1. Jayashree Sadri and Sorab Sadri
BUSINESS ETHICS AND
CORPORATE
GOVERNANACE
Professor Jayashree Sadri
And
Dr Sorab Sadri
2. Jayashree Sadri and Sorab Sadri
Definition
Corporate Governance is a system of
structuring operating and controlling a
company with a view to achieve long run
strategic goals. These goals are meant to
satisfy shareholders, creditors,
employees, suppliers and society at large
in such a manner that legal and regulatory
requirements would be met on the one
hand and society needs would be satisfied
on the other.
3. Jayashree Sadri and Sorab Sadri
WHO IS A STAKE HOLDER?
The definition of stakeholders was expanded to
include customers, creditors, employees,
purchasers and the public at large. Hence the
ambit of concern for corporate governance
expanded to cover all aspects of society.
The basic argument runs thus: An organization is
a social entity and impacts various sections of
society to each of which it owes an obligation. It
must be based on values that must conform to
the values of society in which the organization
exists.
4. Jayashree Sadri and Sorab Sadri
Corporate Governance and Values
Corporate Governance is thus viewed as a
value based system along which
companies are run, managerial activities
are judged and efficiency is achieved.
The concept of Corporate Governance
hinges on total transparency, integrity and
accountability of the management.
5. Jayashree Sadri and Sorab Sadri
Argument
The role of Corporate Governance is to
ensure that the directors of a company are
subject to their duties, obligations and
responsibilities to act in the best interest
of their company, to give direction and to
remain accountable to their shareholders
and other beneficiaries for their actions.
6. Jayashree Sadri and Sorab Sadri
Argument
Corporate Governance is in essence
determination of how companies are governed,
how executive actions are supervised and how a
company is accountable to regulations imposed
on it by law or other commitments to
shareholders.
One of the most important aspects of the modern
corporation is that quality, ethics and excellence
must be built into the system at the level of the
person, process and the product. In the process,
the corporation adopts the learning organization
mode of existence.
7. Jayashree Sadri and Sorab Sadri
Argument
However, all this is not possible unless the
Corporate Governance function is in place. This
needs managerial maturity, civic consciousness
and a high sense of values. It is no wonder
therefore that in organizations that have well
defined and empowered corporate governance
functions, the public perception is enhanced and
is reflected in higher share prices.
8. Jayashree Sadri and Sorab Sadri
Various committees on CG
Dr. J.J. Irani Report on New Company's Act 2005:
The aim of the report was to make the Directors on
the Board of companies both accountable and
empowered. The role and status of the independent
directors was consequently examined and
recommendations were made accordingly. Its notable
achievements include recommending the deletion of
Section 208 of the Companies Act 1956 under which
government approval was needed for payment of
interest on share capital and maintaining that
corporate governance cannot be regulated by law but
brought out through peer pressure. However, it may
be remarked that the small investor was somewhat
overlooked by the Irani Committee Report.
9. Jayashree Sadri and Sorab Sadri
Various committees on CG
Concept Paper on Companies Bill 2004 (Ministry of
Company Affairs, Govt. of India): Following the
recommendations of the Company Law Committee
known as the Bhabha Committee set up in 1950 the
Companies Act, 1956, was enacted with the object to
amend and consolidate the law relating to companies
and certain other associations by repealing the
Companies Act, 1913.
Concept Paper on Companies Bill 2004 (CII's Views): The
Companies Act, 1956, has been in force now for nearly
five decades. The present Companies Act, 1956, has
been amended in the past, for more than 20 times. The
proliferation and diversity of amendments aggravated
the complexities of the Law and its comprehensive
review became inevitable. However, no new path was
charted. Even FICCI voiced the concern that the Concept
Paper did not veer away from the bias towards
regulators and regulations. This over emphasis on
framing rules for every aspect of law may indeed do
more harm than good to Indian business.
10. Jayashree Sadri and Sorab Sadri
Various committees on CG
Clause 49 (2004) (SEBI): Listed companies in India (with paid-up capital of
Rs.3 crore and more) have to comply with the corporate governance
related provisions of Clause 49 of the Listing Agreement of Stock
Exchanges. Clause 49 has been prepared by the Securities and Exchange
Board of India (SEBI). SEBI has issued a circular dated 13th January 2006
amending certain clauses of Clause 49 of the Listing Agreement to take
effect from 1st January 2006. The changes proposed by SEBI were:
(a) the maximum time gap between two Board meetings has been
increased from three months to four months.
(b) .Sitting fees paid to non-executive directors as authorized by the
Companies Act, 1956 would not require the previous approval of
shareholders.
(c) Certification of internal controls and internal control systems by CEO/
CFO would be for the purpose for financial reporting.
