Course Objective
The main aim of this course is:
1. To Discuss the various concepts of Corporate Social Responsibility (CSR).
2. To understand the importance of sustainability and social responsibility with context
business and how they integrate into the vision and planning of the firm.
3. To understand the changing role of Business with context to the society.
Course Outcomes
After the completion of this course, students will be able to
1. Understand about CSR, Models and its strategies.
2. Evaluate corporate governance and its practices.
3. Understand sustainability and its relationship with CSR.
4. To understand about the reporting system of National Voluntary Guidelines on Social,
Environmental and Economic Responsibilities of Business International Standards
Course Features
- Lectures 21
- Quizzes 0
- Duration 10 weeks
- Skill level All levels
- Students 4
- Assessments Yes
Curriculum
- 4 Sections
- 21 Lessons
- 10 Weeks
Expand all sectionsCollapse all sections
- unit 16
- 2.1LESSON 1:UNIT 1 : INTRODUCTION TO CSR Introduction Corporate governance is a central and dynamic aspect of business. The term ‘governance’ is derived from the Latin word gubernare, meaning ‘to steer’, usually applying to the steering of a ship, which implies that corporate governance involves the function of direction rather than control. In fact, the significance of corporate governance for corporate success as well as for social welfare cannot be overstated. Recent examples of massive corporate collapse resulting from weak systems of corporate governance have highlighted the need to improve and reform corporate governance at international level. In the wake of Enron and other similar cases, countries around the world have reacted quickly by pre-empting similar events dramatically. “Capitalism with integrity outside the government is the only way forward to create jobs and solve the problem of poverty. We, the business leaders are the evangelists of capitalism with integrity. If the masses have to accept this we have to become credible and trustworthy. Thus we have to embrace the finest principles of corporate governance and walk and the talk.” (Narayan Murthy) Corporate governance has in recent years succeeded in attracting a good deal of public interest because of its apparent importance for the economic health of corporations and society in general. However, the concept of corporate governance is poorly defined because it potentially covers a large number of distinct economic phenomena. As a result, different individuals have come up with different definitions that basically reflect their special interest in the field. It is hard to see that this ‘disorder’ will be any different in the future so the best way to define the concept is perhaps to list a few of the different definitions. Corporate Governance: An Overview Definition of Corporate Governance Corporate governance comprehends the framework of rules, relationships, systems and processes within and by which fiduciary authority is exercised and controlled in corporations. Relevant rules include applicable laws of the land as well as internal rules of a corporation. Relationships include those between all related parties, the most important of which are the owners, managers, directors of the board (when such entity exists), regulatory authorities and to a lesser extent, employees and the community at large. Systems and processes deal with matters such as delegation of authority, performance measures, assurance mechanisms, reporting requirements and accountabilities Standard and Poors defined corporate governance as “the way in which a company organizes and manages itself to ensure that all financial stakeholders receive their fair share of a company’s earnings and assets” is increasingly a major factor in the investment decision-making process. Poor corporate governance is often cited as one of the main reasons why investors are reluctant, or unwilling, to invest in companies in certain markets. Corporate Governance concerns with the exercise of power in corporate entities. The OECD provides a functional definition of corporate governance as: “Corporate Governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance.” The report of SEBI Committee on Corporate Governance gives the following definition of corporate governance. “Corporate governance is the acceptance by management, of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company”. The simplest definitions, is given by a Cadbury Report (UK). ‘Corporate Governance is the system by which businesses are directed and controlledThe Cadbury Committee said “The primary level is the company’s responsibility to meet its Notes material obligations to shareholders, employees, customer, suppliers, creditors, to pay its taxes and to meet its statutory duties. The next level of responsibility is the direct result of actions of companies in carrying out their primary task including making the most of the community’s human resources and avoiding damage to the environment. Beyond these two levels, there is a much less well-defined area of responsibility, which involves in the interaction between business and society in a wider sense.” The ongoing nature of corporate governance indicates by the definition of the Commission on Global Governance (1995), ‘A continuing process through which conflicting or diverse interests may be accommodated and co-operative action may be taken’. Need of Corporate Governance A corporation is a congregation of various stakeholders, namely customers, employees, investors, vendor partners, government and society. A corporation should be fair and transparent to its stakeholders in all its transactions. This has become imperative in today’s globalized business world where corporations need to access global pools of capital, need to attract and retain the best human capital from various parts of the world, need to partner with vendors on mega collaborations and need to live in harmony with the community. Unless a corporation embraces and demonstrates ethical conduct, it will not be able to succeed. Corporate governance is about ethical conduct in business. Ethics is concerned with the code of values and principles that enable a person to choose between right and wrong and, therefore, select from alternative courses of action. Further, ethical dilemmas arise from conflicting interests of the parties involved. In this regard, managers make decisions based on a set of principles influenced by the values, context and culture of the organization. Ethical leadership is good for business as the organization is seen to conduct its business in line with the expectations of all stakeholders. Corporate governance is beyond the realm of law. It stems from the culture and mindset of management and cannot be regulated by legislation alone. Corporate governance deals with conducting the affairs of a company such that there is fairness to all stakeholders and that its actions benefit the greatest number of stakeholders. It is about openness, integrity and accountability. What legislation can and should do is to lay down a common framework – the “form” to ensure standards. The “substance” will ultimately determine the credibility and integrity of the process. Substance is inexorably linked to the mindset and ethical standards of management. Corporations need to recognize that their growth requires the cooperation of all the stakeholders; and such cooperation is enhanced by the corporation adhering to the best corporate governance practices. In this regard, the management needs to act as trustees of the shareholders at large and prevent asymmetry of benefits between various sections of shareholders, especially between the owner-managers and the rest of the shareholders. Scope of Corporate Governance Corporate governance covers the following functional areas of governance: 1. Preparation of company’s financial statements: Financial disclosure is a very important and critical component of corporate governance. The company should implement procedures to independently verify and safeguard the integrity of the company’s financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information. 2. Internal controls and the independence of entity’s auditors: Internal control is implemented by the board of directors, audit committee, management, and other personnel to provide assurance of the company achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors, who are given responsibility of testing the design and implementing the internal control procedures and the reliability of its financial reporting, should be allowed to work in an independent environment. 3. Review of compensation arrangements for chief executive officer and other senior executives: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behaviour, and can elicit myopic behaviour . 4. The way in which individuals are nominated for the positions on the board: The Board of Directors have the power to hire, fire and compensate the top management. The owners of a business who have decision-making authority, voting authority, and specific responsibilities, which in each case is separate and distinct from the authority, and responsibilities of owners and managers of the business entity. 5. The resources made available to directors in carrying out their duties: The duties of the directors are the fiduciary duties similar to those of an agent or trustee. They are entrusted with adequate power to control the activities of the company. 6. Oversight and management of risk: It is important for the company to be fully aware of the risks facing the business and the shareholders should know that how the company is going to tackle the risks. Similarly the company should also be aware about the opportunities lying ahead.
