Ethics

The term ethics is derived from the Greek word, Ethikos meaning conduct, custom or habit. These meanings
are quite similar to the meaning of a Latin word, “mores”. Therefore, ethics is regarded as the science of
morality or simply, ethics is moral philosophy which deals with moral conduct, judgment, habit, character,
rules or principles. (Habit needs to be distinguished from character. Habit is the outward expression of
character, which is the inner disposition or bent of mind.)
Human conduct which is the foundation of ethics, deals with right or wrong conduct with reference to the
supreme ideals of human life. These ideals are deeply rooted in religion and handed down from generation
to generation. These ideals comprise truth, honesty, non-injury to others, compassion, kindness, and peace,
to name a few.

Ethics is “the study of what is right or good human conduct”.

Ethics is “the science of ideal involved in human life”.
Ethics is “the science of moral judgment”.
Ethics is “the science of morals in human conduct”.
Ethics is “the study of the general nature of morals and of specific moral choices”

Theories of Ethics
Utilitarianism
Utilitarianism is a teleological theory regarding what we ought to do. It is a normative ethical principle of
judging the right or wrong of a human action. According to this theory, social welfare is the sum of the
well-being of all individuals. What should human beings do? The answer can be teleological or
deontological. Deontological theory says that one’s duty is of ultimate importance.
Teleological theory points out than in the ultimate analysis, we should do only those things which can bring
the highest level of happiness to the greatest number of people. It considers the utility of rules or laws, and
is therefore, more concerned with policy formulation. Utilitarianism states that man’s worldly happiness is
the only good. This is a normative-positive test of all policies, actions and institutions.
Motto: “greatest good of the greatest number”. Jeremy Bentham is revered as the father of utilitarianism.

The following are the basic meanings of utilitarianism:

● Greatest good of the greatest number
● Maximization of pleasure
● Minimization of pains
● Maximization of happiness
● Satisfaction of desire

Although there are various meanings and versions of utilitarianism, there is one common philosophy
underlying all these notions. They are basically concerned with the consequences of an action or judgment.
In the case of utilitarianism, the end justifies the means.

Limitations of Utilitarianism
● The theory is incoherent simply because you cannot maximize two numbers at the same time (greatest
happiness and greatest number).
● Utility is essentially a subjective concept. There is no acceptable definition of “good”.
● The concept (happiness) means different things to different people. There are also multiple meanings of
the concept of utilitarianism.
●The idea ‘the end justifies the mean’ has been vehemently criticized by many. It is said by critics that for
a moral action, both the end and the means must be good. To many, the means justify the ends, and not
the other way round.
● Utilitarianism does not consider individuals or minorities. It does not care for individual entitlements,
rights and distributive justice.
● If some actions are by nature morally wrong, but their consequences are good. Utilitarianism will
support those actions. But then this will not prima facie entitle the theory to be a moral theory.

However, in spite of its many conceptual limitations, the movement of utilitarianism has been instrumental
in saving the conditions of common people. The philosophy of utilitarianism stood for the aspirations of
the middle class. It has been the basis of many reformative movements in the fields of legislation, politics
and socio-economic institutional changes around the world.

A consequentialist philosophy is based on consequences of actions. Some human actions which are good
for society at large are regarded as good actions. It is the outcome of the action on the society which is
important. A consequentialist theory is end-based (teleology). If the consequences and end are good, then
it can be recommended for implementation; otherwise not. Consequentialism embodies in itself two
important schools of moral philosophy. These two schools are utilitarian and teleological schools.

Teleological Theory
Greek philosophers, in particular Aristotle, popularized the teleological theory. The word teleology is
derived from telos which means the end or consequences. Thus, the theory of consequentialism is directly
associated with the teleological theory. There are indeed many variations of the theory of teleology. At the
one extreme of the teleological theme, there may be egoism and at the other extreme, there is utilitarianism.
Utilitarianism provides a criterion for the concrete decision-making process to choose an action or policy.
An action is taken only if it maximizes the net utility or benefits from the given circumstances, and also,
the project is accepted if it is the best among all the available projects in terms of net benefits. Thus, there,
apparently is a moral basis of choosing the project. However, the net gains or benefits may also be yielded
by a project which is otherwise not supportable on moral grounds. The cost-benefit calculus that is used for
the calculation of projects in the context of utilitarianism does not say much about morality.
Egoism which is a form of teleology accepts any decision which produces individual gain or benefit. These
benefits include pleasure, power, name and fame. An egoist will choose a situation which will increase his
personal gain or satisfy his ego. The basis of egoism is self-interest. Many people are of the opinion that an
egoistic person or organization is governed by self-interest. They will go to any extent to maximize their
gains and objective functions. They are short-sighted and unethical in principle. However, there is another
variety of egoism known as enlightened egoism which is socially better than pure egoism. Enlightened
egoism takes into account a long-run perspective and also allows for the welfare of people and society, but
in every case, the self-interest remains the primary consideration.

Another aspect of teleological theories, especially utilitarianism is the focus on minimizing harm to affected
individuals. This makes the theory popular in the public eye. Rule-utilitarians follow certain rules to
maximize their gains or net utility. They support the rule of laws in a country as they believe that by
following rules, the society can maximize the total gains. However, if there are alternative rules in a
particular situation, the utilitarians will choose that rule which would promote greater utility. There may be
a problem with the rule-utilitarians. They will not bribe anybody because this is the law of the land.
However, if bribe giving can lead to larger benefits than the cost, then they will perhaps bribe officials to
gain some favours. for a rule utilitarian, rules give him a guideline and at times, he violates them. To an act
utilitarian, bribery is acceptable if it leads to maximum gains or net utility. If corruption can save many
lives, both act and rule utilitarians will perhaps support it.
Teleological theories do give a definite perspective to make moral choices by comparing competitive
alternatives, and the relative impact on people. On this count, the consequentialist theory fares better than
the theory of deonticism. Teleological theories are, however, criticized on the ground that they rely too
much on unknown and uncertain results, and neglect the rights and needs of minorities. These right and
needs may be in conflict with those of the majority.

Relativism Theory
In the materialistic sense, right or wrong can be explained with reference to context, and in the ethical sense,
there is something known as ethical relativism which implies that ethical behaviour is to be judged with
reference to time, place and circumstances. Thus, whether MNCs are good or bad is difficult to determine
in isolation.”
It is an empirical fact that all ethical norms and practices are not equally valid and applicable to all societies.
Some ethical norms or practices are acceptable in some countries but not acceptable in others. For example,
caste system or untouchability was accepted in India, but not in other countries. Matrimony between
homosexuals is legally acceptable in the United Kingdom; based on marital ethics; but is considered
unethical and immoral in other countries. Thus, ethical standards differ from country to country or from
place to place, and hence the birth of ethical relativism. Ethical standards are relative to a situation, place,
time and circumstances.

