TYBFM

Business Ethics & Corporate

Governance
 What is Ethics
 The word “ethics” derived from Greek word ETHOS
meaning – character, guiding beliefs, standards,
ideals and customs, etc.
 Branch of knowledge that deals with moral
principles that govern a person’s behavior or
conducting of an activity – business (Business
Ethics)
 Study of what constitutes right & wrong, good &
bad; changes from individual to individual and
organization to organization
 It goes beyond legal questions dealing in good or
bad and not legal or illegal
 Nature of Ethics
• Applied ethics (application of morals in
behavior and conduct)
• Related to human aspects
• Very old form and deep rooted to society
• Develops dignity to shareholders
• Provides code of business conduct
• Acts as guiding principles of business
 Need/Objectives of Business Ethics
• Acts as moral standards
• Developing socially responsible business
• Principles for business conduct
• Reconcile conflicting interest
• Resolve ethical dilemma
• Social contract
• Stressing the business responsibilities
 Advantages/Benefits of Business
Ethics
• Moral consciousness
• Self-interest
• Environmental pressure
• Legal imperative
• Enhancement of society
• Maintaining moral course in turbulent period
• Strong teamwork and productivity
• Employee development
• Guarantee that policies are legal
• Compliance with the law
• Strengthen the business
 Scope of Business Ethics
• Ethics in Compliance (abide by all laws)
• Ethics in Production (Green washing, eco-
friendly products)
• Ethics in Marketing (black marketing,
hoarding, misleading advertisements, price
discrimination, manipulation of supply)
• Ethics in Finance (window dressing, fake
reimbursements, insider trading, related party
transactions, bribery, over billing of expenses)
• Ethics in HRM (rights and duties and
relationship between employer and
employee)
 Stakeholders in business
• Shareholders
• Management & Employees
• Customers
• Suppliers
• Bank/ Financial organization
• Government
• Trade unions
• Society/Public
Basic Corporate Structure – Board of
Directors
 Roles & Responsibilities of BOD
• Building a powerful ethical program
• Execution of ethics training program
• Convey workers about ethical models
• Guidance & counsel to workers
• Enable employees to settle on ethical choices
• Form a Board Committee
• Assign supervisors from each division
• Report and resolve ethical breaches
• Disclosure of practices of company
 Key Functions of BOD
• Setting performance objectives,
implementation and monitoring performance
• Making changes in policies if needed
• Succession planning
• Protecting interests of all stakeholders
• Transparent board election process
• Managing potential conflict of interests
• Ensuring integrity in financial reporting
• Proper disclosure and communications
Factors influencing Business Ethics
• Personal ethics of employees
• Organizational culture (History, Founder)
• Organizational systems
• External stakeholders
• Cultural differences
• Knowledge of employees
• Organizational training
• Leadership in the organization
 Ethical Dilemma
Choice between two options
Which have impact on
i. Organization’s profitability
ii. Its stakeholders
Doing what is morally right resulting in a bad
outcome OR doing what seems morally wrong
but leads to better effects is an ethical
dilemma
One alternative has to be finally chosen
 Views of Ethical Behavior (Helps in
decision making)
• Utilitarian View (greatest number of people)

• Individualism View (long term self interest of

individuals)

• Moral Right View (protection of fundamental

rights)

• Justices View (fair and impartial)

 Steps in Ethical Decision Making
(Ethical Dilemma)
• Collect the facts
• Define the ethical issues
• Identify the affected parties
• Identify the consequences
• Identify obligations (principles, rights, etc.)
• Decide proper ethical action
• Implement the plan
Examples of Ethical Dilemma (Videos)
I. Burger Shops: Alternatives
• Do nothing
• Withdraw and destroy all products from that
particular city
• Withdraw and destroy all products worldwide

II. Sales Return order adjustment: Alternatives

• Adjust the amount in financial statements and
reduce bonuses
• First take bonuses then adjust the amount in
next month
 Measures to ensure ethics in
Workplace
• Having a code of conduct
• Open communication
• Announce ethics decisions
• Use of cross-functional teams
• Preparing a grievance policy
• Appointing an ombudsman
• Creating an atmosphere of trust
• Set an example from top

