Module 4: Corporate Governance

Corporate governance is the system by which companies are directed

and controlled. Boards of directors are responsible for the governance of their
companies. 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. Corporate governance is defined, described or delineated in diverse
ways, depending on the writer's purpose. Writers focused on a disciplinary
interest or context often adopt narrow definitions that appear purpose-specific. 

Corporate governance creates the structure, in which the company objectives

are defined, tools for their achievement and supervision by the owner over the
operations of the company. If the corporate governance system is sound, it will
give effective incentives to achieve the objectives in the best interest of the
company and the shareholders. This will contribute to the more efficient
supervision over operations, with direct impact on the effective use of resources
in the company. Dynamic business environment requires from business
companies to be flexible and to react quickly to the market demands. 1 In a
market economy, corporate governance encourages economic development,
ensures economic growth and allows companies to get involved in long-term
projects. Corporate governance can be defined in a usual manner, “corporate
governance is a system through which companies are managed and supervised”
2 . In this way, corporate governance is defined as a set of mechanisms through
which the company operates when ownership is separated from management.
The commonly seen issues with corporate governance do not arise in all types
of companies, but can arise only in the ones where there are several owners and
where ownership and management are two separate areas. There are two central
issues regarding corporate management, and their existence and solution depend
on the ownership structure in the company. On one hand, in the shareholding
companies with dispersed ownership, the basic difficulty is how the external
shareholders can control performance of the managers if they do not have
enough power to influence them.

Corporate Governance is intended to increase the accountability of your

company and avoid massive disasters before they occur. Failed energy giant
Enron, and its bankrupt employees and shareholders, is a prime argument for
the importance of solid Corporate Governance. Well- executed Corporate
Governance should be similar to a police department’s internal affairs unit,
weeding out and eliminating problems with extreme prejudice. The Need,
Significance or Importance of Corporate Governance is listed below.

 Importance of Corporate Governance:

Changing Ownership Structure:-

In recent years, the ownership structure of companies has changed a lot. Public
financial institutions, mutual funds, etc. are the single largest shareholder in
most of the large companies. So, they have effective control on the management
of the companies. They force the management to use corporate governance.
That is, they put pressure on the management to become more efficient,
transparent, accountable, etc. They also ask the management to make consumer-
friendly policies, to protect all social groups and to protect the environment. So,
the changing ownership structure has resulted in corporate governance.

Importance of Social Responsibility

Today, social responsibility is given a lot of importance. The Board of Directors

has to protect the rights of the customers, employees, shareholders, suppliers,
local communities, etc. This is possible only if they use corporate governance

Growing Number of Scams

In recent years, many scams, frauds and corrupt practices have taken place.
Misuse and misappropriation of public money are happening everyday in India
and worldwide. It is happening in the stock market, banks, financial institutions,
companies and government offices. In order to avoid these scams and financial
irregularities, many companies have started corporate governance.

Indifference on the part of Shareholders

In general, shareholders are inactive in the management of their companies.

They only attend the Annual general meeting. Postal ballot is still absent in
India. Proxies are not allowed to speak in the meetings. Shareholders
associations are not strong. Therefore, directors misuse their power for their
own benefits. So, there is a need for corporate governance to protect all the
stakeholders of the company.
Globalization

Today most big companies are selling their goods in the global market. So, they
have to attract foreign investor and foreign customers. They also have to follow
foreign rules and regulations. All this requires corporate governance. Without
Corporate governance, it is impossible to enter, survive and succeed the global
market.

Takeovers and Mergers

Today, there are many takeovers and mergers in the business world. Corporate
governance is required to protect the interest of all the parties during takeovers
and mergers.

``Corporate Performance: Improved governance structures and processes

ensure quality decision-making, encourage effective succession planning for
senior management and enhance the long-term prosperity of companies,
independent of the type of company and its sources of finance. This can be
linked with improved corporate performance- either in terms of share price or
profitability.

Enhanced Investor Trust: Investors consider corporate governance as

important as financial performance when evaluating companies for investment.
Investors who are provided with high levels of disclosure and transparency are
likely to invest openly in those companies. The consulting firm McKinsey
surveyed and determined that global institutional investors are prepared to pay a
premium of up to 40 percent for shares in companies with superior corporate
governance practices.

Better Access to Global Market: Good corporate governance systems attract

investment from global investors, which subsequently leads to greater
efficiencies in the financial sector.

Combating Corruption: Companies that are transparent, and have sound

system that provide full disclosure of accounting and auditing procedures, allow
transparency in all business transactions, provide environment where corruption
would certainly fade out. Corporate Governance enables a corporation to
compete more efficiently and prevent fraud and malpractices within the
organization.
Easy Finance from Institutions: Several structural changes like increased role
of financial intermediaries and institutional investors, size of the enterprises,
investment choices available to investors, increased competition, and increased
risk exposure have made monitoring the use of capital more complex thereby
increasing the need of Good Corporate Governance. Evidences indicate that
well-governed companies receive higher market valuations. The credit
worthiness of a company can be trusted on the basis of corporate governance
practiced in the company.

Enhancing Enterprise Valuation: Improved management accountability and

operational transparency fulfill investors expectations and confidence on
management and corporations, and in return, increase the value of corporations.

Reduced Risk of Corporate Crisis and Scandals: Effective Corporate

Governance ensures efficient risk mitigation system in place. A transparent and
accountable system makes the Board of a company aware of the majority of the
mask risks involved in a particular strategy, thereby, placing various control
systems in place to facilitate the monitoring of the related issues.

