M 2. ETHICAL DILEMMA Either doing what is morally right results in a bad outcome or bad effects. Or doing what is morally wrong results in good or at.

M 2

ETHICAL DILEMMA

• Either doing what is morally right results in a bad outcome or bad effects.

• Or doing what is morally wrong results in good or at least better outcome or effects.

HOW ETHICAL DILEMMAS IN BUSINESS AFFECT STAKEHOLDERS?

• Shareholders• Employees• Society

CORPORATE DILEMMA OVER ETHICAL BEHAVIOUR

• Lack of linkage between business ethics and financial success

• How much is good enough to invest in business ethics

• Lack of short term gains and long gestation period is an obstacle

SOURCES OF ETHICAL PROBLEMS

• Failure of personal character• Conflict of personal values and organisational

goals• Organizational goals vs. Social Values ( P & G‘s

Relytampon statistically linked to deaths) • Production and sale of hazardous but popular

products (ITC & UB)

HOW TO OBSERVE ETHICS TO REDUCE DILEMMAS

• Code of ethics • Creating an ethical working environment

ETHICAL ISSUES AND SOCIETY - EXAMPLES• Involvement in the community• Honesty, truthfulness and fairness in marketing• Use of animals in product testing• The degree of safety built into product design• Donation to good causes• The extent to which a business accepts its alleged responsibilities for mishaps, spillages

and leaks• The selling of addictive products e.g. tobacco

ETHICAL ISSUES ARISING FROM INTERNAL AND INDUSTRY PRACTICES - EXAMPLES

• Treatment of customers - e.g. honouring the spirit as well as the letter of the law in respect to warranties and after sales service

• The number and proportion of women and ethnic minority people in senior positions• The organisation’s loyalty to employees when it is in difficult economic conditions• Employment of disabled people• Working conditions and treatment of workers• Bribes to secure contracts• Child labour in the developing world

UNETHICAL PRACTICES IN MARKETING - EXAMPLES

• Dumping – selling at a loss to increase market share and destroy competition in order to subsequently raise prices

• Price fixing cartels• “Bait and switch” selling - attracting customers and then subjecting

them to high pressure selling techniques to switch to more expensive alternative

• Counterfeit goods and brand piracy• Copying the style of packaging in an attempt to mislead consumers• Deceptive advertising• Irresponsible issue of credit cards and the irresponsible raising of

credit limits• Unethical practices in market research and competitor intelligence

Unethical practices relating to products - examples

• Selling goods abroad which are banned at home• Omitting to provide information on side effects• Unsafe products• Built in obsolescence• Wasteful and unnecessary packaging• Deception on size and content• Inaccurate and incomplete testing of products• Treatment of animals in product testingEthics and the supply chain• - It would be hypocritical to claim to be a ethical firm if it turned a blind to

unethical practices by suppliers in the supply chain. In particular:• The use of child labour and forced labour• Production in sweatshops• Violation of the basic rights of workers• Ignoring of health, safety and environmental standards

MODELS OF BUSINESS CONDUCT

• The Austere Model• The Household model• The Vendor Model• The Investment Model • The Civic Model• The Creative Model

HOW TO RESOLVE ETHICAL PROBLEMS

• Utility• Rights• Justice

HOW TO RESOLVE ETHICAL DILEMMAS

3 step strategy1. Analyse the consequences2. Analyse the actions3. Make a decision

CASE EXCERCISE

PERSONAL VALUES AND ETHICAL DECISION MAKING

• According to the Josephson Institute of Ethics, “ The Six Pillars of Character taken together act as a multilevel filter through which ethical decisions can be processed,” and they believe, these can dramatically improve the ethical quality of our decisions, and thus our character and lives”.

CONT…

• Trustworthiness• Respect• Responsibility• Fairness• Caring• Citizenship

WHY CSR

• Accountability to society• Corporations debt to society

The ethical and social behavior of corporations is essential for the generation of profit, owing its source to the reputation the corporation would acquire in view of its social behavior.

CORPORATE SOCIAL RESPONSIBILITY

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.

CSR, being a voluntary measure, has no rules, regulation or procedure to comply with.

Some companies 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.