Criticism Against Ethical Relativism (ER)

1. If ER is correct, then the same practices cannot be criticized in other parts of the world. For instance, if
drinking is not prohibited in the UK, it should not be prohibited in India. Such a reasoning is not tenable
because circumstances may be different.
2. It seems that to the proponents of ER, all local moral standards are equally acceptable without
exceptions. Morality in that case becomes a flexible concept without any rational basis.
3. ER believes that the only criteria for judging right and wrong are the local standards and practices.
Such a standard of judgment is too constricted.
4. ER tends to believe that the moral standards of a particular society are the fundamental basis of judging
it or for subsequent policy actions. This view is incorrect.
5. If injustice prevails in a particular country, it should not be the yardstick for others. For instance, the
argument that the Indian caste system is good because it is steeped in tradition and hence should be
emulated elsewhere, is objectionable.
6. ER does not lay emphasis on the universal moral standard. In fact, some moral standards are
unchanged, and live on.

Ethical Absolutism: EA relies on the fact that some ethical standards are universal, permanent and absolute
and are applicable to all countries and places. They do not change over time. For instance, the maxims like
“Don’t steal”, “Don’t lie” or “Respect your parents” have universal appeal and applicability. This is ethical
absolutism.

Deontology: The Greek word “deon” means duty. Deontology refers to a particular type of ethical
behavior based on rights and duties and not merely its consequences—it is the intention or motive that
matters rather than the consequences of the overt action. Thus, deontologists are non-consequentialists
which is governed by certain dos and do nots. As per the principle you should not steal or kill even if they
lead to maximum gain or happiness. It is based on the idea of correctness or rightness of moral behavior.
Kant is the leading founder of the principle of universalism, also known as deontological ethics. It is a kind
of non-consequentialist ethics. The basic idea of this ethical principle is that the ends can never justify the
means of an action. Universal ethical principles are based on justice, rights, fairness, honesty and respect.

Rights and Duties

Right is the entitlement or empowerment to do certain things. For instance, a teacher is entitled to teach in
a class and a priest is entitled to worship. Rights are moral claims of individuals recognized by society.
There are many types of rights, like, legal, constitutional, fundamental and moral. Right gives us the liberty
and choice and empowerment. There are many basic rights given to every citizen of a country. These rights
include life and security, education, freedom of speech, employment, express opinion, legal remedies,
contractual right, equality and human rights. Moral rights give individuals the freedom to pursue one’s own
interest so long as the interests of others are not violated. Moral rights need to be justified, and they are
necessary for self-realization. These rights are essential for the highest personal good and social benefits.

Negative rights are rights to be free from interference by others; life, liberty and property rights, Positive
rights are those that others have a duty to supply. If you have a right to education, others must supply
schools, teachers and books.

Rights and duties are correlative terms. Duties are moral obligations. The main duties that a person
should perform are as follows:
● Respect for truth
● Respect for laws
● Respect for society and the state
● Respect for life
● Respect for freedom and personality
Duties are determined by the status and particular station of life. There are generally three classes of
duties:
● Duties to self (health, self-development, capability expansion and so on).
● Duties to others (duties to family and friends, relatives, neighbors, society, humanity, animals
and plants, and the country).
● Duties to God (devotion, prayer, meditation, worship, communion and love for God)

Justice
Philosophers observe that there are three worthwhile things in this universe: truth, beauty and justice.
The term “justice” is derived from the word “just”, which means “appropriate”, “proper” and “fair”.
The word “fairness” is regarded as the most appropriate equivalent to the term “justice”. When a treatment
is accorded to a person in proportion to what he deserves, he can be said to be treated in a just way. For
instance, when a labourer is asked to work and paid wage equal to the market value of his physical
productivity, the payment is based on justice. Justice is something which can be regarded as reasonable on
both moral and empirical grounds. Justice is a normative social order. It is a form of righteousness. When
some people are in bondage, justice implies freedom to them. Absolute justice is divine and is difficult to
achieve in the real world. In the actual practice, we come across what is known as relative justice. There
are six types of justice:
1. Procedural Justice
There may be justice in an act. However, what is important is to see whether that action has been
performed complying to the law or through a correct procedure

2. Commutative Justice
Commutative justice is a form of justice where fairness or justice is ensured at the beginning and all
people are treated equally. In other words, people start on the level field.

3. Compensatory Justice
Some compensation is given to the person who has been treated unequally in the past. The point is that
the compensation for the injustice done in the past must be proportional or equivalent to the loss sustained
by an individual in question.

4. Retributive Justice
This ensures some form of punishment to a defaulter. The imposition of fines or penalties, however, may
not be adequate or just in a particular situation.

5. Communitarian Justice
This refers to a system of justice shown to a particular community which has been suffering in the past
from injustice (say, giving political and economic rights to the tribal people in Australia).

6. Distributive Justice
Distributive justice is very critical for human society as a whole. The basic idea of distributive justice is to
treat equal people equally and unequal people unequally. Therefore, it can be either vertical or horizontal
in character. The principle of distributive justice upholds the view that the benefits and burdens in a
society must be distributed equally among its members.
Care
Care is a particular type of enduring love and affection that is reciprocated by an individual to those people
in his family whom he loves. The same is true of friends and near and dear ones. Care is an expression of
regard coming from esteem. Care for somebody depends primarily on the nature of the relationship. If the
relationship is very intimate, the care becomes deep. On the contrary, if the relationship gets sour, the care
for the person gradually diminishes. When the relationship becomes very strained, the care degenerates into
hate and can no longer be sustained.

Ethics of care is a study of all the factors concerning care, care-based relations, sources and motivation for
care, costs and conflicts of care, care and justice, and many other related issues. There are two broad
domains of care:

The conventional analysis that care is only related to one’s near and dear ones, family and friends is indeed
a narrow view. This can be called the esoteric concept of care. According to this concept, care is shown
only to a person’s own family and to some intimate friends. These people are shown care by sacrifice in
terms of physical or mental efforts or monetary expenditure whenever needed.

Care can also be exoteric in nature and, in some cases, temporary or for a limited period of time. Thus, one
may take an unknown victim of a road accident to a hospital and spend time and money to look after him
until he is discharged. This type of care can be called Exoteric Care and is shown to people outside the
domain of family and friends. Exoteric care can also be about a community or a tribe. In this case, a person
takes pride in or takes care of his own community. This care is called Communitarian Care. It arises out of
compassion and kindness and serves the people at large irrespective of caste, colour, creed or religion.

In a sense, out of all these theories of ethics, the care-based ethics seems to be the best. Rule-based ethics
is too mechanical and as such cannot take care of the relativity of many ethical issues in terms of time,
circumstances and situations. Some rules may prove to be irrelevant with changing time and circumstances.
Thus, it is not always proper to blindly follow the rule-based ethics. The duty-based ethics may follow mere
routine duties. It consists of a job that somebody has asked you to do.
Similar is the case with consequence-based utilitarian ethics. Utilitarian ethics is basically concerned with
the social well-being or the welfare of the majority of population, but it neglects the welfare of the
minorities. The utilitarian principles may be in conflict with many of our core moral standards.