Accountability: Investor relations are essential part of good corporate

governance. Investors directly/ indirectly entrust management of the company
to create enhanced value for their investment. The company is hence obliged to
make timely disclosures on regular basis to all its shareholders in Corporate
Governance is integral to the existence of the company. Lesson 3 Conceptual
framework of Corporate Governance 47 order to maintain good investor’s
relation. Good Corporate Governance practices create the environment whereby
Boards cannot ignore their accountability to these stakeholders.

 CORPORATE GOVERNANCE PRINCIPLES

Corporate governance refers to all laws, regulations, codes and practices, which
defines how institution is administrated and inspected, determines rights and
responsibilities of different partners, attracts human and financial capital, makes
institution work efficiently, provides economic value to stack holders in the
long turn while respecting the values of the community it belong. For corporate
governance, the management approach should be in accordance with the
following principles.

Principle 1 : Governance structure:

All Organizations should be headed by an effective Board. responsibilities and
accountabilities within the organization should be clearly identified.

Principle 2: The structure of the board and its committees :

The board should comprise independent minded directors. It should include an

appropriate combination of executive directors, independent directors and non-
independent non-executive directors to prevent one individual or a small group
of individuals from dominating the board’s decision taking. The board should
be of a size and level of diversity commensurate with the sophistication and
scale of the organization. Appropriate board committees may be formed to
assist the board in the effective performance of its duties.

Principle 3 : Director appointment procedure:

There should be a formal, rigorous and transparent process for the appointment,
election, induction and re-election of directors. The search for board candidates
should be conducted, and appointments made, on merit, against objective
criteria (to include skills, knowledge, experience, and independence and with
due regard for the benefits of diversity on the board, including gender). The
board should ensure that a formal, rigorous and transparent procedure be in
place for planning the succession of all key officeholders.

Principle 4 : Directors duties, remuneration and performance:

Directors should be aware of their legal duties. Directors should observe and
foster high ethical standards and a strong ethical culture in their organization.
Each director must be able to allocate sufficient time to discharge his or her
duties effectively. Conflicts of interest should be disclosed and managed. The
board is responsible for the governance of the organization’s information,
information technology and information security. The board, committees and
individual directors should be supplied with information in a timely manner and
in an appropriate form and quality in order to perform to required standards.
The board, committees and individual directors should have their performance
evaluated and be held accountable to appropriate stakeholders. The board
should be transparent, fair and consistent in determining the remuneration
policy for directors and senior executives.

Principle 5 : Risk governance and internal control:

The board should be responsible for risk governance and should ensure that the
organization develops and executes a comprehensive and robust system of risk
management. The board should ensure the maintenance of a sound internal
control system

Principle 6 : Reporting and integrity:

The board should present a fair, balanced and understandable assessment of the
organization’s financial, environmental, social and governance position,
performance and outlook in its annual report and on its website.

Principle 7 : Audit:

Organizations should consider having an effective and independent internal

audit function that has the respect, confidence and cooperation of both the board
and the management. The board should establish formal and transparent
arrangements to appoint and maintain an appropriate relationship with the
organization’s auditors.

Principle 8 : Relations with share holders and other key shareholder:

The board should be responsible for ensuring that an appropriate dialogue takes
place among the organization, its shareholders and other key stakeholders. The
board should respect the interests of its shareholders and other key stakeholders
within the context of its fundamental purpose.

 Failure of Corporate Governance: A systemic failure of corporate

governance means the failure of the whole set of regulatory, market,
stakeholder, and internal governance. Businesses need to ensure they remain
disciplined, transparent, independent, accountable for their actions,
responsible, and fair. 

Ineffectiveness of corporate governance: There are many reasons why

corporate governance has been failing and these are because corporate
governance is still not being taken as a serious need in the corporate industry.
Some of the reasons why corporate governance is ineffective are:

The Board of Directors are not that effective: The board of directors and the
decisions that they take affect the company as well as the national economy.
The Board should not contain inefficient individuals who do not have sufficient
expertise in the area, as the decision they take and the quality of the decisions
that they take affect how good or bad the corporate governance of the company
is, the goal for every company is to have rights protected for those people who
are involved in the company.

Complex Process: Complex processes are needed so as to ensure that all the
processes that take place in the company are cannot be misused, but on the other
side, if there are complications even in the most intricate processes, it will be
difficult to solve, and if one process has faults in it, within no time all the other
processes that take place in the company also start to have faults.

Communication is poor: Poor communication is a factor for the

ineffectiveness of corporate governance, as while the decisions are being made
by the Board of the company, there is no communication to all the employees of
the company, effective communication is a must for corporate governance to be
effective.

“The most frequent challenge corporations face is finding out about things too
late—whether it’s the data breach, product quality failures, or ethical issues,”
says Simon Barker.

Not foreseeing Risks: Lot of people in companies are completely blind to the
possibility of risks and think that if they ignore the risks that arise it will
eventually go away which is not true, as a risk that is not taken care of at the
right time, will only worsen with time.

Improper culture followed in the company: This is a reason why corporate

governance is not proper. The culture that is followed in the company has a lot
of influence upon the decisions that are taken in the company, the only focus for
most countries are for profits only, but that should not be the case, corporate
governance is said to be good when the rights and interests are protected of the
parties affected.

Incapable of handling new technologies: When the Board handling the

company cannot adapt to the developing technology, the corporate governance
will not be efficient. Corporate governance requires people to be adaptable to
new technology as this will benefit the company as well as the people in the
company.
Capital of company is insufficient: Companies having insufficient capital
cannot have a proper corporate governance as it will be very difficult to
maintain the working of the company.

