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Introduction to business ethicsEthics can be defined as the science of character of a person

expressed as right or wrong conduct of action.

Nature of Ethics Ethics is a subject that deals with human being. The question of ethicsarises, as human beings are associated with values and morals.

Experts were of the opinion that ethics is more of a science than an art

Ethics is normative science Ethics deals with human conduct that is voluntary and not forced

Objective of Ethics

Ethics deals with human behavior. It assesses any act or decision taken byan individual is moral or not To establish moral standards and norms of behavior

To judge human behavior based on these standards and norms

To asses a human behavior and express an opinion about it

To set standard / code for moral behavior and make recommendationsabout desired behavior

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Business Ethics

Business can be defined as a primary economic institution throughwhich people in modern society carry on the task of producing,distributing good and services.While business ethics refers to the application of ethical judgment to

business activities.

Morality

We can define morality as the standards that an individual or agroup has about what is right and wrong, or good or evil.

Moral Standards The norms about the kind of actions believedto be morally right and wrong as well as values placed on the kind

of objects believed to be morally good and morally bad.Exam. Always tell the truth, It is wrong to kill innocent people

Moral Values can usually can be expressed as statementsdescribing objects or features that have worth such as Honesty isgood and Injustice is bad.

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KPMGS 1999 Business Ethics Report (Representing 800top Indian Companies)

The report states that only 14% of Indian companies presently have anombudsman on their rolls, and merely 40% operate a grievance cell foremployees (compared to 30% and 65% respectively in the US). TheEthical violations that came up in the KPMG survey are as follows:

Areas Percentage of respondents

Misuse of confidentialinformation 71%

Poor quality of goodsandservices

rendered

55%

Insider Trading 48%

Receiving gifts or favors from suppliers 48%

Promoting conflicting self-business

interests

47%

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Nature ofBusiness Ethics -Overtethical problems deals with bribery, theft, collusion etcCovertethical situations occur in corporate merger, acquisition,

marketing and personnel policies, capital investment etc.

Characteristics of ethical decisions in business

Business ethics and profits

Relationships between business and ethicsMoral structure

The Unitarian View of ethicsBusiness

Moral Ethics

The Separatist View of ethics(Adam Smith & Milton Friedman)

Business Ethics

Society

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The Integration View of Ethics (Talcot Parsons)

Government Law

Business Morality & Ethics

Market Systems Business Ethics Society

Stages of ethical consciousness Stage 6 - Corp. Citizenship

in businessStage 5 - Stakeholder concept

Stage 4 - Profit maximizationin the long-term

Stage 3 - Profit maximizationin the short-term

Stage 2 - Anything for profit

Need for business ethics Stage 1 - Law of Jungle

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Stakeholders and their expectations

Stakeholders Expectations

Primary Secondary

Owners Financial returns Added value Employees Pay Work satisfactions Customers Supply of goods Quality

and services

Creditors Credit worthiness Security

Suppliers Payment Long term relationships

Community Safety and security Contribution to the community

Government Compliance Improved competitiveness

Standards and Values Clutterbucks institutional and control oriented approach

Drummond and Carmichaels personalized developmentapproach

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Clutterbucks approach

Set a clear example

Publish a code of ethics

Use reward and punishment mechanism

Include ethics in recruitment criteria Reinforce policies through training and development

Provide mechanism for negotiating concerns

Establish openness and transparency into decisionmaking processes

Provide feedback

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Carmichael and Drummonds approach

Acknowledge the personal dimension to ethical behavior

Monitor symptoms of personal, ethic related stress

Analyze feelings about venture and its activities - link

analysis to diagnosis of problems

Draw up personal and corporate ethics checklist

Explain your ground - rules to others

Set up systems of justice and reinforce these throughcontract and ethics statements

Communicate ethics position

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Importance of Ethics in BusinessEthical Theories

Ethics is the field of enquiry. Morality is the object of that enquiry, the code

or code of behavior acceptable within a particular group at a particular time.

Metaethics can be defined as the study of origin and meaning of ethicalconcepts

Metaethcis deals with

> Metaphysical issues, question existence of moral values in humans ortheir human conventions

> Psychological issues question the psychological basis of moral actions

> Linguistic issues deals with meaning of key moral terms we use

Normative ethics is that branch of ethics that guides human conduct

which must be> Prescriptive

> Universal

> Overriding

> Public

>P

ractical Applied Ethics DEALS WITH CONTROVERSIAL MORAL ISSUES

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There are three set of normative ethics, each with own set of moral principles

Utilitarianism :Teleological Ethical Theory is also called ConsequentialistTheory

Teleological theories hold that *an action is considered morally correct ifthe consequences of that action are more favorable than unfavorable.

Draw back - GOOD, BAD, RIGHT & WRONG

Three definitions of good gives a different consequentialist moral theory

> Egoism *only to the individualperforming the action

> Utilitarianism * to everyone

>Altruism *to everyone except the individual

Universalism:Deontological Ethical Theory

> Duties to God, including honoring him and praying to him

> Duties to oneself includes preserving ones life and sharing happiness

> Duties to others, including family duties, social duties and political duties.

Virtue may be defined as any disposition of character one desires for self andalso for others.

Virtue ethics emphasizes character development rather than articulation of

abstract moral principles that guide actions

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Universalism or Utilitarianism cannot be used to judge all moral actions under

all circumstances. Hence two modern ethical systems have been developed,

based more upon values than principles.

1) Distributive justice (John Rawls) is explicitly based upon the primacy ofsingle value: Justice.

Theory of Justice attempts to solve the problem of distributive justice byutilizing the device of the social contract.

2) Personal library is an ethical systems proposed by Robert Nozick is basedupon a single value, Liberty.

Liberty is thought to be the first requirement of society

Lockes Theory of Rights Rights can be defined as something towhich one has a just claim: as a

A - Power or privilege to which one is justly entitledB i) the interest that one has a piece of property often used as plural

ii) plural: the property interest possessed under law or custom andagreement in an intangible thing especially of a literary and artistic nature

iii) something one may claim as due.

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Ethical organization An overview

Judging the ethical nature of an organization

Theory of corporate moral excellence> Espoused values

> Values in practice

Michael Hoffmans three types of corporate culture

- Basic values, attitudes and belief of the organization

- Organizational goals, policies, structure, strategies that areshaped by

the values, attitude and belief prevalent in the organization

- Organizational procedures and processes

Ethics and stakeholders theory

Ethics and corporate governance

COPORATE CODE

The development of corporate code

Implementation of corporate code

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Law and Ethics Law can be defined as a consistent set of universal rulesthat are widely published, generally accepted, and usually enforced.

Characteristics are Consistent Universal Published Accepted Enforced

Relationships between the Law and Moral Standards

Formation of law Individual processesFormation of law Group processesFormation of law Social processesFormation of law Political processes

Value orientation of the firm

The important aspects that managers and entrepreneurs have to consider andwhich are core to their activities are: Ensuring proper systems of corporate ethics and values in enterprise Definite understanding of questions related to compliance Serving the community by looking into the needs of economically and socially

disadvantages

B

ringing products that are environmentally friendly

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Framework of ethical decision making - Multiple Analysis

Economic Analysis - the underlying belief is that a market economy hasa limited number of resources and when consumers are supplied with highest

quality goods at the lowest costs, and then those resources are used

effectively and efficiently.