THEORITICAL JUSTIFICATION FOR CSR

• Trusteeship Model• Social Entity Theory• Pluralistic Model

MODELS FOR IMPLEMNTATION OF CSR

• Ethical (Mahatma Gandhi)• Statist ( Jawaharlal Nehru)• Liberal (Milton Friedman)• Stakeholder (R. Edward Freeman)

CONT…

ADVANTAGES OF CSR

• Improved financial performance• Enhanced brand image and reputation• Increased sales and customer loyalty• Increased ability to attract and retain employees• Reduced regulatory oversight• Innovation and learning• Risk Management• Easier access to capital

SCOPE OF CSR

• 3 levels can be indentifiedMarket forcesMandated actionsVoluntary actions

(Community assistance, health and welfare, education, environment and culture)

CONT…

• The Tata Industrialist Ethos inherited from the great Jamsetji himself, tried to combine high standards and quality production with sincere concern for ethical values such as fair and honest management, product quality, human relations in industry and industrial philanthropy.

INITIATIVES BY COMPANIES

Company Name Scope

Tata Steel Ltd.Environment, Community welfare, Rural

development

Titan Industries Ltd. Education, Physically Challenged, Women

Wipro Ltd. Environment, Education, Energy

Tata Consultancy Services Ltd. Energy, Community welfare, Education

Moser Baer (India) Ltd.Livelihoods and Training, Education,

Environment

Kansai Nerolac Paints Ltd. Community Welfare, Healthcare, Education

Jubilant Life Sciences Ltd. Environment, Community Welfare, Water

Housing Development Finance Corporation Ltd. Community welfare, Children, Healthcare

EXCERCISE

• Work out scope in groups meant for different stakeholders viz. To employees, To shareholders, To consumers and society.

EDUCATION

• Tata Steel • Dr. J. J. Irani Education Excellence Award to encourage

all schools to serve children better. This includes a cash prize for the school.

• The Company donated a building on a 71-acre campus to the Xavier Institute for Tribal Education (XITE) in an endeavour to assist less privileged tribal students improve their quality of life. Assistance to XLRI

• Jamshedpur School of Art and the prestigious National Centre for Performing Arts, Mumbai.

• Informally run balwadis (crèches/nurseries) for infants and toddlers.• Financial assistance and sponsorships.• Sponsorship of two tribal student every year by TCS at the Tata Institute of Social Sciences. • Project Sahyog helps tribal students to develop self-esteem and plan their future. • Assistance and support for The Xavier Institute for Tribal Education near Jamshedpur. • Financial support worth Rs 25 lakhs to more than 493 meritorious tribal students each year since 2004. • Fifty matriculate students identified every year for coaching that prepares them for higher studies. • The eight projects that have been recognised at the Annual Education Excellence Award Function are - • 1. J. H. Tarapore School: 'Parameterised Marking System Computer Practicals'

2. Kerala Samajam Model School: 'Motivational Cards''3. Kerala Samajam Model School: 'Suggestion Mela'4. Baug-E- Jamsheed School: 'Let's Share Learning with Fun'5. Kerala Public School, Mango: 'Hindi Vyanjan Mein Hulchul'6. Jusco School Kadma: 'Green Warriors'7. Kerala Public School NML: 'Students Progress - Our Challenge'8. Jusco School South Park: 'Implementing 2S across the School'

• Camp School• Scholarships total grant is Rs. 1.1 million annually for 110 awards. Jyoti Fellowship 2011-12

• JINDAL STEEL:• Knowledge park : Jindal

Institute of Technology (JIT)• Jindal Institute of Power Technology (JIPT)

• • Knowledge Park• O.P. Jindal Knowledge Park has been formed to provide a new world of opportunity in technical education :• • • School• O. P. Jindal School-A 10+2 co-educational school with all modern facilities at Raigarh.• The oldest girl's school in the region (Raigarh) has also been renovated to offer better standard of education and facilities.• Upgraded school infrastructure and distributed books and other educational materials in schools at Angul and other parts of

Odisha, Patratu (Jharkhand) & Raigarh (Chhattisgarh).• Established Adult Education Centres in Angul, Patratu & Raigarh• • Community Teacher Support• To make up for the deficiency of teachers in government primary, middle & secondary schools in rural areas, 60 teachers have

been selected from the local youth to augment the staff strength in various schools. This has not only enabled 10,000 students to upgrade their standard of education, but also generated employment opportunities for the local youth.