Evolution of corporate governance: The following theories elucidate the basis of

evolution of corporate governance: (a) Agency Theory (b) Shareholder Theory
(c) Stake Holder Theory (d) Stewardship Theory

(a) Agency Theory According to this theory, managers act as ‘Agents’ of the
corporation. The owners set the central objectives of the corporation. Managers
are responsible for carrying out these objectives in day-to-day work of the
company. Corporate Governance is control of management through designing
the structures and processes. In agency theory, the owners are the principals.
But principals may not have knowledge or skill for getting the objectives
executed. Thus, principal authorises the mangers to act as ‘Agents’ and a
contract between principal and agent is made. Under the contract of agency, the
agent should act in good faith. He should protect the interest of the principal and
should remain faithful to the goals. In modern corporations, the shareholdings
are widely spread. The management (the agent) directly or indirectly selected by
the shareholders (the Principals), pursue the objectives set out by the
shareholders. The main thrust of the Agency Theory is that the actions of the
management differ from those required by the shareholders to maximize their
return. The principals who are widely scattered may not be able to counter this
in the absence of proper systems in place as regards timely disclosures,
monitoring and oversight. Corporate Governance puts in place such systems of
oversight.

(b) Stockholder/shareholder Theory According to this theory, it is the

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

(c) Stakeholder Theory According to this theory, the company is seen as an

input-output model and all the interest groups which include creditors,
employees, customers, suppliers, local-community and the government are to be
considered. From their point of view, a corporation exists for them and not the
shareholders alone. The different stakeholders also have a self interest. The
interests of these different stakeholders are at times conflicting. The managers
and the corporation are responsible to mediate between these different
stakeholders interest. The stake holders have solidarity with each other. This
theory assumes that stakeholders are capable and willing to negotiate and
bargain with one another. This results in long term self interest. The role of
shareholders is reduced in the corporation. But they should also work to make
their interest compatible with the other stake holders. This requires integrity and
managers play an important role here. They are faithful agents but of all
stakeholders, not just stockholders. (d) Stewardship Theory The word ‘steward’
means a person who manages another’s property or estate. Here, the word is
used in the sense of guardian in relation to a corporation, this theory is value
based. The managers and employees are to safeguard the resources of
corporation and its property and interest when the owner is absent. They are like
a caretaker. They have to take utmost care of the corporation. They should not
use the property for their selfish ends. This theory thus makes use of the social
approach to human nature. The managers should manage the corporation as if it
is their own corporation. They are not agents as such but occupy a position of
stewards. The managers are motivated by the principal’s objective and the
behavior pattern is collective, pro-organizational and trustworthy. Thus, under
this theory, first of all values as standards are identified and formulated. Second
step is to develop training programmes that help to achieve excellence. Thirdly,
moral support is important to fill any gaps in values.
Module7: Corporate Governance and Other Stakeholders :

From a generic corporate governance perspective, companies are expected to

conduct business with integrity, due skill, care and diligence, with proper
management of conflicts of interests coupled with organisation and control of
affairs.11 Corporate governance allows for financial stability, integrity, investor
confidence, and capital growth through the interplay between a Company's
board of directors, management team, shareholders, and other stakeholders.12

Shareholders

Primarily, good corporate governance should ensure that both minority and
majority shareholders are treated equitably and their rights safeguarded.
Shareholders should have the right to elect board members, request changes to
the company's internal documents, and approve any extraordinary transactions
that the company may need to undertake.13 Shareholder participation and
equitable treatment of all shareholders are two key elements of good corporate
governance and therefore shareholders must always be given full and timely
information on their right to approve or otherwise participate in decisions
relating to corporate changes or other actions undertaken within the company,
including for example changes to the memorandum and articles of association
of a company, increases in share capital, voting rights, and procedures during
shareholder meetings, nomination and election of members of the board of
directors and information as to their remuneration, transfer of company assets
and shares, profit distribution, and other extraordinary transactions that may
take place.14

Additionally, shareholders should also be allowed to enquire and make

proposals with the board on certain aspects such as auditing, items to be placed
on general meeting agendas, resolutions, and other issues that may concern their
shareholder rights. Minority shareholders should also have a right to cooperate
with other shareholders to elect board members and propose items on the
agenda of board meetings. Naturally, such shareholder rights need to be
ascertained, subject to reasonable limitations for the smooth running of a
company. A company should maintain full transparency concerning
arrangements that allow certain shareholders to have control or influence that
might be disproportionate to their shareholding.15 To instil investor confidence,
good corporate governance practices should deter any abusive practices from
board members, corporate managers, or controlling shareholders, who try to use
the company to advance their interests. Timely redress, at reasonable costs,
should be ensured for shareholders to be able to seek remedial action when their
rights are infringed.

An important policy to be implemented for effective corporate governance is

the conflict of interest policy, addressing any conflict of interests that might
arise within a company and also determining how related-party transactions
should be monitored, regulated, and disclosed, and this to avoid and curtail any
abusive behaviour, insider trading, and market manipulation.