Care ethics is above and beyond any cognitive theory of justice and ethics. Since care comes out of love, it
conquers everything, transgression and inequity. Care ethics is above and beyond any cognitive theory of
justice and ethics. Since care comes out of love, it conquers everything, transgression and inequity. If one
has made a habit of caring about others, he may even forget the relationship he has with the person he is
caring for. The victim may be a friend or a stranger or even an enemy.

However, the satisfaction of the needs of the poor is an important part of the ethics of care. Though not all
the theories, the socialist theory of justice comes a long way towards the ethics of care. Under socialism
the payment is based not on contribution but on needs. To supply the needs of people is equivalent to taking
care of them. ey can take care of themselves. In the capitalist principle of justice, payment to the labour is
based on the contributions of labour. If the contribution is low, he gets low wages. There is no scope for
care in such a situation, even if the need for more is genuine. The equity principle of justice is also silent
about the special needs of people to take care of their families and loved ones. Most of the theories of justice
are thus inadequate and cannot supersede the ethics of care and compassion.

Virtue Ethics
Virtue ethics is a special branch of ethics founded by Plato and his disciple, Aristotle. The traditional
theories of ethics are based on actions. For instance, the theory of utilitarianism observes that an action
which maximizes net utility of the society is the right kind of action. Utilitarianism puts more emphasis on
the greatest good of the greatest number of people. This idea is the same as the theory of consequentialism
which says that a right action is the one which leads to good consequences. The theory of deontology
believes that a right action is to be judged in terms of duty. Thus a person doing his duty well is performing
the right action. The same notion applies to theories of justice, caring and compassion. However, the
problem is that even if a person is doing the right action, his character may be morally unethical. It is not
the action that matters, but more importantly the character of the person performing the action. Hence, what
is needed is a combination of both right action as well as correct character. Virtue ethics emphasizes the
importance of right character among human beings. This is, however, not to say that all the alternative
ethical theories mentioned above are devoid of the quality of virtue. But virtue theory exclusively puts an
emphasis on character based on virtues. A man of virtue is always respected and praised because virtue is
a special type of achievement which needs hard work and determination.

Moral virtue is an acquired mental disposition which forms a part of the character of a morally upright
person which is further reflected in the behaviour pattern of that person (Velasquez). There can be a long
list of virtues. However, the major virtues are honesty, sincerity, truth, courage, temperance, integrity,
compassion and kindness. Virtue is the habit of deliberate choice of right activities and performance of
duties in the correct way. Virtue is excellence of character. According to Aristotle, virtue is a permanent
state of mind to perform the best things in life.

Virtue is a relative concept. Virtue is relative to society, the nature of the state and social position and
responsibility. While some virtues like patriotism and nationalism are virtues in all types of states, for some
states, like a communist state, religious activities are not looked upon as virtues. For a totalitarian state,
loyalty to ruler is a higher virtue than devotion to God. People are given different social power, position
and functions, and accordingly their virtues will differ. Thus, the virtue of a teacher is different from the
virtue of a priest. In the Varnashram Dharma (caste-based classification of duties) of Hindu philosophy,
the four different classes of people are to perform different functions, and therefore their virtues will be
different.

The nature of virtue also differs from country to country and from time to time. In Greek society, pride is
regarded as a great elite virtue, but it is not so in India. In some countries, courage is the most important
virtue but not in others. In the olden days, simplicity was regarded as a prime virtue, but now it is regarded
as foolishness to many. To be clever is an ideal virtue in the modern world. Thus, virtue has a contextual
connotation, and therefore, it is a relative term.

Criticisms against Virtue Ethics

● Virtues are not enough for enhancing social welfare which depends on some right overt action. Virtues
are covert qualities. Unless virtues are translated into action, there is no social welfare or personal
improvement or gratification.
● At times, it becomes very difficult to distinguish between virtues and values, and to that extent, virtue
ethics loses its importance as a separate branch of ethics.
● Virtues may be looked upon as vice. For instance, in Aristotle’s Greece, humility was a vice but to
Christians, it was a virtue. There is no clear-cut classification of unique virtues.
● A man may possess some virtues, yet he may be a bad man. For instance, a man may possess courage,
prudence, justice and temperance (the four classic virtues) and yet he may be angry, cruel, nasty and
vengeful.
● Virtue ethics fails to address the dilemmas that arise in applied ethics. For instance, in the case
of abortion virtue ethics does not give any direction.

Integrating Utility, Rights, Justice, and Caring

So far, we have outlined four main kinds of basic moral considerations:

1. Utilitarian standards - must be used when we do not have the resources to attain everyone's objectives,
so we are forced to consider the net social benefits and social costs consequent on the actions (or policies
or institutions) by which we can attain these objectives.

2. Standards that specify how individuals must be treated - must be employed when our actions and policies
will substantially affect the welfare and freedom of specifiable individuals. Moral reasoning of this type
forces consideration of whether the behavior respects the basic rights of the individuals involved and
whether the behavior is consistent with one's agreements and special duties.

3. Standards of justice - indicate how benefits and burdens should be distributed among the members of a
group. These sorts of standards must be employed when evaluating actions whose distributive effects differ
in important ways.

4. Standards of caring - indicate the kind of care that is owed to those with whom we have special concrete
relationships. Standards of caring are essential when moral questions arise that involve persons embedded
in a web of relationships, particularly persons with whom one has close relationships, especially those of
dependency.

One simple strategy for ensuring that all four kinds of considerations are incorporated into one's moral
reasoning is to inquire systematically into the utility, rights, justice, and caring involved in a given moral
judgment. One might, for example, ask a series of questions about an action that one is considering: (a)
Does the action, as far as possible, maximize social benefits and minimize social injuries? (b) Is the action
consistent with the moral rights of those whom it will affect? (c) Will the action lead to a just distribution
of benefits and burdens? (d) Does the action exhibit appropriate care for the well-being of those who are
closely related to or dependent on oneself? Unfortunately, there is not yet any comprehensive moral theory
to show when one of these considerations should take precedence.
Why Ethical Problems in Business?
Business ethics is the systematic analysis of ethical principles pertaining to business, industry, commerce,
trade and other related activities, institutions, beliefs and practices. Business ethics is the sum-total of
rules and principles which can be regarded as the standard norm to evaluate and guide business activities.

Business ethics is necessary to give guidance to uphold the interests of stakeholders including consumers,
shareholders, suppliers, distributors and investors. Business ethics is necessary to remind the business
firm that it is the moral duty of the firm as a part of society to undertake some social responsibilities. The
following are the five primary objectives of business ethics:

Objectives/Purposes
● Business ethics teaches us the ethical rules and principles that are relevant for business.
● Business ethics is concerned with the application of ethical standard and values to business.
● Business ethics teaches the manager as to how to run the business on ethical lines.
● The rules of business ethics enable a business firm to identify the areas which are not practicing ethical
principles and therefore can prescribe the necessary ethical code.
● Business ethics can help a firm to make business decisions and strategy which are morally fair, just and
consistent.