- 2.2LESSON 2:Scope of Corporate Governance Corporate governance covers the following functional areas of governance 1. Preparation of company’s financial statements: Financial disclosure is a very important and critical component of corporate governance. The company should implement procedures to independently verify and safeguard the integrity of the company’s financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information. 2. Internal controls and the independence of entity’s auditors: Internal control is implemented by the board of directors, audit committee, management, and other personnel to provide assurance of the company achieving its objectives related to reliable financial reporting, operating efficiency, and compliance with laws and regulations. Internal auditors, who are given responsibility of testing the design and implementing the internal control procedures and the reliability of its financial reporting, should be allowed to work in an independent environment. 3. Review of compensation arrangements for chief executive officer and other senior executives: Performance-based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash or non-cash payments such as shares and share options, superannuation or other benefits. Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behaviour, and can elicit myopic behavior . 4. The way in which individuals are nominated for the positions on the board: The Board of Directors have the power to hire, fire and compensate the top management. The owners of a business who have decision-making authority, voting authority, and specific responsibilities, which in each case is separate and distinct from the authority, and responsibilities of owners and managers of the business entity. 5. The resources made available to directors in carrying out their duties: The duties of the directors are the fiduciary duties similar to those of an agent or trustee. They are entrusted with adequate power to control the activities of the company. 6. Oversight and management of risk: It is important for the company to be fully aware of the risks facing the business and the shareholders should know that how the company is going to tackle the risks. Similarly the company should also be aware about the opportunities lying ahead. Participants to Corporate Governance Corporate governance Participants to Corporate Governance is concerned with the governing or regulatory body (e.g. the SEBI), the CEO, the board of directors and management. Other stakeholders who take part include suppliers, employees, creditors, customers, and the community at large. Shareholders delegate decision rights to the managers. Managers are expected to act in the interest of shareholders. This results in the loss of effective control by shareholders over managerial decisions. Thus, a system of corporate governance controls is implemented to assist in aligning the incentives of the managers with those of the shareholders in order to limit self-satisfying opportunities for managers. The board of directors plays a key role in corporate governance. It is their responsibility to endorse the organisation’s strategy, develop directional policy, appoint, supervise and remunerate senior executives and to ensure accountability of the organization to its owners and authorities. A key factor in an individual’s decision to participate in an organization (e.g. through providing financial capital or expertise or labor) is trust that they will receive a fair share of the organizational returns. If somebody receives more than their fair return (e.g. exorbitant executive remuneration), then the participants may choose not to continue participating, potentially leading to an organizational collapse (e.g. shareholders withdrawing their capital). Corporate governance is the key mechanism through which this trust is maintained across all stakeholders The findings of (Solomon J. and Solomon A., 1999) endorsed many of the issues relating to the Notes agenda for corporate governance reform in UK. For example, they show, that institutional investors agreed strongly with the Ample view that corporate governance is as important for small companies as for larger ones. The results also indicated significant support from the institutional investment community for the continuance of a voluntary environment for corporate governance. The respondents’ agreement that there should be further reform in their investee companies also added support to the ongoing reform process. Lastly, the institutional investors perceived a role for themselves in corporate governance reform, as they agreed that the institutional investment community should adopt a more activist stance. Benefits of Corporate Governance The initiation of the process of corporate governance in PEs is likely to result into a series of important benefits. Firstly, the flip-flop about owning of the responsibility for low performance would perhaps come to an end. The owners will be on enterprise board. Secondly, goal and role clarity would improve. Enterprise would be mission – vision driven. Thirdly, opportunity for top management to create a cultural transformation from government entities to corporate entities, and from state-financed to self-sustaining ones. Role of Corporate Governance The role of effective corporate governance is of immense significance to the society as a whole. It can be summarised as follows: 1. Corporate governance ensures the efficient use of resources. 2. It makes the resources flow to those sectors or entities where there is efficient production of goods and services and the return is adequate enough to satisfy the demands of stakeholders. 3. It provides for choosing the best managers to administer scarce resources. 4. It helps managers remain focused on improving performance and making sure that they are replaced when they fail to do so. 5. It pressurises the organization to comply with the laws, regulations and expectations of society. 6. It assists the supervisor in regulating the entire economic sector without partiality and nepotism. 7. It increases the shareholders’ value, which attracts more investors. Thus, corporate governance ensures easy access to capital. 8. As corporate governance leads to higher consumer satisfaction, it helps in increasing market share and sales. It also reduces advertising and promotion costs. 9. Employees are more satisfied in organizations that follow corporate governance policies. This reduces the employee turnover, which results in the reduction in the cost of human resource management. Only a satisfied employee can create a satisfied customer. 10. Corporate governance reduces the procurement and inventory cost. It helps in maintaining a good rapport with suppliers, which results in better and more economical inventory management system. 11. Corporate governance helps in establishing good report with distributors providing not only better access to the market, but also reducing the cost of production.
- 2.3LESSON 3:Review of different CSR models and their advantages (CSR) is a self-regulating business strategy that helps businesses to be socially responsible and being accountable, to their stakeholders and to the public. Several CSR models have been formulated over the years. The purpose of these models is to design and execute the CSR process and to enable its monitoring and control. Businesses by implementing CSR models in their operations increase their adaptability to internal and external changes in the environment. This helps to promote positive changes and bringing about progress in socio-economic parameters. CSR benefits people and entities with few or no resources (Ivesha, 2008). Carroll’s pyramid CSR model This is one of the leading CSR model. It is formally known as the model of Carroll’s four-part pyramid. The major focus of the model is to embrace the complete spectrum of expectations that society has from a business, defining them and dividing them into different categories. The model can be represented with the help of diagram-1 shown below. Figure 1: Carroll’s pyramid CSR model As shown in the above figure, there are four kinds of social responsibilities that cohesively constitute the concept of CSR. This involves economic, legal, ethical and philanthropic. The pyramid is used to show the different responsibilities of a business in the order of decreasing importance. The most basic responsibility representing the bottom of the pyramid is economic responsibility (Carroll, 2016). All the other responsibilities of the business are predicted on the basis of this component. Next comes the legal responsibility, all the business whether small or big are expected to operate within the framework that has been specified by the law of the land. Thus, the legal responsibility is depicted as a layer above economic responsibilities. Followed by this in the hierarchy is the ethical responsibilities which cover activities and practices which are expected by the society members even though they are not enforced by law. On top of the pyramid is the philanthropic responsibilities, which is considered discretionary in nature. Thus, the pyramid works towards describing the necessary and the sufficient obligations that socially responsible businesses should follow (Kaman, 2015). Carroll’s pyramid CSR model has been applied by several researchers in order to assess an industry or a company’s CSR program, particularly in the field of social issues. However, consecutively a modified model was proposed by (Schwartz & Carroll, 2003) called the “three-domain model of CSR”. The authors critiqued Carroll’s pyramid as he found that it was insufficient to address the relationship between the four components, it considers philanthropy separately and was theoretically underdeveloped. The three-domain model consists of only three categories; economic, legal and ethical. Philanthropy is assumed to be a part of all these