Employees

Apart from shareholders, other company stakeholders have a role in ensuring

effective corporate governance; in particular employees. Policies and
procedures of companies should encourage constant dialogue between the
company and its employees. Employees must be well informed, allowed to
negotiate, and must be able to give their feedback and opinions on important
decisions. The MFSA's Corporate Governance Code requires Boards to
encourage active employee cooperation for the purposes of contributing to an
entity's growth and success.16 Employees should also be allowed to freely voice
concerns to board members and authorities, regarding any company practices
which may breach policies, laws, or ethics. For such a right to be effective
employees should be assured that they are protected at law, and redress for any
right violation should be available to them.17

Creditors

Company creditors are also important stakeholders within the corporate

governance framework, such that their rights should be protected and duly
enforced. In this respect, insolvency proceedings and creditor right enforcement
proceedings should be effective and available. The importance of creditors
stems from the fact that the volume and type of credit they would afford
companies would be highly dependent on whether their rights are protected and
enforced.18
Auditors

Company auditors must be given access to information, including accounting

records, accounts, and general meeting communications and notices, should be
entitled to ask questions and require explanations, and must be allowed to attend
and participate in general meetings.

Compliance Officers and Risk Managers

Compliance Offisd; cers and Risk Managers (where applicable) play a vital
role in maintaining good corporate governance as they monitor and assess
compliance, conduct tests, ensure policy implementation, manage risks and
report accordingly. Through Compliance monitoring plans compliance officers
assist companies in monitoring their effective implementation and compliance
with legal and regulatory obligations.19 For Compliance Officers and Risk
Managers to conduct their functions properly companies would need to provide
them with the necessary resources and information.20 Moreover, companies
must always ensure that their Compliance Officers and Risk Managers where
applicable; have sufficient knowledge, skills and experience and are entirely
independent of the performance of the services and activities which they are
tasked to monitor.21 Finally, the manner in which Compliance Officers and Risk
Managers are remunerated should not compromise their objectivity and
independence.22
Module no 8 :Application of Ethics in Functional Areas of Business

Ethical issues can arise in various functional areas of a business such as

marketing, research and development, HRM, production and finance. Ethical
issues in all these functional areas must be controlled or coordinated by the
chief executive officer (CEO) of the enterprise. Figure 4.1 shows the main
functional areas of a business that usually give rise to ethical issues.

Ethics in marketing:

Marketing is a technique that is used to attract and persuade customers.

Marketing provides a way in which a product is sold to the target audience.
Marketing is a management process that identifies, anticipates and supplies
consumer requirements efficiently and effectively. The main aim of marketing
is to make customers aware of the products and services. It also focuses on
attracting new customers and keeping existing customers interested in the
product. The marketing department consists of various subdivisions, such as
sales, after-sales service and marketing and research.

In the field of sales, the following ethical issues require safeguards against
unethical behaviour:
 Not supplying the products made by the company as per the order
 Not accepting responsibility for the defective product
 Not giving details about the hidden costs, such as transportation
cost, while making the contract with the client
 Changing the specifications of the product without giving any prior
information to the customer
 Changing the terms of the business without taking any approval from
the client
 Delaying the delivery of the goods without giving any proper reason
  Treating two customers differently
 Not providing the after sales service as per the contract
 Selling the same product at different prices to different customers
Advertising and promotion provide the means for communicating with the
customer. In the field of advertising and promotion, the following are
examples of unethical communication practices:
 Making false commitments to the customers about the benefits of
the product
 Supplying products that are different from those that are advertised
 Giving wrong prices to the customers during advertising
 Not giving the promised gift in the promotional campaign
 Hiding major flaws of the product
 Providing wrong testimonials about the product to prospective
customers
 Not providing the advertised service to the customers as a part of
the promotional plans
 Increasing the price of the product before starting its promotional
campaign
 Making false references about the competitive products

While selling the product to the customer, a company provides some extended
features or facilities along with the product, such as after-sales service. These
facilities are provided to increase the sale of the product. In the field of after-
sales service, the following ethical issues require safeguards against unethical
behaviour:
 Using below-standard material for the service and charging for
relatively better material from the customer
 Using outmoded service equipments which can be harmful for the
products during service
 Not taking the service calls if the location is not easy to reach, while
free service was promised before the sale of the product
 Making only temporary adjustment in the product, which can last only
for a short time or to make the product useful for the time being
 Not keeping proper service records of major products for future use,
as they can help in easy diagnosis of problem
 Ethical Issues in Advertising
 In the advertising field, the ethical issues include decisions on what
business and market a corporate organization should enter. Another
ethical issue can be the decision on what product should be provided by
a corporate organization to its customers. Though it is important that
 ethical standards be provided for the advertising of a particular product,
it is not easy to establish common ethical standards which are agreed
upon by different organizations. According to Ferrel and Gresham,
‘There is no clear consensus about ethical conduct; that ethical
standards are neither absolute nor constant; and that attempts to
determine whether particular marketing activities are ethical or non-
ethical cannot produce a definitive code of marketing behaviour’.
 However, there is a general view also related to ethics in advertising.
This view is that advertising practices, such as deceptive advertising,
price fixing, holding of product test data, and falsifying research
behaviour in the market are unethical practices.
 In the advertising field, marketing promotion is the area where a large
amount of public scrutiny takes place. Media persons report
immediately any lack in ethical standards while selling products, in
public relations and advertising. Organizations follow various methods
that are unethical while advertising for their products and services.
These methods are:
 Ambiguity
 Concealed facts
 Exaggeration
 Psychological appeal

 Ambiguity
 Ambiguous advertisements are mostly deceiving for customers.
Advertisements become ambiguous when they are wrongly interpreted
and also with, the use of words through which organizations can avoid
making direct statements. For example, you can consider the word
‘help’. This word is used by organizations to ambiguously advertise
their products. It can be used in the following ways in advertisement:
 Help us keep young
 Help you improve your complexion
 Help prevent cavities
 Help keep our house insect free
 Organizations must provide clear information about products even
though their advertisements can be interpreted differently by
individuals. Ambiguity in advertisements can affect the health, loyalty
and expectations of people who will be purchasing the product that has
been advertised.

