BUSINESS ETHICS,SOCIAL AUDIT &

COPORATE GOVERNANCE
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Business Ethics:
It determines the rightness or wrongness of actions of
businessmen.
Business Ethics is generally coming to know what is right or
wrong in the work place and doing what is right.
Business ethics are moral principles that guide the way
a business behaves.
Features:
• It determines issue that business houses face in operating
theircitizens.
business activities.
•It distinguishes b/w right or wrong, fair or unfair, just or
unjust.
•It is an important component of CSR that demands business
houses to engage in socially responsible behaviours.
•It demands that corporate houses should obey the law.
•It demands that the corporate houses should be good
corporate CITIZEN
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• It defines not just what business managers do, but also what they
should do.
• It is broader than law, there may be activities that are ethical but illegal
or unethical but legal.
• Importance:
1. Corresponds to Basic Human Needs:
• The basic need of every human being is that they want to be a part of
the organization which they can respect and be proud of, because they
perceive it to be ethical. Everybody likes to be associated with an
organization which the society respects as a honest and socially
responsible organization. The HR managers have to fulfill this basic
need of the employees as well as their own basic need that they want
to direct an ethical organization. The basic needs of the employees as
well as the managers compel the organizations to be ethically oriented.
2. Credibility in the Public:
• Ethical values of an organisation create credibility in the public eye.
People will like to buy the product of a company if they believe that
the company is honest and is offering value for money. The public
issues of such companies are bound to be a success. Because of this
reason only the cola companies are spending huge sums of money
on the advertisements now-a-days to convince the public that their
products are safe and free from pesticides of any kind.
3. Credibility with the Employees:
• When employees are convinced of the ethical values of the
organisation they are working for, they hold the organisation in high
esteem. It creates common goals, values and language. The HR
manager will have credibility with the employees just because the
organisation has creditability in the eyes of the public. Perceived
social uprightness and moral values can win the employees more
than any other incentive plans.
4. Better Decision Making:
• Respect for ethics will force a management to take
various economic, social and ethical aspects into
consideration while taking the decisions. Decision
making will be better if the decisions are in the interest
of the public, employees and company’s own long term
good.
5. Profitability:
• Being ethical does not mean not making any profits.
Every organisation has a responsibility towards itself
also i.e., to earn profits. Ethical companies are bound to
be successful and more profitable in the long run
though in the short run they can lose money
6. Protection of Society:
• Ethics can protect the society in a better way
than even the legal system of the country.
Where law fails, ethics always succeed. The
government cannot regulate all the activities
that are harmful to the society. A HR manager,
who is ethically sound, can reach out to
agitated employees, more effectively than the
police.
• 7. Threat of consumer boycotts.
• 8. Unethical business firms will invite
government regulations and interference
Business Ethics should consider:
• A business should aim to have fair dealing with
everyone dealing with it.
• 2. Ethics should be fixed for everyone working in the
organisation at any level and their implementation
should be linked with reward- punishment system.
• 3. Any violation of ethics should be detected at the
earliest and remedial measures taken immediately.
• 4. Business ethics should be based on broad guidelines
of what should be done and what should be avoided.
• 5. The ethics should be based on the perception of what
is right
Sources of Business Ethics:
1. Religion:
• Religion is the oldest source of Religion is the oldest source of ethical
inspiration. There are more than ethical inspirations. 1, 00,000 religions
which exist across the whole world, but all of them are in agreement on the
fundamental principles. Every religion gives an expression of what is wrong
and right in business and other walks of life. The Principle of reciprocity
towards one’s fellow beings is found in all the religions. Great religions
preach the necessity for an orderly social system and emphasize upon social
responsibility with an objective to contribute to the general welfare. With
these fundamentals, every religion creates its own code of conduct.
2. Culture:
• Culture is the set of important understandings that members of a community
share in common. It consists of a basic set of values, ideas, perceptions,
preferences, concept of morality, code of conduct etc. which creates
distinctiveness among human groups. When we talk about culture we
typically refer to the pattern of development reflected in a society’s pattern
of knowledge, ideology, values, laws, social norms and day to day rituals.