Other changes are (i) the maximum time gap between two Board meetings
has been increased from three months to four months. (ii) Sitting fees paid
to non-executive directors as authorized by the Companies Act, 1956
would not require the previous approval of shareholders. (iii) Certification
of internal controls and internal control systems by CEO/ CFO would be for
the purpose for financial reporting. In view of the above, certain changes
have to be incorporated in the revised Clause 49 and The Stock Exchanges
have been advised to accordingly amend the listing agreement with
immediate effect.
11. Jayashree Sadri and Sorab Sadri
Various committees on CG
Confederation of Indian Industry (CII) in partnership with the Institute of
Company Secretaries of India (ICSI) and the Institute of Chartered
Accountants of India (ICAI) has set up the National Foundation for
Corporate Governance (NFCG). However this more of a debating and
discussion forum of experts rather than a decision making body. True,
decisions may emanate from these discussions and debates but the
conference can at best make recommendations.
Narayana Murthy Committee Report of the SEBI Committee on Corporate
Governance (2003): The Committee was constituted by SEBI to review the
performance of corporate governance in the country as well as to
determine the role of companies in responding to rumour and other price
sensitive information circulating in the market in order to enhance the
transparency and integrity of the market. The Committee submitted its
report to SEBI in February 2003. While the Naresh Chandra Committee had
recommended a nine year term for non-executive directors the Narayana
Murthy Committee recommended that it be restricted to three terms of
three years each running one after the other. But the main theme of
Narayana Murthy Committee was the fillip it gave to whistle blowers. In
short, someone could go straight to the top management bypassing the
superiors if any unethical practices were unearthed in the company. This
was taking the twin issues of transparency and accountability to new
heights. Understandably the bureaucratically inclined Company
Secretaries were quite critical of this as they saw in it the seeds of
depletion of their discriminatory power.
12. Jayashree Sadri and Sorab Sadri
Various committees on CG
Recommendations of the Naresh Chandra Committee Report on Corporate
Audit and Governance (2002): In the wake of the corporate scandals of the US,
the Department of Company Affairs (DCA), Government of India set up the
Naresh Chandra Committee to examine various corporate governance issues so
that the same may not be repeated here. Many recommendations of the report
were incorporated in the Companies (Amendment) Bill 2003, which is currently
being reviewed. It is indeed a pale shadow if not an imitation of the Sarbanes
Oxley Act 2002 (SOX) of the USA which deals with four things: (a) Corporate
Social Responsibility of management and setting up of Audit Committees (b)
Enhancement of financial disclosures in the larger public interest (c)
Independence of Auditors and Audit Committees to present a fair picture of
corporate ground level reality and (d) the Role of Public Company Accounting
Oversight Board. The Naresh Chandra Committee too the cue from SOX and
concentrated on the Company-Auditor relationship, Auditing the Auditors and the
Role, Status, Appointment and Training of independent directors on the board. A
deep study of the Committee Report would show that it lacks teeth. In point of
fact it strangely silent on what happens to Independent Directors if an Enron like
situation were to emerge.
13. Jayashree Sadri and Sorab Sadri
Various committees on CG
Kumar Mangallam Birla Committee on Corporate
Governance (1999): The Committee was set up by SEBI to
promote and raise the standards of Corporate Governance.
The Committee’s terms of reference included suggesting
suitable amendments to the listing agreement executed by
the stock exchanges with the companies in order to
enhance corporate governance standards of listed
companies, drafting a code of corporate best practices; and
suggest safeguards to be instituted within the companies
to deal with insider information and insider trading. Several
of the Committee’s recommendations were incorporated in
Clause 49 of the listing agreement of stock exchanges.
However there were two gaping lacunae: (i) the Committee
did not look beyond the stock exchanges as if the other
sectors of business did not need governance and (ii)
several corporate giants that were unlisted like TCS and
HLL were not covered by the Committee raising questions
of whether multinational expropriation of national wealth
could be audited adequately let alone checked.
14. Jayashree Sadri and Sorab Sadri
Various committees on CG
CII Code on Corporate Governance (1998):
The Confederation of Indian Industry (CII)
published India’s first comprehensive code on
corporate governance (Desirable Corporate
Governance: A Code) in 1998. This Code
was well received by Corporate India and
many of its recommendations became part of
subsequent regulations. It was a slow
beginning and it was evident there was a long
way to go further ahead.
15. Jayashree Sadri and Sorab Sadri
Cloned Capitalism?
After 1980 international trade opened up in newer
ways and increased communication systems
brought about an added transparency in
business. Free market capitalism became the
norm and competition in every conceivable
market began to increase. This increase in
completion meant that many people were fighting
for a bigger piece of the same pie. This meant
that a dog eat dog attitude emerged in the
business and industry sector where only the
fittest would survive.