functions. Intersecting Circle (IC) CSR model The Intersecting Circle (IC) CSR model is very different from the pyramid model. The major point of differentiation between the two models is that: 1. it recognizes that there is a possibility of interrelationships between the different domains of CSR and second and, 2. it rejects the hierarchical order of importance. The diagram-2 below shows the pictorial representation of the model. Figure 2 : Intersecting Circle (IC) CSR model Carroll’s pyramid model could not properly capture the interpenetrating nature of the different domains of the CSR nor does the model was successful in reflecting the possible tension points. However, this mutuality has been considered as an integral characteristic of CSR. This model clearly includes all the possible domains of CSR and hence could clearly depict the picture of the interrelationships between the different domains. The IC model refutes the notion that CSR is just a collection of contingent and externally related topics. Rather, the model states that different responsibilities are in dynamic interplay with each other. It is the responsibility of the corporates to maintain harmony and resolve the conflicts between different responsibilities. The main idea of the model is that no responsibility is more important than the other. Rather everything is a social creation and the existence of everything depends on the willingness of the society to support them (Ma, 2012). Concentric Circle CSR model The Concentric Circle model which is also known as the CON model shares some similarities with Carroll’s Pyramid and IC model. For instance, the CON model also states economic responsibility as one of the core social responsibilities. Also, like the IC model, the CON model also emphasizes the interrelationships among different responsibilities (Zu, 2009). However, besides these similarities, there is a major difference as well. In contrast to the Pyramid model and IC model, the CON model states non-economic social responsibilities are the one that embraces core economic responsibilities. ConcentricCircle CSR model As shown in the figure above the inner circle represents the core responsibilities of the business in terms of CSR. This basically includes responsibilities that focus on the efficient execution of economic functions such as products, jobs and economic growth. The second circle represents the legal responsibilities that involve cooperating with the government on the part of the businesses. The intermediate circle which is the ethical circle includes responsibilities that help to exercise economic functions but with a sensitive awareness of ethical norms as well as values and priorities. The outer circle that represents the philanthropic circle focuses on newly emerging responsibilities that the business should focus on in order to become more broadly involved in social responsibilities. Furthermore, the concentric circle represents the system of inclusion rather than the system of mutually exclusive domains. Thus every member in the inner circle is part of the wider circle (Kaman, 2015). Contemporary innovative CSR models Although the above-discussed models find universal application in the domain of CSR, many businesses have come up with customized models. For instance, Coca-Cola has employed the CSR model known as the 5*20 Program that focuses on employing 5 million women in the developing countries by the year 2020 in their bottling and distribution roles. This will not only benefit the women but also the community as the company also aims to provide better access to health care facilities and education to their employees. Furthermore, Sales force implements a 1-1-1 philanthropic model, which involves giving one percent of the product, one percent of equity, and one percent of employees’ time to communities and the nonprofit sectors. Using this model, the company not only achieved its CSR goals but also increased its revenues (Gavin, 2019). CSR Drivers (The Forces Shaping Corporate Sustainability and Responsibility) National (or internal) drivers refer to pressures from within the country, while international (or external) drivers tend to have a global origin. National Drivers 1. Cultural tradition –CSR often draws strongly on deep-rooted indigenous cultural traditions of philanthropy, business ethics and community embeddedness. 2. Political reform— CSR cannot be divorced from the socio-political policy reform process, which often drives business behaviour towards integrating social and ethical issues. 3. Socio-economic priorities —-CSR is often most directly shaped by the socio-economic environment in which firms operate and the development priorities this creates. 4. Governance gaps —-CSR is often seen as a way to plug the “governance gaps” left by weak, corrupt or under-resourced governments that fail to adequately provide various social services. 5. Crisis response —-CSR responses can be catalysed by economic, social, environmental, health-related or industrial crises. 6. Market access —CSR may be seen as an enabler for companies in developing countries trying to access markets in the developed world International Drivers 1. International standardization —-CSR codes, guidelines and standards are a key driver for companies wishing to operate as global players 2. Investment incentives —CSR is given an incentive by the trend of socially responsible investment (SRI), where funds are screened on ethical, social and environmental criteria 3. Stakeholder activism—– CSR is encouraged through the activism of stakeholder or pressure groups, often acting to address the perceived failure of the market and government policy 4. Supply chain—- CSR activities among small and medium-sized companies are boosted by requirements imposed by multinationals on their supply chains
- 2.4LESSON 4:Strategies for CSR Initiatives Amidst the COVID-19 crisis, EVERFI recognizes that being socially-responsible is more critical than ever and that many organizations are actively doing their part and in the best way they can. If you need it, we’re here to help socially responsible companies navigate this challenging time. What is the purpose of a corporation? Most 20th-century American executives agreed: corporations exist to maximize returns to shareholders. Famed economist Milton Friedman argued that executives should focus on maximizing shareholder return to the exclusion of social initiatives. Here are five strategies that socially responsible companies are using today. 1. Promoting Healthy and Inclusive Workplace Cultures Social responsibility starts with workplace culture and your internal community. Organizations, who keep this in mind, create environments in which their own employees can thrive and excel. In 2018, a viral video sparked protests over racially-motivated arrests of two African-American men at a Philadelphia Starbucks. Starbucks responded by closing Starbucks stores across the country for a four-hour racial bias training. Sephora similarly shut down its stores for a one-hour diversity and inclusion training in 2019. Those training sessions were a step in the right direction to maximize Those training sessions were a step in the right direction to maximizing shareholder value. High-visibility training efforts allow companies to communicate their values across all stakeholder segments, but companies need to go beyond a one-day focus on diversity and inclusion. Organizations must recognize hr or diversity training as just one piece of a larger, ongoing strategy to establish a positive company culture. Socially responsible companies should require managers to translate the lessons of diversity and inclusion training to small-group and 1-on-1 settings. A robust workplace culture conversation also encompasses topics like physical health and mental wellness. A strong workplace culture creates positive feedback loops that enhance a company’s social responsibility mission. Employees are more likely to do their best work and help their company succeed when they feel seen and heard. A successful and happy company attracts top talent who appreciate the company’s culture and positively company attracts top talent who appreciate the company’s culture and positively contribute to the company’s culture. Culture-bearing employees are more likely to bring those inclusive values into their families, social circles, and communities and buy-in to company-sponsored corporate social responsibility initiatives. 2. Designing Goals with Measurable Impact Socially responsible companies set measurable goals. Measurable goals keep organizations accountable to themselves and stakeholders. CSR leaders design goals with multiple priorities in mind. These priorities include community impact, internal business practices, and marketing reach, and public and government relations. Executives should focus first on metrics that relate directly to a CSR program’s performance. If, for example, a program targets changes in the firm’s supply chain, executives should set clear and objective benchmarks. The firm should evaluate supply chain changes through raw numbers, percent changes, and industry comparable and communicate these changes to internal and external stakeholders. The time frame is also an important goal-setting consideration. CSR leaders should consider short-term and long-term goals for a program. Some programs demand longer time horizons than others. It is up to the CSR leader to set goals that accurately reflect these time horizons. 3. Aligning Community Impact Goals with Business Practices Successful socially-responsible companies identify causes that align with their corporate mission, employee base, and communities. These organizations then advance these causes through authentic and sincere actions. How does a company express authenticity in their corporate social responsibility initiatives? Authenticity starts with skin in the game. A company demonstrates skin in the game when it makes material sacrifices or adjustments. Organizations should evaluate their community impact goals alongside their business practices. Executives should work toward alignment between these goals and practices. 