the profession and professionals involved.The medical profession
has formed a ‘body of ethical statements’ primarily for the benefit of the patients; yet, there
are regular reports of medical negligence and patient suffering due to inadequate or careless
medical services. While some such cases have been mentioned earlier as illustrations of care,
there are ample court cases in India about the violation of medical ethics and duty of care. Let
us view one such interesting case:

In the case of Pravat Kumar Mukherjee vs Ruby General Hospital, Kolkata and Others17,
the National Commission dealing with hospital deaths, delivered a landmark judgment
concerning the treatment of an accident victim by the hospital. The case involves the
15
http://en.wikipedia.org/wiki/Universal_Declaration_of_Human_Rights, accessed on 14 October 2011
16
Indian Journal on Medical Ethics,Vol. 4(4), Oct–Dec 1996
17
Medical Ethics and the Treatment of Accident Victim; http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2779963/, accessed on 14 October
2011
 Professional Ethics

unfortunate death of a young boy, Sumanta Mukherjee, a second-year B.Tech. student, on

January 14, 2001. A bus from Calcutta Tramway Corporation crashed with the motorcycle
driven by Sumanta. After the accident, Sumanta was conscious and was taken to Ruby
General Hospital about one km from the accident site. He was insured for Rs. 65,000 under
a Mediclaim policy issued by the New India Assurance Co. Ltd. Sumanta was still conscious
when he reached the hospital. He even showed to the hospital staff the Mediclaim policy
certificate he was carrying in his wallet. He also assured that charges for his treatment
would be paid and urged the hospital staff to start the treatment immediately. Acting on
this promise, the hospital staff started his treatment in their emergency room. However, the
treatment was discontinued after 45 minutes, with the hospital demanding an immediate
payment of Rs. 15,000. The hospital staff remained adamant on its payment demand and
did not resume Sumanta’s treatment though the members of the general public accompanying
Sumanta gave an assurance about the payment. Subsequently, these people were forced to
take Sumanta to the National Calcutta Medical College, which is about 7–8 km from Ruby
General Hospital. Sumanta died on the way and was declared dead upon arrival at the
National Calcutta Medical College. His parents approached the National Commission for
compensation and adequate relief.
The National Commission heard the complaint and directed the opponent Ruby General
Hospital to pay Rs. 10 lakh to the complainant for causing mental pain agony. The Commission
in its judgment observed: “This may serve the purpose of bringing about a qualitative change
in the attitude of the hospitals in providing service to human beings as human beings. A
human touch is necessary; that is their code of conduct; that is their duty and that is what
is required to be implemented. In emergency or critical cases, let them discharge their duty/
social obligation of rendering service without waiting for fee or for consent.” However, it
remains to be seen whether the above award has brought in any attitudinal change in the
medical fraternity.

Especially in India, people repose great trust in a doctor, who is considered second only to
God. However, more and more people are now questioning the practice, the process of providing
health care service and the attitude of the professionals involved. Trust based on ‘goodness’ of
the doctor or nurse is slowly giving way to a patient’s doubts and checks before the treatment.
But, the problem is that in India not all people are in a position to take an educated view of the
situation as they are not so literate, and neither the state nor the medical professionals go out of
their way to minimise the hardship and suffering of common people. The general view is that
medical professionals are duty-bound to care and treat patients to the best of their abilities, and
the state is responsible for building infrastructures, facilities and faculties to ensure that health
care services are possible to provide.
The American Medical Association (AMA), the leading professional body to recognise the
responsibility of medical profession had enacted a code of ethical practices long ago. It states that:
as a member of this profession, a physician must recognise responsibility to the patients first and
foremost, as well as to society, to other health professionals, and to self.The following principles
adopted by the AMA are not laws, but standards of conduct which define the essentials of
honourable behaviour for the physician18:
18
Code of Medical Ethics, American Medical Association; Adapted June 1957; Revised: June 1980; Revised: June 2001: Approved:
June 17 2001
 Ethics in Business and Corporate Governance

improvement of the community and the betterment of public health.

A physician shall, while caring for a patient, regard responsibility to the patient as
paramount.
A physician shall support access to medical care for all people.
The World Medical Association’s Geneva declaration (September, 1983) also calls for
the medical professionals pledging to: ‘service to the humanity, serving the profession with
conscience and dignity, committing to the principle of patients’ health first and above all other
considerations, respect for the secrets confided in doctors by patients, and maintaining the honour
and noble tradition of the medical profession.’ Indian Supreme Court has ruled that ‘Medical
profession is governed by code of medical ethics and etiquettes laid down by Medical Council
of India. Although they are for internal self regulations of the profession, it is an obligation on
the part of the professionals to fulfil certain rights, expectations of the patients.’19
Therefore, the misconduct of some medical professionals reported in India is not due to the
lack of ethical codes or governing principles but due to the lack of care, concern and violation
of professional conduct.20 Health care ethics demand credibility, professionalism, quality of
service, and patients’ confidence reposed in the doctors. While an Indian court has defined
the doctor–patient relationship as a contract for personal service and subject to the Consumer
Protection Act 198621,22. the issue of negligence cannot be solved by rules or regulations; it
calls for a conscience and commitment to service to humanity, by abiding by the oath taken
by all doctors to serve selflessly and with humanity. Like all ethical issues, the failure of ethics
19
Medical Ethics and the Treatment of Accident Victim; http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2779963/, accessed on
14 October 2011
20
http://timesofindia.indiatimes.com/articleshow/899266362.cms, accessed on 17 August 2009, and 14 October 2011
21
http://www.legalserviceindia.com/article/l178-Medical-Negligence.html, accessed on 18 August 2009; http://www.legalserviceindia.com/
article/l178-Medical-Negligence.html, accessed on 14 October 2011
22
Medical Ethics and the Treatment of Accident Victim; http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2779963/, accessed on
14 October 2011
 Professional Ethics

in health care is also driven by greed and opportunity to make money. A general view of the
situation is that while treatment breakthroughs have emerged in modern medical practices,
their costs have soared equally. Furthermore, drugs and equipment supplying companies are
forging unusual alliance with interested parties to promote products that are not optimum—all
this, leading to the continued sufferings of millions in every country. Therefore, the state or
the government has the duty to create facilities and resources (trained medical personnel) in
the country and administer the health policy to assure people of their basic rights. Both, the
profession and the professionals engaged in health care have the ethical responsibility to act and
practice the profession with trust, care and credibility. The codes enshrined in the respective
national medical council must be obeyed and administered with the spirit of faithful compliance
and the conscience that doctors are duty-bound to serve people to the best of their ability and
honesty.
Another aspect of health care professional ethics is self-advertisement. The Medical Council
of India (MCI) forbids advertising of medical doctors and rules advertising by doctors as
unethical.Yet, there are plenty of cases where doctors somehow advertise themselves, in a way
that cannot be acted against by the MCI for some ‘technical reason’. In addition, in India,
exaggerated or false ads by hospitals and diagnostic centres are increasing without any check,
which is also contributing to unethical practices in health care services.There is nothing wrong
in advertising a business, of which health care services are a part, but that should be in good
faith and reflect the truth. Unfortunately, many such ads are more with a view to deceive than
to serve patients well within the principles of professional services and codes. Take the example
of mushrooming of health care services all over country without adequate infrastructure or
supporting qualified staff. Not only are some of these centres charging exorbitant fees, but
are also harassing patients with their deficient treatment facilities, inflated bills and coercion
at a point of time when patients are in desperate need of help and support. This is regarded
as highly unethical professional practice. Professionals associated with these activities have the
ethical responsibility to safeguard the interests of public and serve the customers (patients) with
promised products or packages. Misleading public with exaggerated claims, advertisements and
false promise is unethical; and, behind such a business scenario, there is always some specialised
persons or professional who is propagating wrongdoings. However, it should be appreciated
that majority of businesses, and professionals engaged therein, are generally honest and ethical
within the bounds of legal implications, though certainly there are a few who bring harm to
some profession and business.
Unethical business practices, supported by some professionals, are not confined only to
advertising or merchandising business; they have spread insofar as educational institutions,
tourism and tour operations, and medicinal disciplines among other areas.
It cannot be denied that some professionals in every field of business are not ethical in their
behaviour and dealings. Professional bodies controlling their professions and the government
regulators are, no doubt, trying to prevent any damage done to the consumers and societies,
but the solution is far from control—as can be concluded from recent cases of business frauds
the world over. Justice, fairness and utility are taking a backseat in adapting business strategies
for profits. While society grapples with the dilemma of tackling this situation, every country is
 Ethics in Business and Corporate Governance

strengthening its consumer protection laws.Yet, nothing works (or is working) when individuals
are bent upon making a quick buck even if by doing wrong. Many business philosophers
recommend prevention over cure; prevention, they feel, lies in educating professionals about
their moral duty to the society and about the merits of ethics in business dealings for the
ultimate gain. Punishment may be a deterrent but cannot prevent the occurrence of unethical
practices; stricter regulations for control and heavy punishment for violation can help reduce
the tendency of such unethical practices in many public utility areas, but the real solution lies
in training and counselling the associated professionals to make them aware of the ill-effects
to the society, cost to the public, and their ethical duties to the society and public at large. For
prevention, extensive education, realignment of social forces and enlightenment in the civil
society in the form of reinforced value-system, are called for.
Elaborate discussions on professional ethics in all business related fields could lead to some
dilution of focus in this book. Nonetheless, it is necessary to touch upon these subjects to make
the readers aware of ethical problems—that are challenging the sustainable business growth and
harmony in the society—engulf almost all areas of professions, including medical, legal, real
estate, tourism, telecommunications, etc.There are horror stories of wrong diagnoses and careless
surgery conducted by surgeons, even as abused patients are unable to exercise legal remedies
due to complex court procedures and lack of support from other fellow doctors. In the recent
past, though, consumer courts have forced some correction upon the abuses or abusers. At
times, lawyers behave as if they are above the law that otherwise applies only to their clients.The
recent case of a Delhi lawyer arrested on a criminal charge led the other lawyers in the capital
to rise in protest to protect their colleague—though he was accused for a serious crime. Is this
a fair professional conduct? Though self-regulation has been emphasised in the discussions as
a means to minimise such unethical conduct in professional work and workplaces, it has not
worked out quite successfully thus far. In the words of Prof. S. L. Rao (former Director General
of the National Council for Applied Economic Research, New Delhi), ‘Self-regulation in the
professions has been ineffective in India. Associations can set standards, conduct examinations,
licence practitioners, but misdemeanours should be covered by legislation, not self-regulation’
(The Telegraph, Kolkata, 29 January 2009).23 Indeed, this should extend to all professionals,
including, say, real estate agents. Self-regulating professional associations favour their members
over customers. The Satyam scam should be a wake-up call not only for corporate governance,
but against the myth of self-regulation.The Parliament must create a new independent regulatory
body for chartered professionals that will be open, transparent and consultative. The process
must give confidence to complainants that they will be heard and objectively so. Perhaps, based
on his wide experience, Prof. Rao does not want to leave the issue of professional ethics to
a doubtful start of self-regulation, because the consequences of its failure are proving to be
too damaging to the Indian society and economic well-being. In an article titled ‘The Art of
Fraud’ (The Telegraph, Kolkata, 23 March 2009)24, he opined that constant vigilance and better

23
Matters of Life and Death, S.L. Rao; http://www.telegraphindia.com/1090129/jsp/opinion/story_10450273.jsp, accessed on 14
October 2011
24
The Art of Fraud, S.L. Rao; http://www.telegraphindia.com/1090323/jsp/opinion/story_10687685.jsp, accessed on 14 October
2011
 Professional Ethics

regulations in India could have prevented the Satyam debacle, which has left its deep scar on
Indian business ethics and corporate governance. This may be true for financial scams, but for
many other professions the solution lies in self-regulation and conscience of the professionals.
As the maxim goes: To be a good manager (professional), one has to first be a good human
being; everything will fall in order from that point of goodness and self-regulation.

Summary
1. The chapter reviews a few cases to establish the necessity and importance of professional ethics
in business. It has been pointed out, especially in the recent Indian context, that our professional
practices are not transparent and are open to malpractices, and there is an urgent need to reinforce
existing laws and regulations to protect the public and investors from possible loss and harm from
dubious professional activities.
2. Professional ethics refer to the moral standards demonstrated by the professionals working in
managing, promoting, marketing or (product) developing. However, business is not the only
commercial entity in the society, there are many supporting and servicing professions in the
society where professional ethics is equally important, namely in medical, legal, advertising,
media reporting, etc. Moral standards and ethics in every profession are essential for the well-
being and sustainability of business; absence of which could badly harm the society and the
nation.
3. Shocked and awed by the fallouts of financial scandals, governments are now concerned about
regulating and modulating the behaviour of professionals by reinforcing the laws of the respective
country, and the rules and regulations of various professional bodies, with the intent to promote
fair practices and moral standards in professional behaviour. This chapter discusses the state of
professional ethics, and the ways and means to improve the same, in some function-critical areas
like accounting, advertising, media reporting, product development and management, health
care, etc.
4. In the discussions, an attempt has been made to present professions and professional responsibility
in the light of consumer and social expectations rather than as mere instruments for manipulation
and propagation of wrongdoings by the hands of business owners. The chapter describes and
demonstrates how professional bodies are reinventing themselves in the task of controlling
wrongdoings in their respective profession and regulating the conducts of members therein.
5. Despite all such attempts by the professional bodies and regulators, professional misdemeanours
are continuing unabated in most countries. This is contributing to the view that professional
ethics can be best regulated by promoting ‘self-regulations’ in each field of activities and binding
the professionals by a well-structured code of ethics in their respective fields of activities. Pros
and cons of self-regulations have been brought to light wherever necessary, and it has been
shown that for effective control and regulation, professional bodies and regulating authorities
should move towards educating professionals about social consequences of their actions and self-
regulation for control.
6. Many experts argue that self-regulations in most professions have been in force for a long time
in the US, but they have been ineffective to curb financial scams or unethical business activities
in that country. Nonetheless, many social scientists and business philosophers are recommending
 Ethics in Business and Corporate Governance

prevention over cure; they believe prevention lies in educating professionals about their moral
duty to the society and merits of ethics in business or professional dealings for ultimate gains.
7. The final emerging view is that stricter regulations for control and heavy punishment for
violation can help reduce the tendency of such unethical practices in many public utility areas,
but the solution still lies in training and counselling associated professionals to make them aware
of the ill-effects to the society, cost to the public, and their ethical duties to the society and
public at large. For prevention, we require extensive education, realignment of social forces and
enlightenment in the civil society in the form of a reinforced value-system.

Key Words and Concepts

Accountants, ethical responsibility of accounts professionals, regulator, self-regulation, financial crimes,
professional responsibility, professional ethics, social development, socio-economic institution, government,
customer-supplier relationship, ethics of custodianship, ethics of care, codes of professional conducts,
Pareto’s law, oversight agency, whistle-blower, social effect of advertising, advertising, free market, total
quality, fifth power of a state, professional journalists, public health, consumer protection, health hazard,
customer beliefs.

Exercises
Check Your Progress
1. Ethical issues of professional activities can be best served by ___________
2. Professional ethics refer ___________
3. If professionals are ___________ businesses become automatically ethical and true to their social
responsibility and obligations.
4. Ethics do not stop one from choosing jobs or professions, but ___________
5. There could be regulations and legislations in a country to control any fraud and wrongdoings in the
marketplace, but the ultimate solution of the problem rests ___________
6. Any deficiency of services or product features from the promise by the concerned professional, willingly or
unknowingly, should be termed ___________
7. The touchstone for ethical judgement is ___________
8. Governments in many countries have taken recourse to forming ‘Oversight’ agencies to check and control
financial scams, but what is most required is ___________
9. Deception in advertisement has long been ethically condemned on the grounds that ___________ that
___________
10. It is not enough for the media to depend on the texts and materials submitted by the advertisers, they have
the responsibility to ___________

Review Questions
1. What do you understand by the term ‘professional ethics’? How do professional ethics differ from individual
ethics in business operations?
 Professional Ethics

2. Why do professional ethics in the area of finance and accounting get major attention by the regulators
in a country? Identify two major financial scams of recent times and briefly discuss their impacts on the
society.
3. Describe the steps recommended by ICAI for the professional conduct of Chartered Accountants. Name
few other institutions which prescribe such codes of conduct for their professional members.
4. Discuss the role of ethics, and consequences of ethical failure, in any service sector industry. How can the
conduct of professionals engaged in that industry be regulated for fairness, justice and utility?
5. Discuss the ethical responsibility of marketing professionals in the light of the following statement:
‘Marketing is not merely campaigning or providing information or selling products and services; it is about
marketing the value of a product’.
6. Why are ethics of HR professionals becoming increasingly important nowadays? Discuss the
recommendations of the Society for Human Resource Management (SHRM) guiding the codes of
professional conduct and ethics amongst HR professionals.
7. Why are ethics of advertising professionals gaining importance these days? Describe, with suitable
illustrations, how unethical advertising can harm the consumers as well as society.
8. Identify five important ethical attributes of media reporting as per the guidelines of the Society of
Professional Journalists (SPJ). What is the basis of the formulation of the SPJ code of ethics?
9. Critically discuss the merits and demerits of ‘self-regulation’ in professional ethics vis-à-vis regulatory and
legislative controls.
10. Do you agree with the view that ‘advertising is a means to shift the focus of decision-making (about the
purchase of goods) from the control of consumers to the control of firms?’ Illustrate your answer with
examples from the marketplace.

Further/Suggested Reading
1. The Ground of Professional Ethics, Daryl Koehn, Routledge, London, 1994
2. Ethics and Professionalism, John H. Kultgen, University of Pennsylvania Press, Philadelphia, 1988
3. True Professionalism:The Courage to Care about your People, your Client, and your Career, David H. Maister, Free
Press, New York, 2000
4. Accounting Ethics, Ronald F. Duska, Wiley-Blackwell, New York, 2003
5. Advertising Ethics, Edward Spence and Brett Van Heekeren, Prentice Hall, Upper Saddle River, 2004
6. Organisational Ethics in Health Care: Principles, Cases and Practical Solutions, Philip J. Boyle, Edwin R. Dubose
and Stephen J. Ellingson, John Wiley, Chicago, 2001
 CHAPTER 7
Ethics and the
Environment

To highlight the damaging effects of pollution and environmental

degradation
To justify why the environment is an ethical issue and outline the
Chapter Objectives

ethical tasks
To provide an overview of how modern industrial activities cause
environmental pollution, pollution types, and challenges of pollution
control
To discuss the ethics and ethical responsibility of controlling pollu-
tion and ecological damage
To highlight the damaging effects of ‘greenhouse gases’ (GHG), their
sources and methods of controlling, including ‘carbon trading’, from
the viewpoints of ethics and social well-being
To discuss the necessity of the utilitarian ethical approach for global
emission control vis-à-vis merits of ‘carbon trading’ system as per
the Kyoto Protocol
 Ethics and the Environment

INTRODUCTION
ance
ern ce
Gov ernan
ate
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Cor orate over nce
s and Corp ate G erna
nes d or ov nce
usi ess an Corp ate G erna
B
in usi
n
an d p or Gov
ics B ness nd Cor orate
Eth ics in usi sa orp
Eth s in B usines and C
ic B s
Eth ics in usines
th
E s in B
ic
Eth

1
http://www.telegraphindia.com/1090222/jsp/calcutta/story_10573604.jsp, accessed on 14 October 2011
2
http://www.telegraphindia.com/1090109/jsp/frontpage/story_10365206.jsp, accessed on 14 October 2011
Ethics in Business and Corporate Governance

HOW YOU ARE AFFECTED, EVERYDAY

Healthy airway
Nasal cavity
Oral cavity

Larynx
Trachea Inflamed airway
Bronchl

Mucus

Lungs

Affected airway
A zoomed-in, highly magnified image of airways within the lungs shows
inflammation and mucus build-up as a consequence of traffic emissions

Impact Children
Vehicle exhausts spewed by two-stroke Damage to airways and lungs from emissions is
autos in Calcutta begin meddling with similar in children and adults. But since children
the body’s respiratory functions within are likely to be exposed for longer time periods
minutes, but their effects may build up over their lifetime, they have higher risks of
over time, causing irreversible lung accumulating long-lerm lung damage, in addition
damage. Prolonged exposure to high to short-term impacts such as inflammation,
emission levels can damage cells that persistent cough and exacerbation of the
mop up infectious, allergic and toxic symptoms of asthma.
particles from the airways.
 Ethics and the Environment

These cases show how deep the environmental issues can strike the society, completely
jeopardising the life, living and well-being of people, be it in a remote island or in a populated
city.
Case I depicts how global warming, arising from the carbon dioxide emissions of industries,
coal-based thermal power generating plants, vehicles and machineries run on petro-fuels, is
causing human misery and destruction. This specific case may be about Sundarban, but the
situation is no different in other parts of the world, such as the Indonesian peninsula or the
Amazon delta. Global temperature is rising, causing sea levels to rise and inundating low-lying
areas of the world; global warming is the result of increasing industrialisation and consequent
carbon dioxide emission from industrial plants and machineries of the developed and developing
economies. Statistics show that the US emits 20 tonnes of carbon dioxide per capita, Europe around
10 tonnes, China between 4 to 5 tonnes, and India between 1 to 2 tonnes4; vide the graph shown in Figure
7.1. These are per capita figures for 2003. The situation might have marginally improved in the
latter years5, but the overall level is far greater than what the ‘sustainable equilibrium’ of the
earth can accommodate. This is only one ugly face of the present environmental problem due
to industrial activities. Modern societies are irreversibly dependent on industrial products and
economies based on industrial growth, but they are oblivious of their responsibility to protect
and preserve the environment—essential for the well-being of the human race of present and
future generations. Apparently, indiscriminate industrialisation the world over, without much
effective control over emission and pollution, is becoming the bane of healthy human society.

3
http://www.telegraphindia.com/1090406/jsp/calcutta/story_10778292.jsp, accessed on 14 October 2011, Foul air hits below the
belt—Two-decade study reveals link between male infertility and vehicle pollution; and http://www.nursingtimes.net/whats-new-in-
nursing/something-fishy-in-the-water/1971179.article, accessed on 14 October 2011
4
http://www.thehcf.org/emaila5.html, accessed on 15 October 2011
5
http://en.wikipedia.org/wiki/List_of_countries_by_carbon_dioxide_emissions_per_capita, accessed on 15 October 2011
 Ethics in Business and Corporate Governance

Comparing emissions per capita in tonnes of carbon dioxide

20

11.2
10.2
9.5 9.4
8.1
6.8

3.1 2.7
0.96

World United Russia Germany UK Japan Italy France China India

States
Source: Energy Information Administration International Energy Annual 2003

Figure 7.1 Carbon Dioxide Emission per Capita in Different Countries, as per the Energy International Energy
Study, 2003

Case I points to this direction of ‘social responsibility of the business world’ with a view to
minimise industrial carbon emission and control environmental pollution.
Case II demonstrates the far-reaching ill-effects and penetration of vehicular pollution into
our lives.The case here points to a particular city, but the problem of air pollution is a real threat
to civil society in most other cities in this country as well as in the developing world, including
China. This pollution is penetrating the social well-being of cities and metropolises the world
over, affecting the lives of children and even the unborn foetus. Though serious efforts are
being made to control the emissions from cars in most part of the developed world, it remains a
serious problem in the developing world. The reason is not solely the economic compulsion of
industrialisation, but also populist government policies with liberal attitudes towards the control
of industrial pollution or violation of rules and legal dictates. As reported in the Kolkata daily,
the government is not rising up to its moral responsibility to protect the health of its citizens
and future generations. In this regard, the Consumer Protection Act is also rendered ineffective
in the absence of serious intent of the executor of the law and legal provisions. Hence, sufferings
of the people and society continue unabated with the implications of possible disability and
deformity. Environment protection is a global issue, and all governments have the moral
responsibility to act and regulate environmental pollution to protect the health and interests
of their citizens. And, within this framework of government acts and regulations, organisations
have the responsibility to manage the environment and ecology as a part of good corporate
governance.
Therefore, the question is: Who are morally responsible for protecting the environment
from deterioration? The famous environmentalist William Blackstone, forwarded a view on
the environment in 1974—when the issue had only surfaced as being critical to our socio-
economic growth and well-being—proclaiming that ‘the possession of a liveable environment is not
 Ethics and the Environment

merely a desirable state of affairs, but something to which each human being has a right’. He summed it
up by saying, ‘it is something that others have the duty to allow us to have’. This view is now
widely accepted by all nations and forms the basis of studies and analyses of environmental
ethics. Thus, Blackstone implies that environment protection becomes a state responsibility; the
state has the power to regulate, control and enter into special agreements with other interest
groups (such as corporate and society) to protect and improve the environment.
Environment refers to the combination of external or extrinsic physical conditions affecting and
influencing the growth and development of organisms including the human race. Environmental issues
surround us in all conceivable ways, some examples being: air pollution, water pollution, sound
pollution, global warming, acid rain, ozone depletion, toxicity, land pollutions, deforestation,
solid wastes and nuclear waste, depletion of fossil fuels and minerals, and ecological imbalance.
These issues harm not only human beings but also non-human aspects of the larger ecological
system within which we live. Environmental issue, thus, raises many complicated ethical and
technological questions related to our living, sustainability, well-being of the society, and the way
businesses are carried out. However, the scope of this book is not environment management but
ethics in environment protection. It is important to understand that, if ethics in environment
management of industries and businesses are not maintained and nurtured with great sincerity
and commitment, the disastrous consequences of environment pollution may backfire on the
industry and business itself—causing immense harm to the well-being of present as well as
future generations.This chapter proposes to discuss environmental issues from the standpoint of
‘what causes what effect’ and the ethical responsibility of industries and governments when it
comes to preventing environmental damage.

7.1 INTRODUCTION TO ENVIRONMENTAL ISSUES

That the presence of industries and consumption of industrial products is causing environmental
damages is beyond doubt; the question is, can these damages be minimised so as to strive for
ecological balance? If, as the very basis of their existence, industry and industrial prosperity
are to serve the cause of mankind, then the people behind the industry are also responsible
for stopping or slowing down environmental decay. The society rightfully expects them to be
responsible enough not to do anything that harms the interest and well-being of its people.
However, all environmental issues need not be directly linked to industries; some are created by
the civilised world—arising from the way people choose to live and use industrial products. Let
us consider some issues that lend to environmental exploitation:

In many poor nations, deforestation occurs owing to the illegal felling of trees for people’s
livelihoods; and, to add to this environmental degradation, raw fossil fuels (coal and
wood) are burnt for domestic use. On the other hand, in cities and metropolis, increasing
dependence on automobiles and machines or equipment run on petro-fuels cause high levels
of air pollution. Many civil societies also fail to conserve natural resources like water or fail
to recycle domestic waste—aggravating the problem of environmental exploitation.
 Ethics in Business and Corporate Governance

However, whatever may be the source of environmental pollution, it has to be controlled and
curtailed if damage to living organisms and mankind is to be put to a stop. Thus, it may appear
that environmental degradation is the antithesis of industrialisation and industrial development
in this materialistic world. Therefore, in today’s world, an ethical approach to ‘balancing the
actions of industrial development with those of controlling and minimising environmental
degradation’ is essential.
Unmindful of the environment, our random industrial exploitations of natural resources,
industrialisation around the world, and modernisation of the society have escalated the demand
of industrial products and created unparalleled environmental problems—all of which pose
a threat to our healthy and safe living in this world today. The very technology that enabled
us to manipulate and utilise nature has also polluted our environment and rapidly depleted
valuable natural resources and nature that help us conserve and live. A fallout of this situation
has led to international power struggles to own and control natural and technological resources
in a world where demand far exceeds the supply. This has been a cause of our continued
economic struggle and the source of many conflicts in the world. In our pursuit of continued
prosperity through industrialisation, the world is becoming increasingly polluted and devoid of
natural forests and resources, giving rise to problems like the greenhouse effect, global warming,
acid rain, shrinking forest land, mineral depletion, etc. Such a situation has provoked many
environmentally related ethical questions, some of which are:

damage?

These debates and dimensions should help in bringing out the underlying ethical issues of
environment management. This chapter discusses some such issues relating to air and water
pollution, global warming, as well as conservation of forests and related matters.
Significantly, ‘global warming6’ is drawing the most attention of all the nations, because of
the magnitude of the problem it is causing or can cause. Global warming is an effect; the cause
is the emission of industrial gases mainly containing carbon dioxide—briefly called ‘carbon
emissions’. Carbon emissions cause the ‘greenhouse effect7’ by which the atmosphere traps
and holds some of the sun’s energy, warming the earth enough to support life—much like the

6
http://en.wikipedia.org/wiki/Global_warming, accessed on 15 October 2011
7
http://news.bbc.co.uk/2/shared/spl/hi/sci_nat/04/climate_change/html/greenhouse.stm, accessed on 9 November 2009 and 15 October
2011
 Ethics and the Environment

artificial greenhouse created for plants. Most mainstream scientists believe a human-driven
increase in ‘greenhouse gases’ is increasing the effect artificially. These gases include carbon
dioxide, emitted by fossil fuel burning and deforestation, and methane, released from rice
paddies and landfill sites.
IPCC (Inter-governmental Panel for Climate Change) concluded in their Second Assessment
Report on Climate Change, 1995 that global temperatures have been rising since 1750 as a
consequence of human activities that are producing greenhouse gases. Without any measures
to reduce this emission, the earth’s temperature will rise by 2 to 4°C by the end of this century.
Scientists predict that the slightest increase in temperature (from the present level) will severely
limit fresh water availability in several countries and cause coastal flooding in many parts of the
world (refer Case I cited earlier in this chapter). A temperature rise of 2°C will bring disastrous
consequences of social, economic and environmental damages the world over, nullifying all
industrial endeavours to prosper. While the world has yet to set a global goal to limit carbon
emission in the atmosphere, IPCC experts suggest a 50 per cent cut in world emissions by
20508.The carbon reduction projections for some industrial countries relative to 1990 are given
in Table 7.1.

Table 7.1 Projections of carbon reduction for different industrial countries suggested by IPCC

Country/City 2050 reduction Relative to

UK 60% 1990
France 75% 2000
Germany 80% 1990
Sweden 50% 2004
Norway 100% n/a
California, US 80% 1990
City of Toronto, Canada 80% 1990
New Mexico, US 75% 2000
New Jersey, US 80% 2006
US (proposed) 80% 1990

The IPPC projections for reduction in carbon emission levels show that the major
responsibility for the carbon emission control has to be borne by the industrially advanced
nations. For example, the USA and Germany have to cut the carbon emission by 80 per cent
and the UK by 60 per cent. This is surely going to create conflicts of interests among nations,
which is unlikely to be fully addressed by the global bodies. And, in the face of conflicting
interests, the environmental degradation and human misery may continue unabated.
Furthermore, economists estimate that the cost of keeping temperatures within an acceptable range would
be about 1 per cent of the total global output. And this being the direct cost, what this huge loss of
opportunity to earn and grow will cost the nations is anybody’s guess. A study9 undertaken by
8
http://www.guardian.co.uk/environment/2008/jun/10/carbonemissions, accessed on 19 August 2009 and 15 October 2011
9
TERI Launches GREEN India 2047 Report, http://www.businesswireindia.com/PressRelease.asp?b2mid=20756, accessed on 15
October 2011
 Ethics in Business and Corporate Governance

The Energy and Resources Institute (TERI) in New Delhi found that India is losing about 10
per cent of its annual GDP due to environmental damage and degradation of natural resources.
Not surprisingly then, questions are being raised as to who will bear the expense of balancing
and improving industrial and human activities for the sake of global equity. Blackstone’s approach
to environment as rights to all, points to the reality that it is the responsibility of the states to protect the
environment and ecology. However, the magnitude of the problem is such that no single state or
nation, or a few companies or individuals, can bring any significant change; it has to be the
global and combined efforts of all states, societies and organisations. Given the current level
of emissions in the developed world (the US, UK and EU, among other countries), and the
projected growth of the largest developing economies (e.g., BRIC countries), no reduction in
global scale can be achieved without the cooperation of all, especially the US, the EU, China
and India. While world leaders may be contemplating their economic options (what needs to
be done and by whom), there is no ethical choice. It is the moral duty and responsibility of
all the governments, societies and organisations to undo, or improve over the present situation,
something they have been doing very selfishly and perilously and for so long. The moral
responsibility of these societies, to protect the nature and environment, has to prevail over their
economic calculations of profit and growth. However, challenges of ethics in environment
management are not in curtailing profit or growth of industries and business, but in inventing
the ways and means to carry out industrial necessities in better and mutually agreeable ways
to reduce, eliminate or neutralise emission and pollution. This stand may justify a utilitarian
approach to solving the environmental problem in the present world order.

7.2 INDUSTRY AND ENVIRONMENT POLLUTION: A GENERAL VIEW

So, how does industry affect environment? Let us consider the following facts:

Industry requires land for the setting up of plants and other facilities which leads to
shrinkage of cropland or forests. Industry needs more water—leading to falling water tables
on the earth’s surface on the one hand, and the discharge of used water that is polluted
with chemicals, waste, industrial residue on the other. Industry needs energy and power,
which involves burning fossil fuels and oils—leading to depletion of natural resources, air
pollution and other related effects like ‘ozone depletion10’ which expose us to harmful effects
of ultraviolet (UV) radiation. Industry needs transportation of raw material and goods
which involves usage of petro-fuels and leads to air pollution, greenhouse effect and rise in
atmospheric temperature.

10
Depletion of the Ozone layer in the stratosphere can cause increased amounts of UV radiation to reach the earth, which can lead
to more cases of skin cancer, cataracts and impaired immune systems. It can also damage sensitive crops, reduce crop yields and stress
marine phytoplankton which could adversely affect human food supplies. Refer to http://en.wikipedia.org/wiki/Ozone_depletion,
and http://www.epa.gov/oar/oaqps/gooduphigh/good.html#3, accessed on 18 August 2009
 Ethics and the Environment

In all, industry is an energy guzzling conversion mechanism whereby raw materials are
converted to utility goods—leading to depletion of natural resource and dependence on
the production of huge quantity of industrial power—a major source of solid wastes, toxic
wastes and global warming. Industries such as power, steel, cement and mining, extraction of
ferrous and non-ferrous metals, chemicals, fertilisers and refining are continually producing
pollutants like sulphur dioxide, carbon dioxide, carbon monoxide, nitrogen oxide, particulates,
etc. These are only a few examples of how industries directly or indirectly contribute to the
environmental degradation and pollution.

But, industry is essential for material prosperity. The present world order and world economy
cannot be conceived of without industries; industry is the major source of engagement and
employment of people for their livelihood.Therefore, the solution does not lie in discontinuing
industrial growth, but in pursuing disciplined and innovative methods and systems to ensure
a drastic reduction (or elimination) of damages to the earth and living beings occurring due
to environmental exploitation caused by industrial practices. While the annual reports of
many Indian companies may claim their respective intent to create sustainable environmental
capital for the nation, they fail to list the exact projects undertaken or results achieved by the
companies. Similarly, corporate statements about sustainable environment creation comprise
mostly qualitative description of intent rather than any comprehensive and holistic approach
to the problem. Considering the serious impact of environmental degradation due to industries alone,
governments must come out with stricter environmental laws, and industries should volunteer to limit the
environment degradation and pollution even at the cost of profits from business. Business organisations
have the moral responsibility to be concerned about the society—whose members are, after all,
their chief patrons (by way of consumptions and spending).
Environment management is not a simple system of do’s and don’ts; it is expensive, calls for an
innovative approach and demands high degree of managerial commitment. Industries, especially
in developing countries, are often found to be lacking in commitment and organisational will
to control pollution. Despite their commitments, they are seen to be failing in adequately
planning for environmental control, and continuing with processes and technology that are
neither adequate nor balanced enough to environmental pollution and damage. Many a time,
the violation is intentional in an attempt to evade the requirement of added tasks or resources.
Such violations are more noticeable in developing economies than in developed economies
which have strict social and consumer protection laws with exemplary penalties for failure. Let
us consider industrialisation in the Asia-Pacific region, for instance:

India is still producing nearly 80 per cent of its energy requirements through conventional
thermal power generation.11 According to the Central Electricity Authority of India, as of
March 31, 1998, 83 steam plants were in operation in India. These plants generated almost

11
http://www.mindbranch.com/catalog/print_product_page.jsp?code=R302-9349 accessed on 21-02-2010: India Power Report Q1,
2010, and Environmental Impact of Emissions from Thermal Power Generation: www.enzenglobal.com/pdf_downloads/environmental_
impact.pdf; accessed on 15 October 2011
 Ethics in Business and Corporate Governance

80% of total generated power for the nation. Its disastrous effects on the environment due
to release of carbon dioxide and sulphur bearing gases from the burning of fossil fuels, and
release of fly-ash in the air, are well known. India’s thermal power stations are known to be
the largest contributor of greenhouse gases. Though some efforts are being made to limit
emission to permissible levels of sulphur dioxide and nitrous oxide from these plants, and
to promote alternative sources of energy (like wind power, solar energy and hydrogen fuels),
these efforts have not significantly impacted the national emission scenario so far. Most
thermal plants also appear to be disregarding the basics of environment protection, like
extensive tree plantation or adopting latest pollution control technology. All this tells us a
grim story about the lack of business commitment towards environment protection as well
as the absence of monitoring and strict regulatory controls.
Similarly, despite pollution control laws, many an industrial machinery and production
equipment in India are seen to be belching heavy industrial smoke and dust without much
care and control. Smoking industrial chimneys are a common sight when one travels by
road or rail in India; as is the sight of commercial and passenger vehicles which may not be
fuel-efficient as per global norms, but continue to ply and pollute because of slack traffic
authorities and lack of control. The cumulative effect of these uncontrolled industrial
activities, in developing countries like India and China, given their considerable contribution
to air pollution and global warming, has become the main source of worry and contention
globally.

The question is, does this kind of poor environment management indicate lack of industrial
commitment or slack laws and regulations in these countries? Studies by many NGOs in the
field have found that it is more the absence of moral commitment by the industries, than slack
regulations (or regulators), that is the main problem of environment management in India.
Industries and nations must take the holistic approach to environment management—taking
into consideration all consequential ‘cause and effect’ to minimise damage to society—and not
make isolated technological choices. Not only in power generation, environment management
in all types of industries—starting from plastic and leather to steel industries—have been
problematic everywhere. No industrial or modern activity—using different industrial products
and gadgets—can be truly classified as non-polluting; it is just that these activities lend to
varying degrees and modes of pollution. To cite an example in this context:

A company manufacturing electronic integrated circuits may pollute less or within a limit, in
comparison to a leather processing unit or a metal foundry. Yet, the fact remains that pollution
is a universal phenomenon associated with and a result of industries—be it manufacturing,
construction, distribution and maintenance or service oriented.
Similarly, nuclear power generation—believed to be relatively non-polluting and, hence,
adopted by many developed countries like Japan, Russia and France—pollutes the air
quality far less compared to thermal generation, but is still not non-polluting. Nuclear power
technology is also riddled with the problem of effective management of nuclear waste and
guarding against accidental radiation leakage, both of which are hugely expensive tasks. The
 Ethics and the Environment

Chernobyl nuclear disaster12 in Russia in 1986 is an example of how damaging the failure
in dealing with nuclear radiation could be on a locality and society; the region is still not
fit for human habitation. There are many instances of radiation leakages at nuclear power
plants, which may not have been disclosed due to possible socio-economic repercussions and,
perhaps, the secretive policies of some states and governments.
Furthermore, even the lighting systems or computers used at home and in offices are not free
from polluting tendencies. They leave behind them their ‘carbon footprint13’ that indicate
how they lend to the generation of carbonaceous greenhouse gases and emission.

Hence, the task of environment management is neither industry specific nor area specific; it
is enrooted in all facets of industrial and social activities. However, the most important aspect
of environment management is to appreciate that although nature and natural processes have
an in-built capacity to regenerate the atmosphere to support the required ecological balance
for our life and living, the problem arises when we exploit nature and ecology beyond that
capacity. Modern society’s love for wealth and prosperity the world over may already have, in
all probability, far exceeded that critical level of ecological tolerance and balance.Yet, no matter
how late, nations across the world have to sit up and take note of their moral responsibility to
first bring down pollution levels to a safer level, and then to self-regulate and control pollution
with a view to bring about the well-being of all societies, in general, and future generations
in particular. Only this kind of an approach would translate into any major change—brought
about by the actions of industries to control their emissions and to abide by the (new) norms of
environmental protection. It would be unethical for both industries and governments to leave
such a task unattended.
In view of the danger from unabated emission and pollution facing the nations and societies,
all the governments have come out with policies, regulatory controls and laws governing
environment protection. In India, too, the Ministry of Environment and Forest (MoEF) launched
the ‘Corporate Responsibility for Environmental Protection’ (CREP) charter14 in 2003, aiming
to go beyond the compliance of regulatory norms for prevention and control of pollution
through various measures including waste minimisation, in-plant process control and adoption
of clean technologies. Furthermore, the Central Pollution Control Board (CPCB) and similar
boards at the state level are responsible for granting ‘pollution clearance’ approvals and running
other checks prior to the setting up of any new industry or construction activity. The process
of granting clearance necessitates a detailed examination of the activity or project vis-à-vis the
scope of pollution generation, nature of pollution, planning and protection planned in the project
for pollution control, effect of the pollution on the locality and society, deforestation, impact
on ecological balance, and other situation-specific factors. For example, while all these factors
may have to be studied before setting up a green-field steel plant, the construction of a port may,
instead, call for a very detailed report on the deforestation and ecology aspects of the project. As

12
http://en.wikipedia.org/wiki/Chernobyl_disaster, accessed on 19 August 2009 and 15 October 2011
13
A carbon footprint is a measure of the impact our activities have on the environment, and in particular climate change. It relates
to the amount of greenhouse gases produced by burning fossil fuels for electricity, heating and transportation, etc. Refer to http://
www.carbonfootprint.com/carbonfootprint.html, accessed on 9 November 2009
14
http://www.cpcb.nic.in/crep.php, accessed on 9 November 2009 and 15 October 2011
 Ethics in Business and Corporate Governance

more and more societies and governments take note of the ill-effects of environmental pollution,
more awareness is growing globally. The Kyoto Protocol15 is one such significant initiative
wherein industrialised countries have come together and committed themselves to stabilising
greenhouse gas emissions.
However, environmental pollution is not confined to industrial activities alone; it is intimately
connected with the usage of industrial products as well. To reiterate, let us elaborate on the
earlier examples (in this chapter) of cars and refrigerators that we all use:

Air pollution due to sulphur and nitrous gases released by incomplete fuel combustion in
cars and vehicles has become a major concern of modern civilisation. Cities are reeling under
the effect of ‘vehicular pollution’ that is leading to a rise in the atmospheric levels of toxic
gases and sulphur dioxide, causing respiratory diseases, headaches, etc. Similarly, the use of
CFC (chlorofluorocarbons) refrigerators is adding to atmospheric pollution, causing ozone
depletion and consequent suffering for mankind. While many countries have banned CFC, it
is still being used to manufacture refrigerators or other machines owing to its cost advantage.
CFC gases are released during leakages in refrigeration and air conditioning systems or when
they are repaired or disposed off; the gas rises rapidly to the stratosphere and ultimately
causes a breakdown of the ozone gas that protects us from UV radiation.

Environmental pollution, caused by industries or from the uses and consumptions of industrial
products, can be vastly damaging. And the problem is becoming even more aggravated with
the increasing dependence of the developed and developing world on industrialisation, for
the sake of economic growth. Industries—owing to preconceived notions about the added
costs vis-à-vis direct economic benefits—are buckling from the responsibility; governments of
various nations are debating who should do what. In the meantime, the problem is only being
multiplied and seems to be getting out of hand:

According to statistics (Figure 7.1), America emits about 20 tonnes of carbon dioxide per
capita of that country, Europe around 10 tonnes, China between 4 to 5 tonnes, and India
between 1 to 2 tonnes. In fact, emissions in China and India are increasing every year. And,
sustainable global equilibrium requires that the average emission be brought down to about
2 tonnes per capita by 2050. This is indeed a huge task, if at all it is achievable!

Arguably, emissions may not be arising—at least not 100 per cent—owing to industrial
operations; some of it may also be as a result of modern lifestyles and societies. However, this
chapter concerns itself with environmental issues and deals with measures to control emission
and pollution from industries. In all fairness to society and mankind, it is the governments of
those countries that are major sources of emission and environment violation, which have to
take on a major chunk of the environmental responsibility as well. This would include, setting
stringent goals for respective industries, gradually decreasing caps on emission levels, serious

15
The Kyoto Protocol is an international agreement linked to the United Nations Framework Convention on Climate Change. A
major feature is that it sets binding targets for 37 industrialised countries and the European community for reducing greenhouse
gas emission. Refer to http://unfccc.int/kyoto_protocol/items/2830.php, accessed on 9 November 2009 and 15 October 2011
 Ethics and the Environment

punitive measures for violations, economic incentives, and strict and honest monitoring of the
compliance. Industries, on their part, must rise up to the challenge, seek innovative measures
and improved processes, opt for greener factories and technology, and set up independent
agencies for environment ethics and compliance which aim at self-regulation and self-control.
Industries in the developed countries especially should take the lead—as they have led the way
for industrialisation in the past—for self-regulation; irrespective of what economic incentive
they stand to gain or, for that matter, lose. Industries are morally responsibility to bring about
self-regulation in this situation of their own making, if they are to save this planet from disaster
and human tragedy. In this context, it may be interesting to note that the Government of India is
planning to make it mandatory for companies to share information—about their environmental
commitments and performances related to new and ongoing projects—with the general public,
with the purpose of building public pressure when it comes to the reinforcement of all such
industrial environmental goals.

7.3 SOME ENVIRONMENTAL PHENOMENA OF ETHICAL CONCERN

Sources of environmental pollution can extend from the basic water we drink, air we breathe,
and sound we hear to imbalances in the ecology we are surrounded by. The ecological
balance of nature—that has been the source of our continued well-being—is in grave danger.
Some important types of pollution—brought about by the emission of objectionable gases
and degradation of the environment due to industrial practices and our social habits—are as
follows:
1. Global Warming
First in the list of environmental dangers, due to its very grave impact on the global climate
and marine life, global warming (refer footnotes 1 and 2) is the single most important cause
of ecological imbalances with an equally huge potential for catastrophic damage to the planet.
It occurs due to the ‘greenhouse effect’ (refer footnote 3), when greenhouse gases like carbon
dioxide, nitrous oxide, methane and CFC increase the temperature of the earth’s surface.
Greenhouse gases occur naturally to keep the earth’s temperature warm enough to enable organisms and life
to evolve and flourish. But, an excess of greenhouse gases in the atmosphere causes gradual increase of earth’s
temperature leading to a state when ecology and marine life on the earth is highly disturbed, with extremely
damaging effects on mankind. The increase in earth’s temperature will cause the glaciers to melt,
bringing about reduced ice formation and increased sea temperatures, changing the ecology,
marine life and inundating low-lying areas of the coastal belts. It is reported that average global
temperatures are now nearly 1°C higher than in 1900 AD. (Figure 7.2 tracks the rapid rise in
global temperature over the years.) With exponential rise in greenhouse gases due to large-scale
industrialisation and indiscriminate usage of fossil fuels by the people, the earth’s temperature
is expected to rise by another 2 to 3°C during the next 100 years, if things go unchecked. This
will flood all coastal zones, displacing millions of people and ruining both villages and cities;
decrease agricultural yields, inundating a large percentage of cropland; and change the weather
and climate all around the world, creating imbalance in seasonal changes and living conditions
 Ethics in Business and Corporate Governance

0.6
Global Temperatures

Temperature anomaly (°C)

0.4
Annual average
Five-year average
0.2

– 0.2

– 0.4

1880 1900 1920 1940 1960 1980 2000

Figure 7.2 The Rapid Increase in Global Temperatures over the Last Few Decades (global mean surface
temperature difference from the average for 1961–90)16

for human beings; among other disastrous effects. Thus, global warming has the potential to
bring untold misery and sufferings upon mankind—and whose fault will it be?
In addition to reasons such as fossil fuels, vehicular emission, and industrial gaseous effluents,
technology-driven human activities also contribute to the exponential increase in greenhouse
gases. Let us consider a few examples related to Internet usage:

It is an eye-opener to note that, in the US alone, 17 million tonnes of carbon dioxide is emitted
due to the consumption of energy used to transmit, detect and delete spam while Internet
surfing. The study was undertaken by the climate change consultants ICF, commissioned by
the virus removal service McAfee.17 Even after allowing for the fact that McAfee is not a
disinterested party in propagating this alarming message—since it also sells spam filtering
technology—there is still room for thought. The study indicates that if every ‘inbox’ has a
filter, some 75 per cent of the spam-detection-and-deletion energy could be reduced—which
would be equivalent to taking out 2.3 million cars off the US roads! No doubt that each
spam has a comparatively miniscule ‘carbon footprint’ (0.3 mg of carbon dioxide), but that
cannot be ignored if its cumulative effect is considered. The study further indicates that
on average, business users of Internet spend energy equivalent to approximately 131 kg of
carbon dioxide each, annually, just for e-mails.

This Internet related facts, taken from a recent editorial of a well-known business daily
in India, goes to show how we are getting entangled in the worldwide web—literally—of
pollution and global warming—not only through industrialisation but also due to acquired
habits born of modern-day living.
Afraid of the consequences of global warming and the huge costs of controlling the same,
countries often take recourse to blaming each other for the cause, rather than committing to
16
http://en.wikipedia.org/wiki/Global_warming, accessed on 22 November 2011
17
http://www.pcadvisor.co.uk/news/index.cfm?newsid=114300, accessed on 19 August 2009 and 15 October 2011
 Ethics and the Environment

control the greenhouse gas emission. Economically developed countries like the US and Europe,
which outweigh the other less developed ones in terms of greenhouse gas contribution, are
reluctant to take the lead. Developing countries like China, India and Brazil, which are rapidly
adding to carbon dioxide emission through large-scale industrialisation and population growth,
are also turning away from the imminent danger. IPCC18, the leading body for the assessment of
climate change, established in 1988 by the United Nations Environment Programme (UNEP)
and the World Meteorological Organisation (WMO), has been continuously trying to bring
a global awareness of this serious threat from environment degradation. The climatic change
brings along with it widespread increase in infectious diseases such as dengue, malaria, West
Nile virus, hepatitis, etc. as being observed in many coastal cities world over in recent time.
These effects will certainly spell doom for the mankind, unless gets checked with all urgency.
Global warming is an extremely difficult challenge to meet; perhaps, some experts believe,
we have already caused unrepairable environmental damage. According to an UNEP key fact
sheet19 on biodiversity, as many as 150 to 200 species of organisms become extinct every
day, because of deforestation and other environmental damage like forest fires, pollution, and
blockage of natural migration and feeding routes due to roadways and railways. Yet another
estimate states that, to control global warming now, the world have to reduce current emissions
of greenhouse gases by 60 to 70 per cent—an amount that would seriously damage the present
economy-base and economies of all nations! The repercussions of such drastic control, as the
current situation demands, are so vast, that only a few nations are likely to endeavour. And,
while many nations especially from the developed world are pledging voluntary measures to
cut emission, they have done little to actually arrest global warming; which means, voluntary
measures will certainly not be sufficient. Environmentalists believe that what is needed is a radical
change in lifestyles and values. However, can people accept such changes that may be in total
contrast to what they are being told or taught through media, academics, economists and
advocates of modern industrial society? Question is, can the greed of a few people be sacrificed
for the sake of fulfilling the needs of all? Is it moral and ethical to pursue environmental
destruction in our pursuit of material prosperity at present—knowing it will most certainly
affect the future generations? These are some questions related to environmental ethics that
must be examined and acted upon.
2. Acid Rain20
Like global warming, acid rain is another vicious fallout of atmospheric pollution; it arises
from the combustion of fossil fuels like coal, oil, natural gas, etc., releasing large quantities
of sulphur dioxides and nitrogen oxides into the atmosphere. Fossil fuels are largely used in
thermal power plants, metal industries, coke conversion plants (coke ovens), and public and
private transportation units. Their combustion releases sulphur dioxides and nitrogen oxides
into the atmosphere, which, when going up, come in contact with moist air to form nitric acid
18
http://www.ipcc.ch/organization/organization.shtml, accessed on 15 October 2011
19
http://www.unep.org/tunza/children/pdfs/Fact_sheets/Biodiversity.pdf, accessed on 9 November 2009; and http://www.nyo.unep.org/
action/10f.htm, accessed on 15 October 2011
20
http://en.wikipedia.org/wiki/Acid_rain, accessed on 9 August 2009 and 15 October 2011
 Ethics in Business and Corporate Governance

the upper strata are then carried down with the rain causing ‘acid rain’. This causes widespread
damage to the greens, fishes, forestry, and living organisms. It can also cause harm to human
skin and body, a phenomena common in developing and poor countries due to work culture
(e.g. farmers who work bare-bodied in the fields). One of the many harmful effects of acid rain is its
capacity to contaminate drinking water by leaching down the toxic metallic substances—like lead, mercury,
cadmium, arsenic, etc.—from the earth’s surface to the layers of water below it, and to other surrounding
water bodies. Let us consider an example of acid rain contamination:

In some part of the Gangetic delta of Bengal and Bihar in India, contamination of bore well and
tube well water with arsenic, lead and mercury is a serious problem. This reach of poisonous
elements in the water below ground level may be the result of accumulation over a long time
(hundreds of years) of metallic substances carried by the river water from upper courses and
also from acid rain. In many parts of rural India especially water thus contaminated is the
only source of drinking water, causing widespread diseases amongst people there (skin and
mouth diseases, etc.). The problem is so serious now that UNO agencies, government bodies
and NGOs are intensively working in some critical areas to provide water free from arsenic
and other metallic pollution so as to minimise further damage to public health. Yet, the
problem persists, with newer areas reporting arsenic (and metallic) contamination of water
every now and then. Social scientists are afraid that this problem will continue to aggravate
due to the widespread use of petro-fuels and heavy atmospheric pollution in the nearby
regions.

It is also believed that acid rain has corroded priceless monuments of civilisation like the
Taj Mahal in India. A court ruling then sought the closure of all the chemical refineries in
its vicinity, so as to stop the harmful effect of chemical residue settling on the white marble
monument. More recently, the Kolkata High Court has banned all fuel burning and vehicle
parking in and around the city’s famous museum monument, the Victoria Memorial—due
to the ability of these fuels to create an atmosphere that is acidic and thick with combustion
products.
Significantly, the most serious aspect of ‘acid vapour’ is that sulphur and nitrogen compounds
produced in one country often travel through air to another country and come down as acid
rain there. Thus, it is an international problem that cannot be limited to or controlled by efforts
of any one country. For instance, a study has shown that a part of Holland has suffered from
acid rain due to acid vapour caused in the industrial belt of Germany; likewise, a part of Canada
took the brunt of vapour from the industries of the Great Lakes region in North America. In
this way, our ceaseless pursuit of growth through industrialisation—using industrial practices—
is creating more and more acid vapour in the air. Environmental ethics demand that industries
must control the usage of such technologies that add further misery to mankind over and above
global warming. It would be in the larger interest of mankind to invest in or innovate new
technologies and methods that can reduce generation of sulphur and nitrogen compounds from
industrial combustions or to control their release into the atmosphere.
 Ethics and the Environment

Ethics further demand that, at this late a stage of environmental damage, industries should not
compromise in spending, researching and innovating with a view to curb and drastically reduce
generation and release of harmful gases. Industries must seek the development of alternative
fuels and greener technology; efforts should be made to discover commercially viable alternative
sources of energy that can replace a large part of fossil fuel burning, which is causing irreparable
damage to humanity.
3. Airborne Toxics
Industrial pollution also leads to airborne toxics, which arises from indiscriminate release of
industrial gases into the atmosphere either due to leakage in the system or as exhaust gases
from industrial chemical processes (also known as chemical brew). Many of these gases are
carcinogens (e.g. benzene and formaldehyde) or gases that can severely affect human nerves and
body systems (e.g. phosgene gas). Death and permanent disability of thousands of people in the
case of the Bhopal Gas Leak tragedy (refer Chapter 3, footnote 5) was due to phosgene leakage
from the Union Carbide chemical plant. These toxic gases may be less talked about these days,
but their release still continues in many parts of the world, affecting the health of many civilians.
Studies have shown that living near a chemical plant raises the chance of cancer to more than
one in a 1000, due to higher concentration of carcinogenic gases in that locality. Hence, strict
control is exercised in many countries when it comes to licensing or locating such harmful
chemical industries outside the populated areas.
4. Air Pollution
The most common to us, air pollution affects the health of millions of people every year. It
is prevalent in all industrialised countries, but varies in degree with the quality of regulations
and governance in a country. In India and China, where the economy demands greater and
faster industrialisation, the presence of air pollutants is high, and is rapidly increasing every year.
This is mostly due to industrialisation on the one hand, and usage of industrial products like
automobiles and machinery on the other. In the recently held Beijing Olympic (2008), the
Chinese government had to pull out two million cars from their roads; close down hundreds
of industries in the vicinity of the Olympic venues; and restrict vehicular movement in the city
during that time, to reduce the ‘smog’ effect from automobile exhaust gases and particulates.21
The major sources of air pollution in India are auto-emission and industrial fumes. In fact, most Indian
cities carry a much higher level of sulphur dioxide and suspended particulates in the air than the
stipulated; air pollution has become a major source of respiratory diseases, especially amongst
newborn children. Common industrial causes of air pollution are:
(1) Carbon monoxide produced by heavy traffic in cities, highway vehicles and inefficient
auto combustion. Presence of carbon monoxide in the air that we breathe can cause
headaches, decreased muscular coordination and visual deficiencies.
(2) Sulphur dioxide produced by the burning of coal and oil as fuels.This causes respiratory
diseases, reduced visibility, loss of vegetation and widespread corrosion of metals and

21
http://www.businessweek.com/globalbiz/content/aug2008/gb2008081_625649.htm, accessed on 19 August 2009
 Ethics in Business and Corporate Governance

structures. Restriction of industries and heavy traffic movements in and around Taj
Mahal in Agra and Victoria Memorial in Kolkata are due to corrosion by sulphur
dioxide in the air.
(3) Nitrogen oxide produced by fuel combustion in industrial processes and vehicles on
the road. This gas is known to cause photochemical smog, destruction of greens and
respiratory diseases in humans.
(4) Particulates—a suspension of fine particles (10 micron or less in size) in the air—are
mainly caused by thermal power plants, metal processing units and vehicles plying on
the road. Amongst its many nuisance values and effects on greens and plants, high
particulate levels in air that we inhale can cause serious damage to our lungs. Very
common particulate pollutions observed in India are fly-ash and fumes from sponge
iron plants, thermal power plants and steel plants.
Then there are other pollutants in the industrial air, such as lead and volatile organic
compounds, which are immensely harmful to our health. In congested cities, automobiles are
said to be the cause of 50 per cent of observed air pollution.22 Industrial pollution mainly comes
from thermal power plants, mining and metal refining industries using thermal energy. These
sources release tons of gases containing sulphur oxides, nitrogen oxides and particulates into
the air. Sulphur oxides when taken into the lung, forms sulphuric acid inside the lung, which
damages the linings of the lung and causes diseases like bronchitis, asthma, etc. Alarmed by the
very damaging effects of air pollution, many countries have brought about strict environmental
legislations to control emissions from industrial processes. It is claimed that a decrease in air
pollution would save thousands of lives every year, especially amongst the relatively poor
nations.
5. Water Pollution
Water pollution is, again, due to industries; more specifically, due to discharge of industrial wastes
and effluents into rivers and water bodies; discharge of untreated chemically contaminated
water from factories into rivers and canals; drained water from mines containing sulphuric acid
and other particulates; dissolved salts; oil spillages; inorganic wastes, etc. Water pollution is an
age old problem, but its intensity and diversity has increased many-fold with industrialisation.
The range of water pollution now covers water with dissolved salts, to radioactive wastes and
vast amounts of organic wastes that are threatening marine life and destroying ecology. Water
pollution also includes groundwater pollution due to inorganic pollutants like lead, mercury,
etc. that make their way to underground water layers or to water bodies, which is ultimately
consumed by people through drilled tube-well water. While the presence of these metallic or
toxic elements is ill-known for its harmful nature, it is being increasingly found in drinking
water and well water as well. Originating from industrial waste waters (most notably from metal
extracting industries, leather and paper pulp industries and others who consume plenty of fossil
fuels), and released to the ground or rivers, sources of water pollution are very diverse—in fact,
as diverse as their effect on organisms and humans as this example indicates:
22
http://www.cseindia.org/AboutUs/press_releases/press-20090226.htm, accessed on 19 August 2009
 Ethics and the Environment

Arsenic, a poisonous chemical, is known to be causing havoc in the Gangetic Delta in India,
affecting over 350 million people in Bengal, Bihar and Orissa23. Arsenic compounds carried
by the rivers from the Himalayas, deposit the chemical on the delta soils, which then gets
leached by rains and residues of chemical fertilisers used in agriculture and, thereby, enters
into the underground water table contaminating the accumulated water in the table-bed.
This water, when pumped out by tube-wells for drinking, contains more than tolerable limits
of arsenic that cause various skin diseases and also the dreaded cancer. While governments
and NGOs are trying to help purify such water, the effect of such moves to limit arsenic levels
in drinking water is negligible due to the large-scale dependence of rural people on tube-wells
and bore-wells.

Surface water in most parts of the world is equally polluted due to the release of industrial and
human wastes, oil spills, dumping of solid wastes, acid rain, and usage of chemicals and chemical
fertilisers in fields. In nature’s cycle of constructive events, fishes and worms in the water—that
have long since acted as scavengers of such pollutants in surface water—are also being seriously
affected by the presence of organic and inorganic pollutants in the water. In India, most river
water and water bodies are too polluted to drink due to the use of chemical fertilisers in the
fields, and indiscriminate release of waste waters from industries into the rivers.

The rivers Ganga and Jamuna in northern India are so polluted that many do not recommend
bathing in these river waters—as is called for in certain religions and faiths—due to severe
industrially caused pollution and contamination. Despite environmental regulations in India
and funds made available by the World Bank (to check river pollution), the rivers continue
to be polluted and cause concern about the availability of safe drinking water. Even seas and
oceans are not spared from water pollution in this modern era of industrialisation, due to oil
spills from ships and oil tankers, and the dumping of radioactive wastes, that affects marine
life. Today, as a result of widespread water pollution, more than 1000 million people in the
world suffer due to the lack of safe drinking water and water-related diseases, especially in
the poor nations.

Besides the types of pollution discussed thus far, there are pollution problems arising from
the scourge of solid waste disposal and toxic substances on the land—which, too, finds its way
directly into underground water tables. The dumping of nuclear and electronic wastes is the
other issue in pollution control. E-waste, as it is commonly known, is generated from large-scale
consumption of these waste products which are often illegally dumped and pollute the ground
soil and ground level water quality. The Manufacturers Association of Information Technology
(MAIT) of India states that, in 2008, about 3.3 lac tonnes of electronic waste was generated in
India alone, which has been mostly dumped into the rivers, canals, landfills and sewage drains.24
Furthermore, chemicals and chemical reaction products that corrode such dumped waste seep

23
http://www.indianexpress.com/oldStory/27371/, accessed on 19 August 2009 and 15 October 2011
24
http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2796756/, and http://unpan1.un.org/intradoc/groups/public/documents/apcity/unpan
037141.pdf, accessed on 16 October 2011
 Ethics in Business and Corporate Governance

deep into the ground and add to the damage of ground-level water quality. E-waste is a matter
of deep concern in the society today because of its toxic and carcinogenicity. Toxic substances
in these wastes may include cadmium, lead and mercury, and the carcinogenic substance
polychlorinated biphenyls (PCB). Protection of environment and pollution control from this
viewpoint has also become a major threat to the environment and society—looking at the way
world consumption of industrial products of this category is rising. It is, of course, not because
of the industrial growth but because of the failure of industries to regulate (or recycle) the waste
thus generated or discharge pollutants into land, air and water. Open seas have become the
general dumping ground of all countries, where extensive amount of polluting materials and
E-waste is dumped every year endangering, as we discussed earlier, both marine life and ecology.
It seems the world is losing its will to check and control such disastrous moves. For example, a
recent report of United Nations Framework Convention on Climate Change25 (UNFCCC)
revels that total greenhouse gas emission of the developed countries actually increased during
2000–05—a clear indicator that the situation is far from being under control.
Much needed innovation in controlling industrial pollution, or methods of handling the
increasing amount of pollutants of diverse nature is still greatly lacking. Ethics demand that,
for the sake of humanity and well-being of the society and future generations, industries
and governments must pay heed to environment protection with greater urgency and
commitment. Industry and industrialisation is a necessity in modern times, but that should not
mean continuation of our past mistakes and lack of will or ways to adapt to our present-day
necessities.
Therefore, industries and nations must join hands to develop new energy-efficient processes,
promote maximisation of renewable energy sources, and provide affordable technology for
pollution control especially in the developing nations where industrialisation is just about to
increase, to eliminate poverty under the present global economic system. More developed
economies like the US are known to be using conventional energy many more times than
developing countries like India, due to large-scale industrialisation. Equity in global treatment
demands that these relatively poorer nations must not be forced to unilaterally cut their emission
proportional to the size of the state or the nation.The developing world needs industry, and the
developed world must provide them with energy-efficient, renewable and affordable technology
in order to set a balanced economic order in a world free from the destructive threats of global
warming and hazards of water pollution. Ethics of protecting ecology and environment cannot
be forced upon any one or few nations; they have to be concerted and joint efforts of all the
countries in the world. And it calls for the spirit of ‘distributive justice’ in solving this mammoth
task.
Thus far in this chapter, discussions on types of pollution, their causes and their ill-effects are
aimed at highlighting the hazards of environmental pollution on mankind, and how things are
gradually going out of control. At the same time, ethical tasks and the essentiality of controlling
these pollutions have been touched upon. If ethics is about guiding and regulating human and
industrial activities for the well-being of the society, then there is no greater urgency now
25
http://unfccc.int/2860.php, accessed on 9 November 2009
 Ethics and the Environment

than ever before when it comes to contributing and controlling pollution and environmental
degradation. As things stand now, it would be a folly for any country or industry not to take the
responsibility for environment protection and selfishly focus only on economic benefits. While
economic benefits and profits are certainly an important indicator and measure of growth for
business as well as the society, this cannot be at the expense of environment. The ill effects of
pollution and environmental decay are too serious and grave for the well-being of human
society. Therefore, for the sake of industrial growth and prosperity in a sustained manner,
business enterprises and industries have to take their moral responsibility of not meddling with
the environment and, in turn, not causing irreversible damage and destruction of the society.
Protecting the environment is their moral duty to the society—whose members, in reality, fuel
the industrial and business growth through their economic power and consumption. In a free
market environment, a business exists for its consumers, and not vice versa.

7.4 ETHICS OF CONTROLLING ENVIRONMENTAL POLLUTION

It is important to appreciate that environment—like the air and water—is generally regarded as
the common property of society. Based on this concept, industries all over the world, and other
users of the environment, felt no specific obligation to maintain the quality. Industries dumped
waste and chemicals into the seas and lands till a time they were forced to stop.

DuPont, the largest chemical manufacturer of the world, is reported to have dumped
thousands of tons of chemical waste every month into the Gulf of Mexico at the US coast
until it was forced to stop.26 Similarly, it is regularly reported that industrialised countries
are freely dumping objectionable wastes and gases around the African coast, causing untold
miseries to the natives in these poor countries. This dumping is reportedly being continued
without the care of developed nations. Sadly, the scenario is no different even for inland
pollution by the industries; industries all over the world released objectionable gases and
particulates into the air, causing grave air pollution especially in the industrial areas.

In the past, industries have not shown much concern for the rightfulness or ethics of such
harmful actions; it is only now, with the enactment of laws or the commitment of good
corporate governance, that they are being forced to attend to the problem. Another thing about
environment is that, industries got used to looking at the environment as an ‘unlimited source
of availability’ and each firm felt that its contribution to pollution is not significant enough to
warrant specific actions.

In India, hundreds of small foundries in Agra (Uttar Pradesh) and Howrah (West Bengal),
developed during the early days of India’s industrialisation, dumped huge amounts of waste
waters into the rivers Jamuna and Ganga, causing serious pollution and contamination of the
water of these important rivers that feed millions of people along their course.

26
http://pubs.acs.org/doi/pdf/10.1021/cen-v052n030.p005, accessed on 15 October, 2011 and http://news.google.com/newspapers?nid
=888&dat=19740913&id=4OklAAAAIBAJ&sjid=THkDAAAAIBAJ&pg=6947,1972300, accessed on 15 October 2011
 Ethics in Business and Corporate Governance

Perhaps, industries felt that river water was unlimited and their actions could not really be
a significant cause of any damage to such a vast, unlimited source. When every industry takes
recourse in this reason, the combined effect becomes enormous and potentially disastrous. The
capacity of air and water around an industrial belt soon exceeds the safe tolerable limits, and
these free and unlimited resources like the air and water become seriously contaminated and
deteriorate rapidly. Thus, industry and industrial activities give rise to serious pollution of the resources
that both society and industry have equal rights to enjoy. Ethics of duties and obligations do not permit any
destruction of common property, especially when those properties are so essential for living and sustainable
growth of any organism or mankind.
However, as mentioned earlier, industry alone is not responsible for environmental pollution;
it also results from industrial product (consumption), human waste, habit of disposing, etc.
Put simply, environmental pollution occurs due to modern day lifestyles and social habits.
For example, immersing corpses and unburnt dead bodies in rivers, a practice prevalent in
many parts of India, pollutes water. Thousands of clay idols, immersed in rivers during certain
religious festivals, are also a common cause of water pollution in India. These idols are made of
toxic chemicals and paint which pollute the river water, making it unsuitable for daily usage.
Come to think, all of us are lending to pollution in some way or the other; and the problem
only multiplies along with the population. While the population explosion puts a severe strain
on air and water resources; pollution is further accentuated by the concentration of population
in certain areas, countries and regions of the world where industrialisation is also more. In cities
and urban areas, the pollution problem is more serious than in rural regions because of denser
populations and higher consumption of industrial products, particularly the use of automobiles.
High population density and urbanisation multiply pollution problems, affecting the health and
well-being of people in those areas. Thus, just as the sources and nature of pollution are varied,
approaching their treatment and regulation also demands an equivalent variety of solutions.
However, the scope of our discussion is not pollution treatment but the ethical issues that
arise as a result of the pollution caused by industries and commerce. It is within the duties
and ethics of agencies—responsible for causing, promoting or harbouring environmental
damages to resources like air and water—to stop or control pollution, as well as regulate and
compensate the society for all the damages or losses. Industries and governments must find the
ways and means to do so no matter how difficult it proves to be in a materialistic world order. If
governments are the custodians of the well-being and safety of their populations, they must act
meaningfully to bring about an end to environmental damage by appropriate regulations and
control of the causes. In this context, it would not be out of place to mention that the world
has shown more concern about the proliferation of nuclear weapons (and control thereof)—
perhaps because of the more obvious nature of their destructive power—than for the control of
environmental pollution.What is being overlooked is that environmental damage and pollution
are silently but steadily destroying people and resources and setting death traps for the future
generations as well. It is only because the harmful effects of air and water pollution are not
immediately visible—while it is easier to visualise the total and utter destruction that nuclear
weapons can cause—that industries and governments are often lacking in urgency to attend
to this potentially dangerous issue. Ethics of governance demand an end to this dangerous
 Ethics and the Environment

journey at the cost of innocent people in society. Industry, state, society and people have to join
forces to resist the indiscriminate practice of polluting the so-called free resources like air and
water. Organisations and scientific bodies must also come together to find alternative solutions
for energy—other than the mass-consumed petro-fuels of today—and rid our planet of the
single-most significant cause of pollution. Innovative industrial processes, disciplined industrial
practices and stricter environmental and deforestation laws may help in reducing the present
levels of environmental pollution. Even an improvement of 3–5 per cent annually—and over the
next few years—may extend the dateline of global disaster (due to environmental degradation)
by a couple of centuries. In what could constitute a start, many experts opine that large-scale
tree plantation and reforestation efforts by the industries and governments may partly neutralise
the ill-effects of gaseous carbon dioxide emission (the effect of which has been discussed under
‘global warming’ earlier in this chapter).

7.5 ETHICS OF ECOLOGICAL PROTECTION

Ethical issues due to pollution problems can be best examined in consideration of the ecological
system within which we live. Ecology is an interrelated and interdependent set of environmental factors
within which organisms and all living beings live, evolve and work for supporting and creating sustainable
nature and environment in the earth.

Most useful organisms that control viruses require a regulated temperature (generally up to
and about 35°C) to survive and grow, which is provided by the sun and seasonal changes.
With increasing temperature and humidity, these organisms tend to die, and viruses tend to
grow faster, causing the spread of many diseases amongst people. With increasing discharge
of greenhouse gases that cause global warming, there is climatic change and imbalance in the
temperature cycle, which in turn increases the scope of viruses and, hence, infectious diseases
amongst people in the affected areas.