*(Ombudsman – official appointed to investigate complaints against

company or organization)
 Code of Ethics
Statements of values and principles
Determine the purpose of company
Clarify ethics of company
Set of written rules
Defines how people should behave
To control, guide, manage the behavior and
conduct
 Need for Code of Ethics
• Encourage, help and assist employees
• Making roles and expectations clear
• Manage stakeholder’s demands
• To increase participation of stakeholders
• Fulfill communicative functions
• Increase moral awareness
• A correcting function
 Objectives of Code of Ethics
• Ethical handling of conflict of interest
• Accurate disclosure in documents
• Compliance with law, rules & regulations
• Reporting of violations
• Accountability for its adherence
• Protect company’s reputation and legal
standing
6 Pillars of character – The Josephson
Institute of Ethics
To be considered while setting up an ethical
code:
I. Trustworthiness
II. Respect
III. Responsibility
IV. Caring
V. Justice & Fairness
VI. Civic virtue & citizenship
Principles for International Business
These principles were promulgated at the
Caux Round Table, Japan.
The United Nations Global Compact
Launched at UN headquarters – New York
On July 26, 2000

Encourage businesses to adopt sustainable and

socially responsible policies
Report these policies
Brings together UN Agencies, Labour group &
civil society
 The Global Compact Office is
supported by:
1. The United Nations High Commissioner for
Human Rights
2. The United Nations Environment Programme
3. The International Labour Organization
4. The United Nations Development Programme
5. The United Nations Industrial Development
Organization
6. The United Nations Office on Drugs and
Crime
 4 Areas & 10 Principles of Global
Compact
1. Human Rights:-
a) Principle 1: Businesses should support and
respect the protection of internationally
proclaimed human rights &

a) Principle 2: Make sure that they are not

complicit in human rights bases
 4 Areas & 10 Principles of Global
Compact
2. Labour Standards:-
a) Principle 3: Businesses should uphold the
freedom association and the effective
recognition of the right collective bargaining;
b) Principle 4: The elimination of all forms of
forced and compulsory Labour
c) Principle 5: The effective abolition of child
Labour &
d) Principle 6: The elimination of discrimination in
respect of employment and occupation
 4 Areas & 10 Principles of Global
Compact
• 3. Environment:-
a) Principle 7: Businesses should support a
precautionary approach to environmental
challenges;
b) Principle 8: Undertake initiatives to promote
greater environmental responsibility &
c) Principle 9: Encourage the development and
diffusion of environmentally friendly
technologies
 4 Areas & 10 Principles of Global
Compact
• 4. Anti-Corruption:-
a) Principle 10: Businesses should work against
corruption in all its forms, including extortion
and bribery.
Sample of Code of Ethics
 Ethics Committee (ECs)
An independent body
Constituting independent non-executive
directors
Ensuring employee compliance with the
“CODE OF ETHICS”
Composition of Committee:
 Executives from various departments
 Independent non-executive director
 Outside third party consultant as Chairperson
 Evolution in India
ICMR Ethical guidelines were prepared under
the guidance of Justice H. R. Khanna in
February 1980
To establish a committee in all centres involved
in clinical research
Empower them to approve research projects
under clinical trials
Main aim is to safeguard rights, safety and
well-being of human subjects in trials
 2 Categories of ECs
1. Institutional EC/ Institutional 2. Independent Ethics
Review Board (IRB) Committee (IEC)

