Business Ethics Vs. Corporate Governance. - · PDF file28.02.2014 · Business Ethics Vs. Corporate Governance. Prof. Ram Mallar Prof. Law & Governance February 28, 2014

Business Ethics Vs. Corporate Governance.

Prof. Ram MallarProf. Law & Governance

February 28, 2014.

IPRUnauthorized access to this document by anyone other than theparticipants of the session taken by Prof. Mallar or his MBAstudents, is prohibited. If you are not the participants orstudents of Prof. Mallar, any disclosure, copying, distribution orany action taken or omitted to be taken in reliance on it, isprohibited and may be unlawful. Any opinions or advicecontained in this document are subject to the standard termsand conditions of confidentiality.

© 2014Mallarr Law Associates LLPEmail: [email protected]

[email protected]: www.mlallp.com

Blog: rammallar.blogspot.comPhone: +91 22 24328413

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GENERAL FRAMEWORK

• Transformation of Corporate Manager into successfulProfessional Manager.

• Personal Ethics.

• Business Ethics.

• Corporate Governance.

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OVERALL OBJECT OF THE SESSION

• To benefit Corporate Manager to realize his dream inthe Corporate World.

• How a Corporate Manager can transform himself to avibrant, strong Professional Manager through theoperational framework of Corporate Governance forachieving:

i. His own personal dream, andii. The dream of the Company.

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Object of the Session Contd…..

• For this purpose, we need to clear confusion andlend more clarity between:

1. Ethics.2. Personal Ethics of Common Manager.3. Personal Ethics of Professional Manager.4. Ethics of Business.5. Business Ethics.6. Corporate Social Responsibility.7. Corporate Governance.8. GOOD Corporate Governance.

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IN BRIEF:1. Ethics: Science of studying good and bad.

2. Personal Ethics of Common Manager: Code ofconduct for personal behavior based on what isgood and bad personal life.

3. Personal Ethics of Professional Manager: Personalcode of conduct based on his dream.

4. Ethics of Business: Business of business is to makeprofit.

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In brief Contd…..5. Business Ethics: Introducing social angle to Ethics of

Business, as to what is good & bad, right or wrong forbusiness in the long run.

6. Corporate Social Responsibility: Business to promotethe interest of Society as one of the stakeholder.

7. Corporate Governance: Set of practices by whichbusiness is carried on in corporate businessorganization.

8. Good Corporate Governance: A code of bestmanagement practice which leads to achievement ofcorporate mission.

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WHAT IS “ETHICS” AND “PERSONAL ETHICS”?

• Ethics means study of Good & Bad, right & wrong,just & unjust. Generally.

• Greek word “Ethos” – refers to character.

• Personal Ethics ‐ A code of conduct for personalbehavior based on what he considers Ethics/ Good inhis personal life. A moral Code based on generallyaccepted standards of “good” in the society.

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PERSONAL ETHICS OF COMMON MANAGER AND PROFESSIONAL

MANAGER• Ethics of Common Manager is based on his PersonalEthics built out of Societal Good.

• Ethics of Professional Manager is more based anddetermined by his dream/ambition.

• Social Good is based on “Morals”.

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ETHICS SCALE

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PERSONAL ETHICS OF PROFESSIONAL MANAGER SHOULD BE BUILT AROUND

HIS PERSONAL GOALS.• For developing self‐confidence/ personality/ courage‐ Need to determine what is ‘Good’ & ‘Bad’ for YOU.

• Also for avoiding conflicts/ trauma and for pursuingsuccess.

• Your Ethics

• Right Mind Set – Self Confidence.

• Key to success is Self‐Confidence.


MIND SET OF PROFESSIONAL MANAGER: SELF-CONFIDENCE

• Accept the world as it is with all the problems.

• Use intelligence to change, turn mind to happiness /positive frame of mind / not negative.

• Take problems / difficulty as the price to be paid. Nomeal without price.

• Be happy. Happiness is state of mind. Money beyondserving basic needs, does not contribute tohappiness.


STRESS MANAGEMENT VITAL FOR PROFESSIONAL MANAGER

• As a Professional Manager learn to manage yourstress ‐ drop the problem before it hounds you.

• PROBLEM ‐ TENSION – STRESS

• Professional manager is the one who does not allowthe tension to reach the level of “stress” and kill hishealth.

• What is “Problem”? Your inability to manage changepositively in personal or professional life.


Stress Management Cont…..

• “TENSION” is the mental STRAIN you exercise totackle that “Problem”.

• “STRESS” is a gripping mental losing‐battle, resultedin your inability to solve the Problem.

• Continuous STRESS may paralyze your health learn todrop the Problem altogether to overcome STRESS.