 Concealed Facts
 Organizations can conceal information related to a product that may
result in less selling of that product thereby resulting in loss. The
advertising practice of concealing facts is unethical because it, in a way,
 allows the exploitation of people. There are mainly two considerations
regarding advertisements that force organizations to conceal facts. The
first consideration is that information that will help in selling a product
in the best way should be provided. The second consideration is that the
information about a product should be provided in such a manner that:
 Individuals, who will be purchasing the product do not feel that false
promises have been made to them and that they have been let down.
 Advertisements related to a product are able to avoid objections from
agencies that are responsible for monitoring advertising.
 Organizations may conceal facts that may be important in fulfilling the
needs of customers. This way the organizations may be exploiting the
customers and causing serious health injuries to them. Customers may
also not be able to obtain the products of their choice.

 Exaggeration
 Organizations may mislead the customers by providing exaggerated
information in the advertisements of their products. The exaggerated
information is information that is not supported by evidence.
Organizations can exaggerate information in advertisements by using
superlative phrases. For example, an organization manufacturing pain
relief ointments, can exaggerate information by stating that a pain
reliever provides extra pain relief. The use of these superlatives may not
cause any harm to customers but may be misleading sometimes. For
example, if a washing powder manufacturing organization uses the
phrase, ‘best loved by housewives’ then no harm may be caused to
consumers of washing powders.

Ethics in finance

Finance is an important element of an organization and it helps in its growth

and development. Finance plays an important role in making resources
available in an organization, such as man, machine, material, market and
money. The finance manager of the firm is responsible for arranging the
finances for the firm. The finance manager can raise funds from the following
two sources:
 Internal Sources: Internal sources means the owner’s own funds that
are invested as equity in the organization. In case of small
organizations, the owner’s contribution in terms of equity is low.
Therefore, large amount of money is raised from external sources. The
entrepreneur can raise finance internally from various sources:
o Deposits and loans given by owner
o Personal loan from provident fund and life insurance policy
 o Funds accumulated by the retention of profits
o Ploughing back of profits
 External Sources: External sources means the various financial
institutions from where entrepreneurs can raise funds, such as fixed
capital, commercial banks and development banks. The entrepreneur
can raise finance by:
o Borrowing money from friends and relatives
o Borrowing from financial institutions

Ethics in production:

In order to survive in the competitive sphere organizations try to reduce the

costs involved in production processes. This cost efficiency is sometimes
achieved at the cost of quality. Poor processes and technology is used to keep
the cost down, this is especially true for small players who cannot afford
economies of scale. Having said this there are also examples of industry giants
that compromised on certain production processes, cola companies make up for
a good example.

All the production functions are governed by production ethics but there are
certain that are severely harmful or deleterious which need to be monitored
continuously. The following are worth mentioning:

There are ethical problems arising out of use of new technologies that are
deleterious to health, safety and sustainable growth
There are certain processes involved in the production of goods and a slight
error in the same can degrade the quality severely. In certain products the
danger is greater i.e. a slight error can reduce the quality and increase the danger
associated with consumption or usage of the same exponentially. The dilemma
therefore lies in defining the degree of permissibility, which in turn depends on
a number of factors. Bhopal gas tragedy is one example where the poisonous
gas got leaked out due to negligence on the part of the management.

Usually many manufactures are involved in the production of same good. They
may use similar or dissimilar technologies for the same. Setting a standard in
case of dissimilar technologies is often very difficult. There are many other
factors that contribute to the dilemma, for example, the involvement of the
manpower, the working conditions, the raw material used etc.
Social perceptions also create an impasse sometimes. For example the use of
some fertilizer by cola companies in India recently created a national debate.
The same cold drinks which were consumed till yesterday became noxious
today because of a change in the social perception that the drinks are not fit for
consumption.

Ethics in HRM

Of all the organisational issues or problems, ethical issues are the most difficult
ones to handle or deal with. Issues arise in employment, remuneration and
benefits, industrial relations and health and safety.

Cash and Compensation Plans

There are ethical issues pertaining to the salaries, executive perquisites and the
annual incentive plans etc. The HR manager is often under pressure to raise the
band of base salaries. There is increased pressure upon the HR function to pay
out more incentives to the top management and the justification for the same is
put as the need to retain the latter.

Further ethical issues crop in HR when long term compensation and incentive
plans are designed in consultation with the CEO or an external consultant.
While deciding upon the payout there is pressure on favouring the interests of
the top management in comparison to that of other employees and stakeholders.

Race, gender and Disability

In many organisations till recently the employees were differentiated on the
basis of their race, gender, origin and their disability. Not anymore ever since
the evolution of laws and a regulatory framework that has standardised
employee behaviours towards each other.

In good organisations the only differentiating factor is performance! In addition

the power of filing litigation has made put organisations on the back foot.
Managers are trained for aligning behaviour and avoiding discriminatory
practices.
Employment Issues
Human resource practitioners face bigger dilemmas in employee hiring. One
dilemma stems from the pressure of hiring someone who has been
recommended by a friend, someone from your family or a top executive.

Yet another dilemma arises when you have already hired someone and he/she is
later found to have presented fake documents. Two cases may arise and both are
critical. In the first case the person has been trained and the position is critical.
In the second case the person has been highly appreciated for his work during
his short stint or he/she has a unique blend of skills with the right kind of
attitude. Both the situations are sufficiently dilemmatic to leave even a seasoned
HR campaigner in a fix.

