1. Business Ethics

8/3/2019 1. Business Ethics

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Role of Ethics inCorporate Governance


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ETHICS-definitions

The word ethics is derived from the Greekword ethos meaning character and latinword mores meaning customs

ETHICS AND LAW

Law is a consistent set of universal rulesthat are widely published, generallyaccepted and usually enforced. Theserules describe the ways in which peopleare required to act in society.

Ethics defines what is good for theindividual and for society and establishesthe nature of duties that people owe tooneself and others in society


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What are ethics

The principle of conduct professional

ethics

A system or philosophy of conduct

A discipline dealing with what is good and

bad- moral duty and obligation

A set of moral principles or values.


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Relation between ethics and law


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ETHICS- Reflection in a companys operations of the valuesand moral principles used in the communities in

which they operate

Successful markets and corporate performanceare founded on a commitment to basic ethicalprinciples aligned as much as possible to the

interests of individuals, corporations and society.

Ethical standards may be expressed in acompanys formal conduct requirements, orcontained in generally stated principles that guidea companys preferred conduct or behavior.

Most companies have put in place a code of ethicsfor its employees to conduct themselves in aparticular manner while doing business.


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Purpose of Ethics

Ethics are the guiding principles.

Where the proposed business activity/

operation of the company borders on the

unknown, the company needs to apply the

ethics principle to decide the course of

action

Ethics help make relationships mutuallypleasant and productive- imbibes a sense

of community among members- a sense of

belongingness to society.


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Whyhave a code of ethics?

To define acceptable behavior

To promote high standards of

practice

To provide a benchmark for self-

evaluation To establish a framework for

professional behavior and

res onsibilities


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Code of ethics -transition

OriginalOriginal

Compliance

Enforcement

Punishment

Directive

Secretive

Compliance

Enforcement

Punishment

Directive

Secretive

Integrity

Inspiration

Motivation

Educational

Open

Integrity

Inspiration

Motivation

Educational

Open

RevisedRevised


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Creating the Ethical Imperative

Written code of ethics

Employee commitment

Employee training Discipline process

Full disclosure

Building expectations

Resolution process conflict management


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THE INFOSYS MODEL

A formal code of business conduct and

ethics. To be signed and adhered to by

employees.

Action against any employee for violationthereof.


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THE INFOSYS MODEL -Contents General standards of conduct

Management of conflicts of interest

Prohibition of exploitation of corporateopportunities

Protection of companys confidential

information Obligations under securities laws

Use of assets


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What is corporate governance?

Corporate Governance is concerned withholding the balance between economic and

social goals and between individual andcommunal goals.

The corporate governance framework is thereto encourage the efficient use of resourcesand equally to require accountability for thestewardship of those resources.

The aim is to align as nearly as possible theinterests of individuals, corporations andsociety

- Sir Adrian Cadbury


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What is corporate governance?

Contd The primary purpose of corporate leadership is to

create wealth legally and ethically.

This translates to bringing a high level ofsatisfaction to five constituencies -- customers,employees, investors, vendors and thesociety-at-large.

The raison d'tre of every corporate body is toensure predictability, sustainability and

profitability of revenues year after year.

- N RNarayana Murthy


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History of Corp Gov in India

Unlike South-East and East Asia, the corporategovernance initiative in India was not triggered by anyserious nationwide financial, banking and economic

collapse Also, unlike most OECD (Organisation for Economic Co-operation and Development ) countries, the initiative inIndia was initially driven by an industry association, theConfederation of Indian Industry In December 1995, CII set up a task force to design a voluntary

code of corporate governance

The final draft of this code was widely circulated in 1997 In April 1998, the code was released. It was called DesirableCorporate Governance: A Code

Between 1998 and 2000, over 25 leading companies voluntarilyfollowed the code: Bajaj Auto, Hindalco, Infosys, Dr. ReddysLaboratories, Nicholas Piramal, Bharat Forge, BSES, HDFC,ICICI and many others


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Following CIIs initiative, the Securitiesand Exchange Board of India (SEBI) setup a committee under Kumar MangalamBirla to design a mandatory-cum-recommendatory code for listedcompanies

The Birla Committee Report was approvedby SEBI in December 2000

Became mandatory for listed companiesthrough the listing agreement, andimplemented according to a rollout plan


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Following CII and SEBI, the Department of CompanyAffairs (DCA) modified the Companies Act, 1956 toincorporate specific corporate governance provisionsregarding independent directors and audit committees

In 2001-02, certain accounting standards weremodified to further improve financial disclosures.

These were: Disclosure of related party transactions

Disclosure of segment income: revenues, profitsand capital employed

Deferred tax liabilities or assets

Consolidation of accounts

Initiatives are being taken to (i) account for ESOPs, (ii)further increase disclosures, and (iii) put in placesystems that can further strengthen auditorsindependence


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Fundamental Objective ofCorporate Governance

Enhancement of Shareholder

Valu

e, keeping in view theInterests of otherStakeholders

CG a Way of Life rather thana Code


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Constituents of Corp Gov

The Board of Directors Pivotal role

Accountable to stakeholders

Directs management

The Shareholders & Stakeholders To participate in appointment of directors

To hold the BoD accountable for governance through

proper disclosures

The Management To act on the direction of the BoD

To provide requisite information to the BoD for

decision making

To implement and monitor control systems


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Rationale` for Disclosures

An effective disclosure based regulation

(DBR) implies greater responsibilities

on the company directors, itsmanagement and advisers

An effective DBR promotes investor

activism

Markets believe that perceived benefits

outweigh perceived costs


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Disclosure based Regulation Components & types of disclosure