4. Socially Responsible Companies Leverage Their Core Capabilities Companies also achieve authenticity when they play to their strengths. The most impactful socially responsible companies take advantage of their strongest assets. JetBlue’s strongest asset is travel. The airline crafted its Flying It Forward campaign in 2014. The campaign asked a simple question: “If you were given one flight to spread good, where would you go?” The campaign offered free flights to passengers who pledged their trip toward “making the world a little better.” The program flew recipients across the Americas to serve underserved communities and inspire others. Recipients paid their trip forward by choosing the next free flight recipient. JetBlue has also leveraged its strongest asset through education. The airline supports the Aviation Career Education (ACE) Camp. JetBlue employees help underprivileged high school students understand the science, technology, engineering, and math behind aviation. At least one ACE student has become a JetBlue pilot. By focusing on the flight, JetBlue achieves authentic impact through its corporate social responsibility initiatives. It is easy for companies to throw money at social causes without a focus. The best socially responsible companies achieve clarity of purpose when their leaders reflect on their core capabilities. 5. Soliciting Feedback and Engagement to Maximize Stakeholder Value Socially responsible companies must listen to all of their stakeholders (internal and external communities). The strongest community initiatives incorporate feedback from employees, consumers, and the individuals that the initiative impacts. According to Glass door, 75% of employees and job seekers expect their employer to support local community causes through donations or volunteer efforts. Employee engagement .strengthens the connection between a company’s social responsibility program and workplace culture. CSR and HR leaders should educate employees about initiatives and how they can get involved. Corporate Social Responsibility goals and metrics can play an important role in these conversations. Issues and Challenges The prime purpose of including CSR in corporate business is to make the corporate business activities as well as the corporate culture both sustainable in three ways: economic, social and environmental. Paying equal amount of attention to all the three dimensions, but many companies think that corporate social responsibility is a much exterior part of their business, whereas most think it to be an irrelevant issue for their business as satisfying their customers/clients is more important for them. It is further felt that customer satisfaction is only about price and service, but concentrating on only these aspects of business makes them blind folded towards other important changes taking place worldwide that could blow the business out of the water. The change is named as social responsibility which is an opportunity in itself for the business. Some of the drivers pushing business towards CSR include: Inefficiency of the Government In the past, governments have relied only on legislation and regulation to deliver social and environmental objectives in the business sector which has lead to certain failed initiatives. Demands for Greater Disclosure There is a growing demand for corporate disclosure from stakeholders, including customers, suppliers, employees, communities, investors, and activist organizations. Increased Customer Interest It has been seen and proved through a survey conducted in the year 2002 in 25 countries by Environics International1, it was found that more than one third of surveyed consumers believed that large companies “should do more than give money to solve problems.” The same study found that almost 50 percent of consumers had considered punishing a company based on its social actions, and that nearly 30 percent had actually avoided a company for that reason. Further it was proved that the ethical conduct of companies have a growing influence on the purchasing decisions of customers. Increased pressure from the Investor Investors are changing the way they analyze companies’ performance, and are making decisions based on ethical concerns too. Change in employee behavior Employees are increasingly looking beyond paychecks and benefits and seeking out employers whose operating practices match their own principles. In order to hire and retain skilled employees, companies are being forced to improve working conditions. Advantages of making CSR a part The concept of corporate social responsibility is now firmly rooted around the globe as a business agenda. But in order to move from theory to concrete action, many hurdles need to be overcome. The positives of a CSR initiative are that it can bestow an organization both in terms of finances as well as managerial talent and also attract right people to work on the initiatives. Thus looking at the initiatives by Corporate around the world one feels that we can expect more from them. There is an urgent need to address the various CSR initiatives and also a need to build a mechanism through which such efforts are recognized and rewarded. It would not be wrong in saying that transparency and dialogue can help to make a business appear more trustworthy, and push up the standards of other organizations at the same time. Some of the positive outcomes that can arise when businesses adopt a policy of social responsibility include: Examples of benefits to a Company: • Improved financial performance; • Lower operating costs; • Enhanced brand image and reputation; • Increased sales and customer loyalty; • Greater productivity and quality; • More ability to attract and retain employees; • Reduced regulatory oversight; • Access to capital; • Workforce diversity; • Product safety and decreased liability. Examples of benefits to the Community and the General Public • Charitable contributions; • Employee volunteer programs; • Corporate involvement in community education, employment and homelessness programs; • Product safety and quality. Examples of benefits to the Environment • Greater material recyclability; • Better product durability and functionality; • Greater use of renewable resources; • Integration of environmental management tools into business plans, including life-cycle assessment and costing, environmental management standards, and eco-labeling. It would certainly not be wrong to say that the leading global companies of 2020 will be those that would provide their customers and clients with goods and services and even reach out to them in a manner and with a approach that accommodates solutions to world’s major challenges, such as poverty, climate change, resource depletion, globalization and demographic shift. How to Implement a CSR Strategy Corporate Social Responsibility (CSR) is becoming a core business strategy for many companies. It’s proven to increase customer loyalty, retain employees, increase the bottom line, and all while doing incredible things for the world. Nearly half of all consumers are looking towards brands to lead the way in making the world a better place. It’s not only consumers; a Glassdoor survey found that 75% of employees between 18-34 expect their employers to take a stand on important issues. The influence businesses have, and the responsibilities placed on them today is massive. Before diving into a CSR initiative, it’s important to take a step back and consider a complete CSR strategy. It takes deliberate thought to navigate, and we hope this article helps shed some light on how you can implement a successful CSR strategy for your company. What is a CSR strategy? There are four types of CSR categories, and a CSR strategy helps you define which one is best for your business, ways in which you can implement it, and track the results of your efforts. The four areas of CSR are: • Philanthropic responsibility • Environmental responsibility • Ethical responsibility • Economic responsibility A good CSR strategy builds a business case around how your chosen areas of CSR can integrate into your business growth plan, and makes sure that your initiative stays on track, hitting every KPI along the way. How does CSR integrate into business strategy? Linking your CSR strategy to your company purpose and values is vital. Once you’ve identified them, this will enable you to align your CSR strategy to it. You can then show how it’s contributing to your long term strategy and support continued investment in your CSR program. There are a few different ways CSR can integrate into business strategy. It depends on your company needs and goals. Look at your company’s strategic goals to help you shape your CSR strategy, for example, whether it’s to have an impact, engage or retain employees, or to engage consumers. CSR can help with employee retention and employer branding, so can be aligned with your Human Resources strategy. It’s also shown to increase customer retention and loyalty. In fact, 68% of online consumers in the U.S. and UK would consider ending a relationship with a brand because of poor or misleading CSR. It can, therefore integrate into your sales growth strategy or customer success strategy. The truth is, CSR can actively help a business work toward a larger profit margin while doing great things; it’s a win-win. Who decides the CSR strategy? A CSR strategy is not built by one person alone. A collective of productive heads is much better than one. However, the project certainly needs one core manager to lead the way, assign responsibilities and ensure everyone stays on track. Some companies have a CSR department, and some assign CSR to Human Resources teams or Office Managers. Depending on your goals of using CSR, it can also be a responsibility of marketing or communications teams. How to launch a CSR strategy in 8 steps Let’s dive into the thick of it. Above, we looked at what a Corporate Social Responsibility strategy is, here are the steps you need to take to ensure your strategy runs smoothly. 