Thus, the ecological cycles of sun and season are essential to support living organisms,
which, in turn, protect us from viruses and related infections. However, all these naturally
occurring ecological phenomena are, in turn, dependent on our ability to control the emission
of greenhouse gases. Furthermore, global warming due to the greenhouse effect may flood
coastal areas and change the course of sea current leading to changes in seasonal effects in
some places; all of which, in turn, changes the climate of a place or region for the worse. In
an ecological system, various parts of the system are interdependent and linked to each other; activities of
one of its parts influence all other parts in the system. Therefore, the survival of each part depends on the
survival of other parts in the system—a fact that thrusts responsibility on human society and community
to protect ecology as a moral duty. Being a part of the human society, business and industries have
to share this responsibility by leading from the front. Business organisations depend on the
natural environment—which is ecology dependent—for their material resources (energy, land
usage, seas and rivers for logistical support, etc.); and that environment, in turn, is affected by
the commercial and exploitative activities of those very organisations.This is the other face and
other cycle of business. Therefore, for their own surviving strategy, business enterprises must
 Ethics in Business and Corporate Governance

commit to the ethical task of protecting the ecology and environment. While our industrial
progress may often overwhelm us, this material well-being is only one side of the picture;
ecological imbalance and environmental degradation caused by industrial practices and activities
is the other grim view of the same picture. Thus, for the sake of their own long-term survival,
business organisations must proactively implement steps and innovative measures to control and
minimise the ongoing damage to the environment.
Ecology is not only about human beings; it is also about non-human parts of the larger
ecological system. Each part in this larger system is interdependent and important—although it
ultimately works out for the benefit and growth of human beings in the ecosystem. Therefore,
it is our moral duty to recognise the ethical responsibility to protect even the non-human parts
of our ecosystem, if only for the sake of our own welfare. Many environment philosophers
opine that ecological ethics should be based on the fact that the non-human parts of ecosystem
deserve to be protected for their own sake, regardless of whether we are able to discover their
beneficial effects on mankind. On the basis of this belief, ecological ethics—rules of ethics in
preserving ecology—state that:
(1) The well-being and flourishing of human life on earth are as important and valuable as
that of non-human life on earth—irrespective of the usefulness of one for the other.
(2) Humans have no right to reduce or endanger the richness and diversity of non-human
life, except to satisfy their vital needs for survival.
(3) The present human interface with—and exploitation of—the non-human world is
excessive and the situation is rapidly worsening.
(4) Policies of the society, governments and business in connection with non-human world
must, therefore, be changed. This change will affect the basic economic, technological
and ideological structures of the society—and the resulting state of affairs—will be
vastly different from the present.
(5) The ideological change is mainly that of appreciating quality of life, rather than adhering
to increasingly materialistic higher standards of living.
(6) Society and business have an obligation directly or indirectly to participate in the
attempt to implement the necessary changes in structure, ideology and attitude.
Thus, ecological ethics demand that we, the human beings, bear the duty and responsibility
to respect, protect and preserve ecology of the earth, irrespective of the fact that the pertaining
ecology is human or non-human in nature. These ethical claims and duties have significant
implications for business activities that affect the environment. Here is one such case in point:

In India, whether it is constructing the Narmada Valley Dam by destroying forests and ecology,
and displacing thousands of people, or the construction of a new automobile manufacturing
unit on a high-yield cropland that changes the very character, livelihood and ecology of that
place, has to be examined from even the ecological and socio-economic viewpoints, and
just not be considered from the prosperity aspect of a materialistic society. Organisations
must make ‘environment policies’ an intrinsic part of their plans and operations; so as to
promote both, large-scale (re)forestation of degraded land and the preservation of nature.
 Ethics and the Environment

An ethical approach and commitment to such issues (like industry versus sacrifice of forest
or agricultural land that often come up for debate in developing countries like India) can
further help in balancing and changing ideology and action, with a view towards conserving
the ecology and the environment.

At times, animal lovers campaign for the ecological ethics of protecting animals or for cruelty
against animals; in the sense that the suffering of animals must be considered equal to that of
human beings. While one could argue for and against this aspect, the fact remains that animals
are a part of the ecology and their living and growing is not only valuable to them but also to
us. The cycle of our dependence on birds, animals, flies and other living species on the earth
may be quite complex to understand, but it certainly cannot be denied. Therefore, it is our
ethical duty not to destroy their habitats or places where they live and grow, which are a part of
the larger ecosystem. Raising animals in human localities, often in painful circumstances, to use
them as food or for agriculture (as prevalent in many poor countries), has been also criticised
from the ethical point of view. Some environmentalists give in to the broader idea that the life
of every animal itself lends value to the ecosystem, notwithstanding human beings’ interest in
their existence. Such an approach obliges us to help animals to live and grow in natural and
non-painful conditions; yet, it does not always forbid their usage as food (or for the purpose of
scientific or medical research) even though, at such times, human interest overrides animal rights.
Attempts to extend such a non-utilitarian view—about respecting and protecting the rights
of non-human aspects of the ecosystem—have many opponents. Notwithstanding, ecological
ethics bring out our duties and obligations towards nurturing nature with all its characteristics
and qualities, and link us to the notion of ‘benchmark’ human virtue and character. Ideals
of ecological ethics convey to mankind that nature’s integrity, stability and beauty must be
preserved for the sake of the larger ecosystem as well as our own interests.

7.6 RIGHTS, DUTIES AND CARE IN ENVIRONMENT PROTECTION

Blackstone, in his path breaking ideology stated27 ‘the possession of a liveable environment is not
merely a desirable state of affairs, but something to which each human being has a right’. In summary
of his view, he said, ‘it is something that others have duty to allow us to have’. The concept is
widely accepted now, including by the legal system, and forms the basis of the ethical approach to
environment protection. By accepting this, we agree to have a correlative duty of not interfering in
the others’ rights to a liveable environment—while exercising our own rights. Here’s how:
If deforestation of a huge track of land (as is happening in the state of Orissa in India) for the
purpose of setting up an industry interferes with the liveable environment of the local people,
then they have the right to protection or suitable relocation. Similarly, people affected by the
construction of the Narmada Valley Dam or, for that matter, by the SEZ (Special Economic
Zone) created in the coastal regions of India, have the right to seek a liveable environment.
Society, business enterprises and governments should accept this stand as their correlative duty.

27
Philosophy and Environmental Crisis, William T. Blackstone, University of Georgia Press, Athens, 1975
 Ethics in Business and Corporate Governance

Social scientists observed that disputes over such projects primarily arise when we tend to
overlook this duty and responsibility, and try to assert and exercise ‘rights’ in the guise of some
legal proviso of public utility.

Blackstone argued that a person has the moral right to a thing when possession of that thing
is essential in permitting him or her to live a human life, i.e., in permitting to fulfil his or
her capacities as a rational and free being. Environment is one such thing that is now fully
established as essential for allowing us to fulfil our human capacities. Hence, the right to
liveable environment is a legal right for human beings. Its violation or defiance by any agency
—be it an industry or a government—is morally wrong, illegal and unethical. Blackstone goes
further to state that this moral and legal right should override people’s legal property rights,
in order to limit legal freedom under the guise of property rights, and thereby engaging in
practices that destroy the environment. He defends the rights to liveable environment as
fundamental to our living; any curtailment of it would make us lose the very possibility of
human capacity and exercise of other rights such as rights to liberty and equality. So deep
was the argument in favour of ‘liveable environment’, and wide acceptance of this approach,
that many countries and states have now granted environment rights to their citizens. It is
legally accepted that the people have a right to clean air, pure water and to the preservation
of the natural environment. Blackstone’s arguments provided a rationale to limit property
rights for the sake of human rights to clean environment.

Blackstone’s views establish the rationale for environment control, but offer no practical
and meaningful solution to some pressing environmental choices of the modern materialistic
world; such as: how much control is needed; who is responsible for protecting the environment;
how much protection of environment or control of pollution is required to assure liveable
environment; who will bear the cost; etc. Considering that a complete control over pollution
and protection of environment will mean the closure of many existing industries, curtailing
further industrial growth, and loss of thousands of jobs, it is not always practical or logical even
from the utilitarian point of view. Hence, many countries have chosen the practical approach
to balance the decision by analysing cost and benefits of controlling pollution to a level that
does not endanger living beings and neither does it impose a total ban on pollution (that may
stall or slow industrialisation). A total ban on pollution will not only prove to be very costly, but
will also be unnecessary considering that nature has, to some extent, its own ecosystem within
which to recycle and regenerate the environment. What may be required, here, is ensuring and
maintaining a level of environmental purity and cleanliness that supports healthy living and
growth of human beings as well as of organisms in the larger ecosystem. A utilitarian approach
to pollution control is, thus, necessary. Based on this utilitarian and rational approach to
environment management, governments and states are responsible for enacting regulations and
laws for clean air and pollution control, and for enforcing the same. Companies and industries
are to comply with the required laws and regulations with a view to the welfare of society and
preservation of rights to clean air, pure water and environment protection.
Therefore, pollution control methods and levels should be based on the rational criteria that
ensure safety for the welfare of the society, along with rights to clean air and water required for
 Ethics and the Environment

healthy life and living. This may justify different treatments to pollution control—depending
on the potency of the problem, or the level of danger to society—and the cost of control. This
may justify different approach to pollution control—depending on the potency of the problem,
or the level of danger to society vis-à-vis the cost of controlling the pollutions. From this angle,
methods of environment control and handling that are excessively expensive may have to be
reconsidered for alternative methods that are practically feasibility—despite the fact that such
alternative methods may still leave some scope of damage to ecology.
For example, treating nuclear waste to make it harmless would be a very expensive procedure;
hence, an alternative route of handling it—by simply dumping in the sea in a limited way—
may have to be considered. While this method might also contribute to ecological damage
and could, hence, be objectionable, it should still be borne by the society as the least damaging
solution.While such special consideration may be applicable to some special kinds of pollutants,
a ‘cost-benefit’ base approach to removing pollution of other categories beyond a level should
be practical. Figure 7.3 is a generalised picture of the rising cost of removing the pollutant vis-
à-vis benefit from the removal of the pollutant; the actual cost or benefit may differ from case
to case.
Cost of removing pollutants
Cost

Percentage of
pollutants removed

Percentage of pollutants removed

Figure 7.3 The Costs and Benefits of Pollution Control

Nonetheless, it goes without saying that pollutants dangerous to human life must be removed
or controlled at any cost. This is explained with the help of contrasting examples:
For example, removing the last traces of cyanide from water discharged from a chemical
plant would be essential at any cost for human life, but the control of bio-dissolved oxygen in
discharged water, necessary to protect plants, could be analysed from the cost-benefit aspect,
with reference to standards allowable by the nation. Thus, from the utilitarian point of view,
there is a compromise in this approach to pollution control. However, social and retributive
justice demands that continuous efforts should be made to shift the cost-benefit analysis to the
right (of Figure 7.3) with the help of innovative and technological measures. To some extent,
this justifies all the efforts made by various nations to develop newer, more efficient devices to
control environmental pollution. In India, there is a national policy to encourage manufacturers
of pollution control devices, which offers them considerable tax incentives and government
support. However, it must be noted that these practices and approaches are certainly not based
 Ethics in Business and Corporate Governance

on the notion that people have absolute rights to the environment, but on a more utilitarian
approach to the environment and in justification to the notion of ‘partial control’.
There are other views to this approach of partial control, some of which argue that the
true cost of production (of goods and services) cannot be arrived at, without taking into
consideration the cost incurred by the industry to remove pollutants—otherwise, there will
be a gap (hidden cost) in the cost-benefit analysis. This, in turn, can result in economic loss to
the society and a decline in the economic welfare of society. Therefore, there should be a line
of conduct by which an individual or business enterprise avoids pollution; and, thus, cause no
harm to socio-economic welfare. This is the utilitarian approach applied to the cost-benefit
analysis in the decision concerning pollution control and acceptable levels of pollutants.What it
implies is that, for an ethical decision, pollution issues should be examined from the perspective
of: (a) own internal cost; and (b) external cost to society. These costs implications, both internal
and external, are explained here:

A thermal power plant consumes certain amount of fuel, labour and equipment to generate
a kilowatt of electricity. This adds up to the internal cost, borne by the industry. But, the
process of generating the electricity in a thermal plant also produces certain amount of fly-
ash, which not only pollutes the environment but also settles on the nearby fields. Now, to
use this land for cultivation, it is necessary to remove those settled particulates. This adds up
to the external cost, which is borne by the landowner or farmer. The industry does not pay
for it. This is the attached external cost that has to be, ultimately, borne by society.

Thus, for economic correctness, it would be necessary to understand the total social cost,
which is sum total of the internal private cost to the company and the external cost to the society. If a
producer pays for all the costs or no external cost is involved in manufacturing a product, then
the producer’s cost and the cost to the society are the same. Thus, this approach shows the fact
that, in most cases, an industry’s private cost is always lower than the cost to the society; whether
the pollution is localised (as in the case of thermal power generation) or general (emission
of greenhouse gas that causes global warming). Pollution always imposes external costs—the cost
which the producer of a product or the person who caused pollution does not have to pay. However, this
situation does not impose any compulsion or discipline on the producers or industries and,
therefore, results in a loss of social utility. This implies that the environmental pollution caused
by industrial indiscipline is a violation of the utilitarian principles that underline the fair market
system. This stand raises the question, is it ethical for industries to exploit the governing system
of business that allows them to pollute the environment at a heavy social cost? Should the
industries not have the duty of care for the society, or the society has the right to call upon a
halt for such damaging pollution?
Figure 7.4 illustrates the necessity of balancing the pollution control strategy with that of
various environmental issues and concerns. The underlying principle is: Industries should be guided
by the social rights and necessities for sustainable living rather than ease of control and advantages of costs.
 Ethics and the Environment

Environmental pollution
control issues:
• Safety and welfare of the society,
• Rights to clean air and water for health,
• Sustainable ecology for all organic
living beings

Pollution
control

Strategy
depending on:
• Potency of problems,
• Danger to the society,
• Internal cost of control
to the company
vis-a-vis external
cost to the society for
partial control
• Economic loss to the
nation (due to hidden cost)

Figure 7.4 Ethical Balance of Environment and Pollution Management

One such attempt to internalise the cost of pollution (reflected in the company’s balance
sheet) is the ‘Carbon credit’ system28 introduced under the Kyoto Protocol agreement (refer to
footnote 12). Simply put, it is a permit that allows its holder to either emit a ton of carbon
dioxide or trade that permit to someone who had to control carbon emission within a certain
limit but had exceeded that limit due to circumstances of the business. Credits are awarded to
countries or groups that have reduced greenhouse gases below their emission quota. Thus, the
carbon credit system attempts to introduce a self-regulated economic package to operate business system
that involves greenhouse emission and causes global warming. This may give an idea if the external
cost of pollution is internalised by a producer, the industry will have the right to pollute
the environment. But, it cannot be agreed with, because justice lies in preventing and not
in compensating for the wrongdoing. Moreover, (a) cost of pollution cannot be accurately
estimated; (b) the extent of damage due to pollution in area operated by many industries cannot
be clearly earmarked and ‘cause’ located in one place may create ‘effect’ in another place; and
(c) pollution to environment like air and water (that is public body and utility source), which is
freely accessible by many cannot be actually compensated for.

28
Carbon credit is a permit that allows the holder to emit one ton of carbon dioxide. Credits are awarded to countries or groups
that have reduced their greenhouse gases below their emission quota. Carbon credits can be traded in the international market at
their current market price.The carbon credit system was ratified in conjunction with the Kyoto Protocol. Its goal is to stop increase
of carbon dioxide emissions.
(For details, refer to http://www.carbon-futures.org/index.php/carbon-credits-explained.html, accessed on 15 October 2011 and http://
en.wikipedia.org/wiki/Carbon_credit, accessed on 15 October 2011.)
 ics in Business and Corporate Governance

pollution control devises at self-costs, so that society is not economically burdened with the hidden cost due to
pollution.The carbon credit system is a market-operated business package that provides economic
rewards to industries producing less pollution. It is a method of forcing the internalisation of
cost for pollution in order to promote self-control. In that sense, it also brings fairness into the
market mechanism in conformity to the utilitarian approach, on the one hand, and serves the
end goal of eliminating or minimising the disastrous effects of pollution, on the other hand.
Carbon credit system appears to be a good double-action marketable instrument for controlling
greenhouse gas emission; however, its success will lie in its effectiveness in truly bringing down
pollution and emission in the world. Many environmental ethicists have started questioning
its usage more as a trading instrument than as an object of emission control, especially in the
developing countries where the pressure on and for industrialisation is high and the employable
capital is scarce.
Nonetheless, the utilitarian approach to handling pollution by internalising the cost of
control would be consistent with the requirements of distributive justice and equality. Hence,
it should be ethically acceptable to the society. This approach of internalising costs of pollution
is also in general agreement with the retributive and compensatory elements of justice which
demand that those who are responsible for and benefit from an injury should bear the burden
of rectifying the injury and compensate the injured. Acceptance of this ethical approach to
controlling pollution answers the question as to whose duty it is to curb and control the
environmental pollution.
The approach implies that: (a) pollution must be curbed and controlled either by national or
international actions; (b) the costs of control should be borne by those who cause pollution and
who have benefited from the activity that caused or generated pollution; and (c) the benefits of
pollution control should flow to the society. While business and individuals perform this duty
towards pollution control, the government plays the role of a facilitator, by enacting appropriate
laws and regulations, providing proper incentives, and by administering and controlling the
implementation and practice.
However, protecting the future generations and children—who are most vulnerable and may
have to bear the heaviest cost if things go wrong in a nation’s efforts to control pollution—should
not be compromised by the choice of alternatives. Choices for environmental management—by
approaching it in calculative and rationalistic ways—should not lead to further environmental
crises. The possibility arises when utilitarian thinking assumes that nature has to be measured
and used efficiently by the society, whereas theories based on rights view human and other
entities in their individualistic terms and ignore their relationship with the rest of nature. Ethics
demand that the society we live in must consider these aspects of environment rights and
balances. Ethics of caring requires that pollution management and conservation are guided
by the principles of caring for and nurturing our relationships with nature and living things.
The society has an obligation to conserve resources for future generations as well, because they
have an equal right to the already limited natural resources of this world. Social scientist John
Rawls argued that, although it may appear unjust to impose a disproportionately heavy burden on the
present generation for the sake of future generations, it is equally unjust for the present generation to leave
 Ethics and the Environment

nothing for the future generation. By extending this statement, he claimed that justice demands that
we hand over to our immediate successors a world that is not in a condition worse than the
one we received from our ancestors. Our duties and obligations to environment control and
conservation come from the standpoint of such a just and rational approach, which implies that
industries and businesses have the ethical responsibility to act cautiously in their environment
policies and practices so as to maintain an equilibrium state of pollution, which is tolerable by
mankind and not harmful to children and the future generation.

7.7 ‘CARBON CREDIT’—A UTILITARIAN APPROACH TO GLOBAL

CONTROL OF GREENHOUSE EMISSION
If protection from pollution and environmental degradation are the rights of individuals, then
states and nations are duty-bound to devise means and mechanisms to control and conserve the
same. One of the concepts that emerged from the utilitarian and rational approach to pollution
control is to internalise the costs of pollution from industries and nations. Guided by this
principle, the Kyoto Protocol for climate change control, under the charter of United Nations,
introduced an effective system for global control of greenhouse emission—a critical measure of
air pollution—under the design of ‘carbon credit’ (refer footnote 23).
The carbon credit scheme attempts to address the gravest challenge to environment protection
that comes from greenhouse gas emission, and causes global warming with disastrous effects.
Thus alarmed, the Kyoto Protocol, agreed to by all industrialised nations and the EU countries
introduced a unique market-based economically tradable instrument called the carbon credit
system to effectively reduce emission of greenhouse gases. In effect, the initial credit is allowed
to countries or groups that have reduced their greenhouse gases below the permissible emission
quota, which are then traded in the market as per demand by any nation or group who are
lagging behind in their emission control objectives. Thus, the instrument works to balance the
emission level globally and help in achieving a globally set reduction level. The Kyoto Protocol
thus presents countries with the challenges of reducing greenhouse gases and storing more
carbon, and, thereby, provides an opportunity to make money by trading surplus credits.
The Kyoto Protocol—signed in 1997 but in effect from 2005—binds all industrialised
nations to a commitment to reduce greenhouse gases by an average of 5 per cent over the
1990 levels during the five-year period from 2008–12. The protocol treaty binds the nations
to their targets of greenhouse gas emission primarily through their own internal and national
measures, while also providing a market mechanism that facilitates interlinking of national and
global controls. The Kyoto mechanisms are: emission trading (also known as carbon trading),
clean development mechanism (CDM), and joint implementation (JI). In fact, carbon trading
for surplus credit is facilitated by the CDM and JI mechanisms which are aimed at stimulating
green investments and helping parties to meet their emission target in cost-effective manner
by internalising the cost. As per the protocol, a country’s actual emission has to be monitored
and precise records of carbon trading have to be maintained. This has to be done in a two-tier
system: (a) national registry system to track and record transactions by parties under the Kyoto
Protocol mechanisms; and (b) international transaction logging at the UNFCC secretariat at
 Ethics in Business and Corporate Governance

Bonn, Germany from the annual emission reports to be submitted by nations and parties related
to carbon trading transactions.

If an interest group in a country plants enough trees to reduce carbon dioxide emission by a
ton, the group will be awarded one unit of credit. Now, if an industry that is supposed to limit
its emission to 10 tons but actually produced 11 tons—either due to increased production or
owing to a temporary setback in its pollution control unit—then that company can buy one
unit of credit from the former interest group and compensate. This ‘buying and using’ trade
system can be availed within a group, a country or internationally.

The system works on the basis of carbon footprint—an assessment of carbon dioxide emission
from the energy consumed by a project, product, activities of individuals or an industry. Carbon
footprint has been defined—as per UK Carbon Trust 2008—as: the total set of greenhouse gas
emission caused directly and indirectly by an individual, organisation, event, project or product.
Somewhat similar to tracking pugmarks of an animal, the origin of emission-able carbon can
be traced by carbon footprint left in all activities; the success of carbon trading depends on how
accurate the carbon footprint assessment is. There are carbon footprint calculators available in
this trade, which can indicate factors of potential emission and value of carbon footprint. Some
examples of activities that give rise to emission-able carbon and which can be traced through
carbon footprints are: all industrial activities, construction projects, domestic and commercial
lighting, use of domestic goods like TV, refrigerator, music system, etc., and even desktop or
laptop computers. A very useful technique that attempts to correlate all human activities in
terms of energy consumption and equivalent carbon footprint values, the Kyoto Protocol aims
to stop the increase in carbon dioxide emissions and bring down the emission level from the
present levels to a lower limit for the ultimate safety of mankind and the world we live. The
means for control and regulations are: assessing carbon footprints, setting targets, providing
alternative projects such as solar energy, wind energy or reforestation, etc. for carbon offsets,
making available equipments under CDM and JI systems, and, finally, providing a marketable
trading opportunity through the carbon credit system. This system envisages reduction in
emissions by countries (having honoured their quota in the most transparent manner) and
offers incentive for controlling pollution below the quota level. In other words, if a nation finds
it hard to meet the target of reducing greenhouse gases, it can pay another nation to buy carbon
credits to balance the overall global emission target; its utilitarian approach lies in this policy of
‘buy’ and ‘balance’ mechanism.
The major difference between the Kyoto Protocol and the previous era of pollution control
is that, formerly, pollution control was driven only by ‘command-and-control’ regulations—
wherein encouragement and regulation were the modes of control, but now the Kyoto Protocol
has introduced a marketable economic instrument, thus bringing in industrial commitments
to a set emission target. This system does not seek the elimination of industries, but calls for
control and offset measures for carbon emission. The system is firmly digging into the global
system of greenhouse gas emission control by encouraging reforestation, control and reduction
of emission, promotion of alternative fuels, water harvesting, and development of energy
 Ethics and the Environment

efficient new technology for emission control, etc. To enable their industries to meet pollution
targets, government the world over are offering various additional incentives for pollution
control. As a consequence, there is spurt of activities in the development of alternative fuels and
energy efficient methods. These drives, in turn, are encouraging designers and manufacturers
of pollution control equipment and system to invest in related research and development
promotions. All new projects are being examined with a view to ‘green technology’ in order to
reduce greenhouse gas emission through reduction as well as carbon conservation. However,
transparent mechanisms and close monitoring are required to stop the abuse of the system
by ‘manufactured data’. A recent survey in the industrial districts of West Bengal showed that
business houses are in fact releasing more pollution in the name of undertaking CDM, and
being paid for under the scheme. Perhaps the story is the same all over India, especially in the
small and medium size industries, and in transport industries which are traditionally energy
inefficient. Nonetheless, carbon credit is now an established national and international carbon
trading scheme and a key force in reducing greenhouse gas emission. It attempts to cap the
total annual emission of a nation and allows the market to assign monetary values to cover the
shortfall through carbon credit trading.
The system has generated enough interest amongst companies and individuals to effectively
lower greenhouse gas emission. Many investment funds and carbon development companies
have now emerged to accumulate credits from individual projects and trade them to others to
help offset the shortfall or to finance carbon reduction schemes the world over. Some notable
examples of greenhouse gas reduction schemes are destruction of methane from fossils, capturing
of carbon dioxide from fossil fuel consumption, maximising usage of solar and wind energy, and
emphasising on ‘green technology’ to reduce energy consumption in commercial buildings, etc.
Furthermore, this system is also encouraging industries to move away from more polluting fuels
to less polluting fuels. For example, there is a trend now to shift from coal (a more polluting
fossil fuel) to natural gas fed power plants, which are less polluting and, thereby, needing fewer
carbon credit—or saving the same. In fact, the system has now given rise to quite a few active
trading programmes in the developed countries e.g. in the EU and the US. In the latter, there
is a national market to reduce acid rain and several regional markets to reduce nitrous oxide.
Thus, carbon trading is seen to be an effective and better approach than the hitherto practiced
tax or regulating systems.There is no debate about the effectiveness of carbon trading system in
reducing greenhouse emission, but some critics point to the fact that this system is somewhat
complex, needs continuous monitoring and enforcement of quota, and resolution of disputes
due to either initial allocation or validity of trading data.
There is no doubt that the shift from ‘command and control’ system of controlling pollution
to a more fair carbon credit system has yielded some results with better responses from
industries and business houses alike.Yet, the journey to hold and gain control over greenhouse
gas emission and pollution world over is far from over. A recent Green Report on ‘Carbon
Disclosure Projects’29 revealed that in 2008 only 33 per cent companies surveyed in India
came out clean on greenhouse gas emissions. This figure, however, nearly doubled (63 per
29
http://www.wwfindia.org/wwf_publications/cdp_india/, accessed on 16 October 2011
 Ethics in Business and Corporate Governance

cent) in the 2009 survey. The situation is even worse in China, the world’s fastest growing
industrialised country, with merely 10 per cent of its companies coming out clean in terms
of greenhouse gas emission. Viewing from an ethical standpoint, critics point out that industries only
act where there is scope of making or saving money, and they are not generally moved by ethical duties
and responsibility. While many may challenge this view of industry, in view of their respective
commitments to corporate governance and social responsibility, corporate governance with
regard to environment conservations has been more an intent than an action (for results). For
example:

Rivers in India are being polluted by industrial effluents continuously; mining activities are
still leaving large scale land degradation, and erosion of farmland by industrial aggravations
without creation of commensurate greens is continuing to deplete the environment. As a
result, India is clubbed with China to be the major contributors of greenhouse gases in
the world due to their rapid industrialisation. During the 2008 Beijing Olympics, China
had to consider closing operations of thousands of small and medium industries around the
Olympic venues and regulate plying of thousands of vehicles on the streets of Beijing for
avoiding smog and pollution in the air30.

Another pointer to the lack of environmental care is slow growth of renewable alternate
sources of energy, and continuation of large-scale use of non-renewable petro-fuels or fossil
fuels.The concept of carbon credit, a commercial market-based system, is being keenly watched
for its ability to bring down emissions and achieve the 2012 target set by the Kyoto Protocol.
Despite some loopholes, the measurement of carbon footprints and carbon trading facilities
come closer to acceptable ethical standards and means than all other previous methods of
pollution control. The utilitarian base and the rational approach to the assessment of carbon
footprint and carbon trading systems—for emission control by internalising the costs of emission
and pollutions by industries and nations—is certainly more agreeable to the ethical principles.
Guided by this principle, the Kyoto Protocol for climate change control binds industrialised and
developing nations to bring about global control of greenhouse emission—the most dangerous
and challenging environmental and ecological issue facing the present industrialised world.
But despite the bindings of Kyoto protocol, are the industries and nations making enough
efforts in the right direction? According to a study on the world climate, weather and environment
relating to damages caused by environment pollution for the three-year period prior to January
2009, ‘In China, dirty air causes 400,000 deaths per year, while 340 million people do not have
access to clean water. In 83 Indian cities whose air quality is monitored, more than 84 per cent
breathe poor, bad or dangerous air; only 3 per cent people breathe good air. In Japan emissions
were at record levels in 2007 due to closure of a nuclear power plant, necessitating increased
generation through thermal power plants. In Dubai, per capita carbon emissions are second
only to the USA. The UAE’s per capita energy use is double the world average. Fish stocks
there have dropped 80 per cent’31. The report states in the summary: ‘The population of the

30
http://online.wsj.com/article/SB121729514547791995.html, accessed on 16 October 2011
31
The World—Climate, Weather and the Environment, http://www.mbendi.com/land/p0015.htm, accessed on 16 October 2011
 Ethics and the Environment

world continues to grow, as does the average standard of living, placing increasing pressures
on the environment. Experts warn that world temperatures could rise significantly during
the 21st century, leading to climate changes everywhere, unless governments, companies and
individuals take corrective action soon. There is disagreement between developed nations, with
a history of pollution, and developing nations, industrialising to improve standards of living, on
the appropriate action to take.’
Kyoto protocol may have set the ball rolling, but it is getting stuck again and again due to
conflicts of interests between the developed and developing nations. In the muddle, the ethical
responsibility for maintaining and providing a ‘livable environment’ to the global society is
getting trampled. What is required now is a sincere and selfless commitment of all industrial
and developing nations to make this world a safe and sustainable place for living and social
prosperity. One’s duty to follow ethics must prevail over profits in matters of environment
protection and management. Industries must continually endeavour to improve the environment
quality to ‘livable standards’ all over the world. As the industries have the rights to profits in business,
individuals and society have the rights to clean and harmless environment for their living and sustainability.
The ethics of environment management demand mutual respect for each other’s rights and
obligations. Governments and industries in all countries should pledge to conserve energy;
adopt alternative renewable energy sources, green technology and other innovative means and
measures; go for large-scale reforestation and protect natural resources like land, water and air.
Governments, industries and the society must acknowledge their ethical duty and responsibility
towards protecting the sustainability of present and all future generations from the growing
danger of environment pollution and global warming.

Summary
1. The chapter highlights the grave threat of environmental degradation and pollutions facing
the present day world. It describes how environmental pollution and degradation are affecting
the lives of millions of people and endangering the well-being of future generations. It also
emphasises the urgent need for concerted environment management efforts by all nations.
2. In the backdrop of the threats and dangers arising from environmental degradation to the well-
being of modern society, the chapter tries to highlight the moral and ethical responsibility of the
governments, industries, corporate and the business enterprises regarding their duty to protect
and preserve the environment.
3. The scope and dimensions of environment have been outlined and issues like air pollution, water
pollution, sound pollution, global warming, acid rain, ozone depletion, toxicity, land pollution,
deforestation, generation of solid wastes and nuclear waste, depletion of fossil fuels and minerals,
and ecological imbalance have been elaborated upon.
4. The causes of widespread environmental degradation and ethical responsibilities of the state and
the business—for controlling and restoring ecological balance—have been pointed out. In view
of seriously damaging effects on the society and mankind, environment-related ethical issues
have been highlighted for states, companies and industries to take action.
 Ethics in Business and Corporate Governance

5. Amongst pollution problems the world over, ‘global warming’ has been emphasised as most
damaging, because of the magnitude of the problem it is causing (or can cause). Global warming
is an effect; the cause is the emission of industrial gases mainly containing carbon dioxide—called
‘carbon emission’—leading to the ‘greenhouse effect’ that causes global warming, i.e., a rise in
earth’s temperature, beyond the limits of ecological tolerance.
6. This chapter illustrates the disastrous effects of global warming with scientific data and research
recommendations—with a view to further strengthen the fact that, it is time to strike a balance
between industrialisation and ecology protection—from the ethical standpoint.
7. It has been pointed out that ethics are not against industrialisation, but are meant for the care and
concern about regulating and controlling ecological balance—so that sufferings of millions of
people now, and in the not-so-distant future, can be avoided. It should be appreciated that nature
and natural processes have an intrinsic capacity to regenerate the atmosphere so as to support
the ecological balance required for our lives and living. While this lends sufficient scope for
industrialisation, the problem arises when we cross the limit of tolerance (of nature and ecology).
Mankind’s pursuit of wealth and prosperity the world over, has already led to more exploitation
of nature and ecology than what nature can stand or tolerate without seriously jeopardising the
future of humanity.
8. Governments and organisations across the world have to take the moral responsibility of first
bring down pollution to a safer level, and then self-regulate to control the same. This approach
could translate into some significant actions taken by industries to control their emissions, and
commit to the new norms (of reduced emission) to meet the regulated environmental standards.
It would be unethical for governments and industries to leave such a task unattended. In this
context, the ‘Kyoto Protocol’, wherein industrialised countries come together and commit
themselves to stabilising greenhouse gas emissions, has been discussed briefly.
9. The chapter adheres to the Blackstone philosophy that the environment is one such thing that
is now fully established as essential for allowing us to fulfil our human capacities. Hence, right
to liveable environment is the legal right of all human beings. Its violation or defiance by any
agency—be it a industry or government—is morally wrong, illegal and unethical.
10. The need for an urgent movement has been established, so as to make everybody responsible
towards environment protection, and to maintain our ecosystem and natural resources, which
are essential for our social well-being. Government and industrial goals and pledges to conserve
energy, work on alternative renewable energy sources, adopting green technology including
recycling and up-cycling of waste, and large-scale reforestation and harbouring of natural
resources like land, water and air seem to be the immediate steps for environment protection and
upgradation. Governments, organisations and society must acknowledge their ethical duty and
responsibility in protecting the world population from the misery and menace of atmospheric
pollution and the growing danger of global warming.

Key Words and Concepts

Acid rain, global warming, water pollution, ozone depletion, sustainability, sustainable equilibrium,
environment, consumer protection, sound pollution, toxicity, solid wastes, nuclear wastes, depletion
of fossil fuels, ecology, ecological imbalances, environment management, environment degradation,
greenhouse gases, thermal power, nuclear power, CREP Charter, Kyoto Protocol, airborne toxics, liveable
 Ethics and the Environment

environment, Blackstone’s environmental philosophy, correlative duty, partial control, carbon credit,
carbon footprint, utilitarian approach, distributive justice, clean development mechanisms (CDM).

Exercises
Check Your Progress
1. Environment refers to ___________
2. Global warming is drawing the urgent attention of all nations because _____________________
3. William T. Blackstone proclaimed that ‘the possession of a liveable environment is not merely a desirable
state of affairs, but ___________.
4. Blackstone’s approach to environment as a right to all, points to the reality that ___________
5. The important part of environment management is to appreciate that ___________
6. One of the many harmful effects of acid rain is its capacity to ___________
7. The major source of air pollution in a country like India is ___________
8. Ecology is an interrelated and interdependent set of environmental factors within which ___________
9. Ecology is not only about human beings, it is also about ___________
10. Blackstone argued that a person has a moral right to a thing when ___________

Review Questions
1. What do you understand by ‘environment’? Give some examples of environment types and the way they
are polluted. In view of your examples, why do you think that environment protection is an ethical issue?
2. Considering the dimensions and damaging potential of environment pollution, can you identify the areas
of ethical issues in environment management?
3. From amongst all the pollution issues, why do environmentalists consider ‘global warming’ as the most
serious ethical issue? How does ‘global warming’ take place? Give few examples of industrial and non-
industrial sources of greenhouse gases.
4. Why is ecology considered a critical factor for living beings? Give some examples of the ill effects (on living
beings) if the ecology is disturbed by human activities or environment pollution. What is the basic premise
on which the ‘ethics of ecology protection’ works?
5. Based on the approach of ‘ecological ethics’, identify the rules of ethics in preserving ecology.
6. Critically discuss the ‘ethical approach to environment protection’ from the standpoint of William
Blackstone’s moral philosophy on environment. What are the shortcomings of Blackstone’s stand on
environment and environment rights?
7. Why has the modern world realised the necessity of the utilitarian approach to environment management?
Do you think the ‘Kyoto Protocol’ can be justified as utilitarian? If so, justify your answer with an
illustration.
8. What are the high points of the ‘carbon footprint’ and ‘carbon trading’ systems? In your assessment of
industrialisation pressure the world over, how effective are these systems in controlling the greenhouse
gases?
9. With reference to the assessment of carbon footprint and underlying principles of carbon trading practice,
identify five critical areas of environmental pollution control in Indian cities and societies that you would
like to recommend. Justify your answer.
 Ethics in Business and Corporate Governance

10. Based on your learning from this chapter, discuss in general why it should be the ethical duty of the states
and organisations to protect people and society from the dangers of environmental degradation and global
warming.

Further/Suggested Reading
1. Business Ethics: Critical Perspective on Business and Management, Alan R. Malachowski (Ed.), Routledge,
London 2001
2. The Rights to Nature: A History of Environmental Ethics, Roderick Nash, University of Wisconsin Press,
Madison, 1989
3. Philosophy and Environmental Crisis, William T. Blackstone, University of Georgia Press, Athens, 1975
4. Environment Management, Geoff A. Wilson and Raymond L. Bryant, Routledge, London, 1997
5. ‘Environment Management’, http://en.wikipedia.org/wiki/Environmental_management, 2009
 CHAPTER 8
Ethical Issues of Some
Contemporary Topics
and Technological
Developments
Chapter Objectives
1
http://www.telegraphindia.com/1090212/jsp/nation/story_10522806.jsp, accessed on 19 November 2009 and 16 October 2011
2
http://dir.salon.com/story/news/feature/2005/09/09/wasteland/index.html, accessed on 19 November 2009 and 16 October 2011
 Ethical Issues of Some Contemporary Topics and Technological Developments

accessed on 19 November 2009 and 16 October 2011

 cs in Business and Corporate Governance

Case I describes a contemporary phenomenon that is a fallout of the recent spurt in the
number of drug companies and the regulatory necessity of conducting a new drug’s clinical trials
before its formal marketing. However, drug trials are often conducted in violation of the ethics
and protocols of drug testing, which call for prolonged monitoring of the volunteers who have
been subjected to clinical trials. India is emerging as a major drug testing location. Poor and
backward people of India and South-East Asia are often trapped for drug trials by multinational
drug companies or their agents in exchange of money.The poor souls are totally ignorant of the
adverse consequences or the danger to their lives posed by drug trials.While conducting clinical
trials on human beings for developing new pharmaceutical and bio-engineered products, drug
companies are expected to discharge their full moral and ethical responsibility. But, Case I
shows a situation that is a violation of all ethical norms. Concern has been expressed over the
unethical practices and flouting of drug testing protocols by the multinational pharmaceutical
companies operating in India, which is emerging as a major drug testing location for the US
market. Cases such as this one highlight a moral issue of recent origin in India and some South–
East Asian countries. This issue would have been differently handled had the country been the
USA or someone from Europe. Drug companies do not mind flouting protocols of clinical
trials for new drugs to take advantage of the joblessness and poverty of the people of the region.
Exploiting poor and jobless people for clinical trials without mandatory monitoring and care is
not ethical. In fact, because of widespread unethical clinical trials conducted by pharmaceutical
MNCs in violation of regulations, the Indian government is poised to amend the country’s
drug laws. It is also considering imposition of heavy penalty and imprisonment on those found
guilty of violating the norms while testing drugs on human beings.
Case II involves a more critical and contemporary issue that is raising concern worldwide—
the risk to bio-safety arising from dumping of chemical and toxic wastes into the seas and
open water bodies, which endangers the biological species and human beings. Not limited to
conventional toxic waste, the dumped substances now include nuclear and electronic waste
as well, leading to destruction of marine life and rendering the coastal water full of dreadful
bacteria.The observation of Rebecca Clarren that the hurricane-hit areas of the US Gulf Coast
are drowning in ‘a poisonous stew’—of bacteria and chemical waste—is a reminder of multi-
dimensional nature of calamities that can befall the society from mindless dumping of e-wastes
and heavy chemicals into the coastal seabeds.
Case III is about the ethics concerning the use of genetically-modified (GM) products,
for example, Bt cotton that is a genetically modified cotton seed variety. Many experts have
questioned the widespread use of Bt cotton (Bt stands for bacterial toxin), pointing out its
harmful effects. The Bt cotton case is a pointer how little concerned are the researchers and
marketers of such modified products about their long-term effects on the users and the well-
being of society. The GM seeds and crops have been gaining ground, especially in China and
India where agriculture constitutes a major economic activity and provides livelihood to millions
of people. But the huge demand of the GM products does not justify their use, particularly
when they are considered a risk to the environment and sustainable agriculture. Propagators of
 Ethical Issues of Some Contemporary Topics and Technological Developments

modern technologies have the moral responsibility of comprehensively checking the quality and
effectiveness of their products, including their side-effects or any ill-effects, before marketing
the same. It is only ethical that the companies make their products and innovations harmless
through extensive trials and simulation of real-life conditions. In fact, because of the high
potential of genetically engineered organisms for destroying the natural balance of plant life,
genetic engineering research in any part of the world has to be doubly careful and concerned
about its side effects. Alarmed by the potential danger posed by GM products, the USA is now
substantially engaged in evolving methods to control the damage arising from such agricultural
practices. Here a notable development is the desperate attempt in the USA to continue growing
Bt corn by blending it with tracks of non-Bt corn with a view to balance the farming, and
maintain ‘refuge’ for beneficial insects3b.
These are only a few of the contemporary ethical issues from a list that is ever-increasing
with the advances of science, technology and industrial applications, in one hand, and economic
opportunitism, on the other hand. The cases discussed thus far are only indicative of the
widespread nature of the problem. Although the environment-related issues emerge at the top
of the list, the aim of this chapter is to highlight the ethics involved in some specific areas like
computers and information technology, propagation of social media, intellectual property rights
(IPR), international trade (in the new economic order), and the production and marketing
of genetically engineered products. These emerging areas greatly impact not only the human
society and the socio-economic development of nations, but the future generations as well. No
book on ethics can be complete without reference to ethics in these fields. Not surprisingly,
the complexity of ethical issues in this contemporary world—wherein ecology, socio-economic
demography, society and environment are all changing—is also giving rise to many unethical
consequences arising due to conflicts of power and politics which cannot be ignored either.
Therefore, the chapter also comprises some discussions on ethical issues related to such conflicts
and bargaining powers of groups, societies and nations in the industrialised contemporary
world.

8.1 AN OVERVIEW OF CONTEMPORARY ETHICAL ISSUES

In this materialistic era with increasing influences of urbanisation and consumerism, it is the
consumers and consumption indexes that define the economy as well as the prosperity of a
society or a nation. And feeding the lifestyles of such an urban population are factors such as
penetration of industry and fast-paced progress in science and technology—often unmindful
of the consequences on ecology, socio-economic demography, society and the environment.
Globally, the divide between the rich and the poor, and within a given nation itself, is continuously
widening, bringing with it national and global factors of power, politics and conflicts, which are,
in turn, giving rise to ethical issues that were hitherto unknown to the society and business. Let
us consider one such ethical issue:

3b
http://nature.berkeley.edu/~steggall/8Nov97-10Jan99.html, accessed on 17 October 2011
 Ethics in Business and Corporate Governance

More attention is paid to influence and control depleting petro-fuel sources than to the
development of alternative renewable fuels, despite the looming danger of CO2 emission
and global warming. Similarly, water is being polluted or wasted by indiscriminate
industrialisation without any attention to increasing the availability of fresh drinking water.
Rapid industrialisation and expanding population are threatening the availability of fresh
drinking water in most parts of the world4: only 3.0 per cent of the total water available on
earth is fresh water (that too is mostly ice); less than 0.007 per cent of this water is available
for drinking; every 15 seconds a child dies from water related disease in the world; and
almost 25 million people were displaced last year (2008) as a result of contaminated rivers.
The present society is being threatened more by a water crisis than by war; yet, this problem
remains largely unattended due to conflicts of interest and politics of economic order and
development in society and amongst nations.

Worse still, damage to the environment is continuing with impunity as more and more old
or scrapped cars, refrigerators, computers,TVs and many other household and office gadgets are
dumped into land-pits, water bodies and open seas, posing risk to bio-safety.Taking advantage of
free trade routes, industrially developed countries are generating huge quantities of solid wastes,
due to high consumptions of industrial products, and dumping the same onto developing or
poorer nations.

According to a recent newspaper report, radioactive waste sent from a western country
was found lying on certain Indian ports5. Even steel scrap imported in India from erstwhile
USSR countries was found mixed with live shells and other ammunition—left over from the
country’s internal fights and feuds. And, millions of old discarded personal computers (PCs)
are being dumped onto poorer countries. All these actions amount to dumping of harmful
industrial waste from the developed countries to developing countries.

Thus, the domestic waste of one country is being dumped onto another country. The
new global commercial order as well as the economic disparity are bringing to fore many
new issues related to the environment, computer ethics, ethics of internet protocol (IP) for
business and communications, ethics of competitive management and international business,
and socio-economic ethics pertaining to large-scale destruction of cropland to set up industries,
displacement and migration of people arising from business activities, and new types of crimes
(e.g. cyber crime and organised terrorism) against groups, community, countries and others
for dominance, revenge, selfish gains and even frauds. These contemporary issues which are
increasingly tearing apart present social structures, causing untold misery and intricately
influencing national and international business processes, have their origins in ethical violations,
and arise due to political or economic conflicts of interest. An example of human misery owing
to one such conflict of political interest is the recent (2008) flooding of the Kosi river between

4
http://www.k4health.org/pr/m14/m14chap4.shtml#top and http://www.vjel.org/editorials/ED10064.html, accessed on 16 October
2011
5
http://toxicswatch.blogspot.com/2009/03/row-over-radioactive-steel-exports.html, accessed on 20 August 2009 and 17 October 2011
 Ethical Issues of Some Contemporary Topics and Technological Developments

India and Nepal.6 Thousands of people were marooned in Bihar, India, after the Kosi river
breached its banks upstream in Nepal, flooding villages and towns in many areas across the state.
Analysts observed that this breach at the nearby Nepal border was the outcome of conflicting
stand between the two neighbouring countries in maintaining the river barrage. Had these
countries cooperated in maintaining and managing the river barrage at their border, this disaster
would not have happened. The ethics of duty, care and responsibility towards citizens were
totally disregarded in view of a political agenda—notwithstanding how the affected nations
may have spent huge sums of money and resources for rescue, relief and rehabilitation of the
affected people. Conflicts of interest, politics and power are at the root of such negligence of
duties of the state. The moral and ethical responsibility of both the governments to plan and
act proactively to safeguard its respective people, appears to have been violated in this case. A
government’s duties and responsibilities are no different from those of a business (as discussed
in earlier chapters), because—like a business—a government is also in the business of public
interest and public service. Governments must be accountable to citizens when it comes to
justice, fairness and care for good governance. It is possible that the disaster might have been
avoided—or at its magnitude could have been lesser—had the governments applied the rule of
ethical duties, ethics of care, and responsibility to protect their nationals. The disaster was not
caused by ‘not knowing what to do’, in the first place, but because of ‘inaction due to political
considerations’—a reason that is manifesting more and more in recent times the world over.
Thus, many a time in the modern era, politics and political considerations overrule the ethics of prudence
and justice.
Another contemporary ethical issue denoting conflict of interest is the countrywide protest
led by farmers, in India, against the procurement of land by the governments for industries
using the Land Acquisition Act of 1894. Originally enacted by the British in India to lay rail
roads, road links and bridges to connect the country for the purpose of trade, commerce and
travel, this Act enables the acquisition of land as ‘public utility’ to set up either private or public
sector industries. Considering how ancient its context is and how regressive its application
today, people affected by the acquisition are crying foul about the very purpose of the Act,
claiming that the authorities are being unfair and unjust. While compensation to landowners is
being determined on the basis of the existing market rate, often, the land is also being acquired
without their consent. Here, it may be interesting to note that, in 1894, there was no concept
of annual inflation, the scarcity of spare-able land was not so acute, economic order was much
different than what it is today, and the struggle for existence was far less challenging compared
to today’s materialistic world. In other words, the context of the Act and its relevance was very
different then.The government had argued that, in modern society, industrialisation is necessary
in the chain of economic activities and development (including employment generation); and
that lands thus acquired are in the larger interest of the public. On the other hand, farmers
who thus lost their land, and have no other skills or sources of employment or even the basic
facilities for education, health and employment, feel that they are being evicted from their
rightful property and are being forced to destitution for the benefit of urban or semi-urban
6
http://www.domainofhope.com/2008/08/kosi-river-flood-complete-story.html, accessed on 20 August 2009 and 17 October 2011, and
http://www.mikeldunham.blogs.com/mikeldunham/2008/08/index.html, accessed on 17 October 2011
 Ethics in Business and Corporate Governance

population—which represents only about 35 per cent of India’s total population. Herein stands
the wall of conflict, conflict of interests. Many economists argue that industrialisation is a must for
development; they justify this stand by juxtaposing different economic theories, some of which
may be out of context. The stand may be true, but it is equally true that economic growth and
social development must feed into each other to empower and uplift the society as a whole.
Otherwise, the development will be skewed and that could be a source of conflict, which will
ultimately affect the development and well-being of the society. Fortunately for the farmers
and rural population, the Government of India has now seen merit in its moral responsibility
of protecting the poor farmers. This realisation reflects in introduction of a new modified land
acquisition and rehabilitation bill that was introduced in the Parliament in September, 20117.
The approach to industrialisation has often been skewed due to political pressures and
considerations. It is not always aimed at the inclusive of growth of the society in general, and the
locality in particular. More often than not, these industrial actions are driven by considerations
that are political rather than economic development of the area or society. In most parts of the
world, politics is a contemporary phenomenon when it comes to actions of the state. Modern
ideas of industrialisation—aimed at employment and empowerment of people—have to be
carefully planned and crafted for all-inclusive growth, especially in the present materialistic
world where everybody aspires for prosperity. Otherwise, this modern approach to socio-
economic growth can give rise to more conflict and ethical problems than that it can solve.
Empowerment of people means the realisation of their right to livelihood, food sovereignty,
health and education; upliftment refers to raising the skills and quality of life within the scope
of social development.Thus, approach to de-link social development and environment with the
help of economic growth is being questioned for sustainability in countries like India where
a large percentage of population still lives below the poverty line. Such a skewed approach to
development is often seen as sectarian, led by interest groups (businessmen) and politicians, and
the source of many social ills in the country. The cycle or actions of economic development
must include all members of the society; ethics and ethical principles of governing a state are
concerned with balancing the development and making it all-inclusive. Yet, contrary to this
approach, industries in India are set up either by consuming vast croplands or forestland—
without really improving the life of the locals. This is neither fair nor just in view of the fact
that they (farmers, land owners or forest dwellers) sacrificed the very land that not only earned
them a living (how so meagre it would be) but also gave them a way of life.

A visit to Jamshedpur, Rourkela, Bhillai, etc.—places where very large steel plants are located
—will show that the quality of life of the ‘adivasis’ (original inhabitants of a place; aborigines)
has changed very little compared to the standard of living enjoyed by people who are directly
employed by the steel plants and living in the ‘steel towns’. On the contrary, the adivasis
have been largely marginalised in the new society. Similarly, while Navi-Mumbai (Raighad
district of Maharashtra) has witnessed rapid industrialisation, a huge number of its original

7
http://www.prsindia.org/billtrack/the-land-acquisition-and-resettlement-and-rehabilitation-bill-2011-1867/, accessed on 18 October
2011
 Ethical Issues of Some Contemporary Topics and Technological Developments

inhabitants are still poor. It has been reported that although Maharashtra8 is one of India’s
industrially advanced states, 37 per cent of its population still lives below poverty line. As
a consequence of this imbalance in development, the people of Raighad district are now
strongly opposing Reliance Industries’ move to set up a special economic zone (SEZ) there.

In effect, these industries give rise to migration of skilled workers from mostly urban and
semi-urban areas of the country where there are greater facilities for education and skill training
due to economic development and concentration.This facilitates the availability of ready hands
for employment in these new industries, and somewhat making the business houses forget their
ethical responsibility towards the locals. As a consequence, the locals—who had no appropriate
educational facilities or skill training—lagged far behind despite the industrialisation, which is
often showpieced as a source of employment generation. Original owners or habitants of the
now-industrialised lands have been left far behind in the race to prosperity; in their preference
for educated ready-to-employ urban people, industries and businesses neglect these locals, who,
thus, remain deprived of any improved social welfare and are forced to cope with the exploiting
attitude of the new affluent industrial society that came about with the industrialisation of that
area. This imbalance (skewed development) experienced by the locals may be the reason for
countrywide protests against land acquisitions by industries. In most cases, modern industrialised
civil society seems to have overlooked or ignored its ethics of duty, care and responsibility—for
the very people who sacrificed their land and livelihood to make room for that industrialisation.
Here again, some corrections in the approach are being forced by social activists in India as is
evident from the ‘Mining Bill’ of 2011.9
Lack of ethical considerations and integration of social and economic development
leads to different forms of conflict between the industry and its stakeholders, harming the
progress of business so much so that society and intelligentsia is forced to recognise it as a big
contemporary ethical issue. In turn, recognition or acknowledgement of this ethical lacunae
leads to the much–focused-on and strategic area of ‘corporate social responsibility’ (CSR) in
business management. CSR attempts to address some issues in the interest of the society and
of the environment to which the business belongs to. Thus, the logic of industrialisation and
economic development tries to ‘feed into’ an ethical ‘action-based’ social development system.
But, this is directed more towards correction, and not for the prevention of social deprivation
which still continues in the contemporary economic order. An ethical approach to such issues
(such as the utilisation of cropland for industries) demands a ‘holistic’ view of development
—encompassing all components of the society in a planned approach for a sustainable socio-
economic development where all stakeholders are made partners in progress, both economical
and social. For equitable development, ethicists recommend: minimisation of good land or
forest land usage for industry; choice of land or areas that entails least displacement or loss for
society and locals; reforestation for loss of environment; maximum rehabilitation of locals; fair-

8
http://www.enrap.org.in/Completed.asp?linkid=66, accessed on 20 August 2009 and http://en.wikipedia.org/wiki/Poverty_in_India,
accessed on 17 October 2011
9
http://profit.ndtv.com/news/show/mining-bill-cleared-firms-to-share-26-profits-with-locals-181005, accessed on 18 October 2011
 Ethics in Business and Corporate Governance

value compensation by keeping in view what the land would be worth in future rather than its
current market value; and a focused and committed action plan for the upliftment of the local
society.
Lack of a fair, equitable and inclusive approach for economic and social development is
now beginning to stall many industrial projects in the country, e.g., SEZ projects in Raighad,
Maharashtra, and many steel plant projects in the state of Orissa.
While the earlier examples pertain to social areas, there are similar issues in environment
management, business, politics and trade. Then there are a few examples of contemporary conflicts
arising from partisan attitude and disregard of ethics: (i) allegations made by developed countries
like the US, that China and India, owing to rapid industrialisation, are the major sources of
greenhouse emission in the world, and, for the same, these countries should pay more to those
countries with lower emissions; (ii) allegation made by developing countries like India that
developed countries, namely USA and Europe are dumping solid industrial waste on their
land without their knowledge; (iii) artificial trade barriers imposed by certain countries which
cause trade imbalances and add to the suffering of poorer and developing nations; (iv) non-
transparent handling of communication and business data across the globe to establish business
superiority; lack of rational computer ethics; hacking and abuse of Internet protocols; and
manipulation of stock and investment for gain under camouflaged financial trading systems,
among others. These contemporary conflicts are the result of extreme pressure for survival in
a fiercely competitive world where resources necessary for ambitious material prosperity are
far less than what nations and societies are aspiring for. In other words, these conflicts are the results
of ‘greed’ and not ‘need’. Such situations demand invocation of the ‘rule of ethics’ to minimise
the damage to society. Perhaps, the most recent and cruellest example of such greedy and reckless
actions of business violating its responsibility of ‘investor ethics’ for maximising gains is that of
the ‘subprime lending and house mortgage covering’10 by financial institutions across the US
market. Bad coverage and associated financial risks undertaken in total disregard of duties and
responsibility towards customers and investors (i.e., the people who invested money in those
companies) led to the collapse of leading financial houses like Lehman Brothers, AIG and
other traditional financial giants of Wall Street, in New York. Collapses of these giant financial
and investment bankers—the great financial meltdown—shook the world’s financial order and
brought about billions of dollars worth of losses to investing public across the world, eroding
the value of their life’s earnings and pension savings. Whether these financial institutions had
violated laws is being probed by the FBI (Federal Bureau of Investigation), USA, but they had
most certainly violated the rule of business ethics.
Issues pertaining to environmental violation,water crises,dumping of nuclear waste,skewed industrialisation
or financial crimes are all a part of the contemporary development in the way we choose to do the business.
Some of these current issues need to be examined from the ethical point of view—independent
of the laws governing or regulating these fields—because of their impact on modern society.
Very often, laws alone may be unable or insufficient to ensure fairness and justice in a case,
but laws together with the application of ethics may be able to do just that. The complexity of

10
http://en.wikipedia.org/wiki/Subprime_mortgage_crisis, accessed on 20 August 2009 and 18 October 2011
 Ethical Issues of Some Contemporary Topics and Technological Developments

Technological
Applications

Social
Interests
Contemporary
Ethical Issues

Figure 8.1 Contemporary Ethical Issues

present day problems can be appreciated by the fact that despite tight security transaction laws,
financial regulations and audit, disclosure norms in US companies, fraud and unethical financial
dealings, etc. are regularly surfacing in that market. Clauses related to corporate governance
and CSR have failed to put a stop to such risky and extremely damaging acts of business that
are driven by sheer profit motive and tread on the edge of laws and ethics. Growth that sans the
welfare of people and society in totality is meaningless even in the contemporary materialistic society. Such
a situation ultimately breeds more conflict than progress, drags each other away from set goals,
causes chaos in the society, and catapults destruction and damage in the social order.
Figure 8.1 shows the contemporary ethical issues, which result from the mismatch of
purpose, and direction of efforts, between the social interests and the commercial interests of
technological developments.

8.2 COMPUTER AND INFORMATION ETHICS

The most important among contemporary developments that are influencing society and the
world order is the near revolutionary development of computer and information technology
(IT). Often referred to as the ‘information age’, the present era is one in which every part of the
world has been wired or accessed for information transmission and sharing at lightening speed.
This new technology has severely changed the way we live: rapidly increasing globalisation
and decreasing the importance of distance; the emergence of new ways to communicate and
transfer any kind of media and information—movies, news, advertisements, articles, data, codes,
 Ethics in Business and Corporate Governance

etc.—instantaneously from one place to another; change of lifestyle as new products and
information fill the market at ever increasing speed; and the increasing possibility of abusing this
new technology for selfish and abusive goals, e.g., the Internet-based frauds and personal data theft
for unlawful monetary gains.Thus, the computer and IT-related issues have created new ethical
problems in this information dominated global village. Internet communication has become
the order of the day, in every conceivable field of our social and work lives; today’s software and
practices seem quite attuned to keeping one’s identity in check and retain anonymity while
communicating with others (the third party). But this is, in turn, encouraging many socially
evil and unethical activities through the word wide web, e.g., child pornography, terrorist
campaign, human rights violations and other criminal activities. The technology, developed to
serve the good of the society and bridge gaps in communication and international commerce,
is being used to hack into personal information with a view to commit fraud, send terror mails,
collect and distribute pornographic material, abuse children, and send abusive social media
communications and text messages. This is adversely affecting the society in particular and
nations in general. Rule of ethics is meant to help solution to problems and protection of interests
of people at large. Unfortunately, deliberate violation of ethics, especially in the Internet world,
by those who are supposed to benefit from this technology is causing grave concern. Internet
hacking, web paralysing by virus induced infections, data pilferage and theft, uninvited web
mails and blogging, uploading indecent photographs of children and individuals for perverted
usage, etc. are a few examples of unethical and unsolicited Internet usage with dangerous
implications. This is indicative of a dangerous symptom of the ‘dog eats dog’ syndrome. Much
like the cloning of living beings, computer related technological developments, and protection
from possible abuse thereof, should have their own ethical obligations and regulations.The very
technology that has enabled the society to hasten development, communication, technological
advancement, and trade must not be allowed to cause social decay and disaster.
IT has touched each one of us and, with the rapid growth of computer technology, the world
has witnessed an ‘information revolution’ of the kind that very few had visualised in the 1970s
and 1980s. It has very significantly altered many aspects of our lives: in work and employment;
in communication and entertainment; in banking and commerce; in education and research; in
community and personal life; in human relationships and understanding, to name a few. Today,
IT extends from contemporary socio-economic areas to technology-based developments in
communication, trade and business. It is, therefore, necessary to examine the role of ethics in
shaping the field of computer and IT to make it truly beneficial to the society.
In a broad sense, computer ethics can be described as the branch of ethics that analyses and
deals with such social and ethical aspects that arise from IT and its applications in trade, business,
governance and commerce. This age of the ‘world wide web’, and ‘dot com’ for information
and information search has rendered computer ethics as ‘global information ethics’. All types of
information is available on the web, including: business, technical, scientific, medical, historical,
global, personal, social, religious, promotional (advertising), blogs and even Internet abuse. The
technology to network with thousands of computers across a single net is opening up new
challenges and threats as well.Therefore, to reap the full benefits of computer and IT applications
it has become essential to follow some order and rules (ethical and legal) for information
 Ethical Issues of Some Contemporary Topics and Technological Developments

providing, sharing, protecting and preserving at the same time, controlling the damages of
abuse. For instance, ‘hacking’ is a very common violation of computer ethics, breaking into a
computer network to steal information or plant a ‘computer virus’ to render the other system
inoperative or useless.
The development of computer ethics began in mid-70s, but became a part of professional
ethics since the 90s when the growth and penetration of computers became a part of personal life
as well. Computer ethics11 have now evolved to be a part of ‘information ethics’ that investigate
and deal with issues arising from the development and applications of IT. Information ethics
provide a critical framework to consider moral issues and responsibility in relation to: (i) privacy
of information; (ii) IT behaviour in the new information environment; (iii) problems arising
from the creation and management of ‘information cycle’ that gives rise to collecting, recording,
processing, networking and distribution of data and information; and (iv) the duty to protect
and preserve the rights of computer users, i.e., consumers. The purpose of information ethics
is to establish an ethical foundation that promotes fair, equitable and responsible information
practices by examining issues related to ownership, access, privacy, security, accountability and
society.
Information ethics, therefore, relates to the ethics of computer system management and
philosophy of information management. For example, increasing amount of critical information,
data and literature is being posted on the web everyday, giving rise to the need for ethical
rules and philosophy to protect: rights of privacy vis-à-vis rights to information, copyrights
and ownership. Though attempts are being made to technically address such issues (i.e. by
developing appropriate IT programme to protect or check infringement of data, etc.), for fair,
equitable and responsible practices, it is essential to establish an ethical foundation and rules
for information dissemination and protection. Information ethics are becoming increasingly
important to maintain the integrity of the modern-day ‘information society’; it must deal with
protection of fundamental rights, involving intellectual freedom, rights to express, accountability,
privacy of individuals, and security. Professional codes for computer ethics should offer a basis for
making ethical decisions and rules of applications to situations involving information logging,
coding, distributing and usage by individuals, society, business, governments and professions.
And, based on sound computer ethics, information ethics should be able to facilitate effective
personal services, professional practices, business processes and trade, transparency of public
policies and governance, and social security. Association for Computing Machineries (ACM)
issued their code in 1992 to put the computing technology on the right ethical platform.12
A computer is a logical ‘black box’ that can be shaped and modelled to do any activity
which can be characterised in terms of input, output, connecting logic and operational (logical)
systems. Thus, the potential applications of computer technology are limitless; limited only by

11
http://en.wikipedia.org/wiki/Computer_ethics, and http://en.wikipedia.org/wiki/Ten_Commandments_of_Computer_Ethics, accessed on
20 August 2009 and 18 October 2011
12
http://www.acm.org/about/code-of-ethics, accessed on 20 August, 2009 and 18 October, 2011
 Ethics in Business and Corporate Governance

human creativity and capability to connect things logically. According to James H. Moor13, the
author of Modern Computer Ethics, computer revolution comprises two parts: (i) ‘technological
development’ in which computer technology—hardware for processing—is developed and
refined; and (ii) ‘technological permeation’ in which computer technology is permeated and
integrated into our lives and way of working through software development and applications.
Moor visualised computer ethics from the domain of ‘policy vacuum’ and ‘conceptual muddles’
regarding social and ethical use of IT. According to him, a typical problem in computer ethics
arises because there is a policy vacuum about how computer technology should be used.
Computers provide us with new capabilities and these, in turn, give us new choices for action
and application. Often, in these situations, there exist no policies for conduct (of computer
applications) or the existing policies seem inadequate. The central task of computer ethics is,
therefore, to determine what we should do in such cases, i.e., to formulate policies to guide our
actions and applications. One difficulty is that there is often a conceptual vacuum along with a
policy vacuum. Although a certain problem in computer ethics may initially seem clear, a little
reflection of the same would reveal conceptual haziness. For example, we all want freedom of
expression and an IT channel that can reach many people at one time or at a lighting speed, but
we are also hazy about how much such a blanket facility would hurt individual rights, security
or privacy. Such cases necessitate an analysis that provides a coherent conceptual framework
within which to formulate a policy for action. Moor’s approach has been broad enough to
accommodate the changing face of wide-ranging philosophy and methodology of life and
living together with advancing technology, but appears to lack direct considerations to certain
‘human values’ concerning freedom of expression, opportunity to knowledge, democratic
approach, rights to health, wealth, privacy and security, etc. With the growth of computer
technology comes the growing realisation that computer ethics need to embrace a very broad
view to combine technology, sociology, applied ethics and cyber laws. Nonetheless, Moor’s way
of defining the field of computer ethics is very powerful, and suggestive of how future problems
can be tackled. It is broad enough to be compatible with emerging experiences and perceptive
understanding of related ethical issues.
There is yet another approach to computer ethics that views it as a branch of ‘professional
ethics’ as propagated in 1991; Donald Gotterbarn14 opined that computer ethics should
be treated as professional ethics concerning standards of practice and codes of conduct of
computer professionals. He pointed out the necessity to pay major attention to professional
ethics and values that guide day-to-day activity of computer ‘professionals’ who are engaged in
the design and development of computer artefacts. According to him, ethical decisions made
during the development of these computer artefacts have a direct relationship to many of the
issues that come up later under the broader concept of computer ethics, which examines ethical
problems aggravated, transformed or created by computer technology.This is equally applicable
for modern communication technology used by the ‘Blackberry’ mobile communication or

13
http://www.southernct.edu/organizations/rccs/resources/teaching/teaching_mono/moor/moor_definition.html, accessed on 20 August
2009 and 18 October 2011
14
http://plato.stanford.edu/entries/ethics-computer/, accessed on 21 August 2009 and 18 October 2011
 Ethical Issues of Some Contemporary Topics and Technological Developments

any such other special mobile communication facility that facilitates many useful as well as
offending, objectionable and illegal communication features.
From early days to modern times, there has been a sea change of understanding and perception
about computer technology; the role of computers has since changed from machine and method
of replacing human labour and jobs to creator of new jobs and facilitator of business processes and
operations for social and economic growth. While this revolutionary concept has effectively changed
the way modern society lives and works, what has also changed with this development is the
scope of computer crime and of infringing personal rights and privacy. Computer viruses,
worms and ‘logic bombs’ have been constant threats to users and society due to their power to
disable computer functions and erase data and information.
‘Hacking’ into other’s computer to carry out illegal and anonymous functions—with a view
to destabilise operations or steal personal data for gain—is quite frequent in today’s computer
enabled environment.The central concern, therefore, is to prevent such happenings in computer
applications by establishing a professional code of conduct, care and comprehension of designing
computer artefacts, cyber laws, and promotion of social sense of ethics in the handling of and
dealing with computers.
In this computer and telecommunication age, social media marketing and communication
and information exchange, using the Internet or mobile technology, are fast gaining ground
and popularity. But these modern means of social interaction face the risk of serious abuse.The
span of social media use is so large and vast now that it is beyond the scope of this book to
discuss. However, it must be emphasised that the importance of ethics and owning up of moral
responsibility in the use of the Internet-based social media is undeniable if we have to save
the society from a great chaos. Designers of social sites have the responsibility of making them
technologically capable to own up the moral responsibility for messages and communications.
They should at least ensure the capability of delivering the utilitarian ethics, that is, design their
business to achieve greatest good for the greatest number of people. In this respect, designers of
computers or web technologies—the main sources of channelling information—should also be
seen as ethically responsible for following ethical standards.
Other ethical concerns of computer include infringement of privacy, security of transactions,
and loss of ‘intellectual property’ on subject matters communicated across computer networks.
These are termed ‘cyber crimes’. As more and more people become computer-dependent for
their living and daily work, more and more such threats will become real and frequent, calling
for stricter cyber laws and some special development of software-based security locking of
computers so as to prevent these unethical computer acts.Technological developments like safety
locks, spyware, spam guard, etc. are making computer systems foolproof and rendering violations
of privacy and loss of data a bit more difficult, but the ethical issues to protect users and society
from malice and harm still remain to be comprehensively addressed. Identifying ethical issues as
they arise and, then, work to deal with the same is proving to be inadequate to prevent damage.
Here, what may be required is the promotion of an ethical work culture amongst computer
professionals and users. Yet, considering how every field of science and philosophy has been
abused in the past, we may well expect the continuation of abuse and ethical violation in the
field of computer technology. Therefore, it is not surprising that standards for codes of conduct, governing
 Ethics in Business and Corporate Governance

ethical behaviour amongst computer professionals, emphasise in the first place to educate and regulate the
members in four basic areas: (1) general moral imperatives; (2) specific professional responsibilities; (3)
organisation leadership imperatives; and (4) compliance with the codes. These standards attempt to
cover the core set of computer ethics from professional responsibility to the consequences of
technology in the society. The ethical codes bind the members (i.e. computer professionals) to
behave in a manner that complies with the codes of conduct defined by the respective regulator
or the computer establishment in a country such as NASSCOM (National Association of
Software and Services Companies) in India. The codes—which may differ in wording but not
in spirit from country to country—are designed to create moral imperatives amongst computer
professionals so as to minimise the negative consequences of computing systems and, thereby,
threats to safety, security and health of their users.When designing or implementing IT systems,
computer professionals must attempt to ensure that the products of their efforts will be used in
socially responsible ways, will meet social needs, and, as far as possible, will be secure from the
possibility of harmful usage; here, harmful refers to usage which can cause undesirable loss of
information, files, infringement of property, and damage to individuals (users), public, society or
environment. To minimise the possibility of indirectly harming others, computing professionals
must minimise malfunctions by following generally accepted standards for system design and
testing. These are the ethical challenges to computer technology for sustainable development
and support to modern society.

8.3 ETHICS OF GENETICALLY ENGINEERED AND MODIFIED PRODUCTS

Ethics about genetically engineered and modified products are inspiring heated debates owing
to the consequences that can penetrate deep into the way human beings will live in the future.
Advancement in biotechnology has created this new field which is riddled with a host of
ethical issues.15 Genetic engineering allows the transfer of ‘genes’ in human, animal and plant
cells, and thereby create new biological entities containing the blueprint of the respective DNA
(Deoxyribonucleic Acid) that determine what characteristics an organism will have. It is applied
to create hybrids through recombinant DNA technology.

Genes from one species can be removed and inserted into the genes of another species to
create a new kind of organism which has the combined characteristics of both these species.
This technique has been used to create and market high-yielding vegetables, fruits, crops, etc.
as well as bacteria and viruses for medical and clinical research.

