BUSINESS ETHICS

AND
CORPORA TE GO
CORPORATE VERNANCE
GOVERNANCE

102 III 22/101 VII 33

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 UTKAL UNIVERSITY SYLLABI-BOOK MAPPING TABLE
Business Ethics and Corporate Governance

Syllabi Mapping in Book

Unit-I
Ethics and Business Ethics, Concepts Values and Ethics. Unit 1: Introduction to Ethics
(Pages 3-25)

Unit-II
Ethical Corporate Behaviour, Its Development, Ethical Unit 2: Organizational Ethics
Leadership. (Pages 27-40)

Unit-III
Ethical Decision-making, Ethical Dilemmas in Organization, Unit 3: Ethical Decisions (Pages 41-111)
Social Responsibility of Business and Corporate Governance.

Unit-IV
Ethic in Functional Area, Marketing, Finance, Human Resource Unit 4: Ethical Issues in the Functional
and Information Technology. Area (Pages 113-131)

Unit-V
Environmental Ethics, Corruption and Gender Issues—Gender Unit 5: Environmental Ethics, Corruption
Ethics, Sexual Harassment and Discrimination. and Gender Issues (Pages 133-141)
 UNIT 5 ENVIRONMENTAL ETHICS, CORRUPTION AND GENDER ISSUES 133-141
CONTENTS 5.0 Introduction
5.1 Unit Objectives
INTRODUCTION 1 5.2 Environmental Ethics
5.3 Corruption
UNIT 1 INTRODUCTION TO ETHICS 3-25 5.4 Gender Ethics
1.0 Introduction 5.5 Sexual Harassment and Discrimination
1.1 Unit Objectives 5.6 Summary
1.2 Ethics and Business Ethics 5.7 Answers to ‘Check Your Progress’
1.3 Ethical Concepts 5.8 Exercises and Questions;
1.4 Ethical Values 5.9 Further Reading
1.5 Business Ethics
1.6 Summary
1.7 Answers to ‘Check Your Progress’
1.8 Exercises and Questions
1.9 Further Reading

UNIT 2 ORGANIZATIONAL ETHICS 27-40

2.0 Introduction
2.1 Unit Objectives
2.2 Ethical Corporate Behaviour
2.3 Development of Ethical Corporate Behaviour
2.4 Ethical Leadership
2.5 Summary
2.6 Answers to ‘Check Your Progress’
2.7 Exercises and Questions
2.8 Further Reading

UNIT 3 ETHICAL DECISIONS 41-111

3.0 Introduction
3.1 Unit Objectives
3.2 Ethical Decision Making
3.3 Ethical Dilemmas in Organization
3.4 Social Responsibility of Business
3.5 Corporate Governance
3.6 Summary
3.7 Answers to ‘Check Your Progress’
3.8 Exercises and Questions
3.9 Further Reading

UNIT 4 ETHICAL ISSUES IN THE FUNCTIONAL AREA 113-131

4.0 Introduction
4.1 Unit Objectives
4.2 Ethics in the Functional Area
4.3 Ethics in Marketing
4.4 Ethics in Finance
4.5 HR and Information Technology
4.6 Summary
4.7 Answers to ‘Check Your Progress’
4.8 exercises and Questions
4.9 Further Reading
 Introduction
Introduction Unit 3
INTRODUCTION
This unit discuss the process of decision-making in organizations and the decision making
models. It also discusses the ethical dilemmas faced by organizations and the social
For a very long time, there has been a real and a significant need for a good textbook on responsibility of business.
NOTES NOTES
business ethics and corporate governance.
Unit 4
This textbook covers the issues related to corporate governance, business ethics, risk
management and ethical decisions. This unit deals with ethics in the areas of marketing, finance, human resource management,
and information technology.
It tries to answer questions like,
• What is corporate governance? Unit 5
• What is ethics and business ethics?
• How is risk managed in corporate governance? This unit gives a general overview of ethical issues in relation to the environment. It
generally discusses the issues of corruption, gender ethics and sexual harassment.
This textbook is primarily intended for students of management in undergraduate, graduate
and diploma courses in universities and colleges. However, we know that many such
students are already managers anyway, who are undertaking part-time and distance
education programmes of study. Hence, this book is written with the manager and the
potential manager in mind.
When we look at the general scenario of Continuing Education in our country, we see
that there is a tremendous potential and opportunity for providing flexible forms of
learning, that complement the professional practices of managers and executives. For
instance, when the learning has to be implanted by stand-alone resources (such as this
textbook), one has to devise innovative means of imparting knowledge and skills. We
have attempted to do precisely this: by presenting the learning material through a content
exposition approach. In this approach, we begin with an introduction to the topic of the
unit; then, we outline the learning objectives of the unit; and then we present the details
of the contents in simple and easy-to-learn manner. At the end of each unit, we have a
summary for quick recollection. Finally, we have carefully posed review questions to
check your progress as you complete each unit of learning.
Obviously, how well a job we have done will be determined by you, the reader, as you go
through the materials herein. We would be most grateful for critical comments and
constructive suggestions to continually improve and refine the learning resources and
educational value of this textbook.

How This Book Is Organized

This book is divided into five units:

Unit 1
This unit explains the ethical concepts and its different models. It also explains the
different ethical theories and role of ethical actions in organizations. In addition, this unit
defines the concept of social responsibility.

Unit 2
This unit discuss ethical behaviour as applicable to organizations. It also explains the
significance of ethical leadership.

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 Introduction to Ethics Introduction to Ethics  Commitment to agreements
UNIT 1 INTRODUCTION TO ETHICS  Broad-mindedness
 Considerateness
Structure  Importance given to human esteem and self-respect
NOTES NOTES
1.0 Introduction  Responsible citizenship
1.1 Unit Objectives  Attempt to excel
1.2 Ethics and Business Ethics
 Accountability
1.3 Ethical Concepts
1.4 Ethical Values These principles, if strictly pursued, lead to a decent business environment and
1.5 Business Ethics create healthy relationships in the organization. However, deviations from these
1.6 Summary principles can occur due to the following factors:
1.7 Answers to ‘Check Your Progress’  Ignorance and indifference to issues
1.8 Exercises and Questions  Selfishness
1.9 Further Reading  Imperfect reasoning

1.0 INTRODUCTION 1.2.2 Concept of Business

Just like human beings function with limbs, corporations or companies function
Ethics is the branch of philosophy that studies the values and behaviour of a through their businesses. The term business can be broken as ‘busy-ness’
person. Value study of a person is used to determine his positive and negative meaning thereby an activity that keeps an individual busy. In the economic sense,
attitude towards life. Ethics studies concepts like good and evil, responsibility and the creation of utility is called business while in the commercial sense, the
right and wrong. Ethics can be distinguished in three categories: normative ethics, activities concerned with the purchase and sale of goods and services are called
descriptive ethics and metaethics. Metaethics focuses on the issues of universal business. A business includes that part of production, which is equally exchanged
truths, ethical judgements and the meaning of ethical terms. Normative ethics can and results in mutual benefits to the parties who exchanged goods in the
be used to regulate the right and wrong behaviour of individuals. Descriptive transaction.
ethics, also called applied ethics, is used to consider controversial issues, such as
abortion, animal rights, capital punishment and nuclear war. Business Definitions
According to Peterson and Ploughman, ‘Business may be defined as an activity in
1.1 UNIT OBJECTIVES which different persons exchange something of value, whether goods or services
for mutual gain or profit.’
This unit teaches you about: According to James Stephenson, ‘Business is the sum total of those processes
 Ethical concepts, models and values which are engaged in the removal of hindrances of persons (trade), places
 Self-development methods (transport and insurance) and time (warehousing) in the exchange (banking) of
commodities.’
 Types of ethical actions
 Benefits of business ethics According to F.C. Hooper, ‘Business means the whole complex field of
commerce and industry, the basic industries, processing and manufacturing
industries and the network of ancillary services, distribution, banking, insurance,
1.2 ETHICS AND BUSINESS ETHICS transport, and so on, which serve and interpenetrate the world of business as a
whole.’
1.2.1 Meaning of Ethics
According to Section 2(13) of the Indian Income Tax Act, 1961, business means,
The term ‘ethics’ defines the standards that bear on right and wrong issues of ‘any trade, commerce or manufacture or any adventure in the nature of trade,
society. Business ethics is thus a set of professional standards, which emphasize commerce or manufacture’.
principles of honesty and duty to the business and the general public. The other
significant principles included in business ethics are: Nature of Business
 Fairness Business is a wide term. It includes all occupations in which people are busy in
 Integrity earning income either by production or purchase, sale and exchange of goods and

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services to satisfy the needs of people and to earn profit. The following points Introduction to Ethics Introduction to Ethics Figure 1.1 shows the types of business activities.
may be discussed to reveal the true nature of a business:
 Economic activity: Business is an essential economic activity. Profit
Business
motive is the key element that inspires a businessman to work efficiently.
NOTES NOTES
 Human activity: Business is a human activity. In this sense, business is
Industry Commerce
considered to be an economic activity of human beings only. A business
is by the people and for the people.
 Social process: Business is a social process. All the individuals involved
Analytical Synthetic Assembling
in a business, such as owners, customers and employees, are an integral Enterprises
Enterprises Enterprises
part of society. Business has to fulfil its social responsibilities.
 System: A system is a combination of things or parts forming a unitary
whole. It is an established arrangement of components for the attainment Trade Aid to
of objectives. Similarly, business is a system consisting of various trade
subsystems that are operated in a balanced and coordinated way.
Internal External
Types of Business Activities Trade Trade Transport Banking Insurance
All human activities concerned with earning money are included under the term
business. Cultivation by a farmer, teaching by a teacher and treatment taken by a
patient from a doctor are also treated as business activities. Wholesale Retail Import Export
There are different types of business activities, which may be classified as
follows: Figure 1.1: Types of Business Activities
 Industry: An industry includes the activities connected with the
production and processing of goods. Manufacturing enterprises are Characteristics of Business
engaged in the production of goods. These kinds of industries can be Business means the creation of utilities. There are many features of business
classified as follows: activities and, thus, the business. The essential characteristics of business may be
o Analytical enterprises: An oil refinery that separates crude oil summarized as follows:
into petroleum, kerosene and diesel oil is an analytical concern.  Exchange or sale: A business includes the sale, purchase and exchange
o Synthetic enterprises: An enterprise which combines several of goods and services.
materials to produce one product is a synthetic enterprise. All  Creation of utilities: A business creates transfers and utilities of goods
soap mills and cement factories are synthetic enterprises. by making them available in proper form at the appropriate time and
o Assembling enterprises: All those plants engaged in the place.
production of products, such as radios, scooters and television sets  Social institution: A business deals with the people of society. All the
are assembling enterprises. A few enterprises involved in mining persons engaged in the business, such as owners, customers, employees
are involved in mineral resource production, for example, iron and other professionals, belong to the society. A business has to fulfil its
ore, coal, gold and silver. social responsibilities towards each part of the community and has to
 Commerce: It is the total of all those activities that are engaged in the follow the business ethics as well.
removal of hindrances of persons or trade, places or transportation, risk of  Profit motive: Business activities are carried out to make profit. A non-
loss or insurance and time, such as warehousing, banking and financing profitable business cannot continue to exist for long. Profits are essential
of commodities. Commerce can be divided into two categories: trade and for growth of a business.
aid to trade. Trade can be further divided into two categories, which are
 Risk and uncertainty: There are two types of risks in a business. The
as follows:
first type of risk is floods and thefts. The second type of risk is loss due to
o Internal: This includes the trade that is done with the country, fall in demand and labour trouble.
such as wholesale and retail trade.
Uncertainty arises because of unpredictability of profit in a business.
o External: This includes the trade that is done with various Profit is such an element which cannot be predicted in advance.
countries, such as export and import.
 Customer satisfaction: A business always tries to satisfy its customer
Aid to trade can be divided into transport, banking and insurance. with better quality and reasonable prices.

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 Introduction to Ethics Introduction to Ethics businessman but also improve the creditworthiness and
bargaining strength of the business.
Business Goals  Social objectives: The purpose of a business is not only to earn profits
The term ‘goals’ denote what an organization expects to achieve in the future. A but also to discharge responsibilities towards society as well as
NOTES NOTES employees. These objectives are as follows:
goal describes clearly the activities and tasks to be completed by an individual
and a department or an organization. A business has a number of goals, which o Service to society: A business must serve the society by
describe a desired future state for which efforts are directed. The goals are like a considering the following factors:
measure to evaluate the success of the business. It helps the management to keep  Better product: Customer satisfaction is the backbone of
the organization and the individuals working for it, away from distractive a business. Therefore, a business must ensure a supply of
activities which come in the way of the success of an organization. better quality of goods and services to its customers.
The characteristics of business goals are as follows:  More employment: A business provides a large number
 Business goals are derived from mission statements. of employment opportunities to the members of the
society. This is a very important service especially in
 Business goals are task oriented and, therefore, they must state what is to developing countries like India where the pressure of
be achieved by an organization. population is high and thus unemployment prevails.
 Business goals are short term in nature.  Better environment: No business can survive for long if
 Business goals are challenging as they challenge the individuals who are it is harmful to the society. It must not cause any kind of
responsible for its attainment. air, water or noise pollution. All effort must be made to
 Business goals must specify the conditions that are necessary for the reduce the adverse effects of business on the quality of
attainment of organizational goals. life. Men, animals and birds must also be protected from
industrial pollution of the environment.
Objectives of Business  Better living standard: Good employment opportunities
Objectives are needed in every field where performance and results affect the and good quality of products improve the living standard
survival and prosperity of a business. Success in a business cannot be achieved of the people.
without the proper selection of objectives. The structure, direction and o Service to employees: A business must serve its employees by
management of a business closely depend upon its objectives. Some of the considering the following features:
important objectives are as follows:  Fair wages: Social justice requires that employees get fair
 Economic objectives: Profit earning is the most important objective of a remuneration for their work. Apart from the wages, if
business. Profits must be earned by a business to provide for its own their employers acknowledge their contribution, the
survival, coverage of risks, growth and expansion. It is a necessary employees would be satisfied and would work more
motivating force and it is in terms of profits that the efficiency of a sincerely.
business is measured. All business activities are performed to achieve the  Growth and promotion: The work of the employees
following economic objectives: must be acknowledged and they should be given adequate
o Incentive: Profit is the biggest incentive for work. It is the driving training to improve themselves so that they will be ready
force behind the business enterprise. It encourages a man to work to accept better positions in an organization, if offered.
to the best of his ability and capacity.  Partnership in the prosperity of business: Employees
o Survival: Profit is essential for the survival of a business. In the should not be considered servants in an organization.
absence of profits, an organization will not be able to survive. It Their contribution must be given due recognition. They
also helps in replacing obsolete machinery and equipment and, must be allowed to share in the prosperity of the business
thus, ensures the continuity of a business. either by sharing of profits or capital.
o Growth: Stagnation is the biggest setback for any industry. The  Human objectives: The production process consists not only of
prosperity and continuity of an industry largely depends upon its materials, machines and land, but also the workers working for the
growth and expansion. organization. Different human objectives can be listed as below:
o Measurement of efficiency: Profits measure the performance of o Fair wages, bonus, dearness allowance, provident fund, medical
the business. It is the accepted yardstick for the evaluation of the facilities and educational and other facilities to employees
efficiency of the business. o Workers’ participation in management
o Prestige: An unsuccessful business concern carries no good will. o Encouragement of creativity, initiative and provision of growth
Higher profits not only provide economic power and status to the opportunities for employees
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 o Job satisfaction and other provisions to raise the morale of Introduction to Ethics Introduction to Ethics o To make the products more satisfactory to consumers through the
workers study of consumer needs
o Congenial working conditions o To handle the complaints of consumers more carefully and to
o Security of employment for workers analyse them properly
o Profit sharing schemes for the workforce NOTES NOTES
o To answer consumers’ enquiries related to the company, its
 National objectives: Apart from the other objectives, there are some products and services
national objectives as well which are as follows:  Responsibilities towards shareholders: The basic responsibility of a
o Ensuring social justice business is to ensure the safety of investment and higher rate of return on
o Development of skilled personnel the investment. Owners of a business may be proprietors, partners or
o Development of small entrepreneurs shareholders. The interest of shareholders lies in participating in the
o Export development management and getting regular dividends at appropriate rates. It is,
o To abide by laws passed by local, state and central governments therefore, the responsibility of the management to improve
communication between the company and its shareholders. This can be
Role of Objectives done by providing maximum information to the shareholders through
newsletters, annual reports or by holding the annual general meeting of
Business objectives play a very significant role in strategic management. They the company at an appropriate time and place so that the maximum
help the management in the following ways: number of members can come and participate in the discussions.
 Objectives are the base of strategic decision-making. They help in
 Responsibilities towards community: The management has the
strategic decision-making by directing the attention of strategists to the
responsibility of informing the community about the organizational
areas where decision-making is required by them and also by
policies, activities and contribution towards the betterment of society. The
coordinating individuals’ behaviour towards strategic decision-making.
various other responsibilities towards the community are as follows:
 Objectives help in providing standards with the help of which both the
o Financial help to the municipal and district boards for the
individual as well as the overall performance of an organization can be
improvement of housing conditions
judged.
o To help the community by aiding hospitals, schools, colleges,
 Objectives also define the relationship of an organization with its
religious institutions, and so on
environment. This helps the organization to take into consideration what
has to be achieved for its employees, customers and the organization o To organize community forums and group discussions to promote
itself. better understanding of national and local affairs
 Objectives also help define the vision and mission statements of an o To encourage sports and provide recreational facilities
organization.
Business Ethics
1.2.3 Responsibilities of a Business towards Various Business ethics has different meanings for different people, but generally it is to
Interest Groups decide what is right or wrong in the business. According to Wallace and Pekel,
‘attention to business ethics is necessary during times of fundamental change as
Interest groups consist of the various persons connected with a business, such as the moral values that were not taken seriously are strongly questioned at that
consumers, shareholders and the community. The responsibilities of a business time’. Business ethics enables the leaders and employees to act at the time of
towards various interest groups are as follows: crises and confusion in the business. Therefore, business ethics helps to deal with
 Responsibilities towards consumers: A consumer is a person who business ethical issues that are vague.
determines what goods shall be produced and whether they should be sold
in the market or not. Consumers not only determine the income of the 1.3 ETHICAL CONCEPTS
business but also affect the success and survival of the business.
Therefore, a business has some basic responsibilities towards the Ethics is the branch of philosophy that is used to evaluate human actions. Some
consumers and these are as follows: basic ethical concepts in business are as follows:
o To produce those goods that meet the needs of consumers of
 Ethical subjectivism: This concept emphasizes that the ethical choice of
different tastes, classes and purchasing power
the individual decides the rightness or wrongness of his behaviour.
o To establish the lowest possible price with efficiency and
reasonable profit to the business  Ethical relativism: According to this concept, no principle is universally
o To ensure fair distribution of products among all sections of the applicable and so it would be inaccurate to measure the behaviour of one
consumers society with another’s principles or standards. Relativism overlooks the

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 fact that there may be enough evidence to believe that an ethical practice Introduction to Ethics Introduction to Ethics 1.3.1 Ethical Models
is based on false belief, illogical reasoning, and so on.
Ethical models can be used to define ethical situations and manage ethical
 Consequentialism: Consequentialism is based on two ideas: the concept dilemmas that may occur in the organizations. The Golden Rule Model and The
of value and the maximization of value. If, for example, honesty is Right-driven or Kantian model are two operational models that have emerged
considered a value, an act is considered ethical only if it maximizes this NOTES NOTES
from the work of philosopher Immanuel Kant .
value. An act, which does not maximize the said value, is not ethically
permissible. The Golden Rule Model
 Deontological ethics: This concept stresses that ethical values can be
This model—originated from the New Testament—specifies people should treat
developed from the concepts of reason as all rational individuals possess
others in the same manner that they themselves would like to be treated. It is a
the ability to reason. We may, for example, end up causing pain
fundamental principle found in every culture and religion and it is the most
unknowingly while trying to create happiness. Therefore, the ethical
important basis for the modern concept of human rights. It is also called the ethics
value of an action cannot be determined by its consequences. Instead, it is
of reciprocity as it stimulates an individual to put oneself in the other person’s
in the motive that lies behind the particular action.
shoes and then evaluate how one would wish to be treated in that particular
 Ethics of virtue: This concept emphasizes those traits that give the situation. This proves that this rule is absurd without identifying the receiver
individual a sense of satisfaction from ethical point of view. Virtuous acts and the situation. The ethics of reciprocity should not be confused with
like courage, honesty, tolerance and generosity are done as a way of revenge or penalizing justice. The ethics also mentions that one has the
living and not by chance. freedom to do anything as long as those activities do not harm anyone. If
 Whistle blowing: Whistle blowing refers to the attempt of an employee this golden rule is applied to every anomaly, then many unethical consequences
to disclose what he or she believes to be illegal behaviour in or by the may result in causing harm to others and perfectionists may charge others
organization. From one point of view, this seems to deceive the principle with critical analysis, which may lead to harassments. Different people have
of honesty in business ethics, as it is taken for granted that the employees different ideologies, beliefs and may belong to different cultural heritages. This
of an organization need to be loyal to its workings. However, when difference is the reason behind the difference people’s behaviour towards various
loyalty to one’s organization in particular is perceived to be harming situations.
one’s general loyalty to mankind, the act of whistle blowing is justified.
Failure on the part of the management of the organization to fulfil its The Kantian Model
social obligations calls for whistle blowing. It is the responsibility of the
This model is based on the hypothesis that everybody has some fundamental
whistle blower to be careful about revealing the organization’s secrets and rights in this ethical universe. So any action is ethically correct if it reduces the
to consider the harm it may cause to his colleagues and shareholders. The stakeholders’collective violation of rights. This model willingly provides
steps that should be taken into consideration by the whistle blower are: assistance in the internal audit review and helps in managerial decision-making.
o Ascertain the gravity of the situation before whistle blowing Kant did not believe that any outcome was good from its origin. According to
o Scrutinize the purpose him good is not always intrinsic. He did not believe in ‘good’ character traits like
o Authenticate and keep a record of the concerned information ingenuity, intelligence and courage. In fact, he used the term ‘good’ to describe
‘goodwill’, by which he meant the resolve to perform the act purely in
o Determine the type of offence and to whom it should be reported
accordance with one’s duty.
o Assert your claim in a proper way
If the actions are predetermined then they cannot be described as free and moral.
o Stick to the facts
He believed that to act morally, freedom is required. According to Kant there are
o Determine if the whistle blowing need be external or internal two concepts of duty. According to one concept, duty is just following orders
o Decide if the whistle blowing should be anonymous or otherwise imposed by others. The other concept is that duty is internal and can be imposed
o Make sure to follow proper rules in reporting the offence on oneself. He considered that inclinations constitute motivation whereas others
o Consult a lawyer (if required) believed that it was the physical world that acted as motivation. But Kant
believed that the sources of the physical world might be unreliable, passive and
o Anticipate and document vengeance phenomenal. Sometimes, man’s mind is over-clouded by sorrows due to his lack
 Ethical dilemmas in business: An organization’s ethical problems of sympathy from others but he still has the power to help those in distress. He no
indicate a conflict between its economic and social performance. This longer needs any support as he is sufficiently occupied with his own inclinations,
results in a dilemma for managers. Since people handle business, it is a making him indifferent to the sufferings of others. He becomes adaptive to his
crucial requirement to check and ascertain ethical behaviour at a personal sufferings with the help of the patience and endurance he has developed in due
level. This will confirm ethically correct responses from the organization course of time. This begins to show his worth of character and temperament.
to the mutual actions of individuals.

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 Introduction to Ethics Introduction to Ethics
Most of us live by rules most of the time. Some of them are called categorical be acquired and is not just a normal characteristic like beauty or intelligence.
imperatives that are unconditional commands which bind everyone at all times. Possessing a moral virtue is worthy of praise because it is like an accomplishment
There are two types of imperatives: hypothetical imperative, which is to say that since it needs effort. The question that arises from this standpoint of ethics is:
if one wants to achieve success then he should work in a free way and not bind What are the characteristics that make a person morally good? Which traits are
NOTES NOTES
himself to his inclinations; and categorical imperative, for example, the termed as moral virtues? There are several views based on these. The most
imperative to always tell the truth as it is unconditional and can be applied at all noteworthy theory of virtue was by Aristotle who was of the opinion that moral
times. virtue is a like a habit that allows a person to perform an action in harmony with
the definite goal of human beings. Aristotle distinguished human beings from all
Kant also introduced maxims, which are subjective rules that guide actions and
other living beings by their capacity to reason and therefore, the main purpose of
help an individual to act according to the relevant description. There is sufficient
human beings is to use reason in all their actions and behaviours. Therefore, it
generality in description. All actions have maxims like:
can be said that moral virtues are habits that allows a human being to live with
 Never lie to your colleagues. reason. Aristotle was of the opinion that a human being lives his life in
 Never act in a manner that would make your family or organization accordance to reason. Moral virtues makes a human being aware and he selects
ashamed of you. the reasonable ground in his actions, emotions and desires by going too far and
 Always work hard to be the best performer. still not going far enough. Moral virtue draws a line between two vices, one of
 Its acceptable to cheat if the pattern demands it. lack and the other of surplus, and its purpose is to hit the mean in reference to
desires, actions and feelings. Consider this example, in case of the emotion fear,
1.3.2 Virtue Ethics—An Alternative Model of Ethics courage is the virtue in response to fear while cowardliness is a vice in response
to fear and recklessness. In case of desire for food, restraint is the virtue which
The traditional ethical models of utilitarianism and Kantian ethics ignore the restrains you from indulging in excess while gluttony is the vice that leads to
character of the agent who delivers the action and focuses primarily on the action indulging in excess and austerity is the vice of unfairly indulging in too less.
as the main theme of ethics. Utilitarianism tells us that actions are right according Justice is the virtue that gives people what they are worthy of whereas injustice
to the happiness that emerges as the outcome, while Kantian ethics tells us to ‘act either gives them less or more than they are worthy of. Virtues, therefore, deal
only according to that maxim whereby you can at the same time will that it with one’s aspirations, actions and emotions in a way that takes the sensible
should become a universal law’. The morality of human beings and their actions middle path and keep away from irrational extremes, whereas vices leads to the
are evaluated by the alternative approach to ethics. The fact that actions form the extremes of either surplus or too less. Aristotle argued that the virtue that allows a
basic subject matter of ethics has been criticized by several ethicists. This person to identify what is reasonable in a situation is prudence. A Christian
assumption highly debated the fact that ethics should also pay attention to the philosopher of the middle ages, St Thomas Aquinas, was of the opinion that a
kind of person an agent ought to be and not just focus on the action of the agent. person’s purpose is not just to use reason, but also the union with God. Thus,
This helps to carefully judge a person’s moral character which includes whether Aquinas added the theological or Christian virtues of hope, charity and faith—the
his moral character displays vice or virtue. According to ethicists, an adequate virtues that permit a person to unite with God—to Aristotle’s list of moral virtues.
approach to ethics takes virtue and vice as the fundamental beginning for ethical So far one significant facet of virtue theory has been ignored: How does it help a
point of view in contrast to the action-based ethics. However, it does not believe person to decide what he should do? Can a virtue ethic give person guidance
that ethics of virtue vary majorly from the action-based ethics. It is said that about how he should live his life and how he should behave? There is an analysis
moral virtue is obtained and is appreciated as part of a good human being who is that criticizes virtue theory by saying that it is unsuccessful in providing guidance
morally high and this is revealed in the habitual behaviour of the person. A on how one should act. In a situation when a person is in a dilemma or about to
person is said to possess moral virtue when he is inclined to act normally in the commit an act which he is unable to decide if his action is right or wrong, it is
way that are the characteristics of a morally sound person. For instance, honesty likely he will ask a friend for a solution, it does not help to be told what kind of
is regarded as an attribute of a person who is morally good. CHECK YOUR PROGRESS character one should have. In such circumstances, one requires advice on what
1. Define the term ethics.
When a person believes that telling the truth is right and he feels good when he type of actions are suitable in a given condition, and the virtue theory seems
2. List two different types of
speaks the truth he is said to be honest by virtue. He habitually speaks the truth models of ethics. incapable of giving such advices.
and does so because when he lies he is uncomfortable and therefore, tells the truth 3. What are the different ethical
out of respect for truth. If a person spoke truthfully occasionally or spoke the business concepts?
4. Name an alternative model of
1.4 ETHICAL VALUES
truth with immoral desires, or for wrong motives, in that case he is not honest. A
ethics.
person cannot be called honest if he lies frequently, or if his motive for telling the 5. What is the golden rule Ethical values and actions are an integral part of ethical societies. Ethical actions
truth was to get people to like him or out of fear. Honest as a moral virtue has to model? in the ethical society refer to the initiatives taken by the people to show their
Self-Instructional Material 13 14 Self-Instructional Material
commitment towards building a better life for them and for their children. Ethical Introduction to Ethics Introduction to Ethics Constructive Actions
actions are also termed as the categorical imperative actions. The whole world is
created by action and is meant for action. The future life depends on the actions Constructive actions are also considered as desire-prompted duties. Constructive
performed by the people. Ethical actions are the activities performed by the actions are always done by people who consider it their responsibility or duty to
social, national or personal group. The people in these groups perform the NOTES NOTES perform these actions. These actions can be performed either daily or on some
activities in a spirit of service and commitment. The dimensions of ethical actions special time. These actions always provide a result that is purposeful and
can be divided into two major categories. These categories are: self-determined. Constructive actions can be of three different types. These types
 Community service: Community service aims at helping the are:
organizations and the people in the community. The organizations in the  Obligatory actions: These actions can be performed by any type of
Baltimore area providing food to AIDS victims and their families come person in the society. These actions do not affect any special category of
under this category. people. Every man, society and the universe would be affected by these
 Social issues support: Social issues support aims at giving emotional and actions.
physical support to organizations and the people in the society. Social
 Prohibited actions: Prohibited actions do not prove to be of worth for the
issues support can come in different forms. These forms are:
people. The non-performance of prohibited actions is also obligatory.
o Emotional support
 Optional action: Optional actions are also called hypothetical imperative
o Informational support
actions. These actions prove to be beneficial to human beings and are also
o Instrumental support performed by the people to secure their personal benefits.
o Personal feedback
Therefore, ethical actions are responsible for performing the obligatory and
o Sharing view points
optional actions successfully and avoiding the prohibited actions.
1.4.1 Types of Ethical Actions
Characteristics of Ethical Actions
Ethical actions can be of two types. These types are:
The different characteristics of ethical actions are:
 Destructive actions
 Ethical actions are not only activities to serve others but also the inner
 Constructive actions
temperament of the mind.
Destructive Actions  Ethical actions give importance to helping others.
Destructive actions are those that can harm the people performing the actions as  Ethical actions are not the instrumental value but the intrinsic value.
well as others. It is very difficult for people to find out which actions are harmful.  Ethical actions are performed for prosperity, success and sound decisions.
Some actions can cause damage in one situation and the same actions can be
 Ethical actions are used to avoid prohibited constructive actions and to
useful in some other situation. Buddhist ethics point out that the motivation and
promote obligatory and optional actions.
frames of mind are the two concepts that can be useful to determine destructive
actions. A destructive action must be motivated by passion, anger and naivety  Ethical actions are performed as duties or responsibilities of individuals.
about its effects. Buddhist ethics determined that most of the mental, physical and
verbal actions could be destructive. The ten destructive actions determined by Karma Yoga
Buddhist ethics are: Karma yoga is also referred to as the Buddhi yoga or the discipline of actions.
 Taking the life of others Karma yoga is one of the four pillars of yoga. Karma yoga gives importance to
 Taking something from others that has not been given to them perform the ethical actions and not care for the results or reward. It states that the
 Lying only way to spend life successfully is to perform ethical actions regularly.
 Talking and speaking insensitively According to karma yoga, people performing ethical actions can achieve Moksha
 Using cruel language and blessings of God. Ethical actions are a way to perform duties or
responsibilities in an unselfish manner. Individuals performing ethical actions
 Using language consisting of idle words
without care for the fruit would be detached from this world. Only these persons
 Thinking thoughts of meanness
can understand the truth of life. Indian Hindu culture is derived from this
 Thinking jealous thoughts philosophy.
 Distorted and aggressive thinking
People with belief in the karma yoga are able to face any type of situation in life
 Behaving like a moderator and can also explain the results of their ethical actions to others. The person
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 Introduction to Ethics
performing ethical actions by keeping the karma yoga principles in mind spends a Introduction to Ethics Benefits to Some
Cultural and Religious Traditions
truly moral and more satisfied life. The principles of karma satisfy the logical as
well as the moral awareness of people. People following the principles of karma
yoga understand that:
NOTES NOTES
 They have to perform only ethical actions. Analysis of Value Moral Moral Dilemmas
Ethical
 They should not be concerned with the results of their ethical actions. Principles
Judgements Standards

 They should not perform ethical actions to get a predefined result.