Business behaviour in the macro perspective is based on mutual trust, faith and consideration. This trust is
found generally between employer and employee, customers and sellers and suppliers and purchasers.
These relations have to be based on some tacit normative moral standards. Thus, ethics can be very useful
for running a business successfully. The importance and significance of BE can be summarized as given
below.
● BE provides a broad framework for giving guidance to all those who run the business. This guidance is
based on certain moral principles that we derive from ethics. Without such a framework, business may go
haywire.
● A company based on ethical principles is trusted by all the stakeholders like customers, suppliers,
employees and the public. The visible and invisible benefits of such a trust may not be quantified in the
short-run under all circumstances but its benefits can be realized in the long-run.
● A business based on ethics improves its social image which gives it a long standing goodwill and
financial pay off at the end. A better public image brings about many types of positive externalities and
consequences.
● Business ethics improves and strengthens organizational culture at all levels both within and without.
When the whole organization is motivated by a unified culture, the milieu of work and motivation,
compliance and respect for the company automatically improves. This is indeed a great advantage for not
only making a policy but for its implementation as well.
● The strategic value and decision-making goals of a business concern are founded on ethical beliefs and
values and not on its balance sheet position and profit mark-up. While monetary norms are transitory,
ethical values create a solid foundation for all time to come.
● A company run on the basis of business ethics can avoid many types of work-related conflicts both
within and outside the firm. The principles of fairness and justice in running the firm save it from many
possible harms, injustice, unfair discrimination and exploitation. Even if there is any conflict, it can be
hoped to be solved on the basis of cooperation, justice and fairness.
● A business firm that is run on ethical principles can save a lot of money every year as it can avoid
criminal and legal involvement. Indeed, the economic costs of sin are very high.
● Many types of market failures that arise from misleading information, lack of transparency, non-
absorption of harmful externalities of firms can be prevented by ethically run organizations. Needless to
add, the economic cost of market failure in any society is indeed prohibitively high.

Ethics in Marketing
What is Marketing Ethics?
● Honesty in all marketing transactions
● Responsibility for the goods sold
● Openness in all dealing
● Fairness in all the deals (absence of cheating or deception at any stage)
● Respect for human dignity
● Disclosure of information regarding the product
● Selling products that are not harmful or injurious
● Absence of unethical means to sell the product (no unethical advertisements)
● Charging fair prices
● Truthfulness in disclosing the quality and effect of the product being sold (no hiding of information)

The British Code of Advertising Practice is based on the four fundamental ethical principles— Truthfulness,
Legality, Honesty and Decency. CP Act 2019.

Unethical Practices in Marketing

Products: These are not always safe and harmless. They may be adulterated, qualitatively poor and may
contain some substances whose effect on health may be dangerous. The buyers may be ignorant about the
long-run impact of the ingredients.

Pricing: Dealers and manufacturers often charge either too high (skimming or gouging) or too low
(predatory or penetrating) pricing. There are many methods of price fixation but manufacturers often
indulge in charging unethical prices and not just prices. Predatory prices are charged to eliminate
competition, often unethically.

Packaging: Does not often mention the safety instruction or level and no expiry date. Packaging may be
done with harmful materials like plastics.

Placing (Distribution): May be often uneven but, certain products are not distributed in all the areas and an
artificial scarcity is created by the dealers to charge higher prices.

Promotion (Advertisements): Promotion of the product through advertisement is the most unethical part of
marketing.

Advertisements: As H.G. Wells once remarked, advertisement is a sort of legalized lying. Very often it
makes false claims, and is deceitful and implies cheating. The products which are used for slimming,
improving skin colour and hair growth might be misleading and false.
Ethical consumerism has therefore take into account many policies, rules and provisions to ensure
consumers’ rights. The following are the major issues that consumer ethics is now trying to address:
● The first and foremost issue is the consumer protection and safety.
● Consumer organization is looking after the interest and welfare.
● Assurance about product life, product safety, reliability and maintenance.
● Disclosure of all necessary and relevant information about the product.
● There should be no information asymmetry about the product between the seller and the buyer.
● Proper marketing and advertisement ethics for selling products.
● Proper product labeling with warnings and methods of use.
● Protection against unfair trade practices and unfair and false advertisement.
● Consumers’ grievance cells run by the state.
● Strong consumer organizations and agencies.
● Consumer-seller relations agencies.
● Consumers law and policy.

Ethics in Finance
There are, fundamentally, two objectives of financial management. First, in the short-run to maximize
profits and to plough back some part of this profit. And second, to maximize wealth or company assets.
Ideally, the financial sector of a company is motivated by some operational and social desiderata. These
are:
Operational Desiderata: ● To ensure that adequate amount of finance is available when it is necessary to
make an investment. ● To efficiently use the financial resources for the benefit of the company. ● To make
safe and sound investment that generates a stream of cash flow. ● To ensure that investments lead to net
benefits over costs.

Social Desiderata: ● To make timely payments of wages, interest and taxes, a reasonable amount of
dividend. The social desiderate also may include, in some cases, a payment for social work to fulfill social
responsibilities.

A proper financial management, however, depends on the correctness of information and its flow. If there
is an uneven flow of information across the market, the financial market dynamics cannot work in an
optimum way.

The manager is accountable and answerable to the management authorities or board about the justification
for each and every type of payment made by him or his department. This accountability is a sort of
ownership corporate financial responsibility. Accountability slots well with transparency in a responsible
managerial function. Transparency implies the openness with which the financial functions are discharged;
there is nothing secret or confidential and everything is available for examination and verification.
However, a business world is not the citadel of ethicists or philosophers. It is a world of materialist
acquisitions. Here, growth or development does not mean what you are but what you have, and in
discharging the duties as a financial manager or officer, many unethical activities are performed by them,
some of which are listed as under:
Unethical Financial Practices
● For gathering money for investment it is necessary to show that the financial health of the company is
very safe and sound. Hence, the company cooks the financial data and manipulates them to suit the
requirements. The cooking of data is also known as creative accounting.
● The share prices are artificially raised without any economic fundamentals justifying this action. In
this context, the Harshad Mehta case of Financial Scam is a pointer. In order to raise the share prices, in
the prospectus, the company’s performance is glorified. The public is cheated this way. There may be
some government rules and regulations, but there is a regulatory capture where government officials are
bribed.
● Insider Trading is a very notorious form of financial practice. People having inside information buy
most of the shares of a company when the conditions are very favourable, and the outsiders get less
number of such shares. It is one of the undesirable situations when company executives pass the
information on to some selected people.
● Merger of companies may be a financial stunt. A good company merges with an old company in order
to evade taxes or to reduce competition. creating unusual delay in making payments to suppliers, taxes,
excise duties and other legal payments.
● Many companies open accounts in different banks to avoid taxes and avoid adjustments against loans.
● Companies may create many independent subsidiaries and make ‘benami’ property transactions to
avoid payments to government and taxes.
● Financial irregularities also include cheating employees in the matter of payment of regular wages,
medical bills, bonus, LTC, children’s tuition fees, and so on.
● Companies falsify bills of purchase to inflate cost in order to reduce taxes.
● Loans are often taken from those institutions which are ready to do some personal favour.
● Sometimes, excessive or inappropriate trading on behalf of a client is done by a broker. This is called
churning. It is a breach of fiduciary duty.
●Many a time a company does not share the correct information in the stock market. It commits fraud and
there is information asymmetry. The practice is unethical.
● The banking sector is not free from fraud. Several types of frauds are committed in the banking sector
as well.