Few examples of genetically engineered products that have proved to be beneficial to the
society are: bacteria to consume oil spills from ships in the sea and to detoxify wastes, high-
yielding wheat that resists disease, and a huge variety of hybrid fruits, vegetables and crops like
engineered tomato, soybean, etc. While these products were very well received initially, and
they have served a very useful and eminent purpose in the modern world, their consequences

15
http://www.voice.buz.org/genetic_engineering/ethicsandge.html, accessed on 21 August 2009 and http://biotech.about.com/od/bioethics/
Ethics_Topics_in_Biotechnology.html, accessed on 18 October 2011
 Ethical Issues of Some Contemporary Topics and Technological Developments

to our health, environment and living conditions are being questioned as unpredictable. This
technology may, arguably, have the potential to create more ‘good’ than ‘bad’ for this world,
but scientists advocate extreme caution to control and regulate the propagation of this type
of genetic engineering, especially when dealing with animals and human cloning. Thus, the
subject brings to fore the question about doing what is ethical by choosing ‘good from the bad’.
Engineers and scientists should be aware of their responsibility not to disturb the ecology of
the earth. It is said that the basic ethical norms concern the well-being of the ‘comprehensive
community’ within which we live—and not just the well-being of human beings. The earth is
a single ethical system; if this is recognised as the first principle of ecological ethics, then such
an ethic would demand a unified legal framework where the rights of the geological, biological
and human component of the users of such facilities must be protected.
That is, indeed, a huge task, and one which is most frequently overlooked by both scientists
and businesses in their pursuit of this new and exciting field of business opportunity. Foreseeing
the emerging conflicts on ethical issues of genetically engineered foods and agricultural products,
the Food and Agricultural Organisation of the United Nations (FAO) has elaborated the
approach.16 Unfortunately, in the development of genetically engineered foods and agricultural
products, FAO directives are not always adhered to—a fact that is now raising a huge debate
about the ethical and beneficial parts of GM products in developed countries.17
Most new technologies, such as computer technology or genetic engineering technology, run
the risk of being unaware of their consequences which can neither be predicted nor controlled.
And, most ethical issues concerning these technologies arise from this uncertainty concerning
future consequences or process infiltrations. Therefore, in genetically engineering a product,
questions arise whether these risks are predictable, reversible or controllable? Are the benefits
worth the uncertain risks; who should decide about making such moves? Ethics demand that
people who bear such risks should be made aware of the potential risks and danger, and in case
of ‘damage’, they should be adequately compensated for the loss. Ethics do not differentiate
between rich and poor in the society or between rich and poor nations; hence, consequences
of such risky actions and moves should have to be ‘fairly’ distributed among various parts of the
society, nations, generations and other stakeholders.
Before promoting any (genetically) artificially engineered species or organisms,‘due care’ and
‘ethical justice’ must be factored in the move to protect unsuspecting public or consumers. The
fact that ‘one man’s medicine can be another man’s poison’ must be remembered and considered
in the process of developing such products. This can be explained with an example:

It has been reported that genetically engineered plants have poisoned wild organisms that
are required to maintain ecological balance. Furthermore, the pollen of one species of corn
engineered to kill certain pests was later found to be killing certain butterflies that were
attracted to the cornfields.18

16
http://www.fao.org/ethics/ser_en.html, accessed on 21 August 2009 and 18 October 2011
17
http://www.who.int/foodsafety/publications/biotech/20questions/en/, and http://www.gmfreeireland.org/news/2007/july.php, accessed
on 21 August 2009 and 18 October 2011
18
http://www.pmac.net/jeopardy.html, accessed on 21 August 2009 and 18 October 2011
 Ethics in Business and Corporate Governance

The most recent example of failure of genetically modified products in India is the massive
damage caused by Bt cotton seeds in the cotton growing states of India—namely Andhra
Pradesh, Madhya Pradesh, Gujarat and Maharashtra. Bt cotton seeds had been genetically
engineered to produce a toxin that can kill the bollworm, a major headache for cotton farmers,
thereby decreasing the usage of expensive pesticides for bollworm control.19 A study conducted
in China revealed that Bt cotton was harming natural parasitic enemies of the bollworm20
causing widespread failure of the hybrid cotton farming that farmers had carried out at the
behest of the government and other interested parties. So is the case in India, where hundreds
of farmers committed suicide due to the failure of Bt cotton crop.21 Apparently, the farmers
did not have the complete information on all aspects of Bt cotton cultivation—including the
special resistance management plan that producers and marketers of such hybrid seeds expect
the farmers to practice. As a result, farmers suffered a huge loss. Ethics demand that a new
technology is introduced only after its consumers have the complete information on all aspects
of its usage and practice, so that they can make informed choices and decisions. Such a choice
was denied to the unsuspecting cotton farmers and they had to learn the facts the hard way.
Meanwhile, evidence against Bt cotton continues to accumulate worldwide. A study
by the Nanjing Institute of Environmental Sciences (refer to footnote 3a) under the State
Environmental Protection Administration (China) revealed that Bt cotton is harming natural
parasitic enemies of the bollworm and seems to be encouraging other pests; the diversity index
of the insect community in Bt fields was also much lower than on conventional cotton farms.
It also found that, while the population of pests other than the bollworm had increased in the
Bt cotton fields, some had even replaced it as the primary pest. Thus, instead of establishing
the benefits of a technology that was adopted for higher yield, the study raises more doubts
about Bt cotton. These findings should be taken seriously as Bt cotton accounts for over 35
per cent of the total cotton acreage in China. Here, it would be pertinent to note that since Bt
cotton was developed in the US to tackle the bollworm mainly, its applicability to other parts
of the world with higher pest diversity was always suspect. Therefore, propagation of such bio-
engineered product in other parts of the world by the US company, Monsanto Inc., was perhaps
neither justified nor ethical from the standpoint of risks.22 In fact, given the high potential of
genetically engineered organisms to destroy the natural balance in plant cultivation, a substantial
part of genetic engineering research is now engaged in evolving methods to control damages
from such practices.
There are many such examples of genetic engineering where the risk of using the products
so developed is not predictable or truly assessable within the time frame of today’s competitive
business environment. The apparent threat from genetically engineered organisms was so high
that in the year 1999, a de facto moratorium on GM crops was introduced in the European
Union, which was in force until 2004.23 Subsequent directives and regulations governing

19
http://www.biotech-info.net/harvest_bitter.html, accessed on 21 August 2009 and 18 October 2011
20
http://ngin.tripod.com/060602a.htm, accessed on 21 August 2009 and 18 October 2011
21
http://www.gmfreecymru.org/documents/suicidebelt.html, accessed on 4 January 2012
22
http://www.globalresearch.ca/index.php?aid=3912&context=va, accessed on 18 October 2011
23
http://en.wikipedia.org/wiki/International_trade_of_genetically_modified_foods#European_de_facto_moratorium, accessed on 18 October
2011
 Ethical Issues of Some Contemporary Topics and Technological Developments

GM crops and foods in EU emphasised precautions, risk assessment and special labelling for
introduction and follow-ups, fearing that this might accidentally create a potentially dangerous
new organism.
The situation is more critical in areas of bio-engineered pharmaceutical products and animal
cloning; the former manifests risks to human life, and the latter is likely to endanger natural
species and ecology. Therefore, naturalists question if it is ethical for businesses to market and
distribute such unpredictable genetically engineered products and organisms. Many countries
(like the Ireland) have banned GM products because of the serious doubt about their quality;
And, while well-known food companies even declared that they would not use any genetically
engineered food ingredients in their products, some food stores across the globe were forced to
aptly label those containers that contained GM products.
Challenges of ethics in view of contemporary developments are fitting the ethical imperatives
of actions and applications of technological developments into the grooves of social well-being
and sustainable developments of the society (Figure 8.2).

Social and Sustainable Technology and

Well-being Technological Developments

Ethics

Ethics and Ethical Standards Applications of Technology

and their Purpose

Figure 8.2 Challenges of Ethics in view of Contemporary Developments

Ethics forbid the passing of risks onto consumers unless those risks are taken willingly, with complete
information and knowledge by the consumers. Environmentalists and ethicists insist that producers of
newer technologies must shoulder the responsibility of presenting convincing evidence that it is
safe for human consumption and usage. Furthermore, they should not be guided or motivated
to adopt biotechnological advantages merely for personal benefit and commercial gain (i.e., by
taking advantage of a shortage or an economically competitive market situation). However, one
cannot deny that biotechnology has ushered some fundamental changes into our lives, opening
up a vast potential of engineered products and resources that can be very useful to mankind
in general, and poor nations in particular. In this context, ethics are not about altogether
preventing the propagation of biotechnology or genetic engineering, but about following the
‘ethics of due care, fairness and justice’ so that consumers are not harmed or their health does
not suffer. Debates about the harmful nature of biotechnological products continue in absence
of undisputed scientific evidences, but it does not mean that engineered or hybrid products
should be banned or stopped. What should cease, in this regard, is the aggressive marketing of
such products without fair product trials which reasonably establish the possible side-effects
on human health, environment and ecology. Notwithstanding fair product evaluation, ethics
demand that the product labels carry complete information and statutory warnings about
 Ethics in Business and Corporate Governance

possible hazards (of product usage), and that both the industry and the government concerned
ensure adequate measures for consumer protection.
Any discussion about the ethics of biotechnology will be incomplete without reference
to the debate about bioethics raging in modern society, be it religious places (church, etc.) or
medical professionals. Scientists and doctors have cited many reasons for cloning or for the
application of bioengineered products and processes in controlling human life and the course
of future living. In a recent pronouncement to provide moral response to bioethical questions
being raised by various agencies and bodies, the Vatican, the world’s largest Roman Catholic
church, has come out strongly against in vitro fertilisation, human cloning, genetic testing on the
embryo before implantation, and embryonic stem cell research.24 The Vatican argued that these
techniques violate the principle that every human life—even an embryo—is sacred; a view that
will certainly influence the future course of research in biomedical engineering and bioethical
norms. In this context, it is important to note—yet again—that the primary concern of ethics is
not profit or gain from future discovery, ethics are more concerned about minimising potential
damage—known or unknown—from an act or work of business or profession.

8.4 INTELLECTUAL PROPERTY RIGHTS (IPR)

With growing internationalisation of business and transfer of technology involving companies
across the world, professional ethics now involve other areas as well, namely ‘intellectual property
rights’ (IPR) and ‘international business’.The companies or professionals engaged in these areas
need to follow a few cardinal principles of ethics to maintain discipline, reduce damage, and
ensure growth in their respective areas. For example, ethics of intellectual properties, ownership
of knowledge and skills are becoming some of the most debated subjects amongst nations and
global corporations in the context of their critical importance in the growth of business in
the era of knowledge-based business. The US drug makers have often accused pharmaceutical
industries in India of patent infringements. According to a Business Service (BS) report dated
24 December 2008 (The Economic Times, Kolkata, 25 December 2008): ‘A leading Indian
pharmaceutical company (name avoided) has entered into an agreement with Schering and
Sepracor of the US to resolve all pending patent infringement actions filed by the latter against
the former Hyderabad-based company in the New Jersey District Court.’25 The agreement
was forced onto the Indian company in order to allow them to market some of their disputed
generic drugs in the US market. Though the matter was being resolved by mutual agreement,
it remained that the said Indian company had been sued for infringement of patent rights.
The situation may have been precipitated by the severity of competition in the international
market, but that in no way allowed for the violation of basic rules in business. It is in their own
interest for industries to follow ‘best ethical practices’ in resolving such matters; the way patents
and copyrights are being infringed globally, if one went to the court for justice every time,
new drug development would soon come to a standstill because companies would be busy
24
http://www.msnbc.msn.com/id/28197514/ns/health-cloning_and_stem_cells/ and http://sys12-today.msnbc.msn.com/id/28197514/
ns/health-cloning_and_stem_cells/, accessed on 18 October 2011
25
http://articles.economictimes.indiatimes.com/keyword/glenmark-pharmaceuticals/recent/5, accessed on 18 October 2011
 Ethical Issues of Some Contemporary Topics and Technological Developments

defending the cases instead of attending to the need for new research for better drugs. Typical
areas where ethical practices need to be observed in IPR protection are: patent infringement,
copyright infringement, trademark infringement and industrial espionage.
Characteristics of intellectual property are shown in Figure 8.3.

Created by
intellectual
applications of
mind and
knowledge
An abstract & For the benefits
non-physical of mankind and
property society

Characteristics
of Intellectual
Property

Figure 8.3 Characteristics of Intellectual Property

In recent times, there have been several reports about Indian pharmaceutical companies being
sued by American pharmacy giants; the matter of dispute is by-and-large the infringement of
respective patent (or intellectual property) rights.While such issues are reported when it comes
to big companies and big deals, the infringement of copyright or IPR—including patent rights
—are quite common and go almost unnoticed in many other fields of business like computer
software, books, music and movies, video games, etc. It has been reported that the Indian film
and music industries lose billions in revenue every year, due to infringement and pirating of
records (music) and prints (film).Thus, while IPR creation and application play a critical role in
the development of modern science, technology and business, the protection of their rightful
owners is also critical if we are to continue this culture of developing knowledge, skill and
art. In fact, protection of IPR in R&D efforts of pharmaceutical industries, computers, bio-
technology and genetic engineering is assuming even greater importance in recent times given
the critical dependence of these sciences and related industries on innovation and discovery.
Intellectual property (IP) is an abstract and non-physical property created by intellectual
applications of minds and knowledge for the benefits of society and mankind. Examples of
IP are: computer software (programmes), songs, book material, ideas and innovations about
products or processes, genetic code, or any form of useful information unearthed and established
by special efforts or research. Since IP is non-physical, it can be copied, used and consumed
simultaneously by a number of people or sources. For instance, a physical property like a car
can be used by only one party at a time, but a non-physical property like a song or software
can be copied and used by many at the same time. Thus, IP is amenable to infringement and
 Ethics in Business and Corporate Governance

copying with or without the permission of the rightful owner. Usage of IP without permission
or permit is considered unethical, because it is infringing into the rights of that other person
who has earned it through special skill and/or effort. The ethical objection to IP infringement
is not from the viewpoint of social damage, but with a view to prevent any hindrance to the
growth of innovation, discovery, art, science and knowledge creation, all of which are essential
for the well-being and progress of modern society the world over.
However, one may ask about the ethical purpose of such knowledge creation: Is it for
private ownership and gain or for collective or common ownership that freely benefits the
society? What sort of property systems should a society adopt to determine ownership rights
of intellectual property? Though the IP system is still evolving, especially in the backdrop of
emerging globalisation in trade and business, the issue could have two possible approaches:
1. The utilitarian approach which claims that if one creates a property such as a song,
a patented product or a computer programme by his or her special efforts, skill and
labour, then it should be treated as his or her private property and he or she would be
free to treat that property as he or she likes but not in a way that is detriment to the
society at large; and
2. The socialistic approach which supports the view that such creation or property
should be treated as collective or common property for the benefit of all concerned in
the society.
Supporters of the latter approach argue that individual claims on intellectual property should
be subordinated to more fundamental claims of social well-being.They further argue that, while
people may have right to the fruits of their efforts, they also have a duty to reward the society
which made the very fruitfulness of their efforts possible. They believe that common good of a
society would be better served if IP is treated as common property that can be freely used for
new development or usage for greater social benefits. Scientific discovery or new engineering
developments (such as development of alternative sources of energy, genetic engineering of
cells, vaccines, drugs for cancer treatment, etc.) should not be covered under ‘patent rights’
as private property and ownership. Such moves will dangerously sever the beneficial effect of
various scientific and artistic developments in the world, and may even encourage unnecessary
and illegal infringement of such rights.Yet, with the progression of commerce in modern world,
people tend to stick to the ownership of the fruits of their labour, and try to gain most from the
exploitation of the results of such special efforts—a practice that has, in fact, promoted rampant
piracy in books, movies, music videos, software, etc. in developing countries.
In dealing with this subject, it is necessary to examine what is termed ‘intellectual property’.
In the US and most parts of the world, an important distinction is made between ‘idea’ and
‘expression of the idea’. An idea cannot be ‘private property’ or owned by an individual, but
expression of an idea in a special (or specific) way—such as programming, writing a book or
singing a song—can be granted ownership rights through ‘copyright’, which then becomes the
private property of an individual or group or a company. Once the copyright has been obtained
and announced, it becomes ethically necessary to respect the ownership and not to infringe or
use without prior permission of the owner. Similarly, processes, products, inventions, discoveries,
 Ethical Issues of Some Contemporary Topics and Technological Developments

new compositions of drugs, genes, cells, etc. can be covered under ‘patent laws’ of a country.
Many countries (like India) do not encourage patenting a product but do grant a patent to the
process of producing that product. It is believed in this system that process is the essence of
expressing the speciality of a product, and, therefore, merits the right of ownership. Here, the
product is regarded as a descriptive narration of ideas, whereas process is the expression of how
the product idea can be manifested in reality and practice.
Due to the high commercial value and advantages of protecting an ‘idea’ or ‘expression of
an idea’ through copyright or patent, this field witnesses large bursts of unethical activities. An
instance of such activities would include the attempts made by large international companies
to own the ‘trademarks’ of names such as ‘neem’, ‘basmati’, ‘turmeric’, ‘Himalayas’, etc. with
a view to commercially use these naturally occurring generic brand names. Similarly, due to
protectionism and tendency (of their lawful owners) to charge high prices for thus copyrighted
or patented products, there prevail global tendencies for product piracy (theft) for cheap usage
and sharing the benefits of such developments. The argument forwarded for such unethical
activities is that a property should serve the good of a society, and actions taken to propagate
or exploit such names or contents for the benefit of public at large are justified, especially
when behind the product or property is a tendency to make excessive profit by charging
prohibitive prices. On the other hand, in order to ensure that such developments are not
blocked by individuals perpetually or long enough to cause loss to the society, a compromise
is attempted by introducing a ‘fixed life’ for a patent or a copyright. Time frame to limit the
free and common IP usage may vary from country to country, but it generally ranges from 12
to 20 years for patents and 15 to 25 years for copyrights. Yet, many subscribe to the view that
intellectual property should be freely available for sustained and rapid growth of civilisation and
society in a fast-changing world. For the possibility of abuse in case of such free IP usage, they
hold the view that benefit to society at large would be much greater than the loss or damage it
can cause.
While this debate between the utilitarian and socialistic approaches continues, ethics and
ethical approach to this problem faces the dilemma of how to ensure and balance the fairness
of distribution of benefits between the individuals who worked to derive the ‘property’ and
the society who deserves to be benefited by their efforts. While judging IP as free for all users
may cause serious disincentive for those who make special efforts to develop that ‘property’,
making it ‘private property’ and restricting the usage, on the other hand, may also hinder further
developments in related and allied fields of science, arts and technology which may be beneficial
to the society, the world and future generations. A case in hand is the property rights granted
to multinational pharmaceutical companies for drugs developed to control AIDS (Acquired
Immunity Deficiency Syndrome). AIDS is most prevalent in poor countries like Africa where
affected people can hardly afford the cost of expensive drugs developed and protected under
IPR as products patented by MNCs. Does this mean that such drugs will have to remain out of
their reach for ever? Would it be unethical if a local company copied such a product and offered
it at a very reasonable rate to those needy but poor people who are fighting for their lives? Laws
to protect intellectual property in a country may take a different view, but ethics and duty of
care necessitates that some means are found out to reach the benefit of such development to the
 Ethics in Business and Corporate Governance

millions who are poor. It would also not be fair to the society to hold back material information
about any life-saving drugs that may ultimately deprive the benefits of such developments to
the society or lead to stagnation of scientific growth.
Thus, there could be conflicting views about protection or propagation of intellectual
property depending on the nature of society, economic situation and market dynamics. A
country in the developed world with a strong economic and commerce orientation may strictly
protect its intellectual property with the help of regulations and laws, whereas a poorer nation
may still allow or overlook certain infringements of IP rights due to greater consideration of
benefits to a larger cross-section of its population. Thus, consideration for due care and good for
greater number of people in the society would be the guiding factors for ethical judgement. However,
there cannot be a blanket clearance to violate copyrights or patents in a country in all fields of
business and industries; such a situation would only deter new developments, competition and
contribution to national growth. For example, photocopying the pages of an expensive text
book may be overlooked in India by many as an ‘infringement’, but ‘pirating’ the latest movie
by copying it onto a VCD would be considered a crime by most in the same society. Such a
social and economic situation tends to favour the utilitarian approach to managing IP rights,
which principally says that the right action for a particular occasion is the one that produces
more utility than any other possible action, and that the right action need not be the one which
produces the most utility for the person performing the action.
Due to the high value placed on such efforts and work in a country, there has been
considerable interest in the development, protection and utilisation of IP in all industrialised
countries. It is felt that, with the growth of knowledge-based industries, value of IP in both
commercial and creative sectors seems to be fast surpassing the value of physical property the
world over. Countries generally work on the basis of ‘ownership’ and most countries have laws
to protect any violation of this ownership right. However, the issue has still not been settled
due to differences in views about what truly constitutes intellectual property. Many hold the
view that IP in areas like green technology and eco-friendly products, issues that are gaining
priority nowadays, should be made freely available to combat climate change. In contrast to this
view, a confusing situation persists in this field when even industrially advanced countries seek
and grant ‘trademark’ rights to such naturally occurring things as ‘neem’, ‘basmati’, turmeric’,
‘Himalayas’, etc.There are also differences of practice in granting IPR to processes and products.
Nonetheless, the subject is not only commercially important, but also pertains to handling
contemporary problems of promoting and ethically managing innovations and knowledge
generation that are essential for the well-being of the entire humanity.

8.5 ETHICS OF INTERNATIONAL BUSINESS AND TRADE IN THE

PRESENT-DAY CONTEXT
The present era is symbolised by free-market opportunity, globally open but competitive
markets, liberalised trade, and IT-enabled and IT-driven business processes.The global economy
has become virtually unipolar, binding all countries into the same economic chain of events.
While this has opened up tremendous business opportunities amongst participating countries,
 Ethical Issues of Some Contemporary Topics and Technological Developments

it has equally endangered the countries by making them economically interdependent with
threats of unethical and harmful actions of one befalling onto others. The recent collapse of
huge financial institutions in the US, due to the subprime crises and mismanagement of financial
regulations, and the consequent downturn of global financial market, is an example of this chain
effect (refer footnote 9) and the imminent danger thereof. What may have happened in the
international business scenario to cause such a chain reaction is the effect of ‘ethical relativism’26
exposing the un-coordinated weak links of the different, so-called ‘ethical beliefs’ of various
participating economies leading to actions and transactions that were neither transparent nor
moral. As per ethical relativism, ethical beliefs and actions in one zone of an economy—that
may have the moral sanction of the majority of people of that region—may not necessarily hold
good for another region with a different social culture, economic background and beliefs, i.e.,
there could be relative difference in moral actions and judgement among the countries. This
can be explained with the example of activities or concepts perceived differently in different
places:

In a developed capitalistic economy, where majority of people live well above the poverty
line, taking chances and risks as in gambling—generally understood to be an unethical
practice—may be morally acceptable or justified for accelerated growth of public and private
investments. However, the same activity would not hold good in the economy of a country
where a large percentage of people are still under the poverty line (or whose per capita
income is much below the average of developed countries). Similarly, some countries could
have laws forbidding ‘bribe and commission’ with regard to government or federal purchases,
but the same could be a prevalent and acceptable mode of business in some other countries.
Similarly, while the Sharia27 may prohibit those professing Islam from accepting ‘interest’ on
financial deposits, this remains a common financial practice in other parts of the world.

There are numerous such examples to show that ethical and moral standards differ from
place to place, and that there are no definite criteria of right or wrong in those matters. We
should not dismiss the moral beliefs of other cultures simply because they do not match ours.
Increasing globalisation and free trade agreements have generated the possibility of potential
conflict between free trade practice and ethical standards. While free trade in theory need
not be anti-ethical in practice, at times, actual practice in the name of free trade conflicts
with national ethics in relation to labour standards, environmental impact and social welfare
among other issues. Thus, there is a need for regulation or self-regulation in international trade,
i.e., appropriate ‘regulations and controls’ in the respective countries to prevent any unethical
and dangerous social or financial consequences. Hence, in matters of trade and business in
this contemporary situation, there is an urgent need for a greater and transparent system of
coordination regarding the right and wrong between countries and trading partners with a

26
http://en.wikipedia.org/wiki/Moral_relativism, accessed on 21 August 2009 and 18 October 2011
27
The wide body of Islamic religious law the code of which is derived from the Koran and from the teachings and example
of Mohammed; sharia is only applicable to those who profess Islam; refer to http://en.wikipedia.org/wiki/Sharia, accessed on
20 November 2009
 Ethics in Business and Corporate Governance

view to minimise the risk of loss and damage to interest. In the absence of such a transparent
and integrated system, it is better to follow the old adage: ‘when in Rome, do as the Romans
do’; in other words, follow the moral standards prevalent in whatever society or country one
finds oneself.
Nonetheless, there are certain moral standards that members of any society must accept if that
society is to survive and prosper by interacting with each other in this era of global economy,
trade and IT-enabled businesses. Critics of ethical relativism argue that because different people
have different moral beliefs about some issues, it does not mean that those issues have no
‘objective truth’ or that all beliefs about those issues are equally acceptable. Philosophically,
when two groups have two different moral beliefs, both may have some ‘objective truth’ in
their views but one of them only would be acceptable as ethical. Thus, a disputed issue may
have a correct ‘ethical view’, any disagreement to which would only signal that some people
are less informed or enlightened than others. In other words, disagreement by itself does not
mean that truth does not exist for questionable issues. Truth does exist for all rightful actions with
morality of purpose, which must come from the morality of beliefs and its logical inclusiveness of the interests
of all involved. Therefore, interests and beliefs of our own may not have to always match with others in
other region, but what is needed for efficient international trade and business is moral amalgamation and
integration of practices keeping in view the interests of all parties but by abiding by the right ethical view.
To cite an example not so long ago, the British clothes retailer, Primark28, sacked three Indian
suppliers who were subcontracting labour to child workers. While most developed countries
as well as India prohibit the use or employment of child labour for commercial gains, this is a
prevalent practice in most developing countries including India, in view of economic situation
of the poor people and children. In the latter society, many may try to morally justify child
labour from the point of view of survival and alleviation of poverty. Despite the economic
situation of the poor in India or the compulsion of their circumstances, engagement of child
labour cannot be ethically justified as it is tantamount to exploitation instead of protection.
In other words, there exists a correct ‘ethical view’ that exploitation of a situation cannot be
ethically justified, though there could be disagreement due to a local (region-specific) work
culture. Professionals directing and conducting international business have to be sensitive to
the local culture and ethical norms, but cannot violate the correct ethical view. Primark has
been just in banning the Indian suppliers, but as reported by the BBC (British Broadcasting
Corporation), Primark did not act on their own good sense; they were forced to act following
an exposé of their business operations. This type of business practice (if proved correct) goes
against both professional ethics and business ethics in general. Ethical issues in the emerging
field of international trade practices are becoming increasingly critical for the growth of the
world economy. Issues pertaining to emerging international business ethics have become so
critical that the present trend of offloading jobs in the low-wage developing countries by the
high-wage developed countries is also being questioned by many with regard to its ethical
appropriateness.

28
http://www.iccle.org/newsletter08/Primark-Special-July-2008.php, Hidden Face of Primark Fashion, Dan McDougal, The Observer,
22 June 2008, accessed on 17 August 2009 and 18 October 2011
 Ethical Issues of Some Contemporary Topics and Technological Developments

Therefore, international business practices have to be regulated and controlled with a

transparency of purpose that protects the interests of all involved.This is cardinal in international
trade and business, even in the present era of free-market economy. The recent US financial
meltdown that affected global financial systems and trade, is being attributed by experts as
‘regulatory and supervisory failure’ to curb ‘market indiscipline’; the latter points at the
violation of ethical conducts and standards that should have been maintained in such core and
critical international business practices governing financial and stock markets of the world. In
an analysis of the present cause and effect of the world financial crises, Prime Ministers and
Heads of States of ASEM (Asia and European Meet) in their meeting at Beijing on 24 October,
2008, recognised ‘the need to improve the supervision and regulation of all financial sectors,
in particular their accountability’. ‘Regulation and supervision’ generally come under the legal
format of administration, but ‘accountability’ is more laced with ethics than legality, where the
‘voice of ethics’ is quite loud.
International business faces a variety of complex situations, making it necessary for businesses
to consider multi-variant environment while doing business. Added to this complexity is the
‘Internet-based face-less marketing’ where buyers and sellers operate from distant places without
having to face each other. In such circumstances, owning up ethics and legality of a deal is
often questionable. International trade and business can be grouped into: purely commercial
trades (like export and import), manufacturing and services, financial and banking, stocks and
investment, off-shore establishments—like the BPOs, and direct marketing through webs.These
companies, who are operating in different countries, are known as ‘multinationals’, and their
operations are driven exclusively by the profit motive. Any barrier to making better profits than
elsewhere, often make them shift investments, operations and other activities to another part of
the world that offers better opportunity. This syndrome is quite common in financial and stock
market investments, where monies are moved with ease, but the practice is also true for other
sectors of international trade. Thus, these companies or operations are not necessarily bound
by the social responsibility and ethical principles of the country in which they operate. This
situation introduces a condition called ‘ethical dilemmas’ in international business, due to which
some ethical obligations may remain unfulfilled and cause sufferings or loss of the other party
in the trade or business.The same company, or a purely national business in India, cannot dither
from its ethical responsibility under the same situation in the country of its origin, because,
in such a situation, the laws and ethics of that country apply in governance and compliance.
Therefore, these multinationals can freely move when the going is not good without completely
fulfilling the normal corporate obligations that a national company will have to comply with.
For example, the US multinational Union Carbide simply shut down the Indian business in the
aftermath of 1984 Bhopal Gas Leak disaster that left several thousands of people dead or blind
—due to leakage of deadly gas from their plant in Bhopal—without settling the compensation
and welfare measures, which are still largely pending. Thus, the financial and stock markets are
not the only international business operations that have global repercussions for their actions; all
international businesses are open to such cascading effects. Recent slowdown of export-import
trade in countries like India and China due to the financial crises in the US owing to the
 Ethics in Business and Corporate Governance

subprime crises and the consequent global meltdown of stock markets, is an example of how
countries, in an interdependent global economy, influence the performance of each other.
In the present global scenario, many large manufacturing houses are becoming multinationals
through mergers and acquisitions (M&As) or setting up their offices offshore as well.Very large
in size and operating in different countries, these MNCs draw capital, raw material, and human
resources from wherever they are available cheap and economical; set up production or service
facilities and market them in whichever countries that offer them a cost-advantage or the
right scale of operations. Although operating profit is the prime mover for such operations,
successfully operating a business in a different country demands cultural, ethical and legal
integration with that of the parent as well as subsidiary companies. Indian companies like Tata
Steel, Tata Motors, Tata Consultancy, Infosys, Wipro, Hindustan Unilever, India Hotels, etc., are
some such multinationals with a global presence, which have had to work through cultural and
ethical integration of business processes, people and operations in the countries they operate.
This is the difficult part of an international business, where ethical clarity and transparency is a
key factor for success. For example, it is now recognised that much of the success in profitably
running the Anglo-Dutch Steel giant Corus—acquired by Tata Steel of India—will depend on
ethical and (work) cultural integration of management, technology and processes, and people
in the new-formed entity.This is the challenge in present-day international business, where the
scale of success is not merely dependent on financial strength, but also on the ability to integrate
into a new work and ethical culture.
Tata Steel’s commitment to meet the pension fund obligations of former Corus employees
is a measure towards the same. The key to this success is to identify and appropriately deal
with the ‘ethical dilemmas’. In fact, foreign MNCs operating in India’s manufacturing, service,
banking, financial and BPO sectors—e.g. General Electric, IBM, Microsoft, Motorola, General
Motors, Toyota, etc.—also face such ethical dilemmas. Operating in more than one country
poses ethical dilemmas, which businesses operating in a single nation do not face e.g. the rules
of law or ethics of the governing nation. For example, Indian employees of IT companies like
the TCS, Infosys, etc. who are operating in the US may not be bound by the US rules for trade
union or for fair wages and equal opportunity; similarly, the employees of a BPO firm in India,
operated by an US or UK company, may be unable to approach an Indian Labour Court for
dispute resolution. However, in reality, multinational businesses are often confronted with the
dilemma of choosing the economic needs and interests of their business, on the one hand, and
the local needs and interests of their host country on the other. And, in case of such a dilemma,
companies will do better to protect the mutual interests by following the dictates of moral and
ethical standards as per the beliefs of the host country. Failing this approach, the operations
of many businesses have faced hostile environments in some parts of the world, especially in
developing economies.
Issues related to international business and trade in the global economic agenda may include:
wages and compensation, transfer of assets and technology, quality of goods, foods and services,
environment and waste management, creation of unfavourable trade balances by not adhering
to export-import norms, trade manipulations and transfer of funds, swaps between different tax
regimes, etc. The chain could be endless and extend to all conceivable areas of operations and
 Ethical Issues of Some Contemporary Topics and Technological Developments

opportunities. If these businesses are solely driven by need, greed and profit, there will be total
chaos and lack of confidence in global trade. There must be international rules, regulations,
controls and ethical standards to guide and regulate the market for the benefits of trading
partners, countries and their people. While international codes of business practices already
exist in areas like foods and chemicals, some countries are also establishing such codes in other
areas to bring about order and discipline for sustained business. Yet, for issues pertaining to
child labour for cheap production, dumping of harmful wastes in others’ territories, export
and usage of banned and harmful chemicals, manipulation of capital market for excess profit,
‘hawala transactions’ of money across borders, etc. are very rampant. Laws of the lands engaged
in common trade have not been effective to stop such practices completely. Hence, a consensus
attempt by invoking the ‘rules of ethics’ and ‘responsible care’ are being promoted by different agencies to
minimise the damages. Different agencies of the United Nations (e.g., UNIDO, WHO, ILO and
OECD)29 and ISO (International Standards Organisation) are active in codifying the practices
for fairness of trade and control of consequential damages, which are being adopted by trading
nations. Trades are being further regulated by special international agreements like GATT30—
an agreement on technical barriers to regulate international trade, and the Doha Declaration—
an instrument for tariff and trade controls (refer to Chapter 5, footnote 7). Though there could
be some abuse of such agreements, their purpose is to regulate and control harmful trades from
unregulated markets in international business.
As a result, more and more countries are installing proper regulatory mechanisms and trying
to join international business by complying with various codes of conduct and agreement.
These agreements are not ‘frozen documents’, they are periodically discussed between member
countries for modifications and new clauses in order to promote and facilitate international
trade. In India, the early-90s movement wherein industries sought ‘ISO-9000 Standards31,
certification to facilitate international trade is an example of such conformance. Designed
by Geneva-based International Organisation for Standardisation these standards assure global
customers and traders about the quality and manufacturing standards of the goods being traded
by a nation or manufacturer. Despite all such attempts to formalise and standardise, unethical
businesses commonly occur between countries for the sake of profits, and often involve banned
items or items of sub-standard quality, e.g., arms supply, raw and processed food stuff, apparel,
children’s toys, banned chemicals, harmful waste dumps, etc. One of the major objectives of
various laws, regulations and codes of conduct in international trade is to protect consumer
health, protect well-being of children, ensure fair practices in international trade, protect
the environment, and facilitate trade and business through elaboration of legal and ethical
requirements and harmonisation. However, for all practical purposes, and keeping in view the
presence of ‘ethical relativism’ in international business, it is necessary to achieve a balance between
29
The United Nations Industrial Development Organisation (UNIDO),World Health Organisation (WHO), International Labour
Organisation (ILO) and the Organisation for Economic Cooperation and Development
30
The General Agreement on Tariffs and Trade (GATT)
31
ISO, the world’s largest developer and publisher of International Standards, is a network of the national standards institutes of 162
countries, one member per country, with a Central Secretariat in Geneva, Switzerland, that coordinates the system. Thus, when
the large majority of products or services in a particular business or industry sector conform to International Standards, a state of
industry-wide standardisation exists. Refer to http://www.iso.org/iso/home.htm, accessed on 20 November 2009
 Ethics in Business and Corporate Governance

legitimate ethical issues and minimising trade barriers. Important steps, currently in vogue
when it comes to minimising barriers in international trade are: regulation about classification,
packaging and labelling of products, and provision of mandatory declaration about detailed
‘product information and constituents’ on the bills, brochures, packets or containers of the
products for consumer information, awareness and safety. This system is especially applied and
monitored in products, items and consumables for infants, children and other vulnerable groups
(e.g., medicine for AIDS and other life-saving drugs) to ensure ethical international trade and
minimise damage to society.
Thus far in the chapter, discussions involving different facets of international business and
trade bring out the importance, applicability and relevance of ethics in this field of business
as much as in national businesses. Companies with non-transparent and unethical business
practices have witnessed rather high mortality throughout the world; in India, most companies
of the pre-World-war-II era have become extinct or insignificant, except for a few private
business houses like Tata and Birla. Notwithstanding this, the issue of ethics seldom arises in
discussions between trading partners or governments, where talks and agreements generally
revolve around policy, economic security, commercial terms, applicability of specific laws
and tariffs, etc. Assurances about ethics, governance and environment are hardly discussed in
such trade pacts or business agreements; and, even if they are, it is from the ‘utilitarian ethical’
perspective and from the viewpoint of ‘limited liability’ principles. Often the rule of utilitarian
principle of ‘greatest good for the greatest number of people’ is ignored in preference to
‘good can outweigh the bad’ principle, which favours unequal partnership in such trades. This
approach is particularly noticed in international environment and waste management, finance
and investment management, technology transfer, and in framing economic cooperation
agreements between developed economies and developing economy. Such trade practices or
agreements tend to lead to unethical risks that often jeopardise the interests of a large number
of unsuspecting people. Recent downturn of global trade due to unethical risks in financial
contracts covered by huge global financial houses, which had largely gone unregulated by the
concerned governments, is an example of this bad trading practice.
Topics discussed in this chapter are only a few of the contemporary ethical issues prevalent
in the world today; confronting the society are many more such issues arising from incessant
greed in this materialistic world, self-serving attitude of people, political agenda of the states
and nations, and complexities of economic order and systems in the fiercely competitive world.
Moreover, reports of social and financial fraud—perhaps old in nature but contemporary in
terms of situation and circumstances—are becoming more and more common. Yet, the most
serious areas of contemporary ethics that can gravely endanger the well-being of the earth and
society are in the filed of environment ethics, bio-ethics, and computer ethics, for which we
need to wake up and take a call. Nanotechnology, another area holding great promise for future
well-being, is also subject to abuse and endangering the world, if we do not tread the path of
development cautiously. In fact, all modern scientific and technological innovations are laced
with the dual possibility of ‘boon and bane’ if the applicators of the results are not imbibed with
the principles of ethics and thoughts of social responsibility. The world has opened up to great
possibilities with the advances of modern science and technology, along with vast experiences
 Ethical Issues of Some Contemporary Topics and Technological Developments

of socio-economic understanding for human welfare and growth; yet much will depend on the
honesty of purpose and ethics of application.

Summary
1. The chapter provides an overview of contemporary ethical issues that are plaguing societies
and nations, and attempts to identify the sources of conflict and ethical dispute. It also discusses
ethical approach with regard to some of the contemporary issues like computer and information
technology, bio-engineered products, protection of intellectual property rights, international
business and trade in the context of present global economic order, etc.
2. Starting with a few examples of ethical cases concerning the clinical trials of pharmaceutical
and bio-technological products, farming of bio-engineered cotton variety, and the dumping of
toxic waste into seas, this chapter goes on to describe how various ethical issues are born of the
political environment and conflict of interests. Here, the purpose of these discussions is neither
to denounce modernism and industrialisation of society and nations, nor to criticise political and
present economic systems; the purpose has been to highlight the need to blend ethical necessity
and ethics of care and protection in advancing and administering IT related areas of progress.
3. The chapter discusses ethical issues involved in specific areas like computer and IT—namely
ethics; ethics of protecting intellectual properties; ethics of international business and trade in
the context of modern-day economic and world order; and ethics of genetically engineered
products and species. In the process of these discussions, some aspects of social ethics in relation
to land and environment rights have been touched upon, especially from the viewpoint of
politics and conflict of interest, which play an influential role in contemporary society when
it comes to providing or protecting the rights of individuals. The chapter highlights through
examples how conflicts arising from partisan attitude and disregard for ethics are vitiating social
and economic order, creating greater differences between rich and poor nations, and, thus, giving
rise to many contemporary social and ethical issues.
4. Recent technological advances—namely computer and information technology and bio-
engineering and genetic engineering—have been the other sources of ethical disputes. While
these advances are changing the way people live and work, simultaneously they are also
giving rise to many ethical questions. IT has now touched each one of us, and, with the rapid
growth of computer technology, the world has witnessed an ‘information revolution’ of the
order that very few had visualised in the 70s and 80s. This has necessitated the development of
‘information ethics’ that include computer ethics as well. Information ethics provide a critical
framework within which to consider moral issues and responsibility for: (i) concerning privacy
of information; (ii) IT behaviour in the new information environment; (iii) problems arising
from the creation and management of ‘information cycle’ that gives rise to collection, recording,
processing, networking and distribution of data and information; and (iv) duty to protect and
preserve the rights of computer users, i.e., consumers. The purpose of information ethics is to
establish an ethical foundation that promotes fair, equitable and responsible information practices
by examining issues related to ownership, access, privacy, security, accountability, and society.
5. Modern methods to protect intellectual property (IP) are also giving rise to many ethical
questions. If intellectual property is protected by ownership rights, then how does the society
benefit from its effect? Why should the concept of social benefit not given priority over the
 Ethics in Business and Corporate Governance

rights of individual benefit (or economic benefit to few) over commercialisation? It has been
highlighted that IP is an abstract and non-physical property created by intellectual applications
of minds and knowledge for the benefit of society and mankind. Usage of IP without permission
or permit is considered unethical, because it is infringing into the rights of another person or an
organisation who has earned that through special efforts and skills.
6. It is generally held that such infringement may hamper the growth of innovation, discovery, art,
science and knowledge creation—all of which are essential for the well-being and progress of
modern society and the world. Hence, protection is necessary for the well-being and progress of
modern society and the world. The chapter discusses these issues in some details with regard to
the utilitarian and the socialistic approaches to ethics.
7. International business may not be a new phenomenon, but its operation in the present global
context of uni-polar economic environment, politically aligned trade blocks, and free-market
conditions has brought in some ethical issues affecting the developing world as has become
evident from the global financial meltdown of 2008–09.
8. Activities of corporate giants and MNCs appear to be suffering from ‘ethical relativism’, exposing
how their transactions are not exactly moral or transparent in the country of operation.This is due
to the un-coordinated weak links born of different ‘ethical beliefs’ of the different participating
economy. As per ethical relativism, ethical beliefs and actions in one zone of economy—that may
have moral sanction of the majority of people of that region—may not necessarily hold good
for another region that has a different social culture, economic background and beliefs, i.e., there
could be relative difference in the moral actions and judgement amongst the countries.
9. The ethics of international business have been briefly discussed in this context as well as from
the viewpoint of the complex chain of trade regulations and trade blocks. The necessity of
international rules, regulations, controls and ethical standards has been pointed out as necessary
to guide and regulate the markets for the benefit of trading partners, countries and their people.
Also discussed is the situation that may arise due to ‘ethical dilemmas’ in international business
that are mostly born of the feeling that MNCs are not necessarily bound by the social and ethical
responsibilities of the countries they operate in.
10. The chapter also touches upon the ethical issues of genetically engineered products and species.
Ethics concerning genetically engineered and modified products are giving rise to heated
debates owing to how the (product) consequences can penetrate deep into the way human being
will live in future. Advancement in biotechnology is riddled with hosts of ethical issues; this
technology may have the potential to create more ‘good’ than ‘bad’ for this world, yet scientists
advocate extreme caution in controlling and regulating the propagation of this area of genetic
engineering, especially when dealing with animal and human cloning. The subject thus brings
to fore the aspect of doing what is ethical by choosing ‘good from the bad’.
11. The chapter concludes that most new technologies—such as IT or genetic engineering—run
the risk of being unaware of their consequences which can neither be predicted nor controlled.
And, most ethical issues concerning these technologies crop up from this uncertainty vis-à-vis
future consequences or process infiltrations. Therefore, in genetically engineering a product,
questions arise whether the risks are predictable, reversible or controllable; and if the benefits
are worth the risks. Ethics demand that people who bear such risks should be made aware of
the potential risks and danger, and should be adequately compensated for the loss in case of
‘damage’. Ethics do not differentiate between rich and poor in the society or between rich and
poor nations. Therefore, consequences of such risky actions would have to be ‘fairly’ distributed
among various parts of the society, nations, generations and other stakeholders.
 Ethical Issues of Some Contemporary Topics and Technological Developments

Key Words and Concepts

Clinical trials, drug laws, protocols of clinical trials, poisonous stew, bacteria, biotechnical products,
Bt cotton, Bt corn, ‘intellectual property’, socio-economic demography, petro-fuel, global warming,
radioactive wastes, computer ethics, information ethics, ethics of Internet protocol, contemporary ethical
issues, empowerment of people, corporate social responsibility, holistic view, special economic zone, rule
of ethics, investor ethics, genetic engineering, DNA, hybrid, ecological ethics, ethical justice, Monsanto,
genetically modified products, stem cell research, patent infringement, trademark infringement, copyright
infringement, ethical relativism, right ethical view, ethical integration, hawala transaction, utilitarian
ethics, social view of ethics.

Exercises
Check Your Progress
1. Contemporary ethical issues are related to ___________
2. Empowerment of people ___________
3. The lack of ethical consideration and integration of social and economic development as an integral part
of industrial development has led to ___________
4. The ‘corporate social responsibility’ (CSR) clause in a business management strategy aims to address
___________
5. The frequent troubles experienced by greenfield projects in India are due to ___________
6. Computer ethics can be described as the branch of ethics ___________
7. Professional codes for computer ethics should offer a basis to make ___________
8. Ethics demand that people ___________
9. Intellectual property (IP) is ___________
10. The US meltdown of financial markets in 2008 and the global chain-effect is perhaps the effect of ‘ethical
relativism’ ___________

Review Questions
1. Name few important areas of recent development that are raising ethical questions. What are the ethical
issues in each of these areas as per your understanding?
2. Many social scientists describe the global financial meltdown of 2008–09 as a result of the violation of
ethics of care for ‘investors’ – a contemporary issue of ‘investor ethics’ in the contemporary business system.
Do you agree to this view? Justify your answer.
3. Describe the scope of ‘information ethics’.Who pioneered the development of computer ethics and when?
Give a brief overview of this approach to ethical issues. How is it different from the view of Donald
Gotterbarn?
4. What do you understand by ‘intellectual property’? Why is the protection of IP rights (IPR) gaining
importance in the present economic world? What are the ethical issues involved in IPR violation?
5. Discuss the relative merits of two possible approaches to governing the ethical issues of IPR and IPR
violation. Which one would you prefer and why?
 Ethics in Business and Corporate Governance

6. Give few reasons about why modern international business does get entangled with several ethical issues.
What do you understand by ‘ethical relativism’ and ‘ethical dilemmas’? Illustrate your answer.
7. Why are the ethics involved in genetically engineered and modified products giving rise to heated debates?
List a few damages these products can inflict on the society.
8. Scientists opine that ethics and ethical responsibility are standing in the way of further discovery and
experimentation with biotechnology. ‘Ethics forbid any passing of risks to consumers unless those risks are
taken willingly with complete information and knowledge by consumers’. Critically analyse this stand and
offer your suggestions to overcome inherent difficulties without compromising with ethics.

Further/Suggested Reading
1. Computer Ethics (3rd ed.), Deborah Johnson, Pearson Education, Upper Saddle River, 2003
2. Computer and Information Ethics (Revised ed.), Terrell Bynum (Ed.), Stanford Encyclopaedia of Philosophy,
The Metaphysics Research Laboratory, Center for the Study of Language and Information, Stanford, Oct.
2008
3. Ethics of Genetic Engineering, Robert M. Berry, Routledge, 2007
4. Ethics of Genetic Engineering, Siedler Maurya, Greenhaven, 2004
5. Ethics and Law of Intellectual Property: Current Problems in Politics, Science and Technology, Christian Lenk et al.,
Ashgate Publishing, 2007
6. International Trade and Business: Law, Policy and Ethics (2nd ed.), Gabriel Moens and Peter Gillies, Routledge
Cavandish, 2006
 CHAPTER 9
Corporate Governance:
Principles and Practices
To describe the importance of good corporate governance in the
sustainability of business
To define corporate governance and identify its role and scope
To discuss the main principles of corporate governance, and estab-
Chapter Objectives

lish its objectives, means and methods

To describe different codes, standards and principles of corporate
governance for practice as prevalent in different parts of the busi-
ness world
To highlight the purpose and utility of different corporate governance
models, and describe the salient features of some of the working
models
To discuss the ‘Social view of corporate governance’—the Corporate
Social Responsibility (CSR)
To discuss the aim, means and methods of best practice in corporate
governance.
 Ethics in Business and Corporate Governance

INTRODUCTION
ance
ern ce
Gov ernan
ate
por Gov nance
Cor porate over ance
nd
s a d Cor orate G overn nce
nes
usi ess an Corp ate G erna
in B usin and por Gov
ics B ness nd Cor orate
Eth ics in usi sa orp
Eth s in B usines and C
ic B s
Eth ics in usines
Eth s in B
ic
Eth

1
‘The Real Reasons Enron Failed—Lessons for Directors’, Journal of Applied Corporate Finance, Vol. 18, No. 2, pp. 116–119,
Spring 2006; also refer to: http://www.allbusiness.com/corporate-governance/4070029-1.html, accessed on 21 October 2011
2
http://www.livemint.com/2009/01/12225114/UK-investment-bank-Noble-sees.html, accessed on 22 August 2009 and 21 October
2011
 Ethics in Business and Corporate Governance

Case I views the infamous Enron scandal differently, pointing out that the company ‘collapsed
chiefly because its managers were paid to aim at the wrong financial measures, and consequently,
its internal system of financial controls was a shambles’. Bennett Stewart argues that, more
often than not, corporate governance failure creates serious troubles, such as faulty organisation
design, hazy business goals and faulty business practices—leading to the collapse of industrial
giants. In a desperate attempt to keep abreast of aggressive earnings targets, Enron’s managers
became indiscriminate in committing the firm’s capital by deceptive practices and its internal
system of financial controls—which is a critical corporate governance function—collapsed.
This finding collaborates with the very cause of the recent trouble for US financial giants
(like Goldman Sachs and Lehman Brothers among others) in 20083, which lead to the global
financial meltdown.Though the sub-prime lending crises has been cited as the primary cause of
the collapse, it is widely believed that managers in those financial institutions were encouraged
and paid to aim at extremely risky financial targets, for which they adopted deceptive practices
and wrong financial measures—leaving the companies’ financial situation in a shambles. These
are clear cases of bad corporate governance where no respect was shown to the principles of governance and
care for investors.
Case II highlights the urgent need for ethics in corporate governance in India to curb
the widespread accounting lapses in the country. The report implies that many companies in
India are operating on the basis of ‘pump and dump’ and ‘blab and grab’ in loosely regulated
business burses, and, thereby, putting thousands of business investors and public at great risk.The
Satyam scandal, according to the Noble Group, is one such case among many. If these unethical
corporate governance practices go unchecked in Indian business, there could be many more
Satyam-like occurrences. Such a business environment does not serve the purpose of business;
it is highly risky and puts the country’s economy and well-being in jeopardy.The Noble Group
was ‘disappointed but not surprised’ by the Satyam development. Although the Group’s report
was prepared for Indian businesses in particular, it seems to be largely true for today’s business
world—as is apparent from the collapse of many large businesses globally, in recent times. The
report not only points a finger at ethically errant companies, but also points out what is ethically
ailing these companies as regards corporate governance.
The two cases have been presented to drive home the point that the root of all corporate
trouble lies in the problem of corporate governance, concerning ethics, morality and sometimes
legality of governance. The history of corporate performances has proved that the continued
success of a business depends on the quality of its corporate governance, which, in turn, depends
on the following factors:
1. How ethical is the purpose and conduct of business?
2. How customers, employees and other stakeholders are integrated into the company’s
goals?
3. How inclusive are the corporate goals with respect to social demands?

3
http://en.wikipedia.org/wiki/Goldman_Sachs, accessed on 22 October 2011; http://en.wikipedia.org/wiki/Financial_crisis and http://
en.wikipedia.org/wiki/Subprime_mortgage_crisis, accessed on 21 October 2011
 Corporate Governance: Principles and Practices

4. How are the companies structured and the business processes designed?
5. How ethical are the goals?
Goals must be honest, inclusive of all stakeholders and the society where it operates, and
ethically right (refer the Enron case which is reported to have failed more for wrong and
unethical corporate goals than any other reason). There may be situations of conflicts about
what is ethically right and conflicting views of the situation; there could be a debate about the
business model and the fairness of market approach; there could be a situation where—despite
the honest intention put up by top executives—the business could be in great difficulty due to
faulty goals and targets; but good corporate governance should be able to put a check on these
factors and carry the business forward to long-term success. As such, the corporate governance
system is not only about compliance with legal systems and company laws, but also about:
• Ethicality and utility of the systems and resources being employed by the company;
• The means and measures adopted in conducting the business;
• The quality and value system of the people of the company who run the business; and
• The sensitivity of the board or management to the ‘duty of care’ for its stakeholders and
the society it is supposed to serve.
Corporate governance is not about self-serving gains and profits for a few in the organisation,
but about taking a ‘holistic view’ of the growth and sustainability of the business where the
well-being of all stakeholders in the business—including such external forces as the customers,
clients, governments, society, locality and environment—is integrated. Corporate governance
is, thus, a multifaceted as well as multidimensional subject; it should ideally span several
objectives and issues which can influence a company’s business, and must maintain transparency
in managing and maintaining operational efficiency that includes legal mandatory disclosure
norms and transparency.To accomplish these holistic multidimensional tasks and objectives, this
chapter will, therefore, briefly discuss the principles, methods and measures of good corporate
governance in business enterprises in terms of best practices. The purpose, here, is to introduce
the concept of corporate governance and principles of best practice, and not the entire subject
of corporate governance (for the same, readers may refer to specialised books—some of which
have been listed at the end of this chapter).

9.1 CORPORATE GOVERNANCE: ROLE AND SCOPE

Corporate governance broadly refers to the rules, processes or laws by which businesses are
operated, regulated and controlled. The term can refer to internal factors defined by the
management, stockholders or the constitution of a corporation, as well as to external forces
such as consumer groups, clients, society, environment and government regulations. This
definition implies that corporate governance should provide a structure that works for the
benefit of everyone concerned by ensuring that the enterprise adheres to accepted ethical
standards and best practices, as well as to formal laws and regulations. An important theme of
modern corporate governance is to ensure the accountability of certain key individuals in the
organisation through a mechanism of ‘code of practice’ and by-laws. Simultaneously, today’s
 Ethics in Business and Corporate Governance

corporate governance places a strong emphasis on both economic efficiency and safeguarding
the welfare of shareholders. These functions are, by and large, prescribed by the Companies
Law, governing regulations and codes of practices. However, both laws and codes concerning
corporate governance consider shareholders’ view and interests a priority concern. As such,
at least theoretically, the process of corporate governance in an organisation flows from the
shareholders’ discretions. A broadly accepted view of the corporate governance function
vis-à-vis the organisation is shown in Figure 9.1. Corporate governance is, thus, structured
and guided in an organisation by the shareholders, the board of directors and the independent
auditors of the organisation’s accounts and functions.

Shareholders

Corporate
governance

Board of directors Auditors

Figure 9.1 A Typical Corporate Governance Scheme in an Organisation

The process of corporate governance has evolved with the beginning of corporatisation of
business since the 19th century. Initially, corporate laws and rules for business administration in a
state or country formed the basis of corporate governance, which was not necessarily transparent
or unanimous. Gradually, with the rise of large trading houses and corporations, especially in the
US, and with increasing flow of public money to various corporate entities, rights of individual
owners and shareholders became an increasingly important issue in corporate governance. In
the aftermath of famous Wall Street crash of 1929, the concern of shareholders over stock losses
had periodically raised calls for reforms in corporate governance. These debates over the role
of modern corporations led to several views on the purpose and governance4 of corporate
and private property. Finally, in 1983, Eugene Fama and Michael Jensen5 firmly established the
‘agency theory’ to explain the purpose and process of corporate governance. According to the
theory, a firm is seen as a series of contracts and the responsibility of the firm is governed by
the ‘principal-agent’ relationship. This is the beginning of the modern corporate governance
approach where shareholders are recognised as the ‘owner’ (principal) of the company and the
board is the ‘agent’ responsible to serve the rightful purpose of the business including economic
efficiency and protecting shareholders’ interests.

4
http://en.wikipedia.org/wiki/Corporate_governance, accessed on 25 August 2009 and 21 October 2011
5
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=94034, accessed on 31 August 2009
 Corporate Governance: Principles and Practices

Attention to corporate governance increased in the recent past, following corporate upheavals
of the early 1990s in the US, the East Asian financial crisis of 19976, and the huge bankruptcies
and financial scandals of early 2000s in the US, for example, Enron and MCI Inc (formerly
WorldCom). In 2002, the US federal government passed the Sarbanes-Oxley Act7, intending
to restore public confidence in corporate governance by improving the accuracy and reliability
of financial disclosures in the background of high-profile corporate scandals like the Enron and
WorldCom. The enactment saw a new, quasi-public agency, the Public Company Accounting
Oversight Board (PCAOB) to oversee, regulate, inspect and discipline accounting firms in their
roles as auditors of public companies. In addition, it covered issues such as auditor independence,
corporate governance, internal control assessment, and enhanced financial disclosure. Despite
such laws and protective measures, neither the financial crises of 2008 in the US and the UK,
nor the consequent trouble in some of the world’s leading companies could be averted8. These
corporate scandals (including the 2009 Satyam case in India) have shocked the business world
and governments alike, and have been the reason of many corporate debates over governance
practice in recent times. The corporate world has no doubt learned many valuable lessons from
these scandals; corporate governance has, since the financial meltdown of 2008, been faced with
the challenge of turning around the troubled companies and rebuilding their ‘brand image’ by
adopting better models of governance. The National Conference on Corporate Governance9,
held recently at the Indian Institute of Management Calcutta (IIMC) Centre for Corporate
Governance was one such attempt to review and reinforce the present models:

The conference theme, ‘Corporate Governance at Cross Roads’, appealed to academics, policy
makers and business/industry professionals: ‘Corporate governance has evolved significantly
during the last two decades and has had a tremendous impact on all countries and business
organisations. However, there is a widespread feeling that the corporate governance model
adopted by most countries has failed to deliver the desired results. The financial crisis all over
the globe and the Satyam episode at home has revealed the weakness of the present corporate
governance models. This is the right time to review the present models and to generate ideas
on how to make the model more robust.’

In the post-2008 scenario, when many businesses suffered on account of ‘adventurous

governance’, the need of the hour is to revisit the governance model and make it more robust,
purposeful and ethically tenable. This model of corporate governance should ensure that
managers do indeed employ the principles of value-based management that assure protection of
the interests of all stakeholders, maximisation of wealth for the company, and creation of wealth
and value for the society. Perhaps, with economic ties between nations being closer than ever
before, the global business environment has the opportunity to advance the scope of corporate
governance from ‘national relativism’ to ‘global relativism’ with regard to the creation of wealth
6
http://en.wikipedia.org/wiki/1997_Asian_Financial_Crisis, accessed on 29 August 2009 and 21 October 2011
7
http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act, accessed on 21 October 2011
8
http://en.wikipedia.org/wiki/Goldman_Sachs, accessed on 22 October 2011; http://en.wikipedia.org/wiki/Financial_crisis and http://
en.wikipedia.org/wiki/Subprime_mortgage_crisis, accessed on 21 October 2011
9
http://www.iimcal.ac.in/National_conference_2009_Brochure.doc, accessed on 24 August 2009
 Ethics in Business and Corporate Governance

and environment for the global community. Given this backdrop of interdependence of nations
for economic and social growth, models and codes of corporate governance should be able to
globally unify the standards of business operations intertwined with ethics and care for investors
and other stakeholders, and respect for the local culture and the environment.
Although it is a critical issue, corporate governance largely remains an ambiguous and often
misunderstood term, barring some feeble attempts from various quarters. Many tend to equate
it with an administrative technique, but corporate governance is a much broader concept; it
includes a fair, ethical, efficient and transparent management that strives to accomplish certain
well-defined objectives—including social and environmental.The corporate governance system
is necessary not only as an effective tool for the company’s ‘command and control’ over the
business and regulatory compliance, but also for promoting business, implementing economic
growth plans, and the well-being of society. In this context, let us consider the view of business
author Gabrielle O’Donovan10:

In her article, ‘A Board Culture of Corporate Governance’, O’Donovan defines corporate

governance as ‘an internal system encompassing policies, processes and people, which serves
the needs of shareholders and other stakeholders, by directing and controlling management
activities with good business savvy, objectivity and integrity. Sound corporate governance is
reliant on external marketplace commitment and legislation, plus a healthy board culture
which safeguards policies and processes’.

Thus, the functional roles of corporate governance—as appeared from our discussion so
far—are:
1. Establishing a good and ethical sense of purpose of the business;
2. Structuring the business processes with well-defined objectives to serve shareholders
and other stakeholders;
3. Building a spirit of inclusive growth in the society and within the environment of
operations;
4. Building a partnership with all stakeholders—internal and external;
5. Thinking and acting in the bigger frame of global businesses;
6. Continually sensitising the organisation to global business changes, environment and
risks; and
7. Finally, always keeping to the right side of the law and environmental regulations.
Though corporate governance is said to be about the way companies are directed and
controlled, in today’s business environment it is more appropriately about innovation and
evolution of ways and means for growth within a socio-economic order, ethical framework,
and regulatory and legal bindings.There may be many paths of governance, but the chosen path
must be legally and ethically right, and should serve the interests of all the stakeholders and the
society at large.
10
‘A Board Culture of Corporate Governance’, Corporate Governance International Journal, Vol 6, Issue 3, 2003; Refer to http://
en.wikipedia.org/wiki/Corporate_governance, accessed on 25 August 2009, and http://www.articlesbase.com/accounting-articles/corporate-
governance-637944.html, accessed on 20 November 2009 and 21 October 2011
 Corporate Governance: Principles and Practices

Functionally, corporate governance should be concerned with the relationship and

responsibilities among the board, management, governments of the countries of operations,
shareholders, and other relevant stakeholders (employees, society, locality and environment).
Though originally the concept of corporate governance evolved to safeguard the interests
of shareholders and investors in the business, it matured to protecting the interests of all
stakeholders as a means for ensuring sustainable growth of the business. It is now generally
recognised that the business cannot survive only by working for investors; it has to work for
protecting the interests of other key stakeholders—like the customers, employees, society and the
government. Corporate governance has to establish a mutually beneficial relationship between
the corporate and its stakeholders though the interests of investors and shareholders might get
some preference due to value for the money and resources they provide for smooth functioning.
A good corporate governance system has to connect all its stakeholders in a mutually beneficial
relationship. The unifying force in these matrices of mutual relationship and responsibility is
the concern for ethics and the commitment to obey laws and regulations. Many may opine
that excessive regulatory control may shackle the process of corporate governance to become
a mere instrument in the hands of the management, but the fact remains that regulations are
necessary—even more so in view of the several big business collapses in recent times, wherein
both professionals and corporate executives have allegedly indulged in regulatory lapses. Hence,
more and more countries are re-examining the adequacy of their regulations to set right the
process and means of corporate governance. For this purpose, the codes and principles of
corporate governance are being re-examined and corporate governance structures are being
re-cast to prevent regulatory lapses.11
In effect, corporate governance is a system of structuring, operating and controlling a company
with a view to achieving long-term strategic goals to satisfy shareholders, creditors, employees,
customers and suppliers, and complying with the legal and regulatory requirements, apart from
meeting environmental and local community needs. No doubt, one of the most important roles
of corporate governance is to protect the interests of shareholders—who are, in effect, the true
financiers and owners of the company, but for the sake of good business, the system has also to
be structured and administered for serving the interests of other stakeholders. Unfortunately,
the history of corporate governance is dotted with failures arising from unethical business
practices on the one hand, and the failure of regulatory authorities to check such practices on
the other hand.12
The regulatory approach to corporate governance had become necessary due to the
overwhelming power exercised by a few individual entities who took unfair advantage of
the shareholding pattern of the common retail investors of their companies and manipulated
the company’s board decisions, actions, accounts and governance system with a view to reap
personal benefits. The story of corporate failures11—like Enron and Wal-Mart in the USA

11
http://www.investis.com/aml/financial/financial_news/financial_reports/2009/ar_2008/index_html/accountability/acc_corp_gov_cecgs.
html, and http://homepages.rpi.edu/~tealj2/corp23.pdf, accessed on 22 October 2011
12
http://www.forbes.com/2003/12/08/cx_1207bbcorporate.html and http://www.indianmba.com/Faculty_Column/FC974/fc974.html,
accessed on 22 October 2011
 Ethics in Business and Corporate Governance

and Satyam in India—are glaring evidences of how investors are being duped world over.
Not surprisingly, the developed economies are increasingly moving to strengthen shareholder
rights with new regulations that empower them in matters of direction and results of corporate
governance. Two significant examples in this direction would be the legislation drawn up by
CalPERS (California Public Employees’ Retirement System)13 in the USA, and the Companies
(Shareholders’ Rights) Regulations 200914 in the UK. In fact, in India, corporate governance had
long back recognised shareholders as the true owners of a company. Mr. N. Narayana Murthy,
chief mentor of Infosys Technologies Ltd., who headed the SEBI committee for modification
of clause 49 of the SEBI Act in 2002, described “corporate governance is about owners and
managers operating as the trustees on behalf of the shareholders—large or small”. This view
gets reflected in the following SEBI definition of corporate governance.

In keeping with the Gandhian principle of Trusteeship15 and the Directive Principles of the Indian
Constitution, SEBI defined corporate governance as the ‘acceptance by management of the inalienable
rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf
of the shareholders. It is about commitment to values, about ethical business conduct and about making
a distinction between personal and corporate funds in the management of a company’.
The SEBI report views corporate governance as a moral duty—stemming from the culture and mindset
of the management—and beyond the realm of law. The credibility offered by good corporate governance
procedures also helps maintain the confidence of investors – both foreign and domestic—to attract
more ‘patient’, long-term capital, and to reduce the cost of capital. This ultimately induces more stable
sources of financing.
(Source: http://www.sebi.gov.in/commreport/corpgov.pdf, para 1.1.7 of the SEBI Report, accessed on
4 January 2012.)

In addition to the role of corporate governance—established through cases and examples

cited thus far—as an internal system encompassing policies, processes and people, which serves
the needs of shareholders and other stakeholders, by directing and controlling management
activities with good business savvy, objectivity, accountability and integrity, it is the external
forces and factors that are also becoming increasingly important in modern business.The quality
of a company’s corporate governance, says O’Donovan (refer to footnote 10) ‘is determined by
the financial markets, legislation and other external market forces plus how policies and processes
are implemented and how people are led. External forces are, to a large extent, outside the
circle of control of any board. The internal environment is quite a different matter, and offers
companies the opportunity to differentiate from competitors through their board culture’. She
further observes, ‘To date, too much of corporate governance debate has centred on legislative
policy and regulations, to deter fraudulent activities and transparency policy, which misleads
executives to treat the symptoms and not the cause.’ In that, the role of corporate governance is
also to treat the cause, which often rests with the people who run the show. A glance over cases
like Satyam and Enron shows that it was individuals who had conducted unethical and illegal
13
http://www.calpers.ca.gov/index.jsp?bc=/about/leg-reg-statutes/legislation/home.xml, accessed on 25 August 2009
14
http://corporatelawandgovernance.blogspot.com/2009/07/uk-companies-shareholders-rights.html, accessed on 25 August 2009
15
http://www.financialexpress.com/news/form-and-substance-of-corporate-governance/79537/ and http://www.nfcgindia.org/library narayana-
murthy 2003.pdf, accessed on 20 November 2009
 Corporate Governance: Principles and Practices

acts in the name of the enterprise. Hence, an integral part of an effective corporate governance
system should include auditing of individual activities and providing regulatory and criminal
actions wherever necessary.
In other words, the role of good corporate governance is to: set right objectives; chart the
right processes of operations and process of governance; ensure ethics in the corporate objectives
and practice; develop right kind of people and talent in the organisation; inculcate the culture
of ethics amongst people; obey the rules, laws and regulations concerning the business; adopt
methods of measures and means to control and regulate within the rules and regulations; and
adhere to the environmental laws and regulatory principles. Corporate governance principles
and codes broadly deal with these issues in order to set a code of practices (or, a principled
approach to governance) to develop relationship and responsibility matrices among a company’s
board, its management, shareholders and other stakeholders on the one hand, and to provide
structures through which the company’s objectives should be set, and means of attaining those
objectives and monitoring of performances should be determined on the other. It is widely
believed that the presence of an effective corporate governance system, within a company and
across an economy as a whole, helps to strengthen the economy, create investor confidence, and
contribute to social well-being. It may appear from some earlier cases and reports that financial
regulations and protection of shareholders’ interests are the primary concerns of corporate
governance16, but it is being increasingly realised that ethical corporate governance is a key
element in improving the long-term economic efficiency and growth of a company and a
nation, as well as in enhancing the confidence of the investors and public in the institution of
business. Ethics of corporate functionaries and ethical filters of corporate actions act to win the
confidence of investors as well as other stakeholders associated with the business. Ethics help
in self-regulation of the system and guide the business to take the ‘responsible route to success’
with a moral purpose. A good ethical corporate governance system helps the organisation in
many ways—by helping to develop right strategies for long-term business objectives, building
corporate image and brand for attracting, motivating and retaining right talents and resources,
creating a secured and satisfying operating environment for improved performance, and
managing and mitigating risks arising from socio-political sources.

In her latest book, Supercorp: How Vanguard Companies Create Innovation, Profits, Growth
and Social Good, Harvard professor Rosabeth Moss Kanter describes corporate governance
as ‘taking the responsible route to success’, but her vision of corporate governance is leading
the business to success with a moral purpose. She describes that ‘vanguard companies’, which
are ‘ahead of the pack and potentially the wave of the future’, are the companies that aspire to
be ‘big but human, efficient but innovative, global but concerned about local communities’.
She adds, ‘The best have business prowess and clout with partners and governments, but try
to use their power and influence to develop solutions to problems the people care about. The
leaders of a vanguard company espouse positive values and encourage their employees to
embrace and act on them’. Source: Book Review17, The Financial Times, New York

16
http://business.gov.in/outerwin.htm?id=http://www.ecgi.org/codes/documents/cadbury.pdf, accessed on 26 August 2009
17
http://www.ft.com/cms/s/0/c6b143b2-9283-11de-b63b-00144feabdc0.html?nclick_check=1, accessed on 20 November 2009 and
22 October 2011
 Ethics in Business and Corporate Governance

Perhaps, Kanter’s description of vanguard companies and their method of working best
describe what the role of corporate governance should be.

9.2 CORPORATE GOVERNANCE PRINCIPLES AND STRUCTURE

Principles lend the direction to reach goals and objectives; they demarcate a clear line between
what is acceptable and unacceptable behaviour in reaching those goals. They are non-binding;
principles are for self-regulation and for the understanding of what should be done and why.
Likewise, the purpose of corporate governance principles is to develop an understanding of
what needs to be done, how and why for the enduring success of a business. Sometimes these
principles are stated in the form of ‘codes’ or rules. Confusion may, therefore, arise between rules
and principles. Compared to principles, rules are more complex and subject to interpretation.
Rules are binding; they are fixed by the regulators or the controllers within the knowledge
and information available to them at the point of time making the rules. They are subject to
change or can be interpreted differently. At times, rules can reduce the discretion on the part of
individual managers and auditors in dealing with special situations or new types of transactions
or situations that are not covered by the codes or rules. This may not always be desirable
from the points of view of ethics and morality of an issue, and effective corporate governance.
Yet, corporate governance mechanism requires formulation and promulgation of rules and
regulations for standardisation of practices.
Rules must be respected for good corporate governance; in matters of good corporate
governance, both principles and rules have their own roles to play. Whereas principles are a set
of non-binding guidelines for acts, actions, accountability and responsibility for good corporate
governance, rules are meant to set and state how the process should be structured and practised
within the legal framework of the country or within the provisions of by-laws of the company.
Since rules are subjected to interpretation, even if clear rules are followed, one can still find a
way to circumvent their underlying purpose and abuse the rules. Principles and the dictates
of principles, as self-regulating and self-screening, non-binding mechanism, are not subjected
to such abuse. Principles are necessary to guide the company to ‘best governance practice’ and
to contain (or condition) the activities of people and enterprises within the true spirit of laws
and rules so that their abuse is minimised. Yet, when it comes to the governance of business
and enterprises, abuse and distortion of rules are taking place the world over for self-serving
purposes. The financial crisis of 2008 in the US and UK is one such example. Abuse of rules
has also been noticed frequently in matters of environmental regulation, which are increasingly
bearing life-threatening consequences for the global community18.
As for principles, the corporate governance process has to have three built-in elements,
namely:
(i) ‘What to act’ pertaining to the corporate mission, objectives and goals;
(ii) ‘How to act’ pertaining to the systems and processes of corporate governance; and
(iii) ‘By whom to act’ pertaining to people, i.e., the corporate participants.

18
http://www.hrichina.org/public/contents/article?revision%5fid=3988&item%5fid=3987, accessed on 26 August 2009
 Corporate Governance: Principles and Practices

Any system of corporate governance must consider these elements and then align the
corporate structure, guiding values and ethics with the objectives and goals and the mode
of operating systems. Also important is the value system and ethics of corporate participants
who actually act on behalf of the corporate. Therefore, it is of importance how directors and
management develop the model of governance that aligns the people of the organisation with the
corporate values and ethical standards. In particular, senior executives should conduct themselves
honestly and ethically, especially while dealing with actual or apparent conflicts of interest
between different stakeholders, and disclosures in financial reports. The key elements of good
corporate governance principles—pertaining to corporate participants—are honesty, integrity,
transparency, trustworthiness, mutual respect, and sense of responsibility and accountability.
Such a value-based approach of the people to corporate governance must be brought about if
it is to serve its rightful purpose. It is widely believed that the Indian ethos about values and
moral principles goes a long way in addressing many ills of today’s profit-driven, self-serving
business enterprises. However, the Indian ethos is more about people and the personal quality
of corporate participants, which is only one part of the issue of corporate governance. Though
it is widely believed that adopting Indian thoughts for an ethics-based and spiritual approach
to corporate governance is beneficial to all19, what is required from the business perspective is a
systemic approach to corporate governance principles in terms of core management practices.
Listed here are the commonly accepted principles of corporate governance in terms of core
management practices:
1. Rights and Equitable Treatment of Shareholders
Organisations should respect the rights of shareholders and help them to exercise these rights—
by effectively communicating information that is understandable and accessible—and encourage
shareholders to participate in general meetings.
2. Interests of Other Stakeholders
Organisations should recognise that they have legal and moral obligations to all legitimate
stakeholders—including the society and the environment. Organisations should, therefore, act
to enhance, or at least protect, the interests of all such stakeholders—including employees,
customers and clients, society, locality, government, and environment.
3. Role and Responsibilities of the Board
The board needs a range of skills and understanding to be able to deal with various business
issues and have the ability to review, control and challenge management performance. It needs
to be of a sufficient size and have an appropriate level of commitment to fulfil its responsibilities
and duties. Issues about the appropriate mix of executive and non-executive directors (including
independent directors) should be fulfilled.