• Lack of awareness and inadequate facilities had made education take a back seat in the districts of Raigarh & Patratu. The basic infrastructure in several schools needed urgent overhauling. Having taken note of all this, JSPL has undertaken the following measures to upgrade the facilities in the schools of the adopted villages at Raigarh & Patratu -– Construction of additional class-rooms, toilets, sheds etc– Installation of computers and distribution of furniture to various schools– Arrangement of training classes for teachers and principals– Appointment of teachers on contract basis

• • O.P. Jindal Community College• The establishment of O.P. Jindal Community College (OPJCC) in 2011 as an entirely philanthropic, pioneering institution is the realisation of Shri OP Jindal’s vision to educate

and train a "skilled workforce who make the products and services of industry as per international standards." Under the astute leadership of CMD JSPL, Mr. Naveen Jindal, the first O.P. Jindal Community College opened its doors in 2007 and was known as O.P. Jindal Institute of Technology and Skills. The college’s mission is "To promote lifelong learning of vocational skills for all, irrespective of age, caste, creed, gender, prior education, and socioeconomic environment."

• OPJCC is unique among community colleges in India in that open access is highly valued. The college enrolls all literate students, including school dropouts. Over 37 technical vocational programmes are offered on five campuses located in Angul and Barbil (Odisha), Godda and Patratu (Jharkhand), and Punjipathra (Chhattisgarh). OPJCC also operates four Industrial Training Institutes (ITIs) that have been adopted under the Public Private Partnership (PPP) Scheme of the Government of India. The ITIs are located at Sarangarh, Kharsia, Gharghoda in Chhattisgarh, and Barbil in Odisha.

• OPJCC emphasizes employability as well as educational and economic mobility. Vocational training programmes prepare students for employment, entrepreneurship, and further studies. Programmes include plumbing, welding, masonry, air conditioning and refrigeration, electronics, electrical wiring (industrial and home), manufacturing, and metallurgy. Nursing and paramedical programmes and hospitality courses are new additions.

• Practical, hands-on training aligned with industry requirements is stressed. OPJCC has experienced instructors delivering high quality, relevant, modular courses leading to a certificate, vocational diploma, and associate’s degrees recognized by IGNOU Community College Scheme and the National Council for Vocational Training, India. Instruction is face-to-face in English and local languages. Learners are taught technical content as well as 21st century workplace skills such as occupational safety, time management, critical thinking, and communication skills.

• IT Certificate Course• Exclusively for tribal and marginalized girls belonging to poor families in the remote village of Kunjimora. A computer course of duration of 3/6 weeks has been conducted

here after setting up a computer lab in the school in the village. Instructors and teachers have been outsourced from registered and accredited LCC institutes. More than 200 girls have undergone this course and more are expected to join. This initiative is the first of its kind in the area, which has been well received.

• • Vocational Training• JSPL supports self-help groups for imparting vocational training in tailoring & embroidery in order to empower women from the weaker sections of the society. The staff,

material cost, and other infrastructure are borne by JSPL.• JSPL, Patratu is imparting a beautician course for females, having already trained more than 70. It is also conducting mushroom cultivation training for self-help groups.• • Financial support to meritorious and needy students• As part of its social initiatives, JSPL provides active financial support to the poor, deserving students, who compete in national/technical and other professional courses but

are unable to pursue their studies due to their financial condition.• JSPL, Patratu, established two coaching centres (English/Maths/Science) at the village level, for students from the economically weaker sections of the society.

ENVIRONMENT• Walking for a Cause - On World Environment Day (5th June 2011), GM India's team of 110 volunteers joined the Go Green team at the Tech Centre in association with the

Corporate Social Responsibility (CSR) Panel of Confederation of Indian Industries (CII). GM had the highest number of walkers.• Drawing Competition - To spread awareness about environment, GM India organized a drawing competition for school children of various age groups from the nearby village

Halol.• Renovation and repair of homes destroyed by natural disasters - GM India provided relief to victims of natural disasters, supported educational/technical institutions like

Industrial Training Institutes (ITIs) and Hospitals, helped renovate and repair homes of those impacted by floods and earthquakes.• Toy donation drive - for a local NGO and basic donation drives towards flood relief and rehabilitation work in Karnataka.• GM India imparts knowledge to school students, educates them about health, hygiene, safe water, sanitation etc. Also, makes an effort for girl empowerment by enhancing

the behaviour skills, personality development, communication skills etc. The community service program has also been a focus area for organized free medical camps for the residents of nearby villages.