Unethical Practices in Accounting

● Misappropriation by not recording the cash receipts.
●Misappropriation of cash payments..
● Misappropriation of goods by wrong recording of sales and supply or by theft, or by showing damages,
and so on.
● Manipulation of accounts may be done by showing higher values of assets, lower liabilities, higher
sales, and so on.

The basic task of an auditor is to bring to the surface the financial problems and loopholes of a company
and give it a direction and point out how to improve the situation and manage the company in a better
way in terms of finance and accounts.
Ethics in Human Resource Management
Narrowly defined, HRM consists of acquisition, development and utilization of workforce for the benefit
of a business organization. Broadly speaking, it includes recruitment, training, positioning, allocation,
motivation, performance appraisal, promotional policy, welfare consideration, workforce strategy and
policy, forecasting of workforce demand and supply, and developing a committed workforce through a
healthy relationship between the employer and the employees and also between the employees themselves
to work as an organized team.

There has been a paradigm shift of emphasis on the recruitment of people based on hard skill or academic
qualifications to overall personality endowment, or what is called soft skill development. In the days of
value-based management, the emphasis has shifted from the creation of physical productivity to value
creation that includes the idea of value added as well as ethicality and human values.

Challenges in HRM
 The training of workforce poses a challenge. Not only does it involve funds but also a choice of the
right type of training that the organization will need both in the short-run and in the long-run.
 The problem of brain drain is a real challenge to those organizations that need highly qualified
workforce.
 To maintain allocative efficiency where the productivity of a factor is just equal to its remuneration, is
also a challenge.
 The removal of discrimination is a tricky issue. The discrimination may be due to age, race, caste,
religion, and so on.
 Pay differences among various ladders of services or jobs are substantial in some firms.
 There may also be a problem of alienation among some employees; it may be an alienation from the
product, alienation from organization and alienation from the working environment.
 Many foreign organizations believe that there is an economy in high wages. High wages should lead
to higher labour productivity. It comes under the scheme of incentives. But how the individual firm
should go about it and how to make sure about its effectiveness in micro perspective are some of the
critical challenges in HRM.
 While it is accepted in principle that there should be a balance between the economic efficiency of a
firm and its ethical policy-making, nobody is sure as to how to bring this balance through a change in
wages and salaries.
 To enhance the contestability of employees through capability expansion is perhaps one of the
greatest challenges in HRM today.

Ethical Dilemmas in HRM

●In the matter of promotion, whether one should give special preference to his relatives or friends, or
caste and religion?
● Should the manager follow the policy of divide and rule by making a rift in the trade union leaderships?
If he does so, he can control the work perhaps in a better way. But is it moralistic to do so?
● The use of women and children will reduce the wage cost. Is it morally all right to use child labour?
● Many MNCs practice what is called the policy of race to the bottom so that at the lower end of the
employment ladder, wages are reduced, and the workers who are affected are mostly women and manual
workers. This is profitable for the firm, but is it morally correct?
● Should the firm declare a generous bonus at the end of the year or a stingy one?
● By exploiting labour (that is, by paying less wage than productivity) the company can gain much, but is
it morally permissible?
● Should discrimination be permitted? It may allow the firm to get some egoistic satisfaction or earn
more profit. But is it not morally oblique?
● Given the resource endowment, a firm can increase the wage level and reduce the level of employment
or wages may be lowered to employ more people. Which alternative is ethically correct?
● The firm can practice the policy of hiring and firing of labour without giving any prior notice. This is
done in China with the connivance of the government. But is it morally justified?
● The choice of technique of production is itself an ethical issue. If labour-intensive method of production
is used, productivity per labour may be lower but employment can be given to a large number of
labourers. However, if the capital-intensive method of production is used, labour productivity will go up
but labour employment will go down.

Unethical Practices in HRM

There are rampant unethical practices in HRM. Some of those practices are listed as under:
● Many firms use discriminatory policies in recruitment, promotion, wages payment and even in work
allocation. This includes gender and caste or religious discrimination.
● Firms often do not care for safety, health, job satisfaction and comfortable working environment.
● HRM policies may be absent or biased with respect to promotion, recruitment, reward and punishment.
● Workers’ rights and unionism are not looked upon favourably by employers.
● While practicing downsizing and lay-offs, sufficient prior notice is not given to employees.
● Many firms are engaged in exploiting workers by giving them unjustifiably lower wages.
● Sometimes privacy is not allowed and this goes against the women workers.
● Forced labour and child labourers are used by many firms.
● Hiring and firing policy is extended too far to threaten the workers.
● Sexual harassment prevails in many firms in both overt and covert forms.
● Industrial disputes are solved high-handedly without much consideration for the inferior economic
status of workers. Conflicts are not settled through negotiations and co-operations.
● For the exploited workers, compensatory justice policy is either delayed or completely denied. No
affirmative actions are permitted.

Ethics in Compliance
In business ethics contexts, compliance generally refers to a company’s or a business person’s conformity
with relevant laws and regulations—that is, following the rules set out by government. In its slightly broader
sense, a focus on compliance may also imply a focus on adherence by employees on the organization’s own
internal rules.
Many large businesses today have entire compliance departments, typically consisting of a special team of
lawyers (and others) whose job it is to make sure that the company remains in conformity with the laws
and regulations applying to its activities. Given the very wide range of laws and regulations to which
modern businesses are subject, this can be a very substantial task. Big companies regularly engage in
compliance training, which both expose employees to the relevant laws and regulations to which the
company is subject and the practices and procedures for conforming to them in the performance of their
duties.
Compliance and the means by which companies seek to ensure it give rise to interesting issues of corporate
culture. One worry is that a corporate culture emphasizing compliance is or may become a legalistic
culture—one emphasizing being (barely) on the right side of the law. Legalistic cultures may be corrosive
of creating or maintaining a values-based corporate culture—one in which a company’s norms and practices
reflect a commitment to ethical values greater than merely avoiding legal liability or punishment. The
converse worry is that a corporate culture emphasizing ethical values may find employees engaging in well-
meaning activity that may inadvertently expose the company to legal liability or punishment for failing to
observe the often arcane, technical requirements of the law. Thus, finding and maintaining the right balance
of commitment to legal compliance and to ethical values is an ongoing challenge of corporate culture.