19
http://www.scribd.com/doc/17295255/Indian-Ethos and http://www.ccsforum.org/media.html, accessed on 25 August 2009
 Ethics in Business and Corporate Governance

4. Integrity and Ethical Behaviour

The corporate work culture should comprise ethical and responsible decision-making. It is not
an ornamental aspect of public relations; it should be the core requirement for all decision-
making process including risk management, avoiding lawsuits, environment management, and
social services. Organisations should develop codes of conduct for their directors and executives
that promote ethical and responsible decision-making.To ensure ethical decisions, organisations
should establish compliance and ethics programmes to minimise the risks of ethical failure and
of straying outside the legal boundaries.
5. Disclosure and Transparency
Organisations should clarify and make publicly known the roles and responsibilities of board
and management to provide shareholders with information on accountability of corporate
positions. They should also implement procedures for independent and truthful audit, verify
and safeguard the integrity of the company’s financial reporting. Disclosure of (material) matters
concerning the organisation should be timely and balanced to ensure that all investors have
access to clear and factual information.
These principles lead to the structuring of corporate governance process for fulfilling the
underlying objectives of those principles. A representative functional corporate governance
structure, emerging from these principles, is shown in Figure 9.2.

General Shareholders’ Independent

Meeting Auditors

Audit
Committee Strategy &
Board of
Invest
Directors
HRM Committee
Committee

CFO and
CEO Corporate Functions

Managing
Directors

Sr. Management
Team

Figure 9.2 A Representative Corporate Governance Structure, showing the position of CEO and various
management committees that may advise the Board

The corporate governance structure, depicted in Figure 9.2, unmistakably presents the picture
that shareholders’ interests get the priority and the business process flows downward from that
point to the Board of Directors, which is in effect responsible for corporate governance. As
 Corporate Governance: Principles and Practices

per this system, there is an important function of independent auditors who are independent
of the Board and, in principle, directly report to the shareholders’ body through the ‘General
Body Meeting’. The purpose of this direct reporting is to provide the shareholders correct
information about the company’s state of finance and regulatory and statutory compliances.
Therefore, the Board works under the power delegated by the shareholders and, in turn, the
Board is free to form other committees for advice and guidance on corporate governance. The
CEO of an enterprise works under the delegated authority of the Board and so do other senior
executives. While this is the hierarchical structure of corporate governance, the functional aim
of the corporate structure is to fulfil the guiding principles of good governance and compliance
with regulations governing the business.
Fulfilling these principles and structural responsibility brings to the fore certain functional
issues for the corporate bodies, especially in financial areas, upon which depends the quality of
corporate governance. These issues are:

Finance draws major attention in the field of corporate governance due to the vulnerability of the
organisation to financial corruption and scandal. Nonetheless, the quality of governance is equally
important in areas like marketing and product introduction, customer and client services,
environment management, and corporate social services. While financial mismanagement has
an immediate impact on the company, it is being realised, more and more, that for long-term
business success, ethics and fairness in marketing, client and customer servicing, environment
management, and in discharging corporate social responsibility are equally important. Business is
not only about financial management—although this is very critical—but is also about building
a brand image and brand value for long-term success. Integrity and ethical market behaviour,
and respect to social causes and responsibility, helps in achieving the much needed corporate
brand image. Corporate social responsibility (CSR) and service thereto, is gaining importance
among the principles of corporate governance.
Corporate governance is often perceived as a means to control and regulate within the
provisions of laws and regulations, but, at time, it may have to go beyond the legal boundaries in
order to discharge moral responsibility.This is more so in developing economies where business
has definite social and environmental responsibility (also refer Chapter 3). For example:
 Ethics in Business and Corporate Governance

As soon as the Satyam scandal was brought to light, in India, the first thing that the government
did was to appoint an interim board to ensure that employees did not lose their jobs as
an immediate consequence. Even in the US, the federal government came forward to save
thousands of jobs by financially bailing out troubled companies like AIG and others.20 These
are some of the instances when a company—or the government on behalf of the company
—intervened more on moral grounds than to abide by the law.

Thus, corporate governance has to evolve—as per the necessity—due to interplay of various
factors, especially the external ones. It cannot display the ‘one key fits all’ syndrome in a business
world that is fast-changing and being increasingly influenced by many external factors on
which companies will have, theoretically, little control. Corporate governance is an ‘intelligent
system’—sensitive to the purpose and objective of the business, the global business environment
and opportunity, laws and regulations, and ethical issues of the society—which should be capable
of constantly evolving through creative thinking and meeting the challenges of uncertainty
in business. The tasks of corporate governance is not to avoid risks and uncertain situations
of business—which will always prevail in any business—but to creatively and intelligently
(strategically) work within the ethical and legal framework to bring about positive differences
in the results. And, while results are the visible measure of success of governance, the means
(to achieve these results) must be legal, ethical and morally acceptable to the government and
society at large.
However, the principles of corporate governance are continuously evolving along with
needs, experiences and changes of the world order. To cite an extract from the foreword
to the OECD (Organisation for Economic Cooperation and Development) principles of
corporate governance,21 ‘The principles are a living instrument offering non-binding standards of
good practices as well as guidance on implementation, which can be adapted to the specific
circumstances of individual countries and regions.’ In corporate governance, these principles are
sometimes classified as codes of practice. There are a number of reports and recommendations
of international committees, associations, etc. on the development of an appropriate framework
to promote good corporate governance principles, standards, codes and practices which are to
be followed. Some of them are discussed in the following section.

9.3 CODES AND STANDARDS OF CORPORATE GOVERNANCE

In the changing global business scenario, it has become necessary to bring in effective governance
practices in the corporate sector through codes and standards.Today, good corporate governance
is being considered imperative for long-term success or even for the survival of a business in
a fiercely competitive market. Accordingly, several codes, guidelines and principles—covering
varied aspects of corporate governance—have been drafted and implemented.The aim of these
codes and guidelines is to:

20
http://online.wsj.com/article/SB122156561931242905.html, accessed on 25 August 2009 and 22 October 2011
21
http://www.oecd.org/dataoecd/32/18/31557724.pdf, accessed on 20 November 2009
 Corporate Governance: Principles and Practices

(a) Bring transparency and accountability in the functions and decisions;

(b) Seek to establish accountability standards for the company’s board and management;
(c) Protect investors’ interests;
(d) Care for other stakeholders; and
(e) Promote investor confidence in the business system.
Since the codes tend to curb some flexibility of the process of governance, questions may
be raised about their need or necessity. However, the international business community, in
general, is not averse to such codes of practice, especially in the wake of the corporate scandals
of recent times (e.g. Enron, WorldCom, and Satyam among many others). As a result, different
committees, association or trade bodies have developed several codes or standards over the
years. Corporate governance principles and codes have been developed in different countries
and issued either from stock exchanges or corporations or by the associations (institutes) of
directors and managers with the support of governments and international organisations. As a
rule, compliance with these governance recommendations is not mandated by law, although the
codes linked to stock exchange listing requirements may have a coercive effect. For example, to
bring in better corporate governance in listed companies, capital markets regulator in India, the
Security and Exchange Board of India (SEBI) mandated the guidelines for Board composition
of listed companies by amending Clause 49 of the SEBI Act22 dealing with Listing Agreement.
A brief view of the purpose of corporate governance codes is illustrated in Figure 9.3.

Purpose of Corporate Governance Codes

Bringing Establishing Promoting Promoting

transparency accountability Protecting care and confidence of
and standards of shareholders concern for all investors and
accountability the Board and and other stakeholders the society in
of functions Sr. Management investors’ of the business the business
and interests and society system
decisions

Figure 9.3 Purpose of Corporate Governance Codes

The Cadbury Committee Report of 199223 titled ‘The Report of the Committee on the
Financial Aspects of Corporate Governance’, was one such early effort. As such the committee
addressed the financial aspects of corporate governance and subsequently produced a Code of
Best Practice, the provisions of which, in their belief, all boards of UK listed companies should
comply with. The Cadbury Report and the recommended code was the first in the series

22
http://en.wikipedia.org/wiki/Clause_49, accessed on 27 August 2009, and http://www.sebi.gov.in/circulars/2008/cfddil23.html,
accessed on 21 October 2011
23
http://business.gov.in/outerwin.htm?id=http://www.ecgi.org/codes/documents/cadbury.pdf, accessed on 26 August 2009, and http://
www.manifest.co.uk/reports/governance/UK%20Corporate%20Governance%20Milestones.pdf, accessed on 20 November 2009
 Ethics in Business and Corporate Governance

of attempts to standardise corporate governance practice in the UK; thereafter many other
such studies were conducted—and codes formed—in different countries. The purpose of the
Cadbury Report was to establish corporate standards to control and report the functions of
boards, and on the roles of auditors.The report reviewed those aspects of corporate governance
that are specifically related to financial reporting and accountability, and recommended a set
of codes for the promotion of good corporate governance practice as a whole. The ‘Code of
Best Practice’ was thus designed to achieve the necessary high standards of corporate behaviour.
Furthermore, the report recognised that these codes have to be reviewed as and when business
circumstances change and a broader view of governance develops. It was expected that by
adhering to the codes, all listed companies would strengthen their controls over both business
operations and public accountability. As an obligation to public listing, companies in the UK
were required to comply with the codes, give reason for non-compliance and take measures
to enable the shareholders to know where they stand in relation to the code. To set the tone of
good corporate governance, the Cadbury report starts with an introduction24 stating that:

(I) Corporate governance is the system by which companies are directed and controlled;
(II) Boards of directors are responsible for the governance of their companies;
(III) The shareholders’ role in governance is to appoint the directors and the auditors and to
satisfy themselves that an appropriate governance structure is in place to protect their
interests;
(IV) The responsibilities of the board include setting the company’s strategic aims, providing
the leadership to put them into effect, supervising the management of the business and
reporting to shareholders on their stewardship; and
(V) The board’s actions are subject to laws, regulations and the shareholders’ approval in
general meetings.

Thus, the report views the enterprise as an entity under the custodianship of the board,
and goes on to put forward the recommended codes for who should do what and how. These
recommendations for the board, to help facilitate ‘best practices’ in corporate governance, are
briefly mentioned here.

Cadbury Committee Recommendations for the Board and Its Functioning

1. The Board of Directors
1.1 The board should meet regularly, retain full and effective control over the company
and monitor the executive management.
1.2 There should be a clearly acceptable 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. 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 recognised senior member.
24
http://www.ecgi.org/codes/documents/cadbury.pdf, accessed on 26 August 2009
 Corporate Governance: Principles and Practices

1.3 The board should include non-executive directors of sufficient calibre and number
for their views to carry significant weight in the board’s decisions.
1.4 The board should have a formal schedule of matters specifically reserved to it for
decision to ensure that the direction and control of the company is firmly in its
hands.
1.5 There should be an agreed procedure for directors in the furtherance of their duties
to take independent professional advice if necessary, at the company’s expense.
1.6 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. Any question of the
removal of the company secretary should be a matter for the board as a whole.
2. Non-Executive Directors
Non-executive directors should bring an independent judgement to bear on issues of
strategy, performance, resources, including key appointments, and standards of conduct.
2.1 The majority should be independent of management and free from any business
or other relationship which could materially interfere with the exercise of their
independent judgement, apart from their fees and shareholding. Their fees should
reflect the time which they commit to the company.
2.2 Non-executive directors should be appointed for specified terms and reappointment
should not be automatic.
2.3 Non-executive directors should be selected through a formal process and both this
process and their appointment should be a matter for the board as a whole.
3. Executive Directors
3.1 Directors’ service contracts should not exceed three years without shareholders’
approval.
3.2 There should be full and clear disclosure of directors’ total emoluments and those of
the chairman and highest-paid (UK) directors, including pension contributions and
stock options. Performance-related elements and the basis on which performance is
measured should be explained.
3.3 Executive directors pay should be subject to the recommendations of a remuneration
committee made up wholly and mainly non-executive directors.
4. Reporting and Controls
4.1 It is the board’s duty to present the balance sheet and understandable assessment of
the company’s business position.
4.2 The board should ensure that an objective and professional relationship is maintained
with the auditors.
4.3 The board should establish an audit committee of at least three non-executive
directors with written terms of reference which deal clearly with its authority and
duties.
 Ethics in Business and Corporate Governance

4.4 The directors should explain their responsibility for preparing the accounts next to
a statement by the auditors about their reporting responsibilities.
4.5 The directors should report on the effectiveness of the company’s system of internal
control.
4.6 The directors should report that the business is a going concern, with supporting
assumptions or qualifications as necessary.
Finally, to ensure adherence to the true spirit of the codes, and as a matter of ‘best practice’,
the committee further recommended specific statement by the company with regard to
compliance to points: 1.4, 1.5, 2.3, 2.4, 3.1 to 3.3, and 4.3 to 4.6 of the Code.
The Cadbury Code is, therefore, a compendium of ideal functions of the board and its
appointed or nominated executives (refer to footnote 24 for more details). Most other codes
and standards also relate to the board and management functions for clarity, transparency,
responsibility, and reporting. The points and clauses of the Cadbury Code are illustrative of
such purpose of codes and standards. Some highlights of other popular codes are:
1. The OECD Principles of Corporate Governance (refer to footnote 21) is another set
of important non-binding but extremely useful guidelines for corporate governance. These
principles were originally formulated in 1998, but were revised and re-issued in 2004 in the
wake of financial problems in the global corporate world. OECD, in the foreword to its report,
states that these principles will also ‘help develop a culture of values for professionals and ethical
behaviour on which well-functioning markets depend.Trust and integrity play an essential role in economic
life and for the sake of business and future prosperity’. Corporate governance practice should capture
this spirit as embedded in the philosophy of the OECD principles.
OCED addresses the corporate governance principles from six perspectives, namely:
1. Providing the basis for an effective corporate governance framework;
2. The rights of shareholders and key ownership functions;
3. The equitable treatment of shareholders;
4. The role of stakeholders in corporate governance;
5. Disclosure and transparency; and
6. The responsibilities of the board.
Moreover, OECD guidance emphasises that ‘corporate governance involves a set of
relationships between a company’s management, its board, its shareholders and other stakeholders.
Corporate governance also provides the structure through which the objectives of the company
are set, and the means of attaining those objectives and monitoring performance are determined.
Good corporate governance should provide proper incentives for the board and management
to pursue objectives that are in the interests of the company and its shareholders and should
facilitate effective monitoring. The presence of an effective corporate governance system,
within an individual company and across an economy as a whole, helps to provide a degree
of confidence that is necessary for the proper functioning of a market economy’. As per some
important highlights of the OECD principles, the corporate governance framework should:
 Corporate Governance: Principles and Practices

1. Promote transparent and efficient markets, be consistent with the rule of law and clearly
articulate the division of responsibilities among different supervisory, regulatory and
enforcement authorities.
2. Protect and facilitate the exercise of shareholders’ rights.
3. Ensure the equitable treatment of all shareholders, including minority and foreign
shareholders. All shareholders should have the opportunity to obtain effective redress
for violation of their rights.
4. Recognise the rights of stakeholders established by law or through mutual agreements
and encourage active cooperation between corporations and stakeholders in creating
wealth, jobs, and the sustainability of financially sound enterprises.
5. Ensure that timely and accurate disclosure is made on all material matters regarding the
corporation, including the financial situation, performance, ownership, and governance
of the company.
6. Ensure the strategic guidance of the company, the effective monitoring of management
by the board, and the board’s accountability to the company and the shareholders.

OECD principles emphasise that ‘to ensure an effective corporate governance framework, it
is necessary that an appropriate and effective legal, regulatory and institutional foundation
is established upon which all market participants can rely in establishing their private
contractual relations. This corporate governance framework typically comprises elements of
legislation, regulation, self-regulatory arrangements, voluntary commitments and business
practices that are the result of a country’s specific circumstances, history and tradition. The
desirable mix between legislation, regulation, self-regulation, voluntary standards, etc. in this
area will therefore vary from country to country’. Thus, OECD code or principles attempt to
cover the issues of corporate governance more comprehensively than the Cadbury Code, in
order to guide the growing international trade between countries and the rapidly enhancing
stock markets across the globe.

2. The Combined Code of Corporate Governance25, issued in June 2008 by the Financial
Reporting Council (FRC), UK, is the latest in this series on corporate governance. The
preamble to Code states: ‘Good corporate governance should contribute to better company
performance by helping a board discharge its duties in the best interests of shareholders; if it is
ignored, the consequence may well be vulnerability or poor performance. Good governance
should facilitate efficient, effective and entrepreneurial management that can deliver shareholder
value over the longer term.’ Intended to support these outcomes and promote confidence in
corporate reporting and governance, the Code deals with (1) responsibility of the company and
the board of directors, accountability and audit, and relations with shareholders; (2) guidance on
liability of non-executive directors: care, skill and diligence; and (3) disclosure norms. Broadly,
the code is divided into two sections; the first section outlines the principles of best practices

25
http://www.frc.org.uk/documents/pagemanager/frc/Combined_Code_June_2008/Combined%20Code%20Web%20Optimized%20
June%202008(2).pdf, accessed on 27 August, 2009
 Ethics in Business and Corporate Governance

and their supporting provisions for the company and the second deals with shareholders’ voting,
evaluation of disclosures for governance, etc.
In general, these recommendations, codes or principles have mainly focused on the company’s
structure, its financial and non-financial disclosures, compliance with codes of corporate
governance, competitive remuneration policy, shareholders rights and responsibilities, financial
reporting and internal controls with a view to bring favourable changes in the operating
systems of the board of directors and the management and administration, as well as to improve
the overall quality and ethics of its business operations. Though quite a few of these codes or
recommendations focus more on financial governance and disclosure, some—like the OECD
Code—have recognised the broader role of corporate governance to include all stakeholders,
society and environmental duties.
India, too, has been no stranger to financial scandals—be it the Harshad Mehta26, 27 scam
in 1992, the UTI US–6428 scam in 1998, or the Ketan Parekh29 scam in 2001. Alarmed by
such market irregularities, SEBI constituted a Committee on Corporate Governance (refer to
footnotes 15 and 22) in 200230, to evaluate the existing practices and improvements thereof,
as well as to review Clause 49 (refer to footnote 22) of the SEBI guidelines on corporate
governance. Issued in 2000, Clause 49 suggested measures to improve governance standards
and has since played a pivotal role in corporate governance in India. In 2004, an amendment
to Clause 4931 laid down tighter qualification criteria for independent directors, disqualifying
material suppliers and customers from being independent directors. The major new provisions
included in the new Clause 49 are:
1. The board will lay down a code of conduct for all board members and senior management
of the company to compulsorily follow.
2. The CEO and CFO will certify the company’s financial statements and cash flow
statements.
3. At least one independent director of the holding company will be a member of the
board of a material non-listed subsidiary.
4. The audit committee of the listed company shall review the financial statements of the
unlisted subsidiary, in particular its investments.
5. If while preparing financial statements, the company follows a treatment that is different
from that prescribed in the accounting standards, it must disclose this in the financial
statements and the management should also provide an explanation for doing so in the
corporate governance report of the annual report.
6. The company will have to lay down procedures for informing the board members
about the risk management and minimisation procedures.
26
http://en.wikipedia.org/wiki/Harshad_Mehta, accessed on 27 August 2009
27
http://indianblogger.com/top-10-financial-scams-in-india/, accessed on 21 October 2011
28
ibid.
29
ibid.
30
http://www.sebi.gov.in/circulars/2003/cir2803.html, accessed on 30 November 2011
31
http://www.sebi.gov.in/commreport/clause49.html, accessed on 30 November 2011
 Corporate Governance: Principles and Practices

7. Where money is raised through public issues, rights issues, etc., the company will
have to disclose the uses/applications of funds according to major categories (capital
expenditure, working capital, marketing costs, etc.) as part of quarterly disclosures of
financial statements.
8. The company will have to publish its criteria for making its payments to non-executive
directors in its annual report.
The revised Clause 49 also includes certain non-mandatory clauses like the whistle-blower
policy and restriction of the term of independent directors. In fact, it strengthens the original
intent of protecting the interests of investors through enhanced governance practices and
disclosures. To encapsulate:

The five broad functional aspects addressed under Clause 49 of the Indian listing agreement
are: (1) Clarifies the criteria for independent directors; (2) Enhances the roles and
responsibilities of the board; (3) Improves the quality and quantity of financial disclosures;
(4) Consolidates the roles and responsibilities of the audit committee in all matters relating
to internal controls and financial reporting; and (5) Enhances the accountability of the top
management, specifically the CEO and CFO.

Even within each of the listed areas, the revised Clause 49 moves further into the realm of
global best practices in corporate governance. Some details of the revised Clause 49 are:
Half the board of directors must be independent directors.
The board must lay down a code of conduct for all board members and senior
management, and must record an annual affirmation.
The audit committee has oversight of the financial reporting process and the disclosure
of its financial information to ensure that the financial statement is correct, sufficient
and credible.
The company must lay down procedures to inform the board about the risk assessment
and minimisation procedures, which shall be periodically reviewed to ensure that
executive management controls risk through a properly defined framework.
A management discussion and analysis report must form part of the annual report to
the shareholders, which must include discussion on matters such as internal controls and
their adequacy.
The CEO and CFO must certify to the board that they accept responsibility for
establishing and maintaining internal controls, that they have evaluated the effectiveness
of the company’s internal control systems, and that they have disclosed to the auditors
and the audit committee deficiencies in the design or operation of internal controls and
the steps they have taken or propose to take to rectify these deficiencies.
The CEO and CFO must indicate to the auditors and the audit committee the
significant changes in internal control during the year, instances of significant fraud of
which they have become aware and the involvement of management or employees with
a significant role in the company’s internal control system.
 Ethics in Business and Corporate Governance

The company’s annual report must have a separate section on corporate governance,
including a detailed compliance report on corporate governance that highlights
noncompliance with any mandatory requirement (as detailed in annexure 1C of the
circular) with reasons for and the extent to which the non-mandatory requirements (as
detailed in annexure 1D of the circular) have been adopted.
The company must submit a quarterly compliance report to stock exchanges within
15 days from the close of the quarter that is duly signed by the compliance officer or
CEO in the format specified in annexure 1B of the circular.
The company must obtain a certificate from either the auditors or practicing company
secretaries regarding compliance of conditions of corporate governance.
Most significantly, provisions of Clause 49 have changed the Indian corporate governance
scenario for the better. It has necessitated widespread adoption of modern information system
and information management technology to cope with the requirements of compliance and
disclosures, which has, in turn, paved the way for efficient E-governance in the country. As a
result, it is now common for many companies in India to appoint CIOs (chief information
officers) in line with the CFOs who directly report to the board.

9.4 MODELS OF CORPORATE GOVERNANCE

Provisions for corporate governance, in the codes mentioned earlier, factually refer to a set
of company practices, rules, relations, processes and systems designed for fair and efficient
management of the enterprise, and are meant as a system of earning benefits among the
potentially divergent interests of many stakeholders, including the minority shareholders, the
controlling shareholders, and the directors and employees of a company. While these codes act
as guidelines for ‘micro-management’, companies work under an adopted ‘model’ of corporate
governance for ‘macro-management’. The structure and system—the model—of corporate
governance should influence and manifest the rules and processes for decision-making in a
company, the procedures to set the company’s objectives, and the means to attain and measure
the results achieved, and other such matters that increase the company’s business potential.
There are many different models of corporate governance around the world, and they differ
according to the economic style, social priorities, and business philosophy of the country or
the state in which the company operates. And though the concept has sparked many a debates,
so far there is no ‘one-size-fits-all’32 corporate governance model. Notwithstanding, corporate
governance models should prescribe codes of corporate conduct in relation to all stakeholders.
Stakeholders may include the list of all those direct or indirect participants in the business who
have some interest in the outcome of the business or in its well-being. Most notably, the list of
stakeholders includes shareholders, employees, suppliers, customers, the locality and community,
society, government, etc.
Therefore, the essence of a corporate governance model is to provide a framework of effective accountability
to such stakeholders. Incidentally, stakeholders of modern corporations, especially the large ones

32
http://knowledge.wharton.upenn.edu/article.cfm?articleid=1877, accessed on 27 August 2009 and 22 October 2011
 Corporate Governance: Principles and Practices

engaged in international business, are not confined to locality, local individual shareholders or to
the rules of a single country. Hence, the dimensions and scope of corporate governance in such
companies have changed significantly to deal with institutional investors, global environmental
laws, and standards of international business practice. Features like cross-listing at stock exchanges
of different countries, flow of international funds, outsourcing of business functions to an offshore
location, institutional investment instead of individual investment, different taxation laws and
regulatory controls, etc. are changing the scope and mode of corporate governance. Business
seems to be growing borderless in this early part of the 21st century; it is influencing the way
companies are doing business and the corporate governance models they are to follow.
There exist different models of corporate governance around the world, which have evolved
as per the laws of the land, the economic systems, and the focus of the respective country
on business enterprises. Mainly, this difference in governance models is due to the degree of
capitalism in which the company operates. The two main models around which the system of
corporate governance has developed are: (i) liberal model and (ii) coordinated model.

The liberal model is common in Anglo-American countries such as the US, the UK and
some old British colonial English-speaking countries like India, Sri Lanka, etc.; it tends to
give priority to the interests of the company’s shareholders. The coordinated model, on
the other hand, is found in Continental Europe and Japan; it recognises the interests of
workers, managers, suppliers, customers and the community, in addition to the shareholders’
interests.

Each of these models has its own distinct approach and focus to bring transparency in
operations and competitiveness in the marketplace. The liberal model of corporate governance
encourages radical innovation and cost competition whereas the coordinated model, as prevalent
in Japan, facilitates quality superiority and continuous innovative improvements (Kaizen) for
market dominance and competition. The corporate governance priorities are also based on the
laws and regulations in the legal framework of the country in which the business operates, as
well as the company’s own by-laws.The relationship and responsibility of the company with and
towards its stakeholders—i.e. shareholders, directors, management, employees, regulators, and
the society—depend on the recommendations of the model that the company adopts. These
recommendations typically refer to how the board should operate, the duty and responsibility
structure of the board members and the senior management, processes and systems for delegation
of power, means and methods of performance measures, accounting and auditing procedures,
and reporting. Some popular models of corporate governance around the world are33:
1. The Anglo-American Model
This is a typical liberal model of governance, which is prevalent in the US, UK, and many
English-speaking countries of the erstwhile British Empire. This model calls for governance by
the board of directors, which has the power to choose the CEO.While the CEO has the power
delegated by the board to manage the company on a daily basis, he or she needs board approval
33
http://en.wikipedia.org/wiki/Corporate_governance#Corporate_governance_models_around_the_world, accessed on 23 October 2011
 Ethics in Business and Corporate Governance

for certain major decisions—like senior level appointments, fund raising, bid for acquisition,
expansion, etc. Duties of the board may include policy-making, decision-making, monitoring
management performance and corporate control, besides facilitating the CEO to function
under the set policy and guidelines. In this model, the board of directors is responsible towards
the shareholders; however, the by-laws of many companies make it difficult for all but the
largest shareholders to have any influence or say over the make up of the board. Contrary to the
spirit of good corporate governance, individual shareholders are not given the opportunity to
choose their nominees to the board, despite the fact that their total holding put together may
exceed the shareholding of the largest shareholder. Individual shareholders are merely asked to
put in their approval for the board nominees, giving the board or the CEO the opportunity to
frame board decisions as per choice and to violate the corporate norms. Often, the overseeing
responsibility of the board is marginalised and shareholders’ interests are compromised. This
leads to conflicts of interest between the widely-dispersed individual shareholders and the
powerful board members. Nonetheless, the Anglo-American model typically gives priority to
shareholder interests, which translates into strong pressure on the management to innovate,
compete and grow profitability in order to secure the loyalty of shareholders.This model places
less emphasis on the interests of managers, employees, customers, suppliers and the community
in general. Ironically, as mentioned earlier, this approach does not really translate into proactive
shareholder involvement in corporate governance. In fact, it is being used more as a hands-off
relationship in which a powerful CEO runs the daily operations of the organisation and the
board provides overarching stewardship.

This hands-off approach would be evident in the style of running many Indian listed companies
(which by and large follow the Anglo-American model of corporate governance). In such a
process, retail shareholders have hardly any say in matters of appointment to the board or
in any major policy decision like fund raising or acquisition. As a ritual, the shareholders
are asked to register their approvals through a voting process (including proxy vote) at the
general meetings. The inclusion of shareholders in the major decisions of the company has
hitherto been minimal.

However, the US scandals of the 90s have introduced greater concern for oversight
to board responsibilities beyond their traditional stewardship that were before the scandals.
Furthermore, the financial crises of 2008 in the UK and US and the consequent trouble in
many leading companies and financial institutions across the world have started new debates
about the effectiveness of corporate governance in the traditional Anglo-American style. It is
believed that the process of governance has to evolve itself to protect the economy from erring
business operations that control huge national economic interests and employment potential.
A shift—perhaps temporary—is already being noticed in the US and UK economies, where
governments are buying out (or leasing out) trapped financial and business enterprises in order
to protect the interests of the nation (see footnote 20)—something that is in stark contrast to
the strong capitalistic economic structures governing these countries.
 Corporate Governance: Principles and Practices

2. The Coordinated Model

This model, prevalent in Europe and Japan, acquiesces to shareholder interest but also gives
priority to the interests of managers, employees, customers, suppliers and the community in
general. The coordinated model encourages innovation and profit on a more incremental level.
Thus, while the coordinated model may have a slower growth in profits, companies are less
likely to suffer the ethical and moral failures that occur in the Anglo-American model with its
unrelenting demand for greater and greater profits.
Apparently, it now appears that a combination of these two models may provide the right
answer to most issues of corporate governance. In fact, a socially and democratically oriented
country like India is indeed closer to a model that combines the best of both these business
models and codes for governance—as is incorporated in Clause 49 (discussed earlier).
3. The Family-Owned Company Model
Yet another type of corporate governance model run by a family-owned business, this is prevalent
in Asian and Latin American countries, where companies owned by families often dominate the
market. In these countries, it is not unusual for a small number of powerful families to control a
majority of public companies. Reportedly, a survey of ownership structures of listed companies
in India revealed a mixture of governance mechanisms and a persistence of the ‘business house
model’ of governance.34 Let us consider an example:

The Reliance Group of industries in India, the largest Indian corporate family, is termed by
many as a family-owned business because the majority shareholding—over 51 per cent—
comprises closely related family members. Thus, it is the family that is controlling the stakes
and governance in the listed companies of the Reliance Group. There may be many such
examples of prominent family-owned businesses amongst the old companies in India, but the
companies of recent origin are no exception. Wipro, the Indian IT-major, is an example with
its promoter said to be holding nearly 80 per cent shares.35

The notion of financial transparency that dominates the framework of corporate governance
under the Anglo-American model is very difficult for family-owned companies to accept and
operate with. This business model views the transparency and disclosure norms of the Anglo-
American model as exposing the core business financials and strategies to others, which would
mostly benefit the competitors and regulators, with few tangible benefits to the organisation.
Thus, the system is more amenable to self-serving gains from business, and vulnerable with
regard to ethics and social responsibility. However, family-owned companies do not necessarily
harm the interests of shareholders because they themselves are major beneficiaries of their
dividend policy or related benefits. A family-owned company, with its shareholding exceeding
51 per cent, is still dominant in the Indian market, and the mode and model of governance in

34
‘Corporate Governance Models in Emerging Markets: The Case of India’, International Journal of Business Governance and Ethics,
Vol. 1, No.1, 2004. Refer to: http://www.inderscience.com/search/index.php?action=record&rec_id=4897, accessed on 1 September 2009
and 23 October 2011
35
http://www.rediff.com/money/2007/mar/24wipro.html, accessed on 23 January 2011
 Ethics in Business and Corporate Governance

such companies is still looked upon with some reservation. In general, the family-owned model
is neither seen as fully transparent nor open to disclosure norms, though many such companies in
India are apparently complying with Clause 49 of the listing agreement, while also contributing
to many social and developmental works. Nonetheless, a study of ownership structures of Indian
listed companies, titled ‘Corporate Governance Models in Emerging Markets: The Case of
India’ (refer to footnote 34), revealed a mixture of governance mechanisms and a persistence of
the business house model of governance. The article concludes that, despite external pressures
towards an ‘Anglo-Americanisation’ of governance practice, the outcomes thus far reveal the
emergence of a diversity of governance mechanisms arising in a path-dependent fashion.
Following several upheavals in the world of business, both governments and regulators have
come to recognise corporate governance as the cornerstone of economic reform, seeking to
promote stability and growth in the national economy, especially in developing countries. The
Asian crisis of 1997 was viewed as having its roots in poor governance (refer to footnote 6);
hence, national governments as well as international organisations have sought to further
strengthen governance mechanisms. India is also economically vulnerable to such regional
or global financial crises; as such, there has been increased attention to good corporate
governance practices in India too. Indian governance codes have been largely influenced by
the Anglo-American models of corporate governance, though the business house model of
governance still persists in some family controlled businesses. Many corporate governance
researchers claim that the family-controlled business is still a dominant force in the Indian
corporate scenario.36 However, it is generally recognised that India has a mix of the ‘insider
model’ (the coordinated model), found generally in Continental Europe and OECD countries,
and the ‘external model’ (the Anglo-American model) found in the US and UK.
The history of Indian corporate governance began with the ‘managing agency system’
during the pre-independence era, then matured to the ‘promoter system’ and, finally, to the
‘Anglo-American system’ in the early 90s. Till the time of economic liberalisation in early 90s,
the Indian Companies Act 1956 had been the main anchor of corporate governance practices
in India, but this has been now replaced by the Indian Companies Act, 2008, which outlines the
recommended governance procedures.37 Prior to 1990 was the era of regulation and control.
With the opening up of the Indian economy in 1991, corporate governance has more or less
adopted the Anglo-American model as the natural choice because of the overwhelming interest
of British and American businesses in the country. However, the Indian corporate governance
system is said to have matured to being a world class with the introduction of the revised Clause
49, which—besides ensuring transparency and fair practice—includes protection of minority
shareholders in family and promoter-led businesses. With the enactment of measures similar to
those included in the Sarbanes-Oxley Act (the US, 2002), India’s corporate governance system
has warmed up to the call of global business and competitiveness of the Anglo-American
model, including attracting foreign institutional investors (FII).

36
http://lindsayleaver.blogspot.com/2009/12/family-research-report.html and http://business.outlookindia.com/article.aspx?101413, acce-
ssed on 23 October 2011
37
http://www.mondaq.com/article.asp?articleid=77452, accessed on 23 October 2011
 Corporate Governance: Principles and Practices

However, globally, there are signs that corporate governance standards across the US, UK
and Continental Europe are trying to adjust and converge into a process as required by the
contemporary business situations and frequent stock market bubbles.The trend has been in both
ways—convergence to Anglo-American standards as well as US/UK standards of corporate
governance converging to European standards.38 A study (refer to footnote 34) found that
ownership concentration, separation of management and control, and increasing importance of
stakeholders’ concerns are increasing in the US and UK enterprises and decreasing in Europe.
The study observed that though the process of convergence is slow and the difference between
US/UK and European models may persist for some more time, a sign of regime change from
market governance towards governance by increased importance of stakeholders’ interests may
be underway following the bursting of stock market bubbles and wave of financial scandals in
the US during 2008–2009.

9.5 CORPORATE SOCIAL RESPONSIBILITY (CSR): THE SOCIAL

VIEW OF GOVERNANCE
Corporate social responsibility (CSR) is, in effect, a part of corporate governance and
encompasses areas of concern about how a company serves the interests of the society, locality,
environment and the well-being of people at large. CSR is seen as comprising of voluntary
actions and responses of the company, over and above its legal requirements, with a view to
meet the ethical needs of its customers (consumers), society, locality and the environment. In
the context of modern business philosophy, it is an index of good corporate citizenship.
As defined by the World Business Council for Sustainable Development: ‘Corporate Social
Responsibility is the continuing commitment by business to behave ethically and contribute to economic
development while improving the quality of life of the workforce and their families as well as of the local
community and society at large’. Such a holistic approach to business means that business can no
longer be treated merely as an institution to make profits for its owners and shareholders; it has
to shoulder responsibility for the society and communities as well. Going beyond the conventional
concept of charity and donations, CSR requires the company to take full responsibility of the impact of its
policies and actions on the society, community and the environment. For example, a one-time donation
made out to the victims of a natural disaster—say, the Tsunami—is not the measure of CSR.
Ideally, a company or a business house could adopt one such Tsunami-hit village and take it
upon itself to reconstruct it economically and community-wise. CSR is not tokenism; it is part
of business responsibility for ‘giving back to the society a part of what you get from them’. It
is largely voluntary, though, at times, it is demanded by social activists and social scientists for
inclusive growth of the society.
CSR being a voluntary measure has no rules, regulation or procedure to comply with. Any
work or activity falling under CSR is recognised as a means to demonstrate to the society at
large that the company believes in ethical responsibility. Such an image of the business adds
to its goodwill and brand image, ultimately helping it attain its objectives. Many companies
in India—Tata, HUL (Hindustan Unilever Ltd.), etc.—make provisions for their CSR
38
http://journals.cambridge.org/action/displayAbstract?fromPage=online&aid=201090, accessed on 23 October 2011
 Ethics in Business and Corporate Governance

commitments in the annual plan itself and get their compliance externally audited and reported
in their Annual Reports. Some companies even appoint an Ethics Officer—a senior member
of the management team—who would not only establish ethical standards but also oversee the
company’s compliance to its CSR policy. The objectives of a company’s CSR governance must
be clearly defined with respect to its different stakeholders and business environment—not
only are many changes taking place herein, they are also being influenced by socio-economic
and political changes in the locality or country. Hence, strategic and ethical means of CSR
compliance often need to be charted and communicated within the organisation and to the
society at large—to support and motivate people. Thus, the CSR activity programme of a
company and related resource allocations would most significantly require commitment and
intervention of the top management.
However, of late, CSR has become a subject of much debate with views for and against corporate
social responsibility.This is because of the varied practices being followed by various companies
and institutions. Many question if charitable work (e.g., donation to an NGO working for
the development of a weaker section of the society) should get precedence over the interests
of direct stakeholders (e.g., employees, shareholders, suppliers, vendors, etc.) and the need for
environment protection. It is argued that such charities tend to strain the company’s limited
resources and, in turn, the welfare measures undertaken for its employees, investors, suppliers,
etc. Others argue that adherence to laws and caring for the society and environment make good
business sense for long-term benefits and image building, by inspiring greater customer-base
and business goodwill. But, the answer is not in doing this or that; it is about doing what is necessary for
sustainable profit and growth in a competitive business environment where the opinions of customers, people
and society are very important. And, resolving any arising conflict through employee education
about the company’s social responsibility is equally significant. Many argue that there could be
a conflict of interest between direct stakeholders, society and the government.Yet, if the rules of
ethical governance are followed with transparency, and if the moral reasoning behind all such
acts is clearly communicated, then most conflicts would resolve easily. An industry can benefit
the neighbouring society and its people through increased local employment opportunity, along
with better quality of community life and education and environment management. And, in
return, the benefitted community or locality can be a source of support for availability of better
quality manpower, commitment to furthering the company’s social, environmental and market
interests, creating goodwill, and being friendly (not hostile) to the causes of the business. Thus,
CSR can be of mutual benefits and make a good business sense. If these ethical elements and
social responsibility can be factored into business philosophy, the system could deliver better
results and benefit the business in general. Therefore, CSR programme and planning is, in fact,
not voluntary work, but a necessity for modern-day industry and business.
This social view of business is, however, not of recent origin, especially in India; it was in
vogue even in the past. For example, the various ‘trusts’ run by the Tatas and Birlas—two leading
Indian business houses—were designed and operated with this purpose of social service and to
help the poor and needy in the community. These pioneers of Indian industry recognised their
responsibility to the society at very early stages of their business.They realised that by neglecting
the responsibility to society, the business cannot serve its true purpose nor endure sustainable
 Corporate Governance: Principles and Practices

growth. Mr. R. C. Bhargava, former long-time CEO of Maruti Udyog Limited (MUL), New
Delhi, observed (The Economic Times, Kolkata, 16 June, 2008)39 in his article titled ‘The Real
Meaning of CSR,’ that the mix of these ethical ingredients along with a focus on Japanese style
man-management—wherein workers feel involved in the company’s goals and systems, not
exploited or deprived of better quality of life and livelihood, and are treated respectfully and
ethically—explains MUL’s resounding success, despite the fact that it had to operate within the
constraints of ‘public sector’ in India and in a tensely competitive field of business. Then there
are those who argue that corporate social responsibility is a scheme by which a company takes
care of its external business forces—such as politics, society, the government and others—which
are not necessarily beneficial to its business goals. They also believe that traditional business
ethics are based on broad principles of integrity, justice and fairness, and should focus on the
issues of internal stakeholders—such as product quality, customer satisfaction, employee wages
and benefits, etc.
External focus may, at best, integrate local community and environmental responsibilities
with the company’s business philosophy. The influence of such actions on a company’s business
is limited and, beyond that scope, it will adversely affect the business itself.The CSR movement,
they argue, has come to elevate a social and political agenda that draws on the notions of liberal
propriety and correctness. Examples of such approach are the movements to protect equal job
opportunity, women or minority rights, or the under-developed society, which are considered
ethical directions for fulfilling social responsibility. Arguably, the latter direction of social
responsibility is more of an outwardly-focused social vision to satisfy the political and social
critics; it is not directed towards any real business purpose, such as: offering a quality product at
reasonable price; treating employees, vendors, franchisees and investors fairly; acting responsibly
toward the local environment and community; and, most of all, embracing transparency in
operations and accountability to even the critics. A case in hand are the widespread protest
movements by the locals against mining and forest land-based projects in India because of
the total neglect of environmental and social responsibility by the industries and businesses
operating in those areas. Concerned at the ‘go and no-go’ state of affairs of the sanctioned
projects, the Government of India has of late come up with the idea of royalty sharing by the
operating companies in mining projects for spending in the local area development and welfare
schemes.40 Such steps and measures are meant to give the message to the industries operating in
backward areas that they have the responsibility for ‘inclusive growth’ of the local society along
with running their business.

None can deny that an organisation has moral responsibility not only towards its employees,
customers and other stakeholders, but also towards the society, government, locality and
environment. But, when there are conflicts of interests between the industry and the society
then CSR can act as the moral filter of the business. For example, manufacturing weapons
of mass destruction or conducting tests on animals for medicinal development may appear
39
http://economictimes.indiatimes.com/opinion/view-point/the-real-meaning-of-csr/articleshow/3132042.cms, accessed on 23 October
2011
40
http://www.ismenvis.nic.in/current_news_jul11.htm and http://articles.economictimes.indiatimes.com/2011-07-08/news/29751811_1_
coal-mining-captive-mining-mining-areas, accessed on 23 October 2011
 Ethics in Business and Corporate Governance

unethical to many and are hence counterproductive to social interest. CSR may, therefore, be
invoked to stop such practices. However, it should be noted that social responsibility is not
about posturing a noble intention; it must be meaningful for the overall purpose and progress
of the business and society. It has often been observed that companies that lay claim to good
CSR policies lack in accountability and honesty in their marketing and customer service
activities. In India, for that matter, many a family-owned business house is known for its
charity to foster public interest (CSR), but its business ethics, marketing policy and customer
service is largely questioned by the public.

It must be recognised that a business cannot grow in isolation of the people and society it
serves; a large part of it may lie external to the conventional business system and judgement.
Incorporating these outwardly-focused responsibilities into business management systems and
processes is the task of the CSR policy. Commitment to the identified areas of CSR and honestly
working towards the discharge of related responsibilities, make good sense for the long-term
success of the business and benefit of stakeholders. In fact, in today’s customer-dominated
and environment-sensitive market, social responsibility has become a common denominator
to judge corporate performance. However, CSR must not end up as mere lip service (e.g.,
donate to charities only to avail permissible relief from income tax), the company must be
committed to behave ethically towards the external social environment wherein it operates
and to contribute to the economic development and quality of life of the community and
society at large. This is neither in conflict with the interests of the workforce and other direct
stakeholders, from the standpoint of long-term benefit and sustained growth, nor in conflict
with the purpose of business and tenants of business ethics. CSR is, indeed, an opportunity
to create a win-win situation for all internal and external stakeholders. An important role of
ethics in business operations is to reconcile and harmonise such apparent conflicting issues and
interests with the larger objectives of growth and sustenance of business, which can be best
accomplished by integrating CSR into the business strategy. Thus, what lies at the very core of
corporate social responsibility is an ethical approach to business practices for the sake of its own
survival and growth.
In a policy paper on the corporate social responsibility by ASOCIO (Asian-Oceania
Computing Industry Organisation), 200441, the rationale for adopting CSR by the industry
was aptly described. As per this paper, the rationale for CSR is not voluntary work, but building
a sustainable business environment with the help of communities where the business operates.
The key drivers of CSR, outlined by this study, are:
1. Creating a self-supportive business platform by institutionalising ethics and ethical
responsibility into the business by integrating society and social needs into business
operations.
2. Building social investment and goodwill by contributing to the social needs and
development.

41
http://www.scribd.com/doc/54613522/Corporate-Social-Responsibility, accessed on 26 October 2011
 Corporate Governance: Principles and Practices

3. Building much needed trust and transparency in the business as regards society and
environment.
4. Meeting public expectations from the business as benefactors of all stakeholders.
5. Engaging in public policy for welfare of a nation or society as a measure of responsible
business.

CSR has now become part of the fundamental business practice, which no governance
practice can ignore because its impact on the economic, social and environmental landscape
directly affects the business relationship with its stakeholders, in general, and society and
government, in particular.
Interestingly, the paper refers to a global research finding by Ernst & Young42. According
to the results of a global survey, carried out by Ernst & Young in 2002, 94 per cent of
companies believe the development of a CSR strategy can deliver real business benefits,
though only 11 per cent have made significant progress in implementing any CSR strategy
in their organisations. Senior executives from 147 companies in a range of industry sectors
across Europe, North America and Australasia were interviewed for the survey. The survey
concluded that CEOs are failing to recognise the benefits of implementing corporate social
strategies despite increased pressure to include ethical, social and environmental issues
into their decision-making processes. The Ernst & Young survey found that company CSR
programmes influence 70 per cent of all consumer purchasing decisions, with many investors
and employees also being swayed in their choice of companies. “While companies recognise
the value of an integrated CSR strategy, the majority are failing to maximise the associated
business opportunities,” said Andrew Grant, Ernst & Young Environment and Sustainability
Services Principal. The survey ended with the remarks: “Corporate social responsibility is
now a determining factor in consumer and client choice, which companies cannot afford
to ignore. Companies who fail to maximise their adoption of a CSR strategy will be left
behind”.
The 2002 findings of Ernst & Young are still valid. Despite this observation, many
companies are still seen to be swaying or dithering about their corporate social responsibility
and contribution to the society. These companies are failing to appreciate that well-being
of business depends on the economic power of the society—as being revealed by growing
consumerism in India and the market support it provides for growth of existing business and
formation of new business.

9.6 ‘BEST PRACTICES’ IN CORPORATE GOVERNANCE

Ideally, corporate governance best practices should refer to processes, practices and systems that
are identified in top performing companies and are recognised as improving the company’s
performance across the entire value-chain and efficiency in cost and capital management,
increasing shareholders’ value, and promoting excellence in the company’s brand image and

42
http://www.ey.com/Global/content.nsf/Australia/News_Release_-_Corporate_Social_Responsibility_26Aug02, accessed on 16 October
2011
 Ethics in Business and Corporate Governance

goal-means-path’, transparency of
the processes and procedures, and superiority of business results over peers and competitors.
The quality of corporate governance has long since been recognised as an important aspect
of business to improve shareholders’ value and rise over the value-chain across all business
processes. Companies with strong governance systems have outperformed peer enterprises in
a wide range of business settings or have been able to wither many business adversities or
downturns without much damage. Some Indian companies with sound corporate governance
like Infosys, HUL, TCS, etc. are examples of this strength.43 As it is, these few companies came
out nearly unscathed from the global business downturn of 2008.

What, then, constitutes a strong governance system? While codes and principles have
been devised for the companies to follow for governance and performance, various
aspects of corporate governance have been outlined (as discussed earlier) with regard to
transparency and disclosures, protection of shareholders’ interests, role of board members,
financial disclosures and audits, accountability and responsibility, etc. For example, vide
the recommendation of Cadbury Committee on Corporate governance for ‘best practice’
as back as in 1990 by emphasising on compliance to points 1.4, 1.5, 2.3, 2.4, 3.1 to 3.3,
and 4.3 to 4.6 of the Code. Yet, the world over, there are cases of individuals violating
these codes and standards to perpetrate self-interest and causing suffering to businesses as
well as thousands of stakeholders. So, what brings about this difference in good corporate
governance and how does good governance help? According to KPMG—a global network of
professional services firms providing audit, tax and advisory services—it is the character and
spirit of the governance system that makes all the difference. A recent KPMG poll44, which
was conducted from November 2008 to January 2009, and involved over 90 respondents
comprising CEOs, CFOs, independent directors and similar leaders (who were asked about
the journey, experience and their outlook for corporate governance in India), displayed the
following results:
The KPMG poll titled, ‘The State of Corporate Governance in India’45, noted that a good
corporate governance system is characterised by the company’s commitment to and adoption
of ethical practices across its entire value-chain and in all its activities encompassing the
wide group of stakeholders—shareholders (including minority shareholders), employees,
customers, vendors, regulators and the society—in both good and bad times. For the same,
the company needs to wholeheartedly embrace certain checks and practices.

Furthermore, the report noted the significance of the following elements in good
governance:
Adherence to a code of conduct and the practice of whistle-blowing is important; but how they
are communicated and practised across the organisation is even more important. It is
vital for board members and senior managers to lead by example.
43
http://www.business-standard.com/india/news/infosys-tcs-wipro-india%5Cs-most-admired-companies/41970/on, accessed on 1 September 2009
and http://trak.in/tags/business/2009/08/15/top-10-most-admired-companies/, accessed on 27 January 2011
44
http://www.in.kpmg.com/TL_Files/Pictures/CG%20Survey%20Report.pdf, accessed on 31 August 2009 and on 27 October 2011
45
ibid.
 Corporate Governance: Principles and Practices

Following trusteeship in order to protect shareholders—including minority

shareholders—is essential.
An independent and transparent process is needed to evaluate the functioning of the
board.
Integrity and ethical values should be emphasised as being fundamental to the governance
system.
Focus on sustainability.
Increased responsibility and empowerment of independent directors.
Skills to listen to and understand stakeholders—their needs and interests.
Concern for purposeful corporate social responsibility.
CSR must be need-based and meaningful to the society; it is not charity but an economically
justified action that is capable of transforming the business environment to sustain the business
itself. The corporate governance system of a company should benchmark these ‘best practice’
enabling factors with reference to the most successful and enduring companies of the world.
Very often it has been proved that a social purpose of the business is strategically helpful. In
her book Supercorp (refer to footnote 17), Kanter says that the social purpose in business helps
to achieve better involvement, motivation and cooperation of people as well as lesser internal
politics, and inspires employees. All models of corporate governance best practice emphasise
the need for a social and ethical purpose of the business and ethical functioning across its
operations.
Corporate governance is not mere adherence to a method or a code of conduct in order
to bring discipline into the functioning of an organisation for the sake of profitability and
economic efficiency; it is also one of the principal ways to ‘build the company’ in the society
within which it operates. Hence, corporate governance mechanisms and systems should not
be treated as ‘means and ends’ of governing a company for regulatory compliances—which are
necessary—but should be used to create a larger frame of business in a transparent, creative and
competitive manner.
The aim of corporate governance best practice is not only to comply with codes and
regulations, it is also to create opportunities to determine the right business objectives, to ensure
transparent administration of the ‘means and ends’, to raise the bar for corporate standards,
to check misuse of power by the powerful in the company or business, and to ensure that all
stakeholders are fairly and ethically treated and that their interests are served.
Best practice in corporate governance should be mission-driven; a company’s mission should
be:
To foster a culture to promote good and ethical governance and voluntary compliance,
and to facilitate effective participation of different stakeholders in the company’s policy
and programmes.
To create a framework of best practices, structure, processes and ethical work culture.
To respect the professional code and ethics in propagating the interests of the business.
 Ethics in Business and Corporate Governance

To make a significant difference (contribution) to corporate society by raising the

standards of corporate governance for achieving growth, stability and strength.
To contribute to environmental protection and social well-being.
To promote ultimate self-regulation and self-discipline as a means of governance.
A PricewaterhouseCoopers (PWC) report46, based predominantly on the annual reports
and accounts (31 December 2007 to 31 March 2008) of UK listed companies, validates the
relevance of these mission-driven actions of a company.

PWC, in its report, ‘Best Practice: Corporate Governance reporting 2008’, identified a few
parameters for best governance and observed that best practice companies expect: (a) high
standards of governance as critical to business integrity and to maintain investors’ trust in
the company; (b) all directors and employees to act with honesty, integrity and fairness;
(c) to operate and act in accordance with the laws and customs of the countries in which they
operate; (d) to adopt proper standards of business practice and transparent procedures; (e) to
operate with integrity; and (f) to observe and respect the culture of every country in which
they do business.

These parameters—in addition to the best practice clauses of the company’s respective
codes—ensure effectiveness of corporate governance and provide the company with the ability
to operate successfully in the global business environment wherein all best practice companies
operate. An illustrative view of components that go into corporate governance best practices is
shown in Figure 9.4.
Structurally, best practice of governance would require examination of the company’s
(a) governance framework—which should be ethical and legal; (b) organisation and

Balanced goafs-
Congruence of
goals of all
stakeholders

Contribution to Compliance
Corporate
corporate social to corporate
governance
responsibility governance
‘best practice’
(CSR) ‘codes’

Adhernce to
ethical standards
and ethical
responsibility

Figure 9.4 Essential Components of Corporate Governance Best Practice

46
http:/www.pwc.co.uk/pdf/best_practice_2008pdf, accessed on 27 October 2011
 Corporate Governance: Principles and Practices

structure—starting with board members and senior management vis-à-vis functions,

responsibility, accountability and transparency; (c) the internal control framework; (d)
independent assurance of adherence to codes, principles and by-laws; and (e) strategic intent
and policy of the company’s corporate social responsibility. The board should take steps to
engage with shareholders and other important stakeholders to evaluate the relevant financial,
social, ethical and environmental issues that may affect or influence their interests. It should
adopt the principles of ‘best practice’ for what is strategically and ethically right. In this context,
corporate best practice would naturally involve47:
Balanced objectives: Congruence of goals of all interested parties.
Integrity in the roles of key players: Owners, directors, senior management and staff.
Ethics and ethical responsibility in all functions and decisions.
Transparent decision-making process that is considerate to protecting the due interest
of all stakeholders.
Equal concern for stakeholders, albeit some have greater weightage than others.
Accountability and transparency to shareholders.
These acts and actions fundamentally point to few rules for best corporate governance
practice, which are outlined below:
(1) Ethical base of the business, (2) Alignment of business goals that are appropriate
to law and ethics, (3) Decision-making systems that are inclusive of all stakeholders’
interests, (4) Strategic management incorporating stakeholders’ value, (5) Suitable
organisational framework of governance structure with (a) clear delegation of authority
and responsibility, (b) a reporting system structured to provide complete transparency
and accountability, and (6) a strong and effective audit and compliance monitoring
system/committee.
The best corporate governance practice is not simply compliance with regulatory notes and
rules, but about the ethos of the organisation and holding on to the ethically balanced goals
of the business. These goals may be different for different stakeholders, and they may even
conflict with each other’s interests. But, the true success of a business governance process lies in
harmonising them in the spirit of legitimacy, ethics and fairness.This is a challenge for modern-
day management and corporate governance practices.

Summary
1. This chapter discusses the spirit, purpose, methods, means and measures of corporate governance
for the sustainability and prosperity of business enterprises. Some cases of business failure and
closures due to corporate governance failure have been referred to highlight the importance of
good governance.
2. Various views and definitions of corporate governance have been referred to in varied discussions,
and the role of good corporate governance has been identified. It has been highlighted that the
47
http://www.applied-corporate-governance.com/best-corporate-governance-practice.html, accessed on 27 October 2011
 Ethics in Business and Corporate Governance

corporate governance system is not only about compliance to the legal systems and company
laws, but also about ethicality and utility of the systems and resources being employed by the
company, the means and measures adopted in conducting the business, quality and value-system
of the people who run the business, and the sensitivity of the board or management towards
‘duty of care’ for its stakeholders and the society it is supposed to serve. In other words, corporate
governance is a multifaceted subject, spanning a multitude of factors both internal and external
to the company. The process, therefore, necessitates a holistic view of growth and well-being of
all stakeholders—including external factors as customers, clients groups, governments, society,
locality and the environment.
3. Functionally, corporate governance should provide a structure that works for the benefit of
all concerned by ensuring that the enterprise adheres to accepted ethical standards and best
practices as well as to formal laws. An important theme of modern-day corporate governance is
to ensure accountability of certain key individuals in the organisation through a mechanism of
‘code of practice’ and by-laws.
4. It has been pointed out that concern for good corporate governance has increased in the
wake of corporate upheavals in the US in the 90s and big corporate failures post 2001. In the
aftermath of the crises, both shareholders and governments are showing increasing interest in
corporate governance. In the US, the enactment of the Sarbanes-Oxley Act of 2002 (Public
Company Accounting Reform and Investor Protection Act of 2002) saw a new, quasi-public
agency, the PCAOB, to oversee, regulate, inspect and discipline accounting firms in their roles as
auditors of public companies.The Act also covers issues such as auditor independence, corporate
governance, internal control assessment, and enhanced financial disclosure. This is considered a
big step forward in regulating corporate governance for the welfare of shareholders—including
minority shareholders.
5. Good corporate governance is considered imperative for long-term success or even for the very
survival of an enterprise in a fiercely competitive market—as is the character of modern business.
Several codes, guidelines and principles have been made and implemented to guide businesses
towards good corporate governance, these include the varied aspects of corporate governance
as adopted by various countries and parts of the business world. The aim of these codes and
guidelines has been to bring transparency and accountability in the functions and decisions of
the board, seek to establish accountability standards of the board and management of a company,
protect investors’ interests, care for other stakeholders, and promote investor confidence in the
business system.These codes have been issued either by stock exchanges, regulators, corporations
or by the associations (institutes) of directors and managers of the various countries with the
support of respective governments and international organisations. As a rule, compliance with
these recommendations (for governance) is not mandated by the law, although the codes linked
to the stock exchange listing requirements may have a coercive effect. In particular, the chapter
discusses the Cadbury Code, the OECD principles and the Combined Code of Corporate
Governance.
6. The chapter also highlights the importance of the revised Clause 49 as mandatory conditions
for listed companies in India and as an important milestone in Indian corporate governance.
The five broad functional aspects addressed under Clause 49 of the Indian listing agreement are:
(1) Clarifies the criteria for independent directors; (2) Enhances the roles and responsibilities
of the board; (3) Improves the quality and quantity of financial disclosures; (4) Consolidates the
roles and responsibilities of the audit committee in all matters relating to internal controls and
 Corporate Governance: Principles and Practices

financial reporting; and (5) Enhances the accountability of the top management, specifically the
CEO and CFO.
7. The main features of the different models of corporate governance prevalent in different parts
of the world have been highlighted, and their relative merits have been discussed. The chapter
brings out the essence of corporate governance models in providing a framework for effective
accountability to every stakeholder. How this is important in good governance practice has been
established, as is the necessity to adopt or combine more than one model for country-specific
and business-specific operations. The chapter also discusses Indian governance models—post
the revisions in Clause 49 and the incorporation of the Sarbanes-Oxley Act type of measures
in 2004—in view of the socio-economic demand and necessity of attracting foreign funds for
growth of the business.
8. Corporate Social Responsibility (CSR)—which is getting increasingly accepted as the legitimate
social view of the business—has been discussed at length.The importance of CSR, its commonly
adopted format and what it should imply in the business, and the benefits of CSR have been
highlighted. After critical discussions of CSR, its key drivers in the business operations have been
mentioned.
9. Finally, the means and methods of corporate ‘best practice’ have been discussed, and the
necessities of benchmarking the governance process have been highlighted. Briefly, the goal of
best practice in corporate governance should be to identify and adopt all the opportunities the
system provides for the clarity of the ‘goal-means-path’ of practice, transparency of the processes
and procedures, and superiority of business results over peers and competitors. It has been shown
that this can be best achieved by adopting an ethically right and balanced goal for the business.

Key Words and Concepts

Corporate governance, ethics, board, board culture, management, Clause 49, corporate participant,
disclosure norm, transparency, responsibility and accountability, codes of governance practice, corporate
governance principles, corporate governance best practice, holistic, brand, adventurous governance, global
relativism, robust model, micro-management, macro-management, Indian ethos, spirituality, objectivity,
subjectivity, organisation structure, governance model, stakeholders, shareholders, financial scam, global
meltdown, executive director, non-executive director, board of directors, social welfare, shareholders’
welfare, environmental regulations, legislation, regulation, self-regulation, market force, human values,
integrity, conduct, Cadbury Code, OECD principles, vanguard companies.

Exercises
Check Your Progress
1. Corporate governance is a term that broadly refers to ___________
2. The history of corporate performances has proved that the continuation of success of a business depends
on ___________
3. Functionally, corporate governance should be concerned with the ___________
4. The term ‘stakeholders’ includes ___________
 Ethics in Business and Corporate Governance

5. One of the most important roles of corporate governance is ___________

6. Corporate governance has to evolve—as per the necessity—due to ___________; it cannot be ‘one size fits
all’.
7. In general, codes or principles have mainly focused on ___________
8. The Anglo-American model tends to give priority ___________ whereas the coordinated model recognises
___________
9. The aim of corporate governance best practice is not only compliances to the codes and regulations, but
___________
10. The corporate social responsibility is defined as ___________
11. The key drivers of CSR are ___________

Review Questions
1. Define corporate governance, and identify the model role and purpose of corporate governance with
reference to that definition.
2. Why do you think so many big corporate got into business troubles since late 1990s? What measures were
taken by USA as well as India to contain the problem of non-transparent governance of listed companies
since 2001?
3. What are the high points of SEBI definition of corporate governance? Discuss with reference to functioning
of a known company of yours how these points of governance are taken care of by an Indian company.
4. Briefly identify and outline the commonly accepted principles of corporate governance.
5. What is the role of ‘corporate governance codes’? Name three important code of governance practice
prevalent in the business world. What are the six perspectives of corporate governance principles of
OECD?
6. As matter of ‘best practice’, what are the clauses of Cadbury codes that must be complied with? Briefly
outline these clauses.
7. What are the purposes of SEBI guideline of Clause 49 for corporate governance? What are the five broad
themes that have been addressed under Clause 49 of Indian listing agreement?
8. What is the purpose of corporate governance model? Discuss two major governance models and point out
their relative merits. What type of governance model do Indian companies generally follow and on what
basis?
9. What should be the aim of best practice in corporate governance? Identify the important factors for good
corporate governance as brought out by the KPMG poll referred in the text.
10. What are the benefits of the Corporate Social Responsibility (CSR) function of business? Critically discuss
the pros and cons of CSR in business.

Further/Suggested Reading
1. Corporate Governance (4th ed.), Robert A.G. Monks and Nell Minow, John Wiley and Sons, West Sussex,
2008
2. Corporate Governance Around the World, (Routledge Studies in Corporate Governance), Ahmed Naciri (Ed.),
Routledge, New York, 2008
3. Corporate Collapse: Accounting, Regulatory and Ethical Failure (Revised ed.), Frank Clarke, Graeme Dean, and
Kyle Oliver, Cambridge University Press, Cambridge, 2003
4. OECD Principles of Corporate Governance – 2004, OECD Publishing, www.sourceoecd.org, 2004
5. Corporate Governance in Asia: A Comparative Perspective, OECD Publishing, Paris, 2001
6. ‘Corporate Governance’, http://en.wikipedia.org/wiki/Corporate_governance
 CHAPTER 10
Corporate Governance:
The Indian Scenario

identify various landmarks

Chapter Objectives

rate governance models and codes

especially in view of the dominant ‘family-owned business’

nance in the changing economic systems, and to discuss how the

corporate governance system can benefit by establishing synergy
between various elements of Indian ethos
 Ethics in Business and Corporate Governance

INTRODUCTION
ance
ern ce
Gov ernan
ate
por Gov nance
Cor orate over nce
and Corp ate G erna
ness d or Gov nance
usi an orp
in B siness nd C porate over
u a G
ics B ness nd Cor orate
Eth ics in usi sa orp
Eth s in B usines and C
ic B s
Eth ics in usines
Eth s in B
ic
Eth

1
http://www.dnaindia.com/money/slideshow_2010-the-year-of-scams_1488340-5#selected_thumb, accessed on 29 October 2011
2
http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4344, accessed on 29 January 2011
 Corporate Governance: The
he Indian Scenario

The Satyam case brought to sharp focus several critical corporate governance issues in India.
Some of these issues are listed below:
1. The sorry state of ethics in governance of the Indian corporations and other agencies
(including government machineries) in the public domain
2. Ineffectiveness of the regulatory authorities for governance (and administration), who
either could not detect or turned a blind eye to so many scams in recent years
3. The role and responsibility of independent (non-executive) directors in the board
4. The role and responsibility of auditors, who in accordance with their professional code
of conduct are supposed to (and empowered to) protect the investors and public from
such ‘wrongdoings’
3
http://inaudit.com/audit/external-audit/pwc-partner-resigns-amid-satyam-computers-issue-6655/, accessed on 28 January 2011
 Ethics in Business and Corporate Governance

5. The importance of ‘whistle-blower’ in unearthing corporate governance wrongdoing

or scam, and their near-absence in the country
Corporate governance elsewhere in the world, including the developed economies like the
US and UK, is no stranger to the above-listed issues. However, these are especially important
and noteworthy for India, a country known for lethargic and inept regulatory controls on the
one hand, and in desperate need for ‘best uses’ of public wealth and resources on the other.
India being a developing economy must address these issues to be able to face the stiff global
competition effectively. The Satyam debacle and the recent scams in different fields of business
have badly dented India’s image. The Indian public and potential investors are at a loss to
understand what they should do when the companies and governing agencies slip on ethics and
basic tenets of corporate governance.
It is not that India does not have a good corporate governance system or bears the burden of
a bad history of corporate governance. India has a strong Company Act (of 1956 and of 2008)
to guide businesses in such matters, a capital market regulator (SEBI) to regulate the financial
governance of all listed companies, a financial regulator (RBI) to control the governance of
financial institutions, and various ‘oversight agencies’ to keep watch on illegality and scams.
There are enough good laws and regulations in India, but scams and frauds are still happening
at regular intervals. Scams and scandals even touched the ‘donor-funded social projects’ in India.
The latest example is the microfinance scandal in Andhra Pradesh, which led many farmers to
suicide.4 The hub of Indian microfinance is the South Indian state of Andhra Pradesh (AP), and
the sector’s problems there have recently been making headlines internationally. The Indian
microfinance schemes—mostly started as donor-funded charities—were actually conceived to
rescue the poor from loan sharks. But the recent wave of suicides by the borrowers of the
microfinance industry, which has evolved into a huge, for-profit business (charging interest rates
between 26 and 30 per cent), has raised a serious question: whether the pursuit of profits has
corrupted Indian microfinanciers’ original social mission5—the financial inclusion of rural poor.
A social mission has been turned into a self-serving profit mission by greedy microfinanciers,
unethically exploiting the funding needs of poor and helpless rural farmers. There might be
some confusion about microfinance regulations and regulatory controls in India, which might
get corrected after the passage of the proposed bill on microfinance opertaions6, but the question
about ethics in operations and governance of such social schemes remains nonetheless same.
These cases and examples put forth various corporate governance issues in India and shed
some light on their causes. Among the causes, the prominent one is the tendency of most
Indian corporates (or any Institution, for that matter) to go for profit (and easy money) at any
cost. These enterprises tend to even bypass laws and governing regulations, leave alone caring
about their duty and responsibility to make their operations ethical. But, law does catch up with
the offenders sooner or later, howsoever lax the regulator might be. The alleged cases of 2-G

4
http://www.inwent.org/ez/articles/184683/index.en.shtml, accessed on 29 October 2011
5
http://www.ft.com/intl/cms/s/0/33dfa528-e378-11df-8ad3-00144feabdc0.html#axzz1cAM12KgZ, accessed on 29 October 2011
6
http://www.firstpost.com/business/sks-microfinance-punters-may-have-partied-a-bit-too-soon-40858.html, accessed on 29 October 2011
 Corporate Governance: The
he Indian Scenario

spectrum allocation in India7 or the ‘hedge fund’ manipulation using the ‘insider’s information’
in the USA, where some global corporate bigwigs stand accused, are the examples.8 There
are many cases of law catching up with the offenders, but there is no authority to enforce
ethics and punish ethical lapses. Only the public, society and the customers—the victims of
any ethical fraud—ultimately stand up together and make the enterprise pay the price in the
form of customer attrition or downturn or closure of the business. Corporate governance in
India, which is the system that helps companies control and direct operations for the right
purpose by the right process, is in the spotlight as key parts of the governance framework
such as investor protection, truthful audit and transparent finance functions have been ignored,
leading to failure to check the promoter-driven agendas. Investors have been short-changed by
manipulating finance through creative accounting and by fudging the facts, taking advantage of
the fragmented retail shareholdings (minority individual shareholders). Besides, ineffective role
of independent directors, audit manipulation, and ineffective and sloth regulatory controls also
contributed to the duping of investors by badly governed companies.
But, it would not be correct to infer from such failures that the Indian corporate governance
system and scenario is inept, ineffective or insensitive to the cause of investor protection and
social responsibility. Post-Independence India had a very elaborate Company Law (1956)9
which acted as a guide to responsible management and governance of registered companies.
In financial matters and regulations, India had a very elaborate Reserve bank of India (RBI)
Act of 193410 (last revised in 2009), which was complemented by the SEBI Act of 199211 for
the governance of the listed companies in the post-liberalisation Indian economy. Successive
governments in India did not rest with enacting these laws and regulations, but also reviewed
and modified them periodically to suit the emerging market needs following changes in the
country’s economic policy.What then ailed the Indian corporate governance is not the absence
of laws and regulations, but the motives of few business faces and the ineffective implementation
and administration of regulations. In view of this scenario, the Indian corporate governance
systems, models and regulatory status will be discussed in this chapter.