Privacy Issues
Any person working with any organisation is an individual and has a personal
side to his existence which he demands should be respected and not intruded.
The employee wants the organisation to protect his/her personal life.

This personal life may encompass things like his/her religious, political and
social beliefs etc. However certain situations may arise that mandate snooping
behaviours on the part of the employer.

For example, mail scanning is one of the activities used to track the activities of
an employee who is believed to be engaged in activities that are not in the larger
benefit of the organisation.

Similarly there are ethical issues in HR that pertain to health and safety,
restructuring and layoffs and employee responsibilities. There is still a debate
going on whether such activities are ethically permitted or not. Layoffs, for
example, are no more considered as unethical as they were thought of in the
past.
Module 09 Corporate Social Responsibility :

What Is Corporate Social Responsibility (CSR)?

Corporate social responsibility (CSR) is a self-regulating business model that
helps a company be socially accountable to itself, its stakeholders, and the
public. By practicing corporate social responsibility, also called corporate
citizenship, companies can be conscious of the kind of impact they are having
on all aspects of society, including economic, social, and environmental.
Corporate social responsibility is a broad concept that can take many forms
depending on the company and industry. Through CSR programs,
philanthropy, and volunteer efforts, businesses can benefit society while
boosting their brands.

or a company to be socially responsible, it first needs to be accountable to itself

and its shareholders. Companies that adopt CSR programs have often grown
their business to the point where they can give back to society. Thus, CSR is
typically a strategy that's implemented by large corporations. After all, the
more visible and successful a corporation is, the more responsibility it has to
set standards of ethical behavior for its peers, competition, and industry.

Small and midsize businesses also create social responsibility programs,

although their initiatives are rarely as well-publicized as those of larger
corporations.
Types of Corporate Social Responsibility
In general, there are four main types of corporate social responsibility. A
company may choose to engage in any of these separately, and lack of
involvement in one area does not necessarily exclude a company from being
socially responsible.

Environmental Responsibility

Environmental responsibility is the pillar of corporate social responsibility

rooted in preserving mother nature. Through optimal operations and support of
related causes, a company can ensure it leaves natural resources better than
before its operations. Companies often pursue environmental stewardship
through:

 Reducing pollution, waste, natural resource consumption, and emissions

through its manufacturing process.
 Recycling goods and materials throughout its processes including
promoting re-use practices with its customers.
 Offsetting negative impacts by replenishing natural resources or
supporting causes that can help neutralize the company's impact. For
example, a manufacturer that deforests trees may commit to planting the
same amount or more.
 Distributing goods consciously by choosing methods that have the least
impact on emissions and pollution.
 Creating product lines that enhance these values. For example, a
company that offers a gas lawnmower may design an electric
lawnmower.

Ethical Responsibility

Ethical responsibility is the pillar of corporate social responsibility rooted in

acting in a fair, ethical manner. Companies often set their own standards,
though external forces or demands by clients may shape ethical goals. Instances
of ethical responsibility include:

 Fair treatment across all types of customers regardless of age, race,

culture, or sexual orientation.
 Positive treatment of all employees including favorable pay and benefits
in excess of mandated minimums. This includes fair employment
consideration for all individuals regardless of personal differences.
 Expansion of vendor use to utilize different suppliers of different races,
genders, Veteran statuses, or economic statuses.
 Honest disclosure of operating concerns to investors in a timely and
respectful manner. Though not always mandated, a company may choose
to manage its relationship with external stakeholders beyond what is
legally required.

Philanthropic Responsibility

Philanthropic responsibility is the pillar of corporate social responsibility that

challenges how a company acts and how it contributes to society. In its
simplest form, philanthropic responsibility refers to how a company spends its
resources to make the world a better place. This includes:
  Whether a company donates profit to charities or causes it believes in.
 Whether a company only enters into transactions with suppliers or
vendors that align with the company philanthropically.
 Whether a company supports employee philanthropic endeavors through
time off or matching contributions.
 Whether a company sponsors fundraising events or has a presence in the
community for related events.

Financial Responsibility

Financial responsibility is the pillar of corporate social responsibility that ties

together the three areas above. A company make plans to be more
environmentally, ethically, and philanthropically focused; however, the
company must back these plans through financial investments of programs,
donations, or product research. This includes spending on:

 Research and development for new products that encourage

sustainability.
 Recruiting different types of talent to ensure a diverse workforce.
 Initiatives that train employees on DEI, social awareness, or
environmental concerns.
 Processes that might be more expensive but yield greater CSR results.
 Ensuring transparent and timely financial reporting including external
audits.

 
Some corporate social responsibility models replace financial responsibility
with a sense of volunteerism. Otherwise, most models still include
environmental, ethical, and philanthropic as types of CSR.

Benefits of Corporate Social Responsibility

As important as CSR is for the community, it is equally valuable for a
company. CSR activities can help forge a stronger bond between employees
and corporations, boost morale, and aid both employees and employers in
feeling more connected to the world around them. Aside from the positive
impacts to the planet, here are some additional reasons businesses pursue
corporate social responsibility.

Brand Recognition

According to a study published in the Journal of Consumer Psychology,

consumers are more likely to act favorably towards a company that has acted to
benefit its customers as opposed to companies that have demonstrated an
ability to delivery quality products.3 Customers are increasingly becoming
more aware of the impacts companies can have on their community, and many
now base purchasing decisions on the CSR aspect of a business. As a company
engages more in CSR, they are more likely to receive favorable brand
recognition.