Legal Analysis - the underlying belief is that a democratic society canestablish its own rules. If people and organization follow these rules, then

members of the society will be treated as justly as possible.

Ethical Analysis - the underlying belief is that is all men and women in asociety acted on the same principles of either beneficial or consistency, then

members of that society would treated as fairly as possible.

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Market system

The right to own and control private property

Freedom of choice in buying and selling of goods and services Accesses to quick, reliable and precise market information

Implication ofUnethical behavior in Market system

Behavior Impact on Decision Maker Likely result of behavior

Coercion Fear of harm Increased cost

Alter decision choice Reduce product or service quality

Deceptive False impression Reduce satisfaction

information After decision choice

Theft Lose resources Increased costs or eliminate

product or service

Bribery Unearned personal gain Increase cost

After decision choice Reduced product or service quality

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Importance of trust in business> Dependability> Predictability

> Faith

Importance of unethical behavior on trust in businessrelations

Supplier relations Customer relations

Employee relations

Integrate Social Contract Theory Hypernorms are universal norms that apply equally to all individuals

Macro social contracts - provides global norms

Micro social contracts - are developed for a community

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orporate Social Responsibility - A Historical Perspective

Keith Davis defined Social Responsibility as Social responsibilities refer tobusinessmans decisions and actions taken for reasons at least partially

beyond the firms direct economic or technical interest.- Socio- economic obligation

- Socio-human obligation

Historical Perspective

The Industrial Revolution 1700-1900

The first Industrial Revolution:Textiles and Steam: 1772-18301712: The Newcomen steam engine

1733: John Kay invents the flying shuttle

1764: James Hargreaves invents the spinning jenny.

1769: Richard Arkwright patents the water frames. James Watt patents aseries of improvements on Newcomen engine making it more efficient.

1779: Samuel Crompton perfects the spinning mule

1785: Edmond Cartwright patents a power loom

1793: Eli Whitney patents the cotton gin

1807: Robert Fulton begins steamboat service on the Hudson river

1830: George Stephenson begins rail service between Liverpool and LondonCont.

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The spread of the industrial revolution: 1830 - 18751840: Samuel Cunard begins transatlantic steamship service1856: Henry Bessemer develops the Bessemer converter1859: The first commercial oil well is drilled in Pennsylvania1866: The Siemens brothers improved steel making by developing open hearth

furnace

The second industrial revolution: Electricity and Chemicals: 1875-19051836: Samuel F.B.Morse invents the telegraph

1866: Cyrus Field lays the first successful transatlantic cable

1876: Alexander Graham Bell invents the telephone

1879: Thomas Edison invents the incandescent light bulb.1892: Rudolf Diesel patents the diesel engine

1899: Guglielmo Marconi invents the wireless

1903: The Wright Brothers make the first successful airplane flight

Dark Satanic Mills - Change in British Economy late eighteenth to earlynineteenth century Technological innovation

Agricultural development

Improvement in communication

Growing trade

Rising population and consumer demand cont.

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Shift from agrarian economy to industrial economy brought changes theeconomic life of people

Working conditions deteriorated

Locals were deprived of the enclosed common land share ( known as Enclosure)

New technology and Enclosure resulted into migration of labor

Migration lead to development of cities like Bradford, Cardiff and Manchester

Labor mobility, shifts of land ownership, population pressure reduced the sense ofresponsibility for others ( seen as characteristic feature of older and ruralcommunities)

Victorian capitalism came into existence Samuel Smiles popularized a feeling that saving, thrift, sobriety and self-restraintwill improve the community

Britain experienced a rapid growth of wealth in the early part of century comparedto Europe and Germany

Change in per capita GNP

The positive effects of redistribution of wealth and power were shadowed byincreasing unemployment and recession

A common belief prevailed that the concentration of power could threaten the stateand allocation of resources

The values that influenced the behavior of individuals and the ethics that were

followed in their businesses were under stake. Cont.

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According to Lord Macaulay Our rulers will best promote the improvement of thenation by strictly confining themselves to their own legitimate duties, by leaving capitalto find its own most lucrative course, commodities their fair price, industry and

intelligence their natural reward , idleness and folly their natural punishment.

Corporations were suspected to threaten the freedom of citizen

Business entities had no conscience and were focusing on increasing power oftheir ownership

The new working class faced severe problem

Poverty grew as landlords moved tenants from the estates to maximize theirrevenue

No intervention from Government as citizens played important role to make Britaina powerful nation

Henry VIII and Elizabeth I introduced legislation against Enclosure

Adam Smith emphasized the importance of maintaining restrictions of trade,movement and minimum intervention, to enable every individual to pursue freely hisown interest in his own way, and to compete with his own capital and industry.

Improvements in manufacturing, commercial and economic skills form the Britishpower

Cont.

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In 1788, Britain passed a Humanitarian legislation to protect the chimney sweepsfrom exploitation In 1802, focused on controlling the condition of pauper children

In 1803, protection of immigrants

In 1833, introduced the Factorys Act

In 1842, to channelize the condition of mines

In 1848, createdPublic Health Act.

Victorian PhilanthropyPrior to Victorias accession to throne, The Times commented The two great divisionof society there, are masters, who have reduced the wages, and the workmen, whocomplain their masters for having done so.

Support from British Intellectuals who were not benefited from Industrial Revolution

End of Eighteenth century saw the growth of Methodism, which formed a base for

those who identified the difference between equality before God and inequality beforeman

Different types of responses from individuals, entrepreneurial and corporate sectorstowards Government initiatives

Industrialists formed philosophical societies like Manchester Library

Civic Universities were started in Manchester, Liverpool, New Castle andBirmingham Cont.

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The Nonconformist Challenge in Britain Religion played important role in influencing attitudes and actions

Variance in the practice of Christianity, especially between Catholicism and

Quakerism

Quakers like brewing families Whitbreads and Truman, bankers like Lloyds andBarclays, confectioners like Cadburys and Rowntrees, glass makerPilingtons, andmany of the cotton and tobacco families Wills and Players played important roles inshaping the entrepreneurial values.

British Parliamentary reform was in full swing throughout the century

Efforts to widen franchise, and direct invention to eradicate abuses in factories,mines and homes

The Utilitarian and the Nonconformist creates opportunities for self-employment andtried to bring changes in personal behavior.

As a result, Sunday schools, subscription libraries, mechanics institute, engineering

institutions, the new civic Universities and the Society for the diffusion of UsefulKnowledge started

As part of social responsibility poor were given guidelines to improve themselves

In the nineteenth century, the concept of self-help was replaced by a number ofmovement for political, economic and social reforms

The leaders from entrepreneurial class believed that corporate social responsibilitymeans a new form of corporation Cont.

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Progressive movements motivated industrialist like Whitworth, Milenes,Bauwens and Bessy

Robert Owen and his colleagues experiences three problems1) Shortage of fund, tried to raise though donations but failed to get any

2) Artisan supporters lacked the education and trading skills necessary fordeveloping ventures.