Depending upon the pattern and stage of development, culture differs from
society to society. Moreover culture is passed from generation to generation.
Culture facilitates the generation of commitment to something larger than
one’s individual self interest.
 Culture encourages the members of the organisation to give priority
to organizational goals over and above their personal interests.
Culture also serves as a sense making and control mechanism that
guides and shapes the attitudes and behaviour of people. Managers
have to run an industrial enterprise on the cutting edge of cultural
experience. The tension that their actions create makes the business
ethically more complex.
3. Law:
• The legal system of any country, guide the human behaviour in the
society. Whatever, ethics the law defines are binding on the society.
The society expects the business to abide by the law. Although it is
expected that every business should be law abiding, seldom do the
businesses adhere to the rules and regulations. Law breaking in
business is common eg. Tax evasion, hoarding, adulteration, poor
quality & high priced products, environment pollution etc.
 Below is a list of some significant ethical principles to be followed for
a successful business-
• Protect the basic rights of the employees/workers.
• Follow health, safety and environmental standards.
• Continuously improvise the products, operations and production
facilities to optimize the resource consumption
• Do not replicate the packaging style so as to mislead the consumers.
• Indulge in truthful and reliable advertising.
• Strictly adhere to the product safety standards.
• Accept new ideas. Encourage feedback from both employees as well
as customers.
• Present factual information. Maintain accurate and true business
records.
• Treat everyone (employees, partners and customers) with respect
and integrity.
• The mission and vision of the company should be very clear to it.
• Do not get engaged in business relationships that
lead to conflicts of interest. Discourage black
marketing, corruption and hoarding.
• Meet all the commitments and obligations timely.
• Encourage free and open competition. Do not ruin
competitors’ image by fraudulent practices.
• The policies and procedures of the Company
should be updated regularly.
• Maintain confidentiality of personal data and
proprietary records held by the company.
• Do not accept child labour, forced labour or any
other human right abuses.
Social Audit:
• Social Audit may be defined as a systematic
assessment of the social impact of a
business firm.
• It is a critical examination of the activities
of a company in order to measure ,
evaluate and report the impact on the
immediate social environment.
Objectives:
• To improve social performance of company
• To boost the public image of the company.
• To assess the type of social and environmental influence that
the company has in its local community.
• Another aim is to make a judgment of the material and
monetary shortfalls between the needs of the community
and the assets that are available for the development of the
local society.
• Another aim of social audits is to make local social service
providers and other beneficiaries aware of the needs of the
community.
• Yet another is to provide information needed to improve the
effectiveness of programs designed to enhance community
development.
Advantages:
• Helping the community with planning
• Supporting democracy in the local community
• Promoting community involvement
• Benefiting individuals and families that are poor or
disadvantaged
• Promoting decision-making as a community and
the sharing of the responsibilities
• Assisting with human resources growth and
development
• Enhancing the company's image in the eyes of the
public
Corporate Governance:
• Corporate governance is the system of rules, practices and
processes by which a company is directed and controlled.
CG can be defined as “the system by which companies are
directed and controlled.”
• Corporate governance refers to the accountability of the
Board of Directors to all stakeholders of the corporation i.e.
shareholders, employees, suppliers, customers and society in
general; towards giving the corporation a fair, efficient and
transparent administration.
• It means carrying the business as per the stakeholders’
desires. It is actually conducted by the board of Directors and
the concerned committees for the company’s stakeholder’s
benefit. It is all about balancing individual and societal goals,
as well as, economic and social goals.
• Corporate Governance is the interaction
between various participants (shareholders,
board of directors, and company’s
management) in shaping corporation’s
performance and the way it is proceeding
towards. The relationship between the owners
and the managers in an organization must be
healthy and there should be no conflict
between the two. The owners must see that
individual’s actual performance is according to
the standard performance. These dimensions
of corporate governance should not be
overlooked.