 These principles do not force people to sit idle. Social and Economic Situations
Harm to Others
Morality
People should be self-disciplined in order to carry out ethical actions
successfully. Morality refers to the concept of human action which pertains to Figure 1.2: Relationship between Morals, Values and Ethics
matters of right and wrong. Individuals who oppose with determination The mind is responsible for the thoughts and feelings of individuals. The
inducement towards the wrong spend a good moral life. existence of individuals and their activities is only due to their mind. The feelings
Ethical actions should be performed as a community standard rather than as an and opinions of persons depend on their mind. A person having a good mind has
good feelings and a person having a disturbed mind has disturbed feelings.
individual responsibility. Individuals in a society can perform three types of
ethical actions. These actions are: Professor Gardner suggests five types of minds. The ethical mind is one of them.
 Morality: Morality actions are performed to secure the future of others. The others are disciplined mind, synthesizing mind, creating mind and respectful
mind. The ethical mind of a person is affected by the nearby surroundings and
 Religion: Religion is the collection of ethical actions that can affect a culture. Ethical minds can be of two types. These are:
group or society.
 Subjective mind: The subjective mind faces motivation from the
 Civil law: Civil law actions are a collection of ethical actions that can be different objects of the world. This type of human mind is also called the
used to change or control the behaviour of an individual in society. outer mind.
Therefore, morality can be defined as the collection of concepts and attitude  Objective mind: This type of mind reacts to the encouragement received
that can be used by a culture or a group in society to control or change from the outside world. This type of human mind is also called the inner
the behaviour of an individual. Different societies or cultures have their mind.
different opinions on morality. Morality can be applied to the generality or the Figure 1.3 shows the two types of ethical minds.
part of the fields in which the personal opinions of the individual have some
relation or reference to other individuals. These individuals may belong to some
other community too. Therefore, morality can exist in isolation or in a generic Egoistic Desires
society.
Subjective Mind Objective Mind
There exist different types of groups or societies having different views on
behaviour. Some groups put heavy restrictions on behaviour and some groups
allow the individuals to be self-determined. Morality can also be defined as the
personal ethical behaviour that an individual creates for himself.
The terms ‘morality’ and ‘ethics’ have a strong relationship with each other.
Morality refers to moral character or standards. Morality is used to analyse the
Action World Real World
behaviour of the individual and the standards of conduct. Ethics is used to refer to
the formal study of these standards. Morality can be considered as ethics in
action.
Figure 1.3: Subjective and Objective Minds
Figure 1.2 shows the relationship between morals, values and ethics.
The objective mind of the human being is under the control of the subjective
mind. The objective and subjective minds of human beings are separated by
layers of egoistic desires. The confidence of an individual depends on the
distance between these two minds. The greater the distance between these two
minds, the more confused is the person. If the distance between the two minds is
Self-Instructional Material 17 18 Self-Instructional Material
large, then the objective mind does not receive any message from the subjective Introduction to Ethics Introduction to Ethics results. This is also the Indian philosophy. Ethical actions are a way to
mind. If the mind is in a state of confusion, then the mind of the individual perform one’s duties or responsibilities in an unselfish manner.
becomes nervous, unsteady and confused. Thus, the person loses his morale. If  Path of knowledge: The path of knowledge means to move towards
the emotions of the person are separated from his mental power, then the acquiring knowledge. The path of knowledge also eliminates the distance
objective mind would not be under the control of the subjective mind. This NOTES NOTES between the subjective mind and the objective mind. Thus, the path of
situation can make a man wild and come to some unintelligent conclusions. knowledge makes a man confident and self-developed.
Each person should try to decrease the distance between the subjective mind and  Path of discrimination: The path of discrimination assists a person to
the objective mind. This can only be accomplished by training the mind. Each identify his inner faults. The person has to transform the inner motives
person should be able to identify support that will maintain mental energy, and mental attitudes to train the mind. The path of discrimination forces
intellectual vision and physical patience to spend the ethical action life. individuals to control the emotions of attachment, fear and anger.
Training of the mind can be accomplished by two methods. These methods are:  Path of sacrifice of wealth: The path of sacrifice of wealth refers to
 Art of disengagement: Mental disengagement can only be developed by donations of wealth in charities without a consequence in mind. This
developing a mind that is free from abstracted and fractional feelings and feature makes people more positive towards life and helps individuals
is more concentrated. Every person should identify his role and keep the overcome greed.
subjective and objective mind steady to fulfil his role. The mind of the  Path of self-control: Self-control is an internal characteristic of
person should be integrated so as to keep him aware of each situation. individuals. Self-control can be of five types. These are:
The integrated mind does not allow the individuals to cross the o Non-injury
boundaries of his current role. o Truthfulness
 Self-denial: Self-denial is an inner characteristic of a person, by which he o Non-stealing
does not let any extraneous thoughts enter his mind so as to achieve
o Celibacy
something. This is one of the methods to train the mind. Some examples
of self-denial are the state of mind of a student before an examination, o Non-acceptance of gifts
and the state of mind of a dancer before the performance.  Path of mind-control: The path of mind-control consists of
concentration and meditation. Concentration refers to focusing on the
1.4.2 Self-development object on which one is working. Devotion to God helps in achieving
concentration. Meditation refers to the state of the body in which the
Self-development is the responsibility and duty of the individuals to learn and
person feels relaxed and the mind is more focused. Therefore, meditation
develop themselves. Individuals can use the process of assessment, reflection, and
helps in achieving concentration. The path of meditation is also called the
take necessary action to achieve self-development. Self-development is the only
path of yoga. Yoga is the only way to keep the mind calm and focused
way for individuals to update their skills and knowledge in order to face the new
and hence to get concentration.
problems that emerge in life. Self-development also determines one’s future
career direction. Some of the characteristics of self-development are:
 The person undergoing self-development does not depend on the support 1.5 BUSINESS ETHICS
of the outside world. Such type of person becomes self-sufficient. Self-
development in individuals makes them independent. Business is described as an activity done by humans to produce or acquire wealth
where he buys and sells goods. Business ethics and values are important for the
 Self-development brings in the feature of objectivity in individuals. Such
successful development of a business organization. Ethics in business refer to a
a feature gives individuals an impersonal attitude.
code of standard by which one can determine what is wrong and what is right for
 A self-developed person looks happy in life. His inner nature looks full of the business enterprise. Fairness, integrity, commitment to agreements, broad-
cheer and joy. He will not be depressed and miserable. mindedness, considerateness, importance given to human esteem and self-respect
 A self-developed person becomes dynamic, active and brighter in life. and many such principles determine business ethics.
 A self-developed person is more lovable. Business ethics generally deals with what is right or wrong in the business.
According to Wallace and Pekel, ‘attention to business ethics is necessary during
Self-development Methods times of fundamental change as the moral values that were not taken seriously are
Individuals can use different methods for self-development. Some of the methods strongly questioned at that time’. It is business ethics that enables the leaders and
are: employees to act in times of crisis and confusion in the business. Business ethics
is a method of dealing with unclear business problems.
 Path of action: The path of action is also called as karma yoga. Karma
yoga is one of the four pillars of yoga. The path of action states that
people should only perform their job and should not care for the fruits or
Self-Instructional Material 19 20 Self-Instructional Material
 Introduction to Ethics ethics of that organization should have honesty listed in it. Code of ethics
1.5.1 Unethical Problems in a Business Introduction to Ethics
changes with the change in the society and the needs of an organization.
 Managerial misbehaviour: Managerial misbehaviour includes illegal
and unethical practices involved in the management of an organization.  Business ethics is an opinion. Many people believe that stress and
confusion may inspire good people to behave unethically. Ethics in an
 Moral mazes: It is a part of business ethics which deals with the ‘moral NOTES NOTES organization can be managed by helping each other to stay ethical and to
mazes of management’. It includes ethical problems, such as conflicts of work together through confusing and stressful ethical dilemmas.
interest, misconduct of contracts and agreements and the illegal use of
resources. After the birth of the social responsibility movement in 1960,  Business ethics is the new trend. Many people believe that business ethics
business ethics has become a management discipline. This movement is a recent phenomenon and has recently gained attention. However, it is
helped solve various social problems, such as poverty, crime and an old phenomenon that has received importance now.
illiteracy by using the finance of business class people.  Business ethics is unmanageable by an organization. Actually, ethics is
not directly ‘managed’ by an organization, but the behaviour of the team
To develop better relationships among people within an organization, the field of leader has a strong moral influence on the employees. The objectives of
human resources emerged recently. As the complexity in the field of commerce an organization, such as maximizing profit and minimizing costs also
has been increasing day by day, so has the need to simplify trade in an have a strong impact on the ethics of an organization. Even the laws,
organization. The process of simplifying the commerce within an organization regulations and rules have a good impact on the ethical values of the
ensures better trading between the partners. With the growing need of simplifying employees and hence minimize the harm to the business. But still, some
trade, the discipline of business ethics emerged. Business ethics is managed by believe that business ethics cannot be managed by an organization.
following the ethical code and the code of conduct as set by an organization.
 Business ethics is a social responsibility. Many people believe that ethics
1.5.2 Myths regarding Business Ethics is a social responsibility that does not deal with practical matters. Madsen
and Shafritz define business ethics as an application of ethics to the
Business ethics maintains moral values and ensures that the behaviour of corporate world. It helps in determining business dealing responsibilities
employees is aligned with these values. Still, there are certain myths regarding and also identifies significant business and social issues.
business ethics, which are as follows:  Business ethics is not needed if the organization has no legal problems.
 Business ethics is a matter of belief than management. People are of the belief that persons who are unethical can function within
 Organizations believes that their employees are ethical so they are not the limits of law. For example, complaining constantly about others and
required to pay attention to business ethics. According to Wallace, ethical withholding information from superiors. However, breaking the law often
conflicts arise in the following situations: starts with unethical behaviour that has gone unnoticed.
o When there exist significant value conflicts among differing  Business ethics has little practical significance in a business. Business
interests of employees. ethics helps identify and prioritize the values to guide the behaviour of
o When other alternatives are equally acceptable. employees in an organization and establish associated policies and
procedures for ensuring that a certain behaviour is followed.
o When there are significant consequences on the ‘stakeholders’ of
an organization.
1.5.3 Benefits of Business Ethics
o According to Kirrane, people consider honesty and courtesy as
the only business ethics. But when the complex ethical problems The various benefits of managing ethics in a business are as follows:
come into play, most people realize that it is difficult to apply  Business ethics helps in improving society by establishing government
ethical principles in real-life situations. agencies, unions, laws and regulations in the society.
 Business ethics constitutes the principles propounded by philosophers and  Business ethics helps an organization maintain ethical values during times
theologians. Many people are of the opinion that business ethics is a of crisis. Business ethics programmes guide leaders about the right or
religion or a theoretical debate. In the day-to-day issues of the wrong ways of dealing with complex dilemmas and how they should act
organization, business ethics has very little to contribute. However, ethics during that time.
is a management discipline that requires a planned approach and several  Business ethics helps employees behave according to the ethical values
management programmes. CHECK YOUR PROGRESS that are preferred by the top management of an organization. An
 Business ethics only states the obvious do-good situations. Several people 6. What do you understand by organization discovers many differences between the values that reflect in
are of the opinion that ethics represents the values that a person should self-development? the actions of the employees and the values preferred. Employees
naturally aspire to have and, therefore, establishing codes of ethics is 7. Mention two benefits of experience a relationship that is strong between the values of the
business ethics.
unnecessary. However, importance should be given to the ethical values organization and their values. Ethical values induce teamwork and
of an organization. For instance, it is understood that everybody should be increase the efficiency of the employees.
honest. If the workers of an organization are not honest then the code of
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  Ethics supports employee growth. When an employee pays attention to Introduction to Ethics Introduction to Ethics Ethical actions in the ethical society are used to represent the initiative taken by
ethics, it induces confidence in the employee to deal with reality and face the people to show their commitment to their work. Ethical actions can be of two
both good and bad circumstances. Bennett, in his article ‘Unethical types: destructive and constructive. The ethical mind is also used to represent the
Behaviour, Stress Appear Linked’, explained that the more an employee thoughts and feelings of the individuals. Subjective and objective minds are two
is emotionally healthy, the more ethical he is. NOTES NOTES kinds of ethical minds.
 Ethics have become legal instruments. These days, there are several Ethical management is a term used in organizations to handle different ethical
lawsuits regarding personnel matters and the influence of the services of dilemmas. Social responsibility of businesses involves the consideration of
the organization on the investors and customers. Major ethical principles general public interest by businessmen while taking business decisions and
that are applied in the organization are the laws that are made by the actions.
government. A greater attention on ethical issues on the part of the
government ensures high ethical procedures and policies in the
workplace. An employee, for example, is subject to breach of contract on 1.7 ANSWERS TO ‘CHECK YOUR PROGRESS’
non-compliance of the terms and conditions of the contract.
 Business ethics helps to avoid criminal acts of ‘omission’ and it also helps 1. (a) The term ‘ethics’ defines the standards that bear on right and wrong
in lowering the fines. Ethics helps in ascertaining the violation of ethical issues of society.
issues and helps in rectifying the violation that is committed by the (b) ‘Ethics’ is the branch of philosophy that is used to study the values
organization. The guidelines set by an organization about ethical values and behaviour of a person.
helps to lower fines. An organization, for example, that has knowingly
violated a contract is considered to have committed a criminal act and the 2. Ethical models can be used to define ethical situations and manage ethical
organization is subject to penalty. dilemmas that may occur in the organizations. Two operational models
have emerged from the work of philosophers and theologians: The
 Business ethics helps to identify and manage the values associated with
Golden Rule Model and The Right-driven or Kantian model, propounded
quality management, strategic management and diversity management.
by philosopher Immanuel Kant.
For managing these values, ethical programmes record the values,
develop policies and procedures and then provide training to the 3. The basic ethical concepts in business are:
employees on these policies and procedures. These ethical programmes  Ethical subjectivism
manage certain values of quality management, such as reliability,
 Ethical relativism
performance, measurement and feedback. Similarly, these programmes
also manage various strategic values, such as reducing cost and increasing  Consequentialism
market share.  Deontological ethics
 Business ethics helps in building a strong and positive public image of  Ethics of virtue
an organization. Ethical values enable an organization to increase their  Whistle blowing
goodwill in the market. Those organizations that value their customers
 Ethical dilemmas in business
have a positive influence in the market. Ethical values are the milestones
that enable the establishing of a successful and socially responsible 4. Virtue ethics is an alternative model of ethics which looks at moral issues
business. and evaluates the morality of people’s character and their actions.
 Business ethics strengthens organizational culture. Ethical values improve 5. The Golden Rule Model is derived from the New Testament and it states
relationships between an organization and its customers. They strengthen that one should treat other people in the same way that he or she would
the organization by ensuring consistency in the standard and quality of want to be treated. It is a fundamental principle found in every culture and
the product. religion and it is the most important basis for the modern concept of
 Business ethics makes sure that the right activities are performed in an human rights. It is also called the ethics of reciprocity as it stimulates an
organization. individual to put oneself in the other person’s shoes and then evaluate
how one would wish to be treated in that particular situation.
1.6 SUMMARY 6. Self-development is the responsibility and duty of the individuals to learn
and develop themselves. Individuals can use the process of assessment,
Ethics is the branch of philosophy that is used to evaluate the attitude and reflection, and take necessary action to achieve self-development. Self-
behaviour of a person. Ethics is also used to analyse human actions. The Golden development is the only way for individuals to update their skills and
Rule and the Kantian model are the two basic models that can be used to define knowledge in order to face the new problems that emerge in life. Self-
the ethical situations and manage ethical dilemmas that may occur in development also determines one’s future career direction.
organizations.
Self-Instructional Material 23 24 Self-Instructional Material
 7. The benefits of business ethics are: Introduction to Ethics

 Business ethics helps in improving society by establishing

government agencies, unions, laws and regulations in society.
 Business ethics helps an organization maintain ethical values during
NOTES
times of crisis. Business ethics programmes guide leaders about the
right or wrong ways of dealing with complex dilemmas and how they
should act during that time.

1.8 EXERCISES AND QUESTIONS

1. What are the types of business activities?
2. Discuss the different ethics models.
3. What are the characteristics of ethical actions?
4. What do you understand by business ethics? What are its benefits?

1.9 FURTHER READING

Modh, Satish, Ethical Management: Text and Cases in Business Ethics and
Corporate Governance. New Delhi: Macmillan Publishers India Ltd, 2005.
Mathur, U.C., Corporate Governance and Business Ethics: Text and Cases. New
Delhi: Macmillan Publishers India Ltd, 2005.

Self-Instructional Material 25
 Organizational Ethics Organizational Ethics the activities of an organization. Therefore, organizational ethics is collective in
UNIT 2 ORGANIZATIONAL ETHICS scope.
Organizational ethical issues can be handled at three levels. These levels are:
Structure
NOTES NOTES
2.0 Introduction  Corporate mission
2.1 Unit Objectives  Constituency relations
2.2 Ethical Corporate Behaviour
 Policies and practices
2.3 Development of Ethical Corporate Behaviour
2.4 Ethical Leadership Corporate mission refers to the objectives of an organization that are used to
2.5 Summary define its ethical responsibilities. Corporate mission also reflects the ambitions
2.6 Answers to ‘Check Your Progress’ and expectations of the employees. Employees should be integrated in a good
manner to achieve the corporate mission.
2.7 Exercises and Questions
2.8 Further Reading Constituency relations define the responsibilities of the elements of an
organization. The elements of an organization may be employees, customers,
suppliers, shareholders and the general public. These responsibilities must be
2.0 INTRODUCTION handled properly to manage the ethical conduct of business.
Organizational ethics can also be used to evaluate the policies and practices of the
To understand the term ‘organizational ethics’, one has to first try and understand
organizations. Public commitment to ethical principles can give way to business
the two terms ‘organization’ and ‘ethics’. An organization is a collection of
and administrative practices.
individuals with a common mission while ‘ethics’ may be described as an attempt
or endeavour by individuals, to understand what is ‘right’ or ‘wrong’. Ethics is Organizational ethics also depends on the type of the organization. Organizations
concerned with the critical analysis of situations. can be classified by considering their economic and ethical concerns.
Organizations can be classified into four types. These are:
Organizational design and follow a set of core principle or concepts in that
attempt to develop ethical corporate behaviour.  Exploitative: Organizations with low economic and ethical concerns are
called exploitative organizations. These organizations utilize child labour
and use rivers for dumping wastes to maximize their profits.
2.1 UNIT OBJECTIVES
 Manipulative: Organizations with high economic performance concerns
This unit teaches you about: and low ethical concerns are called manipulative organizations. These
 The collective scope of organizational ethics organizations use tax laws, labour laws and union leaders to maximize
profit.
 Corporate code of ethics
 Holistic: Organizations with high ethical concerns and low economic
 Framing a code of conduct concerns are called holistic organizations. These organizations spend their
 Managing ethics in an organization money in social and environmental purposes.
 Roles and responsibilities in ethics management  Balanced: Balanced organizations have high ethical and economic
concerns. These types of organizations gain profit as well as work for
2.2 ETHICAL CORPORATE BEHAVIOUR social and environmental purposes.
Figure 1.3 shows the different types of organizations classified by economic and
Organizational ethics is used to consider the issues of morality and rationality in ethical issues.
organizations. Organizational ethics is completely different from management
ethics. Management ethics focuses on the ethical quality of the decisions and
actions taken by managers of an organization. Thus, management ethics deals
with the individuals in the organization and organizational ethics deals with all
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 Ethical Issues Organizational Ethics Organizational Ethics  Not using official property for personal use
 Performance of good quality of work
High Holistic Balanced  Having initiative
NOTES NOTES  Conservation of resources and protection of quality of environment

Advantages of a Code of Ethics

Low Exploitative Manipulative Some of the advantages of a code of ethics are:
 Code of ethics can be used to handle outside pressure.
 They can also be used in making overall strategic decisions.
High  These codes can be used to define and implement the policies of the
Low
organization and distribute work between the employees.
 Code of ethics can be used to optimize the public image and confidence
of the organization.
Figure 2.1: Different Types of Organizations  They can be used to increase the skills and knowledge of the individuals.
 Code of ethics can also be used to respond to the different issues of
2.2.1 Corporate Code of Ethics stakeholders.
Corporate ethical codes can be defined as the standards and beliefs of an  These codes of ethics can be used to discourage improper requests from
organization. These standards and beliefs are made by the managers of the employees.
organization. These ethical codes can be used to adjust the thinking and attitude  They can also strengthen the enterprise system.
of the individuals in the organization. Ethics codes of organizations are different
from the rules of ethics. Ethical rules are the requirements according to which an
individual acts. 2.3 DEVELOPMENT OF ETHICAL CORPORATE
Snoeyenbos and Jewell define three elements to implement ethical behaviour in
BEHAVIOUR
the organization. These elements are:
The approaches to business ethics can be classified into the following areas:
 Implementing the corporate ethical code
 Identifying practical issues and assigning responsibilities
 Introducing an ethics committee
 Analysing existing practices and framing a code of conduct
 Introducing a management training programme that includes ethics
 Raising fundamental philosophical problems
training
Organizations can handle the issue of ethics by incorporating the code of business 2.3.1 Identifying Practical Issues and Assigning Responsibilities
conduct in the corporate structure. These business codes can be used to advise, This approach explores various kinds of ethical issues that can arise in business
guide and regulate the behaviour of the individuals in organizations.
and society. Business activities should be conducted in such a way that they do
Organizations can translate the human core values into business codes by using
not cause any harm to the society. The various ethical issues that can arise in
some specific guidelines. Many organizations have formulated codes of ethics for
business and society are:
their employees. Most of these codes are very different and some are similar.
These formulated codes of ethics can be used as a tool for developing ethical  Employee rights
conduct. Some of the ethical codes formulated by organizations are:  Ethical business conducts
 Ethical codes for discipline  Environmental protection
 Proper code of dressing CHECK YOUR PROGRESS  Child labour in business
 Avoiding abusive language or actions 1. What are the types of  Discrepancies in the wages of women employees
organization?
 Punctuality  Bonded labour
2. What are the three elements
 Legalistic ethical codes for implementing ethical  Exploitation of unorganized labour
 Always following instructions from superiors
behaviour in the organization?  Minimum wages
3. Mention five ethical codes
 Performance of fair performance appraisals usually formulated by  Obligations of large and multinational corporations
organizations.
 Personal and cultural ethical codes
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2.3.2 Analysing Existing Practices and Framing a Code of Organizational Ethics Organizational Ethics Other organizations use benchmarking to carry out their day-to-day activities.
Conduct The examples include the development of benchmarking strategies to reduce
manufacturing set up time, increase in the number of customers served per hour
This approach deals with the subject of public policy and with the identification
and cut in the delivery time. The following is the sequence of steps involved in an
of unethical practices. There are various areas of conduct that require some
NOTES NOTES effective benchmarking process:
amount of government regulation. Such areas include product liability, worker
rights, environmental problems, white-collar crimes and child labour. This  Determine the key performance areas that need to be benchmarked. These
approach also deals with the ethical guidelines that provide benchmarking for the include products and services, customers, business processes in all
decision-making process. departments and organizations, business culture and calibre and training
of employees.
Benchmarking  Identify the most relevant competitors and best organization in the
Benchmarking is one of the trends or perspectives that can be used by the relevant industry.
management for the purpose of organizational development. Benchmarking can  Set the key standards and variables that need to be measured.
be defined as a process of comparing the works and service methods against the  Measure the standard variables regularly and objectively.
best practices and best outcomes. Benchmarking acts as a powerful agent for  Develop an action plan to gain or maintain superiority over competitors.
change and motivation that helps in organizational development. Benchmarking
basically focuses on identifying changes that can result in higher-quality output  Specify programmes and actions to implement the action plan and
by incorporating different organizational behaviour techniques. The process of monitor the ongoing performance of the organization.
benchmarking involves looking both inside and outside the organization for
identifying the methods that can be used for organizational development. 2.3.3 Fundamental Philosophical Problems
Benchmarking facilitates organizational development by identifying Under this approach, business ethics can be defined as an attempt to keep ethical
improvement strategies. It enables the organization to learn from other obligations. This approach deals with the relationship of the individual and the
organizations. It also helps in the relocation of resources that speed up society and it is used to identify the area of development of the society and its
organizational development. Benchmarking is also used to train and develop culture.
human resources to ensure efficient performance that is comparable to the
performance of competitors. It also focuses on the differences between personal morality and social morality.
The main aim of this approach is to identify and define business values.
Benchmarking involves team activity. In benchmarking, a team activity should be
encouraged by seeking new ideas, suggestions and cooperation through a process Business values
of external consultation. Benchmarking also involves introducing new ways of
working that utilize the talents and abilities of the employees working in an A business value refers to a set of beliefs pursued by an organization. Business
organization. The active involvement of employees at all levels ensures their values like ‘customer satisfaction’, ‘enthusiatic teamwork’ and ‘state-of-the-art
interest and commitment, which is essential for organizational development. In an provision for production’ are some of the commonly pursued values by several
organization, the internal teams which are used to obtain and analyse data related organizations.
to benchmarking are responsible for recommending changes and improvements in When such values are pursued effectively and with zeal by executing them in the
order to support organization development. There are basically three types of daily activities of the management and the employees of the organization, they
benchmarking: internal benchmarking, functional benchmarking and competitive are believed to pay back in manifold returns and success.
benchmarking. Internal benchmarking is carried out between closely related Pursuing business values plays a vital role in the growth and survival tactics of an
divisions or similar plants of the organization. This type of benchmarking uses organization.
shared performance parameters as a basis for comparison. Functional bench-
In general, the most common values that facilitate in improving profits and the
marking is a more positive approach than internal benchmarking. Functional
image of the organization are as follows:
benchmarking is used to compare performance parameters of similar business
units of different organizations. It is also used to compare various procedures  Persistent progress: It refers to an eagerness and enthusiasm on the part
followed by the organizations for the purpose of organizational development. of the organization to keep its functioning as an ever efficient and up-to-
Competitive benchmarking uses customer requirements as a parameter for date working endeavour towards progress.
comparing the performance of the organization against other companies that are  Customer satisfaction: It refers to making the customers feel important
best in the industry. This helps in identifying the areas which should be targeted and responding to their needs, interests and, if need be, providing
for improvement, in order to ensure organizational development. solutions to their problems in case of any documentation processes
regarding the purchase of the organization’s product.
Some organizations implement benchmarking at the start of the projects. This
 Personnel development: When it comes to development, organizations
strategy begins with the formation of a team, which is responsible for defining the
can benefit more by developing the skills of their employees. Besides
goals of the project and identifying the areas in which benchmarking will be used.
considering the satisfaction of its customers and management, it should
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 also take into account the satisfaction of its employees, which in turn can Organizational Ethics Organizational Ethics guidelines that the managers derive from their personal moral philosophy. The
yield sincere work performance from the employees. moral awareness of the managers can be ascertained by the organizational
 Innovation: It refers to the enthusiasm to take on new challenges and administration.
responsibilities on the part of the employees and a desire to diversify and Management ethics in an organization deals with the morality and conduct of the
try out new ventures on the part of the organization. NOTES NOTES
individuals and the responsibilities of the management. Therefore, ethical
Optimal use of resources: It refers to making sincere efforts to enhance management or ethical leadership deals with issues relating to managerial
overall business performance by maximum utilization of the organization’s misbehaviour and the moral conduct of the management.
current resources.
2.4.1 Ethical Issues in Organizations
2.4 ETHICAL LEADERSHIP There exist many different ethical issues in the organization or at the workplace.
Some of them are:
Importance of Leaders in an Organization  Identifying the conflict issues in the organization and trying to avoid them
A leader is an integral part of an organization, because it is the leader who helps  Deciding different methods to motivate employees
the organization to achieve the goals and objectives. The various reasons why the  Managing fairness in employee performance appraisals
leaders are important for an organization are as follows:  Protecting secret information of the organization
 A leader acts as a friend to the employees he is leading.  Identifying the areas of interest of customers, employees, suppliers,
 A leader recognizes the potentialities of the individuals and transforms owners and the staff
them into realities.  Taking action against the reports of complaints in the organization
 A leader wins the confidence of the employees of an organization.  Handling different problems of employees
 A leader unites the people as a team and builds up team spirit.  Taking corrective action against employees
 A leader maintains discipline among his group and develops a sense of Ethics management programmes are used by the organizations to manage ethics
responsibility among them. in their workplace. According to Brain Schrag, ‘Ethics programmes convey
 A leader builds up a high morale among the employees of the corporate values using codes and policies to guide decisions and behaviour, and
organization. can include extensive training and evaluating, depending on the organization.’
 A leader motivates his group in order to achieve the goals and objectives Ethics management programmes are made up of values, policies and activities
of an organization. that can affect the behaviour of the organization.
 A leader maintains the ethical standards among the employees of an Managing ethics as a programme is advantageous to organizations in many ways.
organization. Some of the advantages are that:
 A leader acts as a link between the work groups and the forces outside the  These programmes can assign an independent role to each individual in
organization. the organization to manage ethics.
Leadership is a form of management, and can be defined as the art of getting  Ethics management can provide the necessary operating values and
things done by others. Thus, the term management divides all the employees of behaviour to the organizations.
the organization into two groups. These groups are:  These programmes are used to align the operating values and behaviour.
 Managers: Managers are the individuals in the organization who are  Ethics management programmes are used to schedule different ethical
responsible for directing the activities of others. requirements.
 Workers: Workers are the individuals who are working under the control  These programmes are used to make the organizations aware of ethical
of the managers or leaders. issues.
Leadership involves planning, organizing and controlling the resources of the  These programmes provide structural mechanisms to handle ethical
organization so as to achieve the goals and objectives of the organization. The problems.
managers of the organization make some rules to coordinate and control their  They also provide some guidelines to decision-making.
subordinates in the right manner. These rules can be determined by the
environment and the culture of the organization. These rules also define the 2.4.2 Guidelines for Managing Ethics in Organizations
relationship of the managers with their subordinates and peers. These rules
defined by the managers of the organization are termed as descriptive ethics Some guidelines for managing the ethics in organizations are:
because no one is forced to follow them. These rules are the contextual and moral  Identify ethics management as a process: Ethics management is used to
provide operating values and associated behaviour. Ethics programmes
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 are process-oriented because the operating values are determined by Organizational Ethics Organizational Ethics 2.4.4 Comparative Study: Japanese Management and Z Culture
ongoing reflection. The deliverables of the ethics programmes, such as of American Companies
codes, policies and procedures, budget times and meeting minutes, are not
Culture can be considered as a constellation of factors that are learned through
produced directly. However, these deliverables are produced by the
our interaction with the environment and during our developmental and growth
process of reflection and dialogue. NOTES NOTES
years. A growing baby learns a basic set of values, ideas, perceptions,
 Use ethics programmes to manage behaviour in organizations: The preferences, concept of morality, code of conduct, and so on, through family and
ethical values provided by the ethical programmes can be used to direct cultural socialization and such prevailing culture with which the member of the
behaviour in the workplace. Therefore, ethical management practices, in family is associated determines many of the responses that an individual makes in
addition to ethical values, should also generate deliverables. These a given situation.
deliverables can be used to transform ethical values into behaviour.
The organizational culture is a system of shared beliefs and attitudes that develop
 Avoid ethical dilemma: The codes of ethics and the codes of conduct can within an organization and guides the behaviour of its members. It is also known
be used to minimize the occurrences of ethical dilemma.
as ‘corporate culture’, and has a major impact on the performance of
 Combine ethics management with other management practices: organizations, especially on the quality of work life experienced by the
Ethical management should be integrated with other management employees at all levels of the organizational hierarchy. The corporate culture
practices. While developing strategic planning, ethical values of the ‘consists of the norms, values and unwritten rules of conduct of an organization
organization should be considered. While developing personnel policies, as well as management styles, priorities, beliefs and interpersonal behaviour that
determine the ethical values that are most effective for the environment of prevail. Together, they create a climate that influences the way people
the organization and then implement policies to produce these kinds of communicate, plan and make decisions. Strong corporate values let people know
behaviour. what is expected of them. There are clear guidelines as to how employees are to
 Develop ethics management programmes using cross-functional behave generally within the organization and their expected code of conduct
teams: The employees of the organization should be included in the outside the organization. Also, if the employees understand the basic philosophy
development and implementation of the ethics management programmes. of the organization, then they are more likely to make decisions that will support
 Value maintenance: Ethics management programmes may increase the these standards set by the organization and reinforce corporate values.
ethics of people in the beginning because of the sensitivity of people on The word ‘culture’ has been derived metaphorically from the idea of
their occurrence. However, people should remain ethical on the ‘cultivation’, the process of tilling and developing land. When we talk about
implementation of these ethics management programmes. culture, we are typically referring to the pattern of development reflected in a
society’s system of knowledge, ideology, values, laws, social norms and
2.4.3 Roles and Responsibilities in Ethics Management day-to-day rituals. Since the pattern of development differs from society to
Each individual in the organization should be provided a specific role in society, the cultural phenomenon varies according to a given society’s stage of
managing ethics in the organization. However, the role assigned to each development. Accordingly, culture varies from one society to another requiring a
individual depends on the size and nature of the organization. The roles can also study of cross-national and cross-cultural phenomenon within organizations. For
be full-time or part-time. The following responsibilities can be assigned in ethics example, Japanese work culture is very different from American work culture. In
management: America, the ethics of competitive individualism shapes organizational
 The chief executive officer of the organization must support the ethics management and operational performance. The industrial and economic
management programme. performance in America is taken as a kind of a game in which each individual
desires to be a ‘winner’ in order to receive a reward for successful behaviour.
 A committee or group should be developed in the organization to control
This work culture is a continuation of general culture and family upbringing
the development and operation of the ethics management programme.
where children are encouraged to ‘think for themselves’, and show a sense of
 A committee or group should be developed which should be responsible assertion and independence.
for training the employees on the policies and procedures of the ethics
management programme and should resolve any ethical dilemmas that The Japanese culture, on the other hand, encourages individuals as a part of a
may arise. This committee can contain senior officers. team, thus encouraging interdependence, shared concerns and mutual help. The
organization is viewed as a family to which workers frequently make life-long
 A person in the organization should be designated as ombudsperson who
commitments as they see the organization as an extension of their own families.
has the responsibility of investigating or resolving complaints from the
The authority relations are often paternalistic in nature and strong links exist
employees of the organization against the ethics management programme.
CHECK YOUR PROGRESS between the welfare of the individual, the corporation and the nation.
 Each person of the organization is responsible for the implementation of
4. What are business values?
the ethics management programme. Origins of Organizational Culture
5. Mention the guidelines for
managing ethics is While culture has been a continuous development of values and attitudes over
organization.
many generations, at least the organizational culture can be partially traced back
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to the values held by the founders of the organization. Such founders were Organizational Ethics Organizational Ethics Typical American Organization
usually dynamic personalities with strong values and a clear vision as to where
 Usually, employment is short-term. Layoffs are quite common. Lateral
they wanted to take their organizations. These founders usually selected their
job mobility is also common.
associates and their employees who had a similar value system so that these
values became an integral part of the organization. NOTES NOTES  Performance evaluations and promotions are relatively fast.
 Career paths are very specialized. People tend to stay in the same area,
Second, the organizational culture is influenced by the external environment and
the interaction between the organization and the external environment. For such as accounting, and become experts in their area.
example, one organization may create a niche for itself for an extremely high  Decisions are carried out by individual managers who are responsible for
quality defect-free product as a result of competitive forces and customer the outcome of such decisions.
demand, while another organization may opt for moderate quality but lower  The control systems are very explicit via policies, rules and guidelines
prices. The work cultures of these two types of organizations would accordingly and people are expected to strictly follow these guidelines.
differ and would be influenced by external forces such as customer demand.  The organization is concerned primarily with the worker’s work life and
Third, work culture is also a function of the nature of the work and the mission his role in the organization.
and goals of the organization. For example, in a professional, research-oriented,
small organization, the workers may be more informal at all hierarchical levels of Typical Japanese Organization
the organization, the dress code may not be strictly observed and the employees  Fairly long-term, usually lifetime employment.
may be encouraged to be independent and innovative. In contrast, other
 Rigorous evaluation and slow promotion.
organizations may have a strictly enforced formal classical hierarchical structure
with clearly established channels of communication and strict adherence to work  People are primarily generalists and they become familiar with all areas
rules. Accordingly, the organizational culture of these two types of organizations of operations.
would be different.  Collective decision making is the norm.
Much has been written and talked about Japanese management styles. Almost  Primary reliance is on implicit control (self-control). People rely heavily
invariably, the economic success of Japanese society is associated with Japanese on trust and good will.
culture. The cultural aspect of organizational performance came into focus with  The organization is concerned with the whole life of the worker, business
Theory Z, proposed by William Ouchi in 1981. Even though Theory Z draws as well as personal and social.
heavily on the Japanese approach to management, it is more a combination of the
These cultural views are so contrary to each other, even though both American as
current American as well as Japanese style of managing an organization.
well as Japanese organizations are successful in their own ways. Theory Z
Basically, Ouchi’s approach to management calls for:
essentially combines these two approaches and in most cases, it modifies
 Consensus decision making American corporate culture to be more consistent with Japanese corporate
 Worker participation in all phases of organizational operations culture. However, since total adherence to Japanese corporate cultural values
 Genuine concern for the overall well-being of employees such as lifetime employment and slow promotions can stifle creativity, dilute the
intensity of challenges and restrict upward mobility, the modified Theory Z falls
 Lifetime job security
short of accepting the Japanese management style to replace the American style
The importance of strong culture as a driving force for organizational success was of management.
emphasized by Peters and Waterman in their well-received book, In Search of
The modified Theory Z emphasizes the following aspects in relation to the
Excellence. They observed:
specific areas of differences between the operating styles of a typical American
‘Without exception, the dominance and coherence of culture proved to be organization and a typical Japanese organization as discussed earlier. These
an essential quality of the excellent companies. Moreover, the stronger specific aspects are:
the culture and the more directed it was towards the marketplace, the less  Long-term employment and recycling of human talent through training:
need there was for policy manuals, organization charts and detailed This will develop a sense of loyalty and dedication among workers.
procedures and rules. In these companies, people way down the line know
what they are supposed to do in most situations because the handful of  Relatively slow evaluation and promotion: The emphasis is more on
guiding values is crystal clear.’ training and enhancement of skills. Promotions are based on skills rather
than seniority.
Some of the cultural differences in a typical American organization as compared  Career paths are not highly focused in that a person acquires a variety of
to a typical Japanese organization can be seen in the following comparison in skills through job rotation and training so that he/she has a better feel of
various areas and aspects of organizational operations and performance. the entire organization rather than just his/her job.
 Control is both explicit and implicit. Self-control is encouraged along
with respect for established policies and regulations.
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  Decision making is by consensus, specially on those key issues that Organizational Ethics Organizational Ethics 4. A business value refers to a set of beliefs pursued by an organization.
would affect the activities of the workers. Business values like ‘customer satisfaction’, ‘enthusiatic teamwork’ and
 Responsibility is not collective but is assigned to individual managers ‘state-of-the-art provision for production’ are some of the commonly
who are then held accountable for their decisions. They do have the pursued values by several organizations.
authority to delegate some of their decision-making authority to their NOTES NOTES
5. Some guidelines for managing the ethics in organizations are:
subordinates but the accountability still remains with the individual  Identify ethics management as a process
managers.
 Use ethics programmes to manage behaviour in organizations
In addition to the work and performance of workers, the organization takes active
 Avoid ethical dilemma
interest in the worker’s family and social life and provides facilities where social
interaction among all members of the organization, irrespective of the rank, is  Combine ethics management with other management practices
encouraged.  Develop ethics management programmes using cross-functional teams
While many of these factors are common to all successful organizations, such as  Value maintenance.
participative decision making and encouraging team spirit by rewarding group
efforts, some other factors are indeed culturally based and organizations must 2.7 EXERCISES AND QUESTIONS
make decisions in accordance with their own unique culture.
1. Explain the advantages of a Code of Ethics.
2.5 SUMMARY 2. What are the ethical issue that may exist in organization?