16. Jayashree Sadri and Sorab Sadri
Fitness and Free Markets
If only the fit would survive what would happen to
those who were weak? Who would decide who
and what was fit and who and what was not fit?
Was it the market? The government? The
chambers of commerce? Or the company itself?
There was a need for market regulation: either
through the Smithian “invisible hand” or the
Keynesian “macro interventionism”.
17. Jayashree Sadri and Sorab Sadri
FITNESS WAS DEFINED IN TERMS OF:
Better Quality: the product or the service
was dependable.
Better delivery: the lead time between order
and receipt was cut down.Logistics became
important.
Better prices: People could afford to buy the
goods and services. Competition helped reduce
price levels.
18. Jayashree Sadri and Sorab Sadri
The Small Fry
However, when any one or more of the above
three things was absent people began to adopt
foul means for getting business. Trust, Faith
and Dependability on products began to be
questioned. So people went for known brands
whose products they could trust.
19. Jayashree Sadri and Sorab Sadri
The Smaller Fry
The smaller players suffered as a result of
business being diverted to the bigger
players and wanted a “level playing field”.
The governments intervened. Minimum
quality standards were laid down and hall
marks were placed on products declared
that they were good like the Agmark, ISI,
etc. A product or a service having such a
stamp was considered safe and
dependable.
20. Jayashree Sadri and Sorab Sadri
Public Acceptance
This led to a general acceptance of the
importance of Business Ethics and along
with it the realized need to have good
Corporate Governance.
21. Jayashree Sadri and Sorab Sadri
GOOD CORPORATE GOVERNANCE
ENSURED:
Company actions were guided by a set of known
and accepted values.
Companies acted in the best interests of society
at large since the organization itself was a
responsible social citizen.
Business Ethics was built into the system and so
was reflected in all actions.
22. Jayashree Sadri and Sorab Sadri
The Expanse of CG
Corporate Governance was thus not just about
corporate management. It was something
broader. It included:
- Fairness
- Efficiency
- Dependability
- Transparent Administration
- Well defined objectives.
23. Jayashree Sadri and Sorab Sadri
LINKAGE of CG with B E
Four points emerge from any definition of
Corporate Governance and show its link
with Business Ethics.
Effective accountability to all stakeholders.
Fair efficient and transparent administration.
Diverse interests have to be managed.
Competition needs to be tempered with some
sort of value system.
24. Jayashree Sadri and Sorab Sadri
Indian Government and Keynesian Style
Interventionism
This view taken implies that Government must
pay an increasing role as a referee, a counselor
and an active change agent so as to bring about
corporate governance. This can be done either
through legislation or through influencing
industry and business leaders in various forums
like the BMA, CII and FICCI. Special seminars can
also be organized to spread the message.
25. Jayashree Sadri and Sorab Sadri
What is expected from CG
An effective Corporate Governance system
should provide mechanisms for regulating
directors’ duties in order to restrain them from
abusing their powers and to ensure that they act
in the best interests of the company in its broad
sense.
Hence it moves from being a compliance
mechanism managed by regulators and
regulations into being a developmental tool
regulated through management strategy.
26. Jayashree Sadri and Sorab Sadri
BUT
Logically it is unfair to expect something
unless conditions for it have been laid down
and a system is in place to guide it.
In the case of Corporate Governance such
conditions and systems exist more by default
than by design.
27. Jayashree Sadri and Sorab Sadri
Hence
Corporate Governance is also concerned
with the ethics,values and morals of a
company and its directors.
Corporate Governance recognizes issues
like maintaining continuity by succession
planning, identifying opportunities, facing
challenges and managing changes within
the business and allocation of resources
towards the right priority.
28. Jayashree Sadri and Sorab Sadri
Two Routes To C G
The first route to Corporate Governance is
through the mechanism of regulators and
regulations and here it becomes rule
driven and compliance based.
The second route to Corporate
Governance is through the enabling of
business ethics via well planned and well
managed management strategies that are
goal driven and value based.
29. Jayashree Sadri and Sorab Sadri
The Need
Given the positivist nature of change in this
country the State must lead by example if the
effect is to percolate through various levels of
civil society.
This need is not adequately fulfilled by those
at the helm both in the economy and in the
polity.
What we then need is an empowered,
responsible, accountable and transparent
system of National Level Governance.
30. Jayashree Sadri and Sorab Sadri
Conclusion..
Governance is not only managing share market.
It relates itself with all aspect of management.
Governance is not only concerned with
compliance to rules but with overall corporate
growth.
WE TAKE THE SECOND ROUTE AND POSIT
THAT CORPORATE GOVERNANCE MUST BE
BASED ON BUSINESS ETHICS.