3) The link between wealth creation, capital accumulation and wealth distribution

were not liked by many

Yet some of the ideas of Robert Owen reverberate in the history of corporateresponsibility

Progressives in North America Robert Owen ideas were adopted by entrepreneurs like Francis Lowell, the

designer of the first American Power Loom

Early nineteenth century saw the shortage of labor reflected the similarity in theorigin of freedom of movement

Different economic, political and social conditions signified that corporate

responsibility in North America varied from Europe Cont.

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The perspective of individual, entrepreneurial and corporate responsibility inNorth America was centered on education

There was a close relationship between early entrepreneurs and educational

institutions

The great private Universities of Harvard, Yale, Cornell, Princeton, Duke,Dartmouth and Columbia benefited from their relation with emerging entrepreneurs

Responses in The Thirties

The World experienced a new economic order due to industrial revolution

Increase in output, population, concentration and power of motivated individuals,entrepreneurs and communities to understand and interrelationship

The growth of corporations dominated economic life

The businesses needed skilled operational talent and managers

The depression due to war, recession and political change in 1930s affected theexisting system

The decline of prices in New York Stock exchange

As a result of depression the government began to be viewed to be an importantagent of change in Britain and USA

F.D.Roosevelt believed in in government intervention to solve social and economicproblems Cont.

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This belief showed developments at various part of the World.

Scottish Council for development and industry reflected the changedresponsibilities. The aims were

> To streamline existing resources that support industrial developmentand job creation in Scotland

> To encourage firms to locate in Scotland

> To support government and other remedial action

> To create a climate for growth and prosperity

> To remove myths and misinformation about Scotland and its economicprospects

In Europe and North America employees depended on philanthropic employers

Post-war statism

The end of World War II necessitated a re-examination of the relationship betweenindustry, the state and the community

The US economy experienced strong economic growth in post-war period

The nations GNP rose to more than $ 500 thousand million in 1960

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Current CSR practices of the firms in India and abroadIn 2002, Pricewaterhouse Coopers surveyed 1200

Business Leaders found that 70% of CEO agree that CSR is

vital to the profitability of any company.

Among leading Indian companies, those taking initiative inCSR are- LEAD INDIA by Bennett Colman- TATA- ITC- BIRLA

Even small companies at Adityapur in the state of

Jharkhand has shown the impact of CSR in that region.

However, Indian PMs recent address in annual meeting ofCII, stressed the need of corporate India to pay greater heedto CSR has stimulated deeper thinking among corporate

heads about their social responsibilities.

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The Nature of Ethics in Management

Ethical problems as Managerial dilemmas> A conflict between an organizations economic performance(measured by revenues, costs and profits) and its social performance( stated in terms of obligations to persons both inside and outside theorganization)

An ethical dilemma in environmental protection

An ethical dilemma in foreign bribery

Characteristics of ethical problems in management

> Most ethical decisions have extended consequences> Most ethical decisions have multiple alternatives

> Most ethical decisions have mixed outcomes

> Most ethical decisions have uncertain consequences

> Most ethical decisions have personal implications

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Examples of ethical problems in management Pricing level Advertising

Product promotions Working conditions Consumer service Workforce reduction Environmental pollution

Community relations Supplier relations

Ethical Issues in Strategic Management / Top Management

Developing vision statement

> Leadership and senior managers remuneration> Implementing strategic changes

> Changes in organization ownershipExchange offersShare repurchase

Going privateLeveraged buy-outs Cont.

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Merger and acquisitionRestructuringCorporate raidersP

oison pills

Global strategic operations

Ethical Decision Making Model

Step 1 Step 2 Step 3 Step 4

Evaluate decision Evaluate decision Establish moral Engage in ethicalfrom ethical from ethical intent behavior

standpoint standpoint in the

Identity affected context of moralstakeholders principles

Are rights ofstakeholdersviolated?

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Principles underlying an ethical approach to strategic management> Stakeholders theory, strategy and ethics> Loyalty and psychological contract> Cultural relativism

Ethical issues in Marketing Management

Empirical evidence (Burke, Maddock & Rose) - The Study titledattitude of business ethics with 498 senior managers & 165 junior managers in US, focused on

- Conduct of business

- Employee relations

- Social responsibility- Environmental concern

Ethical Issues in Marketing Strategy

Ethical issues in Marketing mix - Mc Carthys 4 Ps

> Product

> Price

> Place

> Promotion &

Three service aspects of marketing mix

> People, physical evidence and process

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Marketing research> The right to be informed of critical research results

- Using market research guise to sell products

- Use of research to obtain information for sales leads or as anopportunity to pitch a sales information

- Telephones or personal interviews mail surveys used to generatesales leads or to solicit sales

> Issues involving the rights of the researcher

>Protection against improper solicitation of proposals

>Misrepresentations of findings

>Excessive requests

> Reneging on promises

> Availability of funds

> Right to expect ethical subject behavior

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Ethical issues in Operation management

Role of Operations Manager

PRODUCTION

Job responsibilities> Receiving raw materials

> Storing them in safe and secure environment

> Supervising the movement of materials in the in the whole plant

> Ensuring that the employees produce the right quality

> Scheduling errors

> Maintaining and established quality standards

> Negotiating with suppliers and customers

> Packaging the products

> Distributing the products> Ensuring proper health and safety for the workers in work environment

> Assessing the standard time values used in the manufacturing processes

> Initiating employee suggestion schemes

> Taking decisions on operational and quality issues

Cont.

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SERVICE

Job responsibilities

> Receiving incoming calls and mails

> Storing the documents in relevance

> Prioritizing the jobs according to their importance

> Motivating quality performers among staff and giving directions to the staff

> Negotiating with suppliers

> Dealing with inquiries

> Taking decisions on the policies that have to be implemented

> Ensuring the health and safety of the workers

> Maintaining computers and office equipment

> Taking decisions on operational issues

> Ensuring quality management

Other activities of operation managers include

Total quality management

Forecasting

Improving technology

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Ethical issues at the workplace Drug and alcohol Employee thefts Conflicts of interest

Quality control Discrimination Misuse of propriety information Fiddling of expense accounts Plant closure and lay-off Misuse of company assets Environmental pollution

Misuse of other information Industrial espionage Inaccuracies in documents and records Receiving excess gifts and entertainment False or misleading advertisements Receiving back handers

Insider trading Relations with local communities Antitrust issues Bribery Political contribution and activities Improper relationship with local government personnel Improper relationship with national government personnel

Inaccurate charging to government bodies

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Quality control - ethical dilemmas- Managerial roles in Quality Control

An analytical framework for ethical problems in Operation Management, like

decisions on

Employing a person from a competitor

Bidding for a contract with competitors to fix prices

Six factors involve ethical decision making. If more than one factorsaffects the dilemmas then the ethical intensity increases. Ethical intensity isthe degree of importance given to an ethical issue. The six factors involvedin decision making are

Magnitude of consequence

Probability of the effect

Social agreement

Time interval

Proximity

Concentration of effect

Analysis of ethical issues at workplace

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Ethical issues in Purchase Management

Role ofPurchase Manager

Role of purchasing departments

To ensure the availability of proper quantity and quality of materials for smoothfunctioning of the production department.

To procure materials at reasonably low cost ( without compromising on quality) forthe company.

To ensure supply of quality materials. To be aware of various substitute materials available in the market, their prices andutility to the organization.