While management ethics concentrates on the ethical quality of management 3. Explain the guidelines that help in managing ethics in an organization.
level decisions, organizational ethics considers the issues of morality and 4. What are the types of organizations? Explain the classification.
rationality in organizations.
5. What do you understand by ethical corporate behaviour?
Corporate ethical codes are used by organizations as a tool for developing ethical
conduct.
2.8 FURTHER READING

2.6 ANSWERS TO ‘CHECK YOUR PROGRESS’ Modh, Satish, Ethical Management.

Mathur, U.C., Corporate Governance and Business Ethics.
1. Organizations can be classified into four types. These are:
 Exploitative
 Manipulative
 Holistic
 Balanced
2. Snoeyenbos and Jewell define three elements to implement ethical
behaviour in the organization. These elements are:
 Implementing the corporate ethical code
 Introducing an ethics committee
 Introducing a management training programme that includes ethics
training.
3. Some of the ethical codes formulated by organizations are:
 Ethical codes for discipline
 Proper code of dressing
 Avoiding abusive language or actions
 Punctuality
 Legalistic ethical codes
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 Ethical Decisions Ethical Decisions  Determine the ethical dilemma and resolve it.
UNIT 3 ETHICAL DECISIONS  Select the best ethical alternative.
Organizations need to perform a set of activities and take various decisions to
Structure achieve organizational goals. These are known as the business strategies of the
NOTES NOTES
3.0 Introduction organization. Business strategies are an important part of businesses, firms and
3.1 Unit Objectives industries. To make a business strategy, all businesses, firms and industries need
to develop a strategic plan once a year. Managers of the firms are given the
3.2 Ethical Decision-making
responsibility to achieve the goals stated in the strategic plan. Business strategies
3.3 Ethical Dilemmas in Organization are used for the following purposes:
3.4 Social Responsibility of Business
 They help determine the products and services that an organization needs
3.5 Corporate Governance to provide.
3.6 Summary  They help determine the various industries in which the organization
3.7 Answers to ‘Check Your Progress’ competes.
3.8 Exercises and Questions  They help identify the competitors, suppliers and customers of the
3.9 Further Reading organization.
 They help analyse the long-term goals of the firm.
3.0 INTRODUCTION
3.2.1 Simon Decision-making Model
The management of an organization is responsible for making effective decisions.
Managers are responsible for all business operations and they also make all the Herbert A. Simon planned a model for decision-making that was known as the
important decisions. To make decisions ethically correct, various models are Simon’s model of decision-making. According to Herbert A. Simon, the decision-
considered for the purpose of good decision-making. There are various making model is based on the following sequence of steps. These steps are:
frameworks of decision-making based on factors such as duty, consequences and (i) Identifying the problem
virtue. Managerial decision-making involves defining problems and then
structuring them for positive results. There are certain steps to be followed during (ii) Generating alternative solution
decision-making. (iii) Selecting a solution
(iv) Implementing and evaluating the solution
3.1 UNIT OBJECTIVES
This model has the following three phases:
This unit teaches you about:  The Intelligence phase
 Decision-making, and the phases in the Simon decision-making model  The Design phase
 Problems in the decision-making process  The Choice phase
 Factors affecting decision-making
The Intelligence Phase
 Concept of social responsibility of business
 Managerial roles and managerial skills in corporate governance A decision-maker gets to learn about the environment where a problem occurs.
The scanning of environment may be continuous or irregular. For example, a
 Corporate governance models
review of daily scrap report by a production manager to check the problems
related to quality constitutes continuous scanning, while frequent visits of a sales
3.2 ETHICAL DECISION-MAKING executive to the key customers to identify customer needs constitute irregular
scanning. The intelligence phase of the decision-making process involves
Managers affect the behaviour and decision-making capability of individuals. problem searching and problem formulation.
The individuals in an organization are responsible for conducting business  Problem searching: In this phase, the difference between the expected
operations. Management is defined as a decision-making process. Ethical
and real result is obtained after making a decision that helps recognize the
decision-making is a method of evaluating and choosing the alternatives decided
problem. The formula for problem searching is as follows:
by ethics management. The following should be kept in mind while making
ethical decisions: Deviation = Expected – Actual
 Identify and eliminate unethical options in the alternatives. For example, a sales manager sets a sales target of five lakh in a particular
 Identify complex, ambiguous and incomplete facts and try to avoid them. month as his expected target. This target could not be achieved and only
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 Ethical Decisions fall under this category. Decisions under this category are taken by the
four lakhs worth of sales were made. Therefore, the difference between Ethical Decisions

the expected and real value of the target helps recognize the problem in operational-level managers, who are at the bottom-level of the
setting the target. management hierarchy in an organization.
 Problem formulation: In this phase, the problem is identified properly to  Structured decisions: These are the decisions that are well defined and
NOTES NOTES require application and implementation of some specified procedure or
avoid the risk of solving the wrong problem. Here, the problem is clearly
stated and well understood. If, sometimes, the problem is difficult to decision rule in order to reach a decision. Such decisions require less time
understand, it is broken down into smaller and manageable sub-problems. for developing alternatives in the design phase. Structured decisions are
Also, sometimes, relationships are established with previously solved made by operating procedures or by using other accepted tools. More
problems that help in solving the current problem. modern techniques for making such decisions involve operations research
(OR), mathematical analysis, modelling and simulation.
The Design Phase  Unstructured decisions: These are the decisions which are not well
In this phase, various alternatives are developed in order to get the best possible defined and have no pre-specified procedure or decision rule. These
alternative to solve a particular problem. The decision-maker makes a detailed decisions may range from one-time decisions relating to a crisis to
analysis of each and every alternative before taking the final decision. decisions relating to recurring problems. The unstructured decisions
usually consume much time in the design phase of the decision-making
The Choice Phase process. These decisions could be solved using judgement and intuition.
Modern approaches to such decisions include special data analysis on
In this phase, an alternative, which was developed in the design phase, is selected. computers and heuristic techniques. Such decisions are usually handled
This selection helps the decision-maker in taking appropriate decisions. After by strategic planning level managers because of their unstructured nature.
making a decision, the decision is implemented. However, at any phase, the
 Semi-structured decisions: These are the decisions that are neither
decision-maker may return to the previous phase. For example, the decision-
structured nor unstructured. These decisions fall somewhere between the
maker in the choice phase may reject all alternatives and return to the design
structured and unstructured decisions. For example, the introduction of a
phase for developing new alternatives.
new product is a semi-structured decision.
3.2.2 Types of Decisions
3.2.3 Knowledge of Outcomes
Organizational decisions can differ in different ways, which initiates development
The knowledge of outcome plays an important role when you have more than one
of different types of decisions from which organizations can choose the
alternative. On the basis of the level of knowledge of outcomes, decision-making
appropriate decisions. Organizational decisions are primarily classified on the
can be classified into the following three categories:
basis of the purpose of decision-making. Knowledge of outcomes is another
approach for classifying organizational decisions. An outcome defines what is  Under certainty: Decision-making under certainty takes place when the
going to happen if a particular decision is taken or a particular course of action is outcome of each alternative is fully known and there is only one outcome
taken. for each alternative. In such a situation, the decision-maker is required to
compute the optimal alternative or outcome.
Organizational decisions involve selecting the best alternative from amongst the
 Under risk: Decision-making under risk occurs when there is a
available alternatives. Organizational decisions are classified into the following
categories: possibility of multiple outcomes of each alternative, and a probability of
occurrence can be attached to each outcome. Such decision-making is
 Strategic planning decisions: These are the decisions in which a also similar to decision-making under certainty where instead of
decision-maker develops objectives and allocates resources for achieving optimizing outcomes, a general rule is applied to optimize the expected
these objectives. Decisions under this category are used for a long period outcome. A decision-maker is assumed to be reasonable for choosing a
of time and involve a large investment. For example, introducing new particular decision. For example, a decision-maker has to choose from
products and the acquisition of another organization are strategic planning two options, one offering a 2 per cent probability of a profit of Rs
decisions. 1,00,000 and the other an 80 per cent probability of a profit of Rs 10,000.
 Management control decisions: These are the decisions taken by the The decision-maker chooses the second alternative because it gives a
management control-level managers, who are at the middle level of the higher expected value. This is explained by using the following formula:
management hierarchy in an organization. These managers deal with the
Outcome x Probability = Expected Value
use of resources in the organization. The management control decisions 1,00,000 x 0.02 = 2,000
include the analysis of variance, product mix and planning decisions. 10,000 x 0.80 = 8,000
 Operational control decisions: These are the decisions that deal with the  Under uncertainty: Decision-making under uncertainty takes place when
day-to-day problems that affect the operation of an organization. For there are many outcomes for each alternative and the probabilities of
example, decisions such as production scheduling and inventory control occurrence of the alternatives are not known. Decision-making under
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 uncertainty arises when different people in an organization take decisions Ethical Decisions Ethical Decisions forecasting of outcomes. The effects of decision-making can be measured in
by applying different decision rules. For example, some may assign equal various ways. These are:
probabilities to all the outcomes for each alternative so as to treat the  Financial costs and benefits
decision-making as ‘decision-making under risk’, whereas others may
 Human happiness
adopt different criteria, such as maximax and maximin criteria to NOTES NOTES
minimize regret.  Organizational growth
The limitations of the consequence-based decision-making framework are:
3.2.4 Characteristics of Good Decision-making  It is hard for the managers to guess the effects of the actions.
ider ifferent characteristics of a good decision-making are:  This approach can reduce the ethics of economics.
 Decision problems should be grabbed by the management both in space  There exist conflicts in the thinking of different individuals in the
and time. This means, the decision problem should be analysed organization.
thoroughly by the management.
 This approach does not care for human life.
 The decision made by the decision-maker should keep him in a state of
calm. Duty-based Decision-making
 Decisions made by the management should contribute to harmony in the
organization. Duty-based decision-making approach is based on the categorical imperative
 Self-interest and self-orientation should not come in the way of decision- statement of Kant. This approach states that one should do to others only that
making. which one would want done to oneself. This approach focuses on the people. It
also considers ethics of duty. Various limitations of the duty-based decision-
3.2.5 Problems in the Decision-making Process making approach are given as:
 It is difficult to know the intentions of individuals.
There are various problems faced by a management in the decision-making
process. These problems are:  Feelings and emotions of individuals can also cause problems.
 Insufficient information: It refers to the lack of information which  Like the consequence-based decision-making approach, it also does not
affects the performance and quality of the management in an consider human life.
organization.  It is very difficult to collect the intentions of individuals into a rule and
 Insufficient knowledge: It refers to the difference between available test it for universality.
knowledge and the required information for the management to take a
decision. Virtue-based decision-making
 Lack of time: It refers to the pressure on the management to make Virtue-based thinking is where a person thinks about the appropriate virtue or
decisions. If time is limited, then the management needs to take hasty good in a particular decision, such as honesty, generosity and justice. It has the
decisions. following limitations:
 Poor communications: It leads to the problem that arises due to  Applicable virtue of a person is dependent on his thinking and his
improper communication of information. surrounding environment.
Other limitations of any management in the decision-making process are with  All the ethics related to virtue-based thinking are based on judgement
respect to the inability of the human mind to handle available knowledge as also rather than specific rules and regulations.
human behaviour.
 Virtue is based on integrity of character.
3.2.6 Ethical Decision-making Frameworks Ethical decision-making models
There are three frameworks for ethical decision-making. These frameworks are: Research on the actual irrational process of decision-making situations is limited.
 Consequence-based decision-making Ferrell and Gresham developed a multi-stage model with three principles of
 Duty-based decision-making CHECK YOUR PROGRESS ethical decision-making, which are as follows:
 Virtue-based decision-making 1. What are the various phases of  Individual factors
the Simon Decision-making
Model?  Organizational settings
Consequence-based decision-making 2. List the various ethical  Opportunity to act
decision-making frameworks.
Consequence-based decision-making is a useful approach for decision-making Individual factors relate to the individual and his value system. Organizational
3. What are the characteristics of
managers. This approach is beneficial for all the persons who are affected by this a good decision-making? settings refer to the environment that advances or prevents ethical actions.
approach. This requires an appraisal of the effects of decision-making and the
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Opportunity to act refers to the chances, if at all, of an unethical act on the part of Ethical Decisions Ethical Decisions  Principle of justice: It acknowledges the rights of the individuals, fair
the individual. compensation and fair distribution of benefits.
In a decision-making process, it is essential to relate decisions regarding possible  Principle of lawfulness: It does not let anybody violate law.
processes to ethical content. Ferrell and Gresham also designed a model The above principles depict the range of traditional normative framework and is
NOTES NOTES
consisting of four factors that affect ethical decision-making on perceived ethical derived from specific results and non-specific results. The first three principles
problems, alternatives, philosophical evaluations and judgements. These factors are consequentialistic as they relate to consequences of an action which affects
are: the individual as well as the society. The remaining are non-consequentialistic as
 Personal experience they are derived from duty-based or right-based theories.
 Organizational norms
3.2.8 Managerial Decision-making
 Industry norms
 Cultural norms
Decision-making and problem solving is a core functions of a management
because it is an integral part of all other managerial functions such as planning,
To some extent, these models look complementary as they try to examine the organizing, directing and controlling. It is also an integral part of life because life
multiple influences on ethically hypothetical situations rather than on actual cannot be managed without making decisions. We are always faced with
decision-making procedures. situations where we have to make choices almost every day of our lives and
making a choice out of many options constitutes a decision. This decision may be
3.2.7 Normative Framework a simple one, such as choosing clothes to wear, selecting food from a menu or
The application of normative theory explains ethical decision-making clarifying deciding the general activities for the day or it may be a major decision such as
two important points. First, normative theory is idealistic and not designed for the changing a job or purchasing a house.
purpose of explaining or predicting behaviour. As it is idealistic, it may not Rational decision-making and problem solving may be used interchangeably
involve actual and practical situations. Second, using a normative approach lacks since a problem has to exist and a decision has to be made to solve such a
validity, because few decision-makers make normative theories from daily problem. While most decisions indeed involve a problem, some decisions are part
processes. The normative ethical framework may also neglect the situation where of routine and may not involve a problem. For example, decisions as to what to
an individual possesses conventional ethical norms because of situational wear or which movie to see or whether to stay or go for swimming are routine
variables. decisions and simple choices among available alternatives, requiring common
Within normative ethics, differences exist between the deontologists and the sense and simple qualitative judgement. Problem solving, on the other hand, is a
teleologists. They differ on the basis of the evaluation and concept of morality. In much more vigorous process which requires rational inquiry based upon
the case of deontologists, some actions are right from their origin or may be unemotional reasoning, identifying the problem, generating feasible solutions for
correct according to some formal principle. However, in the case of the it, choosing the best solution from the point of view of utility and then applying
teleologists, moral judgements are justified on the basis of references to the this solution to see if it works efficiently and effectively. In general, while
goodness of a purpose or the results of an action. decision-making results in a choice from many alternative courses of action,
problem solving results in resolving the disparities between the desired
To arrive at a list of representative normative frameworks is a challenging task in performance and the performance actually obtained.
itself. The framework must not be narrowly focussed as this may direct all the
Decision-making is a complex mental exercise in reality. Some of the decisions
actions to short-term benefits. The following are the principles that are most
we make are highly significant with highly important consequences. The more
commonly applied in ethical discussions:
significant decisions very often need the exercise of considerable analytical
 Personal benefit: This framework acknowledges the range to which any judgement and the quality of such judgement is the backbone of successful
action provides benefits to an individual in question. It also acknowledges decisions. These judgements must eliminate the root causes of problems that have
the right to life and the freedom of an individual over his/her actions or necessitated such decisions. Ineffective decisions attack only the symptoms and
information. are only cosmetic in nature. They may solve the problem on the surface or on a
 Social benefits: It acknowledges the need for actions that are beneficial short-run basis, but in order to find a lasting solution, the problem must be
to society. attacked at its roots.
 Principle of neutralization: It is utilized to diminish the possible impact As we all face the future, its unpredictability brings to us certain situations that
of norm-violating behaviour. are unexpected and hence problematic in nature. As we grow older and share
 Categorical imperatives: This framework is based on the idea that an
added responsibilities, we develop certain characteristics and some intuitional
senses that help us solve some of these problems. Moreover, we also learn some
action is morally correct or wrong regardless of its consequences.
techniques and methodologies through the acquisition of knowledge and skills,
 Duty: An action is originally right because of the duty arising out of a which assist us in solving certain types of problems. These problems require
stated or unstated value system. decisions that exist at personal, organizational and social levels.
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 Ethical Decisions
Individuals must make major decisions regarding their careers, their marriage and Ethical Decisions Structure of problems
family and other decisions, which have far-reaching personal implications. According to Harvey G. Brightman, problems may be of the following types:
Organizational decisions involve problems relating to investments, products,
marketing, location of production or service facilities, dealing with personnel 1. Ill-structured versus well-structured problems: The ill-structured
problems, contributions towards community welfare, and so on. Societies, in NOTES NOTES problems are unique, unpredicted and unprecedented situations. These
general, have many problems that affect their very survival, such as crime, energy problems are ambiguous and poorly understood and defy any cut-and-dry
solution. These are generally ‘one-shot’ occurrences for which standard
shortages, depletion of finite resources, health services, employment and political
responses are not available and hence, require a creative process of
conflicts among nations.
problem solving which is specifically tailored to meet the requirements of
All these problems have to be faced and solved. No person can avoid problems the situation at hand. Such problems may involve the closing of a plant,
and ignoring a problem is never a solution. As Thomas J. Watson Jr put it: buying or merging into a new company, starting a new business, and so
on. Because the ill-structured problems do not have well-structured
I never varied from the managerial rule that the worst possible thing we solutions, such solutions generally rely upon skill, intuition, creativity,
could do would be to lie dead in the water with any problem. Solve it, experience and considered judgement and carry with them the
solve it quickly, and solve it right or wrong. If you solved it wrong, it consequences of diverse ramifications. The top-level management
would come back and slap you on the face and then you could solve it generally faces these problems because their environment is complex and
right. Doing nothing is a comfortable alternative because it is without is involved with high-level policy decisions.
immediate risk, but it is an absolutely fatal way to manage a business. Well-structured problems, on the other hand, are clearly defined, routine,
and repetitive and respond to standardized responses. They are familiar,
From organizational point of view, the decision-making process is such an complete and easily defined and analysed. These problems are generally
integral and important part of management that some thinkers propose that faced by lower-level and middle-level managers who have, at their
management is simply a decision-making process. They call it the ‘decision disposal, a set of rules, policies and procedures misses can be used to
theory school of management’. The basic emphasis of this school is not on people solve these problems, so that such problems do not have to be referred to
or environmental variables influencing the management behaviour, but on the superiors for solutions. For example, if a professor cuts too many classes,
process of decision-making and the theory that all management thought could be the chairperson of the department can use the prescribed rules to
built around it. According to Simon: discipline him and the issue does not have to be referred to the president
of the college. Similarly, if you buy some merchandise and it turns out to
A theory of administration should be concerned with the process of be defective, you can take it back for a refund. The management of the
decision as well as with the process of action. Even if the decision- company has a well-structured set of rules and procedures to deal with the
making is not the only skill required for effective management, it cannot problem of making refunds for defective merchandise.
be denied that in fact it is an essential and highly important skill. This
skill is actively utilized in all other functions of management such as 2. Operating level versus strategic level problems: Operating-level
problems are generally well-structured problems encountered by the
planning, organizing, directing and controlling. Hence, decision-making
organization on a daily basis. For example, a newspaper shop owner has
is widely acknowledged as the centre of executive activity in business and
the problem of reordering the newspapers and magazines every day and
industry and is considered as the major criterion for the evaluation of an he knows when to order and how much to order. Similarly, daily or
executive’s administrative performance. weekly production levels, inventory levels or sales levels are set and
known and standard solutions exist to solve any problems in these areas
3.2.9 Defining a Problem when they arise. These situations are not new or unique and do not
Since a problem must exist in order to make a decision for solving it, we must involve any changes in organizational policies or procedures.
know what the problem is so that we can identify it when it shows up. Being On the other hand, strategic-level problems are unique and demand high-
aware of the problem is the first prerequisite for finding a solution. The Webster’s level managerial attention. These problems may involve changes in
Dictionary defines a problem as ‘a question raised for inquiry, consideration or policies and are important in terms of actions taken or resources
solution’. While this definition is not complete or self-explanatory in itself, a committed. While operating-level problems do not affect the survival of
problem seems to exist when the symptoms of the outcome of an activity do not an organization, strategic-level problems do. Sometimes, if the operating
seem to conform to the expected outcome of the same activity as planned. For level problems are left unattended, they may become strategic-level
example, you are going to your office in the car and on the way, you get a flat problems. For example, if no action is taken against a professor who
tyre, then you have a problem since you did not expect this to happen. Similarly, habitually miss classes, this may affect other professors thus making it a
if someone becomes ill, then this is a deviation from the norm of healthy living morale problem for the college, which then would be considered a
and this would constitute a problem and the sick person would seek a solution to strategic-level problem.
the problem by going to the doctor.
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3. Crisis versus opportunity problems: Crisis problems develop suddenly Ethical Decisions Ethical Decisions in advanced stages it can be fatal. The early awareness of the problem is the first
and are totally unexpected at a given time. These may develop within the prerequisite for dealing with it. However, sometimes we may not even know that
general framework of expectations that the management has prepared to there is a problem when in fact it exists until it is too late. Colon cancer, for
some extent to handle these crisis situations. For example, a forest fire example, does not have obvious symptoms for early detection so that the patient
will create a crisis problem but the government and the community is NOTES NOTES may not even know that he has it until it reaches an advanced stage. At other
generally prepared to fight the forest fire. Similarly, a major strike at the times, we may be aware of a problem but may not consider it serious enough to
plant may not have been expected, but the management has generally find a solution until it becomes a crisis. Some problems may hit us when their
made provisions to handle the situation. Solving crisis problems is severity can no longer be ignored. For example, too many lives lost in car
reactive in nature and requires reacting quickly and aggressively to solve collisions may require legislation about seat belts in cars in order to solve the
the problem. It may be achieved through task forces, which may try to problem of death and injury in car accidents. Similarly, the destruction brought
mould crisis situations into familiar problems for which the solutions are about by typhoons and hurricanes may indicate the problem of inadequate early
known to exist. warning systems.
The opportunity problems are more challenging. These must be exploited
Another problem pointer is a built-in signal in the process of operations so that
for the betterment of the organization, For example, if an opportunity of a
whenever there is a deviation from the expected outcome, it gives out a signal.
highly beneficial merger arises, and the organization fails to recognize the
For example, the Internal Revenue Service computer will create and send a signal
potential, it would be considered a lost opportunity. Similarly, a slightly
increased rate of employee absenteeism may mean some deeper to alert an administrator if some tax deductions are excessive in a given tax form
organizational problem and if the management does not recognise this so that some action can be taken. Similarly, our organizational accounting system
opportunity to deal with the problem, this missed opportunity may blow can be set up in such a manner that any change in the cash flow or demand,
up into a crisis. The central management handles both the crisis problems increases the cost per unit produced; excessive and delayed state of accounts
as well as the opportunity problems. receivables, excessive inventories at hand, and so on will attract the manager’s
attention quickly for an appropriate action.
The problem pointers Third parties, such as a user of a product or a consumer representative group
First, how do we determine that there is a problem? Even if we know that there is points out some problems. The problem of toxic wastes almost became a crisis
a problem, how do we determine the extent and seriousness of the problem? when various consumer groups started pointing out the problem of community
According to Miller and Starr, there are certain characteristics that are attributes health to the government agencies. The polaroid instant camera came into
of problems. One main characteristic of a problem is the existence of a deviation existence because of a ‘consumer complaint’, when the consumer happened to be
between what was expected under a given set of conditions and what actually the daughter of the instant camera inventor, who wanted to look at the pictures
happened. taken right away. Thus, if a product is faulty, it can be brought to the attention of
the manufacturer. The Federal Safety Commission and Food and Drug
Before solutions can be found, the problems must be thoroughly and correctly
diagnosed and the decisions concerning solutions to the problems must be dealt Administration in America test products to see if they conform to the prescribed
with, keeping in view the underlying factors other than the surface symptoms. For standards. If they do not, then there is a problem for which the solution must be
example, a doctor prescribing a medicine for a headache as a symptom without found.
looking into the root cause of it will only provide temporary relief and not really There are some problems that come to the surface due to sheer idle curiosity. The
‘solve’ the problem. Accordingly, in properly defining a problem, we must ask problem may not be a real one but may be considered a problem if solving it
some critical questions relating to it. Some of these critical questions may be: leads to better outcomes. Such a problem is not really the deviation between what
 What type of problem is it? is happening and what is expected, but a deviation between what is happening
 How large is the deviation from the norm? and what is actually achievable.
 How quickly has this deviation been observed? For example, when Fredrick Taylor applied scientific methods to production, the
 What are the critical factors relating to the problem? productivity improved tremendously so that there was really no problem in
 Why do we want to solve this problem? production except that the situation was made into a problem by asking, ‘can we
do it better?’ Based upon this premise, some organizations are continuously
 Would the cost of solving the problem be justified?
involved in finding problems with existing methods in order to improve upon
 Who should solve the problem and what particular method is chosen to them.
solve the problem?
In general, a problem exists whenever there is a difference between an actual
These initial questions would indicate the extent of the problem so that we can
situation and the desired situation. For example, if the total number of incoming
become fully aware of it and grasp its significance.
students into a college suddenly goes down than what was expected, then this
It is very important that the problem be diagnosed as early and correctly as would pose a problem requiring administrative attention and solution.
possible. For example, cancer, when detected in earlier stages, may be cured, but
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3.2.10 Factors affecting Decision-making Ethical Decisions Ethical Decisions  Attitudes about risk and uncertainty: These attitudes are developed in a
person, partly due to certain personal characteristics and partly due to
Some of the factors and personal characteristics that have an impact on decision- organizational characteristics. If the organizational policy is such that it
makers are described below. Some factors are more important at higher levels of penalizes losses more than it rewards gains, then the decision-maker
management and others are more important at the lower levels. NOTES NOTES would tend to avoid the alternatives that have some chances of failure.
 Programmed versus non-programmed decisions: As discussed earlier, Thus, a manager may avoid a potentially good opportunity if there is a
in the types of problems that managers face, programmed decisions are slight chance of a loss. The personal characteristics of a decision-maker
made in predictable circumstances and managers have clear parameters regarding his attitudes towards risk taking affect the success of the
and criteria. Problems are well structured and alternatives are well decision. The risk taking attitude is influenced by the following variables:
defined. The problems are solved and decisions are implemented through A. Intelligence of the decision-maker: Higher intelligence generally
established policy directives, rules and procedures. results in highly conservative attitudes and highly conservative
Non-programmed decisions are made in unique circumstances and the decision-makers take low risks. There are others who are more
results of such decisions are often unpredictable. Managers face ill- willing to take calculated risks if the potential rewards are larger
structured problems. These problems require a custom-made response and and there is some chance of success.
are usually handled by the top management. To start a new business, to B. Expectation of the decision-maker: People with high
merge with another business or to close a plant are all examples of non- expectations are generally highly optimistic in nature and are
programmed decisions. For example, when Steven Jobs and Stephen willing to make decisions even with less information. The
Wozniak introduced the first Apple microcomputer in 1978, they were decision-makers with low expectations of success will require
not certain about the market for it. Today, Apple Macintosh computer is a more and more information to decide upon a course of action.
major competitor to IBM computers.
C. Time constraints: As the complexity of the personal habits of the
 Information inputs: It is very important to have adequate and accurate decision-maker and the complexity of the decision variables
information about the situation for decision-making; otherwise, the merit increase, so does the time required to make a rational decision.
of the decision will suffer. It must be recognized, however that an Even though there are certain individuals who work best under
individual has certain mental constraints, which limit the amount of time pressures and may outperform others under severe time
information that he can adequately handle. Less information is as constraints, most people, by and large, require time to gather all
dangerous as too much information. Some highly authoritative the available information for evaluation purposes. However, most
individuals do make decisions on the basis of comparatively less people under time pressure rely on ‘heuristic approach’, which
information when compared to more conservative decision-makers. relies on satisfactory rather than optimal decisions. This limit the
 Prejudice: Prejudice and bias are introduced in our decisions by our search for additional information, considering few alternatives
perceptual processes and may cause us to make ineffective decisions. and few characteristics of alternatives and focusing on reasons to
First, perception is highly selective, which means that we only accept reject some alternatives. This approach may also be in use when
what we want to accept and hence, only such type of information filters the cost of gathering information and evaluating all such
down to our senses. Second, perception is highly subjective, meaning that information is too high.
information gets distorted in order to be consistent with our pre-  Personal habits: Personal habits of the decision-maker, formed through
established beliefs, attitudes and values. For example, a preconceived idea social environmental influences and personal perceptual processes must
that a given person or an organization is honest or deceptive, good or poor be studied in order to predict his decision-making style. Some people
source of information, late or prompt delivery, and so on, can have a stick to their decisions even when these decisions are not optimal. For
considerable effect on the objective ability of the decision-maker and the example, Hitler found himself bound by his own decisions. Once he
quality of the decision. decided to attack Russia, there was no going back even when he realized
 Cognitive constraints: A human brain, which is the source of thinking, that the decision was not the right one. Some people cannot admit that
creativity and decision-making, is limited in capacity in a number of they were wrong and they continue with their decisions even ignoring
ways. For example, except for some unique circumstances, our memory is such evidence, which indicates that a change is necessary. Some decision-
short term, having the capacity of only a few ideas, words and symbols. makers shift the blame for failure on outside factors rather than their own
Second, we cannot perform more than a limited number of calculations in mistakes. These personal habits have a great impact on organizational
our heads and it is tough to compare all the possible alternatives and operations and effectiveness.
make a choice. Finally, psychologically, we are always uncomfortable  Social and cultural influences: A major impact on the style of the
with making decisions. We are never really sure if our choice of the decision-maker is made by the social and group norms. According to
alternative was correct and optimal until the impact of the implication of Ebert and Mitchell, social norm is ‘an evaluating scale designating an
the decision has been felt. This makes us feel insecure. acceptable latitude and an objectionable latitude for behaviour activity,
events, beliefs or any object of concern to members of a social unit. In
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 other words social norm is the standard and accepted way of making Ethical Decisions Ethical Decisions problem at the same time. Furthermore, a written form provides an
judgements.’ In the same way, cultural background and other social excellent form of communication to all parties concerned.
environment have fundamental impact on the decision-making style of a
2. Generation of alternate solutions: The next step in decision-making
manager. As for instance, in the organizational system followed in Japan,
process is to generate possible solutions and their consequences to the
a decision-maker makes a decision after taking into consideration the NOTES NOTES
organization. All possible solutions should be considered because the
view of others involved in it. This method is influenced by culture and
most obvious solution may not be the optimal solution. However,
makes the implementation of the decision very easy, as everyone takes
creativity should be encouraged so that the focus can be shifted to unique
part in the decision-making process. On the other hand, in America, the
solutions. The degree and depth of creativity would generally influence
decision-making style is usually individual based. This is done with the
the quality of decisions and consequently the results of actions that are
help of decision models and qualitative techniques.
based on such decisions.
Creativity must not be-locked by personal values or perceptions about the
3.2.11 Steps in Decision-making problem. It must be objective and removed from emotions and cultural
taboos that might affect the outcome of a decision.
All decisions involve a series of sequential steps that lead to a particular result.
While developing alternate courses of action, the decision-maker should
These steps are generally followed to make systematic, objective, analytical and
take into consideration possible changes in the organizational
unemotional decisions and some management scholars have called this process a
environment as a result of the decision made and that might pose either a
‘rational decision-making process.’ Figure 3.1 shows the steps in decision-
threat or an opportunity in a given period of time. In searching for
making.
alternatives, some of the resources that can be drawn upon are: the past
experience of the decision-maker to look for similarities with the
problems and solutions in the past, drawing on the experience of other
experts both within and outside the organization and the responses of the
people who would be affected by the decision.
3. Evaluation of alternatives and selecting a course of action: The
evaluation of alternatives and selecting the best alternative with the most
advantages is the most critical part of the decision-making process. A
wrong choice would negate the effects of all efforts put in the preparation
of the process. Finding the optimal choice requires the consideration of
the possible impact of all alternatives in such a manner that the chosen
course of action will not only meet the requirements of the objectives, but
also eliminate the root cause of the problem. Some of the criteria against
which the alternatives are to be measured are quantitative in nature such
as return on investment, market share or net profits. Some other criteria
are qualitative in nature such as consumer attitude, employee morale and
ethics of the organizational mission. The bottom line in any decision
Figure 3.1: The Decision-making Steps criterion is the benefit derived from it in financial terms. This may be in
the form of cost effectiveness, which means that for a given cost, the
These steps are explained in more detail as follows: alternative with a greater degree of achievement of objective will be
selected. Similarly, for a set level of achievement, the alternative with a
1. Perception and diagnosis of the problem: Problems are defined in terms
lower cost will be accepted.
of discrepancy or deviation between the desired and actual state of affairs.
The greater this deviation the more serious is the problem. This No matter how tangible the methodology of the decision-making method
discrepancy must be perceived correctly, since any solution to a wrong may be, the effect of the personal judgement of the decision-maker in
problem would be a wrong solution. This deviation could develop either choosing the best alternative is always dominant. This judgement will be
because the performance slips when the goals remain constant or because a reflection of current management values, ethics, social commitment and
the goals change and the performance remains constant. organizational politics. This judgement cannot be quantified and hence,
must be based upon strong intuition and past experience.
A problem once isolated, must be defined and formulated. A written
problem statement must be developed, describing as specifically as 4. Implementation of the decision: Implementation means putting the
possible the nature and extent of the symptoms and when and where they selected alternative into action and seeing it through to its completion.
occurred and what the underlying causes are thought to be. A written The process of implementation starts with assigning responsibilities to
problem statement is easier to work on and more people can work on the persons who will be involved in carrying out the decision. The possibility
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 of any resistance to change should be examined, especially if it affects or Ethical Decisions Ethical Decisions Managing ethics as a programme is advantageous to organizations in many ways.
conflicts with personal values and personalities and group norms or, as These are:
the case may be, group objectives. The implementation, of course,  These programmes can assign an independent role to each individual in
becomes easier if the persons implementing it and persons affected by it the organization to manage ethics.
were also involved in the decision-making process and if they have some NOTES NOTES
 Ethics management can provide the necessary operating values and
stake, financial or otherwise, in the success of the solution. It is vital to
behaviour to the organizations.
communicate the details of the decision and procedures for
implementation to all the employees clearly, in detail, and in a manner  These programmes are used to align the operating values and behaviour.
that would invite commitment and dedication. This commitment can  Ethics management programmes are used to schedule different ethics
further be improved if the implementation plan has provisions for any requirements.
necessary modification that may be required and the members of the  These programmes are used to make the organizations aware of ethics
organization should be empowered to modify the solution during issues.
implementation based upon their experience with it.
 These programmes provide structural mechanisms to handle ethical
5. Monitoring feedback: Feedback provides the means of determining the problems.
effectiveness of the implemented decision. If possible, a mechanism  They also provide some guidelines to decision-making.
should be built into the process, which would give periodic reports on the
success of the implementation. In addition, the mechanism should also
serve as an instrument of ‘preventive maintenance’ so that the problems 3.4 SOCIAL RESPONSIBILITY OF BUSINESS
can be prevented before they occur.
In many situations, computers are very successfully used in monitoring, Social responsibility of business involves the consideration of general public
since the information retrieval process is very fast and accurate and in interest by businessmen while taking business decisions and actions.
some instances, the self-correcting is instantaneous. According to Bowen, social responsibility refers to the ‘obligations of
Monitoring the decision is necessary and useful irrespective of whether the businessmen to pursue those policies, to make those decisions or to follow those
feedback is positive or negative. Positive feedback reaffirms the correctness of lines of action which are desirable in terms of the objectives and values of our
the decision and the process. Negative feedback indicates either that the society’.
implementation requires more time, resources, efforts or planning than originally This entails that businessmen should perform their operations with due
thought or that the decision was a poor one and needs to be re-examined. consideration to the aspirations of society. They should fulfil the demands of
those who have a claim on the operations of business. They must measure the
3.3 ETHICAL DILEMMAS IN ORGANIZATION consequences of their decisions and courses of action on the society and ascertain
that no undue harm is done to the interests of the society.
There exist many different ethical issues in an organization or at the workplace. The concept of social responsibility has emerged due to several economic, social,
Some of them are as follows: political and legal influences. These forces, which have obliged, persuaded and
 Identifying the conflict issues in the organization and trying to avoid them helped businessmen to become aware of their responsibility to society, are as
follows:
 Deciding different methods to motivate employees
 Public opinion: Public interference with the help of the government has
 Managing fairness in employee performance appraisals
instilled a fear in the heart of businessmen. The threat of public regulation
 Protecting secret information of the organization and public ownership has compelled them to acknowledge the fact that
 Identifying the areas of interest of customers, employees, suppliers, responsible behaviour is essential on their part for survival in the private
owners and the staff sector.
 Taking action against the reports of complaints in the organization  Trade union movement: The recent development of socialism that
 Handling different problems of employees boosted the strength of labour unions has forced businessmen to give a
fair share to workers. Human relations and labour legislation have
 Taking corrective action against employees
facilitated trade unions to increase their influence.
Ethics management programmes are used by the organizations to manage ethics CHECK YOUR PROGRESS  Consumerism: Consumer organizations have encouraged awareness
at their workplace. According to Brain Schrag, ‘Ethics programmes convey 4. List the factors affecting about consumer rights. Consequently, businesses have become more
corporate values using codes and policies to guide decisions and behaviour, and decision-making. responsive to consumer needs and stress the dictum of ‘consumer is the
can include extensive training and evaluating, depending on the organization.’ 5. What are the steps in the king’. Businessmen can no longer adopt the approach of ‘let the buyer
Ethics management programmes are made up of values, policies and activities process of decision-making? beware’.
that can affect the behaviour of the organization.
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  Education: Extensive education has made businessmen conscious about Ethical Decisions Ethical Decisions these challenges can convert them to opportunities, which in turn will
the quality of life, moral values and social standards. Liberal business ascertain not just the existence, but also the benefits of the organization.
leaders have been pressing the business community to acknowledge its  System interdependence: Business system and social dependence are
social obligations. interrelated and thus affect each other.
 Public relations: Modern businessmen are aware that a good public NOTES NOTES
The arguments against social responsibility on the part of business enterprise are
image contributes to their growth. There is a greater alertness in their as follows:
hearts that business is a construction of society and hence, it should
consider and react positively to the expectations of society.  Dilution of profit maximization: Economic value is the main criterion
by which the success of a business should be estimated. According to
 Managerial revolution: Separation of ownership from control in Milton Friedman, ‘Few trends could so thoroughly undermine the very
large corporations has resulted in professionalism in management.
foundation of our free society as the acceptance by corporate officials of
A professional manager is fairly aware of the society’s expectations
a social responsibility other than to make as much money for
and attempts to meet the demands of all social components, like
shareholders as possible. This is a fundamentally subversive doctrine.
customers, employees, shareholders and the government, in a well-
Management’s spending for society is hypocrisy. Only people can have
adjusted manner. responsibilities not corporations.’
The case of social responsibility has been subject of controversy since long.  Loss of incentive: The motivation to utilize resources effectively is
There have been arguments both in favour and against it. The main points that decreased when social responsibility is considered important. It is the
support the assumption of social responsibility by business enterprise are as profit motive principally that encourages optimum use of resources and
follows: manpower to run the business with enthusiasm.
 Long-term self-interest of business: As stated earlier, a good public  Lack of standard: Besides the effort motive, profit serves as a standard
image is bound to give better returns to a business enterprise. to measure the performance of business. A business organization goes off
Businessmen can benefit in the long run by providing for the welfare of course as it loses the guiding measure that depicts the efficiency of its
the society through education and better living conditions. This will result performance and thus hinders decision-making.
in better employees in business and enlightened customers in society who
 Business is an objective venture: The emotional insights and experience
will benefit through their increased purchasing power.
essential to tackle social problems are lacking in the temperament of
 Ascertainment of law and order: Social responsibility on the part of businessmen. They cannot determine what is in public interest. The
business can avoid unrest in society. If the society feels that it is not solutions to social problems should be expected from specialized social
getting its appropriate share in business, it is bound to create disorder by agencies and not from businessmen.
adopting anti-social and illegal activities and rebellions. Pursuing the
 Undue use of power: If business organizations are involved in social
doctrine of social responsibility can help business organizations prevent
institutions they are likely to dominate the decisions of these institutions
social chaos.
for their own interests. They can use their financial power to take
 Maintenance of free enterprise: Government or public regulation can decisions concerning the functioning of these institutions. This may
hinder the development of business by decreasing the flexibility of further lead to increased social detriment.
decision-making and the freedom of choice and action. Therefore, the
 Market mechanism gets distorted: The principle of social responsibility
voluntary assumption of social responsibilities is essential for the growth
is based on the assumption that market mechanism is not the appropriate
of a business organization.
way to allocate scarce resources to alternative uses and so it should be
 Creation of society: Business is a part of society and survives on the replaced by political mechanism. If the market price of a product contains
demands of the society. Therefore, it should be responsive to social the cost of social actions, it does not actually represent the relative cost of
expectations and welfare. The right of the business to grow goes hand in producing it and thus the market mechanism gets distorted.
hand with its awareness of social responsibility and welfare. It is the duty
of the business enterprise to contribute in some way to the well-being of
its society. 3.5 CORPORATE GOVERNANCE
 Moral justification: Enlightened businessmen have now become more
aware about their moral duty to serve the society. Business has the Corporate governance is defined as an act of controlling, directing and evaluating
resources and power to solve social problems. Therefore, its power should the activities of an organization. The structure of corporate governance specifies
be balanced with social responsibility. that the others taking part in the organization, such as the board managers, board
of directors, shareholders and other stakeholders must be provided with some
 Profitable environment: To ensure a profitable environment in the
rights and responsibilities. Providing powers to the participants of the
society in which it operates, business needs to meet the challenges of organization results in the monitoring of performance of the employees in an
social evils. Active interference on the part of businessmen in solving