• A Board/Committee/Group • An independent body which

formally constituted by an is not part of any
institution institution
• Provide an opinion on • Protection of rights, safety
research projects involving and well being of the
human subjects human subjects
• Where IRB is not available, • Established in Mumbai,
approval from IEC is Ahmedabad, Delhi,
required Hyderabad, Bangalore and
other places
 Objectives of ECs
• Embedding ethical values
• Raise Board awareness
• Maintenance of ethical discipline
• Ethical conflict resolutions
• Monitors non-financial aspects
• Accountability of ethical conduct
• Reinforcement of Ethical culture
 Role & Functions of ECs
• Review activities that require formal ethical
standards
• Suggest behaviors to upper management
• Responsible for Ethics Compliance
• Due diligence of to be employees
• Communicating ethical standards & procedures
• Monitoring and auditing
• Disciplinary mechanism
• Analysis of violations
• Standard follow-ups
 Importance & Benefits of ECs
• Ensure good corporate citizenship
• Facilitate environment, health and safety
• Helps in improving consumer relationships
• Ensure smooth Labour and employment
• Creates stable operating environment
• Enhances reputation
• Higher Motivation and Productivity
• Mitigation of costs
• Better community relations
 Challenges in ECs
• Issues related to selection of members
• Relationship between members
• Perspective difference of individuals
• Criticism regarding its usefulness
• Unwillingness of management to form a
committee
• Managing Ethics within Ethics Committee!!!
 Ethics Training
 To enable all organizational members to
understand, share and apply the values stated in
the “Code of Ethics”
 Inculcate organizational ethics in its human
resources
 Help employees to deal with ethical problems
 Fosters employee compliance with organization’s
ethical vision
 Not only means informing employees but also
putting each individual in a position to
understand, interiorize and contribute to the
corporate mission achievement through their
choices and behavior
 Objectives of Ethics Training
• Empower participants to accept personal
accountability
• Respond to ethical challenges in the way
leaders want to
• Provide ethical problem solving model
• Helps in managing ethical issues by making
managers strong role models
• Provide “a ladder of escalation”
• Promote principle based decision making
 Key Features of Effective Ethics
Programme
• Top management support
• Ethics Committee on Board
• Ethics Officer or Ombudsperson
• Code of Conduct
• Incentives for compliance
• Sanctions for non-compliance
• Properly designed Ethics Programme
 Elements of effective Ethics Training
Programme
• Employment Terms
• Performance Appraisals (Behavior based
criteria)
• Board Level Committee
• Leadership Style
• Grievance Mechanism
• Decision Making Mechanism (Ethical
considerations in everyday decision making)
 Benefits/Importance of Ethics
Training
• Employees practice organizational values
• Enhances employee performance
• Enhances ethical awareness
• Give confidence to make right decisions
• Build good employer-employee relationship
• Provides strategic mileage
• Increased productivity
• Immediate solutions to stop unethical conduct
• Feedback to managers
• Positive economic benefits to whole society
 Challenges in Ethics Training
• Identifying ethical dilemma is the real
challenge
• Different points of views
• Relies on intuition than reasoning
• Difficult to train each and every worker
• Mode of training (E-learning/Face-to-Face/In-
Person Training)
• Can become ineffective
 Latest News Update on Ethics
 Big Four auditing firm EY has agreed to a record
$100mn settlement with the US securities
regulator to resolve claims that dozens of its
employees cheated on an ethics exam between
2017 and 2021.
The fine is the highest ever imposed by the US
Securities and Exchange Commission on an
auditor, twice the penalty paid by KPMG in 2019
for exam cheating and illegal tip-offs.
It’s simply outrageous that the very professionals
responsible for catching cheating by clients
cheated on ethics exams of all things.
 Few Ethics Training Examples
1. Kellogg’s - The reason behind Kellogg’s being a
successful global leader in the food industry is
the company’s code of ethics. The core of their
ethics is acting with integrity and building trust
among the employees.
2. Starbucks - The company has trained its
employees in such a way that they always
ensure that all these ethics are followed
seriously. Along with the employees, the
company has also educated its partners, board
of directors, contractors, etc., with their ethical
norms.

https://www.getimpactly.com/post/ethics-training-examples
 Few Ethics Training Examples
3. Pepsi Co. - Pepsi has defined a global code of
conduct for its employees, partners, customers,
and everyone related to the company. It is called
“The PepsiCo Way”. It defines the ethical
behaviour that the employees and partners need
to follow.
4. Sony Co. - The Sony group has defined its code
of conduct that must be followed by all the
employees, officers, and directors of the Sony
group. All these are based on the principles of
fairness, responsibility, honesty, integrity, and
respect.
 Few Ethics Training Examples
5. Microsoft - Microsoft’s Standards of Business
Conduct, known as its trust code, is one of the
successful examples of ethics training. This includes
various policies and laws that the employees need to
follow compulsorily.