To pass on information regarding purchasing to other departments of the companysuch as design, production, sales, finance etc.

To study possible substitutes for raw materials. To ensure continuity of suppliers of raw materials.

To identify and develop new vendors and maintain good relationship with existingvendors

To develop good procedures and systems for purchase departments

To coordinate with other functional departments, to achieve continuity of information

flow and integration between different departments to the extent possible

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Ethical issues in purchasing

Research conducted by Browning and Zabriskie (1983) showed thatpurchasing personnel adopt high ethical standards. Another studyconducted by Farker and Janson (1990) also corroborated this view.

The conclusions drawn from the studies found that

Purchasing personnel are ethical wile dealing with sales people

Actions of buyers are more ethical than their beliefs, and

Young buyers were more ethical than their older counter-parts

In another study conducted by Rudelius and Buchholz (1979)revealed that most purchase managers were concerned aboutaccepting gifts. Therefore, wanted guidance from top management.

However, most purchasing managers counter the following unethical.

Accepting free gifts

Deceiving suppliers

Showing favoritism to suppliers

Revealing confidential information

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Principles and standards of purchasing practice

The followings are the principals and standards of purchasing practice asestablished by National Association ofPurchasing Management

Avoid the intent and appearance of unethical or compromising practices inrelationships, actions and communications.

Demonstrate loyalty to the employer by diligently following the lawful instructionsof the employer, using reasonable care only and the authority granted.

Refrain from any private business or professional activity that would create aconflict between personal interests and the interest of the employer.

Refrain from soliciting or accepting money, loans, credits, or prejudicial discounts,and from accepting gifts, entertainment, favors or services, from present or potentialsuppliers that might influence, or appear to influence, purchasing decisions.

Handle confidential or proprietary information belonging to employers or suppliers

with due care and proper consideration of ethical and legal ramifications andgovernmental regulations

Promote positive suppliers relationships through courtesy and impartiality in allphases of purchasing cycle.

Refrain from reciprocal agreement that restrain competition.

Cont.

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Know and obey the letter and spirit of the law governing the purchasing function andremain alert to the legal ramifications of purchasing decisions.

Encourage all segments of society to participate by demonstrating support for small,small disadvantaged, women-owned, and disabled veteran-owned businesses.

Discourage purchasing involvement in employer-sponsored programs of personalpurchases that are business-related.

Enhance the proficiency and stature of the purchasing profession by acquiring andmaintaining current technical knowledge and the highest standard of ethical behavior.

Conduct International purchasing in accordance with the laws, customs and

practices of foreign countries, consistent with US laws, your organization policies andthese ethical standards and guidelines.

Empirical evidence for the ethical issues in Global Buyer - SuppliersRelationships

The research objectives were

The factors that impact the level unethical activities

Whether buyers and their foreign suppliers follow the same code of ethics for judgingbusiness transactions.

Impact of that the level of unethical activities has on effectiveness of the buyer-suppliers relationships

Cont.

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Ethical issues in Human Resource ManagementNature of employment contract

Hiring / Recruitment - The principle of ethical selection

Discrimination> Ageism

> Credentials

> Testing

Working condition

Remuneration Ethical remuneration - Need, Effort and Ability

> A person with pressing needs do not automatically qualify togreater remuneration

> Mere possession of superior skills and abilities do not

determine the remuneration.

> Employees who work hard to perform a task need not berewarded more than those who do it effortlessly.

> A person who works hard but fails to achieve results, deservesno reward but sympathy

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Ethical Remuneration - Seniority and Loyalty

Ethics in retrenchment Firing

Downsizing of workforceEthical issues in Finance

Importance of financial statements> Determining the key elements of the business like the objectives of

the firm and see how they are defined and measured.

> Making sure that the funds are allocated to different activities on thebasis of their importance.

> Frame rules that have a positive effect on business activities. It isimportant to ensure that each project or department is allotted its fair share offunds and that projected earning of the project or department are in accordance

with the funds allocated to it. Ethical issues in mergers and acquisitions

> Hostile takeovers - POISON PILLS

GREENMAIL

GOLDEN PARACHUTEP

EOP

LEP

ILLSAND BAG

M b

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> Management buyouts

Ethical issues at Top Management Insider trading

Money laundering

Ethics in Financial markets and investors protection

Ethical responsibility towards competitors and business partners

Ethical issues in accounting and other functions

The importance of financial statements

> Fictitious revenues

> Fraudulent timing differences

> Concealed liabilities and expenses

> Important or fraudulent disclosures or omissions

> Fraudulent asset valuations Types of financial accounts

> Financial accounts

> Internal management accounts

Importance of transparency in disclosure of accounts

R l f t t

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Role of accountants

> Accountants employed by an organization

- Financial accountant

- Management accountant> Accountants in professional practice

- The auditor

- Related services

> The rules regulating the professional conduct of accountants

- The ethical audit> Ethical issues in information technology

- The information technology act

> The importance of software audit

Ethical dilemmas at workplace- Power, trust and authority

- Secrecy, confidentiality and loyalty

> Resolving dilemmas

- Manager

- Employees

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Complexity of Ethical Issues

Managerial ethics and individual decisions

Ethical analysis and a bribery case

Ethical analysis and ethical dilemmas

> Pricing of checking accounting practices

> Exaggerated or misleading claims in Advertising

> Misuse of Frequent Flyer discounts and trips

> Working conditions in a Manufacturing plant

> Customer service and declining product quality

> Workforce reduction

> Property tax reduction

> Environmental pollution

Solving ethical dilemmas

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L d hi t l th t t lt

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Leadership styles that get result

Basis Coercive Authoritative Affiliative Democratic Pacesetting Coaching

Theleaders Demands Mobilizes Creates harmony Forges Set high standards Develops

modus immediate people toward and builds consensus forperformance people foroperandi compliance a vision emotional bonds through the future

Thestylein Do what Come with People come What do you Do as I do now Try thisaphrase I tell you me first think?

Underlying Drive to Self-confidence Empathy Collaboration, Conscientiousness Developingemotional achieve, empathy, change building team leadership drive to achieve others

and initiative, catalyst relationship communication initiative empathyintelligenceself-control self-awarenesscompeten-cies

When the In a crisis When changes To heal riftsin To build buy-in To get quick To helpanstyle works to kick-start requirea new a team or to or consensus, or results from a employee

best a turnaround vision, or when motivatepeople to get input highly motivated improveor problem a cleardirection during stressful from valuable and competent performanceemployees is needed circumstances employees team ordevelop

long -termstrength

Overall Negative Most strongly Positive Positive Negative PositiveImpact on Positive

climate

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Understanding team work and Leadership - The use of teamin organizations has increased because team performs betterthan traditional work groups

The use of teams have resulted

Improved organizational performance

Employee benefits

Reduced costs Organizational enhancement

The leader acts as facilitator and coach, who helps team

members make effective decisions.