Principles of Business Ethics

1. Principle of Conscience – This principle is based on inner-feeling of persons to analyse the sense of right
and wrong. On this basis the businessmen can determine different roles and behaviour at their levels.
2. Principle of Wishless Work – This principle emphasise that there is no need to perform all the task to be
self-centered or self-interest. Accordingly, we should perform all the role and behaviour to another person’s
for their esteemed interest. We should be devoted to our efforts to do the work for others.
3. Principle of Esprit – According to this principle, businessmen should give due attention to make best
possible services and try to develop the feelings of devotion and truthfulness in services. All the behaviour
and activities should be based on values and service motive in business.
4. Principle of Publicity – According to this principle, all the activities and performance as conducting in
business houses, should be well informed to every person or organisation who are directly or indirectly
attached with business. It aims to remove the doubtfulness and misunderstanding among people.
5. Principle of Purity – It is most needful that every businessman should follow the politeness, truthfulness
and tolerance for developing the feelings of mental peace. At the same time, the mental peace and purity
also becomes the ways for politeness and tolerances etc.
6. Principle of Humanity – It is needful that every businessman should follow the human values, human
decorum and human aspects within their policies, programmes and different working areas. The ethical
behaviour may determine the path of humanity.
7. Principle of Universal Values – It is required that every businessmen should conduct and perform the
task and different business activities to be based on universal assumptions, customs and overall accepted
norms and principles by society.
8. Principle of Commitment – According to this principle, every businessmen should be able to fulfill their
commitments and assurances as given to other persons. The implementation of commitments should be
based on honesty and responsiveness.
9. Principle of Rationality – On the basis of the ethical code of conduct, every businessmen should analyse
and evaluate the good or bad, right or wrong, ethical or unethical aspects within their business transaction
and day to day working of the business houses. They must follow the rational attitudes and behaviour.
10. Principle of Communicability – According to this principle, there is a need to make effective means of
communication with the internal and external persons as engaged with business houses. The
communication should be in cleared, open and justified manners.
11. Principle of non-Cooperation in Evils – It is needful that businessmen should try to make non-
cooperation or discourage the evils, misconduct and unethical behaviour not only with different customers
but with society also.
12. Principle of Cooperation with Other – Ethical norms motivate the feeling of collaboration and team
spirit. It is required that on the basis of capacity and available resource, the businessmen should make full
cooperation to different other persons as per their good conduct and value based behaviour.
13. Principle of Satisfaction – Every businessmen are required to create and develop their role and
behaviour to establish pleasure and happiness with other persons and the society at large. Fore mostly, in
business as per their products and services, the customers should be satisfied at every stage.
14. Principle of Coordinate Ends and Means – The businessmen should try to make a coordinating or
balancing form between their ends and means within their work performance and its allied activities. They
should develop their ventures within the limitations of resources and capacities.
15. Principle of Due Process – All the persons and different employees, as engaged in business are required
to involve in decision making process and different important task. Businessmen should follow a reasonable
and justified working process in their organisation.
16. Principle of Liking in Expectations – In order to establish the ethical norms and conducts in business, it
is required to follow all these good and acceptable behaviour by businessmen. They must give and perform
some excellence examples as per the expectations of others.
17. Principle of Transparency – Ethics denotes the concept of purity and truth. All the business activities
and transactions should be well informed with justified manners with their different stakeholders and
society.

Ethical Implications of Organization Structure

In general, in a centralized organization structure, the down-top communication is few and far between,
and there is also an absence of personal contact, relationship and concern. Thus, the employees at the bottom
have practically no chance to communicate to the top level bosses. It is this distance that makes the medium
level and lower level employees somewhat aloof and alienated from the mainstream culture and ethos of
the organization, and because of the communication gap, the lower level employees often engage in many
unethical activities such as bribe, gift-taking and so on for favours done to outsiders. They may also run
sweat shops, use forced labour and illegal immigrants for the factory work. This may be done without the
knowledge of top level bosses as they never visit the production centre of the factory. In fact, lack of
communication, and absence of direct supervision by top level employers can lead to many unethical
practices in and outside the factory premises. Unless the ethical culture is put into the communication flow
and all the official activities by a motivated leader, the employees in a centralized system do not have the
feel and compulsion to work ethically.

Contrary to the ethos of a centralized system, a decentralized system is more informal with personal contact
and communication. In such a system, the flow of information is very quick and information asymmetry is
almost conspicuous by its absence. So, any unethical behaviour by an employee promptly comes to the
notice of everybody through grapevines. It is very difficult for an unethical person to survive there for a
long time, as he is caught and condemned sooner or later. Official ostracism is the cost of an unethical
behaviour. Thus, an unethical aberration can be corrected more easily in a decentralized system than in a
system which is centralized. A decentralized system can resolve, or even avoid, many ethical dilemmas
more promptly through informal discussion, as the system is more democratic.
In a centralized system, however, corruption and similar other unethical practices get institutionalized over
time, and it is very difficult to remove them. In fact, it takes a long time to unearth unethical practices as
they get entrenched. The procedure is too formal, cumbersome and lengthy. However, if a person is found
guilty of any serious unethical aberration, he is dismissed from the job. However, the bottom line is that
certain unethical practices are possible in both centralized and decentralized types of organizations. But in
a centralized system, it takes a long time for the unethical cultural rooting and the elimination of such a
behaviour, as compared to a decentralized system where minor unethical aberrations may come and go
without rooting and sprawling.

The following are some of the ways through which both personal and organizational integrity can be
strengthened:
● The employees must be held responsible for any unethical action whether that action is taken on behalf
of the organization or on a particular employee’s own behalf.
● The organization must develop a code of ethical conduct for everybody.
● Personal integrity should be the guiding principle everywhere whether at work or in the private domain.
Once this is distilled in the sub-conscious mind, it will become a part of individual behaviour.
● It is necessary to understand right and wrong very objectively both in the case of personal activities and
also in organizational matters.
● The organization must encourage right, ethical leadership and it will ensure that ethical personal
behaviour converges with that of organizational behaviour. The leader must circulate the advantages of
ethical behaviour and action for all concerned and also for the growth of organization.
● The manager should be responsible for the maintenance of an ethical ambience through the functioning
of ethics committee which will work on the basis of reward-punishment principle. A carrot-and-stick
policy should be used to carry out proper functioning.
● Consistent ethical behaviour and commitment to the idea of growth of the company will strengthen both
personal and organizational integrity.

SOME MAJOR UNETHICAL BUSINESS PRACTICES

Sexual Harassment at Workplaces: It includes many types of offences including sexual advances, requests
for sexual favours, avoidable physical contacts, request for dates, and so on. In the name of good business,
girls of nubile age-groups are sent to different places and persons to gain business favour, contract and
orders. This is often done sometimes by alluring the poor girls with higher pay and promotions, and
sometimes, it is done without the consent of these helpless girls.