1. Define the concept Especially today, CSR can mean many different things to different people. It depends on someone’s culture and past experiences with CSR that will determine their opinion and definition of it. At this stage, it’s important to speak to and understand all stakeholders’ concerns; leadership, employees, consumers, professional organisations or unions, local communities or environmental groups. Once you’ve understood concerns, you can consider where there is a match, and how your CSR program can address these. Define or redefine what CSR means to your business, and make sure the entire business is on the same page. Once you know everyone understands what CSR is, then you can start discussing it without bias or misconceptions. 2. Understand the benefits Before your CSR strategy even begins, you need to get the project approved, and to do that requires buy-in from internal stakeholders. It’s important to spend a lot of time researching the benefits of CSR and find some example businesses that have profited from having a successful CSR plan in place. Once you have an idea of the ways you can benefit from CSR, this will help guide your business case—spoiler alert for step three—to one that is more specific for your business. 3. Get project approval You may have seen this one coming, but launching a CSR plan does require a certain amount of budget and human resources from your business. You can certainly use tools to optimise the CSR experience, however, until you get to that point you’re going to need people power. Put together a business case for implementing a CSR strategy and make sure you include all of the potential benefits a unique CSR initiative can bring to your business. 4. Set project goals Next up on your list for implementing and launching a CSR plan is setting goals. These goals and KPIs showcase your strategy is positively impacting your business, and that your CSR project is on track. In the early stages, they can be anything from winning board member buy-in, have 100% of employees understand what CSR is, host 3-5 meetings with potential CSR SaaS providers, ehem we’re right here, to name a few. Further down the line, they can be more KPI-orientated like employee engagement rates, online brand sentiment, or lower customer churn. All of these goals are designed around making progress to launching. 5. A current CSR analysis A current analysis includes a full review of any CSR initiative you currently have running, be it officially or unofficially, within your company. Perhaps employees have set up their form of a socially responsible initiative that can be something bigger with new support from the company. For example, fundraisers like bake sales, community running groups, volunteering days, in-office recycling, meat-free Fridays, or eliminating single-use plastics. 6. Do your initiative research You have the benefits of what CSR can bring to your business, you’ve won company buy-in, now it’s time to find your initiative and CSR tools. This stage includes researching social and environmental initiatives you think will be a good fit for your company mission and vision and those that answer employees’ values. Corporate Social Responsibility research also includes looking at the initiatives of others in your industry. How are other businesses aligning CSR to their company purpose? It could inspire some great ideas or possible collaborations of your own. Lastly, this step includes different tools you may need to support your CSR efforts. Consider technology that empowers your employees to take the initiative and communication tools to help stay on top of everything. 7. Launch your CSR campaign Once you’ve done all of the above, you should be in a comfortable position to launch your CSR campaign— it’s potentially the most important part of your CSR plan. You get one shot at launching it as effectively as possible, so it’s the time to make it count. Your CSR launch needs to be communicated clearly to the right stakeholders; this includes: • Employees • Shareholders or investors • External stakeholders, partners, & local communities • Press • Customers • Fans and followers Make sure that each of these groups has a clear communication plan and priority so that your initiative launches with maximum impact. For example, your employees need to know the ins and outs of your initiative before your fans and followers. 8. Manage your program to success Last on your list is the maintenance of your CSR campaign or campaigns. What KPIs or goals have you set? Consider all types of goals. For example, if your initiative was to plant 100 trees by planting one for every time an employee took a bike to work instead of driving, then consider every goal around this goal. • How many trees have you planted? • How many individual employees have biked to work? • Has your employee engagement rate and happiness increased? . CSR in India: CSR rules and CSR implementation areas Corporate Social Responsibility (CSR) in India has become a mandatory provision for companies crossing a certain threshold in terms of profit, turnover or net worth. The Corporate Social Responsibility details have been defined in separate sections and the schedule of Companies Act, 2013 which introduced the provision for Corporate Social Responsibility (CSR). The Ministry of Corporate Affairs notified Section 135 and Schedule VII of the Companies Act as well as the provisions of the Companies (Corporate Social Responsibility Policy) Rules, 2014 (CRS Rules) which came into effect from 1 April 2014. CSR in India: No Government intervention in CSR planning and implementation As per the government policies, the very purpose of the CSR provisions is to make corporates use their corporate innovations and managerial skills in the delivery of “public goods”. Thus, the CSR in India should not be interpreted as a source of financing the resource gaps in the Government schemes. Use of corporate innovations and managerial skills in the delivery of “public goods” is at the core of CSR implementation by the companies. Also, the Government has no role to play in the approving and implementing of CSR projects. Ministry of Corporate Affairs (MCA) provides only the broad contours within which eligible companies will formulate their CSR policies, including activities to be undertaken and implement the same in right earnest. Here, we simplify different aspects of the Companies Act, 2013 by explaining a few points below: • What are specific rules regarding CSR in India? • What is Section 135 of Companies Act, 2013? • What is Schedule VII of the Companies Act, 2013 for? • In India, what kind of CSR spent is accounted for? • Does CSR need to be aligned with United Nations Sustainable Development Goals (SDG) CSR rules in India- Highlights Below is the list of highlights of CSR rules in India as per Companies Act 2013. CSR Rule 1: Companies with Annual Profit of Rs 5 Crore or Annual Turnover of Rs 1000 Crore or Net Worth of Rs 500 Crore must spend on CSR activities 2% of their average profit over the last three years. CSR Rule 2:Every company falling in the ambit of CSR laws must form a CSR policy document and make it public CSR Rule 3: The companies with prescribed CSR amount of more than Rs 50 lakh must constitute a CSR committee consisting of 3 or more directors, to plan, monitor and assess the impact of company’s CSR activities CSR Rule 4:The CSR activities undertaken by the companies must be included in their annual report and also in their Business Responsibility Report (BRR). CSR Rule 5: As per the CSR Rules, the provisions of CSR are not only applicable to Indian companies, but also applicable to branch and project offices of a foreign company in India. CSR Rule 6: Expenditure on CSR does not form part of business expenditure. CSR Rule 7: For undertaking Corporate Social Responsibility activities, the company shall not limit itself to local area or areas around it where it operates but shall select areas across the country. CSR Rule 8: The CSR Committee shall also prepare the CSR Policy in which it includes the projects and programmes which is to be undertaken, prepare a list of projects and programmes which a company plans to undertake during the implementation year and also focus on integrating business models with social and environmental priorities and process in order to create shared value. CSR Rule 9: In the annual CSR report the companies must include the prescribed CSR expenditure and also report total spend amount and non-spent amount in separate headers. CSR Rule 10: In case, a company is unable to spend the minimum required expenditure, it has to give the reasons in the Board Report for non-compliance so that there are no penal provisions are attracted by it. Section 135 of Companies Act – CSR Committee and Policy Formulation The Section 135 of Companies Act makes provision for formation of CSR Committee for the companies who need to mandatorily spend on CSR. However, the company with prescribed CSR budget of Rs 50 lakh or less does not necessarily need to form such a committee Further, the Section 135 also specifies that every company must have a CSR policy which shall indicate the activities to be undertaken and recommend the amount of expenditure to be incurred on the activities and monitor the CSR Policy of the company. The Board shall take into account the recommendations made by the CSR Committee and approve the CSR Policy of the company. Areas to spend your CSR money – Section VII of Companies Act 2013 Section VII of the Companies Act 2013 prescribes the