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organization. Corporate governance helps the organization achieve the goals and Ethical Decisions Ethical Decisions support can only be possible by adhering to the best practices of corporate
objectives of an organization in a desired manner. governance. In this context, management has to take the responsibility of
Corporate governance has achieved a great deal of success in attracting public the shareholders at large and stop any unbalanced benefits of the varied
interest because corporate governance gives importance to the economic health of sections of the shareholders.
NOTES NOTES
the corporation and the society as a whole. However, corporate governance  The economic competence of a company can be improved through
covers a wide variety of the distinct economic phenomenon. Therefore, many corporate governance. Corporate governance also ensures that
people have given different definitions of corporate governance. A few corporations consider the interests of a wide range of constituencies and
definitions of corporate governance are as follows: also of the communities within which they function. Corporate
According to Shleifer and Vishny, ‘Corporate governance deals with the ways in governance also makes sure that the boards of directors are responsible to
which suppliers of finance to corporations assure themselves of getting a return the shareholders. This even helps to ensure that corporations work for the
on their investment.’ benefit of the society at large, including the society’s concerns about
An article from Financial Times has defined corporate governance as ‘the labour and environment.
relationship of a company to its shareholders or, more broadly, as its  If the execution of good governance fails, heavy losses can result in terms
relationship to society’. of cost other than regulatory problems. Many organizations that do not
According to the J. Wolfensohn, ‘Corporate governance is about promoting give due importance to corporate governance end up paying a large risk
corporate fairness, transparency and accountability.’ premium while contending for scarce capital in the public markets. Of
late, stock market analysts have started realizing, accepting and
3.5.1 The Need for Corporate Governance appreciating the relationship between returns and corporate governance.
There are various reasons for the need for corporate governance in an  The confidence of both foreign and domestic investors is maintained and
organization. These are: upheld due to the trustworthiness that comes from good measures of
 A corporation, which is a union of many stakeholders, such as employees, corporate governance. The cost of capital should be brought down so that
customers, investors, vendors, and so on, must be fair and transparent to more long-term investment is attracted.
its stakeholders in all its dealings. It is very important in today’s  Often, importance and attention is given to corporate governance in times
globalized business world, where corporations require to have access to of financial crisis. In the US, when scandals disturbed the otherwise calm
global pools of capital attract and retain the best human resource from all and contented corporate environment, new initiatives thrown up by them
parts of the globe. If a corporation does not take up and show ethical led to fresh debates in Asia and the European Union. With many
conduct, it is not considered to be successful. instances of corporate misdemeanour coming into limelight, the emphasis
 Corporate governance covers ethical conduct in business, the code of now is on compliance with substance, rather than on form. It has also
values and principles that helps an individual to choose between right and brought to the fore the need of intellectual honesty and integrity. The
wrong or make the right selection from the options or alternatives financial and other disclosures made by firms are only as good as the
provided. Managers decide on certain actions on the basis of an people who make it.
principles that are governed by the culture, context and values of an
 In 1998, the Confederation of Indian Industry (CII) made public a
organization. An organization that follows ethical values feel that it is
desirable and voluntary code. This marked the beginning of corporate
better for the business, as it helps in the long run and the stakeholders
governance initiatives in India. Then, on the basis of the Kumarmangalam
observe that the management is running the organization in the desired
Birla Committee Report in February 2000, Securities and Exchange
way.
Board of India (SEBI) made the first formal regulatory framework for
 It is beyond the sphere of law, i.e., it stems from the background and listed companies.
outlook of the management and cannot be regulated by legislation alone.
It deals with running the affairs of a company in such a way that it is fair  Corporate governance has been defined in different ways. Many
to all the stakeholders and that its dealings benefit the greatest number of definitions do not give its scope and the motives of many of the
stakeholders. It is about honesty, integrity and responsibility. Laws should definitions vary. However, the crux is that corporate governance is a
set up a common framework to maintain standards. Since substance is concept and not an individual instrument. It encompasses necessary
very much linked with the mindset and ethical standards of management, management and control structures of a company, the rules about the
it shall in the end lay down the creditability and integrity of the process. power relationship between owners, the board of directors, stakeholders
 Corporations should realize that it is necessary for all the stakeholders to and others. The easiest definition of corporate governance has been given
cooperate in order to facilitate development. Such cooperation and by the Cadbury Report. It has been paraphrased as, ‘the system by which

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 Ethical Decisions Ethical Decisions
business are directed and controlled’. The other all-inclusive definition organization. An organization must disclose the financial information to
has been given by the OECD (Organization for Economic Cooperation investors and shareholders.
Code). According to it, corporate governance includes complex
relationships among the management, its shareholders, board and others. 3.5.3 Role of the Board of Directors in Corporate Governance
NOTES NOTES
It also establishes the framework through which the aims of the company Board of directors is made up of individuals elected by a corporation's
are established and the methods of attaining those objectives and shareholders to oversee the management of the corporation. An organization
observing the working are decided. allows different individuals or parties to add to the capital, expertise and their
knowledge so that the organization can function efficiently without facing any
 Corporate governance is aimed at increasing the long-term value of an difficulties. There are various participants in the organization such as investors
organization for not only its shareholders, but also partners. It represents and shareholders. They do not participate in the operations of the organization.
an amalgamation of all those involved in a process that is socio- Their main interest is to have a proportion of the share in the income of the
economic. It is imperative for all organizations to govern and manage. organization. The shareholders and investors have the right to elect the board of
Corporate governance includes the entire stakeholder and at the same directors of an organization in order to represent and protect their interests. The
time the process is economic as well as social. board of directors has the power and duty to form the corporate policies of an
 Studies related to corporate governance practices conducted worldwide organization. Therefore, the board of directors has the powers to take certain
by various institutions clearly indicate that no single model is available decisions, which can in turn affect the long-run performance of the corporation. It
for good corporate governance. The OECD also recognizes this. It also means that the board of directors has a very significant function in the working of
accepts the fact that a wide range of approaches to corporate governance the business as it also oversees the top management of the organization.
have developed due to the differences that exist in institutional The duties and rules that the board of directors has to follow are plainly laid down
frameworks, legal systems as well as traditions in various countries. All by the organization. It includes monitoring the performance of the company and
good corporate governance regimes place high preference on the interests its management and approving important business policies. The board of directors
of shareholders, as the latter place their trusts on corporations to use their is fully briefed in advance of board meetings and the matter that will be discussed
investment funds in an effective and wise manner. in the meeting. The board of directors receives regular reports on the financial
position of the organization, key areas of the organizations’ operations and other
3.5.2 Principles of Corporate Governance issues.
Corporate governance includes principles such as honesty, trust, integrity, The board of directors provides multi skills and knowledge to the organization
responsibility, accountability and commitment to the organization. Apart from and it also participates fully in making decisions on key issues that the
these, the other principles of corporate governance are as follows: organization faces. The organization follows its own performance review process
 Rights and equitable treatment of shareholders: The organizations to access how well the board and its committees are performing and how they
must acknowledge the rights of the shareholders and they must help the might be further improved.
shareholders in exercising their rights effectively. Shareholders must also
be encouraged to participate in the general meetings of an organization. Responsibilities of the board of directors
 Interests of other stakeholders: It is the duty of an organization to The board of directors has to handle a wide variety of roles and responsibilities.
recognize the legal and other obligations of certain stakeholders. There are certain laws and standards that define the responsibilities of the board
 Role and responsibilities of the board: In order to deal with various of directors. These laws and standards differ from country to country. For
issues of a business, an organization needs a wide range of skills among example, the US does not have any laws and standards that the board of directors
the members of the board. The members of the organization must work must comply with. The various responsibilities of the board of directors are as
with great responsibility. follows:
 Integrity and ethical behaviour: In order to promote ethical and  Providing continuity to the organization by setting up the organization as
responsible decision-making, organizations must develop a code of per the legal requirements and effectively advertising its products and
conduct for the directors of an organization. services to the customers.
 Disclosure and transparency: The roles and duties of directors must be  Selecting and appointing a chief executive whose basic duty is to review
clearly defined by an organization. Organizations must implement certain and evaluate the performance of the organization and offering
administrative guidance to the organization.
procedures in order to verify and safeguard the integrity of the

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  Governing the organization by setting up broad policies and objectives Ethical Decisions Ethical Decisions  The number of the board members is reducing nowadays. This is because
and monitoring whether the organization follows the policies. organizations prefer directors who have good knowledge and expertise
 Acquiring the resources and finance for effectively running the rather those with general experience.
day-to-day operations of the organization. NOTES  As more and more organizations operate their services globally, they look
NOTES
 The board of directors must be accountable to the public for the products for board members who possess international experience.
and services of the organization, which include approving the budget and
formulating the policies related to the contracts for producing a product. Role of top management in corporate governance

In legal terms, the main duty of the board is to direct the affairs of the The board of directors occupies the top management whose prime concern is
organization but not to manage them. If the board of directors does not perform startegic management of the organization. The top management is supervised by
its responsibilities in the right manner and if it harms the organization in any the president in coordination with the vice-president of the organization and the
manner, then the directors can be held responsible for the harm that is caused by vice-presidents of divisions and functional groups.
them. Section 291 of the Companies Act had specified some of the general
3.5.4 Responsibilities of Top Management
powers of the board and they are as follows:
 According to the provisions of the Companies Act, the board of directors The responsibility of the top management is to get the objectives of an
is allowed to exercise the following powers within the organization: organization accomplished within the organization and in the industry. Thus, the
role and responsibility of the top management is multifaceted and is directed
o The board will do only those things which are directed by the
towards the welfare of the organization. The duties of the top management are
management of the organization. The board must also assist in
distinct as they may vary from organization to organization. The development of
doing the things that are not mentioned in the clause of the
the tasks of the top management are developed by the analysis of objectives,
Companies Act.
strategies and fundamental activities of the organization. These tasks are divided
o The organization will abide by the provisions that are in the among different levels of the top management staff which leads to diversity in
Companies Act and will also follow the provisions that are skills. The analysis of this diversity in the top management team can be
formed in the general board meeting of the organization. significantly related to improvements in the market share and profits of the
 The company cannot make any regulations in the general meeting of an organization. The top management should primarily support two critical
organization to invalidate any act of the board. responsibilities, crucial for strategic management to be effective. The two
responsibilities are as follows:
New trends of the board of directors in corporate governance
 Provision of executive leadership and strategic vision: Executive
The board of directors plays a very important part in an organization. If a leadership means directing the activities of the organization to accomplish
company possesses very good corporate governance and board of directors, then its objectives. Strategic vision refers to the description of the capabilities
it will induce the investors to invest more in the organization. Investors are of the organization, which is generally described in the mission statement.
willing to invest more in an organization because good governance and the board The top management defines the strategic vision of the organization to the
of directors in an organization lead to better performance of the organization. employees. The enthusiasm and passion for the organization comes from
Further, good governance reduces the chances of the organization falling into the top management. Top management must have clear strategic vision,
trouble. The various trends of the board of directors in corporate governance are enthusiasm and dynamism. They possess three important characteristics
as follows: that enable them to command respect and alter the process of strategy
 There is more participation of the board not only in evaluating the formulation and its implementation:
performance of the company, but also in formulating the plans and o Articulation of strategic vision with strategy: The top
policies of the organization. management visualizes the organization as what it is expected to
 Institutional investors such as pension funds, mutual funds and insurance become and not to what it already is. He adds a new aspect to the
companies actively participate in the functioning of the board and they strategic activities that enables the employees to refresh their
put pressure on the board to improve the performance of an organization. working habits to attain new heights.
 Non-management directors, which is not recognized in the eyes of law, CHECK YOUR PROGRESS o Makes guidelines for others to identify and follow: The
are now actively participating in the board of an organization. 6. Define corporate governance. behaviour of the top management towards the values concerning
7. Who comprises the board of the objectives of the organization should be clear and must be
directors?
communicated constantly through his work and activities. If the
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 top management behaves responsibly then the employees trust in Ethical Decisions Ethical Decisions  Role as a negotiator
him and get inspired to work with the same enthusiasm.  Role as a communicator
o Communicate high performance level and confidence to the  Role as a role model
followers: Leadership of the managers of an organization involves NOTES NOTES
setting up of goals for the employees accompanied with Personnel action
challenges and training his people for the same. He should
The CEO of a firm has the power to take personnel actions in a manner that is
provide his workforce with power and resources before setting
beneficial for an organization in the following ways:
targets.
 Ordering the employees: A CEO of an organization uses his authority to
 Manage strategic planning process: In an organization, the
order the employees. The employees of an organization are directed by a
characteristics of strategic planning are same as that in learning
CEO to perform certain tasks at a defined period of time. If any of the
organizations where ideas can come from any division of the
employees are disobedient or their actions are not very good, then the
organization. Top management should encourage the planning process so
CEO has an authority to throw him out of the organization. The ordering
that strategic management can work effectively in the organization. In
of employees is done to achieve the goals and objectives of an
multidivisional organizations, the top management should ask its units to
organization.
prepare a strategy for themselves, which should be considered before
planning and formulating the final strategic plan. Such practices make the The ordering method, which is employed by the CEO, provides certain
work atmosphere dynamic and encourage the workforce to work benefits to the organization. When there is a need of any structural
according to their potential. The other method is to provide the workforce changes to be made in the organization, then the ordering method is very
units with the mission statement and objectives and allow them to helpful. For example, if an organization decides to implement a new and
formulate strategies accordingly. Regardless of the approach taken to improved structure for managing the performance of the employees in the
formulate a strategy, the board of directors expects the top management to organization, then the CEO has to just give instructions and train
prepare such a strategic plan that works well with the organizational employees in operating the new system.
objectives. Therefore, the top management’s responsibilities include  Making cultural changes: It is very difficult for a CEO to change the
evaluating each unit’s proposed objective, planning strategies to seek how culture of an organization. Cultural changes are those changes that are
effectively it satiates the organizational goals with respect to available deeply rooted among the employees such as collective thinking, and
resources and providing feedback. mindsets, which have become a part of the organizational’s working
environment. For bringing about cultural change in the organization, just
3.5.5 Role of the CEO in Corporate Governance ordering the employees will not help the CEO. A CEO has to use the right
Any action that is taken by any individual in the organization can affect the firm’s approach for bringing about a change in the cultural mindset of the
operations to a great extent. For example, if any individual is appointed as a team employees. For bringing about a change, a CEO must look after certain
leader, then he has the responsibility to take certain decisions that would help in agendas and the communication network of an organization. If he finds
the progress of his entire team. If an individual is provided with any sort of any defects in the agendas or the communication network, then he must
power, then it is up to him to use it for the benefit of the organization or he can rectify those defects in order to make cultural changes among the
use the powers to fulfil his own requirements. It is the same for CEOs in an employees and achieve the goals and objectives of the organization.
organization. Organizations achieve great success in business because of their  Persuading the employees: A CEO of an organization persuades the
chief executive officer (CEO). The CEO oversees the company's finances and employees to perform certain tasks in an efficient manner. If the
strategic planning. employees find it difficult to perform certain tasks, then the CEO looks
after the problems that the employees face in performing those tasks.
The powers of a CEO can greatly influence the working of an organization.
After looking at all the difficulties, a CEO must persuade the employees
Therefore, it is very important to know about the powers of the CEO and how his
to work better and direct their efforts towards the achievement of the
powers can ultimately influence the results of an organization. The CEO of an
goals. A CEO also negotiates with the employees if there is a situation of
organization has a very important role to play in certain areas of the organization,
dispute between the employees and the management.
which are:
 Inducing the employees: A CEO also induces the employees to work
 Personal action
towards the attainment of the goals and objectives of an organization.
 Handling of organizational politics There may be certain employees in an organization that may not be
performing well in accordance with the expectations of the organization.
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 Ethical Decisions Ethical Decisions
A CEO can induce the employees by asking them to change their ways of complex technological developments that are changing day by day.
working and thinking, so that organizational goals can be achieved in a Therefore, the political behaviour in organizations is increased when the
desired manner. internal technology is complex and when the external environment is
highly unstable.
Handling of organizational politics NOTES NOTES
 Organizational change: Whenever there are changes in the
The CEO must accept the fact that politics is certain in every organization. organizational structure or the rearrangement of organizational policies,
Pfeffer has defined politics as ‘those activities taken within organizations to individuals in powerful positions have the opportunity to play political
acquire, develop and use power and other resources to obtain one's preferred games. These changes may include restructuring of a division or creation
outcomes in a situation in which there is uncertainty or dissension about choices’. of a new division, personnel changes and introduction of a new product
Pfeffer further notes, ‘If power is a force, a store of potential influence through line. All these changes are invitations to political processes when various
which events can be affected, politics involves those activities or behaviour individuals and groups try to control the given situation.
through which power is developed and used in organizational settings.’ While All the above reasons apply to most organizations because the resources are
power is a property of the system at rest, politics is the study of power in action. continuously becoming scarce and competitive and the ever-changing technology
An individual, subunit or department may have power within an organizational makes the environment more complex to handle, which requires organizations to
context at some period of time; politics involves the exercise of power to continuously evaluate their goals and strategies. This would make most
get something accomplished, as well as those activities, which are undertaken organizations political in nature so that managers in responsible positions must
to expand the power already possessed, or the scope over which it can be become sensitive to political processes in order to play their role in acquiring and
exercised. maintaining political power.
Therefore, it is clear that political behaviour is designed and started to surmount There can be politics among the different departments in an organization. For
opposition or resistance. If there is no opposition, there is no need for politics. example, the research and development department of an organization requires
Opposition and resistance are bound to occur in all organizations because of Rs 5,00,000 for testing the new instrument and, on the other hand, the
severe competition for scarce resources. Five major reasons that have strong maintenance manager also requires Rs 5,00,000 for replacing an old pipeline.
influence on the political orientation of organizations are: This puts CEOs in great difficulty in deciding to whom to allot the money. If the
 Scarcity of resources: Any person or subunit having control over the CEO gives 50 per cent of the money to both the departments, then both the
allocation of scarce resources; their power and political influence play an departments will not be satisfied and will blame the CEO if anything goes wrong
important part in how these resources will be distributed to various in the organization. Therefore, in order to minimize these problems, a CEO has to
departments, rather than fulfilling their own needs. perform the following steps, which are:

 Non-programmed decisions: Non-programmed decisions involve unique  A CEO must sit with the two managers and with an open mind listen to
problems that cannot be solved by structured methods and procedures. their problems. The managers and the CEO must appreciate each other’s
These unique problems involve many factors and variables that are viewpoints. By appreciating the views of both the managers, a CEO
ambiguous in nature leaving room for political planning by those who arrives at a particular figure that he will be able to meet the requirements
have the knowledge and techniques to successfully confront and solve of the managers.
such complex problems. Such non-programmed decisions are likely to be  If the CEO finds that the demands of both the managers are urgent, then
made in the areas of strategic planning, mergers and acquisitions and he will try to meet the demand by further borrowing the money from the
policy changes. finance department of the organization.
 Ambiguous goals: When the goals of an organization are clearly defined  If is not possible for the CEO to implement both the above options,
and each member of the organization is aware of these goals and is also then he must inform the managers that they have to use alternative
aware of his role in contributing towards the achievement of such goals, methods and as soon as the finances are available they would be given to
then there are limited grounds for political influences. However, when the them.
goals of a department or the entire organization are ambiguous then there
is more room available for playing politics. Role as a negotiator
 Technology and environment: An organization must have the ability to The CEO performs the role of a negotiator in which he has the full support of an
appropriately respond to an external environment that is highly dynamic organization. A CEO negotiates the problems that the employees face in
and generally unpredictable. The organization must adequately adapt to performing the tasks in a specified period of time. If the CEO is busy in
Self-Instructional Material 69 70 Self-Instructional Material
 Ethical Decisions
performing some other tasks, then the role of negotiator can be delegated between Ethical Decisions

the general manager and any other departmental head. A CEO must keep some
factors in mind before performing the negotiations:
 If the demands of the two persons cannot be met, then the person who is NOTES
NOTES
shouting should not get what he wants. If the demand of a person who
was shouting more is fulfilled then it will lead to the belief that the
demands of the person who shouts will be fulfilled. Therefore, to mitigate
these problems, a CEO must patiently hear the problems or demands of
the employees and must arrive at a situation that is acceptable by all
wholeheartedly.
 A CEO must negotiate the problems in such a manner that the employees
of an organization agree to increase the productivity and reduce the
absenteeism.