Forced Labour and Bonded Labour: In India, bonded labour and forced labour in the rural and urban areas
is around two per cent of the total labour force in the country. The incidence is higher in the rural than in
the urban labour market. Bonded child labour is widespread in many parts of Andhra Pradesh, Uttar
Pradesh, Orissa and Bihar. Child labour is rampant in the carpet industry of Uttar Pradesh in India. Other
industries include tea faming, stone quarrying, fireworks, fishing and cigarette making. Children are also
forced to serve as domestic servants, road-side beggars, prostitutes and shop boys in many Third World
countries. These children never get the opportunity to go to school.

Sweat Shops: These shops are abundant in a country like India and include the places where all types of
manual, unskilled and women labourers have to work to eke out a living. They make toys, shoes, and cheap
quality consumer goods. The wage is very low and irregular and the working conditions are inhuman, to
say the least, with no fans, sometimes no electricity, no pure drinking water and no sanitation facilities.
Numerous abuses are reported in sweat shops but no one cares.

Discriminations: Various types of discriminations including gender discrimination, age discrimination, and
racial and minorities discrimination are openly practiced by business houses. Favouritism, nepotism and
casteism dominate the job market in India. Discrimination is prevalent not only at the entry point but also
in job allocation and promotion. There are also glass ceilings that prevent the ethnic minorities and women
to reach the upper echelons of the corporate sector in many countries including the United States. In United
Sates, the Hispanic, the Asian American and the African labourers do not have the same wage structure.
There are serious wage and job discriminations.

Fraud: A fraud is a type of theft by deception. Fraud may be a violation of civil law (Law of Tort) and/or
a violation of criminal law. A fraud is a deliberate misrepresentation of facts that causes the other party to
suffer loss or damage.

Theft: The corporate sector every year loses a huge amount of money through theft by disgruntled workers,
security personnel, store operators, suppliers, waste contractors, staff purchasers, and so on. Both big
officials and lower grade persons are involved in company theft.

Corruption: Corruption is the abuse of public offices and power for private gain. The gain may be financial
or in kind or any other temptation. There are many forms of corruption such as bribery, kickbacks, extortion
and the like. Absence of accountability and transparency and lack of proper control are the basic causes of
corruption. Corruption is anti-development as it misallocates resources, is anti-poor, anti-democratic and
anti-national, to say the least. Corruption is a function of many factors including personal values, social
values, nature of governance, the legal framework and institutional competence to combat corruption.

Code of conduct
Code of conduct in business is important to organize certain business activities. All codes of conduct in
business are based on the core values of the company, its mission and vision. Core values are the guiding
practices of the company and they are meant to be strictly adhered to by its employees and stakeholders.
The following are the standard codes of conduct in business:
● Compliance with laws, rules and regulations.
● Working with honesty, integrity and diligence and on the basis of work ethics.
● Respect and honour for human rights.
● Everybody should follow the policy of the company and nothing should be done against the company.
● Confidentiality should be maintained and there should be no disclosure of confidential information at
any cost.
● Maintenance of company’s goodwill, assets and property.
● There should no manipulation, abuse or misuse of power and position and non-acceptance of bribery
and favour from others.
● Political connection and subscription to political parties are discouraged.
● No discrimination and harassment against any employee or stakeholders.
● Competition with another company can be done with honesty and fair trade practices.
● Non-development of cartels and monopoly practices.
● No insider trading.
● There should be accountability and transparency.
● Adequate disclosure of useful information inside the company is needed.
● The company should serve well the consumers and ensure adequate after-sales services.
● Goods to be produced by the company should be qualitatively good, reliable and moderately priced.
● To maintain adequate and effective health and safety measures and employees’ privacy.
● The company employees are to protect the environment and help the government in the achievement of
sustainable development.
● The company has to carry out the corporate social responsibilities.
● The whole business will be run on ethical principles for all concerned.

The aforesaid codes will have to be strictly observed by all concerned and if there is any willful violation
of the code, the offender will run the risk of departmental enquiry and even dismissal from the service. Any
conflict in this matter may be brought to the notice of the supervisor. If any other regulation comes in
conflict with the code of conduct in business, the code will be overpowering.

Code of Ethics
Beneficence: Concern for well-being and safety of clients
Nonmeleficence: Refrain from causing intentional harm to clients
Autonomy/Confidentiality: Respect client's rights and opinions
Social Justice: Provide services in a fair and equitable manner
Procedural Justice: Comply with institutional rules, local, state, federal, and international laws
Veracity: Provide comprehensive, accurate, and objective information
Fidelity: Treat colleagues and other professionals with respect, fairness, discretion, and integrity
Organisations have their own code of ethics, different professions have their respective code of ethics.

Best practices in ethics programme

1. Vision statement. A vision statement defines the long-term, most desirable future state for the
organization. The vision gives employees and managers a first screening test for decisions.
2. Values statement. A values statement defines general principles of required behavior. It’s the standard
against which decisions and actions are evaluated to determine if they meet the company’s and
employees’ requirements
3. Organizational code of ethics. A code of ethics gives organization-specific definitions of what’s
expected and required. The code of ethics should clarify the organization’s expectations. The code also
defines the consequences for failure to meet the standard.
4. Ethics officer. An ethics officer ensures that the ethics systems are in place and functioning. This
person monitors the organization to determine if it’s making a good faith effort to abide by its stated
values, that the code of conduct supports those values and that violations of those values are prevented
or detected and addressed.
5. Ethics committee. The ethics committee oversees the organization’s ethics initiative and supervises
the ethics officer. It’s the final interpreter of the ethics code and the final authority on the need for new
or revised ethics policies.
6. Ethics communication strategy. If employees are to know what’s expected of them and what
resources are available to them, the ethics officer must create a cohesive ethics communication strategy.
This strategy ensures that employees have the information they need in a timely and usable fashion and
that the organization is encouraging employee communication regarding the values, standards and the
conduct of the organization and its members
7. Ethics training. Ethics training teaches employees what the organization requires, gives them the
opportunity to practice applying the values to hypothetical situations and challenges, and prepares them
to apply those same standards in the real world
8. Ethics help line. Help lines aren’t just for reporting unethical conduct. They also make it easier for the
organization to provide guidance and interpretation of its expectations when the intent of an ethics
policy is unclear. Establishing an ombudsperson.
9. Measurements and rewards. In most organizations, employees know what’s important by virtue of
what the organization measures and rewards. If ethical conduct is assessed and rewarded, and if
unethical conduct is identified and dissuaded, employees will believe that the organization’s principals
mean it when they say the values and code of ethics are important.
10. Monitoring and tracking systems. It isn’t enough to track and monitor employee behavior. It’s also
critical to assess the extent to which employees accept and internalize the organization’s values and
ethics code.
11. Periodic evaluation. It’s important to assess periodically the effectiveness of any initiative, especially
an ethics program.
12. Ethical leadership. The bottom line is that ethics is a leadership issue. Leaders set the tone, shape the
climate and define the standards. If managers are trustworthy and trusted, if their motivations are
honorable and their expectations crystal clear, and if they’re paying attention to ethics as an integral
element of every business decision, then ethical problems will be rare.