How culture constraints or enhances leadership

Superleadership

Transformational leadership

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Essential leadership skills> Problem solving> Decision making

Visionary Leaders

Jack Welch - Ex chairman & CEO, GEAkio Morita - Founder - Chairman Sony Corp

Ted Turner - TurnerBroadcasting Systems

Micheal Dell - Dell Computers

Narayan Murthy - Chairman, Infosys

Corporate Governance (CG)

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Corporate Governance (CG)- History of corporate forms and models> An integral part of capitalism is the business corporation which was

developed from the sixteenth century joint stock company and acquired its

current characteristics during nineteenth century.> It is known as corporation in USA and public limited company in India.> The corporation / company consists of shareholders who contributecapital and own the corporation but whose liability for the act is limited totheir contribution to the share capital of the company

> The law allows anyone the privilege of forming a company, public orprivate for any purpose

Company Form of organization conducive to efficiency> The law enables the organization of economic activity, be it production,

trade or provision of services with limited liability through the establishment

of a company> It has the same rights to buy and sell and make contracts as a personwould have> This is an improvement over the propriety and partnership form ofbusiness organization

> If the firm has wider participation it enjoys the benefit of access toca ital market

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CG An overviewIssues in corporate Governance

- Ethical issues

- Efficiency issues- Accountability issues

The growing scale of corporation and their style of functioning

have raised many issues that must be addressed by corporategovernance. Some of these are:

The growth of private companies

The magnitude and complexity of corporate groups

Importance of institutional investors

Rise in hostile activities of predators (take over) Insider trading

Litigation against directors

Needs for restructuring of board

Changes in auditing practice

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Definition of corporate governance- Corporate governance is the system by which business

corporations are directed and controlled

Difference between corporation and corporate governance

CORPORATE GOVERNANCE CORPORATE MANAGEMENT

1.External focus 1. Internal focus

2.Governance assumes an open system 2. Management assumes a closed

system

3.Strategy oriented 3. Task Oriented

4.Concerned with where the company is 4. Concerned with getting the

going company there

Theories of corporate governance

The first theory of corporate governance (theory of McGregor)

The stewardship theory (theory of Donanldson and Davis)

M G Th Y f h b h i

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McGregor Theory Y of human behavior- The management of a corporation is responsible for productive

use of its resources in best possible way to accomplish corporategoals.- Employees by nature are not averse to behaving in accordance

to corporation requirements- Every employees has an in-built motivation to behave in way

that will help the corporation to achieve its objectives

Some of the reasons put forth by critics of stewardship theory

Separation of ownership from management There is no single shareholder who holds a major chunk of equitycapital

The inability of small investors to directly monitor the activities ofthe corporation in which they have invested.

Control over the corporation changing from the owners to themanagement

Divergent interests of the owners and management

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Nature and evolution of corporate governance

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Nature and evolution of corporate governance

Global and National Perspectives Global CG Models

Anglo- American Model Corporate Structure

Board of Directors Elect(Supervisors) Shareholders

(Owners)

Appoints and supervises Own

Creditors

Officers Lien( Managers)

Stakeholders

Manage Hold stake

Structural frameworkCompany

Legal System

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German Model / French Model (modified)Corporate structure

Supervisory Board Appoint 1/2

Appoints Reports toandSupervise

Employees andLabor unionsManaging Board

(Including Labor relations)

Independently runsday to day

Appoint 1/2Shareholders

(own)C

ompany own

Japanese model of corporate governance

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Japanese model of corporate governanceCorporate structure

Supervisory Board Appoint(including president) Shareholder own

Ratifies Consults

President

Consults Monitors and actin emergencies

ProvideMangers

Executive Management

(P

rimary board of Directors) Banks

ManagesLoans

Company

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Evolution of Corporate governance

Many factors have contributed for the evolution of corporate governance

The responsibility for ensuring good corporate conduct shifted fromGovernment to free market economy

Active participation of individual and institutional investors

Increasing competition in global economy.

SEBI has taken various steps to strengthen corporate governance in India.Some of these steps are

Strengthen disclosure norms for IPOs following the recommendations ofthe committee set up by SEBI

Providing information in directors report for utilization of funds andvariations between projected and actual use of funds according to therequirement of Companies Act; inclusion cash flow and fund flow statementin annual reports;

Declaration of quarterly results

Cont.

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Mandatory appointment of compliance officer for monitoring the sharetransfer process and ensuring compliance with various rules and

regulations Timely disclosure of material and price sensitive information including

details of all material events having a bearing on the performance ofthe company

Dispatch one copy of complete balance sheet to every household

and abridged balance sheet to all shareholders Issue of guidelines for preferential allotment ay market related prices;

and

Issue regulations providing for a fair and transparent framework fortakeovers and substantial acquisitions

Claims of various stakeholders

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Claims of various stakeholders

Stakeholders may be Any group of people who have a stake in the business

Those who are vital to the survival and success of theorganization

Any group that is affected by the activities of the organization

Based on the relationship with the organization stakeholders can

be categorized as:

Internal stakeholders

External stakeholders

Internal stakeholders are> Shareholders

> Employees

> Management

Share holders

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Share holders

> Shareholders responsibility

Maintaining good relationships with top management

Exercising their voting rights

Similarly, the organization must honor the trust of the shareholders.Therefore, the responsibilities of the organization towards theshareholders are:

> Managing company efficiently in order to secure a fair andcompetitive return on the owners investment

> Disclosing relevant information to shareholders, subject only tolegal requirements and competitive constraints.

> Conserving, protecting and increasing the shareholders assets.

> Respecting the shareholders requests, suggestions, complaints,and formal resolutions.

Employees

> Responsibility of Employees and Employers

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External stakeholders> Consumers> Suppliers> Creditors> Competitors

Responsibility of business corporations towards consumers are:5 Rs

Right Quality

Right quantity

Right time

Right place

Right Price

Responsibility towards suppliers

Seek fairness and truthfulness in all activities, including pricing andlicensing. Cont.

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Ensure that business activities are free from coercion and unnecessarylitigation.

Foster long-term stability in the supplier relationship in return for value,

quality, competitiveness and reliability Share information with suppliers and integrate them in the planningprocesses;

Pay suppliers on time and in accordance with the agreed terms oftrade; and

Seek, encourage and prefer suppliers and sub-contractors whoseemployment practices respect human dignity.

Creditors

Government

Community

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A firms responsibility towards society include:

Respecting human rights and democratic values.

Supporting public policies and practices that promote humandevelopment through harmonious relations between businessand other segments of society.

Collaborating with such activities that aim at improving thestandards of health, education, workplace safety and economic

well-being. Promoting and stimulating sustainable development andplaying a leading role in preserving and enhancing the physicalenvironment and conserving the earths resources.

Supporting peace, security, diversity and social integration;

respecting the integrity of local cultures Encouraging charitable donations, educational and culturalcontributions and employee participation in community and civicaffairs

Why Governance? - Change in eighties

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Why Governance? Change in eighties> Deregulations of financial markets contributed to finance driven governance> Merger activity became an important source of profits for the finance sector> Towards the end of 80s there were no underline pressures or incentives

> Volatility was generated endogenously> Takeover activity itself became a powerful tool for speculation> Speculators invested in stocks of takeover target for higher earnings> Valuation was not based on future earning ability, but on break up value,

dismember parts and sold off.