10.1 EMERGENCE OF CORPORATE GOVERNANCE IN INDIA AND

THE LANDMARKS
India had been a British colonial state till 1947. The country had the distinction of being
the jewel in the British crown. Both the colonial master Britain and the colonial state India
influenced and learnt from each other’s trade and business culture. As such, Indian corporate
governance, if that term could be used for the pre-Independence era, was closely tied to British
legal and governance systems. Formal control and regulation over the financial dealings of
Indian companies started with the enactment of the RBI Act, 1934. This Act, in a way, can be

7
http://www.ndtv.com/article/india/2g-scam-how-raja-allegedly-robbed-india-66769, accessed on 30 January 2011
8
http://www.ft.com/intl/indepth/rajaratnam-galleon-insider-trading, accessed on 30 January 2011
9
http://www.vakilno1.com/bareacts/companiesact/companiesacts.html, accessed on 31 October 2011
10
http://en.wikipedia.org/wiki/Reserve_Bank_of_India, accessed on 31 October 2011
11
http://en.wikipedia.org/wiki/Securities_and_Exchange_Board_of_India_Act_1992, accessed on 31 October 2011
 Ethics in Business and Corporate Governance

considered as the beginning of the Indian corporate governance history. When India attained
Independence from the British rule in 1947, the country already had laws regarding ‘listing,
trading, and settlements’. It also had four fully operational stock exchanges. The Indian system
of corporate governance—at least from the legal and regulatory standpoint—got further boost
by the enactment of post-Independence laws, such as the 1956 Companies Act and the Securities
Contracts Regulation act, 1956, consolidating the rights of investors.
The Company’s Act, 1956, provided some basic features of business operations, especially
with respect to Board formation, issue of shares and management of share capital. Despite such
provisions and regulations, Indian corporate governance was rather lacklustre in the early days.
Many attribute this lacklustre governance to the shift in the government’s industrial policy
towards the ‘socialistic pattern’ in the mid-1950s.12 Because of this policy shift, there were
major thrusts to accelerate the country’s industrialisation through establishment of public sector
companies in all core sectors. Hence, the government attention focused more on creating
public sector companies than regulating the governance of the existing companies in the
private sector for national and social contributions. This led to lacklustre governance of the
of the Indian corporate sector from the 1960s through 1990. Main factors responsible for
this depressing scenario were: (a) the government emphasis on public sector promotion, (b)
necessity of licensing for every industrial unit, (c) introduction and continuation of ‘control-
raj’ under the socialistic orientation of the controlled economic regime, and (d) steady move
toward a culture of red-tapism, giving rise to corruption, nepotism and inefficiency under the
controlled and protected system of economy.
The public sector worked under the government protection with virtually no accountability
to public and minimal responsibility for governance, leading to heights of inefficiency. The
private sector, continuing to suffer under the license-raj and red-tapism of the government
machinery, adopted short cuts to business operations. It violated the basic governance rules,
compromising the interests of investors and customers. The boards of directors of many private
sector companies were packed with relatives and friends in order to facilitate the governance
abuse by the owners or dominant shareholders13, depriving small retail investors and public
of their rightful gains from the prospering business. The Indian equity market was by and
large controlled by the dominant private sector players and stock market manipulators until it
was overhauled by major shifts in the government economic policy in 1991. (The process of
change was started in 1986, which ultimately ushered in the liberal Indian economy from 1991
onwards.) Prior to the 1991 change in the economic policy, the Indian business did not face
much competition, allowing business houses to be sloth in management and governance.
The Indian business scenario changed completely with the government bringing in the
liberal economic policy in 1991.14 The changed economic policy brought a plethora of new
investments, especially foreign investments, necessitating the assurance of good corporate
governance by Indian business enterprises. Corporate governance was seen as a central issue
in India’s developing economy, and development of a strong financial system—both bank-
12
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=649857, accessed on 31 October 2011
13
ibid.
14
http://siadipp.nic.in/publicat/nip0791.html, accessed on 31 October 2011
 Corporate Governance: The
he Indian Scenario

based and market-based—was felt necessary for effective corporate governance in India. The
SEBI Act of 199215 filled this gap, giving wide ranging powers of control to the Securities
and Exchange Board of India (SEBI) to protect the investors’ interests. Establishment of the
Securities and Exchange Board of India (SEBI) in 1988 was a significant development in the
field of corporate governance and investor protection in India. SEBI became an empowered
and fully functional watchdog of the Indian stock market in 1992 following the enactment of
the SEBI Act of 1992.
Established primarily to regulate and monitor stock trading, SEBI has played a crucial role
in framing the basic minimum ground rules of corporate conduct in the country. The SEBI
Act, along with various financial regulations enforced from time to time by the RBI and the
Ministry of Finance, Government of India, acted as guide for effective corporate governance
in the post-liberalisation Indian economy. The mission of SEBI Act was to make India as one of the
best securities markets of the world and SEBI as one of the most respected regulators in the world. (SEBI,
in a way, is equivalent to the US SEC—Security and Exchange Commission). SEBI pledged
to endeavour to achieve the standards of FSAP (Financial Services Assessment Programme)
to strengthen the monitoring of Indian financial system in the context of global financial
sector functioning. The SEBI Act was a landmark in the journey of the Indian corporate sector
towards better governance.
Figure 10.1 shows some landmarks of emergence of Indian corporate governance system.

Revision of
Corporate
Introduction CI. 49 by Emergence
The N.R. Murthy New governance
SEBI Act of of corporate
Companies Committee ‘Companies’ guidelines,
1992 Clause-49 introduced governance
Act, 1956 Act, 2008 2009 by
in SEBI January, in India
MCA
Act, 2000 2006

Figure 10.1 Emergence of Indian Corporate Governance System (New Companies Law, 2011, is also expected
soon.)

Since its introduction in 1992, the SEBI Act was periodically supplemented for fulfilling
its objective of protecting the interest of securities’ investors. SEBI also has the onerous
responsibility of developing and regulating the stock market.16, 17 In 1998, the Confederation of
Indian Industry (CII) also came forward to promote good corporate governance by introducing

15
http://en.wikipedia.org/wiki/Securities_and_Exchange_Board_of_India_Act,_1992, accessed on 1 November 2011
16
http://law-journals-books.vlex.com/vid/governance-india-past-present-suggestions-455135, accessed on 1 November 2011
17
http://finance.indiamart.com/india_business_information/sebi_legal_framework.html, accessed on 2 November 2011
 Ethics in Business and Corporate Governance

corporate governance codes for its members.Though only few firms adopted this code, as it was
purely voluntary, yet it is considered as a milestone in the Indian corporate governance journey.
Encouraged by the private sector efforts for code-based corporate governance, SEBI formed
a committee—called the Birla committee—to work out the corporate governance codes. The
codes, formulated by the Birla committee, were introduced through Clause 49 of the SEBI Act
in 2000. Clause 49 outlined the compliance requirements vis-à-vis corporate governance in
exchange-traded securities, i.e., the listed companies. It was further reinforced by SEBI in 2003
by appointing the Narayana Murthy Committee to scrutinise India’s corporate governance
framework and make additional recommendations to enhance its effectiveness. SEBI accepted
and incorporated the Narayana Murthy Committee’s recommendations and revised Clause 49
of its Listing Agreement of the SEBI Act from January, 2006.This is considered a landmark step,
raising the Indian corporate governance standards at a time when the global business was suffering
from the aftermath of Enron and other big corporate scams in South-East Asia and elsewhere.
However, this was not the end of journey for improving the Indian corporate governance. The
Companies Act 2008, which has replaced the earlier Act of 1956, is the latest milestone for
effective corporate governance in India. The Companies Act 2008 has incorporated the social
view of business in the form of corporate social responsibility (CSR) dictum. Thus, the Indian
corporate governance models and mechanisms are no doubt moving towards a matured position
for fulfilling the globally-accepted objectives of corporate governance, which are: promoting
accountability of the Board, transparency in deals and transactions, disclosure of all material
information, fairness of decisions, and responsibility for actions. However, a grey area of the
Indian corporate governance scenario is represented by the public sector companies. These
companies were established on large scale from the 1950s through the 1970s by government
funding and mostly without listing them on stock exchanges. Hence, they were largely outside
the scope of SEBI’s corporate governance ambit and had shown minimal responsibility and
accountability to public for their dismal performance and governance.
As discussed above, the Indian corporate governance developed to its present maturity
through a number of pragmatic steps since Independence in 1947. Landmark-wise, leaving the
pre-Independence RBI Act of 1934, the corporate governance scene in Independent India can
be divided into two periods: (a) the pre-liberalisation era of the 1950s till 1990, and (b) the
post-liberalisation era of the 1990s till date. In the pre-liberalisation era, the Indian corporate
governance for all registered companies, whether listed on the stock market or not, was modelled
as per the provisions of the Companies Act, 1956 and the Securities Contracts Regulation
Act 1956, which aimed at ensuring some fair play in the Indian bourses. The necessity of
financial regulations and corporate governance for economic development of the country was
embedded in these acts. However, their implementation and regulation had been very sloth and
dismal due to change of focus of successive governments in India from the 1950s through the
1970s towards promotion of public sector enterprises in all core sectors. Hence, industries and
businesses in India in these years had been dominated by the public sector enterprises, which
bothered least about their accountability to public and minimal responsibility for governance.
On the other hand, during this period private sector businesses suffered on the growth front
 Corporate Governance: The
he Indian Scenario

due to constraints of licensing, government controls on pricing and distribution, red-tapism and
corruption. As a result, their corporate governance performance was also lacklustre and dismal,
as they adopted many short cuts to governance, which were adopted for maximising profits
and ensuring their survival. Therefore, corporate governance in India from the 1960s till 1990,
that is till the adoption of the 1991 liberal economic policy, had been rather ineffective and
dismal due to the license-raj, red-tape, corruption and lack of accountability of public sector
enterprises, which accounted for a lion’s share of industrial investment in the country.
The signs of change of India’s economic policy started emerging in 1986, and in 1988, the
Securities and Exchange Board of India was established for overseeing the security market and
its development. But, the true spirit of corporate governance that we see today did not start
developing till the adoption of the policy of economic liberalisation in 1991 and the enactment
of the SEBI Act in 1992. (Details of the SEBI acts, rules, regulations and guidelines can be seen
under the footnotes 15 and 17, though the relevant parts of these provisions will be referred
time and again in this chapter.) Thess steps changed the corporate governance direction in
India from ‘conformance with certain rules and regulations’ to ‘structuring and governing
the business for growth in a competitive and open market environment’. By this change, the
quality of governance got intricately linked to financial and economic success18 in the country.
The concept of effective corporate governance as a mechanism for good management at the
company level, and for economic development at the national level, got sunk into the country’s
governance policy.
From these observations, the following steps can be described as landmarks in the development
of the Indian corporate governance system:
1. Companies Act, 1956: This Act provides the fundamental framework for the
functioning of the corporate India. Before the amendment of this Act in 2000, it did
not have any provisions on corporate governance except the few provisions mentioned
above. The Companies (Amendment) Act, 2000 introduced significant changes in
the Companies Act, 1956 to bring the focus on the principles of modern corporate
governance. But, prior to this amendment Act, the SEBI Act of 1992 was in place to
guide the Indian listed companies for corporate governance.
2. Enactment of the SEBI Act in 1992 imposed a duty on the newly-formed SEBI Board
to protect the interests of securities’ investors and to promote the development and
regulation of the securities market in India.This Act was amended twice in 1995 and in
1999 to clarify the ‘disclosure’ norms and further empower SEBI to protect the interest
of investors and to develop a secured stock market.
3. The CII took initiative (in 1996) by forming a national task force for corporate
governance under the chairmanship of Mr. Rahul Bajaj. In 1998 this task force came
out with a list of desirable corporate governance codes (principles of governance) for
the Indian corporate sector. (These recommendations were modelled on the Cadbury
Committee recommendations of UK.)

18
http://www.onlineprnews.com/news/64170-1285585732-indias-journey-of-corporate-governance.html, accessed on 2 November 2011
 Ethics in Business and Corporate Governance

Act for corporate governance of listed companies. The Clause 49 incorporation was
based on the recommendations19 of the Kumar Mangalam Birla committee. These
recommendations dealt with issues such as the Board composition, independent
directors on the Board, their compensation and remuneration and conduct of the Board
members.
5. The M.N. Narayana Murthy Committee was appointed in 2002 for revision and
further improvement of Clause 49 for making the Indian corporate governance process
contemporary and world class.20 The terms of reference of the Narayana Murthy
Committee were to review the performance of corporate governance in India and to
improve transparency and integrity of the stock market.Accordingly, Murthy Committee
recommendations, finalised in 2004, were given effect to from January, 2006.
6. The new Companies Act, 2008 was enacted to recognise social responsibility as part
good corporate governance. In 2009, the CII came out with a detailed list of corporate
governance codes.
7. ‘Corporate Governance Guidelines 2009’ and ‘Corporate Social Responsibility
Voluntary Guidelines 2009’ by the MCA21 were issued.These guidelines were based on
the recommendations of various SEBI committees, CII and the Institute of Companies
Secretaries (ICSI) for strengthening corporate governance framework in India, covering
areas like formation of Board of directors, responsibility of the Board, audit committee
of the board, auditors’ responsibility, transparency and disclosure, and incorporation of a
mechanism for whistle-blowing.
These are few landmark steps in the journey of promoting good corporate governance in
India. Apart from the committees whose work has been referred to above, various committees
were also formed from time to time to review and recommend improvements. As a result, it
is widely recognised that India has one of the best corporate governance systems, but critics
point out that India’s history of implementation and control of regulations has been sloth and
ineffective.
The driver of corporate governance reform in India has been the SEBI Act, which has been
modified from time to time to suit the market governance and development22 requirements.
The SEBI Act gave the necessary boost through the incorporation of the listing agreement
under Clause 49 in it in 2000. Further revision of Clause 49 was initiated by appointing N.R.
Narayana Murthy Committee in 2002. The Narayana Murthy committee recommendations

19
http://www.sebi.gov.in/circulars/2003/cir2803.html and http://business.gov.in/corporate_governance/kumarmangalam.php, accessed on
3 November 2011
20
http://www.sebi.gov.in/commreport/clause49.html and http://www.sebi.gov.in/commreport/clause49.html, accessed on 2 November
2011
21
http://www.mca.gov.in/Ministry/latestnews/CG_Voluntary_Guidelines_2009_24dec2009.pdf and http://mca.gov.in/Ministry/
latestnews/CSR_Voluntary_Guidelines_24dec2009.pdf, accessed on 4 November 2011
22
http://www.sebi.gov.in/circulars/2003/cir2803.html, accessed on 2 November 2011
 Corporate Governance: The
he Indian Scenario

became effective in January, 2006.23 The revised Clause 49 is regarded as the major milestone
in Indian corporate governance—bringing it at par or even exceeding many standards of
governance in the world. The revised clause especially clarifies the necessity of and the role of
independent directors in the Board. Commenting on Clause 49, The Financial Express24 wrote
on 24 October, 2005:
‘Come January 1, 2006, corporate governance is all set to become more effective and efficient,
thanks to Clause 49 introduced by SEBI in the new corporate governance guidelines. The
issue of corporate guidelines acquired centre stage as a result of the huge foreign investments
coming into India. These foreign investors wish to be assured that the companies they invest
their money in will be managed well, and expect the law of the land to be open and transparent
in functioning. To further enhance their confidence and to safeguard retail investors, SEBI
has revised Clause 49 of its “listing agreement,” which stipulates that at least one-third of the
directors on the boards of the companies should be independent professionals. These directors
should in no way be connected to the interests of promoters’.
Despite India having such developed corporate governance system, corporate fraud did not
stop altogether in the country. Here the glaring example is of the Satyam scandal of 2008-2009.
However, it is not that India alone suffers from corporate frauds the malaise. In fact, the whole
world has suffered from bad corporate governance and frauds in the recent past as became
evident from the unearthing of massive financial scandals and crises of 2007-2008 in the USA,
the UK and many other parts of the world (vide earlier references). This proves that statutory
regulations and controls alone cannot ensure good corporate governance whichever may be
the country. What is needed for good corporate governance is the effective monitoring and
implementation of regulations, and lawful and ethical pursuance of business goals by business
enterprises. In India, steps towards further strengthening of the business purpose, process and
corporate governance are being taken by periodical review of existing regulations and codes
of practices. The latest move in this direction is to strengthen the provisions of the Companies
Act, which has been the primary source of regulations for conducting business in India. The
Companies Act, 1956 has been replaced by the Companies Act, 2008, which is considered a
much needed improvement over the 1956 Act. Yet another move is afoot to bring in a new
Companies Act, which was in the final stages of clearance and enactment as on November,
2011.25 Once enacted, this Act is expected to further raise the bar of corporate governance
standards in the country.

23
http://www.sebi.gov.in/commreport/clause49.html and http://www.sebi.gov.in/commreport/clause49.html, accessed on 2 November
2011
24
http://www.financialexpress.com/news/sebi-clause-49-to-make-corporate-governance-more-effective/154340/, accessed on 2 November
2011
25
http://articles.economictimes.indiatimes.com/2011-11-03/news/30354993_1_corporate-governance-corruption-strict-norms, accessed on
3 November 2011
 Ethics in Business and Corporate Governance

10.2 CORPORATE GOVERNANCE MODELS, CODES AND STATUS IN INDIA

Corporate governance models followed in a country reflect the underlying philosophy
and purpose of business and the corporate governance ‘mantra’ (principles) of that country.
Therefore, based on region- or country-specific requirements, there are a number of corporate
governance models prevalent in the world. Popular among these are: the Anglo-American
Model—prevalent in the USA and the UK, and the Coordinated Model—prevalent in Europe
and Japan. There is another model—the ‘Family-owned Company Model’ (or Business House
Model of Governance), which is used in specific cases of business in India and China, and in
some South-East Asian and Latin American countries where family-owned businesses has a
sizeable persistence. Generally, countries adopt one of these models or a combination of them
to suit their business purpose (mission) and processes. These governance models have been
discussed with related references in Chapter 9 from where students can learn about different
aspects of these models. This section will focus on the characteristics of the Indian business
models and the need for specific governance mechanisms and controls for good corporate
governance in the country.
The basic Indian governance model, by and large, is said to be closer to the Anglo-American
model due to the past tradition and also because of closeness of Indian business houses with
the British and American industries. But, that is not all for the Indian corporate governance.
India has some uniqueness and history of business, which is not exactly like the USA or the
UK, though there are some common grounds between India and these countries as regards
business processes. Like these countries, modern India too subscribes to the need for a strong
and effective corporate governance system for promoting the development of strong financial
systems—both bank- and market-driven—as a means to achieve economic prosperity. But,
India is a developing economy with a lot of its people living below the poverty line. India has
the tradition of the philanthropic family business as well as professionally managed corporates.
India is saddled with many giant public sector enterprises whose success is vital to country’s
economic growth. India is a committed ‘democracy’ where the Government works ‘for the
people, by the people and of the people’. People and people’s welfare are at the philosophical
cornerstone of the purpose of the Indian business. Therefore, it is no surprise that India’s
approach to corporate governance is based on the ‘Gandhian principle of trusteeship’ and the
‘Directive Principles’ of the Indian Constitution. And, appropriate to this approach, the SEBI
committee on corporate governance has defined corporate governance in India (vide footnotes
15 and 19) as the “acceptance by management of the inalienable rights of shareholders as the true owners
of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to
values, about ethical business conduct and about making a distinction between personal and corporate funds
in the management of a company”.
However, the main elements of corporate objectives as viewed in India are also prevalent
in the Anglo-American model of corporate governance (discussed in Chapter 9). Due to this
commonality, along with close business ties of India with the UK and US industries, the Indian
corporate governance codes and models show a preference towards working through the ‘Anglo-
American’ governance model and practice. However, India also has a traditional inclination for
 Corporate Governance: The
he Indian Scenario

family business with preference for ‘business house model’ of governance. These factors are
influencing the choice of corporate governance models and processes in India, introducing
some diversity of mechanisms (not rules). The diversity or mixture of governance mechanisms
is arising mainly from the ownership structures of the listed companies, where family holding
dominates and family interests guide the governance mechanisms in ‘goal-means-path dependent’
fashion.Thus despite preferences and advantages of the ‘Anglo-American’ model of governance
for India, the actual practice shows the presence of diverse corporate governance mechanisms
led by family-owned business with dominant family holding of stakes. Some characteristics of
‘the family-owned company model’ have been discussed in Chapter 9 (Section 9.4).
Another emerging factor with regard to the corporate governance scene is the influence of
international business and listing of Indian companies in different stock exchanges in the world.
Many Indian companies (e.g., Tata Motors, TCS, Infosys, and RIL) are listed in New York
Exchange or London Stock Exchange. Therefore, corporate governance models are, in a way,
converging with each other, at least to some extent, to suit the ‘need-path goal’ of businesses
(refer discussions in Chapter 9). Whatever be the model of governance, their codes of practices

Board and management structure and process

Ownership structure and exercise of control and rights
Corporate responsibility and compliance
Financial transparency and information disclosure
Auditing
The focus of the Indian corporate governance is no exception to this code-based approach
of governance (as is evident from the provisions and contents of Clause 49 of the SEBI Act for
listing), but the character of the Indian business is a bit different. It has a large chunk of public
sector companies many of which are not listed on the stock exchange, hence they are not covered
by Clause 49 of the SEBI Act unless they voluntarily come under this clause. This no doubt
vitiates the environment of good governance in the country, as most of these dominant public
sector companies show little sense of responsibility or accountability to public, which is the
true owner of these companies. However, with the opening up of Indian economy post-1991,
private sector and family-owned businesses are growing in India, and they are listed on stock
exchanges for the obvious benefit of finance mobilisation. Therefore, in the post-liberalisation
economic scenario, private sector companies and family-owned business houses are growing
in India and dominating the stock market. In fact, family-owned businesses have grown more
in number and size in the last two decades in India than the private or public sector businesses,
and they are influencing the corporate governance scene significantly.
Let us take the case of RIL and Wipro—the two prominent family-owned businesses in
India. RIL and Wipro are listed companies but their majority shareholdings are with the
owners. (In such family-owned businesses, the ownership structure could be direct holding of
shares or even complex cross-holding, but with concentrated interests of promoters or owners).
Being listed, these companies are bound by the SEBI rules, yet there would be a difference in
their approach to governance and decision-making processes. There may be debate about the
 Ethics in Business and Corporate Governance

goodness of corporate governance methods and philosophy in such family-owned businesses

with majority shareholding pocketed by the owners, but most would agree about the substantial
contributions made by these companies to the Indian economy. A family-owned management
structure is often found practising superior governance and regulatory oversight capability
(due to overwhelming focus on family interests and growth), resulting in better economic
return to all its shareholders. This is evident in India by the continued growth and superior
performance of RIL and Wipro year after year, benefitting all their stakeholders. Family-owned
companies, large or small, are generally well governed due to the convergence of ownership
and management at the top. However, there are also cases of family-owned business where
funds have been illegally transferred or siphoned off by manipulating or influencing the Board
decision (e.g. Satyam Computers), leaving retail investors high and dry.The large family-owned
business is a new face and force in the Indian corporate governance scenario. It has introduced
some unique features and mechanisms of governance and, perhaps, also requires more vigilance
and regulatory controls to fulfil the SEBI-defined corporate governance objectives in India.
As is clear from the above discussion, the separation or convergence of ownership and
management in the business has considerable influence on the corporate governance model and
mechanisms.The history of the Indian family-owned business shows (with few exceptions) that
this model (i.e., ownership interests in the business) has had a positive effect on value creation.
Some studies show that the companies where the founding families retain majority stake have
performed better than their peers in respective sectors.These companies on average grow faster
and live longer.26 This could be the reason why stock options have increasingly become part of
director compensation package, which creates a sense of ownership in the company and helps
in better governance.
The structure of ownership and the purpose of business are influencing the Indian corporate
governance, bringing in different models of governance such as the Anglo-American model,
the family-owned business model, and a mix of Anglo-American and coordinated models as
is prevalent in Europe and Japan. The selection of the governance model is mostly a ‘goal-
means-path’ dependent choice, following the prescribed codes and regulatory norms of the
country of business operation. In India, this is governed by Clause 49 of the SEBI Act, which
deals with the listing agreement for all listed companies in the country. In a bid to bring greater
transparency and accountability in the functioning of Indian companies, SEBI is reported27
to be further working on new corporate governance models for the listed and to-be-listed
companies in India. Importantly, as of now, five broad functional aspects addressed and improved
under Clause 49 of the Indian listing agreement are: (1) Clarifies the criteria for independent
directors; (2) Enhances the roles and responsibilities of the Board; (3) Improves the quality
and quantity of financial disclosures; (4) Consolidates the roles and responsibilities of the audit
committee in all matters relating to internal controls and financial reporting; and (5) Enhances
the accountability of the top management, specifically the CEO and CFO. Good corporate
governance should be characterised by firm commitment of compliance to these parameters
26
http://www.iccwbo.org/corporate-governance/id3179/index.html and http://en.wikipedia.org/wiki/Corporate_governance, accessed on
3 November 2011
27
http://www.livemint.com/2011/04/13160735/Sebi-working-on-new-corporate.html, accessed on 3 November 2011
 Corporate Governance: The
he Indian Scenario

of the SEBI Act, and adoption of ethical practices in business processes across the value-chain,
dealing with shareholders (including minority shareholders), lenders, employees, customers,
vendors, regulators and the society. There seems to be some reservations and lack of whole-
hearted support to CSR in the Indian corporate governance till now despite the fact that
its relevance to good and beneficial business has been well established the world over, as is
evident from the codes of governance practice of different countries, for example, the OECD
principles.
Towards this direction, SEBI, as regulator of the capital market and listed companies,
continues to work by modifying or clarifying the rules pertaining to Clause 49, examining the
scope of improvements by appointing different committees and initiating government actions
to evolve the right kind of corporate governance model and principles in the country. The
latest direction about the principles of business responsibility and the corporate governance
philosophy in India, based on such SEBI studies and development work, includes the following
guidelines:
Businesses should conduct and govern themselves with ethics, transparency and
accountability.
Businesses should provide goods and services that are safe and contribute to sustainability
throughout their life cycle.
Businesses should promote the well-being of all employees.
Businesses should respect the interests of and be responsible towards all stakeholders,
especially those who are disadvantaged, vulnerable and marginalised.
Businesses should respect and promote human rights.
Businesses should respect, protect, and make efforts to restore the environment.
Businesses, when engaged in influencing public and regulatory policy, should do so in
a responsible manner.
Businesses should support inclusive growth and equitable development.
Businesses should engage with and provide value to their customers and consumers in
a responsible manner.
The above guidelines have been incorporated as ‘National Voluntary Guidelines for the
Social, Environmental and Economic Responsibilities of Business’ issued by the Ministry
of Corporate Affairs (MCA)28, and are expected to form the new base of the corporate
governance model and principles in India in the second decade of the 21st century. These are
refinement on the earlier ‘Corporate Social Responsibility Voluntary Guidelines of 2009’.29
These are designed for all businesses irrespective of the business size, sector and location. These
are in addition to Corporate Governance Guidelines – 2009, issued by the MCA and based
on the task force reports of various CII committees and the Institute of Companies Secretaries
(ICSI) for strengthening corporate governance framework as mentioned earlier (footnote 21).

28
http://responsible-business.in/csr-guidelines, accessed on 4 November 2011
29
http://mca.gov.in/Ministry/latestnews/CSR_Voluntary_Guidelines_24dec2009.pdf and http://www.feeleminds.com/forum/corporate-
social-responsibility-voluntary-guidelines-2009-t9649.html, accessed on 4 November 2011
 Ethics in Business and Corporate Governance

These guidelines and the earnestness of the Indian corporate governance regulatory authorities
denote the country’s continuous efforts for improving the codes and principles of corporate
governance. But, the nation is still questioning the effectiveness of these measures in controlling
the misuse of corporate powers or frauds. It is now widely believed that the present problems of
the Indian corporate governance—as we have observed in last few years—are not due to lack of
laws and regulations or codes of practices, but because of the ineffective oversight and regulatory
controls on the one hand, and greedy, corrupt and unethical businessmen, administrators and
regulators on the other.

10.3 INDIAN CORPORATE GOVERNANCE—ROLES AND RESPONSIBILITIES

OF REGULATORS AND THE BOARD OF DIRECTORS
No doubt, the sovereign authority for guiding, regulating and controlling a country’s economic,
social and environmental affairs rests with the government of that country. Therefore, all rules,
regulations and codes of governance practices by the business flow from government actions.
The government frames rules and regulations through various acts and regulatory notifications
for compliance by business enterprises, and regulators, business associations, professional bodies,
etc. provide the ‘codes’ (or principles) of practice for truthful compliance and adherence with
the government rules and regulations. In this scheme of things, agencies or bodies which have
roles in the corporate governance in India are the government and its corporate and stock
market connected ministries, different government appointed or named regulators (like the
SEBI for listed companies and MCA for the non-listed companies as per Companies Act and
RBI for financial regulations) on the one hand. On the other hand, are the managing Boards of
the companies and the trustees of HUF (Hindu Undivided Family)-run business.
The government role in corporate governance neither begins nor ends with ‘regulation
and control’. The government has to create a conducive, competitive and ethical business
environment in the country by enactment of proper governing laws, facilitating competitive and
growth-focused business policy and operations vis-à-vis market opportunity through reforms,
and administering the governance rules and regulations through oversight and regulatory
controls—uniformly and fairly. The government or regulators’ role in corporate governance
can take two forms: (1) Focusing on the role of the Board, which represents the owners and
the management, and evolving mechanisms for good governance under such power structure.
(2) Focusing on the ownership structure and regulations to control the powers of dominant
shareholders for protecting the interests of minority shareholders in a company to ensure equity
of purpose, protection of interests and fairness of treatment. Although it is claimed that the
latter—disciplining the dominant shareholders—is of paramount importance for the government
and regulators in India30, the rules and mechanisms for corporate governance in a country have
to cover both—not either this or that. As elaborated at length in a research paper (footnote 30),
the central problem in the Indian corporate governance is not a conflict between management
and owners as in the US and the UK, but a conflict between the dominant shareholders and the

30
http://www.iimahd.ernet.in/~jrvarma/papers/iimbr9-4.pdf, accessed on 4 November 2011
 Corporate Governance: The
he Indian Scenario

minority shareholders, which requires a different solution.This paper emphasises that redress of
this Indian problem of corporate governance, concerning protection of minority shareholders
from exploitation by dominant shareholders, is a subject matter outside the Board and requires
stronger regulatory forces and an enlightened capital market. Regulation of Board composition
or board behaviour cannot solve this problem, as the Board derives its power from the dominant
partners or owners of the company. This point has been well proven in the Indian context by
the Satyam scam. Nonetheless, a good corporate governance system would require both forms
of control, namely focus on the role and responsibility of the Board and Board structure, and
also focus on the ownership structure and regulatory measures required to control the powers
of dominant shareholders for protecting the interests of minority shareholders.
In the ultimate analysis of business, goals and sustainability, management of finance, financial
performance and financial deals are at the centre of the business activities. In today’s global
economic system, stock exchanges and listing in stock bourses play a critical role for valuation
and financial strength of a company, and this leads to listing of companies at different stock
exchanges. (Incidentally, to take this advantage in present economic system, companies cutting
across the division of private, public or family-owned businesses are opting for listing in stock
exchanges in India.) Therefore, instruments and regulations relating to stock exchange listing
become the principal driver of corporate governance discipline in a country. In India, SEBI
monitors and regulates corporate governance of listed companies through Clause 49. The
Ministry of Corporate Affairs (MCA) is the other agency entrusted with the responsibility
of taking corporate governance initiatives in India. Clause 49 of the SEBI Act is the principal
guide for corporate governance as per the ‘listing agreement’. It is mandatory for the listed
companies to comply with the provisions of Clause 49 as measures of good corporate
governance. MCA through its various appointed committees and the National Foundation
for Corporate Governance (NFCG), a not-for-profit trust, facilitate exchange of experiences
and ideas among corporate leaders, policy makers, regulators, law enforcing agencies and
non-government organisations for introducing appropriate corporate governance initiatives in
the country, generally through Clause 49. Clause 49 relates to SEBI’s guidelines for India’s capital
market regulation, which has various sub-clauses dealing with different aspects of corporate governance
compliance. Table 10.1 lists out sub-clauses of Clause 49 dealing with corporate governance.
Compliance with Clause 49 is mandatory for the listed companies. (Other companies or public
sector companies, listed or unlisted, can also volunteer to comply with Clause 49).
The clause-wise list provides an overview of the corporate governance responsibilities in India,
which need to be complied with by the Indian listed companies or companies volunteering
for it. The responsibility for forming appropriate regulations and regulatory oversight and
control rests with SEBI. The prevalent Companies Act (now, it is the Companies Act, 2008)
and various SEBI regulations issued from time to time lay down the formal structure and
responsibilities of corporate governance in India. The responsibility of SEBI and MCA is to
ensure the adequacy of regulations and oversight and control of the regulations pertaining to
different sub-clauses of Clause 49 (vide Table 10.1), such as Board structure, Board functioning,
Board responsibility, audits and functioning of the Audit committee, handling of shareholders’
grievances and grievance committee functioning and risk management. However, having rules
 Ethics in Business and Corporate Governance

Table 10.1 Particulars of Clause 49

Particulars Clause of the Listing agreement

I. Board of Directors 49 (I)

(A) Composition of Board 49 (I A)
(B) Non-executive Directors’ compensation and disclosures 49 (I B)
(C) Other provisions as to Board and Committees 49 (I C)
(D) Code of Conduct 49 (I D)
II. Audit Committee 49 (II)
(A) Qualified and Independent Audit Committee 49 (II A)
(B) Meeting of Audit Committee 49 (II B)
(C) Powers of Audit Committee 49 (II C)
(D) Role of Audit Committee 49 (II D)
(E) Review of Information by Audit Committee 49 (II E)
III. Subsidiary Companies 49 (III)
IV. Disclosures 49 (IV)
(A) Basis of related party transactions 49 (IV A)
(B) Disclosure of Accounting Treatment 49 (IV B)
(C) Board Disclosures 49 (IV C)
(D) Proceeds from public issues, rights issues, preferential issues, etc. 49 (IV D)
(E) Remuneration of Directors 49 (IV E)
(F) Management 49 (IV F)
(G) Shareholders 49 (IV G)
V. CEO/CFO Certification 49 (V)
VI. Report on Corporate Governance 49 (VI)
VII. Compliance 49 (VII)

and regulations is one thing and the effectiveness of corporate governance in its true spirit as
‘trustee’ of all stakeholders is another. The Indian corporate governance standards, based on
SEBI principles and codes, are quite adequate and compare well with those followed in the
developed economies. But to improve the effectiveness of corporate governance, India needs
strict regulatory review of the business compliance with the corporate governance standards
and their exemplary enforcement. Even the whistle-blowers—recognised an essential part of
governance system for checking wrongdoings and ethical violations in business—are not given
proper protection or encouragement in India. A study by KPMG, India, Audit Committee, in
2008 observed that weak oversight and monitoring are the biggest risk in the Indian corporate
governance. (Reference: “The State of Corporate Governance in India: 2008”—A Poll; KPMG,
Audit Committee).
The role and responsibility of the Board of Directors, by and large, follow the codes of best
practice as prescribed by the Cadbury committee (footnote 23 of Chapter 9), and the provisions
of Clause 49 of SEBI. Important parts of the Board-related regulations in the SEBI Act are:
The Board composition and function, division of responsibility, accountability and
authority.
 Corporate Governance: The
he Indian Scenario

Functioning and compensation of non-executive directors. (The revised Clause 49

states that all compensation paid to non-executive directors including independent
directors shall be fixed by the Board and shall require prior approval of shareholders
in the general meeting and that limit shall be placed on stock options granted to non-
executive directors. The Board is also required to draft a code of conduct and affirm
compliance with the same annually.)
Appointment and functioning of Audit Committee—its constitution, empowerment
and responsibility;
Compliance with ethics—either through Audit Committee or by appointing separate
oversight agency (This also should include review of functioning of whistle-blower
mechanisms for early detection of wrongdoings.);
Remuneration of Board members, including non-executive directors.
Formation of a grievance committee to address shareholders’ grievances and
complaints.
Certification by CEO/CFO as to the reliability of financial reports and compliance
with applicable laws and regulations.
Finally, the Board has to annually submit report about the compliance with corporate
governance to the SEBI.
In view of various scams and financial wrongdoings under the influence of dominant
shareholders, the SEBI Act now places high importance on the appointment, remuneration,
independence and responsibility of independent directors (non-executive directors) and also
on strict ‘disclosure norm’ for all financial information in order to protect the interests of
minority shareholders. Thus, the new-look Clause 49 has enhanced the role and responsibility
of the Board for (a) quality of financial disclosures, (b) oversight of internal controls and
financial reporting—through the audit committee, and (c) accountability of CEO/CFO
(who are required to certify the reliability of financial reports and compliance with laws and
regulations). Hopefully, these measures of SEBI and the government will be able to further
improve the corporate governance system in India. In this context, observations from the survey
of KPMG-Poll, 2008, may not be still outdated and are worth taking noting of. As was revealed
by this poll, major board room related issues of the Indian corporate governance seem to be:
(a) protection of minority shareholders, (b) empowerment of independent directors, (c) strict
linking of the CEO performance with remuneration, (d) enhancing integrity and ethical values
of Board members in the changed economic system, (e) improving the auditing skills and
commitment, and (f) better commitment to CSR.
It must, however, be appreciated that improved corporate governance does not solely depend
on the increased regulations and controls. Also required are pragmatic regulations and faithful
and ethical implementation of the regulations by the Board where regulations are based on
well-established principles, codes and standards of governance. It cannot be the old ‘cat and
mouse’ story, but new ‘heart and soul’ story of commitment to good governance, with ‘doers of
governance act’ taking a responsible position, preventing moral fragility of business.
 Ethics in Business and Corporate Governance

10.4 CORPORATE GOVERNANCE: SOME INDIA-SPECIFIC ISSUES

The corporate governance system is not, and need not be, a ‘one size fits all’ affair; it has to fit
to a country’s specific requirements for supporting a progressive and ethical business, including
financial governance, system. The efforts of governments or regional groupings are directed to
develop such as system that serves the purpose of and fits in the environment of business, local
and global. For example, the US Securities and Exchange Commission (SEC), which regulates
the US stock market, came out with the Sarbanes-Oxley Act of 2002 after the Enron scandal.The
country was also forced to relook into its regulatory system after the great financial meltdown
triggered by the sub-prime crisis in 2008.31 India’s response akin to the Sarbanes-Oxley Act was
the review and revision of Clause 49 of the SEBI Act by the Narayana Murthy Committee. But
despite the cautionary steps taken by India, the Satyam scandal happened in December, 2008.
The Satyam scandal was facilitated by the tacit support of the Board, including its independent
directors, who initially approved a cooked-up financial deal with the Maytas, another family-
owned company of Raju brothers, the dominant stakeholders in Satyam. This raised serious
questions about the corporate governance32 in India. Subsequently, the complicity of few senior
executives and the audit firm (of international fame) was revealed, raising the questions about
the role of independent directors and audit firms in matters of governance and disclosure. As a
consequence of Satyam scam, most family-run (or owned) businesses in India—like the RIL,
DLF, Anil Ambani Group of companies, Bharati-Airtel, etc.—lost nearly 30% on the bourses33
(on 17 December, 2008) soon after the Satyam scandal revelation. This created market panic
and left many small investors losing their life’s savings. Such cases where the owner or the
dominant stakeholder can unduly influence the course of fair governance and deprive the
minority shareholders are said to be burning issues more in India than to the USA or UK.
In a research paper ‘Corporate Governance in India: Disciplining the Dominant Shareholders’
(footnote 30), it has been emphasised that the issues or problems concerning corporate governance
in India are different than those faced by the Anglo-Saxon world, requiring different solutions.
According to the author, ‘the governance issue in the Anglo-Saxon world aims essentially at
disciplining the management which has ceased to be effectively accountable to the owners.
But in India the problem is different. Here it is of disciplining the dominant shareholder and
protecting the minority shareholders’. The research paper observed that ‘Satyam is a company
which had won Golden Peacock Global Award for Excellence in Corporate Governance (in
2008). This company was named the winner by the World Council for Corporate Governance
as recently as in September 2008! This is after approving the false balance sheet presented in
the Board of Directors’. Following the Satyam scandal, the paper also echoes the big question
over the credibility of auditors in general, as PWC was the auditor of the company. It’s not

31
http://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis, accessed on 6 November 2011
32
http://articles.economictimes.indiatimes.com/2008-12-17/news/27713414_1_corporate-governance-golden-peacock-global-award-maytas-
properties, accessed on 6 November 2011
33
http://articles.economictimes.indiatimes.com/2008-12-17/news/27716794_1_satyam-effect-satyam-computers-ramalinga-raju, accessed
on 6 November 2011
 Corporate Governance: The
he Indian Scenario

the auditor alone, the paper pointed out, ‘even the bankers to Satyam–Bank of Baroda, ICICI,
BNP Paribas, HSBC, and Citibank—did not ask any question or raised any enquiry after
Satyam placing false account details in its balance sheet’. Then how can investors rely upon
the disclosures and ‘balance sheet’ (open to doctoring) while considering investment in India?
Therefore, the corporate governance system in India cannot rest by just focusing on improving
the performance of the Board. The system has to act to curtail, if not eliminate, the following

Failure of the Board—including its independent directors—to stop false accounting and
fictitious financial deals;
Failure of the auditor to detect and highlight such gross malpractices in governance
mechanisms;
Wilful distortion of financial disclosures and material facts with the help of auditor and
senior management;
Laid-back attitude of the banks and bankers to the company; and
Failure of the regulators and oversight agencies to detect such frauds and wrongdoings.
The Satyam case reveals how the owner influenced the Board to approve what he wanted,
and the Board acted under his pressure, neglecting their governance responsibility as per Clause
49. Satyam-like cases may not be history in India, as the present overall administration and
governance approach in the country casts a shadow over the fair governance practice. The
2-G spectrum allocation case and other corporate corruption cases are stark reminders of
the malaise afflicting the corporate governance in India34. The Board (mis)behaviour is only
a part of the story because scams of such magnitude could not have been possible had the
regulatory and oversight agencies not failed in their duty or turned a blind eye to the owners’
misdeeds. It is the responsibility of the regulators, oversight agencies, vigilance committees and
the administrator of the country—the concerned government ministries—to keep a constant
watch for any abuse of governance rules. The Board could do very little to influence or change
the owners’ wish. Because, in principle, the power of the Board flows from the shareholders,
and if the dominant shareholder (or the owner) abuses the system, what power does the Board
have to discipline the power abusers at the top? Now, the challenge before the Indian corporate
governance system is to address these issues, arising from the unethical and corrupt attitude of
the owner or dominant shareholder, the negligent or corrupt regulatory controls, greedy and
corrupt individuals associated with the management and audit responsibility, and the general
laid-back attitude of the public policy administrators in the country.
The corporate governance abuses may be committed by the owners or dominant shareholders
of companies falling in these three categories: (1) Multinational companies (MNCs) where the
foreign partner is the dominant and majority shareholder, (2) Indian business groups where
‘promoters’ together with family members and friends are dominant shareholders, with a large
number of small individual shareholders holding a minority stake, and (3) Public sector units
(PSU) where government is the dominant shareholder, even when listed. Corporate governance

34
http://en.wikipedia.org/wiki/2G_spectrum_scam, accessed on 7 November 2011
 Ethics in Business and Corporate Governance

abuses can take many forms such as inflated executive remuneration, dividend stripping,
accounts fudging, fund diversions or neglect of management responsibility leading to losses (as
in many PSUs), which ultimately deprive or cause to deprive the minority shareholders of a
fair return on their investment. Thus, the important issue of equity and fairness in corporate
governance practice centres on ‘protecting the interests of minority shareholders’.The violation
of the minority shareholders’ rights is an important issue for corporate governance. Keeping
professional management in line with Clause 49 is the only way of protecting minority interests.The other
issue is dealing with ‘inter-locking’ and ‘pyramiding’ of corporate control within the dominant groups.
Further, the managerial control of these businesses is often in the hands of a small group of
people, commonly a family, who either own the majority stake or maintain control with the
aid of other block holders like financial institutions. Their own interests, even when they are
the majority shareholders, need not coincide with those of the minority shareholders. This
often leads to exploitation of the minority shareholder value through actions like ‘tunnelling’ of
corporate gains or funds to other corporate entities within the group. Any effective corporate
governance system has to comprehensively deal with safeguarding the small investors’ interests.
Following the recent spate of corporate scandals and the subsequent interest in improving
corporate governance in the country, a plethora of actions aimed at framing corporate governance
norms and standards have been initiated in India. Notable among them is the Corporate
Governance Guidelines, 2009 (footnote 29) issued by MCA and the proposed Company Act,
2011. MCA’s corporate governance guidelines 2009 aim at addressing the following issues:
The system of appointing independent directors, and the role and responsibilities of
independent directors
Separation of the office of the Chairman and Chief Executive Officer (CEO)
Necessity of the performance evaluation of the Board of Directors, its various committees
(e.g. Audit Committee and Ethics Committee, etc.), and independent directors
Responsibility of the Board to put in place adequate systems to ensure compliance with
laws and regulations (e.g. certification by the CEO/CFO)
Constitution of an Audit Committee comprising at least three members under the
chairmanship of an independent director, with sufficient empowerment for access to
information and enablers
Clarity on the role and responsibility of the Audit Committee
Criteria and conditions for appointment of auditors, their functioning, and certification
about auditors independence and auditors arm’s length relationship with the client
company
Rotation and cooling-off period of audit partners and firms
Internal audit system
Necessity of ‘secretarial audit’ to ensure transparent, ethical and responsible governance
of the company, conducted by a competent professional and reported in the annual
report to the shareholders
 Corporate Governance: The
he Indian Scenario

Institution of the ‘whistle-blowing’ mechanism in the company for employees to report

concerns about unethical behaviour, suspected fraud or violation of company’s code or
ethics policy
However, development of norms and guidelines is one thing and their truthful implementation
another. The biggest challenge in India lies in proper implementation of its healthy corporate
governance policy. Increasingly, external forces like dominant shareholders, stock market dealers
and deal-makers like the GDR (Global Depository Receipt) appear to have been exercising
great influence on the actions of the Board and management of the companies (though their
influence might be limited to few top companies in the country). Nonetheless, more needs to
be done to ensure adequate corporate governance in Indian companies, big or small. Even the
most prudent norms can be flouted or bypassed in a system plagued by widespread corruption
or ineptness. However, with industry organisations (like the CII) and chambers of commerce
pushing for an improved corporate governance system, the future of corporate governance in
India promises to be distinctly better than the past.

10.4.1 Corporate Governance Issues in Family-owned Business in India

The India-specific issues of corporate governance are very much influenced by the big
family-owned business houses. In a study by the rating agency Moody’s35, it has been mentioned
that family-owned companies like those of Tatas, Birlas and Ambanis are dominating the
country’s corporate landscape, but they still face challenges regarding corporate governance
norms such as appointment of successors and transparency in functioning. These companies
are the leaders of the Indian corporate world and they have responded very well to the
opportunities for fast growth presented by the liberalised economy.The report mentioned: ‘The
lack of board nomination sub-committees in many companies suggests that succession planning
is not fully deliberated with independent directors. There is often insufficient transparency
on ownership/control, related-party transactions and the group’s financial position’. In India,
SEBI has introduced the Listing Agreement, wherein Board composition, Audit Committee
responsibility, subsidiary companies’ dealings, risk management, CEO/CFO certification of
financials and internal controls, legal compliance and other disclosures have become mandatory.
All listed companies—whether private, public or family-owned companies—should follow
these norms. But why then questions about insufficient transparency on ownership and control,
related-party transactions and the group’s financial position arise from time to time?
Other studies about family-owned business—relevant to our discussion—observe that:
1. ‘Whatever the perception about the Indian family-owned businesses may be, a Grant
Thornton study has found they are hugely concerned about the corporate governance
regulations that are emerging in the aftermath of major financial scandals worldwide. In
fact, they are already taking steps to put their houses in order.’36

35
http://articles.economictimes.indiatimes.com/2007-10-22/news/27677048_1_corporate-governance-ambani-brothers-companies, accessed
on 7 November 2011
36
http://articles.timesofindia.indiatimes.com/2003-03-11/india-business/27281131_1_family-owned-businesses-corporate-governance-
vishesh-chandiok, accessed on 7 November 2011
 thics in Business and Corporate Governance

2. ‘Coming to family businesses, I feel there is nothing like a family business versus non-
family business when it comes to corporate governance and sustainable wealth creation.
I see no difference at all. Across the world, there are popular names of businesses that
have fuelled entrepreneurship and enterprise—Tatas, Godrej, Dabur, Ford, Bechtel,
Heinz, Johnson and Johnson, Wal-Mart or Ikea. These are brands as big as they can get
which are family-owned.’37
Therefore, the real challenge of corporate governance of family-owned businesses is not
whether they recognise the necessity and merit of corporate governance; it is the ‘will’ to
implement governance in a family business and the quality of implementation. The main issues
that crop up in family-owned businesses are:
1. Board Structure and the Role of Board Members: In a purely family business
(in that sense one should exclude Tatas or any other company managed by professional
board members), very often, the Board consists of family members who do not get
seriously involved into the business or can be influenced to agree to any ‘decision of
personal interests’ and act as ‘rubber-stamp’ decision-maker.
This is contrary to the SEBI or MCA guidelines calling for a Board that takes
independent and unbiased decisions as ‘trustees’ of the shareholders, especially the
minority shareholders, entrusted with the responsibility of providing transparent data,
full disclosure, and ethical decision-making in the best interests of all shareholders. The
family-owned business houses (especially the listed ones) have the responsibility of setting
down codes of conduct to be followed by the Directors and the senior management
team as defined in Clause 49 of the SEBI Act.
2. Separating Ownership from Management: This implies separating the position
of Chairman and the CEO, and compulsorily running the business by appointing a
competent and professionally qualified CEO. The MCA guidelines for corporate
governance model, 2009, recommend this separation of power for better governance.
Many family-owned businesses find it very painful to relinquish authority, responsibility
and accountability to professionals, and violate this norm even in today’s competitive
business environment. Therefore, it is no surprise to find that many big family-
owned business houses are encouraging their family members to acquire professional
management degrees in order to retain the power and influential positions within the
family.
3. Succession Planning: Succession planning is a complex and stressful job for any
business, but more so for a family-owned business. There is an underlying expectation
of the dominant stakeholders of a family business to run the business with family reliable
(read obedient) members, irrespective of whether he or she is competent. Succession
planning is inevitable in a business, and sooner it is done better it is for the business. A
business or an organisation is larger than any individual. Hence, systematic succession
planning must give way to family business for the sake of its very survival.

37
http://www.thermaxindia.com/Fileuploader/Files/CorpGovChallenges.pdf, accessed on 7 November 2011
 Corporate Governance: The
he Indian Scenario

The Grant Thornton International Business Owners’ Survey (IBOS)35 in India (conducted
in 2002-2003) reports that despite the new corporate governance proposals being aimed mainly
at listed or public interest companies, nearly 40 per cent family-owned businesses surveyed felt
the new guidelines would impact their businesses. The survey in India was conducted among
504 mid-sized family-owned businesses (100 each in Mumbai, Delhi, Chennai, Kolkata and
Bangalore) employing 50-500 people.The study brought out few positive aspects of the attitude
of the Indian family-owned businesses by further noting: ‘Not just this, as many as 46 per cent
Indian family-owned businesses have already formed an audit committee against a much lower
global average of 34 per cent. And in the future, as many as 14 per cent Indian business owners
said they plan to put tighter internal controls in place. Globally, the figure is 17 per cent’. What
then brought a deviation from these positive survey findings in 2003 to the Satyam scandal in
2008?
Figure 10.2 illustrates some important issues concerning corporate governance of family-
owned business in India.

To correct or stop Board practices with following loop-holes:

Inclusion of Board members from family or friends, irrespective of
competence
Board structure
Lay-back attitude and and ‘rubber-stamp’ functioning of family board
and the role of
members, leaving decision-making to the ‘dominant’ board member
Board members
—the owner
Focus on serving personal and family interests, overlooking interests
of other shareholders

To separate the position of Chairman and CEO for better

management and governance by professional management with
Separating empowerment.
ownership from
To reduce or eliminate the role of ‘Dominant Shareholder’ to bend
management rules and protecting the interests of minority shareholders.

To curb the tendency to anchor to power for too long and till too late

Succession To introduce ‘new face with new look approach’ to management and
planning governance.

To ensure sustainability of the organisation.

Figure 10.2 Major Issues Concerning the ‘Family-owned Business’ in India

Many Indian family-owned companies seem to have deviated from the Gandhian principle
of ‘trusteeship’ relationship between the business and its stakeholders to ‘ownership’ relationship
 Ethics in Business and Corporate Governance

between the dominant stakeholder and the ‘outside residual stakeholders’, thanks to their greed
of making money even with wrong business goals and unethical means. Perhaps, the answer
lies in the words R.D. Aga (footnote 37)—the founder of Thermax India, a well-known Pune-
based Indian family business. He said:
‘Ownership is not about building a dynasty, but an Institution.’ (Business is an economic
institution for generating wealth for the nation.)
‘Public ownership devolves on us accountability for other people’s money. This is best
addressed by a conviction that the promoter’s role is akin to a ‘Trustee’ so far as the
outside investors are concerned’
‘Profits could remain the ultimate measure of performance but, I would like to believe that
profits in the final analysis are not just a set of figures, but of values. And that is what Corporate
Governance is all about’.
These views reflecting the true spirit of corporate governance along with the following
functional changes can act as ‘game changer’ in the path of healthy and effective corporate
governance in India, in general, and for family-owned businesses in particular. The functional
changes required are:
1. Separation of ownership from management by appointing and working through
‘professional management team’;
2. Adherence to the Corporate Governance Guidelines 2009, issued by the MCA
(footnote 29);
3. Taking into the Board competent and qualified independent directors and empowering
them to act as per SEBI guidelines for functioning;
4. Forming ‘audit committee’,‘ethics committee’ and putting in place the ‘whistle-blowing’
mechanism in the management and governance practices; and
5. Strict, faithful and corruption-free oversight and controls by the regulators of laws and
regulations in the country.
Other views that find place in the scheme of improving corporate governance in Indian
companies are: (a) ‘Executive ownership’ in the form of common stock and/or stock options,
which can enhance decision-making and increase shareholder value in most instances; hence, it is
a practice worth emulating in all listed companies, including private and family-owned business
houses, and (b) Shareholder education (small and independent shareholders) and enlightenment for
making the shareholders more participative in the companies affairs and governance, because
they are the true owners of the company. It is said that no corporate governance can work
well unless there is some engagement on the part of shareholders; unfortunately, this dictum is
being followed too aggressively by the dominant shareholders in India and not the minority
shareholders where it is supposed to be, in principle.

10.5 CORPORATE GOVERNANCE AND THE INDIAN ETHOS

Corporate governance is a business-driven practice, but based on certain philosophy of life,
living and business. Life, living and business are inter-connected in their purpose, and they draw
 Corporate Governance: The
he Indian Scenario

support from each other for flourishing. Hence, spiritualism, which we connect with religious
philosophy of life and living, gets connected to corporate governance, a process connected to
the well-being of business and its stakeholders, including the society. Therefore, while we are
on the subject of corporate governance scenario in India, it would be important to review
what Indian philosophy (which is essentially spirituality-based) and ethos (which imply the
basic values of Indian culture) teach us about the governance priority and path. This section
on corporate governance and the Indian ethos attempts to examine this aspect of corporate
governance priority and path.
Our earlier discussions and deliberations in this and previous chapters bring us to the reality
that the history of business and corporate governance is dotted with stories of failures and
frauds. But, what is unsettling the present business world are the incidents of frequent frauds and
failures of big businesses beginning with the 1990s. Instead of becoming the era of ‘liberal global
business’, the present times are being plagued with corporate upheavals, scams and failures of
the financial sector—the core and anchor of any business system—occurring across the world.
In fact, the world is still struggling to recover from the last in the chain of such failures—the
‘financial crisis of 2008’—and the associated downturn of global business (refer to footnote 3
in Chapter 9). These are not due to absence of laws, regulations and codes or due to lack of
understanding of business management processes; these failures occur largely due to the greed
of individuals and lack of sustainable ethics in those businesses. As one researcher38 puts it, ‘On
the one hand, many people are concerned that those responsible for the financial problems are
the ones being bailed out, while on the other hand, a global financial meltdown will affect the
livelihoods of almost everyone in an increasingly interconnected world. The problem could
have been avoided, if ideologues supporting the current economics models weren’t so vocal,
influential and inconsiderate of others’ viewpoints and concerns’. Power, position, concern
(relationship), ethics, and greed are the factors that appear to be plaguing the business world
causing frequent problems and faltering. At the 2008 International Business and Leadership
Symposium in Brussels, the need for ethics in business was further emphasised by recording
that: ‘The lack of sustainable ethics in business has been a key factor in the financial crisis. Had
this been in place, the global system would be intact and prosperous’.39
Ethics and spirituality are closely related at an individual level; what matters most in good
governance is good individuals—as they are the ones who set the purpose, goals and objectives,
design the processes and parameters, strategise means and methods, innovate, and run the
business to accomplish its goals. If individuals running a business are greedy and unconcerned
about others in the business, negligent of protecting those who put their money into the
business, lack ethics of duty and responsibility, and take decisions based on power, position and
influence, then the business cannot be sustained for long. Nor can it be said to be governed
well.
The role of spirituality and ethos in governance provides two directions: one, about ethics
and the ethical way of doing business, and the other about bringing a change in the ‘mind’—the

38
http://www.globalissues.org/article/768/global-financial-crisis, accessed on 2 September 2009 and 7 November 2011
39
http://www.wfeb.org/bilder/Proceedings.pdf, accessed on 7 November 2011
 Ethics in Business and Corporate Governance

source of the thought process of individuals who take responsibility and control for running
the business. The underlying principles and approach to spirituality and ethos help change the
individuals—to align their thought process with what is ethical, virtuous and good (for the self
and the others in the society), and to harmonise thoughts, words and deeds. Spirituality induces
an ‘inside out transparency’ system in deals and governance. Spirituality aligns the business towards
holistic growth through enlightened leadership—in other words, through people or leaders
who are natural in expression of their hearts, minds and souls, and whose thoughts, words and
deeds are in harmony with the fundamental truth and longings. When external actions and
internal reflections of enlightened leaders become mutually supportive, the process of business
and governance becomes ideal for mankind. The outcome of such business processes becomes
holistic in nature and beneficial to society at large. ‘Holistic’ is about caring all components of an
entity; it is an all inclusive approach: the self, individuals, society, and the universe; the purpose,
means, truths and the path or whatsoever it takes to complete the mission of an entity. It is
about a sense of respect, harmony and equity in matters pertaining to others in the system
howsoever subtle, intangible and tangible that matter could be. On the face of it, corporate
governance and holistic growth may seem irreconcilable—primarily because of the traditional
belief that business is for the profit of those who own it, or that business offers little space to
think about others. However, it is being realised more and more that this focus is not quite
tenable as past experiences show, and is proving to be illusory. Holistic growth is gradually
becoming an integral part of management the world over. Gradually, it is being established that
good management and governance in action form a holistic process, and that spirituality of
individuals is essential in the governance process to meet the ends of a holistic system.
Thus, ethics, spirituality and a holistic approach to the governance of business become integral
and essential for sustainability. In this context, let us consider the words of the spiritual leader
Sri Sri Ravi Shankar at the Brussels symposium on ‘Ethics in Business: Corporate Culture and
Spirituality’ (European Parliament, Brussels, 13–14 November 2008) (refer to footnote 39):

‘Many people believe that ethics and spirituality run counter to economic prosperity. Business
devoid of spirituality breeds greed and exploitation, both significant factors in the current
economic turmoil. The very heart of business will be lost if unethical means are used to make
a quick profit. Only in being bold, by embracing an ethical approach we can ensure long-
term business success and a sustainable future for all.’

Dr Peter Pruzan, Professor Emeritus at the Department of Management, Politics and

Philosophy, Copenhagen Business School, Denmark—who collated the experiences and
perspectives of 31 top executives from 15 countries in six continents in his book Leading
with Wisdom—says that, in the emerging global culture, spirituality and business are seen as
interconnected and not separate areas.
In India, the concept of spirituality has developed on the principles of spiritualism since the
Vedic age; Indian culture and ethos have transcended through the ages and greatly influenced
the way Indian people think and act. Even in business and entrepreneurship, spirituality has not
 Corporate Governance: The
he Indian Scenario

been uncommon to India. Religious philosophers like Swami Vivekananda and philanthropists
like the late J.N.Tata40 (founder of the Tata Group) have helped imbibe the spirit of philosophy
in Indian business since as early as the 19th century. In fact, J.N. Tata promoted a sense of
trusteeship and realisation that, to survive and prosper, free enterprise must serve the needs of
society. For instance, at the 1895 opening of an extension of the Empress Mills, he said:

‘We do not claim to be more unselfish, more generous or more philanthropic than other
people. But we think we started on sound and straightforward business principles, considering
the interests of our shareholders our own and the health and welfare of the employees the
sure foundation of our prosperity.’

Yet, Indian spiritual ideals and ethos found their due recognition among the principles
of business management or corporate governance in the true sense only as late as the 1990s.
Prof. S.K. Chakraborty41, of the Management Centre for Human Values at IIMC, is one of the
pioneers who sowed the seeds of Indian spirituality and ethos in the arena of management
and governance. Today, the same quest for self-awareness and creativity through spiritualism
is making its way into the boardrooms and seminars of business enterprises the world over.
Synthesis through self-awareness and spirituality is fast emerging as the new ‘mantra’ of good
management and governance. Indian ethos is opening up the new but significant dimension of
governance, which is about managing the self and of the relationship with the outside world—the
environment, the universe. The very concept of Indian ethos dowels in five elements, namely:
ethics and virtue, values and beliefs, integrity, codes of conduct, and conduct (‘karma’). The
quality of individuals in terms of these elements is proving to be essential for good governance
and management.
At a seminar on ‘Emergence of Indian Management: Towards New Mantra in Corporate
Corridors’ in Bangalore in April 2011, Prof. Subhas Sharma42 presented a view on the transition
of management approach over the last 100 years. He divided the 100 years of management into
the four following eras:
Scientific Era Humanistic Era Ethics and Values Spirituality
(Science in (Human Dimension (Ethical Values in (Spirituality in
Management) in Management) Management) Management)
1900 1960 1990 2000
Over the last 100 years, the management approach transited through several stages and finally
arrived at a stage where ‘managing through spiritual synergy’ is being seriously looked at by the
industries. It is claimed that the emergence of ‘management by Indian ethos’ coincided with
this change in management perspectives. This change has been in line with the change in the
economic nature of the world business system— transiting from ‘industrial economy’, with roots

40
http://en.wikipedia.org/wiki/Indian_Institute_of_Science, accessed on 4 September 2009 and 7 November 2011
41
http://www.iimb.ernet.in/publications/review/december2002/ethics-drawing-indianvalues, accessed on 8 November 2011
42
http://shunyacreations.com/Emergence_of_Indian_Management_April_2011.pdf, accessed on 8 November 2011
 Ethics in Business and Corporate Governance

from industrial revolution, to ‘service economy’ with roots in consumerism and ‘knowledge
economy’ with focus on innovation and knowledge revolution, supported by growing needs
of the society. Such a change is putting more demand on the quality and character of people
than the mindset rooted in traditional administration and management, thus bringing in the
relevance of ‘creator’ and the ‘creation’—a philosophical subject matter that dips deep into the
Indian ethos.
The very concept of the Indian ethos dwells on five elements, namely ‘ethics and virtue’,
‘values and beliefs’, ‘integrity’, ‘codes of conduct’, and ‘conduct’ (karma). The quality of
individuals in terms of these elements is proving to be essential for good governance and
management through spiritual synergy.
Indian ethos refers to the principles of self-management and governance of society, entity
or a system by wisdom as revealed and brought forth by great scriptures like the Vedas,
Upanishads, Bhagvad Gita, Dhammapada, Bible, and Koran. This wisdom evolved through the
age-old practices of Indian mystics, philosophers and religious ‘gurus’, and is now found to
have profound implications for self-management and good governance of a stormy society and
business environment, or even a politically divided world. These holy books bring to light six
basic principles that are applicable to the principles of management and governance, namely:
Holistic approach; (2) Equal importance to subjectivity and objectivity; (3) Karma Yoga; (4)
Respect to each soul as a potential God; (5) Cooperation; and (6) Yogah Karmashu Kushalam.
The implications of these six principles of Indian ethos in corporate governance are discussed
below.
1. The Holistic approach in governance is based on the spiritual principle of oneness,
non-duality or on the concept of ‘Advaita’. This is a direction to ‘unity’ where the
entire universe is one—an undivided whole—with each element, and each entity is
connected with the other for well-being. It is an integrated approach to consider ‘part
in a whole’ system. Nothing is perfect without the whole of it being complete. In the
holistic approach, integration, cooperation, synthesis and harmony (concept of team
and unity of purpose) provide extraordinary power to deliver real prosperity, enduring
success, and lasting consequences.
2. Equal importance to subjectivity/objectivity is an important aspect of Indian
philosophy, where no distinction is made between the subject and the object. They are
equally important; while the former is subtle and intangible, the latter is concrete and
tangible (visible). According to Indian ethos, creator is subjective and creation is objective. Insight
(the creator) is considered more important than outsight (the creation). Human and
ethical values—integrity, courage, vision, honesty, purity of mind and soul, truth and
social awareness among others—are subjective, subtle and intangible concepts. These
inner resources of human being are important than material objectives, more powerful
than external resources; they are the creator of external resource. And therein emerges
the very important concept of management, that we are not limited by resources but by
our ideas. The quality of creators is a critical requirement of today’s estranged business
 Corporate Governance: The
he Indian Scenario

enterprises if they are to overcome the many apparent limitations that lead managers to
adopt short cuts.
3. Karma yoga is the yoga of selfless service to others; it is about identifying one’s priority
and then acting responsibly to accomplish the same. The Gita decrees: ‘Do your duty
without ego and without calculating your gains. You have the right to work but not
the right to its fruit.’ Thus, ‘karma’ preaches selfless work; work with a purpose that
is divine, that is about doing good unto others in the universe. Karma implies work
with accountability, where you remain responsible to others for whatever goes right or
wrong.
4. Respect to each soul as potential God implies divinity of the soul with immense
power for self-development. Divinity implies wisdom, perfection of knowledge and
power. Every human being has the power to rise—if only respected, encouraged and
empowered. Thus, human beings are an invaluable resource of power to a nation or
in a business when it comes to doing what is apparently impossible and achieving
extraordinary results.
5. Cooperation is the road to success. The Gita says: ‘By cooperation and mutual help all
shall achieve the highest human welfare’ this implies that unity is strength. Cooperation,
unity and selfless efforts (karma) can bring all-round prosperity and success in an
organisation or a society; it is the tool for teamwork. Human beings may have the
tendency to discriminate and divide, but the ‘mantra’ of cooperation inspires to ‘work
with each other and work for each other.’ This is a powerful tool for today’s business
enterprises so as to harmonise all efforts and resources to accomplish their objectives.
6. Yogah Karmashu Kushalam implies working with excellence and with devotion, but
without attachment. This mantra is with a view to develop an attitude towards work
without hankering for benefits and rewards. It helps people to develop values and skills
for excellence, it binds them to work with devotion and skill—without expecting
personal gain or without being motivated by selfish desire. It teaches us to be a part of
one system, and be valuable to others if we have to add value to ourselves.
Significantly, the most powerful Indian ethos is ‘karma yoga’; it is through this that the Gita
preaches us to not let the fruit of our work motivate us, as this just might divert our focus from
the holistic mission. When doing the job, do it wholeheartedly; our heart and soul should
go into it. It is best we do not waste our present dreaming futilely of what will be the future
gain—for the simple reason that we have no control over the future. Future is the result of our
present good work. The Gita explains what we should work for and why; these are:
1. For our own salvation and personal growth and
2. For the good of the world, i.e., others in the society, in the system, in the environment.
Doing good unto others gives ‘inner joy’, a sense of mission fulfilled, a sense of self-respect, a
sense of strength and empowerment. When work is done without attachment and expectation,
results—that are achieved without selfish motive—transcend people to a higher spiritual
platform and higher ability to perform, bringing a synergy between spirit, performance and
sustenance. The latter is the key to business success—success with regard to a purpose that
 Ethics in Business and Corporate Governance

is holistic in nature and sustainable for future. Be it the Western principles of management
and governance or the Indian ethos, all have a similar mission and purpose—which is to add
prosperity to all stakeholders in a sustainable and ethical manner. In their won respective way,
both have a vision and perspectives for development of good individuals, excellence in business
results, well-being of the society, and creation of sustainable culture and environment for welfare
and growth. The strategy for good corporate governance is in synch with this spiritual concept
based on Indian ethos and does not exclude western principles—both are mutually inclusive.
The paramount difference between the so-called western approach and the approach based on
Indian ethos is the way in which each looks at ‘subjectivity’ and ‘objectivity’ in life and in the
management of an entity. According to the Indian ethos, creator is subjective and creation is
objective, and in this context, the undisputed direction of Indian ethos is: ‘Insight (the creator)
is considered more important than outsight (the creation).’ In other words, creation can only
be as good as the creator and no better. Hence, the question is: How and how much of this
concept to integrate and synthesise into the practice of modern management and governance,
and what—metaphorically—should come first—the horse or the carriage?

Summary
1. The chapter discussed the corporate governance scenario in India, especially in the post-
liberalisation period, in view of various shortcomings of the system and critical issues pertaining
to its effectiveness. Based on the chapter-opening case, issues and shortcomings of the Indian
corporate governance have been identified and highlighted.
2. To provide in-depth knowledge and information on the Indian corporate governance scenario,
the chapter examined how the Indian corporate governance system has evolved in post-
Independence era, various landmarks of regulatory measures, corporate governance models and
codes prevalent in India, and the role and responsibility of different agencies and authorities
involved in regulating and controlling the corporate governance mechanisms.
3. Development and improvement of Clause 49 of the SEBI Act, governing the corporate governance
standards of the listed Indian companies, has been elaborated. Mechanisms of regulation and
control of corporate governance in listed Indian companies as per Clause 49 and their limited
effectiveness in the context of various governance failures and frauds have been highlighted.
4. The list of ‘family-owned businesses’ in India is growing post-1991 liberalisation; these businesses
are becoming powerful too. There are some issues of the Indian corporate governance arising
from the mode of functioning of the family business dominated by the promoter or owner.
Therefore, various India-specific issues of corporate governance, especially in view of the
dominance and importance of family-owned businesses in India, have been critically discussed
and possible directions for dealing with the issues have been listed out.
5. It has been pointed out that corporate governance abuses in India by owners or dominant
shareholders arise in three categories of companies: (a) Multinational companies (MNCs) where
the foreign partner is the dominant and majority shareholder, (b) Indian business groups where
‘promoters’ together with family members and friends are dominant shareholders (and residual
minority shareholders are widely scattered to raise any voice in matters of governance), and
 Corporate Governance: The
he Indian Scenario

(c) Public sector units (PSUs) where government is the dominant shareholder, even when listed.
These abuses can take many forms such as inflated executive remuneration, dividend stripping,
accounts fudging, fund diversions or neglect of management responsibility leading to losses (as
in many PSUs), which ultimately deprive or cause to deprive the minority shareholders of a fair
return on their investment. As such,‘protection of minority shareholders’ forms a critical concern
of the Indian corporate governance and it has been a major focus of the Indian corporate
governance system.
6. Further, some issues about the governance of the family-based business have been highlighted.
They are: (a) dominance of family members in the Board, many of whom are sleeping ‘directors’
(b) no separation of ownership from management, and (c) no devolution of management control
by proper succession planning.These issues have been briefly discussed and the changes required
in the functioning of corporate governance systems in the listed family-owned companies have
been identified.
7. Finally, the importance of the Indian ethos in corporate governance has been discussed and
emphasised, especially in the background of widespread violation of ethics in management and
governance the world over. It has been pointed out that the Indian ethos can provide two
directions to governance—one, about ethics and the ethical way of doing business, and the other
about bringing a change in the ‘mind’—the source of the thought process of individuals who
run the business.
8. It has been pointed out that the underlying principles and approach to spirituality and ethos help
individuals align their thought process with what is ethical, virtuous and good (for the self and
others in the society), and to harmonise thoughts, words and deeds. Spirituality induces an ‘inside
out transparency’ system in deals and governance. Spirituality aligns the business towards holistic
growth through enlightened leadership, that is, through people or leaders who are natural in
expression of their hearts, minds and souls, and whose thoughts, words and deeds are in harmony
with the fundamental truth and longings.
9. Six important elements of the Indian ethos—as revealed and brought forth by the great scriptures
of the world in general and Indian scriptures in particular—have been mentioned and their
salient points have been highlighted. The relevance of ‘karma yoga’ in modern management
and governance has been elaborated, and the principle of equal importance to subjectivity
and objectivity has been discussed. The chapter throws light on how, according to the Indian
ethos, the creator is subjective and creation is objective. Insight (the creator) is considered
more important than outsight (the creation) in the Indian ethos. The task of good corporate
governance strategy is to integrate and synthesise this concept into business management in the
most beneficial and balanced manner for the ultimate success and sustainability of the business
enterprise.The challenge before management experts is to integrate these spirituality and ethos-
based approaches into the Western model of governance in a mutually inclusive manner.

Key Words and Concepts

Auditors, audit committee, board of directors, corporate governance system, shareholders, stock
market, regulators, controllers, SEBI Act, Clause 49 of the SEBI Act, Companies Act, Reserve Bank
of India, Ministry of Corporate Affairs (MCA), dominant shareholders, minority shareholders, family-
 Ethics in Business and Corporate Governance

owned business, codes of corporate governance, corporate governance models, corporate governance
principles, social mission, corporate governance guidelines, corporate social responsibility, ownership and
management, sustainability, spiritualism, Indian ethos, subjectivity and objectivity, creator and creation,
insight and outsight, holistic approach, karma yoga, succession planning, ownership structure, board
structure, ethics committee, responsibility of the board, responsibility of regulators.