Role as a communicator
A CEO plays the role of a communicator in an organization. It is an important
duty of a CEO to communicate the organizational mission, vision, goals and
objectives to the employees. The CEO, while playing the role of communicator,
must listen to the employee’s complaints and problems. A CEO must understand
the problem first and then respond in a positive manner to the satisfaction of the Figure 3.2: Various Managerial Roles
employees who are facing the problem. Right communication given correctly at
the desired time can motivate the employees and can charge them to perform the Interpersonal roles
most difficult tasks with great ease. Managers spend a considerable amount of time in interacting with other people,
both within their own organizations as well as outside. These people include
Role as a role model peers, subordinates, superiors, suppliers, customers, government officials and
The CEO of an organization sometimes becomes a role model for the employees community leaders. All these interactions require an understanding of
of the organization. The employees try to emulate the working style of the CEO. interpersonal relations. Studies show that interacting with people takes up nearly
For example, if a CEO of an organization comes late, then the employees will 80 per cent of a manager’s time. These interactions involve the following three
major interpersonal roles, which are:
follow him and they will also start coming late. On the other hand, if a CEO is
punctual, then the employees will also be punctual. Therefore, the CEO has a great  Figurehead: Managers act as a symbolic figurehead performing social or
deal of influence on the employees and he must remain perfect in his actions. legal obligations. These duties include greeting visitors, signing legal
documents, taking important customers to lunch, attending a
subordinate’s wedding and speaking at functions in schools and churches.
3.5.6 Managerial Roles in Corporate Governance
All these, primarily, are duties of a ceremonial nature but are important
The managers of an organization also play a very important role in the success of for the smooth functioning of an organization.
an organization and corporate governance. An organization must examine the  Leader: The influence of a manager is most clearly seen in his role as a
roles that the managers are expected to perform. Henry Mintzberg developed leader of the unit or organization. A manager is responsible for the
these roles in the late 1960s after a careful study of executives at work. All these activities of his subordinates, he must lead and coordinate their activities
roles in one form or another deal with people and their interpersonal in meeting task-related goals and he must motivate them to perform
relationships. These managerial roles are divided into three categories. The first better. He must be an exemplary leader so that his subordinates follow his
category of interpersonal roles arises directly from the manager’s position and the directions and guidelines with respect and dedication.
formal authority bestowed upon him. The second category of informational roles  Liaison: In addition to their constant contact with their own subordinates,
is played as a direct result of interpersonal roles and these two categories lead to peers and superiors, the managers must maintain a network of outside
the third category, that of decisional roles. Figure 3.2 shows the various contacts in order to assess the external environment of competition, social
changes or changes in governmental rules, regulations and laws. In this
managerial roles.
role, the managers build up their own external information system. In
addition, they develop networks of mutual obligations with other
Self-Instructional Material 71 72 Self-Instructional Material
 managers in the organization. They also form alliances to win support for Ethical Decisions Ethical Decisions involve labour disputes, customer complaints, employee grievances,
their proposals or decisions. The liaison with external sources of machine breakdowns, cash flow shortages and interpersonal conflicts.
information can be developed by attending meetings and professional  Resource allocator: The third decisional role of a manager is that of a
conferences, by personal phone calls, trade journals and by informal resource allocator. Managers must establish priorities among various
personal contacts within outside agencies. NOTES NOTES projects or programmes and make budgetary allocations to the different
activities of the organization based upon these priorities. They assign
Informational roles personnel to jobs, allocate their own time to different activities and
By virtue of his interpersonal contacts, a manager emerges as a source of allocate funds for new equipment, advertising and pay raises.
information on a variety of issues concerning the organization. In this capacity of All these roles are important in a manager’s job and are interrelated even through
information processing, a manager executes the following three roles: some roles may be more influential than others, depending upon the managerial
 Monitor: Managers are constantly monitor and scan their environment, position. For example, sales managers may give more importance to interpersonal
both internal and external, collect and study information regarding their roles, while the production managers may give more importance to decisional
organization and the outside environment affecting their organization. roles. The traits of effective managers are their ability to recognize the suitable
This can be done by reading reports and periodicals, by asking their roles to play in each situation and the flexibility to change roles when required.
liaison contacts and through gossip and speculation. However, managerial effectiveness is determined by how well the decisional
roles are performed by the manager in the organization.
 Disseminator of information: Managers must transmit the information
regarding changes in policies or other matters to their subordinates, their 3.5.7 Managerial Skills in Corporate Governance
peers and to other members of the organization. This can be done through
memorandums, phone calls, individual meetings and group meetings. A manager must possess certain skills in order to translate knowledge into
performance. It is the level of competency that allows for performance to be
 Spokesperson: A manager has to be a spokesman for his unit and he
superior in the field in which the employees have the required skill. All managers
represents his unit in either sending relevant information to people outside need to possess technical, interpersonal, conceptual, diagnostic, communicational
his unit or making some demands on behalf of his unit. This may be in the and political skills. The technical and diagnostic skills refer to the knowledge and
form of the president of the company making a speech to a lobby on ability of understanding the processes involved and scientifically analysing
behalf of an organizational cause or an engineer suggesting a product problems and opportunities. These human skills are the most important assets of
modification to a supplier. any successful manager.
Decisional roles It is the manager’s job to achieve the organizational objectives through proper
utilization of its human and material resources. However, since the material
On the basis of the environmental information received, a manager must make resources such as equipment, capital, facilities and information can only be used
decisions and solve organizational problems. In that respect, a manager plays four by humans, the human resources are the most valuable assets of any organization.
important roles, which are: Accordingly, a manager must be highly skilled in the art of optimally utilizing the
 Entrepreneur: As entrepreneurs, managers are continuously involved in human resources. The various skills that the managers must possess are:
improving their units and facing dynamic technological challenges. They  Technical skills
are constantly on the lookout for new ideas for product improvement or  Human skills
products addition. They initiate feasibility studies, arrange for capital for  Conceptual skills
new products if necessary and ask for suggestions from the employees for
 Diagnostic skills
ways to improve the organization. This can be achieved through
 Communication skills
suggestion boxes, holding strategy meetings with project managers and
research and development personnel.  Political skills
 Conflict handler: Managers are constantly involved as arbitrators in Technical skills
solving differences among the subordinates or the employee’s conflicts
with the central management. These conflicts may arise due to demands Technical skills basically involve the use of knowledge, methods and techniques
for higher pay or other benefits or these conflicts may involve outside in performing a job effectively. Technical skills are specialized knowledge and
forces such as vendors increasing their prices, a major customer going expertise, which is utilized in dealing with day-to-day problems and activities.
For example, engineers, accountants, computer programmers and systems
bankrupt or unwanted visits by governmental inspectors. Managers must
analysts, all have technical skills in their areas and these skills are acquired
anticipate such problems and take preventive action if possible or take
through education and training. These skills are highly necessary at the lower
corrective action once the problems have arisen. These problems may also level of management and as one moves to higher levels of management, the
relative importance of technical skills usually diminishes. This is so because
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unlike the first-level supervisors, managers at higher levels have less direct Ethical Decisions Ethical Decisions Political skills
contact with technical operating problems and activities at the lower levels of an
Political skill can be described as the ability to get your own way without
organization.
seeming to be selfish or self-oriented. It is the ability to get your share of power
Human skills and authority and use it without the fear of losing it. It is the most complex of
NOTES NOTES
skills in the sense that it is required to establish the right connections and
Human skill is the ability to work with other people in a cooperative manner. It impressing the right people and then skillfully using these connections to your
involves understanding, patience, trust and genuine involvement in interpersonal own advantage. Political skill is most important at the middle management level
relationships. These are interpersonal skills and are necessary at all levels of because middle managers always aspire to reach the top levels of management
management. People with good interactory human skills build trust and and right connections help in such aspirations.
cooperation as they motivate and lead and thus become successful managers. This
skill is gaining more importance as the workplace is becoming more and more 3.5.8 Leadership Strategies in Corporate Governance
ethnically diversified and the manager has to be aware and become adaptive to
cultural differences. Furthermore, since businesses are becoming more and more Leadership strategies have a very important role to play in corporate governance.
multinational and global, managers are required to learn new ways of dealing A manager of an organization must be a good leader and must possess very good
with people in different countries with different cultures and value systems. leadership strategies to effectively lead the group of employees in order to
achieve the goals and objectives. Leadership is very crucial for the success of an
Conceptual skills organization. Leadership is an integral part of organizations and plays a vital role
in organizational operations. It provides direction, guidance and confidence to the
Conceptual skill is the ability to view the organization as a whole and as a total employees and helps in the attainment of goals in a much easier way. In industrial
entity as well as a system comprising of various parts and subsystems integrated organizations, managers play the role of a leader and activate the employees in
into a single unit. This skill is especially crucial for top-level executives who order to make them work.
must keep the whole system under focus. They must understand the complexities
of the overall organization, including how each unit of the organization Need for leadership strategies
contributes towards the overall success of the entire organization. This skill
generally depends upon an organized thinking process which deals with the The various reasons why the organization needs leadership strategies are:
understanding of various functions of an organization, their interdependence and  Leadership is needed for influencing the behaviour of employees of an
the relationship of the organization with the outside environment in terms of organization.
threats and opportunities.  It is needed to coordinate the activities of the employees of an
organization.
Diagnostic skills
 It is needed to attain the tasks that are assigned to the employees be
Diagnostic skill refers to a manager’s analytical ability where a manager can giving them instructions.
logically and objectively investigate and analyse a problem or an opportunity and  It is needed to provide the employees a vision for the future.
use scientific approaches to arrive at a feasible and optimal solution. It is
 Leadership is needed for encouraging the employees.
important however, that a manager gets to the root cause of the problem so that
the solution is real and a permanent one rather than simply a short-term or a  A leader is a friend to the employees. Only a leader can recognize the
cosmetic one. This skill overlaps with other skills because a manager may need to talents of individuals, and help them realize their dreams.
use technical, human, conceptual or political skills to solve the problem that has  It is only possible for a leader to unite the employees as a team.
been diagnosed.  Only a good leader can build up a high morale within a team.
Communicational skills  A leader is required to help the team focus on a common goal or
mission.
Communicational skills are an important component of interpersonal skills and
are basic to all other skills and these are important and necessary at all levels of According to Koontz and O’Donnell, ‘The leadership is an art of influencing
management. A manager’s best ideas will have little impact if they cannot be people so that they will strive willingly and enthusiastically towards the
communicated effectively. Good communication is the foundation of sound achievement of group goals’. It emphasizes the fact that the leaders help people to
management. Proper communication eliminates delays, misunderstanding, understand the objectives of an organization. Thus, leadership is an endless
confusion, distortions and conflicts and improves coordination and control. All CHECK YOUR PROGRESS process of influencing people to willingly and enthusiastically strive towards the
the four communicational skills, namely writing, reading, listening and 8. What are the characteristics of achievement of the organizational goals. The leader of an organization must
non-verbal gestures are important ingredients of successful leadership. good corporate governance? possess the following qualities:
9. What skills must a manager  Smartness: A leader should be smart enough to solve the problems of
possess?
employees.

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  Knowledge of business: A leader should have a good grasp of business, Ethical Decisions Ethical Decisions must also state what will be required by customers in the future and the manner in
and the organizational goals should be clear in his mind. which these demands can be fulfilled.
 Decisiveness: A leader should be a good listener, that is, he should take a The CEO must possess an ability to clearly identify the stakeholders. The
decision after taking the opinion of employees. managers, workers, suppliers and the government all form the stakeholders of an
NOTES NOTES
 Willingness to admit mistakes: A leader should accept all the mistakes organization. A CEO must clearly define the importance of all these stakeholders.
and learn from them in order to maintain his dignity. The organization must maintain a very good relationship with the stakeholders.
 Innovative: A leader should be innovative in order to meet various The relationship between the organization and the stakeholders is very critical for
environmental changes. the success of an organization. Later, the organization must also maintain an
effective relationship with the suppliers. Suppliers are the persons who supply
Emerging perspectives on leadership in organizations raw materials in an organization. A good relationship with the suppliers will
ensure the timely supply of the raw materials in an organization. An organization
There are two new perspectives that have attracted attention in organizations.
must also make timely payments to the suppliers in order to maintain a regular
These are the concepts of substitutes for leadership and transformational
supply of raw materials in an organization.
leadership.
In order to maintain an effective business strategy, an organization must have a
Substitutes for leadership full understanding of the vision, mission, values and responsibilities towards the
The behaviour of a leader must be appropriate for different situations. This does shareholders. During the event of any crisis, an organization’s relationship with
not include situations where leadership is not required. This concept recognizes the stakeholders and the suppliers will go a long way in protecting the
situations where the characteristics of the subordinates, the task and the organization during the time of crisis.
organization replace the leaders’ behaviour. For example, when a patient is In the future, an organization must have a clear understanding with its
admitted to an emergency room in a hospital, nurses, doctors and attendants act stakeholders. An organization must involve the stakeholders in their decision
immediately without waiting for directive or supportive behaviour of leaders in process. The managers must be accountable for the decisions that they take in an
an emergency ward. organization. If the manager takes any decision that is not beneficial for the
Numerous traits of the subordinates may alter or replace the leader’s behaviour. organization in the long run, then the manager must be held liable for any losses
For instance, employees who are able and also have relevant experiences do not that the organization suffers. An organization must make a very purposeful
require to be instructed on what to do. The features of the job that may substitute accountability plan which must be linked with the performance of the managers.
leadership are intrinsic satisfaction and the availability of feedback. For instance, The role and responsibility of the employees must be clearly defined by the
the subordinate may not need direction when the task is uncomplicated and organization. The various changes that will take place in the 21st century are:
routine. However, he may require or want support when the task is challenging. Balance accountability and enterprise
Organizational traits that may substitute leadership are group cohesion,
The CEO of an organization must show results in a very short period of time. A
formalization, a rigid reward structure and inflexibility. Thus, for example,
CEO must perform the tasks in a very well-planned manner. If any act of the
leadership may not be required when policies are official and inflexible.
CEO results in losses for an organization, then the CEO is held accountable for
Transformational leadership his actions and this may ultimately result in his ouster from the organization.
There is a certain element of risk associated with taking decisions, which could
There are various new concepts of leadership that are used by the organization, either bring a lot of profits or losses. A good CEO is one that has a very good
such as charismatic leadership, inspirational leadership, symbolic leadership and knowledge of the risk factor and planning in an organization. A CEO can take
transformational leadership. These new concepts of the leadership transmit a more accurate decisions if he has a complete knowledge of his competitive
sense of mission, increase learning experiences and inspire new ways of thinking strengths and weaknesses.
among the leader.
Charisma is a form of interpersonal attraction. Charismatic people attract Search for competitive knowledge
followers and this type of leader has great power over his or her followers. The CEO of an organization must continuously try to gain and maintain the
Charismatic leaders are self-confident and can influence others. The followers of competitive advantage of an organization. A CEO tries to gain competitive
a charismatic leader identify with the leader’s beliefs, accept, trust and obey the advantage with the help of the 4Ps, which are product, price, placement and
leader without questioning him and thereby contribute toward the success of the promotion. A CEO must always be quick in taking the decisions regarding the
organizational goals. need of the market. However, competitive advantage could result in losses for an
CHECK YOUR PROGRESS organization. If an organization gains competitive advantage in the market by
3.5.9 Developments in Corporate Governance 10. What qualities should the lowering the prices of products, then it may lead to a belief among the customers
leader of an organization that the price reduction is due to poor quality of the product. This may lead to a
The purpose for which an organization is being established has to be defined. An possess?
organization must not just state what they can offer to the customers. but they decrease in the sales of the products of an organization, which, in turn, affects its
profit.
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 Ethical Decisions
Accountable entrepreneurs and directors Ethical Decisions 3.5.10 Corporate Governance Models
One of the main tasks of an entrepreneur is to provide quality goods to the Corporate governance models are required to make an outline of the corporate
customers at the right price with the help of proper distribution channel. A right governance structure of a corporation. Corporate governance structure is
decision taken by the entrepreneurs goes a long way in providing an impetus to determined by various factors of the corporation. These factors are the rights and
NOTES NOTES
the employees for performing to the best of their abilities. The entire division of responsibilities of different members of the corporation, internal factors such as
organization must work in accordance with each other to achieve the goals and the working environment and the policies of corporation and external factors such
objectives of the organization. The directors and entrepreneurs of an organization as the capital market of the country.
must be well-accountable for their actions as the decisions taken by them could
either make or destroy the organization. There are several members involved in a corporation, who have different rights
and responsibility. A fluent communication between these members is required
Corporate governance and stakeholders for a healthy environment in the corporation. Different models for corporate
governance are required to provide fluent communication between all members
Corporations are always concerned about the interest of the stakeholders of the
of the corporation. Models for corporate governance arrange all the important
corporation. Stakeholders also take care about social causes and the commercial
members of the corporation in a well-structured manner that follows various
value of society in relation to different interest areas of the stakeholders. The
government policies related to the capital market of the country. There are two
success of different corporations is dependant on the operations of the
different models used to govern a corporation. These are as follows:
organizations, which are performed to provide profit to the stakeholders of the
corporation. Stakeholders of a corporation are of four types:  Outsider model
 Primary social stakeholder: These are those stakeholders who have  Insider model
direct relations with the corporation. The presence of these stakeholders Each model for corporate governance has different participants, corporate actions,
in the corporation can affect the progress of the corporation. regulatory framework and disclosure requirement. Participants are those members
 Primary non-social stakeholder: These are also directly related to the of corporation who play an important role in the corporation. Stakeholders,
corporation, but they are never present in the corporation as primary shareholders, CEOs, related industrial groups and management of the corporation
social stakeholders. are examples of different participants of the corporate models. Corporate actions
 Secondary social stakeholder: These are those stakeholders who are not are used to describe essential actions, which are taken by different members of
directly related to the corporation but changes in these stakeholders can the corporation. Electing directors for the board of corporation and the
affect the corporation. appointment of auditors of the corporation are examples of corporate actions.
Disclosure requirements determine necessity, such as interaction between
 Secondary non-social stakeholder: These are those stakeholders who
different participants of the corporation that is used to perform various corporate
are not related to the corporation and can rarely affect the corporation. actions of the model. Figure 3.4 shows the different models for corporate
Figure 3.4 shows the different stakeholders of a corporation. governance.

Primary social stakeholder Primary non-social stakeholder

Model for Corporate
Customers Natural environment Governance
Suppliers Future generation
Investors
Managers and employees
Local communities
Business Partners
Global citizen

Secondary social stakeholder Secondary non-social stakeholder Outsider Insider

Government Environmental pressure group
Society Animal welfare pressure group
Unions
Media and communicators
Trade bodies
Competitors
Anglo-US Model Insider

Figure 3.3: Stakeholders of a Corporation

Figure 3.4: Models for Corporate Governance
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 Ethical Decisions Insider model in eurasian countries
Outsider model Ethical Decisions

European countries, such as England, as well as America, generally follow the In most countries, such as the Eurasian countries, which constitute all
outsider model. The outsider model is also known as shareholder model because European countries except England and America, and most Asian countries, the
in this model, ownership of the corporation is divided among a number of insider model is used for corporate governance. The following are the various
NOTES NOTES
shareholders of the corporation. Thus, the financial section of the corporation is aspects related to the insider model for corporate governance in Eurasian
divided among different shareholders of the corporation. The corporate bodies countries:
that use the outsider model of corporate governance mostly have a good financial  The mass privatization with favourable conditions for employees in
position in the stock market. Different banks help the clients of a corporation that Eurasian countries has created prerequisites for the insider model of
uses the outsider model of corporate governance to obtain short-term finance. The corporate governance.
outsider model has the following features:  The Russian tendency that the employees’ shares pass to other holders is
 A priority to market regulation. also present in Eurasian countries but not so sharp.
 There is a transitory interest in the firm on part of the owners.  For some countries, there is high concentration of the shares’ capital at
the management.
 The absence of close relationships between shareholders and
 Nevertheless, employees continue to play an important role as
management.
shareholders in Armenia, Azerbaijan, Georgia, Kazakhstan, Kyrgyzstan,
 The primacy of shareholder rights over those of other industrial groups. Moldova, Ukraine and Uzbekistan.
Insider model International private initiatives in corporate governance
Most countries except European countries follow the insider model. This model is The role of employees in corporate governance has an important place in
also known as the stakeholder model because those people who have long-term widespread corporate governance guidelines and codes of conduct as, for
relationship with the corporation hold the entire control and ownership of the example, in Corporate Governance Forum Principles (1998), Bosh Report,
corporate body. Stakeholders of the corporation are examples of such people. General Motors Board Guidelines, Dey Report and others (Holly J. Gregory,
Stakeholders of a corporation can be categorized as follows: international comparison of board ‘Best practices’ in developed markets, 1999).
 Employees of the corporation
 Customers of the corporation
3.5.11 Corporate Governance Structure
 Management The corporate governance structure of a corporation is affected by several factors
such as the country to which a corporation is related, responsibilities and roles of
 Creditors different participants of the corporation and the position of the corporation in the
 Suppliers capital market. In other words, the corporate governance structure of any
 Local communities corporation varies according to a specific factor, which is the country to which
the corporation is related. There are two different models used to govern different
The financial section of the corporation that uses the insider model is not corporations according to their corresponding countries. These are as follows:
distributed among different outsiders such as the shareholders of the corporation.
 The Anglo-US model
In this model, the bank is an important part of the corporation that monitors
clients of the corporation. The insider model has the following advantages and  The Japanese model
disadvantages:
The Anglo-US model
 Priority is given to stakeholders’ control.
The Anglo-US model is an outsider model used for corporate governance. This
 The firm owners show a long lasting interest in the company.
model is influenced by share ownership of an individual or an outsider. The
 They, many a times, hold positions in senior managerial positions or on Anglo-US model is a well-maintained framework, which is used to represent
the board of directors. different roles and responsibilities of different participants of a corporation, such
 The relationships between management and shareholders are close and as management, shareholders and directors. This model provides an easy way of
stable. communication between different participants, because this model maintains
good relations between different participants of the corporation. This model is
 The formal rights of employees exist so that the key managerial decisions
used by those countries, which have the largest capital market in the world. USA
can be influenced. and UK are good examples of these countries. Most of the corporations of these
 There is hardly any market for corporate control. countries use equity financing for increasing their capital values.

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The Anglo-US model also maintains a causal relationship between different Ethical Decisions Ethical Decisions Corporations using the Anglo-US model for corporate governance attract many
factors of a corporation such as equity financing, capital market size of outsiders due to the following reasons:
corporation and corporate governance structure. In this model, shareholders play  Attracting pattern of stock ownership
the most important role in maintaining capital market and corporate governance
 Increasing importance of institutional investors among all participants of
of the corporation among all other participants of corporation. Figure 3.5 shows NOTES NOTES
corporation
the different participants of the Anglo-US model used for corporate governance.
 Importance of outsiders in the Anglo-US model’s voting behaviour
 Better proposal of private corporations such as Committee on the
Directors Financial Aspects of Corporate Governance and Shareholder Corporation