Corporate Governance
Corporate governance is defined as holding the balance between economic and social goals and between
individual and communal goals. The governance is there to encourage the efficient use of resources and
equally to require accountability for the stewardship of those resources”. World Bank has given two
definitions of corporate governance (1999): From public policy perspective, “it is about nurturing a
company with accountability in the exercise of power and control over the company” and from the
perspective of the corporation, “corporate governance is relations between owners, management board
and stakeholders”.

Importance of corporate governance

● Accountability and transparency encouraged by corporate governance are essential for capital market
development in LDCs (less developed countries). All these ensure investors’ confidence and can help
overall investment climate in a country.
● Enhanced corporate productivity and efficiency through good corporate governance ensures economic
growth with social justice and development. Thus, it not only improves the economic conditions of people
but also enhances social welfare.
● A disciplined and controlled corporate governance can considerably reduce financial turmoil and can
ensure financial stability, both of which are crucial for economic growth and development.
● A good corporate governance can considerably reduce corporate fraud and corruptions. In such cases, not
only is public confidence raised but also the national prestige is enhanced.
● Competitive product and factor markets can be promoted and sustained by corporate governance. This
can ensure allocative efficiency in the management of scarce resources.
● A good corporate governance is necessary for successful international business as it increases confidence,
product quality, prices, social responsibility and environmental protection.
● A better social responsibility generated by a good corporate governance can enhance social development,
social welfare and public image and confidence. All these can help the corporations to build social capital
and trust.
● A good corporate governance ensures environmental protection and a sustainable development. This not
only reduces the public cost but can also ensure better human health.
● An ethically inspired CG ensures employees’ welfare and consumers’ welfare and is in favour of the
stakeholders’ interests. A good corporate governance does take into account the welfare of all the
stakeholders and thereby ensures justice and fairness to all concerned.

Mechanism of corporate governance

The mechanism of corporate governance works in two ways: control and promotion. The mechanism,
therefore, can be called the mechanism of controlled expansion. The mechanism of control aims at reducing
various types of inefficiencies and irregularities. The control mechanism works in the following ways:
● Control of executives. In order to make such controls effective, the controlling authority (may be Board
of Directors) has to have access to all the necessary information stock.
● The monitoring by the Board of Directors can be made effective through regular meetings of the Board
of Directors to identify and rectify the areas of potential conflicts, mismanagement and problems.
● The control mechanism encompasses both internal and external controls. The internal control mechanism
works through the Board of Directors’, internal audit committee and other personnel who can provide
intelligence about the operational efficiency or otherwise of the company, and the level of compliance with
laws and regulations. (Internal auditing is an important controlling mechanism to look into the veracity of
financial reporting and the financial status of the firm.)
● The provision of exernal and independent auditing is also an important mechanism to authenticate the
reports of internal auditing system. Sometimes, the internal auditing system may be engaged in window
dressing without caring for the actual status of the company. In such a case, independent external auditing
is very helpful. Statutory auditing is a good controlling mechanism for checking the corporate financial
mismanagement.
● Another mechanism of control over inefficiency is to introduce the system of efficiency based
remuneration for executives and employees. It should combine a system of incentive and punishment for
the assigned work.
● Overall, a system of checks and balances at all the levels of the company is what is urgently needed for
the success of a company. For this purpose, a committee may be constituted by indicting some honest
insiders and outsiders. The basic duty of such a committee will be to observe study and report against certain
abnormalities and irregularities.
● In any country, government regulations can be a good mechanism for controlling many odd practices
and aberrations. In India, Companies Act (1956) and SEBI (1992) form an important part of controlling
mechanism.
● A proper code of conduct for the managers and directors of a company can indeed go a long way as a
controlling mechanism. A code of conduct is both principle of corporate governance and also of corporate
mechanism to guide all the activities and duties.

Having said all this, it needs to be mentioned that a fool-proof corporate mechanism is necessary to control
all those inefficiencies which also arise out of moral hazards and adverse selection. Moral hazards occur
when the agent becomes too much dependent on a particular person (may be his boss or supervisor). Since
he thinks that his boss will do everything, he becomes inactive and inefficient. A wrong or adverse selection
may occur when a person has been selected wrongly because he might have suppressed any relevant
information. In both these cases, there may be a corporate inefficiency that needs to be eliminated.
Corporate governance mechanism, in order to be effective, must be made free from political interference
and control. In particular, inefficiency due to adverse selection is very likely to emerge because of political
pressure to accommodate sub-standard people in the corporate sector.

Principles of corporate governance

 The system must perform well in terms of economy and efficiency.
 It must be based on a comprehensive code of conduct for the participants.
 CG should be free from political interference
 Honesty and integrity on the part of all concerned
 based on all types of disclosures and transparency
 Accountability and responsibility both individually and severally
 proper recognition of the rights of every type of shareholders
 The Board of Directors should be properly constituted keeping a balance between the directors
coming from both inside and outside.
 The external auditors should be independent
 Presence of a clear dividend policy.
 Promotion of social safety and environmental sustainability

Duties and Responsibilities of Board of Directors

Since the Board of Directors is the heart and soul of corporate governance, it is empowered with many
duties and responsibilities of which the following are crucial:
● It works as a friend, philosopher and guide for the whole company. It gives direction, defines the
company’s strategy and plans and ensures that management translates those plans into action.
● It appoints independent directors.
● One of the important responsibilities of the board is to ensure that shareholders’ interest is given the top
priority.
● It gives direction and supervises the critical activities of the company.
● It is responsible for the maintenance of accountability and transparency.
● Monitoring the overall activities of the company (and also that of the CEO) is an important function of
the board.
● The fiduciary duties need to be performed with loyalty and good faith, and care and circumspection.
● It has been pointed out by many experts that the Chairman and the CEO should not be the same person,
as there may be a concentration of power, and it is argued that power corrupts itself. However, there is
no denying the fact that for the best functioning of the company their roles should be complementary and
not competitive.
● The board has to ensure that for the smooth functioning of the organization, the flow of information is
optimum and there is no asymmetry anywhere. There should be a maximum flow of information for all
concerned.
● The board draws critical action plans and programs and formulates policies for fulfilling corporate
social responsibilities which are now regarded as an essential corporate objective.
● The Board ensures the availability of financial resources.
● It approves annual budgets.
● It fixes up salaries and compensation.
● The board is obviously involved in all types of crucial decision-making processes. The board conducts
frequent meetings and makes plans and resolves issues.
● The board makes sure that the company is based on ethical principles and it is supposed to give ethical
leadership at different levels.
● The board appoints various critical committees and functions through them. The major committees are:
audit committee, remuneration committee and nomination committee.