Exercises
Check Your Progress
1. Analysis of past events shows that critical corporate governance issues in India are ___________
2. In post-Independence India, all registered companies were guided to responsible management and corporate
governance by the ___________
3. SEBI was established in the year ___________ and the SEBI Act was introduced for governing the listed
Indian companies in the year ___________
4. The Indian corporate governance system was brought on par with world-class standards by the revision
of the SEBI Act by the ___________ committee appointed in the year ___________ and effective from
___________
5. In general, the model of corporate governance and the codes of practice centre on five broad categories
___________
6. The government or regulators’ role in corporate governance can take two forms (1) ___________,
(2) ___________
7. Landmarks of the Indian corporate governance system are ___________
8. The role and responsibilities of the Board of Directors, by and large, follow the codes of best practice as
prescribed by the ___________
9. The governance issue in the Anglo-Saxon world aims essentially at disciplining the management which
has ceased to be effectively accountable to the owners. But in India the problem is different; here it is of
___________
10. Ethics and spirituality are closely related at an individual level. What matters most in good governance is
___________

Review Questions
1. Chronologically discuss the development of the Indian corporate governance system since Independence.
Also discuss the reasons for lacklustre state of governance in the early days.
2. List the landmarks in the journey of the Indian corporate governance system, pointing out their individual
benefits/improvements.
3. Discuss the development of Clause 49 of the SEBI Act and how effective it has been in controlling and
regulating the Indian corporate governance functions.What have been the major thrusts of this clause after
the changes that became effective in January, 2006?
4. Briefly discuss the causes of concern for the Indian corporate governance and reasons for failures despite
having regulations like Clause 49.
5. Discuss the main provisions of the SEBI Clause 49 for the role and responsibility of the Board of
Directors.
 Corporate Governance: The
he Indian Scenario

6. What have been found ailing in the corporate governance practice of India’s family-owned businesses?
What changes are required to make them investor-friendly and more effective in protecting the interests of
minority shareholders?
7. List at least five guiding principles as per ‘National Voluntary Guidelines for Social, Environmental and
Economic Responsibilities of Business’ issued in 2009 by the Ministry of Corporate Affairs (MCA), and
discuss how they can contribute to better corporate governance.
8. What are the salient points of MCA’s Corporate Governance Guidelines, 2009?
9. Justify the incorporation of spiritualism and the Indian ethos in the corporate governance of modern
business organisations in view of the transition of management approach over the last 100 years.
10. Identify the six principles of the Indian ethos that are said to be relevant and important for holistic corporate
governance. Discuss their implications for the corporate governance process.

Further/Suggested Reading
1. Corporate Governance in India: An Evaluation, Subhas Ch. Das, PHI Learning Pvt. Ltd., New Delhi, 2008
2. Corporate Governance:The Indian Scenarios,Vasudha Joshi, Cambridge University Press, 2007
3. Corporate Governance: Codes, Systems and Standards, Subhas Ch. Das, Originals, 2009
4. Corporate Governance in India, Sunita Upendra Sharma, New Century Publications, New Delhi, 2009
5. Management in New Age:Western Windows, Eastern Doors, Subhash Sharma, New Age International Publishers,
New Delhi, 2006
6. ‘Indian Ethos for Management’, http://www.scribd.com/doc/13261125/Indian-Ethos-for-Management
7. Ethics, Indian Ethos and Management, S. Balachandran, K.C.R. Raja, and B.K. Nair, Shroff Publishers, New
Delhi, 2002
8. ‘The State of Corporate Governance in India: 2008’, A Poll, KPMG, Audit Committee, 2008, www.in.kpmg.
com/tl_files/pictures/cg%20survey%20report.pdf
 CHAPTER 11
Ethics and Corporate
Governance

To establish the relationship between ethics and corporate gover-

nance, and the essentiality of ethics in successful and sustainable
corporate governance
To set the purpose of corporate governance as ‘creation of economic
Chapter Objectives

and social enterprise value’ in contrast to the general belief that a

business aims to create wealth for the owners
To discuss the ethical dimensions of corporate governance in terms
of its true purpose
To study the means and mechanisms of ethical corporate governance
vis-à-vis modern business environment and expectations from differ-
ent stakeholders
To highlight the role of ethics in improving the quality of corporate
governance for sustainable development
To discuss the role and scope of ethics in managing competitions
in the marketplace with special reference to the global nature and
character of modern business
INTRODUCTION
ance
ern ce
Gov ernan
ate
por Gov nance
Cor orate over nce
s and Corp ate G erna
nes d or ov nce
usi ess an Corp ate G erna
B
in usi
n
and por Gov
ics B ness nd Cor orate
Eth ics in usi sa orp
Eth s in B usines and C
ic B s
Eth ics in usines
Eth s in B
ic
Eth

While Case I illustrates clear and objective thinking of a public limited company coupled
with a creative attitude in governance with a view to accomplish desired results and corporate
excellence, let us now examine another situation in the Indian corporate world as exposed by
the incidence of Satyam—a family-owned company:

1
http://economictimes.indiatimes.com/Opinion/View-Point/The-real-meaning-of-CSR/articleshow/3132042.cms, accessed on 23
November 2009 and 14 November 2011
2
http://en.wikipedia.org/wiki/Maruti_Suzuki, accessed on 10 November 2011
3
http://articles.economictimes.indiatimes.com/2009-01-15/news/29403894_1_corporate-governance-managers-independent-directors,
accessed on 9 November 2011
4
http://articles.timesofindia.indiatimes.com/2008-11-17/international business/27932862_1_financialsector-options-brussels; http://www.
wfeb.org/news_press_art1.html, and http://www.wfeb.org/bilder/Proceedings.pdf, accessed on 9 November 2011
 In broad terms, Case I provides an idea about the scope of corporate governance; Case II depicts
the current state of affairs in corporate governance in India; and Case III lends direction to the
solution. Case I talks about economic growth with equity as the task of corporate governance,
and hints at the need for change in the way we look at the issues of corporate governance. MSIL
did it successfully notwithstanding the regulations of a public sector company. Furthermore, Case
II offers sound justification for revisiting the process and regulations of corporate governance
with a view to make the business enterprises trustworthy, transparent, accountable and faithful.
This case also questions the ‘will’ and ‘effectiveness’ of corporate governance in India. The case
highlights a very relevant fact about the Indian corporate governance by pointing out: ‘Today,
management representing a small fraction of voting rights successfully masquerade as sole and
lone owners because the bulk of shareholders are spread thin amongst professional money
managers… .’ The truth of corporate governance is not about complying with some regulatory
provisions on paper, but about fulfilling fair economic obligations to all direct stakeholders,
and ethical and environmental obligations to the society for sustained growth and well-being.
Promoters and directors should not take advantage of shortcomings of the financial system or
in regulations for huge personal gains and cause hardships in the lives of many in the society,
especially the weaker section among the stakeholders.
Case III is a strong reminder to the basics of business: sustainable development is possible
only with sustainable ethics. It illustrates how businesses, when in a partying mood in good
times, are oblivious to their duties and responsibilities towards society and stakeholders. It also
warns of crises that are engulfing the world, because of the absence of equity and the presence
of a selfish approach in business. Altogether, the three cases span the scope and concern of
ethical corporate governance; clarifying the social responsibility that business enterprises must
fulfil for sustained development of the business and inclusive growth of the society.
5
http://crisistalk.worldbank.org/files/International_Financial_Crisis.pdf and http://www.artoflivingmedia.org/2008/11/transparency-and-
case-to-case.html, accessed on 23 November 2009
 Ethics in Business and Corporate Governance

Chapters 9 and 10 have already discussed the basic principles and purpose of corporate
governance and the special place of CSR—which is a part of good corporate governance. CSR
comes to reminding corporate functionaries about their social responsibilities and ensuring that
the corporate strategy for good governance is also blended with the actions for social well-being,
as much for the society as for themselves (Rosabeth Moss Kanter in Supercorp6). CSR is not
the social service wing of a company that undertakes some social projects, it is an integral part
of the company’s governance that should identify and undertake all such actions—including
environment protection—as would maximise the probability of accomplishing its (stated)
mission and vision for long-term survival and a sustained growth. A well-strategised CSR
policy is essential for the inclusive growth of business to ensure that it benefits all stakeholders
associated with the business and the society at large. Social value and vision in business are as
important as good strategy. Ethics of corporate governance have been discussed in this context,
and from the standpoint of issues and views that emerge from the few cases discussed in the
text.

11.1 SIGNIFICANCE OF ETHICS IN CORPORATE GOVERNANCE

Ideally, corporate governance should aim to integrate and direct the resources and efforts of
a company in a manner that enables it to accomplish its vision, mission and goals. However,
attaining vision and mission needs the support of appropriate company strategy and policy—
which should be ethically correct—for sustainability. Cases discussed thus far have displayed how
short-sighted business strategy—devoid of ethical principles—can damage a business, challenging
its very existence. History of these failed business organisations talks about their failure to set
and adhere to ethical business goals and transparent operations, of their closed-loop operations
to benefit few principal stakeholders, cutting corners of regulatory provisions, and lack of care
for the investing public. All of them either forgot or ignored their ethical responsibility and
accountability to the stakeholders, as a consequence of which they met with the gloom and
disaster of collapsed businesses.The history of business world has many such stories, but the one
most revealing—when it comes to greedy unethical business operations—emerges from the
recent collapse of big and famous financial institutions in the US due to subprime crises. The
subprime crisis (vide footnote 3 of Chapter 9; Wikipedia on Subprime crises in USA) is said to
be the result of anti-ethics such as greed, unfair business targets, unethical means (adopted by
money managers) to achieve the same, and the total lack of care for, and responsibility to, the
investing public.
Ethics equally apply to all business—be it financial, manufacturing, service, IT-industries
or any other institutions or organisations—and to the systems, organisation and organisational
behaviour through which these businesses produce and distribute goods and services in a society
and serve its customers, employees, suppliers and all other stakeholders. As has been emphasised
earlier, the society is an important stakeholder of the business world. It is imperative, therefore,
that business goals must not only focus on making money but should also embrace greater purpose—the

6
Supercorp: How Vanguard Companies Create Innovation, Profits, Growth and Social Good, Rosabeth Moss Kanter, Crown Business,
New York 2009 and footnote 17 of Chapter 9
 Ethics and Corporate Governance

well-being of the people directly associated with the business and the society. Such a purpose must be
reflected in the business goals and must be acted upon by the business enterprise. It is not
enough for a company to declare its intent to create ‘environmental and social values’ through
its CSR programme; it is necessary to build and implement these concepts into the company’s
corporate governance strategy. Business practice for good governance must show deep concern
and respect—expressed through daily business processes—for the welfare of employees, associates
and its social environment, for the needs of its customers, and for the environment and ecology.
It should also be committed to ethical practices for pricing and supplies, for laws of the land
and for regulations which have evolved with a view to take care of potential risks and damages
to investors, society and other stakeholders. Unfortunately, the near collapse of several vital
sectors of industry and markets globally, which affected the market economy and enterprise
value, strongly points to the fact that industries and businesses had totally neglected their ethical
duties and tasks. In this regard, let us consider the opinion expressed by Alex Malley, President,
CPA Australia7, at Business Leader’s Forum, Sydney, 20 October, 2008 on the subject: ‘Business
leadership amid global economic downturn’:

In the 2008 chain of events, ‘some of the largest financial institutions either teetered on
the brink of collapse or actually fell. Malley identifies a combination of factors: (i) lack of
corporate governance structures and processes; and (ii) failure to instil a culture of compliance
and ethics and these in turn nurturing a culture of greed and hunger for quick profit.
‘It is important in the present circumstances that we take a global view. If we needed any
reminding, these events have certainly shown just how interconnected world financial and
economic markets are. Business leaders must be acutely aware of the growing political push
for a redesign of the global regulatory architecture. If this is to occur the corporate world must
play a central role in formulating its shape and its scope. The issues I’ve raised, governance,
ethics, rigour in financial reporting and the importance of a regional and global perspective,
are all integral to good business leadership, strategy and ensuring financial stability.’ Finally,
concluding his address at the Business Leader’s Forum in Australia, Malley highlighted the
continuing importance of transparency, rigour and ethics in today’s business world.

Experts of economy and corporate governance have called it as the fundamental failure of overall character
and ethics of structuring and running the business enterprises, where obvious risks have been overlooked
for quick gains. As reported in the New York Times article, ‘No Quick Fix to Downturn’, Nouriel
Roubini8, an economist at the Stern School of Business, New York University, says: ‘We are
facing the risk of a systemic financial crisis. It is not just subprime mortgages. The same kind of
reckless lending has been occurring throughout the financial system. Now it is credit cards and
auto loans, where we see problems increasing. The toxic junk is popping up everywhere.’ The
financial turmoil was not as sudden as many want us to believe; it was culmination of regulatory
and governance failure. The recent financial meltdown and business turmoil only goes to show

7
http://community.cpaaustralia.com.au/cpablogs/insight/b/weblog/archive/2011/03/25/business-leadership-amid-global-economic-downturn.
aspx, accessed on 10 November 2011
8
http://www.nytimes.com/2008/01/13/business/13econ.html, accessed on 5 September 2009 and 10 November 2011
 Ethics in Business and Corporate Governance

that certain ethical and moral standards need to be adhered to in the corporate governance of
business enterprises for sustained growth and continued success.
While Chapter 9 talked about the principles and practices of corporate governance and the
necessity of CSR and Chapter 10 discussed the state of corporate governance in India, this
chapter intends to take a critical view of ethics as a key aspect in business and governance. The
basic purpose of corporate governance structuring is to motivate and control executives and
employees to respect and retain fair business practices and effectively utilise various resources
to maximise the efficiency of a business for economic, moral, social and environmental benefits
of the stakeholders. Previous chapters have highlighted how the business environment has
changed, influencing the way we are now carrying out businesses and putting the economy as
well as natural environment into some kind of jeopardy. With changing business environment, the
tasks of corporate governance must also change. Yet, change must have a direction as well as a path
for sustainable development. Ethics help in laying down this path with poles and posts to walk
the direction. Without this ethical guidance, governance would lose its direction and purpose;
companies would fail to create value for themselves without holding onto moral principles and
ethical standards for decisions and actions.Value creation in business is mainly through ‘economic
value’ and ‘social value’ (Figure 11.1). In a competitive, free market environment, a company
must stand the test of ‘brand image’ for success in the marketplace; ‘brand image’ is mostly
the result of ‘social value’ creation—which, in turn, attracts customers, clients, employees, and
vendors alike. Thus, if ‘social value’ is the force that drives the company in the external market,
‘economic value’ is important for its internal stakeholders. Adding value to the organisation in
ethical and sustainable manner is the key to success for good corporate governance.

Value creation

Brand value

Social value

Economic value

Ethics Governance

Figure 11.1 Value Creation

In fact, corporate governance is the journey towards creating sustainable growth

through continuous value addition to the organisation—creating an environment of
service beyond the ‘self’; creating faith in the ‘collective entity’; and creating a sense
of ‘spiritualism’ whilst doing things.
 Ethics and Corporate Governance

Governance aimed at achieving (short-term) gains—disregarding the interests of society,

customers, stakeholders, and environment—is destined to doom and bring more misery in the
long run. Many view the failure to hold on to ethical standards and fairness of actions in business
processes and decisions as the basic reason to crises such as the present meltdown throughout
the financial world. The subprime mortgage crises in the US, high risk financial dealings, and
manipulations in valuation and stocks among other activities are merely by-products of the
‘greed’ of money managers. Apparently, their actions were based on opportunities to make a
quick buck in superficially created and structured consumer markets, and the actions lacked the
checks and balances that are essential for good corporate governance.9 The key to good corporate
governance is in principles like honesty, trust and integrity, fairness of business goals, openness
and transparency in transactions, orientation towards value-based performance, responsibility
and accountability to stakeholders, etc.—which had been missing from all such deals that
triggered the chaos. After analysing the causes of the recent financial crises at the conference
on ‘Ethics in Business: Corporate Culture and Spirituality’ (refer to footnote 4), world leaders,
economists and financial experts were unanimous in concluding that ‘sustainable development
is only possible with sustainable ethics’. Furthermore, they identified that lack of adherence
to the rules of ethics and morality—by industries, financial institutions, business enterprises,
governments (or administrators), etc.—would portend world disaster namely, financial, climate,
food, energy and terrorism crises. It was unanimously agreed that all corporate and financial
institutions should include the spiritual dimension as an integral part of business culture to
promote the concept of inclusive globalisation.
Even India felt the tremors10 of the financial quake in the US and Europe because the 2008
downturn severely affected the country’s business and financial markets. Stock prices tumbled
to an all time low, credit to business and consumers fast evaporated, company valuations took a
blow, consumer spending hit rock bottom, and job cuts and job losses touched new highs during
the late 2008 to early 2009—casting a shadow of ‘economic recession’ in the country. India’s
growth targets along with various sectors of its business were revised downwards; companies
credited with good corporate governance in the recent past were being questioned by the
society, shareholders and employees for their inability to sustain the recessionary impact. The
country’s main financial controller and regulator of the country’s economy—Reserve Bank
of India (RBI)—along with the Federation of Indian Chambers of Commerce and Industry
(FICCI), Confederation of Indian Industry (CII) and other leading institutions pitched in to
identify causes of the problem and the means for recovery. While the country is expected to
soon recover from these losses, the critical question is: Will India and its industries learn the
lessons from this failure? And, more importantly, will the 2008 crises change the way corporate
governance is structured or strategised?
Thus, the growth of business—either internal or global—has to be ‘inclusive’ and ‘sustainable’;
abiding by ethical principles (rules of ethics) is the key to sustainable development. As observed

9
http://investment-blog.net/2008-2009-economic-downturn-is-unprecedented-and-so-there-is-no-way-to-know-how-steep-the-decline-will-be-
or-for-how-long/, accessed on 5 September 2009
10
http://www.zdnetasia.com/news/business/0,39044229,62039955,00.html, accessed on 5 September 2009 and 10 November 2011
 Ethics in Business and Corporate Governance

at the Geneva conference on ‘Ethics in Business’, ‘trust’ and ‘transparency’ are regarded by all
as indispensable to good business. ‘Trust’ in the ethical sense does not simply mean ‘believing
others’, it refers to an attitude of custodianship and care for stakeholders. To win confidence,
trust demands integrity, honesty, ability and good character—all of which are the basic elements
of ethics. Ethics and spiritualism are not synonymous, though the ‘spirit of adoption’ may be
similar. Spiritualism comprises a voluntary component of self-sacrifice for the greater cause,
but ethics are more down-to-earth principles of how to morally and beneficially (or for a
critical cause) serve the majority for ‘inclusive’ growth of the society. In a business situation, this
‘inclusive’ growth means benefits to all stakeholders including the society and the environment.
Ethically, a business must:

Adopt a transparent policy of management and governance—abiding by rules, regulations

and laws, codes of best practices, and the principle of holistic approach.
Adopt a principled approach to product/service design for customers and consumption by
the society.
Be fair in business goals, and transparent in market dealings.
Listen to and communicate with people and customers with integrity and honesty.
Make efforts to reach out to all in the community and society.
Strategise to earn profits and rewards for the benefit of all involved with the business, in the
most fair and equitable manner.
Protect and promote health, safety and environment in the society and locality.

Compare this checklist with the events that occurred at Satyam (India), Enron (the US), or
Sanlu (China), and one can observe an over 90-degree shift in the approaches adopted by these
companies. As mentioned earlier, the 2008 failure of financial institutions and the resultant
financial meltdown were caused by improper goals, unethical means, non-transparent business
models, and so on.
The society and locality are not ‘outsiders’ to a business; they are the base support on
which the business stands and grows. The creation of social value by an organisation through a
purposeful ‘corporate social responsibility’ policy strengthens its corporate image and business
opportunity (vide footnote 6). Ethics and social responsibility are not a ‘dole out’ for the cause
of corporate governance, at least not in a developing economy like India, but are a self-serving
strategy for the sustained growth of the business. Ethics should be built (imbibed) into people,
processes, products, organisation and policy; ethical principles should be the guiding principles
for the corporate strategy; ethical standards should be maintained throughout the organisation;
ethical means and methods should be adopted, measured and acted upon to bring about
correction.Thus, ethics should be made an integral part of corporate governance for excellence
in performance; ethics are indispensable when it comes to bringing discipline in thoughts
and actions that can lead to sustainable development in a fiercely competitive and constantly
changing world. Ethics are not an auxiliary support or anchor, but the principal pillar for the
success and sustainability of a business.
 Ethics and Corporate Governance

11.2 ETHICAL DIMENSIONS OF CORPORATE GOVERNANCE

If corporate governance has to set the rules for inclusiveness and sustained growth of a business,
the leaders of the organisation have to define (or derive) the vision, values and goals of the
business; not short-term but in the long-term sense. Organisations must also consider market
and non-market factors along with those impacting the business environment—such as
national and international laws; regulations and practices; recommended models and codes of
governance; cultures and codes of moral standards of countries (in which the business operates);
expectations of stakeholders and society—and pledge to act with honesty, integrity, trust and
transparency. Success of corporate governance depends upon the organisation’s values, ethical
standards and vision (‘service to create well-being’ of all stakeholders). Corporate governance
is not for managing or manipulating business (or business strategies) for ‘insatiable personal
gain’; it is also not—as popularly known—for ‘creating wealth’. It is about creating a seamless
interface between the ethical practices of processes, people and policy in the organisation for the
‘creation of value to the company and well-being to the society’. Ethical corporate governance
is necessary to enforce a transparent system in the organisation that compels it to demonstrate
its ability to create value by unwaveringly adhering to its mission and vision. Moreover, the
system must also be able to effectively check the greed of company executives and prevent
them from the temptation of earning a quick buck through unethical activities that are also not
relevant to value creation for the company and society.The recent meltdown of global financial
market has demonstrated that disproportionate wealth creation is not the same as value creation
or creation of well-being for the society, at least not in sustainable terms. In terms of ethics,
economic processes should not be viewed only from the standpoint of quick and short-term
profits; they have to ultimately go beyond the profit motive to serve the greater purpose of the
business (i.e., prosperity with sustainability) and collective well-being of the society, economy
and environment. Ideally, the task of corporate governance is to create and integrate such
‘inclusive economic and administrative processes’ to accomplish collective well-being, and be
morally responsible for failure or damage to the society, if any. Ultimately, as discussed earlier
(refer to Section 10.5, ‘Corporate Governance and the Indian Ethos’), the creation of ‘inclusive
growth’ through business and transparent governance calls for a holistic and spiritual approach.
Then, is corporate governance a socialist approach to business management for the well-
being of all concerned? Or, is it a system of business practices that allows organisations to realise
their maximum productivity and efficiency, return on investments, market share and market
capitalisation? Gabrielle O’Donovan (vide footnote 10 of Chapter 9) defines corporate governance as
‘an internal system encompassing policies, processes and people, which serves the needs of shareholders and
other stakeholders, by directing and controlling management activities with good business savvy, objectivity
and integrity’.This is a popular definition around which most companies structure their corporate
governance.These governance systems emphasise more on economic efficiency and shareholder
benefits; they are based on ‘checks and controls’, and measure success with financial outcomes.
These systems are generally weak in determining long-term sustainable objectives in business
processes, and in identifying the factors that sustain the business in the backdrop of national
and global economic and social environments. Such a system tends to isolate the ship from its mast,
and makes the business lose the sensitivity towards ethics, morality and fairness. Surely, the mission of
 Ethics in Business and Corporate Governance

corporate governance should be to manage economic efficiency—but without compromising

ethical principles and values, and without affecting social well-being. The mission should also
include service with integrity and trusteeship to all stakeholders including the society. And,
while this may not be in equal measure (or proportion), it certainly has to be fair and moral.
Going by news reports, industries in Japan have been least affected by the 2008 financial
crises, although they are nearer to the US economy than most other developed economies of
the world. In his book, Timeless Ventures11, Professor Haruo Funabashi—an eminent researcher
on why Japanese industries live long—says,‘in Japan we say business not only has to make money
but it should ultimately go beyond and serve the greater purpose and well-being of society’.
This approach is common for Japanese business. Funabashi also observed that about 20,000
companies in Japan are more than 100 years old—of which 1200 are more than 200 years old,
and 600 companies are over 300 years. These corporate statistics are stunning compared to
other parts of the world, like the UK or US, where most old companies are dead or are rapidly
dying out.
In India, the most established names in the oldest industry—the textile industry founded at
the end of 19th century—are nearly extinct; as are the big names in the old and famous foundry
or silk industry. In fact, the only business house in India that has been standing tall for over
140 years now is the Tata Group—reputed for their ethics and concern for social responsibility.
Barring the Tatas and few others like the Birlas, Wadias, TVS, etc., most of the renowned Indian
business houses of 1940 are either dead or almost bankrupt. And though many new companies
have come up in India’s post-independent era from 60s through the 80s, not all of them are
doing well. In the 90s, with the opening up of the country’s economy and the spread of
information technology, many more new companies were established in emerging sectors such
as IT, pharmaceutical, banking, etc. but some of them are already facing the trouble arising
due to their overdrive for profit, and neglect of ethical checks and balances. In contrast, the
secret behind successfully long life cycles of Japanese business enterprises is their attitude and
commitment to ‘greater purpose and well-being of society’. By and large, entrepreneurs in Japan
are imbibed with values, moral responsibility, and the spirit of spiritualism that flows from the
country’s spiritual legacy of Confucianism and Zen Buddhism. Some of the salient features of
Japanese corporate governance practice can be listed as follows: leadership charged with moral
responsibility, deep concern and care for employees, respect for customers, commitment to fair
business practices, mindfulness for perfection, excellence through creativity, consciousness of
social responsibility, and discipline in thoughts, deeds and actions (refer to Figure 11.2).

In Japan, corporate social responsibility is ‘internalised’ by deeply integrating the behaviour

and actions of the organisation and its people—unlike in other parts of the world where
social responsibility is an ‘external facet’ in a corporate governance structure. Furthermore,
ethics are seamlessly built into business processes, people and policy with a view to serve the
greater purpose of well-being of the society and surroundings. Such a balanced approach
to business management and corporate governance in Japan has yielded by far the best
observable results in the current scenario.

11
Timeless Ventures, Professor Haruo Funabashi, Tata McGraw Hill, 2009
 Ethics and Corporate Governance

Leadership
charged with
Conscious- moral
responsibility Deep
ness for concern and
social care for
responsibility employees

Discipline in Japanese
thoughts, corporate Respect for
deeds and governance customers
actions practice

Excellence Commitment
through for fair
creativity business
Mindfulness
for practice
perfection

Figure 11.2 The Components of Japanese Corporate Governance Practice

This, however, does not mean that all business enterprises in Japan are flawless; there are
flawed companies in that country too owing to unethical individuals running those businesses
—a factor that cannot be totally taken away from the context of business practice.
These facts bring out the distinction between the Japanese way of governing an organisation
and the conventional ways and means for corporate governance generally followed in other
parts. Business practices in Japan are underlined with the spirit of ‘spiritualism’, which not only
borders with core of ethics but merges with ethics in seamless manner. Thus, ethics become an
indispensable part of doing business for the greater good—good of the society and of the people
that it serves. Most other parts of the world view corporate governance as a set of processes,
customs, policies, laws, regulations and conventions impacting the way a corporation is directed,
administered and controlled to deliver a set of business results, i.e., goals. These goals generally
relate to the fulfilment of interests of its principal stakeholders namely, shareholders, promoters,
management and the board of directors. Corporate governance systems in these companies are
then carefully structured to coordinate and administer the relationships among these stakeholders.
As a consequence, other stakeholders namely, employees, suppliers, customers, environment,
society and the locality generally get somewhat less attention and lower priority. Thus, the
system of integration of all stakeholders’ interests into business processes and administration is
not seamless and is fraught with the danger of unethical priorities and practices. Let us take a
closer look into the business processes and conduct of Satyam (refer to Chapter 4 and Chapter
10, footnote 2) as testimony to this effect:
 Ethics in Business and Corporate Governance

According to these sources and news report (The Economic Times, Kolkata, 17 December
2008), Satyam announced the acquisition of the privately held Maytas Properties for US$
1.3 billion and increased its stake in Maytas Infrastructure to 51 per cent for US$ 300
million. Maytas is the privately held company of the company’s chairman and promoter’s
(Mr. Ramalinga Raju) son. Shareholders were not consulted nor informed earlier, though the
deal grossly harmed their financial interest in the company. Analysts said that the deal was
unethical as it aimed to bail out firms owned by chairman’s sons. According to them, the
company grossly overvalued the real estate and infrastructure firms—Maytas Properties and
Maytas Infrastructure—especially at a time when the two sectors were not in a good shape.
This move by none other than a company like Satyam created a major debate in the arena of
corporate governance in India.
Note: The crisis in the corporate governance at Satyam finally led the Government of India to
take control of the company and appoint a special board—superseding the original board—
to save the employees, retail investors, and clients from further damage. (Business Telegraph,
Kolkata, 23 and 29 January 2009)

A typical feature of such an unethical corporate governance system is its inclination to

safeguard the risks of only its principal stakeholders by making adjustments in some policy
decisions and regulating the accountability of certain individuals in the organisations. The
system fails to take a holistic view of business and its moral responsibility to protect the interests
of all stakeholders. In the case of Satyam, it is further alleged that its independent directors failed
to exercise their right to prevent the scam (The Economic Times, Kolkata, 22 December 2008,
and footnote 2 of Chapter 10). The Satyam scandal occurred despite the inclusion of Clause
49 in its listing agreement and SEBI’s clear stand on corporate governance ‘as the acceptance by
management of the inalienable rights of shareholders as the true owners of the corporation and of their
own role as trustees on behalf of the shareholders’. SEBI’s definition of corporate governance not
only necessitates the company’s commitment to values and ethical business conduct but also a
distinction between personal and corporate funds in the management of a company in order
to set the role of trusteeship in business. Thus, Satyam is proof that laws, codes and regulations
are not enough for good corporate governance or to protect the interest of stakeholders; what
is also required is integrity and ethics in the people who are at the helm of the corporate
governance itself.

11.3 ETHICAL APPROACH TO CORPORATE GOVERNANCE

Traditionally, corporate governance is considered as the interaction of three forces: the board, the
management, and the shareholders. If shareholders are considered the true owners of the company,
then the equation of governing the company starts with the shareholders who then appoint
the board and delegate it with the authority to manage the company. The board, in turn,
appoints the managerial team to run the company. In this way, it is the shareholders who—
through the board—delegate the managers with the rights to make policy decisions, to manage
the company, and to act in the best interest of the principal (capital investors). This leads to
separation of ownership from control (over managerial rights) and shareholders effectively lose
 Ethics and Corporate Governance

control over managerial decisions. Partly as a result of this separation—between shareholders

and the management—in the traditional functioning of a company’s management, the system
of corporate governance control is implemented to help in aligning the incentives of managers
with those of the shareholders. Here, the key role of the board and of directors is to endorse
the organisation’s strategy, provide direction to develop its policies and programmes, appoint
and supervise senior executives, and ensure accountability of the organisation to its owners,
authorities and governments. However, in the context of global business environment and a
consumer-driven marketplace, this simple assumption of the tasks of corporate governance
is neither workable nor desirable. These days, good corporate governance is not just about
balancing the incentives of shareholders and managers (top management team), it is also about
balancing the incentives and interests of shareholders (owners), board (top management team),
employees in general, customers and consumers, suppliers and other partners (banks, financial
partners, etc.), society and government, locality and environment, and any other stakeholder
who can cause a difference to the business. The task of corporate governance is, therefore, a
multifaceted subject with a focus on fair (and corruption-free) practices, moral responsibility
towards actions and damages, economic efficiency for the welfare of shareholders and others
directly linked to business processes, and welfare of the society and environment. While, in the
past, it was confined to only corporate management, the realm of corporate governance has
become much broader today—it must include a fair, efficient and transparent administration to
meet certain well-defined objectives and purpose of the business.
O’Donovan points out that sound corporate governance relies on two factors: external forces,
and internal environment within the organisation. He also points to the necessity of having a healthy
board culture that safeguards policies and processes of the management. Recent experiences of
business turmoil in the world additionally highlights the necessity of ‘consciousness for social
responsibility’, recognition of the fact that growth should have to be inclusive of all stakeholders’
interests, and commitment to ethical standard and practices. Business, being a system of economy
and creation of wealth for well-being, cannot be a stand-alone system; it must be inclusive and
interdependent on the people, society, customers, environment, governments, and the global
economic as well as business environment. The external environment is more predominant now
than it was earlier, due to globalisation of the economy and economic systems that control capital
flow, credit rating, business opportunity in other parts of the world, conflicting trade regulations
and practices in the business world, and ecological and environmental controls. No longer is a
business necessarily confined to a region or regional people; it is often multinational in character
with stakeholders spanning the globe. These conditions and forces render, to a large extent, the
external forces beyond the circle of control of a board.The board (along with the management)
has to act strategically in compliance with the external conditions of the business, or by taking
risks to avail the opportunities. But, risks should be ethical and practical—not driven by greed
or manipulation (as reported in the case of the subprime crises). In circumstances where risk is
a part of the business, board members must recognise the fact that they are the trustees of their
investors and shareholders—whose interests they are committed to protect as per the company’s
governance codes. Furthermore, the board members should also realise that sustainable business
gain is only possible with sustainable ethics. Corporate governance by the rules of ethics, due
care and moral justice (whilst judging the risks and options involved in the business) could be
 Ethics in Business and Corporate Governance

more beneficial in the long run—rather than governance by manipulation for short-term gains.
For that matter, Japanese organisations were somewhat less affected by the 2008 global financial
meltdown primarily due to their cultural commitment to ethics.
Internal environment is most certainly within the circle of control of the board and the
management; it is this situation that offers the company an opportunity to create a difference from
the others in the field of business. In general, companies aim to create this difference in business
efficiency for financial success. And, true to this aim, corporate governance systems focus
more on mechanisms and controls that are designed to reduce inefficiencies—arising from
corruption, fraudulent activities and unethical practices—and their effect on the moral and
financial health of the company so that the company can stay ahead of its competitors. Thus,
the system of corporate governance for internal environment operates through ‘controls’; here,
the motivation is to put the house in order so as to maximise financial gains of the company.
This limits the scope of corporate governance, and restrains the company from attaining the
greater purpose of business. Ethically, this greater purpose is not only to make money, but also
the creation of well-being of all those who are concerned with the business—including the
society. Adapting the words of John Ruskin to the context of corporate governance, the most
important index of success is not how much profit a company earns but what it becomes by that. Ethical
corporate governance must dwell on integrating policies, programmes, values, vision and ethical
standards into the work culture of a company to deliver success—in terms of commitments
made to shareholders along with the well-being of all concerned with the business. Corporate
governance must, therefore, focus on creating ‘internal ability’ in the organisation that enables
creation of sustainable development in a sustainable manner. This would mean developing
a work environment, people, policies, programmes and controls via the ethical and moral
principles which help serve the greater purpose of the business.

This trend in corporate governance has only come about since the 2001 turmoil of Enron,
WorldCom and Arthur Anderson. Till that time, say up to the year 2000, much of the debate
about corporate governance centred on compliance to government policy and transparency
in operations—to deter fraudulent activities—which often misled a company to treat the
symptoms and not the cause. It was when a few big US companies went bankrupt in 2001–02
—the cause of which was later unearthed as the failure of top leaders of those companies
to abide by ethical practices—that the business world sat up and took notice of the cause
rather than the symptom. In fact, this corporate upheaval paved the way for the Sarbanes-
Oxley Act of 2002 in the US as well as of the revision in Clause 49 of the listing agreement
in 2004 in India—both aiming at greater transparency and accountability. However, turmoil
continued to plague the business world and the marketplace even if to a lesser degree—as
was evident in the Madoff12 and Stanford13 scandals in the US and the Global Trust Bank14
and Satyam15 failures in India. It was this sequence of financial crises that forced the boards
(of companies), regulators and governments across the world to take a new look at the
principles and practice of corporate governance.

12
http://en.wikipedia.org/wiki/Bernard_Madoff, accessed on 6 September 2009
13
http://www.usatoday.com/money/markets/2009-02-17-allen-stanford-fraud_N.html, accessed on 6 September 2009
14
http://www.expressindia.com/news/fullstory.php?newsid=34377, accessed on 8 September 2009
15
http://www.atimes.com/atimes/South_Asia/KA09Df01.html, accessed on 6 September 2009
 Ethics and Corporate Governance

The need for ethics in business and ethical corporate governance has gained rapid recognition
in the world. In the wake of financial failures in the US and India, the structure of corporate
governance is being redesigned to create and integrate ‘inclusive economic and administrative
processes’ to accomplish company goals along with the collective well-being of all stakeholders,
and to ensure that a company takes moral responsibility for the failure or damage to society.
As a consequence, the emphasis of corporate governance has moved from ‘control’ to ‘creation’ of
ethical environment and to offer space to individuals in an organisation with a view to enhance
their contribution—thus, lending initiative to the concept that an organisation is only as good
as its people (employees).
In business, people are the most important resource for success. No matter what policies, programmes
and other strategic decisions a business adopts, success will elude the organisation if it does
not have good quality of people. The reason is simple: behind every (business) action there is a
person, and for that action to be good, the person has to be good. This is also the plank from
where Japanese work culture takes off. Therefore, the primary task of corporate governance
should be to focus on developing people with high moral values and ethical standards. An
organisation’s moral values and ethical standards are neither developed simply by setting a ‘code
of ethics’ or ‘code of governance’ nor by issuing a threat of punishment (for ethical violation);
they are imbibed—much like religion—in thoughts, deeds and actions of the employees. The
spirit should essentially be to create a work environment and work culture that promotes ethical
thinking and helps retain the same ‘perspective’ in thoughts as well as actions of the people. Here,
‘perspective’ refers to how one views the subject matter of a decision or action in its true relation
to the welfare of all stakeholders. This should not, however, construe that an organisation does
not need rules, regulations and controls to check or control malpractice, corruption, fraudulent
activities or unfair deals. It only suggests that people within the organisation should develop
a healthy respect for rules, concern for the welfare of others, a sense of values and mission,
self-respect, and a commitment to ethical practices in business processes—so that corporate
governance is self-controlled and self-regulated. Perhaps it is time to mould governance practices
as per the requirements of ‘total ethical management’ (TEM) either in line with or in the place
of ‘total quality management’ (TQM), as a strategy for sustainable performance and excellence
in the organisation.
In India, there is no dearth of evidence that ‘ethical codes’ and ‘codes of governance’ have
escaped application especially when it comes to the top management in an organisation. Many
senior managers, even in large and reputed organisations, have been accused of indulging in
misconduct and fraudulent transactions with impunity, whereas others in the same organisations
had been punished more severely for a lesser degree of ethical violation.16 In no way can such
demonstrations of ‘rule by exception’ help develop a culture of ethics. In terms of spirituality, ethics
form a homogeneous mix of ‘good thoughts’ of mind, body and soul. In other words, the principle
of ‘exception’ should have no place in good corporate governance; it only creates a conflict
in a person’s soul and influences his mind and behaviour such that he manifests what he is
not. Ethical management must take care of such situations and negativity of governance by
16
http://www.acfe.com/documents/tone-at-the-top-research.pdf, accessed on 6 September 2009 and 10 November 2011
 Ethics in Business and Corporate Governance

exception. The important directions for ethical management are directors and members of the
top management team should align themselves with the values and vision of the organisation (to
protect the interest of all participants of the business); develop an ethical managerial infrastructure;
measure, monitor and review the progress; and make improvements and control. The conduct
and ethicality of senior executives whilst dealing with matters of apparent conflict of interest,
violation of ethics, financial irregularities, and disclosure of interests and facts should also be
closely monitored, because of their critical influence upon the success of ethical corporate
governance. But, these are only the symptoms; the real challenge to corporate governance is
the eradication of the cause(s) of unethical behaviour. For the same, the following aspects are
needed: change in corporate attitude, an environment of ethical management, promotion of
spirituality in thought and mind among senior members, and change in the mindset of senior
executives regarding moral responsibility and ethicality of actions. Good corporate governance
needs people with a strong mindset who are responsible for governance, and can ensure justice,
fairness, morality and equity in actions.
The discussions thus far mainly relate to the private corporate sector, which is the major force
behind global business. However, in countries like India and China, a substantial part of business
is also controlled by the ‘public sector’, where the realities may be somewhat different. These
public sector units (PSUs) are run in accordance with government rules and laws governing
moral or functional violations (including corruption, fraudulent transactions, duty avoidance,
workplace misconduct, etc.). Corporate governance systems, in PSUs, are structured mainly
to control and for punishment and often lack the focus needed to develop or improve people,
systems, work culture and work environment, or to promote ethical standards—all of which go a
long way in eradicating the cause(s) rather than identifying the symptom(s). In fact, the focus of
corporate governance in the public sector is generally confined to monitoring employee conduct
and activities through third party auditing, discovering financial misconduct, and regulating or
acting to control the damage. Often, in these organisations, there is a tangle between ethics and
law, which makes procedure for governance and ethics a long drawn subject matter. Although
all PSUs recognise ethics as an essential ingredient for good governance, many of them lack the
determination to eradicate the cause of ethical misconduct through prompt, transparent and
fair actions. As a consequence, some of these companies consistently fail to uphold some tasks
that are essential for good governance, such as: maximise the probability of long-term survival
(of the PSU) and sustained growth, protect the interests of all stakeholders, ensure public utility
and gain, and contribute to social well-being and environmental upgradation.
Notwithstanding the type of organisation—private or public enterprise—it must uphold the
‘rule of ethics’ and maintain a standard of ethics not only in its governance and management
processes, but also amongst its people, if the organisation is to ensure smooth functioning and
attain its objectives. For such ethical and good corporate governance, organisations should focus
on the following areas:
Assuring integrity, honesty and ethical behaviour in the workplace—by implementing ‘ethical
standards’ in the company, and monitoring or controlling all its members in an equitable
manner.
 Ethics and Corporate Governance

Maintaining transparency in duties, deals, rules, processes and procedures related to

work and services to members in the organisation or other stakeholders. Roles and
responsibilities of each member should be publicly known, and his or her accountability
should be clearly understood.
Upholding the interests of stakeholders. Not just the owners or directors, the list of
stakeholders includes employees, customers, public (entitled to the company’s service
or benefit), suppliers of goods and services, the society, etc. All stakeholders should be
treated equitably and their interests should not be damaged.
Protecting the environment and controlling pollution to ensure the well-being of society and
nation. In today’s times especially, this awareness and commitment is an important and
integral part of ethics management (refer Chapter 8).
Ensuring the rights of shareholders. Organisations should respect the rights of shareholders
and help them to exercise or benefit from those rights. As for PSUs, they should consider
the public as both shareholders and benefactors, and, in that, they should promote
trusteeship whilst managing their organisations.
Clarifying the role and duties of the board, the auditors, and the CEO for transparency
and fairness in practices. Corporate governance should set the tone of management of the
organisation based on the stated role and duty, and set ‘ethical policy’ of the company for
transparency and fairness in practices.
While these are some of the areas that call for immediate attention of ethical governance,
the list is not complete. An important theme of ethical corporate governance is to ensure
accountability and transparency of the actions of key personnel in the organisation through
appropriate policies, procedures, controls and inspirational and motivational programmes with
a view to minimise the risks to its stakeholders. After all, the primary requirement of good
governance is the confidence of the stakeholders, which helps in assuring sustainability. Hence,
every organisation should include promotion of ‘stakeholders’ confidence’ as a part of its
mission, and diligently work towards this goal through a corporate governance process which
is structured to build relationships with different stakeholders through transparent processes.
Corporate governance is a step above management; it comprises the designing and managing of
systems and processes for long-term sustainability of the business by ensuring economic gains
and benefits for all stakeholders and the well-being of society and public at large. Corporate
governance should always be ‘mission driven’ as against the concept of ‘profit driven’ management.
Which is, however, not to demean profit; profit is also necessary for the next goal—to attain
sustainability of organisation and the well-being of people.

11.4 IMPROVING ETHICS IN CORPORATE GOVERNANCE

Having discussed the significance of and steps to ensure good corporate governance, the natural
next step would be to address ways to improve the same—via ethical means and conduct. For
this, it is important to understand some special features of business. Business, in the modern era,
is no longer confined to one area or a specific (but constant) situation or social environment.
Business and business results are directly or indirectly influenced by global situations, changing
 Ethics in Business and Corporate Governance

social and economical conditions, and the (physical) environment. A business may not be
spread across the globe or may not involve multinational operations, yet it is most likely to be
influenced by the prevalent global financial and business environment. This has been seen time
and again in the recent past, starting from the great meltdown of the economies of the south-
east Asian countries in 1997 to the 2008 financial crises in the US financial market that affected
global as well as Indian business. Therefore, the challenge to corporate is in adopting a model
of corporate governance that is robust enough to adapt to situational variations, but is equally
insulated from wrongdoings (of the influential and the powerful in the business loop), and
committed to profitability (economic value addition)—with assured sustainability of business.
Business processes must be fair and transparent, sensitive to environmental obligations and the
well-being of society, respectful to the customs and cultural issues of the locality and country of
operation, and concerned about ‘inclusive growth and development’ of the business that must
include the interests of minority stakeholders as well. Such working models should also factor
in the following aspects for good governance: government regulations, trade agreements, tariffs
and taxes, socio-economic culture of a country, environmental laws, labour laws and other
related ethical issues.

Many developed economies have banned the engagement or employment of child labour17
even when it comes to outsourcing goods and services; whereas in countries like India,
Bangladesh and Pakistan, it is very common to engage child labour for the sake of cost-
effectiveness. This practice can, therefore, land a business contract into serious trouble—with
respect to good governance—as has happened in the case of certain companies in the apparel
and carpet industries in India. Many western countries which have strict child labour laws
have time and again banned Indian supplies or suppliers on the ethical grounds of child
labour (refer Chapter 4, Case III).
While there may exist arguments for and against such practices, any violation of such laws—
that are based on ethics and philosophy of life and living—can only damage the sustainability
or good governance aspect of the business. This aspect of business should be more guided
by grand social view of the issue than local view of compelling reasons. To improve the
operating ethics of a business, care must be taken to avoid such controversies, infringement
of laws and ethical standards. Similarly, the social culture and environmental priorities of the
place—which may come in the way of sustainability of the business in that location—should
not be damaged in any way.

Today, most businesses are global in nature and character. Hence, for ethical governance
and to create ‘social value’, companies must be aware of their ethical responsibilities and the
ethical culture of those places or countries wherein they operate. The aim of good corporate
governance is to create not only ‘economic value’ but also ‘social value’ for the sustainability
of the business. For a business to be profitable and sustainable it is not enough to measure the success
by financial results, the creation of both ‘economic value’ and ‘social value’ is also indicative of its success.
And, a business can only accomplish this dual objective through the means of ethics and

17
http://theviewspaper.net/child-labour-a-necessary-evil/, accessed on 6 September 2009 and 10 November 2011
 Ethics and Corporate Governance

ethical conduct. While, under certain circumstances, it may be possible for an organisation to
create short-term economic advantage by overlooking its ethical responsibility, but it cannot
be sustained in the long-term. The collapse of many companies globally—such as Enron,
WorldCom, Satyam, Arthur Anderson, and Lehman Brothers—are a terse reminder of that
fact in almost every country. All these companies have one thing in common, and that is the
lack of ethics and ethical consideration in their planning and operations. Evolving from these
experiences of failure and its consequent effect on the entire institution of business, corporate
governance is emerging as a dynamic and robust model which goes beyond compliance to
codes and standards to also include a holistic purpose, ethical means and spiritual measures—all
of which are becoming increasingly important and essential.
In India, many organisations still do not fully appreciate the significance of ethics in corporate
governance although they are an important means to create ‘economic and social value’ for the
business. This is evident from frequent media reports about violations of tax, pension fund or
environment regulations; disputes over loans and deposits; diversion of funds (from one sister
company to another) without adequate security; etc. Such practices hurt the interests of the
stakeholders and the society, cause hardships to suppliers and partners, and bring distress to
shareholders, employees and other minority stakeholders—all because the company failed to
make a distinction between managing for profit and governing for sustainability and well-being
of all. The strategy of good governance is a blend of good management and ethics with a view
to accomplish the broader purpose of business, its mission and vision. In today’s context, this
broader purpose must aim at for an inclusive growth and encompass a holistic approach that
includes stakeholders, society and the environment.This holistic nature of corporate governance
(Figure 11.3) includes ‘stakeholders’ (denoted by ‘s’), who are internal to the company. In effect,
the customers of the corporate governance process are the company’s internal stakeholders
(s); and the sum total of society/regulators, environment and internal stakeholders (s) can be
denoted by capital letter ‘S’ (S). Thus, the concept of ‘S’ has been included to indicate the holistic nature
of the task of corporate governance. The process of governance must recognise the fact that we are
integrally related to the social, economic and environmental health of each other for the well-
being and prosperity of all.
Stakeholders (small ‘s’)

Big ‘S’ Big ‘S’

Governance

Regulators*/Society Environment
* Regulators include government, law makers,
trade bodies, etc.

Figure 11.3 The Holistic Nature of Corporate Governance

 Ethics in Business and Corporate Governance

The vision statement of a company must comprise the essential constituents of business,
which include the society and the environment. A business cannot achieve the welfare of any
of its constituent without the fulfilment of the interests of other stakeholders (refer to Figure
11.3). The acts of governance must be balanced enough to ensure the welfare and well-being
of all; balancing the benefits among these three essential components of business—society,
environment and stakeholders—should be the guiding force of corporate governance. And,
this balance can be attained only by adopting ethical means and principles in conducting the
business. Ethics demand that results of governance must be fair and equitable to all stakeholders,
and the means should be transparent, ethical, legal, trustworthy and efficient. The aim of such
governance is to (a) promote culture of ethics in corporate decisions and actions, and (b) ensure
fairness, justice and equity to all connected with the business, including the society. If the
means are ethical and correct, then the results of governance will also be correct. The control
of dishonesty, unfairness, misconduct, corruption, etc.—all that ails a company on a day-to-day
basis—will become a subset of this correct and ethical strategy for governance where the focus is
more on eradicating the cause(s) of malfunctioning rather than on treating the symptom(s).This
demands a proactive governance mechanism rather than governance based only on controls and
regulations.
Corporate governance must also go beyond the law; laws are often seen as instruments for self-protection
and for justice when aggrieved, whereas the whole purpose of an ethical approach is to avoid causing
injustice and damage to others’ interests. Ethics make for a proactive philosophy with a view towards
fairness in business, morality of actions, and justice to all. Hence, corporate governance should
be empathetic to the interest and well-being of employees and society; it should not be used
only as a vehicle to enhance the earnings of the shareholders, promoters and financiers of
the company. Past experiences and events in the business world, coupled with the acceptance
of Indian ethos and spirituality approach to modern business management practices, has
changed the mindset of India’s corporate world. More and more companies are recognising
the need for proactive ethical governance, which gives priority to the transformation of people
(corporate participants), vision and purpose of the business, legality and ethicality of means, and
inclusiveness of the interests of all stakeholders. A good corporate governance system should
ensure ethical and moral conduct of business, prevent or control damages due to illegal or
unethical acts or corporate actions, promote the morale and motivation of employees by fair
and transparent administrative systems and procedures, work towards equitable benefits and
inclusive growth of all stakeholders, protect the ecology and environment, and devote itself
to the cause of overall well-being of the society. Unfortunately, most corporate governance
systems in organisations appear to do anything but that—as they relate only to qualitative
and quantitative aspects of financial and disciplinary parameters even today. The system is also
characteristically attuned only to ‘internal control’, with very little attention to ‘external factors’
which are gaining importance when it comes to ethical treatment to stakeholders especially
in modern business scenario where export and import of products among countries is very
common. While many may argue that external factors are not exactly within the control of the
company, their detrimental effect can surely be mitigated—to a large extent—when a company
 Ethics and Corporate Governance

adheres to the sense of social responsibility and ethical practices. In this regard, let us consider
how Mattel recalled a million children’s toys from the US market:

‘Lead Paint Prompts Mattel to Recall 967,000 Toys’18

Mattel Inc, importer of children’s toys made by a contract manufacturer in China recalled
toys which had accessible lead in the paint. Not escaping its moral responsibility of possible
damage to the children’s health in the US, the company had to immediately withdraw all
its doubtful products from the market and destroy the same at its own cost. Subsequently,
the company not only stopped operations at the factory in China but also took up the case
with Chinese authorities to ban such exports. What happened as a result of the ban and
the ensuing negative publicity of the manufacturing company is well-known to the world.
As per a news report19: ‘It is not uncommon for Chinese executives to commit suicide after
suffering damage to their reputation. But Mr Zhang’s (head of Lee Der, the Chinese contract
manufacturer for Mattel, the US toymaker) apparent suicide underlines the stakes involved
in China’s crackdown on manufacturers responsible for producing tainted goods.’
In this case, although Mattel had failed to prevent the initial damage done to society, the
company had risen to the call of social responsibility by recalling defective products from the
market and banning imports.

Failure in ethically resolving external factors of a business has caused a lot of trouble in
many companies (discussed earlier in this chapter) with regard to business ethics and business
environment. Therefore, in order to improve governance, the corporate strategy must also
include policies to ethically resolve external business issues (to be discussed later in this
chapter).
Even in the governance of internal factors, most companies fail to prevent ethical misconduct
in the first place; they mostly rely on the ‘feedback’ control system of ethics—which is an
inefficient system as it comes into picture only after the incident has happened and damage has
taken place. For greater effectiveness in improving ethical culture and conduct of the organisation,
the system needs to be proactive—like the ‘feed-forward’ control system—which relies more on
prevention of the cause(s) and promotion of ethical work culture. Like morale in the military,
organisational work culture is the great invisible force that makes all the difference between
success and failure of a business; positive and ethical work culture is the key to organisational
success. Here, let us refer to ‘total quality management’ (TQM)—a management initiative to
promote quality and excellence in all processes and activities of the organisation. At the core of
it, TQM20 is a value-based, transparent, customer-focused management strategy for sustained
growth. The system aims to accomplish excellence in performances by ‘inclusive satisfaction
and growth’ of all stakeholders.Working towards this goal, organisations can introduce a strategy
for ‘total ethical practice’ (TEP) to promote ethical practices—in order to balance both, the

18
http://www.nytimes.com/2007/08/02/business/02toy.html?_r=1&pagewanted=print, accessed on 31 August 2009 and 10 November
2011
19
http://www.telegraph.co.uk/finance/markets/2814037/Chinese-boss-of-toy-firm-involved-in-Mattel-recall-commits-suicide.html, accessed
on 24 November, 2009
20
http://en.wikipedia.org/wiki/Total_Quality_Management, accessed on 31 July 2009
 Ethics in Business and Corporate Governance

Total ethical
practice (TEP)

Monitor, measure, Identify moral

control and prevent guidelines
‘wrongdoings’- for governance
proactively and operations

Manage the execution Identify executive

and operations by processes that
ethics-driven policy are critical
deployment for success

Understand ethical
implications and
directions of these
executive processes

Figure 11.4 Total Ethical Practice (TEP) in Business: Some Essential Steps

‘stakeholders’ view’ and the ‘social welfare view’ of governance (refer to Figure 11.4). Here,
the idea is to address the issue of corporate governance in a holistic manner, i.e., satisfy the
needs and interests not only of the principal stakeholders (investors, employees, customers and
suppliers), but also other stakeholders (society, community, trade bodies, governments, public
at large, etc.). The core approach of TEP should be to: (1) identify moral or philosophical
guidelines for governance and operations; (2) identify executive processes that are critical
to success; (3) understand ethical implications and directions of these processes; (4) manage
the execution and operations by ethics-driven policy deployment; and (5) monitor, measure,
control and prevent any wrongdoing in a proactive manner.The process of deployment involves
identifying what (areas) and how to address, which actions to take and how to measure, and
analyse the outcome and device prevention measures.The aim of TEP should be to prevent the
occurrence of misconduct, ensure just and equitable protection of interests of all stakeholders in
a balanced manner, promote fair and transparent deployment of actions, and focus on the vision
and mission of the company. It should be balanced in order to be fair, equitable and moral to all
stakeholders—maximising neither profit nor social welfare. In such an approach to governance,
from the practical point of view, it may be necessary to consider the various constraints that may
influence business objectives—in spite of which the business should not overlook the inclusion
of various stakeholders in its objectives. A significant way to ensure this is to integrate ethical
principles into the administrative and accountability structure of the corporate governance system, which
should be designed to create both economic and social value. However, adding such business
value to the accounting structure needs a changed mindset—from the traditional ‘earning (or
 Ethics and Corporate Governance

cost) management’ to ‘value management’—the absence of which is considered the root cause
of many ethical failures of business in recent times.

The failure of many giant US financial companies (AIG Insurance, Citibank, Lehman
Brothers21, etc.) in the recent times has been attributed to the failure of corporate governance.
It has been alleged that the boards of these companies had failed to control ‘abusive earnings’
through unethical means. In fact, executives of many of these companies were encouraged
to set ‘unjust financial targets’, which also called for unfair means to achieve them. Thus,
these companies appear to have compromised financial statements taking advantage of
accounting procedures that did not serve their real purpose—that is, to help in taking the
correct investment and governance decisions. Studies have shown that the focus, here, was to
manipulate ‘earning management’ by exploiting different systems. While, at times, this can
be justified as being done within the provisions of laws and regulations, it cannot be justified
from the ethical point of view. As a result, notwithstanding the feeble support from rules and
regulations, such focus and actions could neither bring sustainability in growth nor prevent
the downslide of these famous companies in 2008.

The recent global crises in business and financial world go to prove that there is no shortcut
to success other than via the ethical route.There are no alternatives for ethical management and
prudence for the long-term sustainability of business in terms of ‘value management’.
The external factors pertaining to ethical management and governance could be many:
legal environment, restrictions in ownership structures, government rules and regulations of
countries involved in the trade and business, (foreign) trade pacts and regulations, charters
of the UN and/or the partner countries, environmental and ecological controls, labour laws,
trade unions, market dynamics and restrictions, social demands, and activities of social welfare
organisations and NGOs relating to the business. The situation is so diverse that no ‘one-size-
fits-all’ approach to ethical governance can be adopted to adjust and balance the business,
especially if it is global. Thus, in the governance of ‘internal controls’, the focus is largely
on controlling financial irregularities to control damage to stakeholders. The governance of
‘external factors’, on the other hand, is more about ethical compliance to laws, agreements
and regulations to morally protect the business interests without affecting global and internal
security, environment, financial systems, social culture, and interests of those who are likely to
be affected by the business. For example, if some people have to be displaced from their land to
set up a green-field business, then this has to be addressed in the business plan in the most fair,
moral and ethical manner. Similarly, if the business is likely to affect the environment, adequate
provisions to control the ensuing damage, within the permissible legal limits, must be ensured
to minimise damage to the locality and society. In today’s competitive business and strongly
political environment across the world, the task of governing external factors is of paramount
importance for the success and sustainability of a business. However, the extent of focus on
external factors depends on how the company’s management perceives the situation. Nowadays,
the governance of big companies is not just administrative or strategic; it is very sensitive to
21
http://www.timesonline.co.uk/tol/comment/leading_article/article4761869.ece and http://en.wikipedia.org/wiki/Lehman_Brother, acce-
ssed on 6 September 2009 and 10 November 2011
 Ethics in Business and Corporate Governance

the global political scenario, demanding continual strategic alignment with the ever-changing
external environment. The same can be illustrated with an example:

The Iraqi government threatened to blacklist Reliance Industries (RIL)—the largest and
most successful Indian petrochemical giant—if the oil giant signed a deal with the Kurdish
regional government to hunt for oil in two blocks without Baghdad’s approval.22 So, while
the acquisition of the new oilfields may be justified in terms of the business model for growth,
the changed global and political scenario made it difficult to implement RIL’s plans.

A good corporate governance system must factor-in such changes (in the situation) and
conflicts (of interest); business strategies and governance must be sensitive enough to work
within the applicable regulations and restrictions, and yet, at the same time, uphold the ethical
principles of the business.
Besides political conflicts of interest, social, religious or custom-based groupings can also
prevail. Here, ethical justification of business or business related actions may help in resolving
such crises. It is believed that, under complex external factors, the best way to govern is by
conforming to laws (including applicable regulations), respecting the interest of the country,
respecting the customs and community interests, and holding on to ethical principles of fairness
and equity. If a company can demonstrate its honest intention to contribute to the creation
of ‘social value’ vis-à-vis its locality, and assure the well-being of the society by adhering to
the laws, ethics and culture, then it may not be difficult to get the cooperation of the local
people and government for its smooth functioning. In many such circumstances, taking on a
proactive role in CSR activities may also help—while this may not always help in maximising
business profits, it can certainly assure more ‘social value’ creation, respect and brand-image
of the business, and help in creating opportunity for sustainable growth in the long run. The
recent turmoil in the business world repeatedly points to the fact that the aim of industrial expansion need
not be rapid economic prosperity of the business, but the creation of conditions that add to stability, social
value and economic well-being for maximum number of people and the society. It is said that, in the
eyes of ethics, ‘growth that sans the welfare of people is meaningless’. Conducting business in
violation of ethics in a rising tide is not safe; because the receding tide takes many along with
it, thus exposing the risks. Perhaps, this may have been a reason for the 2008 financial turmoil
when business operators had been blind to see or pre-empt the risk in a rapidly growing global
market. Unfortunately, this has been the general trend in the corporate world till date—often
exposing the society to severe risks and distress. Thus, for the good corporate governance
of external factors, companies should be sensitive to local issues; clear about the legal and
regulatory provisions; aware of moral responsibility of the consequences of its business actions;
committed to the welfare of its stakeholders; and guided by the principle of ‘social value’ creation
in addition to ‘economic value’. In this context, it may be interesting to examine the ethical
dilemma in offshore outsourcing:

22
http://www.telegraphindia.com/1071116/asp/business/story_8554511.asp, accessed on 6 September 2009 and 10 November 2011
 Ethics and Corporate Governance

The recent downturn in business and employment opportunities in the US witnessed a

growing sense of resentment about outsourcing jobs overseas23, with Indian BPOs especially
seen as cutting into the already limited scope. This discontent and dissent reached the
highest US policy-making bodies, and both governments (India and the US) had to counter
arguments from the anti-BPO lobby. Thus, the dominance of the political dimension over the
economic dimension transformed the very nature of the debate, with the potential to damage
the business interests of Indian BPOs.
There can be several ethical and economic aspects to the issue. Ethically, it is being argued
that those US industries that are outsourcing IT jobs—neglecting their social responsibility
and welfare of employees—are being guided by the sole motive of ‘cost management’ instead
of ‘value management’. This is unethical for the local society as it eats into their rights to
employment and social well-being. Yet, at the same time, industries argue for the necessity of
cost management to survive in the backdrop of high infrastructure and wage costs. So, what
can be the answer to this dilemma? While no definite solution has emerged24, many believe
that the situation could have been somewhat different if Indian BPOs were careful to add or
create ‘social value’ to the locality from where they get their business. Certainly, the creation
of ‘social value’ in the US would cost the Indian BPOs more, but this may be better than to
curtail or lose their (business) projects entirely. Perhaps it was time for Indian BPOs in the US
to think ‘outside the box’ and seek a more creative solution. The problem was not so much
to do with the economics of operations in business, as it was about seeking an ethical balance
in a world torn by politics and disparity. Ethical sensitivity to such issues may be helpful to
the business as well.

Corporate governance must address such diverse problems by innovating and creating
a structure of ethical systems that include the growth of that society in which the business
(company) operates. Not only creating value through ‘market capitalisation’ or enhancing
shareholders’ value, corporate governance must also generate wealth and well-being of all who
contribute to and support the business—that is, the society. Business not only needs customers
to survive, it also needs the well-being of society to supports and sustain its efforts.
More importantly, ethical governance is driven by the ‘leadership’—the approach and mindset
of the people at the top—of the organisation. Leadership refers to the top management team
in-charge of running the business in accordance with the mission and vision of the company;
it comprises the lead participants of the business and decision-making process and, therefore,
plays a critical role in ethical corporate governance. Thus, leaders must first identify themselves
with the values, vision and goals of the organisation, and then establish its governance policies
with a sense of commitment to various stakeholders and justify all actions and decisions
with good moral reasoning. The task of leadership is not only to control the overt acts in the
organisation, but also to contribute to framing policies and rules that make the organisation
fair, just and moral. It is the leadership quality that sets the tone of ‘doing well by doing good’ in
23
http://news.indiamart.com/news-analysis/outsourcing-crisis-b-1280.html, accessed on 6 September, 2009 and http://economyincrisis.org/
content/harsh-truth-about-outsourcing, accessed on 10 November 2011
24
http://www.outsource2india.com/why_outsource/articles/ethics_outsourcing.asp, accessed on 6 September 2009 and 10 November
2011
 Ethics in Business and Corporate Governance

the organisation, which is at the root of ethical governance practice. Leadership must comprise
a changed mindset—from running the organisation with a view to make profit, to seeking the
collective well-being of all stakeholders and society. The value of an organisation is not in distributing
higher dividends or carrying out aggressive expansion, but in sustainable value creation for the self and
society. Effectiveness of corporate governance is measured by its compliance to regulations and
codes, and the fulfilment of expectations and perspectives of its stakeholders, including what
the society expects from the business. Employees want jobs that are decent and pay well, a
clean work environment, safety and security, empowerment and continual sense of growth;
shareholders want sustained fulfilment of their specific economic interests and long-term value
creation (EVA) in the company’s operation; society wants clean environment, opportunity for
social growth, contribution to the well-being of people, and socio-economic upliftment of the
area (in which the business operates). Significantly, all these expectations cannot be fulfilled
if corporate governance evades rules or violates ethical principles or focuses only on internal
controls with narrow financial objectives. To fulfil these expectations, leaders must lead with
vision and mission.

Leadership must look beyond the boundaries of the organisation’s direct interests; leaders
should seek to establish equilibrium of business goals, employee welfare, social well-being,
and environment protection. While it remains imperative for the leadership to maximise
economic benefits of the organisation, the bedrock of good governance remains in winning
the confidence and satisfaction of the stakeholders. And, while the efficiency of leadership
lies in skilful direction and administration of the business, the effectiveness of leadership
depends on how others view and perceive the ethics and integrity of its leaders. Leaders must
therefore be fair, moral and human in guiding and governing the affairs of the company.

These are the expected roles of the leaders who are at the forefront of the organisation.
Good leaders are expected to establish and maintain equilibrium of objectives and goals that
are ethical, societal, and beneficial not only to the owners and shareholders of the company, but
also to other stakeholders like the employees, customers, vendors, and the society and locality. It
is the leaders who must set the organisation’s functional and governance processes to fulfil this
balance and blend.
A holistic governance system that seeks to create ‘social value’ has been the secret of Japanese
companies, one which made them uniquely successful even during the global financial
meltdown. The board (or business leaders) must moderate between ‘internal controls’ and
‘external influences’ to balance the outcome, and invent ways and means to fulfil expectations
of all stakeholders and as well as the society. If strategic changes are required to balance the
outcome even at the expense of financial gains, leaders should have the ethical pragmatism to
quickly change and adopt the course that leads to the overall well-being of people. Ultimately,
ethical governance should aim to do good to the maximum number of people (stakeholders)
within the company’s legal and moral framework—in order to create a resourceful society and
a positive social order on which the prosperity of business depends.
 Ethics and Corporate Governance

11.5 MANAGING COMPETITION AND ETHICS

Most abuse of business practices and violation of ethics is said to be occurring due to the
compulsion to manage the competition. A product of the free-market economy, competition
should be viewed as a positive feature of business. A perfectly competitive market should satisfy
certain degree of justice in pricing, satisfy utilitarianism in demand and supply (by optimising
distribution and efficiency of resources and goods), and satisfy certain kinds of moral rights in
buying and selling. Furthermore, competition provides advantages to the consumers—they get
the opportunity to buy what they want, from whom they want, at a price they are willing to
pay, and at conditions that assure intended uses and services. Hence, in a competitive market,
businesses clamour to win customers by differential positioning of products and services. And,
in doing so, it has been observed that companies often tend to discriminate, camouflage and
confuse buyers while providing what they should. Thus, it is here that questions of ethics in
managing competition mainly arise. Advertisements and announcements through media and
public systems are important channels for product promotion and market placement through
the ‘unique selling proposition’ (USP).To be fair and ethical to buyers, USPs must be transparent,
fair and true to the promise—a condition which is often violated in countries like India where
there is weak or no enforcement of consumer protection laws or laws of competition in the
marketplace. For instance, many advertisements in the electronic media—especially for personal
care products like shampoo, soap, cream, etc.—clearly violate their ‘ethical code of conduct’ and
‘fair practice’ consensus in India, where competition is getting tougher day by day. Not confined
merely to consumer items, this is a global phenomenon in all spheres of business. For example,
competition is strongly visible in matters of international trade, exports, purchasing, project
contracts, financing and banking, arms dealing, and even in creating political and economic
dominance. Competition is everywhere; wherever there is a ‘subject matter of interest’ by which
a company, government, society or a nation can be benefited.
Unfortunately, competition is not always positive or based on fair practices and justice. So
deep is the spread of unfair practices in competitive business that most governments have
enacted strict ‘antitrust laws’, ‘competition laws’, ‘consumer protection laws’ and a number
of layers among the regulators of the market in different fields. Notable regulators in India
are SEBI, RBI, Department of Commerce, Department of Company Affairs, and consumer
councils and forums, in addition to the courts of law. These regulators do not aim to restrict
or curtail market opportunities; they aim to create an atmosphere of positive competition in the
country, which is fair and moral to all concerned. Hence, managing competition or lending
positivism to its character calls for ethical understanding and approach to solving problems
arising out of competitive market dynamics.
A recent study undertaken by the American Antitrust Institute25, a think-tank based in
Washington DC, concluded that competition laws and policy play a small role in business
ethics if ethical management of competition is not appreciated or integrated in the corporate
governance strategy. The study recommends the need of, what it calls, ‘ethics of competitive
strategy’ for ethical decision-making in dynamic and innovative market conditions.
25
‘Dynamic Competition and Business Ethics’, Journal of Business Ethics, Vol. 50, Issue 2, 2004; Refer to http://cat.inist.fr/?aModele
=afficheN&cpsidt=15676032, accessed on 6 September 2009
 Ethics in Business and Corporate Governance

Integrity and honesty (in business dealings) are at the core of ethics management; hence,
commitment to a moral approach to business can substantially strengthen competitiveness. In this
regard, behaviour that is trusting, moral, transparent, and cooperative—and not opportunistic—
has been the critical factor in strengthening the competitive advantage of a company.
It is said that sustainable global competitive advantage occurs when a company works towards and
implements a comprehensive ‘value-creating’ business strategy, which is unique and cannot be easily imitated
by any other firm. Such strategies have been observed in the home entertainment business—
for example, adapted for the products of Sony Corporation, Bose Entertainment, etc. Doing
business in a competitive market calls for impeccable ‘reputation’ and ‘brand’ management—
characteristics born of the company’s commitment to total ‘value creation’. A company with
superior business leadership skills that focus on enhancing ‘integrity’ and ‘ethical conduct of
businesses’ finds it easier to build a strong ‘brand’ image in the marketplace which, in turn,
helps in many other areas of business, such as enhancing the confidence of its stakeholders,
capital market, employees, society, etc. In India, some such corporate examples—companies
with reputation for ethics and high brand value—include Tata Steel, India Hotels, Infosys, TCS,
HUL, ITC, and some companies of the TVS group.
Dealing with ethics as a corporate strategy, and effectively implementing ethics in a proactive
manner, could be a great source of competitive advantage. The importance of building a strong
ethical culture is integral to the reputation, growth and resource mobilisation ability of any
organisation. Ethics as corporate strategy builds a brand that attracts the best talent and creates trust
among the stakeholders. Many may argue that companies are primarily business organisations
that are run for the benefits of shareholders, but the history of successful companies shows that
each has a wide-ranging set of responsibilities to its suppliers, customers and employees, to
the communities in which it is located, and to the society at large. Most successful companies
recognise these responsibilities and make serious efforts to fulfil them while trying to utilise
their ‘business ethics’ as a source of competitive advantage. Such an emphasis on ethics can
integrate the interests of all stakeholders, build a lasting relationship with them, and add value
to the company’s business. It is better to deal with ethics in a proactive manner for the long-
term survival of a business—rather than to face the unpleasant consequences of business results
impacted by ethical failures. Many US corporate giants (Enron, WorldCom, Arthur Anderson,
etc.), on failing to adhere to transparent and ethical business practices, had to file for bankruptcy.
For sustainable business results, it is necessary to be proactive with regard to ethics instead of
adopting a reactive method of dealing with ethics and waiting for the failure to occur with
disastrous consequences. Critical analyses of the history of corporate failures worldwide shows
that a majority of companies, in the developed world especially, collapsed due to failure of
managing ethics in business practices.26 Ethics profoundly impact an organisation’s success
quotient in the short-term and the long-term; they should be made a part of the company’s
strategic tool for sustainability, and proactively implemented so as to gain the competitive edge.
26
‘Ethics, Market and Government Failure, and Globalisation’ by Joseph E. Stiglitz, Paper presented at the Vatican Conference at the
Ninth Plenary Session of the Pontifical Academy of Social Sciences, Casina Pio IV,Vatican City, 2003; Refer to http://www.lapres.
net/ethicsmark.pdf, accessed on 6 September 2009, and http://j-node.homeip.net/wfb/research%20archive/favorite/2003_Ethics_Market_
and_Government_Failure_and_Globalization-Stiglitz.pdf, accessed on 14 November 2011
 Ethics and Corporate Governance

In his book Corporate Strategy and the Search for Ethics27, Edward Freeman—a thought leader
in applied ethics—observes that corporate strategy based on the conventional approach (such as BCG
matrix, Porter’s Competitive Analysis framework, etc.) is often suspect as a solution to market challenges, if
the adopted strategy is not connected to ethics. Freeman and his co-workers argued that the best way
to view the connection of ethics and strategy is in terms of thinking of the corporation as a set of voluntary
agreements among human persons (stakeholders) each of whom is seeking to accomplish certain objectives
of importance to him or her and all of them have the rights to fulfilment by the corporation. For the
competitive edge, corporate values and ethical principles must be interwoven into the concept
and choice of enterprise strategy. The viewpoint of Freeman and his co-workers is simple:
‘We must learn to build corporate strategy on a foundation of ethical reasoning, rather than
pretending that strategy and ethics are separate.’ According to them, the questions and issues of
corporate strategy are fundamentally ethical issues.
An emerging view is that, for success in a competitive market, companies should adopt
an attitude of positive competition where each competitor strives to achieve excellence in
business results, satisfy customers, meet the expectations of all stakeholders, and add value
to the society. The latter term is now being described as ‘social marketing’, and is becoming
increasingly important for competitive business. The social and educational programmes
adopted by Microsoft28 in India, China or the world over are examples of social marketing,
and its profound effects on the reputation and competitive edge of their business. The aim of
the competition game that companies play in a competitive market should not be to drive out
competition (such as by price-fixing, curtailing, underhand deals, forming protection groups,
etc.) but to work hard to gain competitive strength—derived from sincerity and morality of
purpose and processes.To overcome competition, companies should play by the rules and ethics
of business, be creative and positive in their business approaches, respect the law, customs and
society, and demonstrate ethics in all actions to make the difference. Globalisation of business
and competitiveness has attracted greater need and involvement of ethical considerations in
doing business, more so for achieving competitive advantages. It is now believed that the social
view of business attracts better talent to the business. Being reputed for ethical management
and branded as an ethical corporation not only draws respect from the business fraternity as
well as potential job seekers, but also helps in propagating global business. Perhaps, Tata Steel
would have had no chance of acquiring the Anglo-Dutch steel giant Corus had it not been
globally reputed as one of the world’s most ethical companies. In a competitive market environment,
when all other parameters of a business are equal, what ultimately stands up and gets counted is the ethics
and value system of the organisation. This was evident in Tata Steel’s efforts to acquire Corus;
the company’s globalisation through this acquisition demonstrated that it is necessary to build
ethics into an organisation’s strategy to win over competition, as this influences a company’s
ability to commit to its shareholders (new and old), investors (internal and external), employees
(new and old) and the enlarged global society. It is said that ethics win trust, and trust wins business.
But, trust must be persevered for building further confidence and sustained growth, and, under

27
Edward Freeman—Corporate strategy and business ethics, http://www.valuebasedmanagement.net/books_freeman_corporate.html
28
http://www.microsoft.com/presspass/itanalyst/docs/10-01-2008FORRESTERMicrosoftUnleashesIndia’sCreativeCapitalism.PDF,
accessed on 14 November 2011
 Ethics in Business and Corporate Governance

no circumstances, should be allowed to wither due to slip-ups in actions or decisions. This

is perhaps best illustrated by a recent report on the corporate governance scandal at Satyam
(refer to Chapter 4, Case I). One of India’s most respected IT companies, Satyam received the
coveted Golden Peacock Global Award for Excellence in Corporate Governance29 as recently
as September 2008, an honour that is bestowed upon companies that follow best practices.
But, the lapses in its ethical standards of governance—in order to bail out certain principal
stakeholders by unethically adjusting policies and decisions—made for the worst corporate
governance scandal in the country. However, as certain facts were revealed by the ‘Serious Fraud
Investigation Office (SFIO)’ of the government, it appeared that this was not the first or only
instance when the Satyam chief had indulged in fraud and unethical business practices—he had
been carrying on that way for quite some time.
The Satyam story goes to say that retaining the reputation for ethics and excellence in
corporate governance practice is as difficult, if not more, as earning the reputation. Good
corporate governance practices always nurture what the company has already earned and
make all efforts to retain what it has built (i.e. ‘holding to gains’) by constantly monitoring
the standards of ethics and quality of business practices. Loss of reputation for the absence of
ethics in its corporate governance due to corrupt and unethical actions of its erstwhile owners
(Satyam had been judged a champion of ethics and corporate excellence for several years in
a row) had certainly put the company—with its new form and new management—at a very
serious disadvantage vis-à-vis its competitive business.
Thus, ethics neither call for a one-time display of trust nor for an ‘off-and-on’ culture of
best practices; the business has to continuously display a positive attitude and ‘trusteeship’, along
with deep respect for morality and moral responsibility. Ethics are indispensable when it comes
to building the trust and confidence of stakeholders, society and the government; ethics make
for the principal force for a business to successfully withstand competition and ensure sustained
growth. Elevating human behaviour through trust, integrity, values and esteem is considered to
be invaluable in both business and governance. In an environment of high global connectivity
and information flow, success is derived through the involvement of and networking with
people, by creating an environment of trust, relationship, transparency, honesty and openness.
These are the core elements of ethics, and companies who stand out in this regard distinguish
themselves from others in the competition.