Investor Relations

In a study by Boston Consulting Group, companies that are considered leaders

in environmental, social, or governance matters had an 11% valuation premium
over their competitors.4 For companies looking to get an edge and outperform
the market, enacting CSR strategies tends to positively impact how investors
feel about an organization and how they view the worth of the company.

Employee Engagement

In yet another study by professionals from Texas A&M, Temple, and the
University of Minnesota, it would found that CSR-related values that align
firms and employees serve as non-financial job benefits that strengthen
employee retention.5 Works are more likely to stick around a company that
they believe in. This in turn reduces employee turnover, disgruntled workers,
and the total cost of a new employee.

Risk Mitigation

Consider adverse activities such as discrimination against employee groups,

disregard for natural resources, or unethical use of company funds. This type of
activity is more likely to lead to lawsuits, litigation, or legal proceeds where the
company may be negatively impacted financially and be captured in headline
news. By adhering to CSR practices, companies can mitigate risk by avoiding
troubling situations and complying with favorable activities.

The following arguments favour corporate social responsibility:

1. Protect the interests of stakeholders:

Labour force is united into unions which demand protection of their rights
from business enterprises. To get the support of workers, it has become
necessary for organisations to discharge responsibility towards their
employees.

Caveat emptor (‘let the buyer beware’), no more holds true. Consumer today
is the kingpin around whom all marketing activities revolve. Consumer does
not buy what is offered to him. He buys what he wants. Firms that fail to
satisfy consumer needs will close down sooner or later. Besides, there are
consumer redressal cells to protect consumers against anti-consumer
activities. Consumer sovereignty has, thus, forced firms to assume social
responsiveness towards them.

Firms that assume social responsibilities may suffer losses in the short-run
but fulfilling social obligations is beneficial for long-run survival of the
firms. The short-term costs are, therefore, investments for long-run
profitability.

2. Long-run survival:

Business organisations are powerful institutions of the society. Their

acceptance by the society will be denied if they ignore social problems. To
avoid self-destruction in the long-run, business enterprises assume social
responsibility.

3. Self-enlightenment:

With increase in the level of education and understanding of businesses that

they are the creations of society, they are motivated to work for the cause of
social good. Managers create public expectations by voluntarily setting and
following standards of moral and social responsibility.

They ensure paying taxes to the Government, dividends to shareholders, fair

wages to workers, quality goods to consumers and so on. Rather than
legislative interference being the cause of social responsibility, firms assume
social responsibility on their own.

4. Avoids government regulation:

Non-conformance to social norms may attract legislative restrictions.

Government directly influences the organisations through regulations that
dictate what they should do and what not. Various agencies monitor business
activities.

For example, Central Pollution Control Board takes care of issues related to
environmental pollution, Securities and Exchange Board of India considers
issues related to investor protection, Employees State Insurance Corporation
promotes issues related to employees’ health etc. Organisations that violate
these regulations are levied fines and penalties. To avoid such interventions,
organisations have risen to the cause of social concerns.

5. Resources:
Business organisations have enormous resources which can be partly used
for solving social problems. Businesses are the creation of society and must
work in the best interest of society, both economically and socially.

6. Professionalisation:

Management is moving towards professionalism which is contributing to

social orientation of business. Increasing professionalism is causing
managers to have formal management education and qualifications.
Managers specialise in planning, organising, leading and controlling through
their knowledge and subscribe to the code of ethics established by a
recognised body.

The ethics of profession bind managers to social values and growing concern
for society. Thus, there is increasing awareness of social responsibility. To
grow in the environment of dynamism and challenge, business concern does
not decide whether or not to discharge social responsibilities but decides
how much social responsibility to discharge. A good business anticipates
developments and acts in accordance with the currently conceived social
responsibilities to achieve the future targets.

Arguments against CSR:

Corporate social responsibility is limited on the following grounds:

1. Business is an economic activity:

It is argued by the opponents of social responsibility that basic function of a

business enterprise is to look into economic viability of its operations. It is
for the Government to look after interests of the society. The prime
responsibility of assuming social responsibility should, therefore, be of the
Government and not of the business enterprises.

2. Quantification of social benefits:

What measures social responsibility and to what extent should a business

enterprise be engaged in it, what amount of resources should be committed
to the social values, whose interest should hold priority over others
(shareholders should be preferred over suppliers or vice versa) and numerous
other questions are open to subjective considerations, which make social
responsibility a difficult task to be assumed.

3. Cost-benefit analysis:
Any social-benefit programme where initial costs exceed the benefits may
not be taken up by enterprises even in the short-run.

4. Lack of skill and competence: Professionally qualified managers may not

have the aptitude to solve the social problems.

5. Transfer of social costs:

Costs related to social programmes are adjusted by the business

concerns in the following ways:

(a) High prices:

The costs are passed to consumers by increasing prices of goods and

services.

(b) Low wages:

If managers maintain the level of prices, the social costs may be reflected in
reduction of wages.

(c) Low profits:

If wages are stabilized, profits would be reduced, which will lower dividends
to the shareholders. Low profits will reduce managers’ desire to further
engage in corporate social responsibility

6. Sub-optimal utilisation of resources:

If scarce resources are utilised for social goals, this would violate the very
purpose of existence of an organisation.
Module 10 Ethical Issues in Global Business
A multinational corporation (MNC) is a company that operates in its home
country, as well as in other countries around the world. It maintains a
central office located in one country, which coordinates the management of all
its other offices, such as administrative branches or factories.