area in which companies can do their CSR activities. Thus, Section VII also broadly defines the scope of CSR activities in India. Below are the specific CSR areas as prescribed in Section VII of the Companies Act 2013: (i) Hunger: Eradicating hunger, poverty and malnutrition, promoting health care including preventive health care and sanitation including contribution to the ‘Swatch Bharat Kosh’ set up by the Central Government for the promotion of sanitation and making available safe drinking water. (ii) Education and Livelihood: Promoting education, including special education and employment enhancing vocational skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects; (iii) Health: Promotion of healthy practices, activities related to enhancing health in communities, Setting-up clinics and camps for health check-ups, providing sustainable health support to community (iv) Gender and Social Equality: Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centers and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups (v) Environment: Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and water including contribution to the ‘Clean Ganga fund’ set up by the Central Government for rejuvenation of river Ganga (vi) Art & Culture: Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts (vii) Army: Measures for the benefit of armed forces veterans, war widows and their dependents (viii) Sports: Training to promote rural sports, nationally recognised sports, Paralympic sports and Olympic sports; (ix) PM Relief Fund: Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Scheduled Castes, the Scheduled Tribes, other backward classes, minorities and women; (x) Incubators: Contributions or funds provided to technology incubators located within academic institutions which are approved by the Central Government; (xi) Rural development: Projects related to rural development (xii) Slum Development: Slum area development in urban areas . ‹›
- 2.5LESSON 5:Code of Conduct & Corporate Social Responsibility CEJN is a global company with operations in many different countries where different laws, cultures, values and traditions apply. In all areas in which we operate we are aware of and respect the views of the general public and effects of our operations, which impose exacting demands on the way we conduct our work. At the same time as we strive for future profitable growth and continued success we are committed of contributing to a sustainable development by assuming our social and environmental responsibility and by doing business in a highly ethical manner. Our solid belief is that the best and most beneficial and successful business conducted between parties is based on honesty, respect, accountability and professional behavior. We create competitiveness and cost benefits by ensuring a high level of professional achievement and never resort to unethical or illegal business practices. We will never do business with someone who is likely to harm or jeopardize our brand-name or reputation. Our ethical requirements and code of conduct for all of our suppliers are primarily based on the UN ten principles (Global Compact) in the areas of human rights, labor, the environment and anti-corruption, as follows; HUMAN RIGHTS Principle 1: CEJN suppliers must support and respect the protection of internationally proclaimed human rights; and Principle 2: Make sure that they are not complicit in human rights abuses. LABOR Principle 3: CEJN suppliers must uphold the freedom of association and the effective recognition of the right to collective bargaining; Principle 4: The elimination of all forms of forced and compulsory labor; Principle 5: The effective abolition of child labor; and Principle 6: The elimination of discrimination in respect of employment and occupation. ENVIRONMENT Principle 7: CEJN suppliers must support a precautionary approach to environmental challenges; Principle 8: Undertake initiatives to promote greater environmental responsibility; Principle 9: Encourage the development and diffusion of environmentally friendly technologies. Our belief is that all environmental considerations and challenges are very important and of profound interest. We are today certified according to the environmental management standard ISO 14001 which focuses on how our organization and operations can minimize any negative environmental impact, how to fulfil applicable laws and agreements, and how to continuously improve within the environmental field towards a sustainable future. In order to become a prioritized or strategic partner to us you must be certified according to ISO 14001 or to an equivalent standard. You must also comply with national and international laws and with the EU’s chemical legislation, REACH no. 1907/2006 issued by the European parliament and its council. ANTI-CORRUPTION Principle 10: CEJN suppliers must work against corruption in all its forms, including extortion and bribery. In practical terms this means that; • Overriding international laws must always be followed. • Each supplier must comply with labor and employment laws, as well as laws governing remuneration and collective bargaining. • The supplier’s facilities must comply with statutory and agreed health- and safety rules. • The supplier must have a contingency and evacuation plan. • The supplier must never, in any way, discriminate employees or in employment decisions. • All employment with the supplier must be voluntary. • All employees must be treated humanely. • All of the supplier’s employees must have a specified minimum age. • All of the supplier’s employees must work less than a specified maximum number of hours per week. • An environmental friendly alternative or consideration to the principle caution must always be given as high priority as possible when choosing between different alternatives. • The supplier must never be related to any form of corruption, extortion or bribery in any relation. • The compliance with these requirements and are subject to monitoring by CEJN at any time. The verdict is out. Infosys has beaten Tata Chemicals for the Number 1 position in our 2020 India sustainability and CSR chart. Tata Chemicals held the top spot for three consecutive years, until now. Infosys was the second ranker in 2019, and has risen to numero uno for CSR in 2020. Infosys Foundation Chair Sudha Murthy’s loving perseverance in supporting the most deserving has left a deep impact on other businesses to do social good. All the companies mentioned in this list are responsible businesses that place corporate social responsibility (CSR) high on the agenda. This ranking is based on the companies’ spending patterns on CSR, performance and spending with respect to the responsibility matrix, ESG performance and how companies are incorporating Sustainable Development Goals (SDGs) into their responsible business actions. CSR in 2020 Implementation in 2020 is a mixed bag, what with COVID-19 activities taking up the biggest chunk of funding. A number of cyclones and floods wreaked havoc in large parts of the subcontinent. As a result, funds were also directed to disaster relief operations in Assam, Kerala, Bihar, Odisha and West Bengal. Sustainability and CSR in 2020 is a work in progress, since we haven’t reached the year-end yet. However, these rankings take into account the FY 2019-20 CSR projects which have been running since last year. Factors we took into account were impact assessment, compliance, funding and implementation on ground. Which Indian companies topped CSR in 2020? Tata Chemicals has dropped to the third position after being No. 1 for the past three years. Infosys has climbed one spot. Mahindra & Mahindra has climbed two spots to claim the second rank in the top 10 Indian companies for CSR in 2020. ITC has also climbed up from No. 5 to the fourth position this year. The Vedanta Group has outdone itself in the corporate citizenship realm, making it to the top 5, from its previous 8th rank. A new entry on the chart is Grasim Industries. The part of the Aditya Birla Group, Grasim won numerous awards for its flagship programmes. Without further adieu, here are our top 100 rankers from India for CSR in 2020. 1. Infosys Limited CSR can’t be merely a job, it’s a passion,” says Sudha Murthy, Chairperson, Infosys Foundation, the CSR arm of IT services conglomerate Infosys. The company spent nearly Rs. 360 crore towards various CSR schemes this year. COVID-19 relief work dominated the activities, with education and health-related programmes following after.Among the main CSR initiatives in the financial year 2019-20 were a 100-bed quarantine setup in Bengaluru in partnership with Narayana Health City, and another one which had 182 beds for COVID-19 patients for Bowring and Lady Curzon Medical College & Research Institute. Infosys Foundation primarily works with non-governmental organizations as the nodal agency for implementing projects. Highlights of the Foundation’s interventions in the past include the introduction of Aarohan Social Innovation Awards, restoration of water bodies in Karnataka, enabling the pursuit of access and excellence in sports through the GoSports Foundation, and disaster relief efforts in Tamil Nadu, Karnataka and Kerala. 