Summary
1. The chapter attempts to establish not only the close relationship between ethics and corporate
governance, but also the essentiality of ethics for successful corporate governance. It emphasises
through examples that the purpose of corporate governance is not merely to generate profit
from the business for a few principal stakeholders, but to create ‘economic value’ as well as ‘social
value’ for all direct and indirect stakeholders respectively.
29
http://www.financialexpress.com/news/satyam-receives-golden-peacock-global-award-for-excellence-in-corporate-governance/364843/,
accessed on 6 September 2009 and accessed on 14 November 2011
 Ethics and Corporate Governance

sustainable ethics. In fact, social philosophers have described corporate governance as a “journey
to create sustainable growth through continuous value addition to the organisation—creating
an environment of service above ‘self ’, creating faith in a ‘collective entity’ and creating a sense
of ‘spiritualism’ in doing things”. This appears to be in sharp contrast to the general belief that
business aims to create wealth for the owners; therefore, the purpose of business should be to
maximise profits—a concept that is at odds with the significance of ethics in business.
3. The chapter goes on to establish through examples that the purpose of business, and for that
matter of corporate governance, is not making money for the principal owners but creating
‘economic value’ and ‘social value’ for all stakeholders in order to bring about the well-being of
those people who are directly associated with the business and of the society at large without
whose support the business cannot survive. The term ‘social value’ also includes creation of
‘environmental value’, which is becoming increasingly crucial for the well-being of people and
society.
4. Corporate governance is a dynamic process; it changes with change in business environment,
government policies, social and political climate, and market conditions. In this environment of
change, ethical guidance to policies and actions can only pave the way for good governance for
the long-term sustainability of the business. Without this ethical guidance, governance would
lose its direction and purpose; ethics help in laying down the path to good governance with
poles and posts to walk the direction.
5. In a competitive free-market environment, an organisation must stand the test of ‘brand image’ to
be successful in the marketplace; ‘brand image’ is largely the result of value creation—especially
‘social value’ which attracts customers and clients the most. While the creation of ‘economic
value’ is important for internal stakeholders, ‘social value’ is the force that drives the company in
the external market. The creation of social value can thus be equated with ‘social marketing’.
6. It has been emphasised that corporate governance is not for—as it is popularly referred to—
‘creating wealth’; it is about creating a seamless interface for ethical practices of processes, people
and policy for the ‘creation of value for the company and well-being to the society’. Ethics in
corporate governance enforce a transparent system in the company and help in demonstrating
that the company is able to create value by unwaveringly adhering to its mission and vision.
7. From the basic standpoints of purpose, mission and vision of corporate governance, and the
role and power of ethics in terms of achieving sustainable benefits for the company and the
society, various aspects of corporate governance have been discussed in this chapter, including
ethical dimensions of governance, ethical approach to governance, ethics as means to improving
governance, and role of ethics in competition management.
8. Also discussed in this chapter are various views—by O’Donovan and Professor Haruo Funabashi
among others—on the definition and scope of corporate governance. It has been illustrated that
governance systems that emphasise more on economic efficiency and shareholders’ benefits, and
measure success only in terms of financial outcome are generally weak when it comes to long-
term sustainable objectivity in business processes.
9. Governance systems that focus only on financial outcomes tend to isolate the ship from the mast,
making the business lose its direction and sensitivity to ethics, morality and fairness. In view of
the several business catastrophes in recent times, it has been recommended that all organisations
should include the spiritual dimension as an integral part of their business culture for good
governance and inclusive growth—which, in turn, is essential to sustain the business and its
 Ethics in Business and Corporate Governance

benefits. Thus, good corporate governance must steer the business to the path of growth that is
‘inclusive’ and ‘sustainable’.
10. It is suggested that corporate governance be improved through ethics in view of the predominantly
global nature and character of business in the modern era, interests and cultural aspects of the
land and locality they operate in, and abiding by the laws and regulations governing the business
and environment of that country (of operation)’.
11. The need for governance by controlling both ‘internal factors’ as well as ‘external factors’, that
can damage the social or political interests of a country, has been emphasised with examples.
Furthermore, the process of total ethical practice (TEP) in sync with TQM has been proposed
for effective governance and inclusive growth of all stakeholders—symbolised by big ‘S’. For the
same, ethical principles must be integrated into the administrative and accountability structure
of TEP processes so as to create economic as well as social value for the organisation.
12. Business practices have been maligned and ethics have been violated owing to the compulsion to
manage competition. Competition is a product of free-market economy and should be viewed
as a positive feature of business, one that satisfies certain kinds of moral rights in buying and
selling. In a competitive market, winning customers by differential positioning of products and
services is natural but, in doing so, it has been observed that companies often tend to discriminate,
camouflage and confuse buyers when it comes to providing the truth or what it should be. In
competition management, this lacuna often gives rise to questions pertaining to ethics in the
marketplace and points to the necessity of integrating ethics into the corporate governance
strategy. Such an ethics-based strategy is essential to win over the competition—in dynamic and
innovative market conditions—as is evident from the state of business these days, dominated by
consumerism and consumer focus.

Key Words and Concepts

Sustainable ethics, sustainable development, brand image, competition, financial crisis, toxic junk,
spirituality, systemic financial crisis, subprime crises, social value, economic value, social marketing,
TQM, TEP, economic downturn, integrity, stakeholders, shareholders, internal factors, external factors,
vision, mission, cost management, value management, social marketing, abusive earnings, mission driven,
transparency, integrity, insatiable personal gain, positive competition.

Exercises
Check Your Progress
1. CSR is not the social service wing of a company that undertakes some social projects; it is an
___________.
2. Corporate governance is neither about managing/manipulating business (or business strategies) for
‘insatiable personal gain’, nor is it about ‘creating wealth’; it is about ___________.
3. Value creation in business comes from both ___________.
4. ‘Trust’ in the ethical sense is not simply ‘believing others’; trust means ___________.
 Ethics and Corporate Governance

5. Gabrielle O’Donovan defines corporate governance as ___________.

6. An important theme of ethical corporate governance is to ensure accountability and transparency of actions
of the key personnel in the organisation through ___________.
7. Most companies fail to prevent ethical misconduct in the first place because they mostly rely on
___________.
8. The recent turmoil in the business world repeatedly points to the fact that the aim of industrial expansion
need not be ___________.
9. The effectiveness of corporate governance is measured by ___________.
10. It is said that sustainable global competitive advantage occurs ___________.

Review Questions
1. Briefly discuss the aims and objectives of good corporate governance with reference to a specific business
type. Identify five common points which are often missing while formulating a corporate governance
strategy in this type of business.
2. Following the great financial meltdown in 2008, the ways of doing business will never be the same again.
Discuss what went fundamentally and ethically wrong so as to cause such havoc.
3. Define corporate governance as suggested by Gabrielle O’Donovan, and discuss the possible shortcoming
of such an approach. In this context, discuss why Japanese companies said to be less prone to ethical
crises.
4. Adapting the words of John Ruskin to the context of corporate governance, ‘the most important index of
success is not how much profit a company makes but for what purpose the company operates’. Outline the
scope of ethics in corporate governance to bring about this difference.
5. List some important areas of focus for ethical management and corporate governance of business, in general.
Identify the ethical themes under each of these focused areas.
6. If you are asked to design a ‘total ethical practice’ (TEP) process for good governance, how would you go
about it, step-by-step? What are the major changes in the attitude and direction of governance that will be
needed to support TEP?
7. Critically discuss the role of leadership in the ethical governance of a company. What are the common
challenges that a leader may face while adhering to the ethical path of governance and sacrificing financial
business goals to create social value and brand image?
8. Why is it said that competitive environment is, at times, the cause of ethical violations in business? What
do you understand by ‘positive competition’? What are the demerits of monopolistic business vis-à-vis
competition?
9. Edward Freeman—a thought leader in applied ethics—observed that ‘corporate strategy based on the
conventional approach (such as the BCG matrix, Porter’s Competitive Analysis framework, etc.) is often
suspected as a solution to market challenges, if the adopted strategy is not connected to ethics’. Why?
10. Briefly outline the principles of the Japanese approach to corporate governance and compare this with the
Indian practices.

Further/Suggested Reading
1. Business Ethics in Theory and Practice: Contribution from Asia and New Zealand, P. Werhane, Alan E. Singer
(Eds.), Kluwer Academic Publishers, The Netherlands, 1999
2. Corporate Governance (4th ed.), Robert A.G. Monks and Nell Minow, John Wiley and Sons, Hoboken,
2008
 Ethics in Business and Corporate Governance

3. Global Corporate Governance, Donald H. Chew and Stuart L. Gillan (Eds.), Colombia University Press, New
York, 2009
4. Corporate Governance and Ethics, Zabihollah Rezaee, John Wiley and Sons, New York, 2008
5. Timeless Ventures, Haruo Funabashi, Tata McGraw-Hill, 2008 New Delhi, ISBN: 0070077827, EAN:
9780070077829
6. Economics, Ethics and the Market: Introduction and Applications, John J. Graafland, Routledge, New York, 2007
 CHAPTER 12
New Paradigms in
Corporate Governance:
Ethics, CSR and
Sustainability
To consolidate the lessons from the cases and discussions of all the
Chapter Objectives

previous chapters and identify critical needs for effective corporate

governance
To review the role of ethics in corporate governance for
sustainability
To discuss the role of ‘regulations versus self-regulation’ for effective
corporate governance
To discuss the significance and implications of CSR for ethical corpo-
rate governance and sustainability
To chart a road map for excellence in corporate governance via qual-
ity of people and ethics
 Ethics in Business and Corporate Governance

INTRODUCTION
ance
ern ce
Gov ernan
ate
por Gov nance
Cor orate over nce
s and Corp ate G erna
nes d or ov nce
usi ess an Corp ate G erna
B
in usi
n
and por Gov
ics B ness nd Cor orate
Eth ics in usi sa orp
Eth s in B usines and C
ic B s
Eth ics in usines
Eth s in B
ic
Eth

1
http://www.commondreams.org/views02/0216-01.html, accessed on 8 September 2009 and 16 November 2011
2
http://en.wikipedia.org/wiki/Satyam_scandal, accessed on 8 September 2009 and 16 November 2011
3
http://www.slideshare.net/nityn/sub-prime-crisis-and-its-impact-presentation, accessed on 9 September 2009 and 16 November 2011
4
http://www.wikinvest.com/concept/2008_Financial_Crisis, accessed on 8 September 2009 and 16 November 2011
5
http://en.wikipedia.org/wiki/2008_G-20_Washington_summit and http://www.g20.org/Documents/g20summit_declaration.pdf, accessed
on 8 September 2009 and 16 November 2011
 Ethics in Business and Corporate Governance

Case I illustrates how the quality of persons who are at the helm of a business is important
if the business has to serve its rightful purpose and endure sustainability. Scams at Enron and
Satyam revealed the urgent need for change in the way of measuring the success of business and
purpose of business. Thousands of unsuspecting investors had invested their lives’ savings and
lost all; thousands of employees and other stakeholders staked their future to these companies
in vain. In all such cases, a few key people were able to influence some others in the business
community (e.g. directors in the board, senior executives, auditors, regulators, etc.) to commit the
crime. They all pretended (and projected) to be great as long as their frauds were not detected.
Satyam even got the ‘Golden Peacock Award’ in 2008 for excellence in governance from the
Institute of Directors. In April 2009, the award was withdrawn and its jury put under scanner
for lack of involvement in the given duties. This goes to show how uncaring and uncontrolled
systems of regulation and evaluation of business processes can be—those in which investors and
benefactors of civil society repose their trust. The persons who were to be the ‘trustees’ turned
‘beneficiaries’ by exploiting the high offices they held. The situation has not changed even a
bit since the Satyam episode or the G-20 summit at Pittsburgh. Recent allegations and cases
in the corporate world and financial markets point to the same fact that no business
could be safe at the hands of greedy unethical executives. Businesses, howsoever large or small,
are vulnerable to ‘individual ethics’. Codes and principles of corporate governance demand
adherence to ethics and trustworthy behaviour from individuals and effective oversight by
regulators to protect the investors, consumers and the society. Laws of natural justice and rights
10
http://moneymorning.com/2009/09/21/g20-world-economy, accessed on 18 November 2011
11
http://www.voanews.com/english/news/special-reports/economy-and-finance/G20-Meeting-in-Pittsburgh.html, accessed on 18 November
2011
12
http://www.guardian.co.uk/politics/2011/jan/10/banks-unlimited-bonuses-ministers, accessed on 18 November 2011
13
http://www.guardian.co.uk/commentisfree/2011/oct/28/executive-pay-young-poor-labour-anger, accessed on 18 November 2011
14
http://www.businessweek.com/managing/content/jan2009/ca20090116_465633.htm, accessed on 18 November 2011
15a
http://blogs.wsj.com/deals/2011/10/26/government-lays-out-rajat-guptas-business-ties-to-rajaratnam/, accessed on 18 November 2011
15b
http://www.disinfo.com/2011/05/the-case-against-goldman-sachs/, accessed on 18 November 2011
 New Paradigms in Corporate Governance: Ethics, CSR and Sustainability

to property and well-being demand better treatment of investors and consumers. But how can
the situation be corrected to guarantee investor protection, consumer protection, fair economic
order and social well-being? Faced by such situation, experts talk about ‘effective corporate
governance’ and ‘ethical governance for sustainability’ as solution to the present problem.
Hope that economic reform would plug the loopholes through which the so-called ‘smart
operators’ (a term that has been used by some to describe the perpetrators of financial fraud)
had exploited the system, and innovative regulatory measures will stop future abuses of financial
business is perhaps receding away as indicated by Case II. With the slightest sign of economic
recovery in the US and Europe, G-20 leaders appeared to be forgiving the crime and failures.
As Will Hutton, one of the Britain’s leading economists puts it, ‘The G-20 has saved us, but it’s
failing to rein in those who caused the crisis’ (Will Hutton, The Observer, 6 September 2009 ).
G-20 governments are now banking more on financial stimuli for correction than the reform
of the economic system and governance codes for the creation of a fair and fraud-free business
world. Contrary to the principle of good governance, these measures are meant to serve the
short-term goal of staving off the crisis than targeting the long-term goal of bringing fair play
and ethics in business. Reports under references in footnotes 12 and 13 further reinforce this
belief and observations.
This chapter aims to re-emphasise the fact that without ethics business is directionless and not
likely to reach the destination that is purposeful for society in the present as well as in the future.
And, if the business is not purposeful to the society then it is not sustainable. Governments,
business managers, business regulators, judiciaries and the society have the responsibility of
bringing this powerful institution—the business—into the ethical order so that it delivers the
desired result, that is, creation of true economic wealth and social well-being for all stakeholders
for sustainable future. This is the spirit of true ‘value creation’—one that leads to excellence in
business and sustainability for future.

12.1 SETTING GOVERNANCE PLATFORM: ETHICS AND SUSTAINABILITY

Aristotle promoted the concept of ‘virtue jurisprudence’17 in its early stages of development,
taking the legal philosophical view that the law should promote the development of virtuous
character (moral virtue) in citizens. He held that moral virtue is a habit that enables a human
being to act in accordance with the specific purpose of being human.While ancient philosophical
literature holds many views on virtue, most philosophers believe that moral virtue is a habit
that enables people to follow reasons in dealing with their desires, emotions and actions, and
these reasons are based on the considered view of utility, justice, rights and care. Virtues are
enablers when it comes to dealing well with social and personal duties and responsibilities, the
effect of which transcends not only society but also socio-economic institutions like business.
This effect is especially relevant to the modern era of economic competition and (pursuit

16
http://www.guardian.co.uk/commentisfree/2009/sep/06/g20-financial-crisis-banking-bonuses, accessed on 10 September 2009 and
17 November 2011
17
http://en.wikipedia.org/wiki/Virtue_jurisprudence and http://www.knowledgerush.com/kr/encyclopedia/Virtue_ethics/, accessed on
9 September 2009
 Ethics in Business and Corporate Governance

of) personal prosperity. In his article ‘Evolution of Islamic Banking and Insurance as Systems
Rooted in Ethics’.18a Dr. Muhammad Siddiqi, Professor of Economics, Centre for Research in
Islamic Economics, King Abdulaziz University, Jeddah, Saudi Arabia, says: ‘Running parallel to
the saga of economic progress there is another thread, the ethical imperative of doing things in
a manner that does not harm others or violate social interests. Even though morality is a human
need in the sense that man’s felicity and ultimately his survival depends on ethical conduct, in
reality ethical conduct does not always prevail. Men misbehave. They act in immoral ways, one
harming other. Some violate public interest. Ultimately these end up harming themselves too.
This necessitated reminders and warnings and a reaffirmation of ethical conduct.’ Governing
the misbehaviour of people—be in society or in business (the means to economic progress
according to Dr. Siddiqi)—requires the institutions of law, regulations and ethics. Ethics of
virtue complements and adds to utilitarianism, rights, justice and care—all of which are the
essential ingredients for good business.
These two standpoints—one on ethics of virtue based on the concept of virtue jurisprudence
and its complementary effect on utilitarianism, rights, justice and care; and the other view
(Dr. Siddiqi’s18b) that ‘… in reality ethical conduct does not always prevail; men misbehave; they
(men) act in immoral ways, one harming other; some violate public interests; ultimately these
end up harming themselves…’ etc.—establish that we need ethics in business as well as the
institutions of law and regulations to control misbehaviour. Such a view is universally accepted.
Laws, regulations, codes, etc. for corporate governance, and the assurance of transparency in
business processes, had actually evolved to serve the dual purpose of fairness (part of ethics) along
with regulation and control from wrongdoing.Yet there were frequent cases of wrongdoing in
business, some of which even had a deep impact on society the world over. As per a report
by the World Bank (Financial Times, 17 September 2009), the worldwide financial crisis would
push almost 90 million people of poorer nations into extreme poverty. It is widely alleged that
regulators had failed to regulate and control the great financial crisis19 of 2008 that plunged
the business world into a deep crisis of survival, from which the world is yet to recover. No
one blamed the laws because laws are often pre-dated and may not have anticipated the abuse;
but the regulators had operated from within a live and dynamic system, and were armed with
powers to control. If they did not act, it may have been due to negligence or because they were
induced not to take timely action. Not surprisingly, it is being debated if the use of regulatory
control and stricter punishment should be continued as a deterrent for wrongdoing or if the
process should be reformed and ‘process participants’ should make the system more effective.
While the general vote could swing for stricter regulation and harsher punishment for the
wrongdoers, there is also the view that ‘the upshot of allowing emotion of punishing the culprit
for the wrong by harsher punishment and stricter regulations may lead us to overlook the
opportunity for genuine reform’. This will amount to treating the symptoms rather than the

18a
http://www.ya-hussain.com/int_col1/Islmbnkg/islamic_economics_dot_com.pdf, accessed on 8 September 2009
18b
http://isa7695.wordpress.com/2010/08/11/evolution-of-islamic-banking-and-insurance-as-systems-rooted-in-ethics/, accessed on
18 November 2011
19
http://www.guardian.co.uk/commentisfree/2009/sep/06/g20-financial-crisis-banking-bonuses, accessed on 10 September 2009 and
17 November 2011
 New Paradigms in Corporate Governance: Ethics, CSR and Sustainability

cause; the pursuit of symptoms may only lead to a few scapegoats, leaving the field of business
open—yet again—to abuse and misuse of public money and finance. Such a move may not
address the systemic problem cultivated by a prevailing mindset that business is for profit, bonus
and rewards at any cost. The prevalence of such an attitude amongst bankers and financial
executives is echoed in the observation of Mr. Lloyd Blankfein, chief executive of Goldman
Sachs that banks lost control of some of the exotic products they sold in the run-up to the
financial crisis, and said that some of the instruments lacked social and economic value (Financial
Times, 9 September, 200920). Therefore, many argue for reforms of business regulations which
are inclusive of society, protective of stakeholders’ interests, preventive of any fraud or scam,
and proactive when it comes to ethical conduct of business that also includes compliance to
environmental rules and to sustainability.
What is needed, therefore, is not stricter regulation while regulators are left unchanged
(untransformed), but reform in the attitude of the people involved in businesses and business
regulations, reform in the present systems that lure people to easy (but unfair) money and
rewards, reform in the way society and peer industries measure the success of a business, reform
in the way we govern and view governance responsibility. Reform should be able to strengthen
the process of corporate governance by infusing it with ethical principles of good conduct,
fair-play and ethics of duty and care. The process of corporate governance has to integrate
the social view of business with the economic view; weigh the ethics of adopting technology
only for profit which could harm the ecology and its sustainability; and add social well-being
as an objective of business and economic value chain. Such a process of governance demands
that organisations are run with both vision and mission, and that their success is measured
with social acceptability and sustainability (what is acceptable and sustainable vis-à-vis people).
The design of the governance process, and its practice, should include all stakeholders and be
holistic in nature. Holistic is an approach of totality and inclusiveness of all that is a part-and-
parcel of the business and for success of business; it includes owners, self, individuals, society,
environment and the universe, and the purpose, means, truths and the path or whatever it takes
to achieve the mission of a business. It is about a sense of respect, harmony, fairness and equity
in matters pertaining to others in the system—howsoever subtle, intangible and tangible that
matter could be. Unfortunately, neither the present-day order of business philosophy nor the
ethics of business leadership—as was evident from the 2008 financial crisis and the ensuing
controversies about senior executives of the collapsed businesses receiving huge bonuses despite
their organisations being funded through special recovery packages21—are any indication of
ethics or inclusive thinking in corporate governance. In fact, these executives acted to create
disproportionate wealth for themselves, completely forgetting that they were the very custodians
of companies wherein people had invested their lives’ savings, their obligation to ‘trusteeship’
in public funded companies, and the necessity of fair-play and equity in business; and, instead,
rewarded themselves for their failures at work. Of course, a business should operate with a view

20
http://www.ft.com/intl/cms/s/0/ffb670be-9d33-11de-9f4a-00144feabdc0.html, accessed on 18 November 2011
21
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20090129/REG/901299977/1048/careers, accessed on 10 September
2009
 Ethics in Business and Corporate Governance

to add to the company’s bottomline, wealth for its shareholders and economic benefits for its
employees; but that does not mean that the investors’ money should be risked for the sake of
excessive earnings, that too through questionable financial instruments, nor does it mean that
those executives should be so unfair as to disproportionately reward themselves even as the
shareholders suffered. Ultimately, it can be said that all these wrongdoings are the products of
the selfish greed of unethical individuals.
Therefore, reform of the governance process (not regulatory reforms) has to begin with
individuals; who, in turn, have to be imbibed with ethics and rules of justice, care and fairness.
This approach is especially applicable to individuals who are also the key participants in the
corporate governance process and key decision-makers. This is not the task of regulation,
but of education and motivation. The spirit of morality and ethics has to sink deep into the
mindsets of the people who govern. Thus, when it comes to the education of and campaign
for ethics, this poses a challenge to the society that shapes the character of individuals and
helps promote ‘moral virtue’. This can perhaps be achieved by integrating Indian ethos and
spiritualism, Confucianism and Zen Buddhism into the various human resource development
programmes in institutions and organisations. At the end of the day, corporate individuals need
to appreciate that making money is not the path to happiness, glory or self-satisfaction; the tales
of prosecution of Madoff, Stanford, Marc Rich22 or Ramalinga Raju (under trial for the Satyam
fraud) and the sad end of Kenneth Lay of Enron in 2006 say it all. All converge to the holistic
concept of sustainability—without which no business can survive, let alone prosper.
So, what is sustainability? The concept can be understood differently depending upon the
purpose. The Washington State Department of Ecology, US, offers a short but good definition
of sustainability from the environment perspective (the World Commission on Environment
and Development has also adopted this definition): ‘Meeting the needs of the present without
compromising the ability of future generations to meet their own needs.’ The main mantra of
sustainability is to attain the present without compromising the ability or curtailing the possibility
of future. In other words, sustainability ensures that the future necessity and well-being are
not affected by the compromise made for the present gain. Achieving the latter at the cost of
future sustainability is an illusion. ‘Welfare of future generations’ is not only the key concern
of environmental sustainability, but also of business. Because, a business exists for the society; it
prospers owing to the support it gets from a society that is well off. In business, it is the welfare
of shareholders, employees, customers, suppliers, society and those having any connection with
its outcome—for now and in the future—are the concerns of sustainability. For sustainability,
a business serves three distinct areas: shareholders and other direct stakeholders, the society and
the environment. Meaning, a business has to optimise its future goals for social welfare along
with stakeholder welfare; reduce random or selfish usage of environment, energy and other
scarce resources; set positive social, environmental and economic examples for the societies—
present and future—and stimulate society’s aspiration for growth, well-being and sustainability.
However, this does not mean that sustainability does not support business prosperity; it only

22
http://www.uslaw.com/library/Criminal_Law/Lessons_Bernie_Madoff_Robert_Allen_Stanford_Marc_Rich.php?item=522582, accessed
on 10 September 2009
 New Paradigms in Corporate Governance: Ethics, CSR and Sustainability

demands sustainable goals, means and path that do not harm the society and stakeholders, in the
present or in the future.
Perhaps, at this stage, it would be helpful to re-examine what stakeholders mean. Stakeholders
refer to anyone who is impacted by the business (e.g. shareholders, employees, customers, locality, society, etc.)
and those with the ability to impact the business (e.g. government, regulators, global society, financiers, policy
makers, etc.). Thus, society is a stakeholder of the business and the business is a stakeholder of the
society. Hence, they have a mutual responsibility for sustainability and well-being. Corporate
governance must recognise this relationship and take all possible measures to prevent damaging
the interests—present and future—of any stakeholders for its own benefit. Yet, the history of
business failures shows that it has always been a few individuals in positions of power who have
systematically damaged the interests of stakeholders, in general, and stripped the company’s
wealth for individual gain and benefit.
What, then, are the corporate responsibilities that a governance process must ensure and
endure? What would constitute inclusive governance in the context of sustainability? A possible
approach, proposed by Prof. David Smukowski of the University of Washington (refer to his
works on business sustainability23) could be to identify the corporate role in cause and solution.
For example, corporate actions can cause: erosion of shareholder interest; consumer suffering
due to unethical practices and propagation of false messages; market fraud; social rifts along
the lines of too rich and too poor; increased emission and global warming; destruction of crop
yield due to unknown effect of bioengineered products; increase in viruses affecting health of
children; ecological imbalances endangering the future generation; and adverse circumstances
for adventurous scientific and intellectual pursuits and activities. Corporate governance must
self-examine if and how corporate actions and decisions can give rise to such social harm
(causes of harm), and must avoid such cause-related decisions and actions in governance.
This is a proactive thought process for good governance; a proactive ‘stakeholder view’ of all
actions can filter any possible bad effect of governance and bring a new look to the process.
As Prof. David Smukowski noted in his paper ‘focusing upon stakeholder needs is a route to
new markets, innovation, reduce business risk and operational freedom’ (i.e. good business).
All corporate governance processes and systems should include a policy of ‘stakeholder view’
to constantly remind the ‘corporate operators’ about what should be good for the business as
well as sustainable growth. Corporate governance should work with a holistic mission to create
an entity (the business) wherein exists a vision for stakeholder responsibility and integrity of
purpose, a culture of trust, and an objective of social well-being—along with the usual economic
functions and focus on corporate results. This calls for a vision-based and inclusive approach to
governance—one that goes beyond the self. Hence, the success of the system is dependent on
the quality of people and the depth of vision. Governance processes should, therefore, focus on
working through ‘insights’, i.e., subjective quality of people (corporate participants)—given that
‘creation’ can only be as good as the ‘creators’. An important part of governance focus should
be on ‘people’—to help develop the right kind of thinking (i.e. inclusive thinking), attitude and
talent. Taking a leaf from Indian ethos, the process of corporate governance should give equal

23
http://www.docstoc.com/docs/34959551/Business-Sustainability, accessed on 17 November 2011
 Ethics in Business and Corporate Governance

importance to ‘subjectivity’ and ‘objectivity’; creator being the subjective part and creation the
objective part of governance. A good creation needs good, honest and ethical creators who are
endowed with integrity and courage and are conscious about their responsibility, social needs
and holistic ideals. They should have a vision for excellence in whatever they think, do or act;
should be committed to the principles of sustainability; and should have an innovative ability that
helps them refrain from making compromises. The quality of creators is a critical requirement
of today’s corporate governance—to ensure economic and social well-being, simultaneously
and on a sustainable basis.

12.2 EFFECTIVE CORPORATE GOVERNANCE: REGULATION

VERSUS SELF-REGULATION
Does it mean that if organisations have quality people, businesses may not require ‘regulatory’
control? The answer is a definite ‘no’. By improving the quality of people in governance, an
organisation ensures that its business is run for the right purpose and in the true spirit of
inclusiveness of all stakeholders and the society. Whereas, the purpose of regulations, codes
and standards is to bring about uniformity in practice, which is legal, fair and good for the
business as well as the community. Regulations are unambiguous communication about what
is to be done and what is the acceptable behaviour when it comes to the organisation fulfilling
the purpose and utility of the business from the standpoint of the government and regulators.
Such a view may not explicitly contain the social view of business, but it is being increasingly
recognised as a necessity for total sustainability.
Regulations are formulated based on prevalent laws and pre-dated data (available data),
knowledge and understanding of the business process requirements vis-à-vis requirements to
protect shareholders’ interests—more so for the stability of the financial market in order to
protect the supply of money for the business rather than ensuring social equity.Yet, regulations
should also be for future growth of the business; they should be able to hold the business on
the right course to meet the chartered responsibilities—especially towards the society and the
environment, both of which are, in turn, strong enablers for business success. Hence, regulations
and regulators have a definite role in business governance—to bind, regulate and guide the
business for future growth. Here, the problem arises when regulations and regulators fail to
rise up to the duty and responsibility of their respective roles. Hence, some people call for
self-regulation in governance to accomplish the greater objectives of business. Yet, just like
regulations have failed to protect the interests of people and society, similarly self-regulations
have also failed—as is made evident by the recent global economic meltdown and financial
crisis. So, rather than leaving the system to self-regulation alone, there is a need for change in
the role of regulations. Self-regulation is known to ease compliances to statutory regulations.
Any guidance to bring about a change in the role of regulations should consider the fact that
business is not an independent entity in our system, it is a part (and an interdependent part)
of the greater social and economic system. Governments, regulators, business operators and
corporate participants have the onus of ensuring that business is run to fulfil both social and
economic goals and needs. Hence, business and business outcomes need to be regulated and
 New Paradigms in Corporate Governance: Ethics, CSR and Sustainability

directed for synergy in achieving national, global and social goals (including in terms of the
environment and ecology). It is fine as long as regulations work towards this purpose, but,
unfortunately recent experiences (of people and society) related to unabated business scams and
financial crimes point to the fact that regulations have not been effective; they failed to protect,
let alone correct.
Let us further examine why regulation is necessary from the functional point of view—
considering that the society is the supreme benefactor for which we work, do business, undertake
activities, cooperate with each other, think and research, innovate and create. If it is so, then
there are various functions, processes, thoughts, attitudes, actions and creations which are to be
coordinated, controlled, synergised and directed in order to accomplish the objective of benefit
to the society. Any disagreement in thought or action, failure to cooperate, futileness or abuse
of innovation or any cause that could curtail or harm the coordination and accomplishment
of this social objective would, therefore, be detriment to the interests of all components and
entities in this social system. Business (or any institutional activity) is a part of this system; it
should be recognised that a business system has many subsets of the elements within itself—
such as interests, functions, processes, goals and objectives—which also need to be coordinated,
controlled and synergised for the best results. While the company’s by-laws (formed within
the legal frameworks of the country or society) and its corporate governance system (its codes
and standards) coordinate the internal system of its business, what is also needed is an external
coordinating system (formed within the greater framework of the country’s laws and in the
interest of its economic and social well-being). The purpose of regulations, and the role of
‘regulators’, in a country arises from these considerations (internal and external coordinating
systems). Therefore, keeping in view the need of the business to work towards sustainability,
while also maintaining profitability, the purpose of regulations should go beyond control to
include correction and prevention—making for a proactive ‘feed forward’ system as against
the existing ‘feedback’ based system. This calls for change in emphasis of a regulatory system,
especially in view of the disastrous consequences of regulatory failures which, in the recent past,
plagued the world, the society and the public at large. Thus, while regulations and regulatory
measures are necessary for business and governance, they have to be effective for sustainable
growth as well.
In May 2009, following the US financial meltdown, the Committee of Capital Markets
Regulation put forth some recommendations24 on how best to regulate the US financial system
post-crisis. Some observations from this report are as follows:

1. That the present crisis is due to a dearth of regulation is inaccurate. The truth is that the
financial crisis is the result of—not so much a lack of regulation as—the lack of effective
regulation.
2. While some areas may require more regulatory measures, the overriding goal must be to
make the prevalent regulatory regime far more effective than it has been.

24
http://www.capmktsreg.org/pdfs/TGFC-CCMR_Report_(5-26-09).pdf, accessed on 12 September 2009 and 17 November 2011
 Ethics in Business and Corporate Governance

3. Regulatory reforms should be based on solid governance principles—chief among them

being the reduction of systemic risk.
4. There is a need for investor protection through greater transparency in the financial system.
Besides which, more information would have enabled the market to more accurately
price its assets, risks and other relevant inputs. Hence, much of the present crisis can be
attributed to a lack of critical information.
5. The regulatory structure (of the US financial market) must be entirely reorganised in
order to become more integrated and efficient.
6. A global crisis demands a global solution.

As per the recommendations of the US Committee, there is a need for principle-based

regulations focused on effectiveness, and greater transparency to protect investors. However,
the report is silent about protection of social interests. Furthermore, it recommends as much
attention to regulatory effectiveness as to regulatory coverage; in that, regulatory reform would
be meaningful if it is based on fundamental principles rather than on political expediency. The
most important among these recommendations—particularly in light of the 2008 financial
crisis—is that regulations must reduce systemic risk. When a systemically important institution
is in danger of failure, its failure could trigger a chain reaction of other failures—the so-called
interconnectedness amongst businesses. Significantly, this study also highlights an important
fact that a global financial system demands globally coordinated rules. Citing how financial
business and financial instruments (like derivatives) are internationally traded, subject to
different requirements in different countries, the report points to the need for coordination and
convergence between the Generally Accepted Accounting Principles (GAAP) and International
Financial Reporting Standards (IFRS) as a single standard for regulation and control. In summary,
while the world may not yet be ready for a global regulator, the time has come to ensure greater
global coordination.
Figure 12.1 illustrates the areas of concern in corporate governance post-financial crisis of
2008.

Regulatory controls and

Economic policy
effectiveness
[for strong, sustainable
[For enforcing codes,
and balanced growth]
principles & ethics]
Problems of
corporate
governance
Regulatory reforms Integration (or
synchronisation)
[To protect investors’
of regulatory structures
interests by increased
financial transparencies] [For efficiency and effective]

Figure 12.1 Problems of Corporate governance: Areas of Concern Post-financial Crisis of 2008
 New Paradigms in Corporate Governance: Ethics, CSR and Sustainability

Globally coordinated regulatory rules are important not only for financial business, they
are also equally important for other areas of business and human activities. Because, the rapid
globalisation of business, flow of capital from one country to other, and, more importantly,
the spread of pollution and ecological imbalances—arising from global competition in
industrialisation and modernisation of society—have given rise to a new situation, which must
be regulated if mankind has to benefit from the advances of science, technology and economy.
Regulating and controlling shady financial deals, and the quality of derivatives and securitisation
of assets and capitals is important; yet, what is equally critical is to regulate and control business
ventures that are prone to adding greenhouse gas emissions, restrictive and protective trade
practices, dumping of waste and refuse onto the shores of another country, proliferation of
unethical use of bioengineering and genetic engineering, and rampant degradation of land
and ecology destruction—and more so, if the present generation has to guarantee future
sustainability. Country-based (or regional) regulations that are partial in character vis-à-vis the
universality and sustainability of business, are proving to be highly inadequate when it comes
to creating a global environment of ethical and sustainable business. It should be appreciated
that the effects of ecological damage and pollution would numerically affect many more—and
even more severely than the financial crisis witnessed in recent times. Hence, the world needs
conscientious regulatory systems dealing with finance, trade, industry and the environment.
This calls for cooperation amongst nations, actions beyond political consideration, acceptance
of the principles of equal opportunity and equity for all, and a vision for sustainable and
inclusive growth for sustainable future. Good corporate governance, in the emerging global
scenario, will require the world of nations to work together under the umbrella of ‘ethics,
conscience, cooperation and contribution’ for all citizens of the world. It could be a matter
of debate whether to call it a regulatory umbrella or not, or if such global regulation for all is
workable or not.Yet, what is certain is that there is a greater need now—than ever before—for
such a regulatory umbrella with focus to shift from local prosperity to global sustainability. In
this context, let us refer to the mission of the European Union25, which, in short, is to integrate
the diverse interests and intentions of its member countries to a common chain of rules and
regulations for prosperity and sustainability in the EU. If such a beginning is possible for the
EU, surely a similar approach can be adopted for global prosperity? The question is not what
is possible, but what we are willing to do. Global cooperation and regulatory coordination for
‘common good’, fairness of business practices, and eradication of imbalances in growth and
sustainability may be extremely complex and contradictory to the interests of some nations,
yet a beginning has to be made if we have learnt any lessons from the mistakes that led to
global recession of 2008–09. Good corporate governance of business enterprises globally would
largely depend on the vision and (change in) direction of regulatory provisions and cooperation
amongst nations.
Therefore, the debate is not about the need for regulations, but about regulatory focus.
Based on the experiences of early 21st century—in business, trade, scientific and technological
25
http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/PARTNERS/WBEU/0, contentMDK:20188287~menuPK:
64136918~pagePK:64137114~piPK:64136911~theSitePK:380823,00.html, accessed on 16 September 2009 and 17 November
2011
 Ethics in Business and Corporate Governance

inventions and in governance—we need sustainability more than random prosperity. While
the debate about reforms in regulations and regulatory coverage for business may go on, what
is needed most urgently is that we put a stop to abuse, misuse and exploitation of the present
business environment and natural environment owing to the increasing dominance of a few
big and powerful organisations and some unscrupulous individuals. And herein lies the role
of self-regulation—in correcting and moderating the path of success. Furthermore, such a
role model for regulation need not wait for an external authority to define what is right or
wrong; self-regulating individuals and organisations can chart their own path of true success and
sustainability. Self-regulation can be described as the self-imposed standards of behaviour with reference
to codes and principles (in this case, of corporate governance) which is based on an understanding of
strengths and weaknesses of the individuals, and of the purpose and perspective of the business. Self-
regulation is seen to be an essential part of the ‘effective regulation’ system that can ensure a
business that is free of corruption (or corrupt intention) and self-serving intent or actions. In
that sense, self-regulation starts with individuals and refers to individual thoughts, beliefs and
actions, which have a cumulative effect on the corporate business and governance, whereas
regulations are meant to be applied on the company—an inanimate object with no sensitivity
of its own and which can be easily manipulated by unscrupulous individuals for selfish gains.
Thus, regulations and regulatory provisions—despite reforms—can easily fail to protect the
interests of all stakeholders, if the individuals running the organisation are not ‘self-regulating’.
Thus, regulation and self-regulation are complementary approaches which both industries and
business need if they were to ensure ethical governance and sustainable results.

12.3 CHALLENGES TO CORPORATE GOVERNANCE:

CORPORATE SOCIAL RESPONSIBILITY (CSR)
One of the greatest challenges in the contemporary era of globalisation and economic
liberalisation is to ensure the free-market economy for the business environment, while also
maintaining and respecting individual rights, human rights, and ethics in corporate governance.
However, the increasing dominance of big and powerful organisations—each trying to flex its
muscle in the global trade, as well as in the investment and value chains of business to suit its
self-serving purpose—constantly undermined the patterns of development that were socially
inclusive and ecologically sustainable. Alarmed by the early signs of this social failure of business,
the UNRISD (United Nations Research Institute for Social Development) formulated a
research and policy brief on CSR and Business Regulation26 in the 1980s. Yet, it was in the
90s that the concept of CSR gained real ground owing to increased consumer awareness and
social demands, on the one hand, and the failure of business the world over to live up to its
social expectations, on the other. The CSR agenda centred on self-regulation and promotion
of voluntary initiatives to minimise manipulation and malpractices in business (aimed at
exclusive self-gain), to improve social, environmental and human rights related dimensions

26
http://www.unrisd.org/80256B3C005BCCF9/(LookupAllDocumentsByUNID)/F862A71428FAC633C1256E9B002F1021?
Open Document, accessed on 17 November 2011
 New Paradigms in Corporate Governance: Ethics, CSR and Sustainability

and compliances of business, and to neutralise the efforts or intention of non-state actors to
undermine socially inclusive pattern of development. It is believed that the indirect agenda of CSR
was to assert social control over the markets, which started misbehaving early with the liberalisation
of economy and the spread of free-market economy.Thus, when corporate governance policies
displayed the first signs of weakness and deviated from social responsibility and inclusiveness,
CSR was developed as a part of the corporate governance mechanism to bring about self-
regulation in industries and business. CSR stressed the need for corporate self-regulation and
voluntary initiatives involving codes of conduct, environmental management responsibility, care
for safety and health of employees and the society, and contribution to the welfare of local
community and philanthropy.
So, has CSR been effective in correcting the course of corporate governance so as to stop
the damage to public and social interests as well as the erosion of wealth from the public domain
of business? Not really, if the recent happenings in the world economy and the continuing
disputes over who should do what to control global warming27, are any indication of this
accomplishment. But to say that corporate governance failed completely would be a deep denial
of the fact that it helped business enterprises to learn to survive (or grow) in a competitive
market and within a somewhat regulatory and disciplined business environment. However, if
the concept of corporate governance has been tarnished or the confidence in business practices
has been lost, it has been so only because of a few (individuals or businesses) in the industry
(here, let us recollect Pareto’s 80:20 rule which states that 80 per cent of the problems are due to
20 per cent of people) that brought suffering upon a million others. In fact, the 2008 financial
crisis clearly shows the inadequacy of the present approach when it comes to the purpose of
governance in the changed context of global agglomeration and environmental challenges.
Furthermore, owing to the same downturn in business, some newer issues of business traits
of corporate governance have come into focus, e.g., transparency, disclosure, protection of
shareholders’ interests, responsibility of environment regulation and management, social benefit,
social support and sustainability.There is a huge social outcry in Europe and the US to regulate
the ‘coalition’ amongst top executives and authorities that enabled the unfair distribution of
gains and benefits from business, leaving the shareholders, other stakeholders and people in the
society high and dry. According to a newspaper report (Financial Times, 21 September 2009),
financial standards—like Basel-II, the regulations that specify the level and quality of capital that
banks in dozens of economically powerful countries should abide by—are being questioned.
Interestingly, the same newspaper issue reports how the World Bank President set an ambitious
agenda for ‘responsible globalisation’ that links efforts to promote a more balanced growth
with financial stability, development and climate change in order to tackle emerging global
challenges. These three links to ‘responsible globalisation’ not only call for regulatory reforms
and systems but also call for a change in the mindsets of leaders, governments, economists
and industry heads so as to be able to redefine the tasks of corporate governance. Take for
example:

27
http://www.climaticoanalysis.org/post/how-green-will-the-london-summit-outcomes-be/, accessed on 13 September 2009 and 17
November 2011
 thics in Business and Corporate Governance

World recession results in steep fall in greenhouse gas emissions28

Falling industrial output has been described by International Energy Agency (IEA) as largely
responsible for the plunge of carbon dioxide gases in the atmosphere. The report describes
this as a ‘unique opportunity’ to move the world away from the disaster of global warming.
Scientists seem to be in consensus over the dire consequences of drastic warming—predicting
the effect as: ‘+1oC increasing risks of wildfire; species shifting habitats due to changing
conditions; +2oC increase will result up to 30 per cent of plant and animal species at risk
of extinction; decreased crop productivity in seasonally dry and tropical regions—leading
to increased risk of famines; most corals getting bleached; +3oC increase will lead to about
30 per cent of global coastal wetlands lost; increased morbidity and mortality from heat
waves, floods and draughts; hundreds of millions of people exposed to water shortages…’
Acknowledging these facts, will the governments and corporate be willing to accept this
‘unique opportunity’ (i.e., cutting down industrial output for ‘balanced growth’) to move the
world away from the disaster of global warming?

Figure 12.2 illustrates the challenges of ethical corporate governance: the sustainability, the
CSR, consumers, investor and environment protection, and drive for responsible globalisation.

Challenges of ethical corporate governance

Responsible
Social
globalisation
Focus to view of Investor Consumer Environment
(economic,
sustainability business protection protection protection
trade and
(CSR)
environ.)

Figure 12.2 Challenges of Ethical Corporate Governance

In this way, the corporate governance debate is not only about financial and regulatory
disciplines, but also about indiscipline in many other areas—such as the random use of scarce
resources, dumping of toxic wastes into coastal lands (causing ecological damage), lack of
concern and commitment regarding greenhouse gas emissions, unfair trade practices, and the
marketing of questionable bio-engineered products, to name a few. Thus, the debate about
corporate governance hinges around saving the world from the disastrous effects of undisciplined
corporate activities, i.e., sustainability.
Governments, economists, environmentalists, and regulatory bodies may well factor these
facts into pertinent events such as the G-20 economic summits and the global talks on climate
change under Kyoto protocol so as to usher a change in the way of doing business and ensuring
sustainability. Yet, if the various reports referred to earlier are any indication, the regulatory

28
http://www.ft.com/cms/s/0/53f3d454-a...44feabdc0.html, or refer to http://www.911oz.com/vbulletin/showthread.php?p=28981,
accessed on 28 November 2009 and 17 November 2011
 New Paradigms in Corporate Governance: Ethics, CSR and Sustainability

capacity—or willingness thereto—seems to be declining in general. Agreements between

nations are receding, and the limitations (or failure) of self-regulation are apparent in the
recent financial events. Given these circumstances, the corporate governance system is facing
the critical challenge of restoring confidence in business—as an institution generating and
distributing economic wealth for national and social well-being in a sustainable manner—and
governments are facing the challenge of adopting the path of ‘balanced growth’—protecting
the dual purpose of the economy and the environment in equal measure. In the absence of a
strong will on the part of the G-20 nations—one of the most economically powerful assemblies
of nations—to reform the regulations and move towards better measures of governance to
ensure equitable, inclusive and sustainable development of global economy and environment,
an alternative approach to regulation and environment protection is now emerging29. It centres
on co-regulation in which a combination of governments, multinationals, civil society and
business interests get engaged through public-private partnerships and multi-stakeholder
initiatives associated with standard procedures for setting, reporting, monitoring, auditing and
certification. In addition to the call for corporate accountability, the system is also increasingly
showing a concern for ‘international regulation for transnational corporations’ (TNCs)30—a
powerful group of companies with wide-ranging business interests and having power within
the ‘political power centre’.
While it is not certain how effective any different approach would be, what is being confirmed
is the global concern for ethical corporate governance in the backdrop of the financial sector’s
failure to create a ‘common good’, on the one hand, and the exploitation by powerful business
enterprises in the context of global trade and business, on the other. It is as if the entire world
wants to put a stop to the excessive profit-drive of powerful nations, and to organisations that
are placing the natural laws of justice, fairness and equity for society and humanity on the
backseat. What is most called for is a change in outlook and governance processes to make
business—the most powerful economic institution of modern civilisation—more inclusive and
sustainable for the future. In the words of Mr. Nobuo Kuroyanagi (CEO of Japan’s largest
bank, Mitsubishi UFJ Financial Group): “Even as civilisation continues to march on, we need
to return to our roots from time to time and ask ourselves whether we are contributing to the
happiness of the human race. If we blindly pursue profits to an excessive degree, it results in
many things going wrong.” (Refer to ‘The Monday Interview’ by Michiyo Nakamoto, ‘Bankers
who want to serve the world’, Financial Times, 14 September 2009.)31 No wonder Japanese
banks, including MUFG, have been relatively unscathed by problems (of 2008) in the US and
elsewhere. According to Mr. Kuroyanagi, financial innovation is fine as long as it leads to greater
social welfare. A vision, mission and value-based approach to corporate governance—that is, all
it took for Japanese banks to remain least affected by the global financial meltdown.
Excellence in corporate governance is, therefore, just not adhering to external regulations
and compliance alone (though this is very important); it is also about self-searching, self-
29
http://ec.europe.eu/governance/areas/group11/report en.pdf, accessed on 23 February 2010 and 17 November 2011
30
http://www.columban.com/stateofplanet1.html, and http://www.policyinnovations.org/ideas/policy_library/data/01311, accessed on 14
September 2009 and 17 November 2011
31
http://chutzpah.typepad.com/slow_movement/2009/09/page/2/, accessed on 17 November 2011
 Ethics in Business and Corporate Governance

asking, and self-seeking what ‘common good’ the company has done or should do. No doubt
governments all over the world must enact laws or agree to common laws and regulations to
safeguard the interests of consumers and customers of all description (meaning all stakeholders);
yet, the success and effectiveness of governance will depend much upon the organisation’s
value-culture and constant thrust on social responsibility. If good corporate governance made
more sense following the introduction of the ‘Sarbanes-Oxley Act’ in the US (refer to Chapter
9) and SEBI’s revised Clause 49 in India, it could neither prevent fraudulent cases (such as
Madoff, Stanford and Satyam) in the corporate arena, nor stop the financial crisis of 2008.
A social view of business has long since been recognised as a good strategy for profit and
sustainable growth that resulted from Milton Friedman’s work ‘The Social Responsibility of
Business is to increase its profits’, New York Time magazine, 13 September 1970 (refer to
footnote 29). Furthermore, it has been observed that when companies voluntarily take social
welfare responsibility and comply with CSR regulations, the job of external business regulators
becomes much easier, which, in turn, helps in protecting the interests of consumers and other
stakeholders as well as of the environment. Excellence in corporate governance is thus an exercise
of strategically and ethically balancing the dynamics of corporate philosophy, ethics of board
members and senior corporate participants, business goals, and corporate stand on social view of
business, shareholder view of business, regulations for governance, and criteria of sustainability
for future. The focus of such governance practice is to develop a responsibility-relationship matrix
with the stakeholders (i.e., those who are influenced by the business behaviour and those
who could influence that behaviour). Such a relationship should be based on the principles of
inclusiveness and sustainability of the society—the objective of CSR. It could be built on the
doctrine of: ‘as a business, give more services, command more respect; as a customer, seek more services,
give more support’. The dynamics may change with changing business environment, but the
focus would still be to gain mutual support of different blocks of stakeholders, society and the
governments for prosperity and sustainability. As the economy grows, resources become scarcer
and competition gets tougher, more and more people (investors) and the society (supporters)
will ask for clarity in the purpose of a business, accountability in its actions, inclusiveness in its
approach, and exchange of welfare between the business and society. Leaders will need to have
a ‘moral compass’ so as to determine the direction of corporate governance and the unassailable
integrity to lead. One such leader who co-founded the Rolls-Royce—world’s best known
name for excellence in design and quality—Sir Henry Royce once said: ‘Whatever is rightly done,
howsoever humble, is noble’. Today’s leaders need to appreciate this spirit of nobility and set their
‘moral compass’ in approaching to corporate governance.They should recognise in their act (of
governance) that ‘doing right is ethical’ and ‘being ethical is noble’.

12.4 ROAD MAP FOR EXCELLENCE IN CORPORATE GOVERNANCE

Generally, corporate governance centred on the internal management of the company,
encompasses board composition, board behaviour, transparency and disclosure norms of
accounting and business operations, listing agreement and compliance of the stock exchange
regulations, risk management, financial regulations, and such other matters that can influence or
affect the company’s business performance; vide, for instance, corporate governance system of the
 New Paradigms in Corporate Governance: Ethics, CSR and Sustainability

New York Stock Exchange (NYSE)32 or refer to the Wikipedia Free Encyclopedia.33 It is more
internal looking than looking outside the sphere of company’s profit-bearing activities.Though,
philosophically, the social and common responsibility of business has long been recognised,
ever since the famous saying of Milton Friedman that social responsibility of business is to
increase its profits34, the process of governance has been mainly used to gather only the direct
benefits of business. Organisations the world over have largely focused on looking out for their
narrow interests, which have often been directly opposite to the greater good of the country
or the society. As some researchers have observed35, organisations or corporate governors have
not acted like reasonable people looking out for the greater good of the society, which they
should have. The purpose of CSR in corporate governance had been—and still is—to establish
this responsibility of business and guide its processes towards a more inclusive growth, which
satisfies the purpose and ethics of business—that is, greater good to a greater number of people
as a result of the process and proceeds of business.
However, there are opposing views36 regarding the benefits of CSR and its utility in sustaining
the interests of business. Critics claim that CSR initiatives, instead of focussing on doing any
real good, are more focused on satisfying social and political activists or drawing in customers—
which is not its real purpose. CSR, which is often synonymous with corporate governance,
has to connect the moral, social and environmental issues of business with its economic and
financial governance to be able to truly serve the interests of all stakeholders. Unfortunately, due
to this misuse of CSR, thus far there has been no consensus on its exact role, rules, structures
or procedures.37 The challenge to CSR or corporate governance is to make it a cohesive set
of principles and processes that can contribute to business economics as well as to the creation
of a better society, cleaner environment, and sustainability. Corporate governance has to weigh
and balance the dynamics between ‘resource consumption’ and ‘value generation’ so as to bring
about true wealth and an all-inclusive welfare. It is the challenge posed by this ‘balancing act’
that necessitates measuring success not by financial profits but by value creation—where the
term value signifies benefits to humanity, society, nations and all other stakeholders. In his book,
Corporate Social Responsibility—The Corporate Governance of the 21st Century, Ramon Mullerat
approaches this subject from a variety of perspectives and recommends that ethics and CSR
are imbibed by the organisation, deep down to its very soul, for the organisation to be stronger.
He observed that while CSR was undoubtedly inspiring corporate governance, there is a need
to define and determine its notion, shape and effects. To quote Mullerat, ‘In a world where
the annual income of the five largest business corporations is more than double the combined
GNPs (gross national products) of the 50 poorest countries, the need for meaningful standards
32
http://www.nyse.com/pdfs/finalcorpgovrules.pdf, accessed on 15 September 2009 and 17 November 2011
33
http://en.wikipedia.org/wiki/Corporate_governance, accessed on 15 September 2009
34
http://www.colorado.edu/studentgroups/libertarians/issues/friedman-soc-resp-business.html, accessed on 15 September 2009 and
17 November 2011
35
http://curiouscapitalist.blogs.time.com/2008/07/22/the_social_responsibility_of_b/, accessed on 15 September 2009 and 17 November
2011
36
http://hbswk.hbs.edu/archive/4008.html, accessed on 15 September 2009 and 17 November 2011
37
http://www.aspenpublishers.com/product.asp? catalog_name=Aspen&product_id=9041123245&cookie%5Ftest=1, accessed on
15 September 2009
 Ethics in Business and Corporate Governance

of corporate social responsibility should be obvious.’ Thus, argue critics, if we search the role
of CSR in only the economic well-being of a business, we miss the core and essence of
governance.
CSR has to be a part of ethical corporate governance for sustainability. In other words,
the corporate governance system must interweave moral, social and environmental issues
with other business issues for profits and survival, and the corporate governance structure
should be built accordingly. The legality of business and business processes, compliances to
different regulatory norms, and enforcement of codes and standards are only a part of corporate
governance; the other part is to do with the environment, society, morality and sustainability.
Thus, the road map for ethical governance starts with clearly defined and transparent mission
statement incorporating economic, social and environmental goals of the organisation.The task
of the board and the management is to transform this mission into strategy-driven actions (or
decisions) that are ethical and beneficial to all stakeholders. Given the condition that regulatory
norms and laws are a reality for the business, no matter if they are effective and futuristic, the
process of governance has to self-regulate, self-correct and self-support the actions and decisions
of the business to meet the mission and goals that are interwoven with morality, society and
environment. The attitude of an ethical governance system should be service beyond self and
sustainability before profitability.
In the midst of numerous views and volumes of work on corporate governance by business
experts, economists, administrators and management professionals (as referred to thus far),
finding a common but ideal corporate governance process becomes difficult.Yet, what should
not be difficult is the recognition of the fact that business cannot exist—let alone prosper—
without a well-off society. Hence, the challenge is to structure a good and effective governance
process for excellence where the society is an inclusive partner in the progress of the business.
In this regard, let us consider a business enterprise in its simplest form: the business purpose,
the inputs, the processes, and the output. Perhaps we can affix the responsibility of corporate
governance in terms of these elementary segments of business. Such an approach would call
for:
(i) Purity of the purpose—mission of the business and social inclusiveness;
(ii) Quality and legality of the inputs—resources: money, men, materials, etc.;
(iii) Integrity and ethics of processes (process of transformation, generation or production),
policies, programmes, and decisions giving effect to goods, services, or any instrument
of deal; and
(iv) Safety (health and moral hazards of people, safety of the society and future generation,
etc.), security (protection from losses and danger from future catastrophe), utility
(utilitarianism of goods, services and benefits in line with greater good to greater
number of people) and capability (ability to serve the consumers and stakeholders in
moral and beneficial manner) of the output, i.e., products, services or economic value
that a business generates for its stakeholders, consumers, society and others in the market
and environment.
 New Paradigms in Corporate Governance: Ethics, CSR and Sustainability

The task of corporate governance should, therefore, start with validating the purity of the
purpose of the business and setting a society-inclusive mission of the business in the context of
social culture and expectations of stakeholders and consumers. If we translate this approach to
levels and activities of corporate governance, then it can be illustrated as in Figure 12.3.
This is not a model of corporate governance, but a conceptual mapping of what should
go into an excellent and comprehensive corporate governance process. The approach, here, is
to ensure ethics of governance by constantly reminding the ‘corporate participants’ about the
‘purity of purpose’ from the top, and improving the quality of ‘corporate participants’ through a

Corporate Governance System

A. Take-off level: Approving, validating, and filtering purity of ‘purpose’ & setting mission
and vision of the business.

B. Top level
System of ‘Responsibility/Accountability’ in the Managing board; Approval of Policy, Programmes
and Strategy for products/services and resource; Monitoring, Auditing, Correcting; Reporting
for statutory/regulatory compliances; Overviewing and supervising implementation of approved
programmes and policies for accomplishment of company’s mission (socially inclusive) and vision.

C. Working level
Level-I: Ensuring, auditing and improving ‘quality and legality’ of inputs and other resources that
should go in to create the strength and opportunity of a company’s business.
Level-II: Administering, auditing, promoting and ensuring ‘ethics and integrity’ of actions, decisions,
processes and parameters that are used in the company for transformation of inputs, generation of
ideas and products (including services), measuring and controlling outputs, or any other action that
contribute to product/service promotion, competition management, environment management,
and such other things that have material and social implications on the company’s performance.
Level-III: Controlling and assuring safety, security, utility and ability of products, services and other
derivatives of the business as per expectations of consumers, society, and individual stakeholders—
including assurance of environment quality and sustainability.

D. Ground level
Promotion of company-wide total quality, culture of ethics and ethics policy, and development
of personnel by transformational processes for support and sustainability amidst social and global
changes and challenges (i.e., total ethical practice).

Figure 12.3 The Levels and Activities of a Corporate Governance System

 Ethics in Business and Corporate Governance

culture of total quality, ethics and other transformational process from the base. Levels B and C
(refer to Figure 12.3) are a reminder for and requirement of the tasks that are to be performed
in adherence to laws, regulations, by-laws and moral reasoning.
A ‘pure and inclusive mission’ would help establish the requirements and rules for ‘inputs’,
which must be of good quality and legally acceptable and workable. For example, finance is
an input; hence, the quality and legality of financial (re)sources should be good. Similarly, the
exploitation of labour or engagement of child labour—notwithstanding the opportunity—
should be treated as a bad input. Random use of scarce natural resources and destruction of
ecology will also not qualify as quality inputs. In other words, compromising process quality,
violation of IPR, adulteration and counterfeiting, undercutting for competition, bribing,
forming an unholy nexus between interested parties, professional abuse, etc. would go against
the integrity and ethics of the business process. Similarly, outcomes of the business, which
are generally in the form of product, service and money (i.e., economic value), must be safe
for use/consumption and for the social well-being (e.g. the debate about genetically induced
products); secured from losses, risks, environmental damage and danger to sustainability;
should have utilitarian value and be capable of satisfying common needs (including individual
rights and interests) and expectations of customers, stakeholders and the society. Codes, rules,
regulations, code of professional conduct, etc. form the support for such a governance process
and help to judge the good from bad, moral from immoral, legal from illegal, transparent from
obscure, beneficial from harmful, social from personal, value from waste. They are good and
positive only when we respect them. However, continuing problems in the business world and
financial institutions—despite such rules, regulations and codes—are due to our wilful violation
of or disrespect for these rules and regulations. Hence, corporate governance is not only about
compliance to regulations and codes, it is more about creating an organisation with economic,
social and sustainable values, and overall social well-being, which can be created by confirming
the purity of purpose and transforming the quality of ‘corporate participants’.
The real challenge for excellence in corporate governance, therefore, lies in learning to
create true value for the stakeholders and the society. Economic profits do not necessarily mean
‘good value’ or ‘sustainable value’. In his article, ‘The Value Every Business Needs to Create
Now’, Mr. Umair Haque—a strategy and management consultant in the US—said38 that profit
through economic harm to others results in ‘thin value’. He describes thin value
as an economic illusion, profit that is economically meaningless, because it leaves
others worse off or, at best, no better off. The corporate governance system, therefore,
has the responsibility to focus on creating real value that is not illusionary but real. He says
that the fundamental challenge for the 21st century business and economies is in learning to
create ‘thick value’. This proposition lends further support that creating ‘thick value’ is the real
challenge to business as economic institution, and that should be the measure of excellence
in corporate governance. Value creation, in an all-inclusive theme, is the challenge to the 21st
century corporate governance process for prosperity as well as sustainability. This requires

38
‘The Value Every Business Needs to Create Now’, Mr. Umair Haque, Harvard Business Review; refer to http://blogs.harvardbusiness.
org/haque/2009/07/the_value_every_business_needs.html, accessed on 17 November 2011
 New Paradigms in Corporate Governance: Ethics, CSR and Sustainability

faithfulness to the purpose, honesty and integrity in business processes, respect for social well-
being, and spirituality in thoughts and deeds.
The answer to such a challenge to corporate governance lies, perhaps, in a combination of the
western model of corporate governance (through codes, rules and regulations), and the oriental
approach (in keeping with Indian ethos and spirituality) of transformation of people (corporate
participants, in this case): through holistic wisdom of respect for all, equality of objectivity and
subjectivity, cooperation, working with excellence and devotion without attachment, and spirit
of ‘karma yoga’—the yoga of selfless service to others (‘do your duty without ego and without
considering your gains’), would be the answer. True fulfilment of a corporate governance task
done well is in developing an unshakable faith in values and morality, unfolding the potential
within the people (of the organisation) to find the honest path amidst diversionary self-serving
interests (the latter may have well been the source of the 2008 financial crisis), manifesting
ethics and social well-being in the corporate work culture, and attaining the goal of ‘true value’
—all, intertwined with the spirit of ethics, equity and sustainability. The corporate governance
process should, thus, comprise a holy mix of purpose, process and persons so as to attain the goal
of creating ‘true value’ for the society and sustainability for the future.

Summary
1. The chapter aims to re-emphasise that without ethics, business is directionless and quite unlikely
to reach its purposeful destination for society or sustainability. Governments, business managers,
business regulators, judiciaries and the society have the responsibility to bring this powerful
institution—the business—into ethical order so that it delivers the result: that is simultaneous
creation of economic wealth and social well-being for all stakeholders. This is the spirit of true
‘value creation’ and excellence in business.
2. According to a particular school of thought, people misbehave. Governing this misbehaviour—
be in society or in business—requires the institutions of law, regulation and ethics. Thus, while
laws, rules and regulations are necessary to control the misbehaviour of people or damage to the
interests of stakeholders, ethics complement this effort by aiding the process of self-regulation.
3. The role of regulations as well as of regulators has been discussed with illustrations to show that,
ultimately, it is the morality and ethical views of corporate participants that matters most in good
corporate governance.While governments and authorities could be tied to many an external and
political consideration, and may not show the right will and willingness to reform regulations
and regulatory measures, corporate governance cannot absolve itself from the responsibility of
ensuring ethics in governance, protection of stakeholders’ interests or the well-being of society.
The role of self-regulation becomes important from this standpoint, i.e., in the absence of
effective regulation.
4. To make regulations effective, this chapter discussed the concept of moulding the governance
process with regard to ‘causes and solutions’. It has been suggested that corporate governance
must self-examine possible causes of grievance and injury to the society and work to solve these
issues with clarity and transparency. A proactive ‘stakeholder-view’ of all actions can filter out any
possible bad effect of governance and bring about a new look to the process.
 Ethics in Business and Corporate Governance

5. Importance of CSR—as integral part of corporate governance—has been emphasised. It has

been pointed out that CSR played the significant role of self-regulating the corporate governance
process and policy when business enterprises began to show weakness and diverted from social
responsibility and inclusive growth. It was CSR that stressed the need for corporate self-regulation
and voluntary initiatives involving codes of conduct, environmental management, care for safety
and health of employees and society, and support for welfare of the local community.
6. The chapter throws light on the fact that when companies voluntarily take social welfare
responsibility and comply with CSR regulations, the job of external business regulators becomes
much easier, which, in turn, helps to protect the interests of consumers and other stakeholders as
well as of the environment.
7. Quoting leading business sources, this chapter shows that many things can go wrong when
business is driven solely for excessive profit—as was the case with the events that led to the
financial crisis of 2008. Business must also self-search the answer if it is contributing to the
happiness of society. Significantly, it was a vision, mission and value-based approach to corporate
governance which left the Japanese banks least affected by the global financial crisis.
8. However, CSR initiatives of business have also been criticised for satisfying only the purpose of
social and political activists or for drawing in customers—rather than doing any real good. In
this context, it has been discussed that CSR, which is now used synonymously with corporate
governance, has to connect the moral, social and environmental issues of business with its
economic and financial governance if it were to truly serve the interests of its stakeholders. The
challenge to CSR or corporate governance, now, is to make for a cohesive set of principles and
processes that can contribute to business economics as well as to the creation of a better society,
cleaner environment, and sustainability for future generations.
9. Based on various sources of opinion and discussion, the role of good corporate governance has
been briefly identified as working towards creating true value for a business, one that includes
economic growth of the company, wealth for investors, satisfaction of all stakeholders, social
well-being and sustainability. Keeping this in view, a simple activity-oriented working model of
corporate governance based on the components of business process has been outlined.
10. It has been re-emphasised that the real challenge for excellence in corporate governance lies in
learning to create true value for stakeholders and society. Economic profits do not necessarily
mean ‘good value’ or ‘sustainable value’. This is especially so given the dependence of human
happiness on balanced development of the society as well as on environmental sustainability.
It has been pointed out that profit through economic harm to others results in thin
value, if any, and that this type of value is an economic illusion. This type of profit is
economically meaningless, because it leaves others worse off and the society unhappy.
The corporate governance system, therefore, has the responsibility to focus on creating real value
that is not illusionary but is real for the society at large.
11. Finally, it has been discussed that such a social-oriented corporate governance system requires
faithfulness to the business purpose, honesty and integrity in the business process, respect for
the social well-being, and spirituality in thoughts and deeds. Perhaps, a combination of the
western model of corporate governance (through codes, rules and regulations), and the oriental
approach (involving Indian ethos and spirituality) to transform people (corporate participants,
in this case) can be the answer. The corporate governance process should thus comprise a holy
mix of purpose, process and persons to attain the goal of creating true value for the society and
sustainability for the future.
 New Paradigms in Corporate Governance: Ethics, CSR and Sustainability

Key Words and Concepts

Sustainability, excellence, virtue jurisprudence, inclusiveness, social well-being, regulations, self-regulations,
effectiveness, correction, prevention, reforms, financial crisis, social responsibility, value creation, social
value, economic value, thin value, thick value, stakeholder-view, transparency, subjectivity, objectivity,
spiritualism, transformation, true value, corporate participants.

Exercises
Check Your Progress
1. Laws, regulations and codes for corporate governance, and assurance of transparency in business processes,
had actually evolved to serve the ___________.
2. Corporate governance reform has to start ___________ and that is not the task of ___________.
3. A policy of ‘stakeholder-view’ in corporate governance processes and systems is a constant reminder of
___________.
4. Regulations are unambiguous communication about ___________.
5. Self-regulation can be described as the ___________.
6. Milton Friedman held the view that social responsibility of a business is to ___________.
7. Excellence in corporate governance is an exercise in ___________.
8. The relationship matrix of business and stakeholders could be built on the doctrine of ___________.
9. The challenge posed to CSR or corporate governance is to make ___________.
10. The true fulfilment of corporate governance task done well lies in developing ___________.