Stress Management Cont…..• Why should you drop the Problem?• A Psychologist walked around a room while teachingStress Management to an audience. As she raised aglass of water, everyone expected they'd be askedwhether "Half empty or Half full" question. Instead,with a smile on her face, she inquired:

• "How heavy is this glass of water?"

• Answers called out ranged from 8 oz. to 20 oz.

• She replied, "The absolute weight doesn't matter. Itdepends on how long I hold it.


Stress Management Cont…..

• If I hold it for a minute, it's not a problem. If I hold itfor an hour, I'll have an ache in my arm. If I hold it fora day, my arm will feel numb and paralyzed.

• In each case, the weight of the glass doesn't change,but the longer I hold it, the heavier it becomes”. Shecontinued, "The Stresses and Worries in Life, are likethat Glass of Water. Think about them for a whilenothing happens. Think about them a bit longer andthey begin to hurt. And If you think about them allday long, you will feel paralyzed – incapable of doinganything. Remember to put the Glass Down”.


“ETHICS OF BUSINESS” Vs. “BUSINESS ETHICS”

• Ethics of Business, study of what is good or bad for thebusiness. The ultimate good in Business is profit, manytimes unbridled !

• Different from Personal Ethics which is based on moralgood.

• Business Ethics is introduction of social angle to the“Ethics of Business”, which focuses making profit somehow.

• Unbridled profiteering harms the business in the longrun.


BUSINESS ETHICS -TRADITIONAL & MODERN

• Traditional Business Ethics.

– Sole objet is Profit.

• Modern Business Ethics

– Promote / protect interest of various stakeholders.

• Stake‐holders:

– Shareholders/Promoters/Employees/Customers/Suppliers/Creditors/Society/Government/Environment/Company itself.


MODERN BUSINESS ETHICS MANDATES:

• How to make profit (Fair Trade Practices).

• How much profit you make (maximisation of profitby optimum utilisation of factors ofproduction/resources).

• How you should utilize the profit so made forpromoting or protecting the interest of multiplestakeholders.


PROFESSIONAL ETHICS

• Sum total of Professional Ethics of Corporatemanagers is Corporate Ethics.

• Sum total of Corporate Ethics is Industry Ethics.

• Sum total of Industry Ethics is “Business Ethics”.


ETHICS OF PROFESSIONAL MANAGER

• Ethics in Bhagwat Geeta: Krishna said “manager shouldlook at the task set for himself more for its satisfaction,the fulfillment that gives, rather than for personal gain orprofit”.

• Mixing of Personal Ethics with the Professional Ethicsmay be dangerous: Down fall of Rajat Gupta.

• Elliot Jacques, American scholar called professionalmanager as “Propertyless Manager”, who manages thecompany successfully, but does not own any part of it aspersonal property. Does job, not for personal gain, butfor satisfaction he drives.


CONFLICT IN MODERN BUSINESS ETHICS

• Promoter’s View – Private goodVs

• Societal View – Public good

• Pursue Private good tempered with/ influenced byPublic good.


WHAT IS CORPORATE SOCIAL RESPONSIBILITY

(CSR) ?• CSR means making the society as one of thestakeholders.

• The World Business Council for SustainableDevelopment has defined CSR as the “continuingcommitment by Business to behave ethically andcontribute to economic development whileimproving the quality of life of the workforce andtheir families as well as the local community andsociety at large” (Holmes and Watts 2000)


OTHER ISSUES IN BUSINESS ETHICS• Is there a difference between Ethical/ Unethicalpractice in business and in personal life?

• Do you agree that the business practice which islegally sound should be treated as ethical and theyneed not be morally sound?

• Distinguish between Fair Trade Practice and UnfairTrade Practice.

• Strictly speaking, a trade practice which is notconsidered unfair should be treated as fair tradepractice.


THE OBJECT OF FAIR TRADE PRACTICE:

• The object is to promote competition, Free Trade, FreeEnterprise and Freedom of choice in the Economy.

• Unfair trade practice is the one which is prohibited underthe law as it is against competition and consumer.

• Practices which are branded as unfair are to be seen inthe following laws:

• Sale of Goods Act.• MRTP/Competition Act.• Consumer Protection Act.• Other Industry specific laws.


STRATEGY AND POLITICAL/ECONOMICAL SYSTEMS IN THE WORLD

• Communism (Total control of economy)– You have two cows:– Government takes both and gives you some milk.

• Socialism (Partial control of economy)– You have two cows:– And you give one to your neighbour.


Strategy and Political/Economical Systems in the World Cont…..

• Fascism (Totalitarian control – Italian)– You have two cows:– Government takes both and sells you the milk.

• Nazism (Totalitarian control – German)– You have two cows:– Government takes both and shoots you.


Strategy and Political/Economical Systems in the World Cont…..

• Bureaucracy (Controlled by “Babus”)– You have two cows:– Government takes both, shoots one, milks theother and throws the milk way.