Disclosures Disclosures

by whom for whom

Public Listed Cos. Shareholders

Intermediaries Investors

Stock Exchanges MARKET Intermediaries

Mutual Funds RegulatorAnalysts & advisors Government

Other stake -

holders


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Disclosure Based Regulation

Components & types of disclosures

Initial Disclosures Disclosures forraising capital by companies, mutualfunds in offer documents

- Public Offers- Private Placement

Continuous disclosures financial / non-financial

Frequency of disclosure

Dissemination process electronic,physical, centralised, dispersed

Accessibility of information


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Disclosure Based Regulation

Initial Disclosures

Continuous disclosures

Corporate Governance

Financial disclosures

Risk based disclosures for

intermediaries

Disclosures for stock exchanges


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Board of Directors: information that must besupplied

Annual, quarter, half year operating plans, budgets andupdates

Quarterly results of company and its business segments

Minutes of the audit committee and other board committees Recruitment and remuneration of senior officers

Materially important legal notices and claims, as well as anyaccidents, hazards, pollution issues and labor problems

Any actual or expected default in financial obligations

Details of joint ventures and collaborations

Transactions involving payment towards goodwill, brandequity and intellectual property

Any materially significant sale of business and investments

Foreign currency and other risks and risk management

Any regulatory non-compliance

Disclosures


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Disclosures to shareholders in addition tobalance sheet, P&L and cash flow statement

Board composition (executive, non-exec, independent)

Qualifications and experience of directors

Number of outside directorships held by each director

(capped at director not being a member of more than 10board-level committees, and Chairman of not more than

5)

Attendance record of directors

Remuneration of directors

Relationship (familial or pecuniary) with other directors

Warning against insider trading, with procedures toprevent such acts

Details of grievances of shareholders, and how quickly

these were addressed

Date, time and venue of annual general meeting of

shareholders

Disclosures


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Dates of book closure and dividend payment

Details of shareholding pattern

Name, address and contact details of registrars

and/or share transfer agents Details about the share transfer system

Stock price data over the reporting year, and how

the companys stock measured up to the index

Financial effects of stock options

Financial effects of any share buyback Financial effects of any warrants that are to be

exercised

Chapter reporting corporate governance practices

Disclosures


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Detailed chapter on Management Discussion and

Analysis focusing on markets, operations,

finances, accounts, risks, opportunities and

threats, internal control systems Consolidated financial statement, incorporating

accounts of all subsidiaries (over 50% shares

held by reporting company)

Details of all significant related party

transactions Detailed segment reporting (revenues, costs,

operating profits and capital employed)

Deferred tax liabilities and assets and

debit/credit in the P&L for the reporting year

Disclosures


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Disclosures

(A) Basis of related party transactionsI. A statement in summary form of

transactions with related parties in the

ordinary course of business shall be placed

periodically before the audit committee.

II. Details of material individual transactionswith related parties which are not in the

normal course of business shall be placed

before the audit committee.

III. Details of material individual transactions

with related parties or others, which are noton an arms length basis should be placed

before the audit committee, together with

Managements justification for the same


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Disclosures

(B) Disclosure of Accounting TreatmentTo disclose in the financial statements, if

an accounting treatment other than

prescribed in Accounting Standard has

been followed alongwith explanation.

(C) Board Disclosures Risk management

Internal and external business risks

Procedures to inform Board members aboutthe risk assessment and minimization.

Periodically reviewed


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Disclosures

(D) Proceeds from public issues, rights issues,preferential issues etc. To disclose to the Audit Committee, on

use/application of funds as and when any issueis made

(E) Additional disclosures:

In the Annual Report the criteria of makingpayments to NEDs to be disclosed or a referenceto be made that the same is available on thecompanys website

number of shares and convertible instrumentsheld by NEDs.

NEDs shall disclose their shareholding (both ownor held by / for other persons on a beneficialbasis) in the company in which they areproposed to be appointed as directors, prior totheir appointment.


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Disclosures

F) Management

A Management Discussion and Analysisreport to form part of the Annual Report.

G) ShareholdersDisclosures to shareholders in case ofappointment /reappointment of directors,quarterly results and presentations made,shareholders grievance committee andshare transfer committee, shareholdingpattern-change


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CEO/CFO certification

The CEO, i.e. Managing Director and the CFO i.e.whole-time Finance Director or head of the financefunction to certify to the Board that:

(a) They have reviewed financial statements and thecash flow statement for the year and these

statements:(i) do not contain any materially untrue statement or omit

any material fact or contain statements that might bemisleading;

(ii) together present a true and fair view of the companysaffairs and are in compliance with existing accounting

standards, applicable laws and regulations.(b) no transactions entered into by the companyduring the year which are fraudulent, illegal orviolative of the companys code of conduct.


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CEO/CFO certification (contd)

(c)They accept responsibility for establishing andmaintaining internal controls and that they haveevaluated the effectiveness of the internal controlsystems of the company and they have disclosed tothe auditors and the Audit Committee, deficienciesin the design or operation of internal controls, if any,

of which they are aware and the steps they havetaken or propose to take to rectify these deficiencies.

(d)They have indicated to the auditors and the Auditcommittee(i) Significant changes in internal control during the year;

(ii) Significant changes in accounting policies during the

year and that the same have been disclosed in thenotes to the financial statements; and

(iii)Instances of significant fraud of which they havebecome aware and the involvement therein, if any, ofthe management or an employee having a significantrole in the companys internal control system


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1. Business Ethics

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