Review Questions
1. List ten points involving ethical, regulatory and policy issues that led to the financial crisis of 2008. Identify
two major issues that could have helped in averting the crisis and suffering in society.
2. Critically discuss why ‘regulatory compulsions’ failed to contain the malpractices in business despite having
a comprehensive coverage for investor protection.
3. Discuss the merits of ‘regulation’ and ‘self-regulation’ in corporate governance vis-à-vis their effectiveness
in controlling wrongdoings.
4. Discuss why corporate social responsibility (CSR) failed to evoke much interest in 1980s and what had
been proposed after the 1990s scandals in USA to make CSR an effective strategy for good governance?
5. What are the challenges to corporate governance system in the face of the present global crisis concerning
the economy and the environment? Why did global cooperation or global regulatory platform for corporate
governance seem like a distance dream—until now?
6. What do you understand by ‘sustainability’? Why do management philosophers overemphasise the concept
of sustainability in corporate governance?
7. Why are individuals critical for good corporate governance? Discuss the role of individuals in taking the
process of corporate governance to the heights of corporate excellence.
8. Following the map of steps and levels in corporate governance and the importance of ethical and spiritual
approach to it, as described and discussed in this chapter, draw a model of corporate governance system and
process for ethical and effective governance.
 Ethics in Business and Corporate Governance

Further/Suggested Reading
1. Corporate Social Responsibility: The Corporate Governance of the 21st Century, Ramon Mullerat, Kluwer Law
International, The Netherlands, 2005
2. ‘Corporate Governance: Challenges, Opportunities and Returns’, Presentation by Michael Webb,The Qatar
Corporate Governance Conference, Doha, 2006 http://www.qfcra.com/publication/CorporateGovernance_
Challengesthe _Opportunities_and_Returns.pdf
3. Corporate Governance and Sustainability: Challenges for Theory and Practice, Suzanne Benn and Dexter Dunphy
(Eds.), Routledge, London, 2006
4. The Wealth Creation and Wealth Sharing, Margaret M. Blair,The Brookings Institution Press,Washington DC,
1996
5. ‘Corporate Governance Reforms in China and India: Challenges and Opportunities’, Nandini Rajagopalon,
Yan Zhang, Harvard Business Review, 2008; http://harvardbusiness.org/product/corporate-governance-reforms-in-
china-and-india-ch/an/BH264-PDF-ENG
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 Index
5 Ps of marketing 192 Agenda for ‘responsible globalisation’ 457
80–20 rule of Pareto’s law 240 efforts to promote a more balanced growth 457
2008 International Business and Leadership Symposium AICTE (All India Council for Technical Educations)
in Brussels 399 246
2010 as the year of Indian scams 374 AIDS (Acquired Immunity Deficiency Syndrome) 321
AIG 308, 348
A ‘holistic’ view of development 307 AIG insurance 431
A ‘pure and inclusive mission’ for establishing the Aim of corporate governance 412, 434
requirements and rules for ‘inputs’ 463
mission of corporate governance 417
A holistic governance system 434
to create not only ‘economic value’ but also ‘social
A social view of business 460 value’ for the sustainability 426
Abuse and misuse of public money and finance 449 Air pollution 263, 271, 277-278
Acid rain 275-277 ill-effects and penetration of vehicular pollution 264
example of acid rain contamination 276 major sources of air pollution in India 277
harmful effects of acid rain 276 common industrial causes of air pollution 264
most serious aspect of acid vapour 276 Airborne toxics 277
Adherence to safety standards 206 Alex Malley 413
Adoption of ethical practices in business processes across a combination of factors leading to turmoil and
the value-chain 387 collapse 413
Advertising 241, 242 importance of transparency, rigour and ethics in
basic function of advertising 242 today’s business world 413
benefits of advertising 242 rigour in financial reporting and the importance of
deceptive nature of contemporary ads 245 a regional and global perspective are all integral to
ethical issues (of advertising) 244 good business leadership 413
primary function of an ad 244 Alleged cases of 2-G spectrum allocation in India 376,
377
Age of ‘world wide web’ and ‘dot com’ 310
Alliances between corporate heads and the company
Agencies of the United Nations (e.g., UNIDO, WHO,
auditors 240
ILO and OECD) 327
Amazon delta 263
Agency to protect consumers 445
America 206
‘Agency theory’ 338
American antitrust institute 217, 435
beginning of the modern corporate governance
approach 338 American Marketing Association (AMA) 219
the purpose and process of corporate governance internet marketing ethics 219, 220
338 American Society of Newspaper Editors 248
 Index

Anglo-Americanisation of Governance Practice (in Basic principles and purpose of corporate governance
India) 360 and the special place of CSR 412
Anglo-Dutch steel giant Corus 437 Basic purpose of corporate governance structuring 414
Animal cloning 317 Bay of Bengal 261
Anti-dumping law 208 BBC (British Broadcasting Corporation) 324
Anti-trust law 215 BCG matrix 437
Antitrust laws 435 Beijing Olympic (2008) 277, 294
‘Antitrust’ view of business 211 Bennett Stewart 334, 336
Approach of consumer protection 201-207 Best practice clauses of the company’s respective codes
368
Approach to industrialisation 306
Bhagvad Gita 402
skewed development 307
Bhopal gas leak disaster, 1984 325
skewed industrialisation 307
Bhopal gas leak tragedy 277
Areas of concern for ethical practice in business 167
phosgene leakage from the Union Carbide chemical
Areas of concern in corporate governance post-financial
plant, Bhopal 277
crisis of 2008 454
Biomedical ethics 301
Areas of focus for ethical and good corporate governance
BITS, Pilani 410
424-425
Board of Directors 346, 350
accountability and transparency of actions of key
personnel in the organisation 425 power delegated by the shareholders 347
Aristotle 7, 447 Bombay Stock Exchange (BSE) 335
virtue jurisprudence 7 Boston Consulting 142
Arsenic (pollution) 279 BPO 182, 237
theft of personal data 182
Arthur Anderson 228, 422
BRIC countries 268
Article 25 of the Universal Declaration of Human
Rights 252 British legal and governance systems 377
right to a standard of living adequate for the health Brussels symposium on ‘ethics in business: corporate
and well-being of oneself and one’s family 252 culture and spirituality’, 2008 400
Arun Maira 142 Bt cotton 301-303, 306
ASCI (Advertising Standards Council of India) 226, 243, ecological disturbances 301
247 hybrid cotton farming 316
Aspects of ethics and ethical issues in computer and risk to bio-safety 301
information technology 219 Burden of a bad history of corporate governance 376
Attitude of trusteeship 5 Bursting of stock market bubbles and wave of financial
Authorities of cyber crime departments 218 scandals in the US during 2008–2009 361
Authority for guiding, regulating and controlling a Business—a socio-economic institution 232
country’s economic, social and environmental affairs Business as an institution of global economic well-being
388 445
Business ethics 115, 130
B. Ramalinga Raju 374 concern of business ethics 124
Balance between legality and morality 123 legal and moral responsibility 116
Balance between profitability and morality 189, 191 principles of ethics and moral reasoning 115, 130
Barack Obama 4, 59, 445 Business goals 412, 413
Basel-II 457 Business interests of Indian BPOs 432
 Index

Business leadership 144 Cause of the recent trouble for US financial giants
Business philosophy 123, 130 (like Goldman Sachs and Lehman Brothers among
business ideology 124 others), 2008 336
business systems, structures and goals 124 clear cases of bad corporate governance 336
modern business philosophy 125 extremely risky financial targets 336
the spirit of business 137 sub-prime lending crises 336
Business philosophy, systems and ethics 123-127 Celebrity endorsement 227
significance of ethics in business 144 Central Bureau of Investigation (CBI), India 375
Business practice for good governance 413 Central Pollution Control Board (CPCB) 271
environment of service beyond the ‘self ’ 415 Centre for Science and Environment (CSE), Delhi 261
faith in the ‘collective entity’ 415 Challenge to the 21st century corporate governance
process 464
growth of business has to be ‘inclusive’ and ‘sustainable’
415 value creation, in an all-inclusive theme 464
to maximise the efficiency of a business for economic, Challenges in present-day international business 326
moral, social and environmental benefits of the international rules, regulations, controls and ethical
stakeholders 414 standards to guide and regulate the market 327
Buyers beware 204 major objectives of various laws, regulations and
codes of conduct in international trade 327
Call of ethics 438 utilitarian principle of ‘greatest good for the greatest
CalPERS (California Public Employees’ Retirement number of people’ 328
System), USA 342 working through cultural and ethical integration of
Carbon credit system 289-295 business processes, people and operations in the
countries of operation 326
carbon trading 291-293
Challenges in the contemporary era of globalisation and
carbon footprint 292
economic liberalisation 456
CDM and JI mechanisms 291
free-market economy for the business environment
incentive for controlling pollution below the quota 456
level 292
maintaining and respecting individual rights, human
investment funds and carbon development companies rights, and ethics in corporate governance 456
293
Challenges of ethical corporate governance 458
the carbon credit scheme 291
Challenges of ethics in environment management 268
Carbon dioxide emission per capita in different countries
Challenges of ethics in view of contemporary
264
developments 317
Carbon footprint 274-291
passing of risks onto consumers 317
carbon footprint calculators 292
Characteristic of ethical behaviour 5
definition 292
Characteristic s of the Indian business models and
Cardinal principle of ethics 5 the need for specific governance mechanisms and
Care and moral justice 421 controls for good corporate governance 384
index of success is not how much profit a company basic Indian governance model: the anglo-american
earns but what it becomes by that 422 model 384
focus on creating ‘internal ability’ in the organisation philosophical cornerstone of the purpose of the
422 Indian business 384
Cartelling 217 tradition of the philanthropic family business 384
Cases of ethics violation and responsibility 175-180 Characteristics of intellectual property 319
 Index

Characteristics of moral standards 12-15 Committee of Capital Markets Regulation 453

moral standards 12, 13, 15, 20, 25 recommendations on how best to regulate the US
violation of moral standards 26 financial system post-crisis 453, 454
Charaka samhita, the ancient philosophy of charaka 252 need for principle-based regulations focused on
(Charaka) code of ethics for medical professionals effectiveness, and greater transparency to protect
252 investor 454
Chernobyl nuclear disaster 271 ‘Command and control’ system of controlling pollution
293
Child labour in industrial jobs 163
Commonly accepted principles of corporate governance
China 195
345
Clarity of ‘goal-means-path’ 366
structuring of corporate governance process 346
Clause 49 of SEBI listing agreement 420
Companies Act - the primary source of regulations for
Clause 49 of the SEBI Act 380, 386, 389 conducting business in India 383
different sub-clauses of Clause 49 389-390 Company Act (of 1956 and of 2008) to guide businesses
five broad functional aspects addressed and improved in India 376
under Clause 49 of the Indian listing agreement Company Law Board 211
386
Company’s mission for best practice in corporate
the new-look Clause 49 391 governance 367-368
principal guide for corporate governance as per the Competition 214
‘listing agreement’ 389
a perfectly competitive market 212
Clause 49 of the SEBI Act, 2002 342, 349
competition law 216
amendment to Clause 49 354
competition regulators 216
functional aspects addressed under Clause 49 of the
managing competition 217
Indian listing agreement 355
strategy of ‘ethics in managing the competitions’
details of the revised Clause 49 355, 356
217
new Clause 49 provisions 354
Competition Law 208, 215, 435
SEBI definition of corporate governance 342
Competitive advertisements 196
Clean Development Mechanism (CDM) 291
Complexities of many human actions and policies of the
Clinical trials 121 21st century 444
Clinical trials on human beings 302 global warming 444
moral and ethical responsibility 302 pollution and ecological erosion 444
Coal India Ltd. 216 uncontrolled biotechnological trials 444
Code of medical ethics and etiquettes laid down by Complexity of ethical issues in contemporary world
Medical Council of India 254 303
Codes and principles of corporate governance 446 Components of operational perspectives in ethical
Codes and standards of corporate governance 348-356 business practices 125
aim of the codes and guidelines 348, 349 Computer ethics 310-312
purpose of corporate governance codes 348-356 computer ethics as ‘global information ethics’ 310
Codes of conduct at work 165 development of computer ethics 311
Codes of conduct governing ethical behaviour amongst Concept of ‘virtue jurisprudence’ 447, 448
computer professionals 313, 314 moral virtue is a habit 447, 450
Codes of conduct of computer professionals 312 Concept of spirituality and principles of spiritualism in
Codes of ethical conduct 116 India 400
 Index

Indian ethos: scope and definition 402 Contemporary problems of promoting and ethically
Indian spiritual ideals and ethos 401 managing innovations 322
synthesis through self-awareness and spirituality 401 Controlling pollution and environmental degradation
Concept of virtue jurisprudence and its complementary 281
effect on utilitarianism, rights, justice and care 448 indiscriminate practice of polluting the free resources
Concern for international regulation for transnational like air and water. 283
corporations (TNCs) 459 Copenhagen Business School, Denmark 400
Concern of monopolistic business practices 214 Core elements of ethics 438
Concerns of corporate governance 343 Corporate frauds 383
ethical corporate governance 343 bad corporate governance and frauds 383
enhancing the confidence of the investors and public Corporate governance—a step above management 425
in the institution of business 343 corporate governance: ‘mission driven’ as against the
ethics of corporate functionaries 343 concept of ‘profit driven’ management 425
financial regulations and protection of shareholders’ Corporate governance ‘best practices’ 365-369
interests 343 aim of corporate governance best practice 367
‘responsible route to success’ with a moral purpose benchmarking the ‘best practice’ enabling factors
343 367
value system and ethics of corporate participants Cadbury Committee on corporate governance for
344 ‘best practice’ 366
Confederation of Indian Industry (CII) 379, 387, 415 performance across the entire value-chain 365
Conflicting interests in business 235 promoting excellence in the company’s brand image
Conflicts in business 125 and social standing 365-366
Conflicts of interests between the developed and Corporate governance 151, 337, 340-342, 347, 348,
developing nations 295 367
Constraints of ‘public sector’ in India 363 accountability of certain key individuals in the
Consumer beliefs 245 organization 337
Consumer marketing 120 an effective tool for the company’s ‘command and
control’ over the business and regulatory
Consumer Product Safety Commission 197
compliance 340
Consumer protection 193-195, 208
broadly accepted view of the corporate governance
consumers 194, 195 function vis-à-vis the organisation 338
consumer behaviour in the marketplace 199 definition and scope 337, 338
consumer counselling forums 198 mechanism of ‘code of practice’ and by-laws 337
consumer grievance cells 198 Corporate governance and holistic growth 400
consumer’s duty to protect self-interest 201 Corporate governance and Indian ethos 398-404
ethical issues and moral responsibility in the ethics and spirituality 399
marketing of consumables 195
role of spirituality and ethos in governance 399
rule of listening to the voice of the consumers 197
underlying principles and approach to spirituality
Consumer Protection Act 264 and ethos 400
Consumer Protection Laws 119, 435 Corporate governance at cross roads 339
Consumer research 199 Corporate governance failure 336
Consumer voice 197 faulty business practices 336
Contemporary ethical issues 309 hazy business goals 336
 Index

need for ethics in corporate governance 336 Corporate governance models in emerging markets
on account of ‘adventurous governance’ 339 360
Corporate governance from ‘national relativism’ to Corporate governance principles and codes 343, 349
‘global relativism’ 339 principles of corporate governance 348
interdependence of nations for economic and social Corporate governance process—three built-in elements
growth 340 344
Corporate Governance Guidelines 2009 (by MCA) 382, Corporate governance responsibility—to focus on
387, 394 creating real value that is not illusionary but real 464
aim of MCA’s Corporate Governance Guidelines Corporate governance scene in independent India 380
2009 394, 395 corporate governance in India from the 1960s till
Corporate governance in India 377 1990 381
Anglo-American model of corporate governance corporate governance after the adoption of the policy
384 of economic liberalisation in 1991 381
‘business house model’ of governance 385 major milestone in Indian corporate governance
definition by SEBI committee 384 383
ineffective role of independent directors 377 Corporate governance standards across the US, UK and
ineffective and sloth regulatory controls 377 continental Europe 361
what ailed the Indian corporate governance? 377 convergence to Anglo-American standards 361
what is needed for good corporate governance? 383 ownership concentration, separation of management
and control, and increasing importance of
Corporate governance—India specific issues 392-395
stakeholders’ concerns are increasing in the US and
problems concerning corporate governance in India UK enterprises and decreasing in Europe 361
and Anglo-Saxon world 392
US/UK standards of corporate governance
Corporate governance issues in family-owned businesses converging to European standards 361
in India 395-398
Corporate governance system 337, 340
appointment of successors and transparency in
business model and the fairness of market approach
functioning 395
337
deviatiom from the Gandhian principle of
compliance with legal systems and company laws
‘trusteeship’ relationship between the business and
337
its stakeholders to ‘ownership’ relationship between
the dominant stakeholder and the ‘outside residual corporate governance system of a company 367
stakeholders’ 397, 398 ethicality and utility of the systems and resources
main issues that crop up in family-owned businesses 337
396 faulty goals and targets 337
Grant Thornton study 395, 396 ‘holistic view’ of the growth and sustainability of the
Corporate governance methods and philosophy in business 337
family-owned businesses 386 means and measures adopted in conducting the
family-owned management structure 386 business 337
Corporate governance models 384 situations of conflicts about what is ethically right
337
the Anglo-American mode 384
sensitivity of the board or management to the ‘duty
the coordinated model 384
of care’ 337
the underlying philosophy and purpose of business and
quality and value system of the people 337
the corporate governance ‘mantra’ (principles)
384 Corporate governance system in India 393
family-owned company model (or business house responsibility of the regulators, oversight agencies,
model of governance) 384 vigilance committees 393
 Index

to act to curtail the deficiencies of the Indian Correcting the course of corporate governance—CSR
corporate governance practice 393 role 457
Corporate governance systems in PSUs 424 Corrupt and failed business cases 128
Corporate governance with regard to environment Cost of keeping temperatures within an acceptable
conservations 294 range 267
Corporate governance: role and scope 337-343 Countrywide protest by farmers, in India, 305
emphasis on economic efficiency and safeguarding CPA, Australia 413
the welfare of shareholders 337 Creating value through ‘market capitalisation’ 433
functional roles of corporate governance 340 Creation of social value through a purposeful ‘corporate
role of good corporate governance 343 social responsibility’ policy 416
the process of corporate governance in an organization Creative accounting 444
338 Critical corporate governance issues in India 375, 376
Corporate governance: the interaction of three forces— CSR—the fundamental business practice 365
the board, the management, and the shareholders global survey by Ernst & Young, 2002 365
420
CSR for inclusive growth of business 412
Corporate governance: the journey towards creating
Current state of affairs in corporate governance in India
sustainable growth through continuous value
411
addition to the organisation 415
‘will’ and ‘effectiveness’ of corporate governance in
Corporate laws and rules for business administration
India 411
338
Customers 145
Corporate responsibilities that a governance process
must ensure and endure 451 Customer satisfaction 208
to avoid ‘social-harm’ cause-related decisions and Cyber crime 304
actions in governance 451
to identify the corporate role in cause and solution Daiichi Sankyo 142
451 Damage to the environment 304
Corporate Responsibility for Environmental Protection David Duncan 156
(CREP) Charter, 2003 271 Dealing with ‘inter-locking’ and ‘pyramiding’ of
Corporate scandals 339 corporate control within the dominant groups 394
Corporate Social Responsibility (CSR) 126, 130, 307, Debate on regulatory control 448
347, 361-365 if stricter punishment should be continued as a
a part of corporate governance 361 deterrent for wrongdoing 448
a voluntary measure—no rules, regulation or if the process should be reformed and ‘process
procedure to comply with 361 participants’ should make the system more
as defined by the World Business Council for effective 448
sustainable development 361 reform in the attitude of the people involved in
objectives of a company’s CSR governance 361 businesses and business regulations 449
responsibility of the impact of policies and actions on Debates about the harmful nature of biotechnological
the society, community and the environment 361 products 317
social view of business 362 Delegation of power and supervision of work 167
scope of CSR 361 Delhi State Consumer Disputes Redressal Commission
196
the CSR movement 363
Demand and supply gaps 209
Corporate Social Responsibility (CSR) 50, 52
Department of Company Affairs 217, 230
Corporate Social Responsibility Voluntary Guidelines
2009 (by MCA) 382, 387 Development in ‘human resource management’ 160
 Index

Development of alternative fuels and greener technology ‘no real and effective institutional framework exists
276 to compel errant management to pay heed
Development of strong financial systems—both bank- (to voices of dissent)’ 410
and market-driven 384 report about corporate governance in India 410
Dhammapada 402 Dr. Muhammad Siddiqi 448
Diamond industry 300 Driver of corporate governance reform in India 382
Dictum of ‘buyers be aware’ 123 Drivers of ethics in marketing 220
Different models of corporate governance around the Drug trials 302
world 357 drug trials by multinational drug companies 302
coordinated model 357 ethics and protocols of drug testing 302
liberal model of corporate governance 357 Dumping of chemical and toxic wastes into the seas and
two main models: liberal model and coordinated open water bodies 302
model 357 mindless dumping of e-wastes and heavy chemicals
Dimensions of ethics 61 into the coastal seabeds 302
Directing and coordinating for better goal-management risk to bio-safety 302
167 Dumping of nuclear and electronic wastes 279
Direction about the principles of business responsibility damage of ground-level water quality 280
and the corporate governance philosophy in India DuPont 281
387 dumping of chemical wastes into the Gulf of Mexico
Directive Principles of the Indian Constitution 342 at the US coast 281
Distinction between the Japanese way of governing an Duties 79-81
organization and the conventional ways and means contractual rights and duties 80
for corporate governance 419 understanding contractual rights and duties 80, 81
Distributive-risk-and-gain format of insurance deals Duties and ethics of agencies responsible for causing,
121 promoting or harbouring environmental damages
Diversity of governance mechanisms—arising in a path- 282
dependent fashion 360 Duties and responsibilities of professionals 234
DNA (Deoxyribonucleic Acid) 314 Duty-responsibility-accountability relationship 158
Doctrine of Caveat Emptor 219
Doctrine of: ‘as a business, give more services, Early signs of social failure of business 456
command more respect; as a customer, seek East Asian Financial Crisis of 1997 339
more services, give more support’ 460 EBITDA (Earnings Before Interest, Taxes, Depreciation
Doha Agreement 208 and Amortisation) 335
Doha Declaration 327 Ecological ethics—rules of ethics in preserving ecology
284
Dominant shareholder 393
our duties and obligations towards nurturing nature
Donald Gotterbarn 312
285
‘Donor-funded social projects’ in India 376
ideals of ecological ethics 285
microfinance scandal in Andhra Pradesh 376
Ecological system 283
Dr Peter Pruzan 400
definition (of ecology) 283
Leading with Wisdom 400 ecology 284
spirituality and business are interconnected and not respecting and protecting the rights of non-human
separate areas 400 aspects of the ecosystem 284
Dr. J.J. Irani 410 the ecological cycles of sun and season 283
 Index

Economic correctness 288 Emissions: in America, Europe, China and India 272
Economic disparity 304 Emphasis of corporate governance 423
Economic growth and social development 306 moved from ‘control’ to ‘creation’ of ethical
conflicts arising from partisan attitude and disregard environment 423
of ethics 308 to offer space to individuals with a view to enhance
integration of social and economic development their contribution 423
307 Employer–employee obligations for ethics and law
lack of fair, equitable and inclusive approach for 114-116
economic and social development 308 manager’s duty to serve his employer 114
Economic profits—not necessarily mean ‘good value’ or Employment of child labour 426
‘sustainable value’ 464 Empowerment of people 306
Edward Freeman 437 Enron 20, 44, 47, 156, 165, 227, 231, 240, 339, 342, 416,
corporate strategy and the search for ethics 437 422, 436, 444, 446
viewpoint of Freeman and his co-workers on Enron scandal: the real Enron story 334
connection of ethics and strategy 437
attempts to keep up with aggressive earnings targets
Effectiveness in improving ethical culture and conduct 334
of the organisation 429
fundamental causes 334
Elements in good governance 367-368
managers were paid to aim at the wrong financial
concern for purposeful corporate social responsibility measures 334
367
reasons why Enron failed 334
Elements of Indian ethos 401, 402
unethical corporate goals 337
codes of conduct 401
Ensuring effectiveness of corporate governance 368
conduct (‘karma’) 401
Environment 265, 266
ethics and virtue 401
definition 265
integrity 401
environmental issue 265
values and beliefs 401
environmental exploitation 265
Emergence of ‘management by Indian ethos’ and
‘management perspectives’ 401 source of environmental pollution 266
Emergence of corporate governance in India 377-380 the common property of society 281
laws regarding ‘listing, trading, and settlements’ in Environmental and social values through CSR
pre-independence India 378 programme 413
governance of the Indian corporate sector from the Environment management 268, 269
1960s through 1990 378 danger from unabated emission and pollution 271
factors responsible for this depressing (CG) scenario cost and benefits of controlling pollution 286
378 ethical approach to environment protection 285
Emerging factors with regard to the corporate ethics of environment management 295
governance scene (in India) 385
holistic approach to environment management 270
the influence of international business 385
industrial environmental goals 273
listing of Indian companies in different stock
lack of industrial commitment 270
exchanges in the world 385
maintaining a level of environmental purity and
large family-owned business—a new face and force
cleanliness 286
in the Indian corporate governance scenario 386
protection of environment and pollution control
separation or convergence of ownership and
280
management in the business 386
structure of ownership and the purpose of business rationale for environment control 286
386 task of environment management 271
 Index

Environment protection 264 Ethical dilemmas 33

a global issue 264 analytical steps in resolving ethical dilemmas 35-36,
Environmental pollution and damage emerge 143 41
automobile pollution 143 resolution of ethical dilemmas 35
environmental ethics 276 sources of ethical dilemmas 34
environmental systems 144 Ethical governance—the ‘leadership’ 433
the problem of industrial pollution 144 the task of leadership 433
responsibility of preserving the ecology and Ethical imperative of doing things 448
environmentally related ethical questions 266 Ethical issues in Human resource management 170-175
EPS (Earning Per Share) 211 common ethical issues concerning employees
Equal Employment Opportunity Law 120 170-171
Equal opportunity for growth 208 ethics governing Human Resource Management
Equity in global treatment 280 (HRM) in an organization 170
Equity of distribution of benefits 86 ethical selection and hiring policies 171
Era of totally monopoly market 210 job discrimination 172
Ernst & Young 365 retrenchment and layoffs 173
Essential components of corporate governance best rule of fairness and equity in deciding the
practices 368 remuneration and perks 172
Ethical attributes of a company 193 the issue of performance appraisal 173-174
Ethical balance of environment and pollution Ethical issues in internet marketing 217-221
management 289 buyer–seller relationship 218
Ethical bond 218 ethics scenario of company-hosted B2B or B2C
Ethical conflicts in business 165 218
lack of clarity in ethical governance and transparency internet-based marketing 217
in practice 165 internet-based mass market frauds 218
Ethical corporate governance 53 Ethical issues of business in dealing with the market,
Ethical decision making 33, 37 consumers, the environment and ecology 142
process of ethical decision making 33 Ethical relativism 323-327
framework for ethical decision-making 38 critics of ethical relativism 324
Ethical decision making in business 148-150 objective truth 324
‘balanced’ by ethical principles and practices 151 Ethical principles in business operations 96
central questions in the practice of ethics and ethical Ethical reasoning 3
decision-making in business 148 Ethical reasoning and morality 118
central to ethical decision-making in business 148 Ethical responsibility for maintaining and providing a
ethical dilemmas 148 ‘livable environment’ 295
examination of ethical standards and morality of Ethical responsibility in business 165
actions 149 Ethical rules for contracts and contractual obligations
major challenge in ethical decision-making 150 81-84
process of ethical decision-making 148 Ethicality (of business objectives) 151
Ethical decision-making in an organization: structure Ethics 109, 110, 145, 151
and system 149 aim of ethics management 137
the agency theory 149-151 elemental issues of ethics 111
shareholder referendum 149 ethical responsibility of the manufacturers 138
two step approach 150 ethical standards of an individual 110
 Index

ethics and ethical filters 151 Ethics in personal life 4

ethics and ethical responsibility 123 Ethics in production and product management
foundation for ethical behaviour in business 126 232-235
moral guard 119 sets of ethical issues 232
practice of ethics in business 146 important production related ethical areas 232
the role of ethics 122 Ethics in terms of spirituality 423
universal ethical principles orientation 121 Ethics of advertising 241-247
violation of ethics 135 ethical and moral issues raised by advertising 246
Ethics 6, 7, 33, 50, 218-219 Ethics of biotechnology 318
ethical issues in business 45 application of bioengineered products and processes
ethical misconduct 25 in controlling human life 318
ethics and moral behaviour in business 45 Ethics of care 93-97
ethics as a system 5 Ethics of competitive management and international
ethics of business 46 business 304
purpose of ethical principles 7 Ethics of controlling environmental pollution 281-283
the violation of ethics 218 Ethics of duties and obligations 282
Ethics and ethical principles of governing a state 306 Ethics of duty, care and responsibility 305
Ethics and spiritualism 416 Ethics of ecological protection 283-285
ethics: an integral part of corporate governance for demands of ecological ethics 284
excellence in performance 416 ethical task of protecting the ecology and environment
ethics: down-to-earth principles of how to morally 284
and beneficially (or for a critical cause) serve protection of ecology as a moral duty 283
the majority for ‘inclusive’ growth of Ethics of finance and accounting professionals 239-241
the society 416
ethics in accounting 239, 241
spirituality: a voluntary component of self-sacrifice
Ethics of genetically engineered and modified products
for the greater cause 416
314-318
Ethics and the ethical justification of an action 60
emerging conflicts on ethical issues of genetically
Ethics as a key aspect in business and governance 414 engineered foods and agricultural products 315
Ethics as corporate strategy 436 Ethics of governance 282
Ethics as cultural part of the organisation 175 Ethics of healthcare services 252-256
Ethics as strategic measure 174 ‘distributive justice’ in managing and administering
Ethics committee 136, 146 health care services 252
Ethics counsellor 136, 146 health: primary indicator of good governance of the
Ethics in a business enterprise 133 country 252
business environment 133 health care: a basic necessity of the people 252
conflicts relating to ethical business practices 148 Ethics of individuals in business 229
Ethics in Human Resource Management (HRM) Ethics of international business & trade 322-318
237-239 assurances about ethics, governance and environment
ethical issues concerning HR professionals 237-238 328
SHRM recommendations 238 ‘ethical dilemmas’ in international business 325
Ethics in marketplace 235 ethical issues in the emerging field of international
Ethics in perfectly competitive market 208 trade 324
demand-supply curves 208, 209 increasing globalisation and free trade agreements
perfectly balanced and ‘equilibrium’ market 209 323
 Index

issues related to international business and trade in Excellence in corporate governance 459
the global economic agenda 326 about self-searching, self-asking, and self-seeking
need for regulation or self-regulation in international what ‘common good’ the company has done
trade 323 or should do 459, 460
regulation and control with a transparency of purpose an exercise of strategically and ethically balancing the
325 dynamics of corporate philosophy 460
what is needed for efficient international trade and focus to develop a responsibility-relationship matrix
business 324 with the stakeholders 460
Ethics of Internet Protocol (IP) 304 Excellent and comprehensive corporate governance
Ethics of marketing professionals 235-237 process 463
ethics of marketing professionals (coverage) 235, 237 created by confirming the purity of purpose and
marketing ethics 235 transforming the quality of ‘corporate participants’
464
rules of ethical behaviour 235
Executive ownership in the form of common stock and/
service transaction with a ‘customer-supplier
or stock options, 398
relationship’ 235
External forces—influencing board behaviour 395
Ethics of media reporting 247-251
concern against uninhibited and unethical shows and Failure in ethically resolving external factors of a business
displays for general viewing 251 429
ethics of media reporting professionals 247 Failures due to the greed of individuals and lack of
need for code of ethics in media 248 sustainable ethics in business 399
Ethics of professional management 130 Fair market opportunity 214
Ethics of protecting ecology and environment 280 competition and competitive marketing 214
Ethics of prudence and justice 305 consumer-driven market 214
Ethics of virtue 99-101, 448 Fair trade practice 208
moral virtue 100 Farmers suicide 201
role of virtue 100 FBI (Federal Bureau of Investigation), USA 308
virtue of justice 99-101 Feature of business 135
virtue 99 Federation of Indian Chambers of Commerce and
Ethics officer 151, 362 Industry (FICCI) 415
Ethics programme of organisations 169 Financial crimes and wrongdoings in business 229
Ethics vis-à-vis law 117-123 Financial fraud 157
ensuring moral justice along with legal justice 119 Financial fraud involving accountants and auditors 240
law and ethics 117 Financial regulator (RBI) to control the governance of
law is an administratively enforceable instrument for financial institutions 376
justice and fairness 123 Financial Reporting Council (FRC), UK 353
role of law and ethics 120 Financial scandals 227
Ethics-and-individuals issue 182 Financial scandals of early 2000s in the US 339
Eugene Fama 338 Five approaches to ethical standards 31
Europe 206 the common good approach 32
EVA (Economic Value Addition) 211 the fairness or justice approach 32
Examples of social marketing 437 the rights approach 32
Examples of unethical behaviour of individuals in a the utilitarian approach 32
business organisation 162 the virtue approach 32
 Index

Five horsemen of the Apocalypse wrecking havoc Genetic engineering 314

throughout the globe—financial crisis, climate crisis, areas of bio-engineered pharmaceutical products
energy crisis, food crisis, and the terrorism crisis 411 317
Flooding of the Kosi river, 2008 304-305 example of failure of genetically modified products
Flow of power to govern 160 316
government or public sector organisation 160 examples of genetically engineered products 314
Flow sheet for ethical judgment 27 risks in genetically engineering a product 315
Food and Agricultural Organisation of the United threat from genetically engineered organisms 316
Nations (FAO) 315 Global best practices in corporate governance 355
Foreign direct investment board 211 Global economy 322
Foreign MNCs operating in India’s manufacturing, Global financial crisis of 2008 444
service, banking, financial and BPO sectors 326 reform to prevent another such crisis in the global
Forms of internet marketing 218 economy and to protect unsuspecting investors
Foundation of Ethical Principles 61 and consumers from unscrupulous designs of
Free market 198, 207 a few individuals or businesses 445
anti-free-market practice 209 responsibility for identifying risks to the financial
system 445
free and competitive market environment 212
stimulus for those who shattered the financial
full benefit of free market 198
system and governance process by risky
moral aspects of a free market system 208 and unethical investments and deals 445
perfectly balanced free market situation 209 Global trust bank 422
Free moral agents 148 Global warming 261, 263, 266, 273-275
Functional corporate governance structure 346 consequences of global warming 274
Functional issues for the corporate bodies 347 global warming, arising from the carbon dioxide
emissions of industries 263
G-20 208, 444, 458 greenhouse effect 273
G-20 meeting in Pittsburgh, 2009 446 global warming due to the greenhouse effect 283
G-20 meeting, London 228 impact on the global climate and marine life 273
‘G-20 rift opens on banking reform’ 445 increase in earth’s temperature 273
Gabrielle O’Donovan 340, 342, 417, 421 Globalisation of business and competitiveness 437
a board culture of corporate governance 340 Globally coordinated regulatory rules 455
corporate governance relies on external forces and country-based (or regional) regulations 455
internal environment 421
global cooperation and regulatory coordination for
on: quality of a company’s corporate governance ‘common good’ 455
342
regulatory umbrella with focus to shift from local
‘Game changer’ for effective corporate governance in prosperity to global sustainability 455
family-owned business 398
GM crops 301
Gandhian principle of trusteeship 342, 384
genetically-modified (GM) products 302
Gangetic delta of Bengal and Bihar 276
production and marketing of genetically engineered
GAP 240 products 303
GATT 327 Goal–Means–Path of ethics 6
General Accounting Practice (GAP) 116 Goals (of business) 337
General body meeting 347 Golden Peacock Award 2008 107, 446
Generally Accepted Accounting Principles (GAAP) 454 Golden rules of advertising ethics 244
 Index

Golden Peacock global award for excellence in corporate History of the Indian family-owned business 386
governance 392 Holistic—an approach of totality and inclusiveness of all
Goldman Sachs 449 449
Good corporate governance practices 438 Holistic nature of corporate governance 427
Governance abuse by the owners or dominant Honest work environment and ethical working platform
shareholders 378 231
Governing the misbehaviour of people 448 Honeywell Inc of USA 170
Government controlled organisations 160 code of ethics and business conduct 170
Government of India 273, 306 Honeywell ethics hotline 170
Government’s industrial policy towards the ‘socialistic How ethics work in business 42-46
pattern’ in the mid-1950s 378 immortal fictitious persons 43
shifts in the government economic policy in 1991 Howard Koh 188
ushering the liberal Indian economy 378 HUL (Hindustan Unilever Ltd.) 361, 366, 436
Green report on ‘carbon disclosure projects’ 293 Human Resource Department (HRD) Ministry of the
Greenhouse gases 273 Government of India 111
Greenhouse effect 266 Human values concerning freedom of expression 312
Greenpeace 301 Hurricane Katrina 300
Growth that sans the welfare of people is meaningless worst environmental catastrophes in US history
432 300
Guide for effective corporate governance in the post- Hybridisation of agricultural produce 234
liberalisation Indian economy 379
the SEBI Act 379 ICAI (Institute of Chartered Accountants of India) 135,
the mission of SEBI Act 379 226, 230, 239
Guilty of professional misconduct and negligence 228 ICAI list of rules and conducts for professional practices
Guinea pigs for clinical trials, 300 of chartered accountants in India 240
Gulf of Mexico 300 promoting ethical culture of: service before self and
extending beyond the legal requirements 240
Harmonising the elements of human characteristics in Idea of royalty sharing by the operating companies in
the organisation 167 mining projects 363
Harshad Mehta 231 Ideal market condition 209
Harshad Mehta scam 354 perfect competition 213
Harvard School of Public Health (HSPH) 188 Ideals of process of business and governance 400
Hazards of environmental pollution on mankind 280 inside out transparency system 400
Heads of states of ASEM (Asia and European Meet), external actions and internal reflections of enlightened
Beijing, 2008 325 leaders 400
Health care professional ethics: bar to self-advertisement holistic 400
255 ethics, spirituality and a holistic approach to the
the Medical Council of India (MCI) rules 255 governance of business 400
Hedge fund manipulation using the ‘insider’s information’ Immortal fictitious persons 112, 124, 157
in the USA 377 Impact of air pollution 261
Hindustan Unilever 326 effect of air pollution: a ‘birth blocker’ 263
History of business 156 Importance of individual ethics and the role of
History of failed business organisations 412 individuals 157
History of Indian corporate governance 360 ethical behaviour and the obligations of individuals
History of social development 231 163
 Index

issue of morality and moral standards of individuals Indian corporate governance system 360
157 introduction of the revised Clause 49 360
moral and ethical issues of individuals in an the Anglo-American model as the natural choice
organization 160 360
principles of ethics 157 Indian corporate governance system and scenario 377
Importance of quality of persons who are at the helm of Indian ethos 345
a business 446 ethics-based and spiritual approach to corporate
Important directions for ethical management 424 governance 345
Important issue of equity and fairness in corporate Indian governance codes 360
governance practice 393 Indian Institute of Management Calcutta (IIMC) centre
Important part of governance focus—the people 451 for corporate governance 339
equal importance to ‘subjectivity’ and ‘objectivity’ the national conference on corporate governance
—quality of creators is a critical requirement of 339
today’s corporate governance 452 Indian Medical Association (IMA) 229, 230
Incidence of Satyam—a family-owned company 409 Indian School of Business (ISB), Hyderabad 374
Independent directors 374 Indian Supreme Court ruling (on medical profession)
role and efficacy of independent directors in India 254
375 Indirect agenda of CSR: to assert social control over the
role of independent directors in the board 383 markets 457
Independent professionals in the board of directors 383 Indiscriminate industrialisation 263
India 195, 228, 250 Industrial Disputes Act, 1947 162
India knowledge@Wharton 374, 375 trade union rights and the rights of individuals in
employment 162
scandal at Satyam: truth, lies and corporate governance
Industrialisation in the Asia-Pacific region 269
374
Industry and the environment pollution 268-273
India’s health care business 180
industrial pollution 269
medical professionals 181
industry—the major source of engagement and
root cause of such social ills and violation of medical
employment of people for livelihood 269
ethics 182
innovation in controlling industrial pollution 280
Indian Companies Act 1956 360
responsible for environmental pollution 282
Indian Companies Act, 2008 360
Information ethics 311-312
Indian corporate governance—roles and responsibility
ethical foundation and rules for information
of regulators and the board 388-391
dissemination and protection 311
disciplining the dominant shareholders 388
management of ‘information cycle’ 311
regulators’ role in corporate governance 388
moral issues and responsibility 311
responsibility of SEBI and MCA 389
Information age 309
roles in the corporate governance in India 388 Infosys 366, 436
the government role in corporate governance 388 Institute of Chartered Accountants of India (ICAI) 116,
Indian corporate governance models and mechanisms 375
380 Institute of Companies Secretaries (ICSI) 387
a grey area of the Indian corporate governance Institute of Cost Accountants 239
scenario 380
Institution of Engineers (India) 229, 230
Indian corporate governance standards—based on SEBI
Instruments and regulations relating to stock exchange
principles and codes 390 listing 389
 Index

Intellectual Property (IP) 319-320 ISO (International Standards Organisation) 327

debate between the utilitarian and socialistic codifying the practices for fairness of trade
approaches 321 and control of consequential damages 327
guiding factors for ethical judgement: consideration ISO-9000 standards 327
for due care and good for greater number Issues of ethics in marketing 190-193
of people 322 ethics in marketing 190
laws to protect intellectual property in a country issues of profitability 191
321
issues of morality in business 191
ownership rights of intellectual property: approaches
new ethical issues (due to communication and
320
information technology) 191
Intellectual Property Rights (IPR) 141, 318-322
the ethical issues in marketing 192
areas where ethical practices need to be observed in
fundamental issues of ethics in marketing 193
IPR protection 319
Issues pertaining to environmental violation 308
ethics of intellectual properties 318
infringement of patent rights 318-319
J.N. Tata 401
IPR creation and application 319
J.N. Tata Endowment Trust 92
utilitarian approach to managing IP rights 322
Jadavpur University 261
Interests of stakeholders and the society 157
oceanographic department 261
Internal and external environments of a business 133
James H. Moor 312
complexity of modern business environments148
Jennifer Hughes 445
external environment 133
Jeremy Bentham 65
important components of external environment 139
John Kenneth Galbraith (on advertising) 245
internal environment 133
John Ruskin 422
managing ethics in market and non-market
Joseph Skilling 156
environments 144
Journalism 247
regulators and government authorities 135
the code of conducts and ethics in journalism 248
Internal stakeholders of a business 46
the duty of journalists 248
International codes of business practices 327
highlights of the codes for journalism 248-250
International Finance Corporation 411
Judging ethics in business 61
International Financial Reporting Standards (IFRS)
239, 240, 454 rule to judge ethics 61
International trade and business: grouping 325 Judging morality and ethics 97-99, 101
Internet-based face-less marketing 325 four types of moral considerations 97
Internet’s colossus marketing power 219 Justice of fairness 91-93
Internet-based frauds and personal data theft 310 Rawls’ approach to justice of fairness 93
IPCC (Inter-governmental Panel for Climate Change) Justice 87-91
267, 275 compensatory justice 90
IPPC projections for reduction in carbon emission distributive justice 87-89, 92
levels for different countries 267 justice based on contribution 91
second assessment report on climate change, 1995 justice based on needs and abilities 91
267 justice of equality 90
Iraq war 250 retributive justice 89
Irrational product choices 199 Justice, fairness and care 84-87
ISI (Indian Standards Institution) 197 guiding principle 85
Islamic banking and insurance as systems 117 stand of justice and moral rights of individuals 86
 Index

Justification for revisiting the process and regulations of

corporate governance 411 market 210
danger to consumer rights 210
Kant’s principle (of moral rights and duties) 82-83 pre-economic-reform days of 1970s and 1980s in
Kant’s approach to morality and equality 84 India 210
Kazutsugi Nami 114
Kenneth Lay 156, 450 M. Rammohan Rao 374
Ketan Parekh scam 354 Madoff 422, 450
Key drivers of CSR 364, 365 Mahatma Gandhi 180
Key factor for a successful business 208 Maintainability 203
Key parts of the governance framework 377 Major board room related issues of the Indian corporate
Key role of the board and of directors 421 governance 391
Key to business success: that is holistic in nature and Management centre for human values at IIMC 401
sustainable for future 403, 404 Management of finance, financial performance and
Key to good corporate governance 415 financial deals 389
KPMG poll, 2008-2009 366 Management representing a small fraction of voting
rights successfully masquerade as sole and lone
the state of corporate governance in India 366
owners 410, 411
Krishna Palepu 374
Managing competition and ethics 435-437
Kyoto protocol 458
critical factor in strengthening the competitive
advantage of a company 436
Lack of rational computer ethics 308
comprehensive ‘value-creating’ business strategy 436
Lack of sustainable ethics in business 399
impeccable ‘reputation’ and ‘brand’ management
Land Acquisition Act of 1894 305 436
Landmarks of emergence of Indian corporate governance questions of ethics in managing competition—
system 379 competition based on fair practices and
landmarks in the development of the Indian corporate justice 435
governance system 381-382 Mangalam Srinivasan 374
landmark steps in the journey of promoting good Manipulating finance through creative accounting 377
corporate governance in India 382
Manipulative accounting and aggressive promoter
Law and ethics in business 109-113 practices 335
primary role of law and ethics 116 Marc Rich 450
responsibility of law in a business enterprise 144 Mark Kula Centre for Applied Ethics at Santa Clara
Law against restrictive trade practices 208 University, USA 38
Law of agency 162 Market and non-market factors—impacting the business
Law of large number 121 environment 417
Laws of natural justice and rights 446 Marketers 189
Legal positivism 117 norm of faithful ‘disclosure’ 190
Lehman Brothers 138, 308, 431, 445 responsibility to protect consumers 189
Level of emissions in the developed world (US, UK and their ethical goals 190
EU) 268 Marketing 190-192, 236
Levels and activities of corporate governance system custodians of customers’ interests 190
463 marketing ethics 190
Lois Gibbs 301 marketing as per modern management principles
Lord Turner 445 236
 Index

marketing personnel 193 Mission for international trade and cooperation 208
strategy of ethical marketing 193 Mission of corporate governance 417, 418
sources of ethical concerns in marketing operations Mission of the European Union 455
193 Mitsubishi UFJ financial group 459
unethical practices in marketing 197 Mix of Anglo-American and coordinated models 386
Marketing ethics 206 Model of governance and their codes of practices 385
avoiding price competition by curtailing 208 Models and codes of corporate governance 340
factors in the build-up of ‘ethics in marketing’ 221 to globally unify the standards of business operations
need for ethics in marketing and marketplace 211 intertwined with ethics and care for investors and
market characteristics and the rule of ethics 207 other stakeholders 340
Maruti Suzuki India Limited (MSIL) 409 Models of corporate governance 356-361
a creative attitude in governance 409 ‘model’ of corporate governance-for ‘macro-
Maruti Udyog Limited (MUL) 363 management’ 356
Mass marketing frauds 191 model of corporate governance: the structure and
system 356
Massive financial scandals and crises of 2007-2008 in the
USA, the UK 383 essence of a corporate governance model 356
Mattel Inc, USA 429 Modern computer ethics 312
Maximum Retail Price (MRP) 195 technological development 312
Maytas infrastructure 374 technological permeation 312
McAfee 189, 274 Modern quality management systems: ISO-9000 and
TQM 145
McDonald 126
Modern retail 202
Media reporting functions 247
retailers 202
responsibility to verify with reasonable efforts and
care 247 Monopoly and monopolistic competition 213-217
the impact of media reporting: ‘fifth power of a state’ distributive inefficiency 214
251 monopoly 213, 215, 216
Menthol bait 188 monopolistic competition 213-215
menthol levels in cigarettes 200 natural monopoly and legal monopoly 213-215
Mergers and Acquisitions (M&As) 326 oligopoly 213
Michael Jensen 338 Monopoly and Restrictive Trade Practices Act 215, 216
Michael Klein 411 Monsanto 301
Micro and macro economic principles 210 Moral judgments 4
Migration of skilled workers 307 Moral reasoning 15-19, 21, 46
Milestone in the Indian corporate governance journey guiding principles for moral reasoning 19
380 Moral responsibility 21-28, 43
Milton Friedman 460, 461 establishing moral responsibility 21
social responsibility of business is to increase its profits reasoning to affix moral responsibility 23
461 test of moral responsibility 25
Mining Bill of 2011 307 uncertainty, difficulty, and involvement 26
Ministry of Company Affairs 135 Moral standards vis-à-vis ethical standards 28-32
Ministry of Environment and Forest (MoEF) 271 distinct aspects of the ethics and moral standards 28
Ministry of Information and Broadcasting 243 characteristics of ethical standards 29
Minority shareholders’ rights 394 spirit of ethical standards 30
Misleading product advertisements 236
 Index

Moral theories 63-65 NBFCs (Non-Banking Financial Companies) in India

ethics of care 65 241
types of moral theories 64 Sanchita chit fund 241
theory of rights and duties 64 Near revolutionary development of computer and
theory of justice 65 information technology (IT) 309
utilitarian theory 63 information revolution 310
Moral, social and environmental issues in corporate internet communication 310
governance system 462 Need for ethical discipline and governance 235
Morality and moral principles 7 Need for ethics in business and ethical corporate
Morality and morality of actions 9 governance 423
morality and ethics 9 Need of the business—to work towards sustainability,
while also maintaining profitability 453
moral values 10
New ethical problems in information dominated global
moral behaviour 10
village 310
Most powerful Indian ethos—‘karma yoga’ 403
New York Stock Exchange (NYSE) 461
transcend people to a higher spiritual platform and
Noble group (on Satyam-like scandal) 335, 336
higher ability to perform 403
the report 335
synergy between spirit, performance and sustenance
403 Notable regulators in India 435
Mr. Lloyd Blankfein 449 Notions of liberal propriety and correctness 363
Mr. Nobuo Kuroyanagi 459 Nouriel Roubini 413
Mr. R.C. Bhargava 363 no quick fix to downturn 413
Mr. Sudheer Thaakur 410 Nuclear power generation 270
time to revisit corporate governance 410 effective management of nuclear waste 270
Mr. Umair Haque 464 accidental radiation leakage 270
Multinational Companies (MNCs) 393
Objective thinking of a public limited company 409
Nanjing Institute of Environmental Sciences, China 301, Obligation to ‘trusteeship’ in public funded companies
316 449
Nanotechnology 328 OECD (Organisation for Economic Cooperation and
Development) principles of corporate governance
Narayani Ganesh 411
348, 352-353
ethics is key to sustainable development 411
perspectives of OECD principles 352
Narmada Valley Dam 284, 285
important highlights of the OECD principles 348,
NASSCOM (National Association of Software and 352-353
Services Companies) 236, 314
OECD principles 387
National Foundation for Corporate Governance
Oligopoly market condition 210
(NFCG) 389
Opposing views regarding the benefits of CSR 461
National Institute of Personnel Management 237
Organisatin and the responsibility for ethics 165-170
National Rehabilitation and Resettlement Policy, 2007
119 limiting the abuse of power and minimising ethical
conflicts 165-166
National voluntary guidelines for the social,
environmental and economic responsibilities of dealing with any occurrence of unethical behaviour
business 387 and practice 165
NBFC (Non-Banking Financial Company) 114 identifying individual responsibility for unethical act
167
 Index

Organisation 144 conflict between the dominant shareholders and the

layers of management 144 minority shareholders 388, 389
ethics and ethical standards in an organisation145 redress of this Indian problem of corporate governance
Organisation’s ‘path–means–and–goal’ 167 389
Ozone depletion 268 Price Waterhouse Coopers 228
PricewaterhouseCoopers (PWC) 368
Pareto’s 80:20 rule 457 PWC report on ‘best Practice: corporate governance,
Perfectly competitive market 435 2008’ 368
Perspective of ethics in business 124 few parameters for best governance 368
Philip Stephens 445 Primark 324
Pioneers of Indian industry 362 Principle of covet vendor 212
Planning business systems and strategies 131 Principle of equal liberty 91
Pointer to the lack of environmental care 294 Principle of fair and equal opportunity 92
Political behaviour in an organisation 166 Principle of inequality 92, 93
Pollution control methods and levels 286 Principle of morality 115
a ‘cost-benefit’ base approach to removing pollution principle of moral constraint 115, 116, 118
287 factors of uncertainty, difficulty and minimal
approach of partial control 287 involvement 116
approach to pollution control 287 Principle of normative ethics 150
necessity of balancing the pollution control strategy golden rule 150
with various environmental issues and concerns Principles of ‘best practice’ for what is strategically and
288 ethically right 369
social and retributive justice (in pollution control) rules for best corporate governance practice 369
287 ethos of the organisation and holding on to the
utilitarian approach applied to the cost-benefit ethically balanced goals of the business 369
analysis (of pollution control) 288 Probability 199
Pollution from solid waste disposal and toxic substances Problem of ethics in a business 175
on the land 279 Process of decision-making and administration 164
Pollution of resources that both society and industry Prof. David Smukowski 451
have equal rights to enjoy 282
focusing upon stakeholder needs is a route to new
Porter’s competitive analysis framework 437 markets, innovation, reduce business risk and
POSCO Steel 141 operational freedom 451
POSCO-India Private Limited 39 ‘Profitability’ to ethical approach of ‘profitability with
Potential of genetically engineered organisms for morality’ 193
destroying the natural balance of plant life 303 Prof. M.N. Siddiqi 117
Practice of TQM 212 Prof. S. L. Rao 256
Pravat Kumar Mukherjee vs Ruby general hospital, (on) self-regulation 256
Kolkata and others 252 Prof. S.K. Chakraborty 401
Presence of different formal and informal power groups Prof. Subhas Sharma 401
165
on: 100 years of management: scientific era,
Present problems of the Indian corporate governance humanistic era, ethics and values, spirituality in
388 management 401
central problem in the Indian corporate governance Professional code of conduct 235
388
 Index

Professional codes for computer ethics 311 principles of value-based management 339
Association Computing Machineries (ACM) codes PwC auditors 375
311 quality of corporate governance 336, 366
Professional ethics 225, 229, 230
behaviour of professionals 230 R. Gopalkrishnan 126
directions to remedy the damage (to professional R.C. Bhargava 409
ethics) 230 Radioactive waste 304
ethical conduct of the profession 233 Ramalinga Raju 156, 450
flow of ethical responsibility of professionals 227 Ramon Mullerat 461
managing professional ethics 231 Ranbaxy 141
moral responsibilities towards the investing public Rational decision-making process 37
and society 230 five steps to rational decision making 37
necessity for professional ethics 229 Rationality of decision 149
regulatory measures 231 rationale of reasons and principles 149
role and responsibility of professionals 225 Rational utility maximisers 199
standards of behaviour expected from professionals RBI 230
230
Real challenge of corporate governance of family-
Professional ethics of individual professionals 130 owned businesses 396
Professional ethics of the emerging market and media important issues concerning corporate governance
229 of family owned business in India. 397
Professor Haruo Funabashi 418 Rebecca Clarren 300, 302
timeless ventures 418 Reform of the governance process to begin with
Profit through economic harm to others results in ‘thin individuals 450
value’ 464 by integrating Indian ethos and spiritualism,
thin value: an economic illusion 464 Confucianism and Zen Buddhism into the various
Programmes 450 human resource development 450
Promoter-driven agendas 377 Regulation of board composition or board behaviour
Public Company Accounting Oversight Board (PCAOB) 389
339 Regulation versus self-regulation 452-454
roles as auditors of public companies 339 self-regulation: definition 456
Public Sector Units (PSU) 393 the purpose of regulations, codes and standards: to
Purpose of corporate governance principles 344 bring about uniformity in practice 452, 453
Purpose of CSR in corporate governance 461 why regulation is necessary from the functional point
of view 453
guide business processes towards a more inclusive
growth 461 Regulatory approach to corporate governance 341
to establish the responsibility of business for ‘greater Reinforcement of rules and regulations 229
good of the society’ 461 Relationship and responsibility of the company with its
Purposes of establishing the ‘ethics policy’ and ‘ethics stakeholders 357
management mechanism’ in the organisation 168 Relationship between individuals and the business 162
Pursuit of economic benefits 126 driven by the self-perceived interests of both parties
PwC 375 162
ethical goals 337 bound by ‘correlated duties and responsibilities’ 162
ethical purpose and conduct of business 336 duties and responsibilities 164
inclusiveness of corporate goals 336 ethics and ethical responsibility 168
 108 RIL 216
Reliability 203 Road map for ethical governance 462
Reliability and quality of India’s BPO 121 Road map for excellence in corporate governance 460-
Reliance group of industries 359 464
Reliance Industries (RIL) 432 Robert Allen Stanford 156
Reminder to the basics of business: sustainable Role and responsibility of the board of directors 390,
development is possible only with sustainable ethics 391
411 appointment and functioning of audit committee
Report of United Nations Framework Convention on 391
Climate Change (UNFCCC) 280 certification by CEO/CFO as to the reliability of
Reserve Bank of India (RBI) Act of 1934 377, 415 financial reports and compliance 391
Responsibility for ethics in business 144-147 compliance with ethics 391
ethical conduct of business operations 146 important parts of the board-related regulations in
Responsibility of bringing this powerful institution— the SEBI act 391
the business—into ethical order 447 Role and scope of ethics in business 46-52
Responsibility of not disturbing the ecology of the earth business ethics concern 47
315 ethics of business philosophy 50
earth as a single ethical system 315 ethics in business operations and management 52
Responsible approach to corporate governance would judging ethics in business 48
call for 462 ultimate aim of business ethics 47
purity of the purpose 462 Role of ethics and regulating oneself in the profession
quality and legality of the inputs 462 234
integrity and ethics of processes 462 importance with the growth of service industries
safety, security, utility and capability of outputs 462 234
Revision of Clause 49 of the SEBI act by the Narayana Role of ethics in marketplace 193, 194
Murthy Committee 392 Roles of HR professionals 237
Right to seek a liveable environment 285 performance appraisal function 237
Rightful actions with morality of purpose 324 Root of all corporate trouble 336
morality of beliefs and its logical inclusiveness of the Rosabeth Moss Kanter 343, 412
interests of all-correct ‘ethical view’ 324 Rule of compensatory justice 206
Rights 74-78 Rule utilitarianism 205
features of moral rights 77 Rules and principles 344
human rights 75 abuse and distortion of rules 344
legal rights 74 principles are self-regulating and self-screening, non-
moral rights 75 binding mechanism 344
Rights and duties 161 rules are binding 344
fair balance between rights and duties in an Rule-utilitarian approach 70-72
organisation 161 qualitative aspects of rule-utilitarian principle 70
Rights and duties 74-80
concept of rights and duties 74 S.H.Venkatramani 108
Rights and obligations of individuals in the organisation Safety 203
160-164 Salient features of Japanese corporate governance
main moral duty of an employee 161 practice 418
rights of individuals and duties 161 components of Japanese corporate governance
understanding individual rights 160 practice 419
 Index

Sanchaita chit fund 114 Self-regulation and conscience of the professionals 257
Sanlu group 2, 24, Self-regulation in professional activities 231
Sanlu, China 416 Seminar on ‘emergence of Indian management: towards
Sarbanes-Oxley Act of 2002 392, 422 New Mantra in corporate corridors’, Bangalore,
Sarbanes-Oxley Act 339, 360 2011 401
Sense of morality, moral standards and moral responsibility
auditor independence 339
3
corporate governance 339
Separation of ownership from control (over managerial
enhanced financial disclosure 339 rights) 420
internal control assessment 339 shareholders effectively losing control over managerial
Sarbanes-Oxley Act, US 460 decisions 421
Satyam 156, 165, 178, 227, 228, 240, 256, 416, 444, 446 Serious areas of contemporary ethics 328
Satyam computer 60 environment ethics, bio-ethics, and computer ethics
chairman Ramalinga Raju 106 328
Maytas deal 107 Serious Fraud Investigation Office (SFIO) 438
collapse of Satyam (India, 2008-09) 124 Service life 204
Satyam Computer Services Ltd. (SCSL) 106, 147 SEZ (Special Economic Zone) 285
Satyam computers 20, 47, 374 SEZ projects in Raighad, Maharashtra 308
Satyam scandal 335, 348, 375, 392 Shareholder education (small and independent
more Satyams in the pipeline 335 shareholders) 398
Sharia 9
Scope and role of business ethics 127-132
SHRM and the ethics resource centre—2003 study
business ethics 127
238
judging ethics in business 128
Six basic principles: applicable to the principles of
purpose of ethics in business 128, 146 management and governance 402-403
responsibility for ethical behaviour 146 holistic approach 402
response to ethical responsibility in a business 148 equal importance to subjectivity and objectivity 402,
the acceptable ‘standards of ethical behaviour’ 146 403
SEBI—capital markets regulator in India 349 karma yoga 402, 403
SEBI (The Securities and Exchange Board of India) respect to each soul as a potential god 402, 403
135 cooperation 402, 403
SEBI 230 Yogah Karmashu Kushalam 402-403
SEBI Act of 1992 377, 379, 381 Smart operators 447
incorporation of the listing agreement under clause Social purpose in business 367
49 in it in 2000 382 Social view of business 380
responsibility of developing and regulating the stock Society and locality—not ‘outsiders’ to a business 416
market 379
Society of professional journalists code of ethics 248
SEBI Committee on Corporate Governance, 2002 354
Socio-economic ethics 304
SEBI regulations 241
Software product ‘scareware’ 189
SEBI revised Clause 49, India 460
innovative marketing 189
SEBI to regulate the financial governance of all listed
Zeus Trojan 189
companies 376
Sony Corporation 436
Securities Contracts Regulation Act 1956 380
Sources of environmental pollution 273
Security Exchange Board of India 211
Spirit of ‘distributive justice’ in solving (industrial
Self-regulation 228 pollution) 280
 Index

Spirit of utilitarian or rule-utilitarian theory 71 Success of corporate governance 417

Spiritual legacy of Confucianism and Zen Buddhism task of corporate governance 417
418 is corporate governance a socialist approach to
Sri Sri Ravi Shankar 400 business management? 417
Sri Sri Ravi Shankar’s International Association for corporate governance by the rules of ethics, due care
Human Values (IAHV) 410 and moral justice 421
conference on ‘ethics in business: corporate culture Summit on financial markets and the world economy in
and spirituality’ 410 Washington D.C., 2008 444
sustainable development is possible only with Sundarban 261, 263
sustainable ethics 410, 415 the story of ghoramara 261
Stakeholders 451 Supreme Court Judgment on Indian Higher Education
business is a stakeholder of the society 451 Bill, 2006 122
mutual responsibility for sustainability and well- Sustainable environmental capital 269
being 451 Sustainable global competitive advantage 436
society is a stakeholder of the business 451 Sustainable profit and growth in a competitive business
Stakeholders and beneficiaries of ethical decisions in environment 362
business 150 Swami Vivekananda 401
Standard business practice 113 System for global control of greenhouse emission 291
Standards and rules of professional bodies 231
Standards of FSAP (Financial Services Assessment Taj Mahal 276
Programme) 379 Task of the CSR policy 364
Standards that guide, shape and control our behaviour commitment to the identified areas of CSR 364
in the society 30 committed to behave ethically towards the external
Stanford 422, 450 social environment 364
Stanford capital management 156 honest working towards the discharge of related
Stanford financial group 156 responsibilities 364
Stephen Covey 6 incorporating these outwardly-focused responsibili-
Steps in moral judgment 99 ties into business management systems and
processes 364
Strategy for sustainable performance and excellence in
the organisation 423 Tata 361
total ethical management (TEM) 423, 429 Tata brand 174
Strategy of good governance 427 Tata Consultancy (TCS) 326
aim at for an inclusive growth and encompass a Tata Motors 11, 140, 326
holistic approach 427 the Singur case 141
Study by KPMG, India, Audit Committee, in 2008 390, Tata Steel 94, 326, 436, 437
391 Anglo-Dutch steel giant Corus 326
the state of corporate governance in India, 2008 390 Tata Steel Ltd 410
Study of business ethics 3 Tata Steel’s Gopalpur project in Orissa 141
Subject matter of ethics 3 TCS (Tata Consultancy Services) 141, 366
‘Subjectivity’ and ‘objectivity’ in life and in the Teamlease Services 59
management of an entity 404 TEP (Total Ethical Practices) 212
Subprime crisis, US and UK 444 The ‘contract view’ of duties to consumers in business
Sub-prime deals 138 201-204
Subprime lending and house mortgage in US 308 correlative right 201
subprime crises 322, 326 duty 201
 Index

four moral duties upon the business 202 The Competition Act, 2002 (amended in 2007) 216
morally correct contract 201 The concept of customer satisfaction and customer
most important moral duty of a business 202 retention 190
success of the contract view approach in consumer The Consumer Protection Act 1986 254
protection 204 The coordinated model 359
violations of contractual understanding and The core and essence of corporate governance 462
obligations 202 CSR has to be a part of ethical corporate governance
virtual agreement 201 for sustainability 462
The ‘social costs’ view 201, 206-207 compliance to regulations and codes 464
aim of social cost view to consumer protection 206 creating an organisation with economic, social and
based on the ‘sellers take care’ doctrine 206 sustainable values 464
proponents of the social costs view 207 The corporate governance process—a holy mix of
manufacturers’ duty to protect the consumers and purpose, process and persons for creating ‘true value’
society from costs arising due to product defects for the society and sustainability 465
or deficiencies 207 The CSR agenda 456
The advent and advancement of Internet marketing and self-regulation and promotion of voluntary initiatives
E-commerce 236 to minimise manipulation and malpractices in
The American Medical Association (AMA) 252 business 456
code of ethical practices (AMA Codes of Medical to improve social, environmental and human rights
Ethics) 253 related dimensions and compliances of business
456
The Anglo-American model 357-358
to neutralise the efforts or intention of non-state
The balancing forces of business 112
actors to undermine socially inclusive pattern of
law, ethics and governance 112 development 456, 457
The Bill and Melinda Gates Foundation 92 The cyber fraud 189
The Birla Committee of SEBI 380 The duties and responsibilities of professionals 229
The Cadbury Committee Report of 1992 349, 350 The Energy and Resources Institute (TERI), New
Cadbury Committee recommendations for the board Delhi 268
and its functioning 350-352 India’s loss of annual GDP due to environmental
the Cadbury Code 352 damage and degradation of natural resources 268
The Centre for Science and Environment Studies, New The ethics of custodianship 236
Delhi 8 The European Union (EU) rules for ethics in financial
The combined code of corporate governance 353-354 audit 240
deals of the codes 353 The family-owned company model 359-361
The common good approach in ethics 72-74 family-controlled business—a dominant force in the
application of the principle of common good 73 Indian corporate scenario 360
definition of the common good 72 The Grant Thornton International Business Owners’
principle of common good 71 Survey (IBOS) 397
The Companies (Shareholders’ Rights) Regulations The Institution of Engineers (India) 116
2009, UK 342 The internet 191, 217-219
The Companies Act 2008 380 internet marketing 191
The Companies Act, 1956 226 The Kyoto mechanisms 291
The companies bill 112 The Kyoto protocol 272, 289, 291-295
modern limited company 113 The Land Acquisition Act, 1894 119
The Company’s Act, 1956 378, 380 Land acquisition (Amendment) Bill, 2007 119
 Index

The Manufacturers Association of Information The Society for Human Resource Management
Technology (MAIT) of India 279 (SHRM) 237
electronic waste generation in India 279 The spirit of morality and ethics 450
The Narayana Murthy Committee of SEBI 380 The spirit of true ‘value creation’ 447
Narayana Murthy Committee’s recommendations The study of ethics or ethical standards 31
and revised Clause 49 of its listing agreement of The subprime crisis—result of anti-ethics 412
the SEBI act 380, 382 The task of corporate governance 421, 423
The National Commission (dealing with hospital deaths) The touchstone of ethical judgement 235
252-253
The Unit Trust of India (UTI) 139
The New Companies Bill, 2008 226
The US drug makers 318
The obligations for ‘due care’ in business dealings 201,
The utilitarian approach to ethics 65-70, 82
204-206
utilitarian principle 66, 68
civic administration and care 205
judging morality and rightness from the ethical
‘due care’ approach to serving the consumer interest
standpoint 67
205
utilitarian principle of judging ethics and morality
duty to take care of the interests of consumers 204
67
limitations (of due care) 205, 206
estimation of cost-and-benefit under utilitarian
The oriental approach to corporate governance 465 approach 69
through holistic wisdom of respect for all, equality of utilitarian moral standards 97
objectivity and subjectivity, cooperation, working
The Vatican 318
with excellence and devotion without attachment,
and spirit of ‘karma yoga’—the yoga of selfless The Vedas 402
service to others 465 The Vedic age 400
The primary concern of ethics 318 The vision, values and goals of business 417
The process of corporate governance 449 The Washington State Department of Ecology, US 450
to integrate the social view of business with the The World Medical Association 254
economic view 449 Geneva Declaration (September, 1983) 254
The purpose of business 108 the Medical Professionals Pledge 254
The real challenge for excellence in corporate Thermal power generation in India 269
governance 464 effects on the environment 270
learning to create true value for the stakeholders and Three steps to ethical analysis 98
the society 464
Total Ethical Practice (TEP) 145, 430
The real challenge to corporate governance—eradication
integration of ethical principles into the administrative
of the cause(s) of unethical behaviour 424
and accountability structure of the corporate
The Right to Information 198 governance system 430
The rivers Ganga and Jamuna 279 some essential steps for TEP 430
The role of computers 313 the aim of TEP 430
creator of new jobs and facilitator of business the core approach of TEP 430
processes and operations 313
Total Quality Management (TQM) 124, 126, 145
ethical concerns of computer 313
Total social cost (of pollution control) 288
ethical challenges to computer technology 314
external costs (of pollution control) 288
social media marketing and communication and
True fulfilment of a corporate governance task 465
information exchange 313
attaining the goal of ‘true value’ 465
The Satyam story 438
developing an unshakable faith in values and morality
The social effect of advertising 244
465
 Index

manifesting ethics and social well-being in the utilitarian principle of ‘greatest good for the greatest
corporate work culture 465 number of people’ 328
unfolding the potential within the people to find Victoria memorial 276
the honest path amidst diversionary self-serving Vice harms doer 6
interests 465 Views on the purpose and governance of corporate and
Trust and transparency—indispensable to good business private property 338
411, 416 Vinod Dham 374
‘Trustees’ turned ‘beneficiaries’ 446
Typical feature of an unethical corporate governance Wall Street crash of 1929 338
system 420 Wall Street, New York 308
Wal-Mart 341
UK Carbon Trust 2008 292
Water pollution 278-281
Uncaring and uncontrolled systems of regulation 446
discharge of industrial wastes and effluents into rivers
Understanding of ‘goal-means and ethics’ 163 and water bodies 278
UNEP key fact sheet on biodiversity 275 discharge of untreated chemically contaminated
Union Carbide 95, 112, 135 water from factories into rivers and canals 278
United Nations Environment Programme (UNEP) 275 groundwater pollution due to inorganic pollutants
University Grants Commission (UGC) 246 278
University of Washington 451 range of water pollution 278
UNRISD (United Nations Research Institute for Social Ways to improve corporate governance 425
Development) 456 adopting a model of corporate governance that is
research and policy brief on CSR and business robust enough to adapt to situational variations
regulation 456 426
Upanishads 402 committed to profitability (economic value
US ban on toys made in China 138 addition)—with assured sustainability of business
426
US financial meltdown 325
guided by grand social view of the issue than local
‘regulatory and supervisory failure’ to curb ‘market
view of compelling reasons 426
indiscipline’ 325
good corporate governance of external factors 432
US SEC—Security and Exchange Commission 379
insulated from wrongdoings (of the influential and
US Securities and Exchange Commission (SEC) 156,
the powerful in the business loop) 426
392
via ethical means and conduct 425
UTI US–64 scam 354
Welfare of future generations—a key concern of
Utilitarian and rational approach to pollution control environment and also of business 450
291
West Nile Virus 275
Utilitarian approach to solving the environmental
Western model of corporate governance 465
problem 268
Western principles of management and governance and
Validity of moral standards 111 the Indian ethos 404
Value creation in business 414 both are mutually inclusive 404
brand image 414 paramount difference between the so-called western
approach and the approach based on Indian ethos
economic value 414
404
social value 414
strategy for good corporate governance 404
Various laws, regulations and codes of conduct in undisputed direction of Indian ethos: creation can
international trade 327 only be as good as the creator and no better 404
 Index

What an ‘organisation’ is? 157 Whistle-blower insurance 178

caring organisation 157, 159, 160 Widespread accounting lapses across the broad index of
political organisation 157-158 500 Indian companies 335
rational organisation 157-158 Will Hutton 447
What is sustainability? 450 William Blackstone 264, 268, 285, 286
definition of sustainability from the environment view on environment 264-265
perspective 450 Words of R.D. Aga, founder of Thermax India 398
main mantra of sustainability: to attain the present true spirit of corporate governance 398
without compromising the ability or curtailing World Bank (WB) 137, 279, 448
the possibility of future 450 World Meteorological Organisation (WMO) 275
sustainability demands sustainable goals, means and World recession results in steep fall in greenhouse gas
path that do not harm the society and stakeholders, emissions 458
in the present or in the future 451
WorldCom 339
What would constitute inclusive governance in the
WTO (World Trade Organisation) 208
context of sustainability? 451
Whistle-blowers 168, 178, 375
Zara-workers of India 178