Necessity of the Anglo-US Model

When the board of directors were involved in the list of participants of the Anglo-
US model, the entire power of ownership and control of corporation was moved
to the hands of Chief Executive Officer (CEO). The person controlling the power
can cause the occurrence of negative factors. These factors are as follows:
Anglo-US  All decisions related to corporation is dependent on one person.
Model for
Corporate  Sometimes, a group of insiders can control the corporation.
Governance  In many cases, insiders or CEOs are always concerned about their own
profit.
Management Shareholders
A lot of outsiders started becoming involved as participants of corporations
Figure 3.5: Different Participants of Anglo-US Model because of the above reasons. Many factors contribute to increasing the interest of
corporate governance with the involvement of outsiders. These factors are as
According to the Anglo-US model, ownership and control of the corporation is
follows:
distributed among different shareholders of the corporation. Distribution of
ownership and control among different outsiders helps the corporation in  Provision of new government regulations
maintaining a strong capital market, because outsiders contribute their efforts and  More involvement of institutional investors
capital to make a strong position of the corporation in the market. A strong  Introduction of takeover activity
position of a corporation in the capital market increases the profit of the
 More competitiveness with Asian countries’s corporation
shareholder. The cost of distributing ownership and control among different
outsiders is known as agency cost. Regular Framework in the Anglo-US Model
In the early days of the use of the Anglo-US model, corporations in the US and Anglo-US model provides a well-maintained relationship between all the
UK had only two types of participants—individual shareholder and institutional participants of the corporation. In America, a centralized agency, Securities and
shareholders. After some time, the board of directors of the corporations was also Exchange Commission (SEC) is used to regulate communication between all
involved in the list of participants of the Anglo-US model. The board of directors participants of corporation involved in the Anglo-US model.
consisted of many insiders and outsiders. Insiders refer to those people who have
a strong relationship with the corporation, such as employee, manager and The size of the capital market and communication system, of corporation affects
stakeholder. Outsiders refer to those people, who are not directly connected with the framework of Anglo-US model. Many laws related to funds and finance of a
the corporation. Shareholders and investors are examples of outsiders of country also regulate the corporate governance. In England, framework of
corporation. corporate governance is established according to its parliamentary rules, which is
established by private or self-regulatory firms such as security and investment
Outsiders such as individual and institutional investors observe many running board. The security and investment board maintains the securities market of the
factors of corporations to know about the trends of corporation and to represent corporation.
their interest in corporations.
Observation is necessary to obtain more information about the corporation so that Disclosure requirement
they never face the problem of lack of information which is one of the most In the Anglo-US model, corporations require the distribution of information
common problem that outsiders of a corporation face. Lack of information is also among all participants of the model. Information can be released by an annual
a limitation for outsiders because of which they never provide their effective report, which contains the following information:
oversight to the corporation.
 Entire financial data of the corporation
 Breakdown of capital structure of corporation
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  Name, occupation, corporate relationship of every member involved in Ethical Decisions Ethical Decisions system and the corporation. This model requires a legal and well-maintained
the board of directors as a member of the Anglo-US model framework to promote industrial groups. Industrial groups are related with the
corporation using cross share holding of equity and trading relationship.
 The compensation paid to the upper management and the CEOs of the
Industrial groups are known as keiretsu in Japan.
corporation NOTES NOTES
The Japanese model is mainly used by Japanese corporations, where equity
 List of all shareholders, who have more than 5 per cent of corporation
financing is one of the most important financing factor of the corporation.
shares
Stakeholders of corporation are also one of the most important factors of
 Name of the auditors of the corporation Japanese corporations. They play an important role in the corporation and its
 All the factors that are used to restructure any part of the corporation entire system. In Japanese corporations, outsiders do not play as important a role
as in Anglo-US model, because outsiders never take more interest in the
Shareholders are also permitted to submit their proposals in the report represented corporation’s profits and loss.
in the Anglo-US model. These proposals are known as shareholder proposals.
Shareholder proposals include information about those activities which are Participants of Japanese model
related to the corporation’s progress. The Japanese model of corporate governance has many participants, which are as
follows:
Note: All the corporations in UK and other countries use the semi-annual report.
 The main bank system
Corporate actions  Keiretsu
Corporate actions in the Anglo-US model require the approval of shareholders.  Management
The shareholders, who have more than 10 per cent of the total share of the  The government of the country
corporation, have permission to assemble an extraordinary general meeting  Shareholders
(EGM) for approving different corporate actions. These actions are of two  Independent directors
types—routine actions and non-routine actions. Routine actions include election
of directors and appointment of auditors of the corporation. Non-routine actions Main bank system
involve the establishment of stock option plans mergers and takeovers and the The main bank system is one of the most important participants of the
restructuring of any part of corporation, if required. corporation. It is concerned with the financial position of the corporation. It also
provides financial help to the corporation if required to maintain a good position
The Japanese model in capital market of the country. The main bank system is responsible for
In the Japanese model, stakeholders of the corporation hold ownership and handling the various clients of the corporation and also helps corporations in
control of the corporation. The main bank system provides most of the finance for providing their customers with services related to loans, equity issues, bond
the company requirements. In other words, it is the largest creditor of the issues, settlement account and consultancy services. It is one of the major
corporation. It provides cross shareholding arrangement to the corporation that shareholders of the corporation.
make the bank one of the important shareholders of the corporation. The main
bank system is responsible for monitoring investment decisions and various Keiretsu
clients of the corporation. It is also concerned with the running progress of the Keiretsu refers to those industrial groups that are related to the corporation in
corporation. It provides financial help to the corporation. The main bank system terms of handling different financial transactions of the corporation. It also plays
is responsible for handling the client of the corporation. It provides the following an important role in the Japanese model of corporate governance. Keiretsu is
services to the clients for handling clients of the corporation: responsible for handling debt and equity transactions of the corporation, trading
 Enabling long-term investment of clients of products of the corporation and informal business contacts.
 Securing lender of the corporation Management
 Providing stability to the shareholders of the corporation
The management of the corporation is responsible for managing communication
 Providing solution to the problem of irregularity of information between the insiders and the stakeholders of the corporation. Managing
 Managing the financial position by gathering rents from excessive communication between different insiders is an important task in any
deposits model. Thus, the management of the corporation is also an important participant
of the corporation, and it uses the Japanese or insider model of corporate
Japanese corporations mainly use the Japanese model, where equity financing is governance.
one of the most important financing factor of the corporation. The stakeholders of
the corporation help in maintaining good relationships between the main bank
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 Ethical Decisions Solid lines show the important participants of the Japanese model of corporate
The government of the country Ethical Decisions
governance. Government policies, management processes such as communication
The government of the country in which the corporation is established also
management, industrial groups, which help corporations in the distribution of
affects the model of corporate governance by introducing different policies
products and other services that are known as keiretsu, and the main bank system
related to the corporation. For example, in the 1930s, the Government of Japan
NOTES NOTES are the most important participants of the Japanese model.
introduced a policy, according to which every corporation has to show official
and unofficial representation on its corporate board when the corporation faces
Composition of the board of directors
financial problems.
The board of directors in the Japanese model contains fifty members that include
Shareholders executive manager of corporation, heads of different departments of the
corporation and administration of the corporation. The executive manager, heads
Outside shareholders are not very important participants in the Japanese model.
of departments and administration of the corporation are directly connected to the
There is a very small number of shareholders in corporations, which is the reason
corporation. In the other words, all the members of board of directors are insiders
behind the less significance of these participants in the Japanese model.
of the corporation.
Independent directors The main bank system and keiretsu of the corporation can also add new members
in the board of directors. For example, if a corporation takes more time to get the
Independent directors refer to the chief executive officer (CEO) of the
required profit than expected, then other participants such as keiretsu and the
corporation. In Anglo-US model of corporate governance, CEOs of the
main bank system of the Japanese model appoint their own member in the board
corporation play an important role, but in the Japanese model, CEOs do not play
of directors. Some corporation also include government bureaucrats in the board
such important role as in the Anglo-US model. These CEOs represent the outside
of directors, because they help corporations in managing the financial section of
stakeholder of the corporation who is only responsible for getting profits.
the corporation.
The main bank system, keiretsu, the management and the government are
important participants in the Japanese model of corporate governance. Regulatory framework
Shareholders and independent stakeholders are two other participants that do not
Japanese government ministries frequently develop industrial policies according
have not so much importance as the other four participants. Figure 3.6 shows
to the role of Japanese corporations in the international market. The Ministry of
different participants of the Japanese model.
Finance and the Ministry of International Trade and Industry are also responsible
for formatting different industrial policies. Industrial policies are changed due to
the following reasons:
Government
 Japanese corporations are becoming more and more globalized day by
day, which makes Japanese corporations more dependent on the domestic
market of other countries.
Management Shareholder
 Most of the Japanese corporations have become partially liberalized in the
international capital market and opening to global standards.
Japanese Model of Corporate
Regulatory framework of Japanese model has developed after World War II.
Governance
Government agencies of Japan provide little effective, independent regulation of
the Japanese securities industry.
Independent Disclosure requirements
Keiretsu Directors
Disclosure requirements of the Japanese model are somewhat similar to the
Anglo-US model of corporate governance. In the Anglo-US model, an annual
Main bank
system
report, which contains information about different factors such as financial
performance of the corporation and members of the board of directors of the
corporation, is required. The main difference between the Japanese and the
Figure 3.6: Participants in the Japanese Model Anglo-US models is that in the Anglo-US model, the annual report is represented
to the board of directors while in the Japanese model, semi-annual information is
In the above figure, the dashed lines show the less significant participants of the
provided in the reports represented to the board of directors. This report includes
Japanese model. Shareholders and independent directors are less significant
information about financial data of corporation, name and information about top
participants of Japanese model of corporate governance, because these
ten shareholders of the corporation.
participants are in very few numbers and are only interested in their share of the
corporate profit.
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Corporate Action Ethical Decisions Ethical Decisions The Cadbury Code 1
In the Japanese model, corporate actions are divided into routine corporate In the post Enron era, much regulatory attention has been given to non-executive
actions and non-routine corporate actions. Routine corporate actions include the directors (NEDs) and their role in contemporary corporate governance. The Higgs
following actions: Review (2003) in the UK suggested the potentially important role or non-
NOTES NOTES
 Paying dividends and allocation of reserves executive directors in improving corporate governance. As part of the firms’
board, non-executive directors participate in monitoring and controlling the
 Election of directors
executive layer of the firm. The UK regulatory scene has sought to encourage
 Appointment of auditors good corporate behaviour through a ‘comply or explain’ approach with fines and
 Authorization of the capital of the corporation to the bank imprisonment as a last resort. In contrast, the US with its Sarbanes Oxley
 Management of the required changes of the corporation legislation has not actively promoted the role of non-executive directors. Instead
the US has used the threat of fines and imprisonment to deter undesirable
 Payment of the retirement bonuses to the directors and auditors
corporate behaviour. For example, the US approach can be seen in the 25-year
 Providing compensation to the directors and auditors prison sentence given in July 2005 to Bernard Ebbers, former CEO at WorldCom,
and the 24-year sentence given in October 2006 to Jeffrey Skilling, former CEO
Note: Non-routine corporate action is similar to the Anglo-US model of at Enron.
corporate governance.
According to the UK approach, to serve as an effective counterweight to the
Interaction among different participants executive layer in the board, non-executive directors are expected to be
independent from the firm they take part in directing. Therefore, the role of
In the Japanese model of corporate governance, interaction among different non-executive directors follows a risk-regulatory rationale. By serving as a
participants produces a strong relationship between each other. Interaction is one counterweight to the top executive part of firms, non-executive directors are
of the basic characteristics of the Japanese model. In the Japanese model, good indented to limit the risk of excessive power concentrating in the hands of the
interaction is required because the main participants of the Japanese model are chief executive officer and senior executive board members. Therefore, in spite of
the insiders of the corporation, This requires fluent communication for the the crucial importance attributed to non-executive directors’ independence, as it
distribution of knowledge about each factor of the corporation. Various reports evolved in the last decade, is lacking, misguided and introduces a considerable
and annual general meetings (AGM) are used to provide good interaction source of risk to the governance of large corporation and, through a systemic
between different participants in the Japanese model. effect, to the entire economy.
3.5.12 Overview of Various Codes of Corporate Governance There are inherent problems regarding the regulatory requirements from boards
of directors. In the UK, in reaction to various corporate scandals in the last two
There are various codes of corporate governance that the organizations have to decades, a chain of regulatory documents were published, starting at the Cadbury
implement. The Cadbury code originated in the United Kingdom and it led to the Report, followed by the Greenbury Committee, the Hampel Committee and
development of the various other codes. The Kumaramanglam code originated in culminating in the first version of The Combined Code in 1998, each stressing
India as a result of the committee that was headed by the Shri Kumaramanglam at more forcefully the importance of appointing independent non-executive
the Securities and Exchange Board of India (SEBI). However, the codes are only directors for transparent and efficient corporate governance.
guidelines, which the organizations must follow to achieve the goals and
objectives of the organization. For the corporate governance code to have real The evolution of the regulatory definitions regarding the independence of NEDs
meaning, it must first focus on the listed organizations. The organizations that are shows a gradual crystallization of two related concepts such as the negative
listed are largely financed by the public money such as equity and debt securities. probabilistic concept and the negative bilateral concept. Practices following the
There are three aspects of codes of the corporate governance. These are the negative bilateral concept assign an independent status to a director according to
following: his/her lack of connections with a specific firm. In contract, the negative
probabilistic concept regards a director as independent according to their lack of
 There is a set structure of corporate governance available worldwide.
connection with certain categories or groups in the general population.
Therefore, a code of corporate governance cannot be designed for an
individual’s own purpose. These two concepts, which together dominate the British regulatory discourse
 Better corporate practices can no longer afford be ignored by Indian about non-executive directors, contain several problematic characteristics that
companies and financial institutions. may bring about systemic risks. First, the concepts do not define positively what
counts as directors’ independence, but only provide a ‘by-default’ deducible
 Corporate governance is far beyond the company law. It is difficult to
definition. Hence, the regulators cannot assess to what extent firms are
legislate in detail the quantity, quality and the length to which the board
interdependent and to what degree their interlocking connections may affect their
of directors exercise their responsibilities towards the shareholders.
decision-making. Second, the existing regulatory concepts create a situation in

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which the recruitment of non-executive directors becomes a utility-maximization Ethical Decisions Ethical Decisions non-executive directors had been eroded, for example, by reports that a third of
exercise (in effect, a zero-sum game). Therefore, in so doing, the regulation non-executive directors are recruited through personal contacts (the old network)
effectively channels firms to circumvent the regulatory recommendations. and that Lord Wajeham, a former UK government cabinet minister, sat on the
boards of sixteen companies. For example, the report stated that the nomination
The Negative Bilateral Concept2 NOTES NOTES committee should ‘consider candidates from a wide range of backgrounds and
The Cadbury Report, published in 1992, was the first attempt to focus on look beyond the ‘usual suspects’. The Higgs Review also led to the Department
non-executive directors as an important mechanism for improving governance in of Trade and Industry commissioning a report on the recruitment and
UK quoted companies. The preface to the report of the Cadbury Committee development of non-executive directors. This report (The Tyson Report, 2003)
referred to ‘the continuing concern about standards of financial reporting and explicitly recommends increased diversity in board membership, particularly with
accountability, heightened by Bank of Credit and Commerce International regard to female participation.
(BCCI), Maxwell and the controversy over directors’ pay which has kept In addition, Higgs recommended that the nomination committee should consist of
corporate governance in the public eye’ (Cadbury Report, 1992: 9). The Cadbury majority of independent non-executive directors and should be chaired by an
Report recommended that quoted company boards should each have a minimum independent non-executive director. The nomination committee should lead the
of three non-executive directors. It was recommended that a majority of the non- process for board appointments and make recommendations to the board. These
executive directors should be independent, that is they should be independent of recommendations (with some minor changes) were incorporated in a revised
the management and free from any business or other relationship which could (2003) version of the Combined Code. Following a review by the Financial
materially interfere with the exercise of their independent judgment. (Cadbury Reporting Council in 2005, a few minor changes were made to the latest version
Report, 1992: 22). of the Combined Code, published in 2006.
The Cadbury Report signifies the beginning of the bilateral negative definition for In addition, one must stress on the importance of directors’ independence to
non-executive directors’ independence: the less connections there are between the proper corporate governance The Combined Code also states that on the boards
director and the firm, the more independent the director is deemed to be. Three of all FTSE 350 companies, ‘at least half the board, excluding the chairman,
years after the Cadbury report, the Greenbury Committee was formed following should comprise non-executive directors determined by the board to be
widespread public concern over what were seen as excessive amounts of independent’. (A.3.2). In their decisions, the Higgs Committee and the Combined
remuneration paid to directors of quoted companies and newly privatized Code entrenched the independence according to the negative probabilistic
companies. The Greenbury Committee recommended that the remuneration approach more deeply by focusing on nomination of directors. Decisions made by
committee should consist exclusively of non-executive directors. These non- a nomination committee would be independent of the board as long as and to the
executive directors should have no personal financial interest, other then as extent that its members are themselves independent. Hence, by recommending
shareholders, in the committee’s decisions. Also, there should be no that nomination committees will be composed of non-executive directors, the
cross-directorships with the Executive Directors, which could be thought to offer committee introduced a structural-recursive element that, in effect, distanced the
scope for mutual agreements to bid up each others remuneration’ (Greenbury board from a position of responsibility and accountability. By calling for a more
Report, 1995: 22, 23). diverse background from which directors are appointed, the Combined Code has
Also in 1995, the Hampel Committee published a report in which it reviewed the tried to offer a potential remedy to the ‘negative’ definition approach and its
implementation of the findings of the Cadbury and Greenbury Committees. The problems. The implicit assumption here is that if NEDs come from outside the
Hampel Committee recommended that ‘boards should disclose in the annual social networks of the existing directors, it is more likely that they would be
report which of the directors are considered to be independent and be prepared to independent. The organizational tools that are expected to ensure a wide diversity
justify their view if challenge’. Principles of Good Governance and Code of Best of appointees are set procedures that firms must follow prior to appointments.
Practice were published by the London Stock Exchange in 1998. The The presentation of the probabilistic approach may seem like a solution but in
recommendation to disclose the independence status of the directors and the fact it simply moves the ‘negativity’ problem to a different location. By
backing of that recommendation by the London Stock Exchange signified a demanding firms to appoint non-executive directors from ‘diverse backgrounds’
further strengthening of the bilateral concept: the corporate discourse that the Combined Code actually asks the firms to appoint non-executive directors
interprets the board’s independence was no longer hidden, but was placed in the from backgrounds that are different from those from which NEDs usually came.
public domain. Hence, the Combined Code still does not provide a positive definition about
directors’ independence, but only a deducible, ‘by-default’ definition. Assuming
The Negative Probabilistic Concept that there is a correlation between expertise and vicinity to the firm, simply
In 1998, following a string of financial scandals including those of Enron and asking firms to diversify their appointments is not likely to diminish the causes
WorldCom, Derek Higgs had been commissioned by the UK government to for the knowledge versus connection optimization process that firms currently
review the role and effectiveness of non-executive directors. Public confidence in perform.
The developments reviewed above reveal that although non-executive directors’
independence is regarded as an important regulatory resource and as a vital
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attribute of corporate governance, the two negative definitions of independence, Ethical Decisions Ethical Decisions some time in India. The topic is no longer confined to the halls of academia and is
the bilateral and the probabilistic, leave the question of defining positively the increasingly finding acceptance for its relevance and underlying importance in
independent directors unanswered. This fact creates a regulatory loophole that industry and the capital market. Progressive firms in India have voluntarily put in
allows British companies to appoint a wide variety of people as directors without place systems of good corporate governance. Internationally also, while this topic
NOTES has been accepted for a long time, the financial crisis in emerging markets has led
providing any positive benchmarks against which the appointments’ NOTES
to renewed discussion and inevitably focused them on the lack of corporate as
independence could be assessed. Furthermore, the definitions create an implicit, well as governmental oversight. The same applies to recent high-profile financial
but potentially risky, trade-off between independence and expertise. The negative reporting failures even among firms in the developed economies. Focus on
definitions state that a non-executive director would be deemed independent if he corporate governance and related issues is an inevitable outcome of a process,
or she is not connected to the firm. These definitions are likely to bring about a which leads firms to increasingly shift to financial markets as the pre-eminent
mode of operation in which the firms would link at the appointment of non- source for capital. In the process, more and more people are recognizing that
executive directors as an optimization exercise between independence of the corporate governance is indispensable to defective market discipline. This
appointed director and his/her relevant knowledge and expertise. Thus, under growing consensus is both an enlightened and a realistic view. In an age where
these regulatory definitions, it is likely that companies would try to appoint capital flows worldwide, just as quickly as information, a company that does not
non-executive directors that are as expert as possible and satisfy the minimal promote a culture that is strong and independent, risks its very stability and future
health. As a result, the link between a company’s management, directors and its
independence criteria.
financial reporting system has never been more crucial. As the boards provide
To address the inherent problems of the non-executive directors’ independence stewardship of companies, they play a significant role in their efficient
concept, an individual needs to think about an alternative concept to that of functioning.
independence. Instead of defining people and boards of directors according to a  Studies of firms in India and abroad have shown that markets and
bilateral binary scheme (where they could either be independent or investors take notice of well-managed companies, respond positively to
non-independent and in relation to only a single organization or person) An them, and reward such companies with higher valuations. A common
individual should consider a decision that would assess the degree of feature of such companies is that they have systems in place, which allow
connectedness of each of the non-executive directors in relation to the entire sufficient freedom to the boards and management to take decisions
towards the progress of the companies and to innovate, while remaining
network of connections. This alternative conceptualization brings with it a host of within the framework of effective accountability. In other words, they
regulatory challenges. The fundamental conceptual difference between directors’ have a system of good corporate governance.
independence and directors’ connectedness lies in the scope of analysis. To  Strong corporate governance is thus indispensable to resilient and vibrant
determine the degree of independence of a director vis-à-vis a board, it is capital markets and is an important instrument of investor protection. It is
necessary to examine and assess the strength and efficacy of the connections the blood that fills the veins of transparent corporate disclosure and
between the individual director and a specific company. high-quality accounting practices. It is the muscle that moves a viable and
In contrast, to measure the director’s connectedness, one would need to trace the accessible financial reporting structure. Without financial reporting
premised on sound, whole numbers, capital markets will collapse upon
network of connections of which the board member is part and then to establish themselves.
how important is the role of the specific board member in maintaining the
 Another important aspect of corporate governance relates to issues of
structure of connections among other members, and through them, among
insider trading. It is important that insiders do not use their position of
companies. What are the advantages that this concept can bring to corporate knowledge and access to inside information about the company, and take
regulation. The interconnected view of corporate boards will allow us to place unfair advantage of the resulting information asymmetry. To prevent this
independence in wider perspective. That is, directors may not be associated with from happening, corporations are expected to disseminate the price-
a company in a direct business respects (not sure how this should be phrased of sensitive information in a timely and proper manner and also ensure that
whose board they are members). However, this does not show us the complete till such information is made public, insiders abstain from transacting in
picture. An interlocking position of board members makes them crucial in the securities of the company. The principle should be ‘disclose or desist’.
relaying information among the economic organizations. Therefore, studying the This, therefore, calls for companies to devise an internal procedure for
inter-board network as a predominantly informational arena allows us to provide adequate and timely disclosures, reporting requirements, confidentiality
a more comprehensive interpretation to the nature of directors’ independence in norms, code of conduct and specific rules for the conduct of its directors
and employees and other insiders. For example, in many countries, there
it.3
are rules for reporting or transactions by directors and other senior
executives of companies, as well as for a report on their holdings, activity
Kumarmangalam Birla Committee Report in their own shares and net year-to-year changes to these in the annual
The report of the Kumaramangalam Birla Committee on corporate governance report. The rules also cover the dealing in the securities of their
states that it is almost a truism that the adequacy and the quality of corporate companies by their companies by the insiders, especially directors and
governance shape the growth and the future of any capital market and economy. other senior executives, during sensitive reporting seasons. However, the
The concept of corporate governance has been attracting public attention for quite need for such procedures, reporting requirements and rules also goes
beyond corporate to other entities in the financial markets such as stock
exchanges, intermediaries, financial institutions, mutual funds and
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 concerned professionals who may have access to inside information. This Ethical Decisions Ethical Decisions Committee believes that the recommendations made in this report mark
is being dealt with in a comprehensive manner, by a separate group an important step forward and if accepted and followed by the industry,
appointed by SEBI, under the Chairmanship of Shri Kumaramangalam they would raise the standards in corporate governance, strengthen the
Birla. unitary board system, significantly increase its effectiveness and
 The issue of corporate governance involves, besides shareholders, all NOTES NOTES ultimately serve the objective of maximizing shareholder value.
other stakeholders. The Committee’s recommendations have looked at
corporate governance from the point of view of the stakeholders and in The Recommendations of the Committee
particular that of the shareholders and investors, because they are the This Report is the first formal and comprehensive attempt to evolve a code of
raison d’etre for corporate governance and also the prime constituency of corporate governance in the context of prevailing conditions of governance in
SEBI. The control and reporting functions of boards, the roles of the Indian companies, as well as the state of capital markets. While making the
various committees of the board, the role of management, all assume recommendations, the Committee has been mindful that any code of corporate
special significance when viewed from this perspective. The other way of governance must be dynamic, evolving and should change with changing
looking at corporate governance is from the contribution that good contexts and times. It would, therefore, be necessary that this code also be
corporate governance makes to the efficiency of a business enterprise, to reviewed from time to time, keeping pace with the changing expectations of the
the creation of wealth and to the country’s economy. In a sense both these investors, shareholders, and other stakeholders and with increasing sophistication
points of view are related and during the discussions at the meetings of achieved in capital markets.
the Committee, there was a clear convergence of both points of view.
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 At the heart of the Committee’s report is the set of recommendations
which distinguishes the responsibilities and obligations of the boards and
the management in instituting the systems for good corporate governance 3.5.13 Objectives of Corporate Governance4
and emphasizes the rights of systems for good corporate governance and There are various objectives of corporate governance. These are:
the rights of shareholders in demanding corporate governance. Many of
the recommendations are mandatory. For reasons stated in the report,  Corporate governance has several claimants such as shareholders and
these recommendations are expected to be enforced on the listed other stakeholders which include suppliers, customers, creditors, the
companies for initial and continuing disclosures in a phased manner bankers, the employees of the company, the government and the society
within specified dates, through the listing agreement. The companies will
at large. This Report on Corporate Governance has been prepared by the
also be required to disclose separately in their annual reports, a report on
corporate governance delineating the steps they have taken to comply Committee for SEBI, keeping in view primarily the interests of a
with the recommendations of the Committee. This will enable particular class of stakeholders, namely the shareholders, who together
shareholders to know where the companies, in which they have invested, with the investors form the principal constituency of SEBI while not
stand with respect to specific initiatives taken to ensure robust corporate ignoring the needs of other stakeholders.
governance. The implementation will be phased. Certain categories of
companies will be required to comply with the mandatory  The Committee, therefore, agreed that the fundamental objective of
recommendations of the report during the financial year 2000–2001, but corporate governance is the ‘enhancement of shareholder value, keeping
not later than 31 March 2001, and others during the financial years in view the interests of other stakeholders’. This definition harmonizes
2001–2002 and 2002–2003. For the non-mandatory recommendations, the need for a company to strike a balance at all times between the need to
the Committee hopes that companies would voluntarily implement these. enhance shareholders’ wealth, while not in any way being detrimental to
It has been recommended that SEBI may write to the appropriate
regulatory bodies and governmental authorities to incorporate where the interests of the other stakeholders in the company.
necessary, the recommendations in their respective regulatory or control  In the opinion of the Committee, the imperative for corporate governance
framework. lies not merely in drafting a code of corporate governance, but in
 The Committee recognized that India had in place a basic system of practising it. Even now, some companies are following exemplary
corporate governance and that SEBI has already taken a number of practices, without the existences of formal guidelines on this subject.
initiatives towards raising the existing standards. The Committee also
recognised that the Confederation of Indian Industries had published a Structures and rules are important alone but these cannot raise the
code entitled ‘Desirable Code of Corporate Governance’ and was standards of corporate governance. What counts is the way in which these
encouraged to note that some of the forward looking companies have are put to use. The Committee is thus of the firm view, that the best
already reviewed or are in the process of reviewing their board structures results would be achieved when the companies begin to treat the code not
and have also reported in their 1998–99 annual reports the extent to which as a mere structure, but as a way of life.
they have complied with the Code. The Committee however felt that
under Indian conditions a statutory rather than a voluntary code would be  It follows that the real onus of achieving the desired level of corporate
far more purposive and meaningful, at least in respect of essential features governance lies in the proactive initiatives taken by the companies
of corporate governance. themselves and not in the external measures such as breadth and depth of
 The Committee, however, recognized that a system of control should not
impede the ability of the companies to compete in the marketplace. The 4
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 Ethical Decisions suggested that only independent directors should be on audit committee. The
a code of stringency of enforcement of norms. The extent of discipline, Ethical Decisions

transparency and fairness, and the willingness shown by the companies reality is that while all independent directors are non-executive directors, it is not
themselves in implementing the code, will be the crucial factor in so vice versa.
achieving the desired confidence of shareholders and other stakeholders Regarding contingent liabilities, it has been suggested that management’s views
and fulfilling the goals of the company. NOTES NOTES thereon and auditor’s comments on management’s views should be given in the
annual report. According to senior company secretaries, there are instances where
Narayana Murthy Committee Code5 contingent liability cannot be ascertained, such as labour disputes and court cases.
As the description suggests, it is all contingent upon future developments and,
The Narayana Murthy Panel Report on Corporate Governance therefore, it cannot be proper for a management to pass a judgement about the
risk involved. Ideally, a management should only give the background of a
The whistle blower policy recommended in the recent report of SEBI’s contingent liability.
committee on corporate governance and Clause 49 of the Listing Agreement, The Narayana Murthy panel is for restricting the tenure of non-executive
which was headed by Mr N.R. Narayana Murthy, Chairman and chief mentor of directors to three terms of three years each, running continuously. The Naresh
Infosysis Technologies, seems to have evoked the sharpest response from veteran Chandra panel said that after a nine-year term the director would not be
company secretaries, who have studied the key suggestions in detail. considered independent, but surely the concerned person would be able to
continue as a non-executive director.
In fact, judging by what they have to say, it is apparent that this particular
recommendation, which is intended to curb unethical and improper practices in Company secretaries make two points: If the intention is to follow the Naresh
corporate, is being singled out by company law experts as simply impractical. Chandra committee’s suggestion, the Narayana Murthy panel’s recommendation
should be redrafted. Representatives of a promoter remain on the board of a
What is the ‘whistle blower’ policy? It is an internal policy on the access to audit company as non-independent directors. The recommendation now made rules out
committees. What is the committee’s recommendation? Personnel who come to continuation of promoter-directors on the board beyond nine years at a stretch.
know about unethical or improper practices, which may not necessarily be a It needs to be clarified whether a partner of an audit firm or a solicitor’s firm can
violation of law, should be able to approach the company’s audit committee be treated as an independent director of a company if his firm is the auditor or
‘without necessarily informing their supervisors’. legal advisor of another company in the same group.
The committee wants corporations to take steps to see that this right of access is
communicated to all employees through internal circulars. Further, a company’s On Analysis and Media Role6
employment and personnel policy should provide a mechanism to protect whistle The Narayana Murthy committee on corporate governance also discussed reports
blowers from ‘unfair termination and other unfair, prejudicial employment brought out from time to time by security analysts and the media, especially the
practices’. financial press. As for reports of security analysts, the committee has desired
Senior company secretaries that spoke to Business Line said that this SEBI to make rules, which are:
recommendation, if implemented, would be instrumental in breeding indiscipline
 Disclosure of whether the company that is being written about is a client
as the audit committee would most likely be flooded with frivolous complaints
of the analyst’s employer or an associate of the analyst’s employer, and
and minor issues. Many complaints might go by their personal likes and dislikes
the nature of services rendered to such company, if any
and thus the possibility of the right of access to the audit committee being
misused would always be there.  Disclosure of whether the analyst or the analyst’s employer or an
They noted that the committee had not said anything on providing evidence in associate of the analyst’s employer hold or held (in the twelve months
immediately preceding the date of the report) or intend to hold any debt
support of a complaint, disclosure of the identity of the complainant and the
or equity instrument in the issuer company that is the subject matter of the
maximum number of complaints that an employee could make in a year.
report of the analyst
The elimination of unethical or improper practices is the responsibility of
respective corporate promoters and management, for which they have to put in Regarding scrutiny of the media, particularly the financial press, it has observed
place systems for efficient administration and transparent transactions. Much also the committee considered views expressed by members.
depends on the environment in which corporations operate and the policies that The Press Council of India has prescribed a code of conduct for the financial
govern their operations. A whistle blower policy cannot be a foolproof safeguard media. However, verifying adherence to the code is difficult. A detailed review
against unethical and improper practices, they contend. by SEBI on the subject is desirable, keeping in mind issues such as transparency
The recommendation regarding composition of an audit committee has given rise and disclosures, conflicts of interest, etc., before making any rule. SEBI should
to confusion. While this panel has suggested that audit committee members consider having a discussion with the representatives of the media, especially the
should be non-executive directors, the Naresh Chandra committee that preceded it financial press.

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Naresh Chandra Committee Code7 Ethical Decisions Ethical Decisions  They have also disclosed to the auditors as well as the Audit Committee,
instances of significant fraud, if any, that involves management or
Section 2.3.8 of this Report states that the Committee would also recommend that employees having a significant role in the company’s internal control
the following mandatory recommendations in the report of the Naresh Chandra systems.
Committee, relating to corporate governance, be implemented by SEBI. NOTES NOTES  They have indicated to the auditors, the audit committee and in the notes
This section sets out such recommendations of the Naresh Chandra Committee on accounts, whether or not there were significant changes in internal
that were considered by this Committee. control and/or of accounting policies during the year.9

Disclosure of Contingent Liabilities (Section 2.5 of the 3.5.14 Risk Management in a Corporation
Naresh Chandra Committee Report) The management of a corporation is responsible for managing all functions,
The Committee makes the mandatory recommendation that the management activities and processes of a corporation. It must also be able to solve different
should provide a clear description in plain English of each material contingent problems, which arise out of improper management of the risks. Risk refers to the
liability and its risks, which should be accompanied by the auditor’s clearly uncertainties existing in any process related to the corporation and the losses
worded comments on the management’s view. This section should be highlighted occurred during an uncertainty. The management of a corporation has to manage
in the significant accounting policies and notes on accounts as well as in the a reliable risk management system in the corporation for proper management of
auditor’s report, where necessary. risk.
Risk management is defined as the steps taken to detect a risk, calculate the
This is important because investors and shareholders should obtain a clear view
probability of occurrence of the risk and take corrective actions. Due to the
of a company’s contingent liabilities as these may be significant risk factors that uncertainties that normally occur in the product development process, the process
could adversely affect the company’s future financial condition and results of of risk management is useful during the scheduling processes of the corporation.
operations. Risk management involves various features, such as risk assessment, risk
identification, risk analysis and risk estimation for the analysis and management
CEO/CFO Certification (Section 2.10 of the of risk.
Naresh Chandra Committee Report)8
Risks indicate possible future happenings and are not concerned with the effects
The committee makes the following mandatory recommendation that have been observed in the past due to these risks. Risks are identified using
For all listed companies, there should be a certification by the CEO (either the the following attributes:
executive chairman or the Managing Director) and the CFO (whole-time finance  Probability that an event will occur: Events can occur at any time
director or other person discharging this function), which should state that, to the during the project development process. An event, for example, can occur
best of their knowledge and belief. The committee makes the following when a project developed on one computer system is transferred to
mandatory recommendations: another computer system. Here, both the computer systems can create
 They have reviewed the balance sheet and profit and loss account and all incompatibility in the hardware or project. This incompatibility causes an
its schedules and notes on accounts, as well as the cash flow statements event to occur and is identified as risk.
and the director’ report.  Loss associated with the event: The adverse impact of an event could be
 These statements do not contain any untrue statement or omit any loss of time, loss of money and lack of expected quality. For example,
material fact nor do they contain statements that might be misleading. there can be change in user requirements after the coding phase is
complete. The change in user requirements results in the loss of control
 These statements together present a true and fair view of the company, when team members develop the project according to earlier user
and are in compliance with the existing accounting standards and/or requirements.
applicable laws/regulations.
 They are responsible for establishing and maintaining internal controls
Note that there is no fixed time for the occurrence of risks. Hence, to keep track
of risks, risk management needs to be carried out throughout the project
and have evaluated the effectiveness of internal control systems of the
development process. Risk management is a systematic process, which focuses
company; and they have also disclosed to the auditors and the Audit
on identification, control and elimination of risks. The objective of risk
Committee, deficiencies in the design or operation of internal controls, if
management is to determine the loss before risks occur and then determine the
any, and what they have done or propose to do to rectify these.
ways to prevent or avoid the adverse impact of risk on the project. Risk
management depends on the number and complexity of risks. Based on this, the
impact of risks can be low, medium, high or very high.
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Uncertainty and constraint Ethical Decisions Ethical Decisions Risk analysis
Risks are a combination of uncertainty and constraints. To minimize the risks, Risk analysis discovers the possible risks by using various techniques. These
either constraint or uncertainty or both can be minimized. Generally, it is techniques include decision analysis, cost-risk analysis, schedule analysis and
observed that it is difficult to minimize constraint, so uncertainty is reduced. Note reliability analysis. After a risk is identified, it is evaluated in order to assess its
NOTES NOTES
that it is difficult to develop a project in which all the risks are eliminated. impact on the project. Once the evaluation is done, risk is ranked according to its
Therefore, it is essential to minimize the effect of risks, as they cannot be probability of occurrence. After analysing the areas of uncertainty, a description
eliminated completely. For this purpose, effective risk management is required. is made, which assists in how these areas affect the performance of project.
Figure 3.7 shows the curved line that indicates the acceptable level of risk,
depending on the project. Principles of risk management
Every corporation is subjected to risks. It is essential to manage the risks to
prevent losses in a corporation. If the risks are not managed, it results in project
failure. Failure to manage risks is usually the result of the inability to do the
following:
 Determine the measures used for managing risks.
Constraint

 Determine when risk management is required.