6. L’Oreal - The code of ethics apply to all the

employees of the L’Oreal group as well as its
subsidiaries. These are very flexible and are
innovated as per the requirements and changes. To
create a better workplace, the employees are
obligated to follow and respect all these values and
principles.
 Ethical Decision Making Example
Volkswagen strategy to reduce its workforce
without layoffs:
Volkswagen cuts the workforce by not filling
empty jobs. For instance, Volkswagen does not
hire replacements for retiring workers.
Existing workers in Volkswagen’s German
operations will not face layoffs for ten years. No
layoffs are a smart policy because it increases
worker morale.
 Workers remaining after a layoff experienced a
20% decline in job performance and a negative
impact on stock performance.
 Ethical Decision Making Example
After layoffs, remaining working suffered a 41%
decline in job satisfaction, a 36% decline in
company loyalty, and a 20% decline in job
performance.
Workers are more likely to quit after seeing
colleagues laid off. Downsizing a workforce by
1% leads to a 31% increase in voluntary turnover
in the next year
Thus, Volkswagen is smart not to layoff workers.
However, history indicates the company could
still suffer serious losses from a smaller
workforce.
 Integrity Pact - Evolution
India is ranked 81st in the global corruption
perception index for 2017
These rankings released by Transparency
International named our country among the
“worst offenders” in the perceived levels of
public sector corruption
Most of the grand corruption in India occurs in
public sector procurement and the damage is
visibly inflicted upon development and
satisfaction of basic necessities like roads,
educational institutions, etc.
 Integrity Pact
Integrity Pact (IP) is a transparency and
accountability tool that allows bid participants
& public officials to agree on rules to be
applied to a specific procurement in public
contracting.
It is Anti-corruption tool and includes an
“honesty pledge” by which involved parties
promise not to offer or demand bribes.
Any entity that violates these terms is liable to
sanctions – blacklisting, contract revocation or
forfeiture of bid bonds.
 Integrity Pact
This is developed by Transparency
International (TI) and is the foremost
collective action tool for reducing the effects
of corruption.
This pact establishes mutual contractual rights
and obligations to reduce cost and prevent
corruption.
It covers all contract-related activities from
pre-selection of bidders, bidding, contracting,
implementation, completion and operation
committing neither side will pay, offer,
demand or accept bribes.
 Goals/Objectives of Integrity Pact
• To reduce the chances of corrupt practices
during procurement through a binding
agreement between the procuring agency and
bidders for specific contracts.
• To reduce corruption in the procurement,
privatization or licensing processes by
enabling companies
• To abstain from bribing, based on assurances
that their competitors will also refrain from
bribing; and
Goals/Objectives of Integrity Pact
• To enable governments to reduce the high
costs and distortionary impact of corruption
on public procurement, privatization and
licensing.
 Major Players and Stakeholders
Major Players: Main Stakeholders:
1. Central Vigilance 1. The Company i.e.
Commission Principal
2. Ministry of Finance 2. The Vendors/Bidders i.e.
Transparency Counter Party
International India (Civil 3. Independent External
Society) Monitor (IEM)
Other Stakeholders:
1. The Sub-contractors
2. Government
3. Civil Society
 Benefits of IP
• Discourage corruption & more efficient
outcomes
• Increased use of e-procurement systems,
simplified administrative procedures and
improved regulatory action
• Generate confidence & credibility
• Increase trust in public decision-making
• Enhanced access to information
• Promote transparent procurement
• Reduces conflict & distrust
 Challenges of IP
• All bidders should follow it
• Involves private behaviors, hence cannot be
ascertained whether it will be honored or not
• Honesty Pledges can be signed only for the sake
for it while continuing “business as usual”
• Difficult to find skilled third parties for
monitoring
• Training to third parties, making of checklist and
manuals might be needed
 Key elements for IP
• A pact (Contract) among a government office
inviting public tenders for supply,
construction, consultancy, etc. and those
companies submitting a tender for this
specific activity
• An undertaking by the Principal that its
officials will not demand or accept any bribes,
gifts, etc.
• A statement by each bidder that it has not
paid and will not pay any bribes
 Key elements for IP
• An undertaking by each bidder to disclose all
payments made in connection with contract to
anybody (agents, middlemen, family members of
officials, etc.)
• The above disclosure would be made either at
the time of tender submission or upon demand
by the Principal
• Undertakings on behalf of bidding company will
be made in the name of company’s CEO
• A pre-announced set of sanctions for any
violation by a bidder of its commitments or
undertakings
 Key elements for IP
Sanctions for violation:
• Denial or loss of contract
• Forfeiture of the bid security and performance
bond
• Liability for damages to the Principal and the
competing bidders &
• Debarment of the violator by the Principal for
an appropriate period of time
 Pre-requisite for the Principal entering
into MoU for signing IP with TII
• Clear understanding of IP implementation
process
• Share the Code of Conduct policy with TII
• Commitment to implement IP should be
reflected in words and deeds of the Principal
• Principal should take steps to communicate
internal staff about IP
• In case of changes in draft MoU & IP program,
TII should be consulted and final draft MoU &
IP Program should be shared with TII
 Pre-requisite for the Principal entering
into MoU for signing IP with TII
• All IEMs should be approved by CVC before
entering into MoU
• Principal, Vendors, IEMs should be present at
the time of signing IP
• MoU has to be signed by the Chair of the
organization.
 Process in implementing IP
• Establish an agreement for implementation of
IP
• Ensure maximum transparency at every phase
of the contracting process
• Agree upon the content of IP
• Civil Society Organization (CSO) selects
Independent External Monitor (IEM)
• CSO trains IEM
 Framework of IP
The UNGC Management model comprises of 6 steps in
implementation of principles of Global Compact:

1. Commit (making 10 principles part of day-to-day

operations)
2. Assess (assess risk & opportunities in financial
terms)
3. Define(define goals, strategies & policies)
4. Implement (implement strategies & policies by
educating employees)
5. Measure (monitor performance & progress against
goals)
6. Communicate(communicate progress and
improvement strategies to stakeholders)