Principles of Corporate Governance:
• (i) Transparency:
• Transparency means the quality of something which enables
one to understand the truth easily. In the context of
corporate governance, it implies an accurate, adequate and
timely disclosure of relevant information about the operating
results etc. of the corporate enterprise to the stakeholders.
• In fact, transparency is the foundation of corporate
governance; which helps to develop a high level of public
confidence in the corporate sector. For ensuring transparency
in corporate administration, a company should publish
relevant information about corporate affairs in leading
newspapers, e.g., on a quarterly or half yearly or annual
basis.
(ii) Accountability:
• Accountability is a liability to explain the results of one’s
decisions taken in the interest of others. In the context of
corporate governance, accountability implies the
responsibility of the Chairman, the Board of Directors and the
chief executive for the use of company’s resources (over
which they have authority) in the best interest of company
and its stakeholders.
(iii) Independence:
• Good corporate governance requires independence on the
part of the top management of the corporation i.e. the Board
of Directors must be strong non-partisan body; so that it can
take all corporate decisions based on business prudence.
Without the top management of the company being
independent; good corporate governance is only a mere
dream.
Need for CG:
(i) Wide Spread of Shareholders:
• Today a company has a very large number of shareholders spread all
over the nation and even the world; and a majority of shareholders
being unorganised and having an indifferent attitude towards
corporate affairs. The idea of shareholders’ democracy remains
confined only to the law and the Articles of Association; which
requires a practical implementation through a code of conduct of
corporate governance.
(ii) Changing Ownership Structure:
• The pattern of corporate ownership has changed considerably, in the
present-day-times; with institutional investors (foreign as well
Indian) and mutual funds becoming largest shareholders in large
corporate private sector. These investors have become the greatest
challenge to corporate managements, forcing the latter to abide by
some established code of corporate governance to build up its image
in society.
(iii) Corporate Scams or Scandals:
• Corporate scams (or frauds) in the recent years of the past have
shaken public confidence in corporate management. The event of
Harshad Mehta scandal, which is perhaps, one biggest scandal, is in
the heart and mind of all, connected with corporate shareholding or
otherwise being educated and socially conscious.
• The need for corporate governance is, then, imperative for reviving
investors’ confidence in the corporate sector towards the economic
development of society.
(iv) Greater Expectations of Society of the Corporate Sector:
• Society of today holds greater expectations of the corporate sector
in terms of reasonable price, better quality, pollution control, best
utilisation of resources etc. To meet social expectations, there is a
need for a code of corporate governance, for the best management
of company in economic and social terms.
(v) Hostile Take-Overs:
• Hostile take-overs of corporations witnessed in several
countries, put a question mark on the efficiency of
managements of take-over companies. This factors also
points out to the need for corporate governance, in the form
of an efficient code of conduct for corporate managements.
(vi) Huge Increase in Top Management Compensation:
• It has been observed in both developing and developed
economies that there has been a great increase in the
monetary payments (compensation) packages of top level
corporate executives. There is no justification for exorbitant
payments to top ranking managers, out of corporate funds,
which are a property of shareholders and society.
• This factor necessitates corporate governance to contain the
ill-practices of top managements of companies.
(vii) Globalization:
• Desire of more and more Indian companies
to get listed on international stock
exchanges also focuses on a need for
corporate governance. In fact, corporate
governance has become a buzzword in the
corporate sector. There is no doubt that
international capital market recognises only
companies well-managed according to
standard codes of corporate governance.
Importance of CG:
• Good corporate governance ensures corporate success and
economic growth.
• Strong corporate governance maintains investors’ confidence, as a
result of which, company can raise capital efficiently and effectively.
• It lowers the capital cost.
• There is a positive impact on the share price.
• It provides proper inducement to the owners as well as managers to
achieve objectives that are in interests of the shareholders and the
organization.
• Good corporate governance also minimizes wastages, corruption,
risks and mismanagement.
• It helps in brand formation and development.
• It ensures organization in managed in a manner that fits the best
interests of all.
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