Self regulatory codes International Capital Markets Groups (1992)proposed the following benefits of self-regulation:

In self-regulation, it is possible to impose ethical standards , which gobeyond those, which can be imposed by statutory legislation. Self regulators are directly accountable to the members of their group, as

self regulatory systems have in built motivation to regulate for effectiveness andleast interference. Selfregulation operates in an environment where there is a willingness toaccept regulations formulated from within for the common good of the group. Self-regulators being part of the group understand the issues facing thegroup more intimately and are therefore more sensitive to the needs of entire

group. Cont.

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The regulated have an opportunity to participate at all levels of the self-regulatory process. Thus makes it easier for them to appreciate andaccept new regulations

Self regulation has a built-in systems of checks and balances as theregulated see it as the regulated see it as their duty to expose non-compliance.

Self-regulators can identify complex regulatory problems at an earlystage and develop suitable solutions before these problems reach a stagewhere they can disrupt group operations.

Self regulators are more comprehensive than official regulations andare easier to operate and implement.

Reports of Committees on Corporate Governance

Cadbury Committee Report

Greenbury report

Hampel report

OECD Report

Cadbury Committee Report Committee set up in May 1991

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Cadbury Committee Report Committee set up in May 1991The recommendations made by the Cadbury Committee on 27th May 1992are as follows:

Decision making power should not be vested in a single person, i.e. there

should be separation of roles of chairman and CEO.

Non-executive directors should act independently while giving theirjudgment on issues of strategy, performance, allocation like resources anddesigning codes of conduct.

A majority of directors should be independent non-executive directors ,i.e. they should not have any financial interests in the company.

The term of a director should not exceed three years. This can beextended only with the prior approval of the shareholders.

There should be full transparency in matters relating to directorsemoluments . There should be a judicious mix of salary and performancerelated pay. A remuneration committee made up wholly or largely to non-executivedirectors, should decide on the pay of the executive directors.

The interim company report should give the balance sheet information

duly reviewed by the auditor.

The pension funds should be managed distinct from the company

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g y

There should be a professional and objective relationship betweenthe board and the executives.

Information regarding the audit fee should be made public and

there should be regular rotation of auditorsGreenbury Report (1995) showed concern about Directorsremuneration.

Hampel Report (1998) - Made a review of Cadbury report.Recommended no need to revolutionize the CG systems in UK. Itaimed to harmonize the Cadbury and Greenbury recommendations

OECD Report On 27th-28thApril 98, OECD Ministers askedOECD to develop a set of Corporate Governance principles that wouldbe useful for its members and non-members countries. The principlesby OECD fall into five broad areas:

The rights of the shareholders The equitable treatment to shareholders The role of stakeholders Disclosure and transparency

The responsibilities of board

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.Sarbanes Oxley Act (SOX Act.) July 2002

Adopted for changes virtually in every areas of CorporateGovernance particularly in areas of

Auditor independence Conflicts of interest

Corporate responsibility

Enhanced financial disclosures and penalties

The aim of the SOX Act was to clean up the auditing process. It sets up a

Public Company Accounting Oversight Board to oversee auditors

> It makes it unlawful for accounting firms to offer a number of other

kind of services to companies whose accounts they audit> It demands that directors sitting on corporate audit committees

(who are responsible for choosing the firms auditors) be independent.

Internal Corporate Governance Mechanism Board

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Internal Corporate Governance Mechanism Board

Style and structure

Types of Directors

Executive directors

Non-executive directors

Nominee directors

Representative directors

Alternative directors

Shadow directors

Associate directors

Types ofBoard structure

All- Executive board

Majority executive board

Majority outside board

Two tier Supervisory board

Governance

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Governance

Board

Management

All- ExecutiveBoard

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G

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Governance

Board

Management

Majority outside board

Two-tier Supervisory Board

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p y

Advisory Boards

Issues in designing a board The board size

The role of chairman and the chief executive

Duality in subsidiary company board

Board Styles

Rubber stamps boards

Representative boards

Country club boards

P

rofessional boardFunctional Committees of the board

Audit committee

Remuneration committee

Nomination committee

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HIGH

Country Club Professional board

board

Concern forrelationsamong

Directors

Rubber stamp Representativeboard board

LOW Commitment to HIGHeffective communication

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Corporate governance Roles and responsibilities

of directors (Code of conduct)

Role of directors

The Performance role

The conformance role

Responsibilities of directors common responsibilities worldover

Responsibilities to shareholders

Obligation to maintain honesty and integrity

Legal aspects and liabilities of directors

Misrepresentations in offer documents and annual accounts

Failure to refund subscription money to investors

Contravention of law

D ti f di t

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Duties of directors

Exercise care in the discharge of functions as directors Attend board meetings and devote sufficient time and attention tothe affairs of the company

Not to be negligent and not to commit or let others commit tort-liable acts

Act in the best interest of the company and its stockholders andcustomers Not to misuse power

Protect interests of creditors

Maintain confidentiality

Not to make secret profits and make good loss, if accrued due tobreach of duty, of negligence

Not to exercise powers for collateral purpose

Not to waste company assets

The role of the chairman

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The role of the chairman> Relationship with the CEO> Relationships with executive directors

> Relationships with non-executive directorsFunctions of the chairman

To set standards and ensure that policies and practices are in place

To ensure that the directors make good decisions. To make sure that directors are continuously upgraded to the levelsrequired by investors to meet current and future needs of the company.

To act decisively in times of crisis

To act as a representative of the company

Role of CEO

Relation with the chairman

Relation with directors

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Functions of the board

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> Strategic role of the board

Systematic level strategy

Structural and portfolio strategy Implementation strategy

> Policy making role of the board

> Monitoring and supervisory roles

Whistle blowers policy

The recommendation of the Committee on CG (2003) thatpersonnel who observe an unethical or improper practice shouldhave access to the audit committee to report is likely to haverestraining effect on management

A key provision of SOX Act. is whistle blowing. Board auditcommittees should provide employees with an anonymous andconfidential way to lodge complaints about suspected financialshenanigans in their midst. Employees have to be informedabout how the system works.

External Corporate Governance Mechanism

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Regulators - Ministry of Corporate Affairs, Government of IndiaMinistrys vision To be a leader and partner in initiatives ofcorporate reforms, good governance, and enlightened regulation witha view to promote and facilitate effective corporate functioning,investors protection and inclusive growth; empower the Indiancitizen and have a global footprint.

Initiatives by Ministry of Corporate Affairs LAW - Limited liability and partnership Act

- Accounting standard- Amendment to Acts governing professionals- Comprehensive revision of Companies Act, 1956

INSTITUTION AND SYSTEMS BUILDING- Indian Institute of Corporate Affairs- Competition commission of India- National Foundation of Corporate Governance- Streamlining Field Organization

PEOPLE ISSUES

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PEOPLE ISSUES

- Rebuilding Indian Corporate law service

- Empowering Investors and citizen

Market Regulator Security and Exchange Board of India (SEBI)

SEBI has laid down that the board set up a remuneration committeeto determine on their behalf and on behalf on the shareholders withagreed terms, the company s policy on specific packages for

executive directors. It is important for shareholders to be informed of the remuneration of

directors of the company

SEBI committee on CG (2003) made a mandatory recommendationthat compensation of non-executive directors as well as independentdirectors be fixed by the board and approved by shareholders

Issue of stock options to non-executive directors as well asindependent directors in any year and in total should be limited andshould vest only one year after retirement

Gate keepers All board of directors are prisoners of their

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Gate keepers All board of directors are prisoners of theirgate keepers and only if the boards agents properly adviceand warn it, the board can function efficiently?