 Identify whether risk management measures are taken or not.
Risk management is necessary because without the elimination of risks, projects
cannot be developed properly. There are several principles that help in effective
risk management. These are listed below:
 Maintain a global perspective: Risks should be viewed in relation to the
Uncertainty project, considering all the aspects of constraints and uncertainties in it. In
addition, the impact of risks on business should be considered.
Figure 3.7: Minimizing Risks in a Project
 Have a forward-looking view: Risks that may occur in future should be
Risk is associated with the uncertainties existing in a project and the losses assumed.
occurred during an uncertainty. Risk management is defined as the steps taken to  Encourage communication: Communication should be encouraged
detect a risk, calculate the probability of occurrence of the risk and take among the team members of the project to increase understandability of
corrective actions. Due to the uncertainties that normally occur in project the concept, thereby reducing the number of risks associated with the
development, the process of risk management is useful during project scheduling. project.
Various steps involved in risk management are:  Develop a shared project vision: Both the project management team and
1. Identify the probable risks that can occur during the project duration. the senior management should be able to view the project and its risks in
terms of the common objective, say, that of developing quality project
2. Calculate the probability of occurrence of a risk and the possible damage
and preventing loss. By following this approach, better risk identification
caused by the risk. and assessment is achieved.
3. Provide ranking to the risks identified, in order of the probability of  Encourage teamwork: The skills and knowledge of every person
occurrence of the risks and the severity of damage caused by the risks. involved in risk management should be combined when risk management
4. Develop a plan to handle risks that have a high ranking. activities are performed.
The plan to handle risks involves making the Risk Mitigation, Monitoring and Risk management comprises of two activities, namely risk assessment and risk
Management (RMMM) plan and developing the risk information sheet. The risk control. These activities identify the risks and determine ways to eliminate them
strategies implemented by the management team are: or reduce their impact.
 Proactive risk strategy
Risk assessment
 Reactive risk strategy
Risk assessment concentrates on the occurrence of risks depending on their
The proactive risk strategy involves the identification of risks in advance and nature, scope and timing. The nature of risks specifies the problems that arise
taking corrective actions to avoid the risks. The proactive risk strategy is based on when a risk occurs. The scope of risks specifies the capability of risks to affect
the preventive action of a risk. The reactive risk strategy includes allocating the project. Timing of risks considers when and for how long the affect of risk is
resources and taking corrective actions when a risk occurs. This strategy allocates observed. With the help of proper risk assessment, risks could be prevented. It is
the resources necessary to deal with the risk. important to provide information according to the level of risks. With complete
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information of risk assessment, the probability of occurrence of risks and its Ethical Decisions Ethical Decisions o Losing the demand of a good project in the market. This is also
severity is determined. called market risk.
Generally, risk assessment can be carried out any time during the project. o Developing a project that does not go in accordance with the
However, it is better to begin risk assessment as soon as possible in the business strategy of a company. This kind of risk is called
NOTES NOTES strategic risk.
development process. To effectively perform risk assessment, the management
should consider the occurrence of risks instead of assuming that no risks will o Developing a project that the marketing team of the company is
occur during project development. In addition, a record of risk assessment should unable to sell.
be maintained during the process. For understanding the severity of risks, which o Developing a project by changing the schedule for work
is termed as low, high or very high, earlier documents should be used as a allocation to the personnel. For example, when the management
reference and compared with the risks being assessed in the present project. decides to handle the project with the junior staff ignoring the
Figure 3.8 shows the risk assessment process. effort of the senior personnel. This kind of risk is called
management risk.
o Developing a project due to the lack of personnel support or
economic support in the form of the budget of the project. These
risks are called budget risks.
 Known risk: These risks are the risks that are identified and rectified
after making a thorough investigation of the prepared project plan and the
technical and market situations. These risks include problems, such as
poor programming of the project and lack of proper planning for the dates
of project completion.
 Predictable risk: The predictable risks are those that are identified from
the past experiences of the project. The predictable risks include risks,
Figure 3.8: The Risk Assessment Process such as the risks involved in the sudden change of personnel allocation
and the lack of good communication with the client.
Risk assessment comprises three functions, namely risk identification, risk  Unpredictable risk: These risks are not predictable in nature and are not
analysis and risk prioritization. Risk identification is used to identify the different easily identifiable.
risks that impact the project. Risk analysis uses different techniques related to
For each of the risks specified above there is another classification—product-
decision analysis, cost risk analysis, schedule analysis and reliability analysis to
specific risk and generic risk. The product-specific risks are traced by personnel
analyse the different types of risks involved in the project. Risk prioritization is
with the knowledge of the project environment and technology. Generic risks are
responsible to manage various risks according to their effects on the projects.
those that are easily traceable.
Classification of risks
Risk identification
The risks occurring in a project are classified according to the degree of
Risk identification is the process of detecting risks or threats occurring in the
uncertainty and the extent of loss associated with the risk. The various types of
process of project development. The threat can be on the basis of the aspects of
risks in project management are:
the project such as resource allocation and planned schedule of the project. The
 Project risk: These risks are the risks that cause delays in the project process of risk identification starts with identifying the known and predictable
schedule and increase the cost of the project. These risks include risks. The project manager identifies the product-specific risks by studying the
uncertainties associated with the project schedule, client requirements, planned project schedule and the statement of scope of the project to be
resources, human resource allocation and the budget of the project. developed.
 Technical risk: These risks are risks that affect the effectiveness of the Risk identification helps identify the events that have an adverse impact on the
project that is being developed. Technical risks include uncertainties project. These events could be the changes in user requirements and the
associated with the implementation of the project, interfacing, designing development of new technologies. In order to identify the risks, inputs from
and other maintenance problems. These risks can also arise due to project management team members, users and management are considered. The
technical uncertainties, such as problems in the integration of two project project plan including the subplans should be carefully analysed in order to
modules. identify the areas of uncertainty, before starting the project. There are various
 Business risk: These risks are the risks that affect the usability of the kinds of risk that occur during the project development process.
project. Business risks include the following risks:
The risk identification process is performed by preparing a list of risks and
checking for their occurrence throughout the process of project development.
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This list of risks is called the risk item checklist. The checklist involves a set of Ethical Decisions Ethical Decisions Risk estimation and exposure
predictable risks, which are generic in nature. The various risks mentioned in the
Risk estimation is the process of rating the risk according to the probability of its
checklist are as follows:
occurrence and the consequence associated with its occurrence. Risk estimation is
 Risks associated with the size of the project developed
NOTES NOTES also called risk projection. The primary objective of risk estimation is to rank the
 Risks associated with conditions prevalent in the market and other risks according to their capability and their impact on the project. This order is
management constraints on the project decided by the project planners who along with technical and other managerial
 Risks associated with the sophistication of the client to specify the staff perform the following four steps:
requirements and risks caused due to the communication gap between the
project manager and the client 1. Setting up a scale that reflects the likeliness of occurrence of a risk
 Risks associated with the planned schedule for the project development 2. Determining the affects of the risk
 Risks associated with the tools used in project development 3. Calculating the impact of the risk on both the project and the final product
 Risks associated with the complexity of the project to be developed and 4. Maintaining a record of the overall accuracy of the risk projection in order
the complexity of the technology used for development
to avoid any type of misunderstanding
 Risks associated with the experience of the personnel involved in project
development All the above-mentioned steps help prioritize the risks. The project manager of a
project performs risk estimation by preparing a risk table. The risk table contains
A project manager assesses the probability of the occurrence of risks in a project the various risks, a categorization of the risks, the probability of occurrence of the
by answering questions such as: risk, the impact of the risk on the risk components and the RMMM plan to
 Are the senior personnel of the development team assigned the critical counteract the risk. The project manager lists down the risks by consulting the
activities of project development? risk item checklist. The risks are classified according to business risk and market
 Is the project being developed, useful to the end users? risk. Each member of the project development team calculates the probability of
 Are the project requirements clear to both the project development team occurrence of these risks. The probabilities calculated by each team member are
and clients? then compared with each other until the values of the probability turn out to be
 Is the scope of the project considered stable? the same.
 Are the clients clear in defining their requirements or have they missed The risks in the risk table are then placed in the decreasing order of priority. The
some requirements? risk with the highest probability and highest impact is listed first and the list is
 Are the requirements of end-users of the project realistic? followed by the risks of lower impact and lower probability. This process of
 Does the personnel involved in developing the project make a skilled arrangement of the table is called first-order risk prioritization. The project
team? manager then defines a cutoff line such that only the risks above the cutoff line
 Have all the requirements of the process of project development been are under consideration. The risks placed below the cutoff line are evaluated
met? again and a second-order prioritization is established. The risks above the cutoff
line are provided with their RMMM plans and risk information sheets.
 Does the personnel have knowledge about the technology involved in
project development? The nature, scope and timing of occurrence of the risk affect the impact of the
 Does the number of personnel employed for the project fulfil the risks. ‘Nature’ refers to the types of problems which arise when the risk occurs.
requirements of the project? ‘Scope’ refers to the extent of harm that is produced when the risk occurs.
 Is the client fully satisfied with the development of the project? ‘Timing’ of the risk is concerned with the duration of the impact of the risk.

When the answer to any of these questions is no, then it means that the project Thus, all the possible types of risks are listed initially in the risk table. After this,
manager has to start with the RMMM plans. The impact of the risk is computed each risk is categorized followed by the probability of their occurrence. Finally,
using the effect, which a risk driver produces on the risk components. The types each risk is scaled on the basis of their impact.
of impact of a risk based on the decreasing order of severity are: Once the risk is scaled, the risk exposure is computed for each risk mentioned in
 Catastrophic: It causes the cancellation of the project. the risk table. The determination of risk exposure is done with the help of
 Critical: It has a great impact on the project. statistically-based decision mechanisms. These mechanisms specify how to
 Marginal: It has an impact on the project, which can be controlled. manage the risk. The risk that has a greater impact on project needs to be
eliminated. On the other hand, the risks that are minor and have no or little impact
 Negligible: It has a minor impact on the project.
on the project can be overlooked.

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 Ethical Decisions
Risk Mitigation, monitoring and management Ethical Decisions

The process of risk mitigation, monitoring and management includes the

preparation of RMMM plans or the maintenance of the Risk Information Sheets
(RIS) for individual risks. The RIS for the risks are maintained using a database.
NOTES NOTES
The database enables the comparison of data and rearrangement of the risks in the
risk table during the process of risk estimation. The RMMM plan includes all the
documents relevant to perform risk analysis. The strategy planned for
counteracting the risks has three major aspects, which are:
 Avoiding risks
 Monitoring risks
 Managing risks
When the developing team prepares a proactive risk strategy, the importance is
more towards avoiding the risks. The risk strategy includes framing a plan for
risk mitigation. Risk mitigation minimizes the impact of risks. For this purpose,
risk mitigation techniques are used, which are based on the occurrence of risks
and their level of impact. Risk mitigation techniques incur additional cost on
extra resources and time, which are required to complete the project. To avoid
Figure 3.9: Steps in the Risk Management Plan
this, a cost benefit analysis should be done to evaluate the benefits of eliminating
the risks or minimizing their impact along with the costs required to implement The risk management plan comprises the following steps:
risk management. Appropriate measures should be taken before the risks occur,
 Statement: It describes the purpose and advantage of identifying and
which later resolves the effect of risks when the project is in progress.
recording risks.
When the project is under process, then the goal of the project manager shifts to  Objectives: It describes the activities and procedures that are followed to
risk monitoring. The process of monitoring involves monitoring the factors that manage risks.
enhance the probability of occurrence of a risk. Risk monitoring contains the
study of the effectiveness of risk mitigation steps. By monitoring the  Roles and responsibilities: It specifies the roles and responsibilities for
documentation standards, the project manager ensures that each of the documents the project management team and sponsor. In addition, users are also
being developed is individually readable. Therefore, when a new staff member is involved during risk management.
recruited to the project, the staff members do not face any problems in  Purpose: It specifies the purpose of the process for risk management.
understanding the documents prepared.  Risk process: It specifies the stages of risk management process and
Thus, risk monitoring observes the risk of a project so that appropriate techniques provides a process diagram to display risks for easier identification and
can be applied when risks occur. The techniques used for risk monitoring include management.
milestone tracking, tracking the risks that have greatest impact and continual risk  Risk management worksheet: It specifies the risk management
re-assessment. For risk monitoring, the project management team members first worksheets the such as risk management log.
prioritize the risks and then they observe them. When the risks are identified, their The steps of the RMMM plan incur some additional project costs due to the cost
effects are recorded by which the risks can be easily managed during the project. of the backup. Another function of risk management involves the cost and benefit
When the risk mitigation plans fail and the risk finally occurs, the project analysis of the backup plans. The cost and benefit analysis refers to analysing
manager proceeds with risk management. For example, if certain members of a whether the extra project costs incurred due to the RMMM plans are small as
project leave, then risk mitigation plans are followed and a backup plan is used to compared to the benefits it provide.
counteract. To resolve the risks, it is important to consider the areas of the project where
The risk management plan describes the process of assessing risks that may occur risks can occur in the process of project development. After determining
during the project development process. Risk management is concerned with the areas, different techniques are used for risk resolution. Generally, the
determining the outcomes of risks before they happen and specifies the CHECK YOUR PROGRESS techniques followed for risk resolution include estimation of cost and schedule
procedures to avoid them and minimize their impact. It is important to consider 11. What is the main objective of of project, quality monitoring, evaluation of new technologies and prototyping.
the risks associated with a project, as it helps in determining the ways to manage risk estimation? The risks that have a very high impact should have an emergency plan that
them when they occur. This in turn saves time and effort required for the project 12. How does a project manager helps in avoiding risks and minimizing the impact of the risk before they could
ensures the individual
development. Figure 3.9 shows the various steps included in risk management readability of documents?
happen.
plan.

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 Ethical Decisions Ethical Decisions 5. The various steps in decision-making are:
3.6 SUMMARY
 Perception and diagnosis of the problem
It is clear that the management has the power to affect the behaviour and  Generation of alternate solutions
decision-making capability of the employees, as management itself is a decision-
making process. Decision-making can be done under risk, certainty or
NOTES NOTES  Evaluation of alternatives and selecting a course of action
uncertainty. In any situation, the process of decision-making is fraught with  Implementation of the decision
problems like paucity of time, weak communication, lack of sufficient  Monitoring feedback
information and lack of knowledge.
6. Corporate governance can be defined as an act of controlling, directing
An organization cannot do without corporate governance which is the act of and evaluating the activities of an organization.
controlling, directing, and evaluating the activities of an organization needless to
say that ethical decision-making forms an integral part of corporate governance 7. Board of directors is made up of the individuals elected by a corporation's
today. shareholders to look after the management of the corporation.
8. Corporate governance includes principles such as honesty, trust, integrity,
3.7 ANSWERS TO ‘CHECK YOUR PROGRESS’ responsibility, accountability and commitment to the organization. It also
includes rights and equitable treatment of shareholders, interests of other
stakeholders, role and responsibilities of the board, integrity and ethical
1. This model has the following three phases:
behaviour, disclosure and transparency.
 Intelligence
9. The various skills that the managers must possess are:
 Design
 Technical skills
 Choice
 Human skills
2. There are three frameworks for ethical decision-making. These  Conceptual skills
frameworks are:
 Diagnostic skills
 Consequence-based decision-making
 Communication skills
 Duty-based decision-making
 Political skills
 Virtue-based decision-making
10. The leader of an organization must possess the following qualities:
3. The different characteristics of a good decision-making are:
 Smartness: A leader should be smart enough to solve the problems
 Decision problems should be grabbed by the management both in of employees.
space and time. This means, the decision problem should be analysed
thoroughly by the management.  Knowledge of business: A leader should have a good grasp of
business, and the organizational goals should be clear in his mind.
 The decision made by the decision-maker should keep him in a state
of calm.  Decisiveness: A leader should be a good listener, that is, he should
take a decision after taking the opinion of employees.
 Decisions made by the management should contribute to harmony in
the organization.  Willingness to admit mistakes: A leader should accept all the
mistakes and learn from them in order to maintain his dignity.
 Self-interest and self-orientation should not come in the way of
decision-making.  Innovative: A leader should be innovative in order to meet various
environmental changes.
4. The factors affecting decision-making are:
11. The primary objective of risk estimation is to rank the risks according to
 Programmed versus non-programmed decisions their capability and their impact on the project.
 Information inputs
12. By monitoring the documentation standards, the project manager ensures
 Prejudice that each of the documents being developed is individually readable.
 Cognitive constraints Therefore, when a new staff member is recruited to the project, the staff
 Attitudes about risk and uncertainty members do not face any problems in understanding the documents
 Personal habits prepared.
 Social and cultural influences

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 Ethical Decisions
3.8 EXERCISES AND QUESTIONS
1. What is the importance of social responsibility in a business? Explain.
2. Explain the need for corporate governance. NOTES
3. Discuss some of the new trends of the board of directors in corporate
governance.
4. How can a CEO handle politics within an organization?
5. Leadership strategies are essential in an organization. Discuss.
6. ‘Ethical decision-making is an integral part of the functioning of an
organization’. Discuss.
7. Explain the various ethical decision-making frameworks.

3.9 FURTHER READING

Modh, Satish, Ethical Management: Text and Cases in Business Ethics and
Corporate Governance. New Delhi: Macmillan Publishers India Ltd, 2005.
Mathur, U.C., Corporate Governance and Business Ethics: Text and Cases. New
Delhi: Macmillan Publishers India Ltd, 2005.

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 Ethical Issues in the Ethical Issues in the
UNIT 4 ETHICAL ISSUES IN THE Functional Area Functional Area
Chief Executive
Officer (CEO)
FUNCTIONAL AREA
NOTES NOTES
Structure
4.0 Introduction
4.1 Unit Objectives
4.2 Ethics in the Functional Area
4.3 Ethics in Marketing
4.4 Ethics in Finance
4.5 Ethics in HR and Information Technology
4.6 Summary
4.7 Answers to ‘Check Your Progress’ Marketing HRM Production Finance R&D

4.8 Exercises and Questions

4.9 Further Reading
Figure 4.1: Different Functional Areas of Business

4.0 INTRODUCTION
4.3 ETHICS IN MARKETING
Ethical in the functional areas of any business is necessary to ensure a good
rapport between the management and the employees. In fact, all functional areas, Marketing is a technique that is used to attract and persuade customers.
namely marketing, finance, human resources as well as information technology Marketing provides a way in which a product is sold to the target audience.
should follow a code of ethics so as to function well and give maximum output. Marketing is a management process that identifies, anticipates and supplies
Only one person alone cannot achieve this. Each employee should feel consumer requirements efficiently and effectively. The main aim of marketing is
responsible and try to stand by what is right in any given situation. In other to make customers aware of the products and services. It also focuses on
words, it should be a team effort across all levels of the organization. attracting new customers and keeping existing customers interested in the
product. The marketing department consists of various subdivisions, such as
sales, after-sales service and marketing and research. The different subdivisions
4.1 UNIT OBJECTIVES of the marketing department are shown in Figure 4.2.

General
This unit teaches you about: Manager
 The ethical issues that may arise in the various functional areas of Marketing
business
 Ethics in marketing, advertising, human resources, finance and
information technology
 Consumer protection in the context of electronic commerce technology

4.2 ETHICS IN THE FUNCTIONAL AREA

Ethical issues can arise in various functional areas of a business such as
marketing, research and development, HRM, production and finance. Ethical
issues in all these functional areas must be controlled or coordinated by the chief
executive officer (CEO) of the enterprise. Figure 4.1 shows the main functional Advertising
Marketing
Sales and After-sales
areas of a business that usually give rise to ethical issues. Service Research
Promotion

Figure 4.2: Subdivisions of Marketing

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In the field of sales, the following ethical issues require safeguards against Ethical Issues in the
Functional Area
Ethical Issues in the  Overbilling the service charges, when the customer is not aware of the
Functional Area
unethical behaviour: actual rates
 Not supplying the products made by the company as per the order  Using rejected or below-standard components for customer’s temporary
 Not accepting responsibility for the defective product relief
NOTES NOTES
 Not giving details about the hidden costs, such as transportation cost,  Refusing the service of the product due to personal reasons
while making the contract with the client  Exchanging healthy parts with below-standard parts when the product
 Changing the specifications of the product without giving any prior comes for servicing
information to the customer Marketing research is done to find out the needs of the market, its trends and
 Changing the terms of the business without taking any approval from the competitive activities. In the field of marketing research, the following are
client example of unethical behaviour:
 Delaying the delivery of the goods without giving any proper reason  Research is conducted only to substantiate the viewpoint of the manager.
 Treating two customers differently  Research is focused on the areas that do not need to be covered.
 Not providing the after sales service as per the contract  Some old research is presented as the new one just for the purpose of
 Selling the same product at different prices to different customers financial gain.
 A biased research report is prepared to suit the marketing manager.
Advertising and promotion provide the means for communicating with the
customer. In the field of advertising and promotion, the following are examples  The research report is sold to the competitor.
of unethical communication practices:  The report does not include important facts.
 Making false commitments to the customers about the benefits of the
product 4.3.1 Ethical Issues in Advertising
 Supplying products that are different from those that are advertised In the advertising field, the ethical issues include decisions on what business and
 Giving wrong prices to the customers during advertising market a corporate organization should enter. Another ethical issue can be the
 Not giving the promised gift in the promotional campaign decision on what product should be provided by a corporate organization to its
 Hiding major flaws of the product 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
 Providing wrong testimonials about the product to prospective customers
standards which are agreed upon by different organizations. According to Ferrel
 Not providing the advertised service to the customers as a part of the and Gresham, ‘There is no clear consensus about ethical conduct; that ethical
promotional plans
standards are neither absolute nor constant; and that attempts to determine
 Increasing the price of the product before starting its promotional whether particular marketing activities are ethical or non-ethical cannot produce a
campaign definitive code of marketing behaviour’.
 Making false references about the competitive products
However, there is a general view also related to ethics in advertising. This view is
While selling the product to the customer, a company provides some extended that advertising practices, such as deceptive advertising, price fixing, holding of
features or facilities along with the product, such as after-sales service. These product test data, and falsifying research behaviour in the market are unethical
facilities are provided to increase the sale of the product. In the field of after-sales practices.
service, the following ethical issues require safeguards against unethical
behaviour: 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
 Using below-standard material for the service and charging for relatively
better material from the customer standards while selling products, in public relations and advertising.
Organizations follow various methods that are unethical while advertising for
 Using outmoded service equipments which can be harmful for the
products during service their products and services. These methods are:
 Not taking the service calls if the location is not easy to reach, while free  Ambiguity
service was promised before the sale of the product  Concealed facts
 Making only temporary adjustment in the product, which can last only for  Exaggeration
a short time or to make the product useful for the time being  Psychological appeal
 Not keeping proper service records of major products for future use, as
they can help in easy diagnosis of problem
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 Ethical Issues in the
Ambiguity Functional Area
Ethical Issues in the Psychological Appeal
Functional Area
Ambiguous advertisements are mostly deceiving for customers. Advertisements A psychological appeal is the appeal made considering the emotions of
become ambiguous when they are wrongly interpreted and also with, the use of customers. The main objective of psychological appeal is to persuade customers
words through which organizations can avoid making direct statements. For to purchase products by appealing to their emotions and not to reason. For
NOTES NOTES
example, you can consider the word ‘help’. This word is used by organizations to example, consider a car advertisement which focuses on the desire of the elite
class to achieve status. Similarly, a life insurance company may use emotions,
ambiguously advertise their products. It can be used in the following ways in
such as pity and fear in its advertisement to persuade people to take insurance
advertisement: policies. Through psychological appeal, the organizations make promises about
 Help us keep young their product that are not fulfilled when customers buy the products.
 Help you improve your complexion
4.3.2 Ethical Issues in Takeovers and Mergers
 Help prevent cavities
Mergers and takeovers are stimulated by the urge to diversify or to anchor the
 Help keep our house insect free
new market rather than to dominate an industry. This diversification may
Organizations must provide clear information about products even though their decrease overhead costs or protect the organization from economic descent in its
advertisements can be interpreted differently by individuals. Ambiguity in actual industry. A takeover may come from within the organization with help
advertisements can affect the health, loyalty and expectations of people who will from an external source. The primary goal of the corporate investor is profit of
be purchasing the product that has been advertised. the shareholders, so even they may be convinced by the idea of the replacement
of the top management. There are certain events that lead to mergers:
Concealed Facts  Lack of funds to compete with organizations with better facilities, new
Organizations can conceal information related to a product that may result in less equipments and a large workforce.
selling of that product thereby resulting in loss. The advertising practice of  A growing number of competitors who have recovered from their
concealing facts is unethical because it, in a way, allows the exploitation of respective economic conditions with the help of mergers and acquisitions.
people. There are mainly two considerations regarding advertisements that force  Liberalization has weakened the economy in many Indian organizations
organizations to conceal facts. The first consideration is that information that will as they have not been able to adjust with the competitive market.
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  Due to technological advancements, there is technical competition
manner that: making it difficult to attain economies of scale and to retain skillful
personnel.
 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.  Emergence of multinationals that have substantial resources to pose a
challenge to the market share of Indian organizations.
 Advertisements related to a product are able to avoid objections from
agencies that are responsible for monitoring advertising. The Merger Process
Organizations may conceal facts that may be important in fulfilling the needs of Every merger and takeover has certain characteristics. The merger process
customers. This way the organizations may be exploiting the customers and involves:
causing serious health injuries to them. Customers may also not be able to obtain
the products of their choice.  The decision to consider options of merging
 Search of a suitable merger partner
Exaggeration  The decision to merge with a specific partner
Organizations may mislead the customers by providing exaggerated information  Making a proposal to a suitable partner
in the advertisements of their products. The exaggerated information is  Negotiation of merger agreements
information that is not supported by evidence. Organizations can exaggerate
 Formulation of implementation plans
information in advertisements by using superlative phrases. For example, an
organization manufacturing pain relief ointments, can exaggerate information by CHECK YOUR PROGRESS  Accomplishing the implementation plan
stating that a pain reliever provides extra pain relief. The use of these superlatives 1. What are the various sub-  Review and evaluation
may not cause any harm to customers but may be misleading sometimes. For divisions of the marketing
department?
example, if a washing powder manufacturing organization uses the phrase, ‘best Issues during the merger process
2. Give some examples of
loved by housewives’ then no harm may be caused to consumers of washing unethical communication in Some organizations are not prepared to face issues and problems that come up
powders. advertising. during the merger process. They barely have a systematic and expansive process
for planning and implementation due to the following reasons:
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  Often, the steps taken during the merger are in response to internal and Ethical Issues in the
Functional Area
Ethical Issues in the o Borrowing money from friends and relatives
Functional Area
external stress. So, there is always the question of whether the merger will o Borrowing from financial institutions
be able to achieve the organizational objectives.
Figure 4.3 shows the organizational chart for the finance function.
 As average organizations do not have experience in mergers, it is tough
for them to identify their problems and formulate alternatives. NOTES NOTES
 The initial problems that follow mergers mark a chain of events that General
Manager
affects jobs and work assignments. The top management neglects the Finance
long-term effects on relevant stakeholders under the pressure of mergers.
 Mergers lead to new organizations with new management structures, so it
becomes difficult to determine directions and policies.

Hostile Take-overs
Mergers and takeovers seem friendly but they are increasingly evolving into
bitter conflicts. This is due to the reason that the top-level managers want
to ensure that they are saved in the event of a merger. A merger can be referred
to as the coming together of two organizations in their mutual interests
and combining to form a large organization. In case of a conflict, one
organization takes over an unwilling partner, which is called a hostile takeover.
The first group may disagree with the existing policies of the organization. Their
aim would be to replace the top management with the people who share
their concerns and will implement the required changes. Sometimes, they may
Finance Accounts Costing Audit
want to take over the management to run it efficiently and to save jobs. To
prevent such discrepancies, many organizations adopt complex defensive
strategies. These strategies are made keeping in view organizational laws and
designed in order to wear down the potential of the aggressors. This strategy may Figure 4.3: Organizational Chart for Finance Function
be short-term or long term, but may sometimes weaken the financial liquidity of
the organization. The finance department of an enterprise is prone to the following unethical
practices:
4.4 ETHICS IN FINANCE  Overestimating promoters’ capital utilization
 Overbudgeting project costs
Finance is an important element of an organization and it helps in its growth and  Using underhand tactics with the financers to gain benefits for the firm as
development. Finance plays an important role in making resources available in an well as for themselves
organization, such as man, machine, material, market and money. The finance
manager of the firm is responsible for arranging the finances for the firm. The  Purchasing capital equipments at a time when there is no requirement for
finance manager can raise funds from the following two sources: it
 Internal Sources: Internal sources means the owner’s own funds that are  Selling the capital equipments in order to raise additional and
invested as equity in the organization. In case of small organizations, the unaccounted funds
owner’s contribution in terms of equity is low. Therefore, large amount of  Siphoning funds for the promoter’s personal benefit
money is raised from external sources. The entrepreneur can raise finance
 Investing unapproved funds in order to gain extra profits
internally from various sources:
o Deposits and loans given by owner  Claiming insurance cover for losses that never happened
o Personal loan from provident fund and life insurance policy  Overpricing the current assets in order to gain more working capital than
CHECK YOUR PROGRESS permitted
o Funds accumulated by the retention of profits
3. How can an entrepreneur raise
o Ploughing back of profits funds internally?  Using working capital funds for personal gains
 External Sources: External sources means the various financial 4. What are the unethical The accounts department of an enterprise is prone to the following types of
methods followed during
institutions from where entrepreneurs can raise funds, such as fixed advertising? unethical issues:
capital, commercial banks and development banks. The entrepreneur can
raise finance by:
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  Showing inflated salaries and getting receipts from employees for an Ethical Issues in the
Functional Area
Ethical Issues in the
4.5 ETHICS IN HR AND INFORMATION
Functional Area
amount larger than what they actually get
TECHNOLOGY
 Playing inflated vendor bills in order to get discounts or commissions
 Paying overtime wages when there in no requirement for them NOTES NOTES 4.5.1 Ethics in Human Resource Management (HRM)
 Maintaining two different sets of books, one for the management and the HRM is concerned with the management of the ‘people’ of an organization. The
other for income tax term HRM is used to refer to the procedures, philosophy, policies, and practices
 Refusing to reject unacceptable raw materials when the vendor bills have related to the management of people within an organization. HRM is an approach
to be paid to bring the people and the organization together so as to achieve the desired
 Delaying the clearance of the bills payable in order to get maximum goals. It helps in creating a relation between the management of the organization
interest for the amount to be paid and the employees which is based on cooperation and coordination according to
the designed strategy. It is the art of promoting, developing and maintaining a
 Allotting extra travelling allowances to favourite employees
competent workforce to achieve the goals of an organization in an effective
 Showing wrong figures in the monthly trial balances for personal manner. HRM is responsible for performing various functions like planning,
benefits organizing, directing and controlling of human resources. HRM also involves
The following are the unethical practices of the costing manager: activities like procurement, development, compensation and maintenance.
 Reducing manufacturing costs by manipulating work hours According to Ivancevich and Glucck, ‘Human resource management is the
 Ignoring cost of rejects function performed in organizations that facilitates the most effective use of
people (employees) to achieve organizational and individual goals.’
 Ignoring cost of rework
HRM is extensive in nature and it is present in all organizations and at all levels
 Not accounting for man-hours lost due to strikes and absenteeism of an organization. HRM focuses on action rather than theoretical procedures and
 Not accounting for man-hours lost in maintenance work it encourages an employee to utilize his skills and potential completely to give his
 Not considering the work stoppages due to change in models best to the organization. It encourages the employees through systematic
procedures like recruitment, selection, training and development. An effective
 Ignoring the man-hours lost due to change in the manufacturing process
HRM works towards achieving its goals by providing a competent and motivated
 Ignoring time lost in failed experimentations workforce. The primary aim of HRM is the promotion of effectiveness of the
 Not taking into acccount the benefits of economies of sales and people employed in the organization and the performance of their allotted duties
experience curve with cooperation. It seeks to develop and bring together an effective organization,
The following points describe the unethical behaviour of the auditing manager: enabling the women and men who make up an enterprise to give their best
contribution towards its success both as members of a working group and as
 Ignoring major deviations from the budgets
individuals . HRM can help organizations achieve their goals more effectively
 Rejecting the tender having lowest cost among all due to personal and efficiently. Effective management of human resources helps in improving the
reasons quality of work life. It seeks to provide fair conditions and terms of employment
 Helping in hiding black money in order to reduce the tax payable amount and work that satisfies all those employed. The following are the key objectives
 Ignoring inflated travel bills of selected employees of HRM:
 To recruit trained and spirited employees
 Accepting payments made by the directors for personal purchases as
official payments  To help the organization reach its goals
 To train the employees for best results
 Enabling the directors in sending and receiving money from overseas
 To communicate HR policies to the employee
through unofficial hawala channels
 To ethically respond to the needs of the society
 Approving payments to suppliers without checking bills or deliverables
Figure 4.4 shows the organizational chart for HRM.
 Approving the substandard construction made by the constructor and
CHECK YOUR PROGRESS
approving their bills for payment
5. What could be the unethical
practices of the auditing
manager?
6. What do you understand by
external sources of funds?