• GM India believes in working with the government to spread awareness about issues that are in public interest and have an overall impact on the State's development.• • • CSR Budget Allocation• (approx Rs.10 crores)• National Calamities : 35%• Donations : 5%• Community Development: 30%• Indian Oil Scholarships: 20%• Other activities: 10%• • Green Initiatives• Low Sulphur (0.5%) Diesel was introduced in metros from April 1996. Extra-low Sulphur (0.25%) Diesel was introduced in the eco-sensitive Taj Trapezium area from

September 1996, in Delhi from October 1997, and across the country from 1st January 2000.• Diesel with 0.05% sulphur content was introduced in the metros in 2001. Unleaded Motor Sprit (petrol or Gasoline) was made available all over the country since February

1, 2000.• Green fuels (petrol and diesel) conforming to Euro-III emission norms have already been introduced in 13 cities/states; the rest of the country is getting BS-II fuels. The

Centre has been certified under ISO-14000:1996 for environment management systems.• All IndianOil refineries fully comply with the prescribed environmental standards and incorporate state-of-the-art effluent treatment technologies. Sustained efforts are

being made to further improve the standards by introducing new state-of-the-art technologies further improve the existing standards and facilities.•

RURAL• RURAL AND COMMUNITY DEVELOPMENT• Our projects are carried out under the aegis of the "Aditya Birla Centre for Community Initiatives and Rural Development", led by Mrs. Rajashree Birla. The Centre provides the strategic

direction, and the thrust areas for our work ensuring performance management as well.

Our focus is on the all-round development of the communities around our plants located mostly in distant rural areas and tribal belts. All our Group companies —- Grasim, Hindalco, Aditya Birla Nuvo and UltraTech have Rural Development Cells, which are the implementation bodies.

• Our partners in development are government bodies, district authorities, village panchayats and the end beneficiaries — the villagers. The Government has, in their 5-year plans, special funds earmarked for human development and we recourse to many of these. At the same time, we network and collaborate with like-minded bilateral and unilateral agencies to share ideas, draw from each other's experiences, and ensure that efforts are not duplicated. At another level, this provides a platform for advocacy.

• Project identification mechanismAll projects are planned in a participatory manner, in consultation with the community, literally sitting with them, and gauging their basic needs. We take recourse to "participatory rural appraisal", which is a mapping process. Subsequently, based on a consensus and in discussion with the village panchayats, we prioritise requirements. And thus a project is born. Implementation is the responsibility of the community and our team, as is the monitoring of milestones and the other aspects. Monitoring entails physical verification of the progress and the actual output of the project.

• Village meetings are held periodically to elicit feedback on the benefits of our community programmes and the areas where these need to be beefed up. We try and ensure that while in the short term we have to do enormous hand-holding, the projects become sustainable by the beneficiaries over the long haul. Once this stage is reached, we withdraw. In this way we do not build a culture of dependence, instead we make the villagers self-reliant.

• Model villagesOne of our unique initiatives is to develop model villages, so each of our major companies is working towards the total transformation of a number of villages in proximity to our plants. Making of a model village entails ensuring self-reliance in all aspects viz., education, health care and family welfare, infrastructure, agriculture and watershed management, and working towards sustainable livelihood patterns. Fundamentally, ensuring that their development reaches a stage wherein village committees take over the complete responsibility and our teams become dispensable.

• Of the 3,000 villages that we are engaged in, we have zeroed in on 300 villages that we hope to morph into model villages. Over a period of time, we expect to see a changed face of these villages. More than 80 villages in the hinterland have already become model villages. From abject poverty to fulfilling the necessities of life. From dependence to freedom. From backwardness to progress — in more ways than one.

• Our focus areasOur rural development activities span five key areas and our single-minded goal here is to help build model villages that can stand on their own feet. Our focus areas are healthcare, education, sustainable livelihood, infrastructure and espousing social causes.

• Education• Formal and non-formal education, adult education• Scholarships for girls, merit scholarships and technical education for boys• Distance education• Girl child education• Digital literacy / computer education•

• Health care and family welfare• Pulse polio programme• Mobile clinics — doctors' visits• General and multispeciality medical camps, cleft lips• Reproductive and child health care, supplementary nutrition / mid-day meal projects• Safe drinking water, sanitation — household toilets, community hospitals• HIV / AIDS, cancer, TB awareness and prevention camps• Blood donation• Responsible parenting• • Sustainable livelihood• Self-help groups (microfinance for women and farmers)• Integrated agriculture development• Integrated livestock development• Watershed management• Microenterprise development• Skill development / vocational training through Aditya Birla Technology Park for integrated training programme and VT centres at most of our plants in collaboration with ITIs• • Infrastructure development• Community centres• Schools in villages• Health care centres and hospitals• Roads• Homes for the homeless• Rural electrification• Irrigation and water storage structures• • Social causes• Widow re-marriage / dowry-less mass marriages• Social security (insurance)• Culture and sports• Women empowerment•