- John KofeeWho are these gate keepers?

Third parties (intermediaries)

> whos cooperation if of essential

> who can prevent misconduct by withholding cooperation

Example

Accountants and lawyers

Bankers

Rating agencies

Physician, ISPs, Bartenders, Gun dealers

Role of Gatekeepers in CG - gatekeepers

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Provide information and certification for directors and investors

Have ability to detect and deter misconduct

Are relied on effective CG

Recent scandals World com, Enron, Satyam due to multiple failure of

gatekeepers

Responsibility of gatekeepers gatekeepers role Is largely a by-product of providing a for free service

Imposes a cost on gatekeepers institution and the economy

Conclusion Each intermediary institution is different, no one-size-fits-all answer is

possible Moral responsibilities are linked to legal responsibility / liability

The appropriate moral and legal principle is what investor wouldchoice

Answer to cost-effective deterrence

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Involvement of Institutional Investors PRO

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Have significant stake in companies

Ability to exercise control on promoters management and prevent abuse

Have assess to information and better monitoring capabilities

Significant positive stock market performance and corporate governance

Research shows companies and countries weak in corporate governancesuffer larger collapses when hit by greater volatility

Major influence in attracting FDI

Involvement of Institutional Investors CON

Investment objectives and compensation system discourage participation Conflict of interest with primary fiduciary responsibility to own investors

and beneficiaries

Investors like MFs have short term performance measurement whichworks against active monitoring

Conclusion Active role should ensure

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Board members have adequate experience and are trulyindependent

Executive remuneration, particularly for family members is notexcessive

Early warning signals are detected from the wealth of informationmade available to shareholders

Companys funds are not diverted to non-core activities or for

benefit to related parties Institutional investors should lead share holders in demanding

corrective action, where such action is warranted

Corporate Raiders create an environment of threat of take over andforce the target company to buy back shares at premium i.e. green mail

technique. These are countered by - Poison Pills

- Golden Parachute

- People Pills

- Sand bag

Corporate Governance Ratings

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Corporate Governance Ratings

At the instances of SEBI two credit rating agencies (CRISIL and ICRA)have launched a unique model for rating CG in an enterprise.

The index subsumes the ability/track record of an enterprise in wealthcreation, wealth management and wealth sharing

The governance audit comprises a special comprehensive audit on thecorporate governances and business practices of the company

The report of governance audit will help to measure how best a

company is governed: excellent - complying with mandatory governancerequirements or below average or badly governed or misgovernedcompany

The audit is done mainly on the basis of disclosures keeping in view theinformation needs of investors , employees, customers and general

public. However, the committee on CG (2003) was of the view that corporate

governance ratings should not be mandatory

The checklist of disclosures and compliance compiled by

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governance audit in such areas: Composition of board

Board procedures

Appointment of new director

Audit committee

Remuneration committee

Shareholders committee

Previous general meetings and postal ballots Management discussion and analysis report

Means of communication

Rating of debts / deposits

Related party transactions

Penalties / enquiries by any statutory authority

Information needs shareholders, customers, employees, community

Internal control and management assessment thereto

Statutory auditors report

Corporate Governance In India:

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Corporate Governance In India:

Corporate form in India 50s to 90s

Development of CG in India during 90s and 2000s

Various reports on CG

CII Report under chairmanship of Rahul Bajaj Kumar Mangalam Birla Committee Report

Narayan Murthy Report

Naresh Chandra Report

JJ Irani Committee report

CII Report - A task force was set up in mid 1996 under theleadership of Rahul Bajaj

Recommendations made by CII Committee are:1 Th f ll b d h ld t i i f i ti f bl t

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1. The full board should meet a minimum of six times a year, preferably atan interval of two months, which should have agenda at least for halfdays discussion

2. Any listed company with 100 crore or more turnover, should haveprofessionally competent non-executive, independent directors, whoshould constitute at least 30% of the board if the chairman is a non-executive director or at least 50% if the chairman and managing director(MD) is the same person.

3. No single person should hold directorships in more than ten companies.This ceiling excludes directorships in subsidiaries (holding of 50% ormore) or associate companies (stake between 25% to 50%)

4. Non-executive directors need to play material role in corporate decisionmaking , maximizing long term shareholder value and become activeparticipants of the board. These excludes those who joined board asexperts from technology and science fields.

5. To secure better effort from non-executive directors, companies shouldpay a commission over and above sitting fees for professional inputs. Thepresent commission is 1% if there is a MD and 3% where there is no MDis sufficient

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> Default in payment of interest or non-payment of the principal on any

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Default in payment of interest or non payment of the principal on anypublic deposit, and/or to any secured creditor or financial institution

> Defaults such as non-payment of inter-corporate deposits by or to the

company , or materially substantial non-payment of goods sold by thecompany

> Any issue which involves possible public or product liability claims ofsubstantial nature, including judgment or any order which might passedstrictures on conduct of the company or taken an adverse view regardinganother enterprise that can have negative implications for the company

> Details of any joint venture or collaboration

> Transactions that involve substantial payment towards goodwill, brandequity , or intellectual property

> Recruitment and remuneration of senior officers just below the boardlevel, including appointment or removal of the chief financial officer and thecompany secretary

> Labor problems and their proposed solutions

> Quarterly details of foreign exchange exposure and the steps taken bymanagement to limit the risks of adverse exchange rate movement, ifmaterial

8. Listed companies with either a turnover of Rs.100 crore or a paid up

capital of Rs 20 crore should set up audit committee within two years

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capital of Rs.20 crore should set up audit committee within two years

9. Under Additional shareholders Information , listed companies shouldgive data on high and low monthly averages of share prices in a major

stock exchange where the company is listed for the reporting year; greaterdetails of business segments, up to 10% of turnover, giving share in salesrevenue, review of operations, analysis of markets and future prospects

10. Consolidation of group accounts should be optional and subject to financialinstitutions allowing Companies to leverage on the basis of groups assetsand the income tax department using the group concept in assessingcorporate income tax

11. Major stock exchanges should gradually insist upon a compliancecertificate , signed by CEO and CFO which clearly states that, themanagement is responsible for the preparation, integrity and fairpresentation of the financial statements and other information in the annual

report, and which also suggest that the company will continue in thebusiness in the following year; the accounting policies and principlesconfirm to standard practice, and where they do not, full disclosure hasbeen made of any material departures; the board has overseen thecompanys systems of internal accounting and administrative control

systems either directly or through audit committee (100 crore T.O or 20P

C)

12. For all companies with a paid up capital of Rs.20 crore or more,

the quality and quantity of disclosure A companys GDR issue

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the quality and quantity of disclosure . A company s GDR issue

should be the norm for any domestic issue

13. Government must allow far greater funding to the corporate sector

against the security of shares and other paper14 It should be desirable for financial institutions as pure creditors to re- write

theirs covenants to eliminate having nominee directors except in events ofserious and systematic debt default and in cases of debtor company notproviding six monthly or quarterly operational data to the concerned

financial institution15 If the company goes to more than one credit rating agency, then it must

divulge in the prospectus and issue document, the rating of all theagencies that did such an exercise

16 Companies that default on fixed deposits should not be permitted to accept

further deposits and make inter-corporate loans or investments until thedefault is made good , and declare dividends only after the default is madegood

17 Reduction in number of companies where there are nominee directors.Many financial institutions have argued that they are in too manycompanies on the board, where only few operate their tasks properly.