2. Mahindra & Mahindra Ltd. No other Indian corporate comes close to Mahindra & Mahindra when it come to leading the charge for climate change action and sustainable business practices. The company spent INR 93.50 crores on CSR initiatives during the financial year 2018-19. Sustainability runs through the ethos here. This commitment stems from the leadership at the top – head honcho Anand Mahindra is passionate about leading by example. Under his guidance, the conglomerate has set international benchmarks for corporate success and sustainability. He is a member of the Harvard Business School Association of India, National Sports Development Fund (NSDF) and India Council for Sustainable Development. Anand Mahindra Mr. Mahindra initiated Project Nanhi Kali in 1996 which went on to become the biggest CSR programme in India for educating the girl child. Not only does the project provide free education to girls from low-income backgrounds in rural and urban pockets, it also empowers their families. The success stories get more interesting when you witness how the very same girls who benefited from Nanhi Kali are growing up and giving back to the programme by mentoring young girls. The group works closely with nonprofits like Naandi Foundation, which feeds over 1.3 million government school children every day. Naandi also works with small holder farmers on farming practices that are more environment friendly. 3. Tata Chemicals Ltd. Author and The CSR Journal columnist Dr. Shashank Shah explains what makes Tata Group’s CSR unique: Although the prescribed CSR for 2019-2020 was 21.39 Crores, the company went on to spend 37.81 crores on community development projects. Improving the quality of life and fostering sustainable and integrated development in the communities where it operates is central to Tata Chemicals’ corporate philosophy. Tata Chemicals spends INR 12 crores on CSR annually, and wildlife conservation accounts for 30% of the budget of the TCSRD. The spend is distributed over the three places the company has operations — Mithapur in Gujarat, Haldia in West Bengal and Babrala, Uttar Pradesh. Tata Chemicals established Tata Chemicals Society for Rural Development (TCSRD) in 1980 as a society and trust. It lays emphasis on the spirit of participatory development by involving the beneficiaries at each stage of the development process which ensures viability and sustainability of the programmes. 4. ITC Ltd. This is a conglomerate contributing to rural development in a big way. ITC Choupal is a long-running flagship CSR programme by the company that has become the gold standard on community development in international circles. Not only has ITC Choupal impacted lakhs of farmers over the years through digital literacy and economic empowerment, it has also been replicated by scores of other corporates for social welfare in their own communities. ITC spent Rs. 326.49 crores on CSR initiatives in 2019-20, surpassing its spend for previous years. The conglomerate has active social projects in education, environmental conservation, sustainable agriculture, healthcare, digital literacy, sports and culture. Chairman Sanjiv Puri leads the social initiatives with a mix of humility and ambition. Sanjiv Puri In his recent AGM address, Mr. Puri said: “ITC’s vision to serve a larger national purpose has inspired unique business models that build substantial economic, environmental and social capital for the Nation. Over the years, competitive and inclusive value chains have been built which are anchored by our world-class brands. Our Social Investment initiatives build capacities for tomorrow through extensive vocational training, women empowerment programmes and supplementary education. In addition, the Company’s extensive interventions in agriculture help in empowering millions of farmers. Our superior environmental benchmarks in all its operations, creation of large forestry and water resources as also a renewable energy portfolio accounting for over 41% of total energy consumption makes ITC an icon of environmental stewardship.” 5. Vedanta Ltd. Vedanta Limited not only supports agriculture and rural development but also has a host of CSR initiatives focusing on themes such as water, energy and carbon management. The group has adopted advanced technologies to optimise water consumption, enhance energy productivity, mitigate climate change and safeguard diversity through their group companies including Hindustan Zinc (HZL), Cairn Oil & Gas, Electrosteels Steel, Sesa Iron Ore Business and Vedanta Aluminium. Focusing on its sustainability pillars of zero harm, zero waste, zero discharge, Vedanta has generated 1,653 units of renewable energy, while solar power projects are being commissioned to produce 22 MW of power. Around 92% of the high-volume low effect wastes such as fly ash, slag and jarosite are being recycled. The company is more and more committed to green mining. footprint 6. Wipro Ltd. Wipro has spent more than the prescribed CSR budget in the last three financial years. The implementation of the CSR programmes happens through multiple channels – Wipro Foundation, a separate trust set up in April 2017, Wipro Cares, the trust for employee contribution and in some cases, directly through functions and groups within Wipro Ltd. The implementation approach of Wipro is to primarily work through partners with established track records in the respective domains. The majority of projects are long-term multi-year programmes. Wipro’s work in primary health care from 6 projects across four states touches the lives of more than 70,000 people. Apart from providing regular health services, the emphasis is also to build the capacity of the communities in terms of higher awareness and developing a higher degree of self-reliance to handle their own primary health care needs. In terms of disaster management, Wipro has helped rebuild the lives of people affected by Karnataka Floods, Bihar Floods, Odisha Floods, the Japan Tsunami, Hurricane Sandy and Philippines Cyclone. 7. Hindustan Unilever Ltd. Hindustan Unilever Limited, popularly known as Unilever or HUL, works on the basis of USLP (Unilever Sustainable Living Plan). The plan was launched in 2010 and is creating sustainable growth through the company’s world-famous brands and in the process cutting costs, reducing risks and building goodwill for the company. USLP has three global goals: to help more than a billion people take action to improve their health and wellbeing, to reduce the environmental footprint of its products and to enhance the livelihoods of people as they grow their business. HUL has been spending more than the mandated 2% of profits over the years. In FY 2020, its CSR spend was a whopping Rs. 142 crores. The company uses its CSR funds to work on issues which plague India’s development. It has achieved huge successes in the areas of water conservation as well as tackling health and hygiene issues at the grassroots level. HUL has pledged INR 100 crores to help the Indian government fight COVID-19. 8. Godrej Consumer Products Ltd. Godrej Consumer Products Ltd. (GCPL) spent Rs. 19.49 crore on CSR initiatives in FY 2019-20. Although the spending is 23% lower than the prescribed Rs. 25.34 crore, the impact of long term projects give it the 8th ranking on our list. Disease prevention, waste management, livelihood with a focus on women are some of the areas of focus for its flagship corporate citizenship initiatives. GCPL CSR is partnering with the Government of India to eliminate malaria by 2030. The company’s flagship project EMBED (Elimination of Mosquito Borne Endemic Diseases) works with the government and NGOs for intensive behaviour change in Madhya Pradesh, Uttar Pradesh and Chhattisgarh. As part of its CSR efforts, GCPL runs community waste management projects using circular economy principles. Some of the projects include collaborations with the Hyderabad and Kalyan-Dombivali Municipal Corporations, a partnership with the Pondicherry Municipal Corporation, another one with a social enterprise in Guwahati for turning plastic waste into fuel. GCPL is working with a nonprofit in Assam that recycles forest and agricultural waste to produce briquettes (used as biofuel). The goal of these waste management projects is to prevent 50 metric tonne of waste from going to landfills daily. 9. Grasim Industries Ltd. The new entrant in 2020 is Grasim Industries, part of the Aditya Birla Group. The total CSR expenditure by Grasim was Rs. 47.14 crore. This sum funded CSR initiatives that had 7,12,140 direct and indirect beneficiaries. World CSR Congress bestowed the Halol unit with the 2019 Global CSR Excellence and Leadership Award. CMO Asia recognised Grasim’s Jagdishpur unit with Asia’s Best CSR Practices Award 2018-19. The company’s CSR work is carried out under the aegis of the Aditya Birla Centre for Community Initiatives and Rural Development, with Rajashree Birla as the Chairperson. The Centre gives the CSR team a strategic direction and ensures performance management. Rajashree Birla Says Rajashree Birla: “The societal challenges we are facing require a pace of change and innovation that can only be achieved by working together across sectors and industries. Our motivation to engage and collaborate goes beyond economic, social and environmental responsibility. We want to create lasting value for all our stakeholders by building partnerships across the value chain.” CSR of Grasim includes managing and operating hospitals and schools in the surrounding communities. The company provides an immunisation programme for children as well as a programme on antenatal and postnatal care. 10. Bharat Petroleum Corporation Ltd. Bharat Petroleum Corporation Limited (BPCL) is a Government of India controlled Maharatna oil and gas company. BPCL employees stood strong in the fight against the virus. They made a collective contribution of INR 4.27 Crores from their salaries. As part of its corporate social responsibility for COVID-19 relief, the PSU organised ‘Swachhta Pakhwada 2020’ from July 1 to 15, 2020. This special initiative was in support of the Indian government’s Swachh Bharat Abhiyan. Under the umbrella of “enabling quality education”, the focus of BPCL CSR is on imparting holistic education, preferably through technology apart from catering to adequate infrastructural facilities, access to education and improvement of education systems. BPCL’s CSR philosophy also includes involving the creation and maintenance of toilets, associated sanitation facilities, Waste Management initiatives leading to overall health and hygiene for the communities.