Characteristics of a Multinational Corporation

The following are the common characteristics of multinational corporations:

1. Very high assets and turnover

To become a multinational corporation, the business must be large and must

own a huge amount of assets, both physical and financial. The company’s
targets are high, and they are able to generate substantial profits.

2. Network of branches

Multinational companies maintain production and marketing operations in

different countries. In each country, the business may oversee multiple offices
that function through several branches and subsidiaries.

3. Control

In relation to the previous point, the management of offices in other countries is

controlled by one head office located in the home country. Therefore, the source
of command is found in the home country.

4. Continued growth

Multinational corporations keep growing. Even as they operate in other

countries, they strive to grow their economic size by constantly upgrading and
by conducting mergers and acquisitions.

5. Sophisticated technology

When a company goes global, they need to make sure that their investment will
grow substantially. In order to achieve substantial growth, they need to make
use of capital-intensive technology, especially in their production and marketing
activities.
6. Right skills

Multinational companies aim to employ only the best managers, those who are
capable of handling large amounts of funds, using advanced technology,
managing workers, and running a huge business entity.

7. Forceful marketing and advertising

One of the most effective survival strategies of multinational corporations is

spending a great deal of money on marketing and advertising. This is how they
are able to sell every product or brand they make.

8. Good quality products

Because they use capital-intensive technology, they are able to produce top-of-
the-line products.

Reasons for Being a Multinational Corporation

There are various reasons why companies want to become multinational

corporations. Here are some of the most common motivations:

1. Access to lower production costs

Setting up production in other countries, especially in developing economies,

usually translates to spending significantly less on production costs. Though
outsourcing is a way of achieving the objective, setting up manufacturing plants
in other countries may be even more cost-efficient.

Due to their large size, MNCs can take advantage of economies of scale and
grow their global brand. The growth is done through strategic
manufacturing/service placement, which allows the corporation to take
advantage of undervalued services across the globe, more efficient and
inexpensive supply chains, and advanced technological/R&D capacity.

2. Proximity to target international markets

It is beneficial to set up business in countries where the target consumer market

of a company is located. Doing so helps reduce transport costs and gives
multinational corporations easier access to consumer feedback and information,
as well as to consumer intelligence.
International brand recognition makes the transition from different countries
and their respective markets easier and decreases per capita marketing costs as
the same brand vision can be applied worldwide.

3. Access to a larger talent pool

Multinational corporations are also known to hire only the best talent from
around the world, which allows management to provide the best technical
knowledge and innovative thinking to their product or service.

4. Avoidance of tariffs

When a company produces or manufactures its products in another country

where they also sell their products, they are exempt from import quotas and
tariffs.

Models of MNCs

The following are the different models of multinational corporations:

1. Centralized

In the centralized model, companies put up an executive headquarters in their

home country and then build various manufacturing plants and production
facilities in other countries. Its most important advantage is being able to avoid
tariffs and import quotas and take advantage of lower production costs.

2. Regional

The regionalized model states that a company keeps its headquarters in one
country that supervises a collection of offices that are located in other countries.
Unlike the centralized model, the regionalized model includes subsidiaries and
affiliates that all report to the headquarters.

3. Multinational

In the multinational model, a parent company operates in the home country and
puts up subsidiaries in different countries. The difference is that the subsidiaries
and affiliates are more independent in their operations.
Advantages of Being a Multinational Corporation

There are many benefits of being a multinational corporation including:

1. Efficiency

In terms of efficiency, multinational companies are able to reach their target

markets more easily because they manufacture in the countries where the target
markets are. Also, they can easily access raw materials and cheaper labor costs.

2. Development

In terms of development, multinational corporations pay better than domestic

companies, making them more attractive to the local labor force. They are
usually favored by the local government because of the substantial amount of
local taxes they pay, which helps boost the country’s economy.

3. Employment

In terms of employment, multinational corporations hire local workers who

know the culture of their place and are thus able to give helpful insider feedback
on what the locals want.

4. Innovation

As multinational corporations employ both locals and foreign workers, they are
able to come up with products that are more creative and innovative.

Foreign Direct Investment

Foreign direct investments are prevalent within multinational corporations. The

investments occur when an investor or company from one country makes an
investment outside the country of operation.
Foreign investments most often occur when a foreign business is established or
bought outright. It can be distinguished from the purchase of an international
portfolio that only contains equities of the company, rather than purchasing
more direct control.

Reasons for Being a Multinational Corporation

There are various reasons why companies want to become multinational

corporations. Here are some of the most common motivations:

1. Access to lower production costs

Setting up production in other countries, especially in developing economies,

usually translates to spending significantly less on production costs. Though
outsourcing is a way of achieving the objective, setting up manufacturing plants
in other countries may be even more cost-efficient.

Due to their large size, MNCs can take advantage of economies of scale and
grow their global brand. The growth is done through strategic
manufacturing/service placement, which allows the corporation to take
advantage of undervalued services across the globe, more efficient and
inexpensive supply chains, and advanced technological/R&D capacity.

2. Proximity to target international markets

It is beneficial to set up business in countries where the target consumer market

of a company is located. Doing so helps reduce transport costs and gives
multinational corporations easier access to consumer feedback and information,
as well as to consumer intelligence.

International brand recognition makes the transition from different countries

and their respective markets easier and decreases per capita marketing costs as
the same brand vision can be applied worldwide.

3. Access to a larger talent pool

Multinational corporations are also known to hire only the best talent from
around the world, which allows management to provide the best technical
knowledge and innovative thinking to their product or service.
4. Avoidance of tariffs

When a company produces or manufactures its products in another country

where they also sell their products, they are exempt from import quotas and
tariffs.