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 Ethical Issues in the
Functional Area
Ethical Issues in the  Supplying outmoded and old training materials for the purpose of
General Functional Area
Manager
training
HRM  Experimenting with trainees by asking them to set their own timetable for
NOTES training
NOTES
In the area of administration, the following are the unethical practices the
manager can indulge in:
 Tampering leave records of the employees
 Giving leaves continuously to favourite employees
 Giving promotions to non-eligible persons merely on the
recommendations of a friend or business associate
 Ignoring issues related to the security of the company
Recruitment Training Administration Industrial
Manager Relation
 Interference in various activities of the administration from the top
Manager Manager
Manager management
Figure 4.4: Subdivisions of HRM
 Giving the contract for uniforms of the employees to the wrong
companies just for the sake of personal benefits
The following are examples of unethical practices during the recruitment process
of a company: 4.5.2 Ethics in Information Technology
 Recruitment of known persons without assessing their abilities Information technology refers to the gathering, processing, creation, delivery and
 Recruitment on the basis of financial favours storage of information and all the processes that make all this possible. The
volume of work that is handled using IT continues to increase almost everyday.
 Recruitment of the relatives of other employees
Whatever be the field, one is sure to find IT at work.
 Recruitment based on the recommendations of friend, business associates
and other persons close to the leader Information technology is new to the world in which the clear legal environment
 Recruitment of underqualified persons is yet to develop, so getting benefits by using IT cannot be surely ethical or legal.
 Recruitment of overqualified persons Therefore, when we talk about ethics and IT, many new problems crop up.
 Recruitment of less acceptable men when there are better suited women The characteristic of IT is that it is a particular field which has no geographical
available for the job. boundaries but application of IT may affect culture and environment differently.
 Employing children below fourteen years for the job The features which are acceptable in one culture may be unethical in another.
 Giving less than minimum wages fixed by the government
Computer ethics was founded by MIT Professor Norbert Wiener in the early
The training manager of the company can also indulge in unethical practices as 1940s when he was providing a helping hand in the development of an aircraft
can be seen from the following points: cannon, capable of gunning down fast-moving war planes. Wiener created a new
 Arranging training only for favourite employees, whether they deserve it branch of science called cybernetics—the science of information feedback. By
or not combining cybernetics with digital computers, he foresaw revolutionary social
 Employing outsiders for providing training to trainees even when there and ethical consequences.
are several persons available inside Technology Ethics: Technology ethics is a new subject. The profile of
 Planning and organizing the training programme without even knowing technology ethics is as follows:
the need for training 1. Thinking ethically about human biotechnology.
 Organizing training during peak seasons or on days when workload is 2. Taking responsibility for e-wastage like environmental damage from
very high computer and other electronic wastages.
 Starting training programmes in an ill-prepared manner CHECK YOUR PROGRESS 3. Employers must check whether employees are wasting time at
 Extending the time of the training programme to allow the trainees to 7. Can the training manager also recreational websites or sending unprofessional e-mails.
indulge unethical practices?
have a relaxed time 4. Sometimes the invasions of piracy occurs through to use of the Internet
services.
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 Ethical Issues in the
Wiener was of the view that the integration of computer technology into society Functional Area
Ethical Issues in the 8. You will not use other people’s intellectual output.
Functional Area
would have a great impact. New computer crime laws and privacy laws had been
9. You will think about the social consequences of the programme you are
enacted in Europe and America by the mid-1970s. Walter Maner innovated a
writing or the system you are designing.
separate branch of applied ethics—‘computer ethics’ which he defined as the
branch of applied ethics which studies ethical problems — transformed, NOTES NOTES 10. You will always use a computer in ways that demonstrate considerations
aggravated, or created by computer technology. Computer ethics has been and respect for your fellow humans.
described in the following manner by James Moor: ‘A typical problem in
computer ethics arises because there is a policy vacuum about how computer
technology should be used. Computers provide us with new capabilities and these 4.5.3 Consumer Protection in the Context of Electronic
in turn provide new choices for action. Often, either no policies for conduct in Commerce
these situations exist or existing policies seem inadequate.’ According to Moor,
Recommendation of the Organization for Economic Cooperation and
computer ethics should include:
Development (OECD) Council Concerning Guidelines for Consumer
1. Identification of computer-generated policy vacuums Protection in the Context of Electronic Commerce (e-commerce).
2. Clarification of conceptual muddles
Consumer laws, practices and policies limit misleading, fraudulent, and unfair
3. Formulation of policies for the use of computer technology
commercial conduct. Such protection is indispensable for establishing a more
4. Ethical justification of such policies
balanced relationship between consumers and businesses in commercial
Ethical Issues: There are various ethical issues involved in information transactions and in building consumer confidence.
technology. In 1986, Masovi had classified ethical issues in the following four
groups: The digital networks and computer technologies that comprise the electronic
marketplace have an inherent international nature. This requires a global
1. Accessibility approach to consumer protection as part of a predictable and transparent legal and
It involves the right of accessing the required information as well as the true self-regulatory framework for e-commerce. The global network environment
payment of charges to access the information. challenges the abilities of each country or jurisdiction to adequately address
issues related to consumer protection in the context of e-commerce. Disparate
2. Privacy
national policies may impede the growth of e-commerce, and as such, these
It deals with the degree of privacy and dissemination of information about an consumer protection issues may be addressed most effectively through
individual. international cooperation and consultation. OECD member governments have
3. Property recognized that internationally coordinated approaches may be needed to
exchange information and establish a general understanding about how to address
It talks about ownership and value of information.
these issues.
4. Accuracy
A variety of consumer protection laws exist that govern business practices. Many
The information which is viable and being accessed is now much more accurate OECD member countries have begun to review existing consumer protection
and authentic. laws and practices to determine whether or not changes need to be made to
The Computer Ethics Institute in Washington DC has laid down the following ten accommodate the unique aspects of e-commerce. In April 1998, the OECD
commandments of computer ethics: Committee on Consumer Policy began to develop a set of general guidelines to
protect consumers participating in e- commerce without erecting barriers to trade.
1. You will not use computer to harm other people. These guidelines represent a recommendation to businesses, governments,
2. You will not interfere with the computer network of other people. consumers and their representatives as to the core characteristics of effective
3. You will not snoop around in files of other people’s computer. consumer protection for e-commerce. In particular, the purpose of the guidelines
is to provide a framework and a set of principles to assist:
4. You will not use a computer to steal.
 Governments in formulating, reviewing, and implementing consumer and
5. You will not use a computer to bear false witness. law enforcement practices, policies, and regulations if necessary for
6. You will not copy or use proprietary software for which you have not effective consumer protection in the context of electronic commerce
CHECK YOUR PROGRESS
paid.  Consumer groups, business associations, and self-regulatory bodies, by
8. Mention Masovi’s
7. You will not use other people’s computer resources without authorization. classification of ethical issues. providing guidance as to the core characteristics of effective consumer
Self-Instructional Material 125 126 Self-Instructional Material
 protection that should be considered in formulating, reviewing, and Ethical Issues in the
Functional Area
Ethical Issues in the  Marketing and advertising should be clearly identifiable as such. Marketing
Functional Area
implementing self-regulatory schemes in the context of e-commerce, and and advertising should identify the business on whose behalf the advertising
or marketing is being conducted where failure to do so would be deceptive.
 Individual consumers and businesses engaged in e-commerce, by
providing clear guidance as to the core characteristics of information NOTES NOTES  Businesses should be able to substantiate any expressed or implied
disclosure and fair business practices that businesses should provide and representations as long as the representations are maintained, and for a
consumers should expect in the context of e-commerce. reasonable time thereafter.
Guidelines  Businesses should implement and develop easy-to-use and effective
procedures that permit consumers to choose whether or not they wish to
Scope: These guidelines apply only to business-to-consumer e-commerce and not
receive unsolicited commercial e-mail messages. Where consumers have
to business-to-business transactions.
indicated that they do not want to receive unsolicited commercial e-mail
General Principles messages, such choice should be respected. In many countries, unsolicited
1. Transparent and effective protection commercial e-mail is subject to specific legal or self-regulatory requirements.
Consumers who participate in e-commerce should be afforded effective and  Businesses should take special care in marketing or advertising that is
transparent consumer protection that is not less than the level of protection targeted at the elderly, children, the seriously ill, and others who may be
afforded in other forms of commerce. helpless in fully understanding the information presented to them.
Businesses, governments, consumers and their representatives should work
together to achieve such protection and determine what changes may be 4.6 SUMMARY
necessary to address the special circumstances of e-commerce.
2. Fair business, advertising and marketing practices Ethical issues are a part and parcel of any business as unethical practices can take
place across the organization in all departments.
 Businesses engaged in e-commerce should pay due regard to consumers’
interests and act in accordance with fair advertising, business, and marketing Ambiguity, concealed facts, exaggeration and psychological appeal are certain
practices. methods by which organizations may be following unethical practices while
advertising. Facts are almost always concealed in advertisements, which is
 Businesses should not make any representation or omission, or engage in any
absolutely unethical. Similar practices are common in the finance and human
practices that are likely to be fraudulent, deceptive, misleading, or unfair.
resources departments also. Effective consumer laws, policies and practices can
 Businesses promoting, selling or marketing services or goods to consumers limit fraudulent and misleading commercial conduct.
should not engage in practices that are likely to cause unreasonable risk or
harm to consumers.
4.7 ANSWERS TO ‘CHECK YOUR PROGRESS’
 Whenever businesses make information available about the goods or services
they provide , they should try to present such information in an accurate, 1. The marketing department consists of various subdivisions, such as sales,
clear, conspicuous, and easily accessible manner. after-sales service and marketing and research.
 Businesses should comply with any presentations they make regarding 2. In the field of advertising, the following are examples of unethical
practices or policies relating to their transactions with consumers. communication practices:
 Businesses should take into account the global nature of e-commerce and  Making false commitments to the customers about the benefits of the
wherever possible, should consider the various regulatory characteristics of product
the markets they target.  Supplying products that are different from those that are advertised
 Businesses should not exploit the special characteristics of e- commerce to  Giving wrong prices to the customers during advertising
hide their true location or identity , or to avoid compliance with consumer  Not giving the promised gift in the promotional campaign
protection standards and/or enforcement mechanisms.
 Hiding major flaws of the product
 Businesses should avoid using unfair contract terms.  Providing wrong testimonials about the product to prospective
customers

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  Not providing the advertised service to the customers as a part of the Ethical Issues in the
Functional Area
Ethical Issues in the 7. The training manager of the company can also indulge in unethical
Functional Area
promotional plans practices in the following:
 Increasing the price of the product before starting its promotional  Arranging training only for favourite employees, whether they
campaign NOTES NOTES deserve it or not
 Making false references about the competitive products.  Employing outsiders for providing training to trainees even when
3. An entrepreneur can raise funds internally from various sources: there are several persons available inside
 Deposits and loans given by owner  Planning and organizing the training programme without even
knowing the need for training
 Personal loan from provident fund and life insurance policy
 Organizing training during peak seasons or on days when workload is
 Funds accumulated by the retention of profits very high
 Ploughing back of profits  Starting training programmes in an ill-prepared manner
4. Organizations follow various methods that are unethical while  Extending the time of the training programme to allow the trainees to
advertising for their products and services. These methods are: have a relaxed time
 Ambiguity  Supplying outmoded and old training materials for the purpose of
 Concealed facts training
 Exaggeration  Experimenting with trainees by asking them to set their own timetable
for training
 Psychological appeal
8. In 1986, Masovi had classified ethical issues in information technology in
5. The following points describe the unethical behaviour of the auditing the following four groups:
manager:
1. Accessibility
 Ignoring major deviations from the budgets
It involves the right of accessing the required information as well as the
 Rejecting the tender having lowest cost among all due to personal
true payment of charges to access the information.
reasons
 Helping in hiding black money in order to reduce the tax payable 2. Privacy
amount It deals with the degree of privacy and dissemination of information about
 Ignoring inflated travel bills of selected employees an individual.
 Accepting payments made by the directors for personal purchases as 3. Property
official payments It talks about ownership and value of information.
 Enabling the directors in sending and receiving money from overseas
4. Accuracy
through unofficial hawala channels
The information which is viable and being accessed is now much more
 Approving payments to suppliers without checking bills or
accurate and authentic.
deliverables
 Approving the substandard construction made by the constructor and
approving their bills for payment 4.8 EXERCISES AND QUESTIONS
6. External sources of funds means the various financial institutions from
1. What are the ethical issues involved in information technology?
where entrepreneurs can raise funds, such as fixed capital, commercial
banks and development banks. The entrepreneur can raise by: 2. Unethical practices can take place during recruitment. Explain.
 Borrowing money from friends and relatives 3. The finance department is prone to unethical practices. Explain.
 Borrowing from financial institutions 4. What are the guidelines for effective consumer protection in electronic
commerce?

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 Ethical Issues in the
4.9 FURTHER READING Functional Area

Modh, Satish, Ethical Management: Text and Cases in Business Ethics and
Corporate Governance. New Delhi: Macmillan Publishers India Ltd, 2005.
NOTES
Mathur, U.C., Corporate Governance and Business Ethics: Text and Cases. New
Delhi: Macmillan Publishers India Ltd, 2005.

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 Environmental Ethics, Corruption Environmental Ethics, Corruption
UNIT 5 ENVIRONMENTAL ETHICS, and Gender Issues and Gender Issues 5.2 ENVIRONMENTAL ETHICS
CORRUPTION AND GENDER Environmental ethics is all about the ethical relationship between us as human
beings and his natural environment.
ISSUES NOTES NOTES
Human beings take a lot of ethical decisions concerning the environment. These
decisions could be about whether a forest area needs to be cleared to create space
Structure for humans or for human consumption, whether zero-emission vehicles should be
used in order to save on fossil fuel resources, whether consumption should be cut
5.0 Introduction down to preserve resources for future generations, whether it is right to be
5.1 Unit Objectives indifferent to the extinction of certain species only because it is convenient for the
society, and so on.
5.2 Environmental Ethics
5.3 Corruption Suppose some farmers burn and clear forest areas for cultivation, would it be
possible to justify their act? Suppose a green area is totally cleared of the
5.4 Gender Ethics vegetation to make space for commercial or residential complexes, would this act
5.5 Sexual Harassment and Discrimination be justified? Suppose a company conducts open-pit mining in some virgin
territory, does the company hold the responsibility to restore the ecology of that
5.6 Summary
region?
5.7 Answers to ‘Check Your Progress’
Is it right to spread awareness against pollution only because it affects human
5.8 Exercises and Questions beings and not because the values of certain members of the natural environment
5.9 Further Reading also need to be protected? Environmental ethics is all about raising such
questions and finding their answers.
5.0 INTRODUCTION Environmental movements started when the environmentalists the world over
acted together to draw attention to the philosophical aspects of environment-
related problems. People woke up to realize the importance of a natural
Corporate governance is all about the ethical issues, morals or the value ecological balance between the living and non-living entities. Activists across the
framework within which corporate decisions are taken. Financial integrity would globe are spreading awareness about global warming and the significance of
be the most important issue as far as corporate governance is concerned. But environmental preservation.
apart from these, corporate governance is faced with problems arising out of
gender issues, corruption and sexual harassment too. None of these issues are Marshall supports three ethical approaches to classify the various attempts at
explaining the significance and importance of environmental preservation — the
easy to check. For example, in case of corruption, the political will of the ruling Libertarian extension, the Ecological extension and Conservation ethics.
management and an effective anti-corruption framework is required to control
unethical practices. In most countries, especially the developing ones, it is seen The first approach emphasizes on the theories that promote the application of
that the very institutions responsible for checking corruption are themselves human rights to non-human animals as well as the inanimate entities. The second
fraught with internal corruption. As a result, their proper functioning is approach emphasizes on the fundamental interdependence of both biological as
well as abiological entities and their diversity. This classification would include
compromised. Therefore, effective corporate governance would translate into the theory that earth as a planet modifies its geophysiological structure with time
transparency in functioning without compromising the business strategies to be able to support the equilibrium of evolving organic and inorganic matter.
required to succeed. Needless to say that considering the unethical practices The conservation approach considers only the worth of the environment, that is,
rampant today, this is quite a mammoth task. the purpose it serves for human beings. In other words, conservation is solely
concerned with human beings and their intergenerational considerations.
Environmental ethics as an institution gained prominence only in the1990s.
5.1 UNIT OBJECTIVES Nowadays, universities offer programmes that specialize in environmental ethics
and philosophy.
This unit teaches you about:
 Ethics in relation to the environment
5.3 CORRUPTION
 Ethics with regard to gender discrimination
 Sexual harassment and its legal aspect Corruption refers to the abuse of public office, that is, use of public office for
 Effect of corruption on governance some personal benefit. Ethical governance propagates that all are equal in the
eyes of the law. But, corruption practices the exact opposite. Increasing
corruption has led to a situation where only dissipation of corruption can result in
equality before the law.
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The root cause of corruption is moral decline. Changing lifestyles have not only Environmental Ethics, Corruption Environmental Ethics, Corruption corruption leads to death is the manufacture and sale of illicit liquor. In short,
and Gender Issues and Gender Issues
affected the individual’s sense of values, but also the values that were nurtured corruption is anti-economic development, anti-national, and anti-poor. The irony
and preserved by the society. These changes have affected the system of is that we nevertheless seem to accept corruption as a part of life.
governance.
Corruption works against the nation, against the poor strata and against the NOTES NOTES
5.4 GENDER ETHICS
economic progress of the country.
The history of our country’s governance is fraught with examples of corruption It is hard to believe that even a progressive phenomenon such as globalization can
that put the nation at security risk. There have been instances of corruption in actually heighten gender inequality. It has been pointed out many a times that
politics, in defence deals and even cases of militants being funded through gender equality plays a major role in the development of a nation. However,
Hawala. despite modern initiatives it is disappointing to note that the situation of women
Corruption in today’s society can be linked directly with the falling morality all over the world has not improved significantly. This is where gender ethics
standards. The level of corruption in any society is dependent on the following takes a back seat.
three factors. These are: Societies that still remain backward are those where women have been
(i) The values cherished by society marginalized and where poverty has been feminized. Globalization means a
(ii) The individual sense of values situation or condition that encourages the movement of capital around the globe
(iii) The governance system (probably, at this stage, it is worth looking at at a fast pace. It also implies the disappearance of tariff barriers and the spread of
corruption’s social roots ) new information and communications technologies. But the benefits of
globalization are not always equally distributed. Needless to say, the efforts to
Corruption is harmful for the society in different ways. Corruption is anti- help women progress are also stunted.
national. The Hawala scam that was exposed a few years ago has shown how the
militants based in Kashmir were receiving cash from abroad through hawala It would be quite a challenge to encourage women from all over the world to
channels. Through this same route politicians, businessmen and bureaucrats were participate in the whole process of globalization, because not all women enjoy
also collecting money. freedom of movement. For those who are not even allowed to leave the four walls
of their home, the need to create channels that would help throw the doors open
The nation witnessed another major scam, which was exposed by Tehelka.com. for participation arises. In the women-friendly regions, the focus should be on
The expose highlighted the high level of corruption in defence deals. From such creating more facilities for women to participate in different ways and at different
events, one can judge that corruption is anti-national as it threatens national levels in the market.
security.
The majority of the Internet users consists of men which means women still
Moreover, corruption is anti-poor. There have been reports in the Indian media of remain far behind when it comes to benefiting from information technology. The
high level of corruption in the Public Distribution System (PDS). A major portion benefits of progress, modernization and globalization have not been fairly
of sugar and other food grains , which are designed to ensure food security to the distributed and the gap between the haves and the have nots has not been bridged.
population living below poverty line, goes to the black market. With women forming the majority of the poor in the world, this only strengthens
The Indian Government incurs huge expenditure every year on PDS by way of the fact that gender inequality is certainly not a myth.
subsidizing the foodgrain prices for the poor. This means that huge amounts of Women clearly shoulder more responsibilities than men and are also expected to
money lands in the pockets of the corrupt PDS shopkeepers and their godfathers
play dual roles as bread-winners as well as housekeepers. This exposes them to
in bureaucracy and politics. Out of every rupee meant for anti-poverty
more mental and physical stress as well as health hazards than men. The
programmes, it is a known fact that only a fraction reaches the beneficiary.
underdeveloped countries have been victims to unethical peddling of medicines
Corruption is, therefore, anti-poor.
that do not meet the global safety standards. Women, especially those who are
Corruption also has another characteristic of being anti-economic to pregnant are at the receiving end of all the harmful effects of these dangerous
development. In mid-1997, the collapse of the South East Asian economies had medicines. They not only risk losing their lives, but also endanger the lives of
shown how even the so-called tiger economies were not immune to the disastrous their unborn children.
consequences of crony capitalism and corruption. In 1999, the Mahbub Ul Huq
Centre in Islamabad in its Human Development Report for South Asia said that In the Third World countries, often aggressive and unethical sales campaigns lead
India’s GDP will grow by 1.5 per cent and the foreign direct investment will the illiterate women to believe that breastfeeding is no longer the best way to feed
grow by 12 per cent if the country’s corruption level comes down to that of the an infant. With declining breastfeeding rates, the state of health of women and
Scandinavian countries. children have been far from enviable. This is just one of the ways in which
unethical practices are targeted at women.
Corruption can be a matter of life and death many a times. For example, spurious
drugs can lead to the death of many innocent people as a result of corruption in With smoking taking a back seat in the developed countries, more and more
the pharmaceutical industry. Corruption in government departments can also lead tobacco companies are targeting the population in the underdeveloped nations to
to deaths of innocent people. The 1993 Mumbai blast, in which 300 innocent promote their products. The victims of such marketing include women too who
people were killed was the result of RDX smuggled into the country with the not only risk their health, but also turn their offsprings into passive smokers.
support of corrupt officials in the state government. Another example of how Indirectly, the wives of poor farmers who are addicted to tobacco or other forms
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of hazardous intoxication bear the brunt of the resulting poverty and are forced to Environmental Ethics, Corruption Environmental Ethics, Corruption exchange for work benefits and threatening the victim with dismissal or
and Gender Issues and Gender Issues
shoulder the burden of running the family. impossible/stressful working conditions in case of non-cooperation. The ‘Hostile
working environment’ type of harassment refers to the creation of a hostile
A look at today’s best advertisement will prove to us that gender ethics has yet working atmosphere for the female employees to function in. This would include
not been given due importance in the world today. It is here that women are unwelcome activities like displaying of pornography or obscene graffiti, physical
exploited the most in terms of their sexuality. Most often than not, the products NOTES NOTES
contact or brushing against female employees, and so on.
advertised possess no connection with the figure of the scantily-clad women
displayed beside them, for example, advertisements featuring motorbikes and In India, the Vishaka guidelines provide a framework that emphasizes on
men’s wear. These advertisements and the concept of sex tourism which has prevention of sexual harassment and facilitates the adoption of preventive
gained alarming popularity clearly reflect the manner in which women are measures. These guidelines apply to women employed in both the organized and
regarded in society—their value or worth being measured merely in terms of their unorganized sectors and also to all women whether working full time or part
sexual appeal and glamour. time, on contract or in a voluntary capacity. As is expected, the guidelines stress
on the adoption of a sexual harassment policy prohibiting sexual harassment at
the workplace and providing well-thoughtout grievance procedures for all
5.5 SEXUAL HARASSMENT AND employees irrespective of their level in the organization.
DISCRIMINATION In most developed countries, it is considered a crime to discriminate against any
person seeking employment, on the basis of his/her sex. Hiring, terminating or
promoting a person merely on the basis of the person’s sex can result in legal
In USA and UK, sexual harassment is considered to be a serious form of violence
intervention.
and proper legislative measures have been taken to protect women and combat
sexual harassment at work. In the developed nations, laws have been enforced that require equal pay to be
given to both men and women for equal work. Compensation discrimination
However, in India, it has not been very long since The Supreme Court recognized based on the sex of the worker is also prohibited. However, the truth is that
sexual harassment, for the first time, as a violation of human rights and a gender- despite such laws, discrimination at work is a malady that refuses to be cured.
based discrimination affecting women’s ‘Right to Life and Livelihood’.
Although mandatory guidelines for resolution and prevention of sexual
harassment of women at work have been put in place, the issue of sexual
Sexual Harassment of Women at Workplace and Constitutional
harassment and discrimination still remains under carpet for most employers and Guidelines and Norms
women. The three Judge Bench of the Supreme Court in Vishaka vs. Union of India in an
The Supreme Court of India defines sexual harassment as ‘any unwelcome epoch-making judgement made a significant contribution in evolving the code
sexually-determined behaviour that includes a demand or request for sexual against sexual harassment. While emphasizing the need to have guidelines, the
favours, physical contact, sexually-coloured remarks, pornography display, and Supreme Court said that:
any other verbal, physical, or non-verbal conduct that is of a sexual nature. The legislature and the executive have the primary responsibility to ensure the
A sexually-harassed person would be one who: safety and dignity of womencreating the right legislations and also building
mechanisms for their enforcement. However, when instances of sexual
1. Is subjected to an unwelcome act of physical intimacy harassment that have resulted in violation of fundamental rights of women
2. Has been asked for sexual favours in return for employment, payment of workers under Articles 14, 19 and 21 are brought before us for redressal under
wages or a promotion Article 32, an effective redressal requires that some guidelines should be laid
down for the protection of these rights to fill the legislative vacuum.
3. Has been at the receiving end of sexually explicit compliments, or sexist
remarks or jokes with sexual connotations
Guidelines and norms
4. Has been forced to view sexually explicit pictures, cartoons, calendars or
even e-mails, etc. For the enforcement and preservation of the right to gender equality of the
working women, the Supreme Court of India has laid down norms and guidelines
5. Has been subjected to offensive gestures, sounds or any conduct of a that are to be strictly observed at all workplaces. According to the Supreme
sexual nature which could be either verbal or non-verbal Court, these directions are enforceable and binding in law until suitable
6. Has been threatened for refusing to cooperate with the person demanding legislation is enacted to occupy the field. However, these guidelines shall not
sexual favour prejudice any of the rights available under the Protection of Human Rights Act,
1993.
7. Has been repeatedly asked out by the boss or forced to answer queries (by
the boss) regarding personal life 1. Duty of the employer or other responsible persons in workplaces and
8. Has been made to feel embarrassed by a group of colleagues joking or other institutions. It shall be the duty of responsible persons or the
sniggering about sexual conduct employer in institutions and workplaces to take the required and
necessary steps for prevention of acts of sexual harassment, for determent
At the workplace, sexual harassment can be broadly classified into two
categories. The ‘quid pro quo’ type includes asking for sexual favours in
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 Environmental Ethics, Corruption
of the commission of sexual harassment acts, and provide the procedure and Gender Issues
Environmental Ethics, Corruption (c) Annual report: The complaint committee of the concerned
and Gender Issues
for the settlement, resolution, and prosecution of sexual harassment acts. government department shall prepare an annual report of its
2. Preventive steps. All persons in charge of the workplace or employers , activities of the previous year. Such report should also state
be it in the private or public sector, should take suitable steps for complaints and actions taken by them. The committee shall forward
NOTES NOTES a copy thereof to the head of the organization concerned who shall
prevention of sexual harassment. The following steps are required to be
taken by them: forward the same to the government department concerned with its
comments.
(i) At the workplace prohibition of sexual harassment, as described
(d) Compliance report: The employer and the person in charge is also
above, should be published, notified, and circulated in suitable
required to report:
ways.
(i) On compliance with the aforesaid guidelines.
(ii) The rules and regulations relating to conduct and discipline of the (ii) Compliance on the reports of the complaint committee.
public sector and government bodies should include rules and
(iii) Such report must be sent to the concerned government
regulations that help in prohibiting sexual harassment and also
provide the right penalties against the offender. department.

(iii) As regards the employers in the private sector, steps should be taken 6. Workers’ initiative. In order to prevent and control sexual harassment at
by them for inclusion of the aforesaid prohibitions in the standing the workplace, employers should be allowed to raise these issues:
orders of their company, under the Industrial Employment (i) At workers’ meetings
(Standing Orders) Act, 1946. (ii) In other appropriate forums
(iv) To further guarantee that there is friendly environment towards The issues of sexual harassment should be affirmatively discussed in
women at the workplace, appropriate work conditions should be employer–employee meetings.
provided in respect of health, work, leisure and hygiene and no
woman employee should have reasonable grounds to believe that 7. Awareness. In order to create awareness about the right of female
she is disadvantaged in her current employment. employees in regard to sexual harassment, the employer should take the
following steps: (i) prominently notify the guidelines in a suitable
3. Disciplinary action. The employer should initiate disciplinary action in manner; and (ii) enact appropriate legislation on the subject, and also be
accordance with the rules, where the conduct of the accused amounts to suitably notified and displayed.
misconduct in employment under the relevant service rules.
8. Third party harassment. Where sexual harassment occurs as a result of
4. Complaint mechanism. For the redressal of the complaint made by the an act or omission by (i) any third party or (ii) outsider, the employer and
victim, the employer is required to create an appropriate complaint persons in charge are required to take necessary and reasonable steps to
mechanism in his organization to decide whether or not the conduct of the assist the affected person (a) in terms of support; and (b) take preventive
accused constitutes a breach of service or an offence under law. The time- action.
bound disposal of complaints should be ensured by such a complaint
mechanism. 9. Steps to be taken by the government. The Central and state
governments are required to:
5. Complaint committee
(i) Take suitable measures (including legislation)
(a) Design of complaint mechanism: The complaint mechanism (ii) Ensure that the guidelines are observed by the employers in private
should be adequate to provide where necessary a complaint sector
committee, a special counsellor, or other support service (including
Two years later, in Export Promotion Council vs. A. K. Chopra, the Supreme
maintenance of confidentiality).
Court was invited to decide the following issues:
(b) Composition of complaint committee: The composition of the 1. Does an action of the superior against a female employee, which is
complaint committee shall be as under: against moral sanctions and does not withstand the test of decency and
(i) It shall be headed by a woman. CHECK YOUR PROGRESS
modesty not amount to sexual harassment?
(ii) Not less than half of its members of the committee be women. 1. Define sexual harassment. 2. Is physical contact with the female employee an essential ingredient of
2. Mention one way in which such a charge?
(iii) The committee should involve a third party, either an NGO or unethical sales campaigns can 3. Does the allegation that the superior ‘tried to molest’ a female
another body familiar with the issues of sexual harassment, in affect women.
employee at the ‘place of work’ not constitute an act unbecoming of good
order to prevent the possibility of any undue pressures or 3. What is corruption?
conduct and behaviour expected from the superior?
influence from the senior levels. 4. How can corruption endanger
lives?

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The Supreme Court’s response on the aforesaid issues was as follows: Environmental Ethics, Corruption
and Gender Issues
With regards to the first issue, the Supreme Court ruled that ‘each incident of
sexual harassment at the place of work results in violation of: the fundamental
right to life and liberty and the right to gender equality —the two most precious
fundamental rights guaranteed by the Constitution of India’. NOTES
The Supreme Court answered the second issue in negative and ruled that it was
not correct to hold that since the respondent had not ‘actually molested’ Miss X
and that he had only ‘tried to molest’ her and had ‘not managed’ to make physical
contact with her, the punishment of removal from service was not justified.

5.6 SUMMARY
Corruption, environment ethics, gender ethics and sexual harassment or
discrimination are all issues that have been animatedly discussed at seminars and
conferences all over the world. However, very little of what is preached is
brought into practice. It is clear that while the developed nations continue to
progress, the state of the women, especially in the third world countries,
continues to fall and the degree of corruption continues to rise.

5.7 ANSWERS TO ‘CHECK YOUR PROGRESS’

1. According to the Supreme Court, sexual harassment is any unwelcome
sexually-determined behaviour that includes physical contact, a demand
or request for sexual favours, sexually-coloured remarks, showing
pornography, any other physical, verbal or non-verbal conduct of a sexual
nature.
2. In the Third World countries, often aggressive and unethical sales
campaigns lead illiterate women to believe that breastfeeding is no longer
the best way to feed an infant. With declining breastfeeding rates, the
state of health of women and children have been far from enviable.
3. Corruption refers to the abuse of public office, that is, use of public office
for some personal benefit.
4. Corruption, many a time, can be a matter of life and death. For example,
corruption in the pharmaceutical industry, resulting in spurious drugs
flooding the market, may mean the death of many innocent people.

5.8 EXERCISES AND QUESTIONS

1. Globalization has actually heightened gender inequality. Discuss.
2. Sexual harassment is a major concern in India. Discuss.

5.9 FURTHER READING

Modh, Satish, Ethical Management: Text and Cases in Business Ethics and
Corporate Governance. New Delhi: Macmillan Publishers India Ltd, 2005.
Mathur, U.C., Corporate Governance and Business Ethics: Text and Cases. New
Delhi: Macmillan Publishers India Ltd, 2005.

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NOTES NOTES