Kumar Managalam Birla (KMB) headed the committee appointed bySEBI on May 7 1999 the committee was formed to promote and raise the

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SEBI on May 7, 1999. the committee was formed to promote and raise thestandard of CG.

The objective of the K M B committee was to> Suggest suitable amendments to the listing agreement executed by the

stock exchanges with the Companies and any other measures to improve thestandards of corporate governance in the listed Companies, in areas such ascontinuous disclosure of material information both financial, manner and

frequency of such disclosures, responsibilities of independent and outsidedirectors.> Draft a code of corporate best practices> Suggest safeguards to be instituted within the Companies to deal with

insider information and insider trading

Recommendation made by KMB Committee are The board should have an optimum combination of Executive and Non-Executive directors

A qualified Audit Committee should be set up by the board or company

The board should set up a Remuneration Committee Cont.

The board should set up a committee under the chairmanship of non-

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executive director to look into shareholders issues.

B

oard should delegate power to registrars or share transfer agents toexpedite the process of share transfers.

The CG section of Annual Report should make disclosures on issuesrelated to stakeholders

Board meetings should be held at least four times in a year

A s part of disclosure, apart from Directors report, managementdiscussion and analysis report should be part of annual report issued to

the shareholders.

All company related information like quarterly reports should be madeavailable in website for analysis

Cont.

There should be separate section of CG in the Annual report, with details

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p p ,on level of by the compliance by the Company. Reason for non-compliance if any must be mentioned

No Director should be a member more than 10 committee or act asChairman of more than 5 Companies. It is mandatory to inform the positionhe / she occupies.

The company should provide brief resume, expertise in specific functionalareas and names of the companies in which the person holds Directorship.

Disclosure to be made by board by the management relating to allmaterial, financial and commercial transactions where they have personal

interest.

The half yearly disclosure of financial performance including summary ofthe significant events in last six months should be sent to eachshareholders. Cont.

The financial institutions should under normal circumstances have no

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direct roles in the decision making in the company. They should notnominate anyone in the board. However, the term lending institution mayhave nominees in the board.

A separate section on compliance with mandatory recommendation ofclause 49 should form part of the report and details of non-complianceshould be highlighted.

A certificate from the auditors on compliance should be form part of theAnnual Report and Annual Return and a copy has to be sent to the StockExchange.

SEBI constituted a committee on CG under the chairmanshipof N.R. Narayana Murthy whose report was presented on 8th

February 2003

The issue discussed by the committee (2003) presented are related to

Audit committee

Audit report

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Audit report

Independent directors

Related parties

Risk management Directorship and directors compensation

Codes of conduct

Financial disclosure

This report has also set out the recommendations of NareshChandra Committee (2003) on corporate audit and governanceset up by Department of Company Affairs. These relate to

Contingent liabilities CEO / CFO certification Definition of independent directors Independence of audit committee Exemption of independent directors from civil and criminal liabilities

under certain circumstances

J. J. IraniReport on Company Law, dated 31stMay 2005 Management and Board Governance

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Management and Board Governance Board of Directors Minimum and Maximum number of Directors

Manner of appointment, removal and resignation of Directors Age limit of Directors Independent Directors

> The concept and numbers of independent Directors Definition of independent Directors / Attributes of Independent Directors Mode of Appointment of Independent Directors

Material Transactions Numbers of Directorships and Alternate Directors Directors Remuneration Sitting fees to Non-Executive Directors Disclosure of Remuneration Remuneration of Non- Executive Directors Board Committees Audit Committee for Accounting and Financial Matters Shareholders Relationship Committee Remuneration Committee Duties and responsibilities of Directors

Disqualification of Directors

Vacation of offices by Directors Resignation by Directors

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Liabilities of Independent and Non- Executive Directors Knowledge Test Directors and Officers (D&O) Insurance Rights of Independent / Non- Executive Directors Meetings of Directors Related Matters Quorum for emergency meetings Matters to be discussed at a Board Meeting Restrictions ofBoards Powers

Meetings of Members Demand for Poll Other recommendations Higher deposit amount for notice regarding

nominating / appointing a Director Options of buy-back for shareholders of de-listed companies Corporate Structure

Key Managerial Personnel Interested Shareholders General Related Party Transactions Directors duty to disclose interest

Certain transactions, in which directors are interested, subject to approval

Disclosure

Restrictions on Loan to directors or holding office or place of profit by

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g p p yrelative of director

Duty on directors to disclose information relating to directorship and

shareholding in the company and in other companies

Introduction of CG - Clause 49 in the Listing Agreement issued

via circulars dated 21st February, 9th March and 12th Sept 2000

and 22nd January, 16th March and 31st December 2001

Revision of Clause 49 listing agreement with effect from

01.04.2005

1. Board of Directorsa) Composition ofBoard

b) Non- Executive Directors compensation and disclosure

c) Other provision to as to Board and Committees

d) Code of conduct

2. Audit committee

a) Qualified and independent audit committee

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) p

b) Meeting of audit committee

c) Powers of audit committee

d) Role of audit committeee) Review of information by audit committee

3. Subsidiary companies

4. Disclosures

a) Basis of related party transactions

b) Disclosure of accounting treatment

c) Board disclosure Risk management

d) Proceeds form public issues, right issues. Preferential issues etce) Remunerations of directors

f) Management

g) Shareholders

Corporate Governance in practice in India

The Ministry of Company Affairs set up National Foundation

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The Ministry of Company Affairs, set up National Foundationfor Corporate Governance (NFCG) in partnership with CII, ICSIand ICAI

The NFCG has the following Vision and Mission

VISION: Be a catalyst in making India the best in Corporate Governancepractices

MISSION:

To foster a culture for promoting good governance, voluntary complianceand facilitate effective participation of different stakeholders

To create a framework of best practices, structure, processes and ethics

To make significant difference to Indian corporate sector by raising thestandard of Corporate Governance towards achieving stability and growth

The NFCG focuses on the following areas Creating awareness on the importance of implementing good CGpractices both at the level of individual corporations and for the economy as

a whole. The foundation would provide a platform for quality discussions

and debates among academicians, policy makers, professionals and

corporate leaders through workshops, conferences, meetings and seminars

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Encouraging research capability in area of CG in the country andproviding key inputs in developing laws and regulations, which meet the twin

objectives of maximizing wealth creation and fair distribution of this wealth.

Working with regulatory authorities at multiple levels to improveimplementation and enforcement of various laws related to CG

In close co-ordination with the private sector, work to instill a commitmentto CG reforms to facilitate the development of a CG culture

Cultivating international linkages and maintaining the evolution to-wardsconvergence with international standards and practices for accounting, audit,

and non-financial disclosure

Setting up National Centers for Corporate Governance across thecountry, which would provide quality training to Directors as well as produce