• Capitalism (Free economy – competition)– You have two cows:– You sell one and buy a bull and have more cows/bulls.


WHAT IS “CORPORATE GOVERNANCE”?

• It is a set of Methods / Practices by which business iscarried on, directed and controlled in a corporateform of business organization.

• Board of Directors primarily responsible forgovernance.

• Quality of Corporate Governance determine thegrowth and future of the business.


WHAT IS “GOOD CORPORATE GOVERNANCE”?

• A code of best management practices which:i. leads to achievements of corporate goals/

mission,ii. Promotes or protects the interest of multiple

stakeholders,iii. Which is fair and transparent, andiv. gives enough freedom for the Board to act, and

be accountable.

• How good is Good, depends on whether the organization achieves its mission / goal.


What is Good Corporate Governance Contd…..According to OECD & Cadbury Committee: “Corporategovernance is the system by which businesscorporations are directed and controlled. The corporategovernance structure specifies the distribution of rightsand responsibilities among different participants in thecorporation, such as, the Board, Managers,shareholders and other stakeholders, and spells out therules and procedures for making decisions on corporateaffairs. By doing this, it provides the structures throughwhich the company objectives are set, and alsoprovides the means of attaining those objectives andmonitoring performance”.


NEED OF CORPORATE GOVERNANCE

• The Corporate Governance as the code of bestManagement Practice came into corporate businessfor preventing poor governance and corporatefrauds.

• Seeds of modern corporate governance was sownWatergate Scandal in 1970s, in USA.

• Spate of scandals, collapses and spectacularcorporate failures in USA and UK in late 1980s areresponsible for the growth of modern corporategovernance.


AUTHORITATIVE REPORTS ON MODERN CORPORATE

GOVERNANCE• Modern Corporate Governance is based on thefollowing Reports:

i. Cadbury Committee Report 1992.ii. Ron Hampel Committee Report.iii. Turn Bull Guidance of 1999 for risk management.iv. Kumarmangalam Birla Committee Report of 1999.v. Naresh Chandra Committee Report.vi. Narayan Moorthy Committee Report.


Modern Corporate Governance Contd…..Since various Reports of Corporate Governance werenot implemented by the industry, rules of the goodgovernance were converted into law:

1. Combined Code on Corporate Governance of UK ‐July 2003.

2. Sarbanes Oxley Act of 2001 of USA.3. Clause 49 of Listing Agreement.4. Companies Act, 1956 as amended in 2000.5. Companies Act, 2013.


WHETHER CODIFIED GOVERNANCE SUCCESSFUL IN STOPPING POOR GOVERNANCE AND CORPORATE

FRAUD?• Answer is emphatic NO.

• Collapse of Enron Corporation in 2001.

• Satyam Scam in 2009 ‐ the Biggest corporate fraud of Rs. 20,000 crores.


PRESENT STATE OF CORPORATE GOVERNANCE IN INDIA

• In India, Corporate Governance has been muchdebated buzzword since the year 1998 with a largenumber of seminars, workshops and conventionsand programmes devoted to it.

• It has been the most favourite for the able writers,learned speakers and business luminaries in the last14 years and it is not surprising that many PostGraduates and other Professionally qualified personsare today pursuing research on CorporateGovernance to acquire Doctorates on this subject.


Present State of Corporate Governance in India Contd…..

• In a common man’s language, “Corporate Governance”came in as a fashion, soon became a fad and withcollapse of Enron and lately Satyam and with thepassing of the Companies Act, 2013, it is again apassion.

• But then this is only the truth as far as the theoreticalaspects goes, practically, the story is quite different. Inpractical realm, we see examples of sheer pretense witheven top corporate names shying away from theimplementation of Good Corporate Governance in realspirit and merely confining its application to the fourcorners of the laid down law and not in the spirit of thelaw.


Present State of Corporate Governance in India Contd…..

• Added to the futile exercise is the new Companies Act,2013. Government foolishly believes that GoodCorporate Governance will be ushered in by mandatingall the Public Limited Companies, of certain size, toappoint 1/3rd Independent Directors and allocate partof the net profit for CSR.

• The Corporate Governance has remained more inpaper and almost negligible in real practice.

• Ultimately, the test of Good Corporate Governance isthe test of the Professional Manager and hisProfessional Ethics.


FOR MORE ON THE SUBJECT, READ MY BLOG:

RAMMALLAR.BLOGSPOT.COM

39 February 28, 2014.

Ram Mallar© Mallarr Law Associates LLP

Email: [email protected]@mallarlaw.com

Website: www.mlallp.comBlog: rammallar.blogspot.com

Phone: +91 22 24328413

Business Ethics Vs. Corporate Governance. - · PDF file28.02.2014 · Business Ethics Vs. Corporate Governance. Prof. Ram Mallar Prof. Law & Governance February 28, 2014

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