Modules 4,7,8,9,10
Modules 4,7,8,9,10
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.
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.
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.
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 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.
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.
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.
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:
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.
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.
“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.
(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.
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
Employees
Creditors
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
Ethics in marketing:
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
Ethics in production:
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.
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.
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 :
Environmental Responsibility
Ethical Responsibility
Philanthropic Responsibility
Financial Responsibility
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.
Brand Recognition
Investor Relations
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
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:
3. Self-enlightenment:
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:
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.
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.
If managers maintain the level of prices, the social costs may be reflected in
reduction of wages.
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
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.
2. Network of branches
3. Control
4. Continued growth
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.
Because they use capital-intensive technology, they are able to produce top-of-
the-line products.
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.
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
Models of MNCs
1. Centralized
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
1. Efficiency
2. Development
3. Employment
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.
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.
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