PRESTIGIOUS AWARDS

• Most admired companies list – By fortune – with numerous criteria

• Best companies to work for list – By Fortune – Work environment as criteria

• National award for Excellence in corporate governance – By Dept of co. affairs – Fairness and transparency as criteria

• CNBC TV 18 India Business Leader awards – By CNBC TV 18 – CSR Initiatives as criteria

CREATIVE ACCOUNTING

• Creative accounting refers to accounting practices that may or may not follow the letter of the rules of standard accounting practices but certainly deviate from the spirit of those rules.

• They are characterized by excessive complication and the use of novel ways of characterizing income, assets, or liabilities.

CONT...

• The term creative accounting as generally understood refers to systematic misrepresentation of the true income and assets of corporations or other organizations.

• Newspaper and television journalists have hypothesized that the stock market downturn of 2002 was precipitated by reports of accounting irregularities at Enron, WorldCom and other firms in the United States.

ROOT CAUSE

• The origin of creative accounting scandals, besides their moral and ethical no-no's, is the monstrous greed and hubris exhibited by their perpetrators.

• So creative accounting is the transformation of accounting figures from what they actually are to what perpetrators desire by taking advantage of the existing rules and/or ignoring some or all of them.

FURTHER CAUSES

• Flexibility in GAAP The selection and application of generally accepted accounting principles (GAAP) is flexible, leaving enough room for judgment in certain areas. We can consider the example of inventory valuation which offers a number of accounting policy choice and estimation decisions for the companies to prepare financial statements.

• Due to this flexibility the management can be creative in preparation of financial statements. In most cases the management judgment results in change of reported financial results from one direction to another which is generally referred to as aggressive accounting.

CONT...

• However it is very difficult to identify the point beyond which aggressive accounting becomes fraudulent. The nature of management action may lead to such identification. As for example when revenue is recognized fictitiously and not in premature fashion, it represents a case of fraudulent accounting.

TECHNIQUES INVOLVED

• It involves those techniques which are openly displayed (window dressing) as well as those which are sophisticated ones (off-balance sheet financing).

• A firm can intentionally alter reported financial results, i.e., income statement and statement of cash flows, or reported financial position, i.e., the balance sheet, in some desired amount and/or some desired direction.

OUTCOMES

• Enron has made everyone from politicians to comedians aware of the potentially disastrous results of creative accounting practices.

• A recent poll conducted by Business Week and Financial Executives International - a professional association whose members include CFOs, controllers, and treasurers - revealed that nearly half of those surveyed believe Enron is not an isolated situation. It is merely the most extreme example of problematic financial reporting leading to creative accounting. Companies have to lose when managers play Financial Numbers Game with good reputation and investor confidence.

INCENTIVES FOR THOSE INVOLVED

• These rewards may include a favourable effect on

- share prices, - lower corporate borrowing costs due to an

improved credit rating, - incentive compensation plans for corporate

officers and key employees, and/or political gains.

COMMON PRACTICES

• Most common creative accounting practices include improper revenue recognition and misreporting expenses.

• People have shifted from valuations based on last year's actual earnings and this year's "projected earnings". Related to this is another common problem involving when revenue is recognized.

• Creative accounting tricks include off balance sheet financing, over-optimistic revenue recognition and the use of exaggerated non-recurring items.

CONT…

• If an individual gets a contract for work that will pay $50,000 a year for ten years, he can't claim the whole $500,000 as revenue in the first year. But some companies do so. One should not claim revenue when the contract is signed but should claim it when it is actually paid.

SOLUTIONS

• Detection• Protection• Prevention

ANALYSIS FOR CREDIBLE ACCOUNTING

• Debtors and inventory• Sales vs. Debtors:• Growth of Sales vs. Earnings• Return on Capital Employed:• Cash Flow Statement• Capitalization of Expenses• Matching Concept:• Impact of Contingent Liability:

CONT...

• Introducing forensic accounting for white collar fraud detection and fraud prevention;

• Reducing the alternative choices of accounting treatment in accounting standards;

• Enhancing the quality of corporate governance;• Amending Companies Act;• Enforcing strong regulation, and• Increasing the effectiveness of audit.

THANK YOU