- 2.6LESSON 6:Corporate Social Responsibility Corporate Social Responsibility is the continuing commitment by businesses to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large. Scope of CSR 1. Environment: This area involves the environmental aspects of production, covering pollution control in the conduct of business operations, prevention or repair of damage to the environment resulting from processing of natural resources and the conservation of natural resources. Corporate social objectives are to be found in the abatement of the negative external social effects of industrial production, and adopting more efficient technologies to minimize the use of irreplaceable resources and the production of waste. 2. Energy: This area covers conservation of energy in the conduct of business operations and increasing the energy efficiency of the company’s products. 3. Fair Business Practices: This area concerns the relationship of the company to special interest groups. In particular it deals with: i. Employment of minority’s ii. Advancement of minorities iii. Employment of women iv. Employment of other special interest groups v. Support for minority businesses vi. Socially responsible practices abroad . 4. Human Resources: This area concerns the impact of organizational activities on the people who constitute the human resources of the organization. These activities include: Recruiting practices ii. Training programs iii. Experience building -job rotation iv. Job enrichment v. Wage and salary levels vi. Fringe benefit plans vii. Congruence of employee and organizational goals viii Mutual trust and confidence i. ix. Job security, stability of workforce, layoff and recall practices ii. x. Transfer and promotion policies xi. Occupational health 5. Community Development: This area involves community activities, health-related activities, education and the arts and other community activity disclosures. 6. Products: This area concerns the qualitative aspects of the products, for example their utility, life- durability, safety and serviceability, as well as their effect on pollution. Moreover, it includes customer satisfaction, truthfulness in advertising, completeness and clarity of labeling and packaging. Many of these considerations are important already from a marketing point of view. It is clear, however, that the social responsibility aspect of the product contribution extends beyond what is advantageous from a marketing angle. Corporate sustainability Sustainability is responsibility for the impact that the organization exerts on its surroundings, in business, environmental and social terms. Conscious managementof the impact translates into lower costs, improved external relations and better managed risks. Sustainability is skilled positioning of the organization in the economic reality, taking account of the social and economic challenges, environmental opportunities and threats. The awareness that the organization functions within a broader framework, amid complex interrelations with many stakeholder groups, allows it to get ready and make use of the opportunities linked with sustainability. Sustainability is awareness that each entity is surrounded by stakeholders. Building and cultivating good relations with stakeholders based on engagement and dialogue is crucial, because it not only affects the possibilities to manage risks, but also supports development and gives the organization a competitive edge. Sustainability is transformation and development of the organization as well as creation of its long-term value based on innovation as well as intellectual and relation capital. Benefits for businesses Business transformation and sustainable approach to management translate into: • Identification of the areas that create the organization’s long-term value • Reduction of operating costs due to more effective resource management across the entire supply chain • Effective economic, social and environmental risk management • Business stability relying on good relations with key stakeholders • Building loyalty and trust of customers through a dialogue and engagement Sustainability is a response to the challenges of the modern world which transforms potential threats and risks into development opportunities for organizations from the public and private sectors . Corporate Sustainability The term “corporate sustainability” describes a new corporate management model. It can also fall under the broader term “environmental social governance” ESG Corporate sustainability emphasizes growth and profitability through intentional business practices in three areas of society. The goal is to provide long-term value for stakeholders without compromising people, the planet, or the economy. The three pillars of corporate sustainability. 1. The Environmental Pillar The environmental pillar is often the most talked-about of the three pillars of corporate sustainability. It includes the various actions companies can take to reduce their environmental impact and carbon footprint. Examples include reducing packaging waste, reducing water usage, recycling materials, and using sustainable energy sources. 2. The Social Pillar The social pillar focuses on a company seeking the approval of its stakeholders, employees, and the local community. A big part of corporate sustainability is a company’s dedication to taking good care of people inside and outside of the business. Social pillar practices include eliminating child labor, offering paternity and maternity leave, and giving back to the community. 3. The Economic Pillar The economic pillar involves implementing sustainable business practices to promote long term profitability. After all, a company can’t have a positive impact on the environment or community if it’s not profitable. Elements of the economic pillar include compliance and good corporate governance. Meaning, the values of stakeholders and management align in terms of how to spend resources. The economic pillar makes it possible for a company to strategize and invest in new corporate sustainability methods. Economic Effects OF corporate sustainability Sustainability has become a trend, and many multinational corporations understand that stakeholders are concerned about the environment and wasteful business practices. Because consumers have become more mindful of air quality, emissions, carbon footprint and eco-friendly consumption, many corporations .Why sustainability must be a business imperative Sustainability is an ever-changing and evolving issue that is becoming increasingly sophisticated in the demands it places on businesses and brands. For example, several decades ago it was considered a competitive advantage to be called a “green” company. Yet once more and more brands started to adopt and use this message, it somehow seemed to lose it meaning and true gravitas. Today, with so many large corporations and the financial and banking sector making significant commitments, it is simply not enough to “be sustainable” and limiting sustainability to encompass only environmental issues is a symptom of leadership that has not recognized the larger role customers now expect business to play. Leadership must now embrace an expanded definition of sustainability that includes social, economic, moral, ethical, and environmental sustainability and reframe business leadership in terms of global stewardship for positive social change.And the sustainability imperative evolves and expands so will its success metrics and this presents yet another opportunity for companies to demonstrate leadership, accountability, and innovation. Whether it’s contributing to a new set of industry standards, taking steps to quantify and improve yearly environmental impact like Apple or redefining how a company can show bottom-line benefits to shareholders, now is the time for corporates to step up and not only ensure their own success but also to provide lessons for the corporate world at large. It is clear that brands cannot survive in societies that fail, and the most iconic and sustainable brands of the future will be those that drive the most meaningful and holistic change to achieve success for both their own brand as well as the planet.
- unit 25
- 3.1LESSON 1:(UNIT II) EVOLUTION OF CORPORATE GOVERNANCE 1 . Forms of Corporate/Business Organizations’ There are four principal forms of business organization in India. • Companies incorporated under the Indian Companies Act, 2013 (the “Companies Act” or the “2013 Act”), which include: 1. a private limited company, which limits the number of shareholders and restricts the free transferability of shares; 2. a public limited company, which may be listed on the Indian stock exchange and whose shares can be freely traded and transferred; • a non-profit company, popularly referred to as a Section 8 company, whose objective is to promote arts, commerce, charity, education, science, social welfare and sports, and which intends to apply its profits, if any, to promoting its objects (it prohibits the payment of dividends to its members); and • a one-person company, which has only one single shareholder (this is relatively new, introduced by the 2013 Act, and is not very popular yet). • Partnerships under the Indian Partnership Act, 1932 ‒ partnerships are very popular with small traders and businesses and require a partnership deed to be registered or filed. • Limited liability partnerships, under the Limited Liability Partnership Act, 2008 ‒ these were principally introduced to help professional and service organisations form partnerships with limited personal liability for partners. • Sole proprietorships, which are simply individuals doing business ‒ this is the simplest form of business organisation and requires almost no registration or reporting for its formation. 1.2 Sources of Corporate Governance Requirements India has always heavily regulated businesses. In the last decade, the emphasis has been more on regulation through self-reporting rather than licensing and approvals. The principal source of governance is the Companies Act, Rules published under the Companies Act, and Notifications and Circulars issued by the Ministry of Corporate Affairs (MCA). Limited liability partnerships (LLPs) are governed by the Limited Liability Partnership Act, 2008. Listed companies in India are also required to comply with the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (the “SEBI Regulations”) and the listing agreement with the stock exchange on which the company may be listed. 1.3 Corporate Governance Requirements for Companies with Publicly Traded Shares India has a very strong disclosure, governance and reporting policy with many of the disclosure and governance requirements being mandatory. In the past couple of years, the government has started to suspend companies and disqualify directors of the companies that have not complied with the disclosure, governance and reporting requirements. There are many additional provisions that affect governance, like the whistleblowing policy, corporate social responsibility (CSR) and related party transactions, all of which require the maintaining of detailed records, disclosure and reporting. The SEBI Regulations broadly require every publicly listed company to meet the following requirements: • there must be at least one female director; • no less than 50% of the board must comprise non-executive directors; • the board constitutes an Audit Committee, a Stakeholders’ Relationship Committee, a Risk Management Committee and a Related Party Transactions Policy; • there must be two independent directors if the paid-up capital is more than INR100 million, if there is a turnover of more than INR1 billion or if the aggregate outstanding loans, debentures and deposits exceed INR500 million, and such directors are not entitled to any stock options; • the independent directors must hold at least one meeting within the financial year, without the presence of non-independent directors and members; • the board of top 2,000 listed entities require a minimum of six directors; • the chairperson of top 500 listed entities needs to be a non-executive director and not be related to the managing director or CEO; and • a person should not be a director in more than seven listed entities. SEBI has also framed regulations for the issuance of shares, foreign investment, the buy-back of securities and the prevention of insider trading. 2. Corporate Governance Context 2.1 Key Corporate Governance Rules and Requirements 2.2 Environmental, Social and Governance (ESG) Considerations The Companies Act requires companies with a certain threshold of turnover or profitability to establish a CSR Committee, develop CSR policies, spend 2% of profits on these policies and report on these activities to the shareholders in its annual report. Companies are encouraged to focus their CSR activities on eradicating poverty, hunger and malnutrition, improving education, promoting gender equality and female empowerment, as well as environmental sustainability. Since the outbreak of the COVID-19 pandemic, CSR funds are permitted to be used for alleviating pandemic-related hardship as well. Prior to 2019, CSR spending was voluntary. After the 2019 amendment to the 2013 Act, it has been made a mandatory obligation for companies. As per the new amendment, a company has to transfer the unspent CSR amount to a government specified fund. Non-compliance to this requirement will attract penalties for the company and defaulting officers. Also, the new CSR rules enacted in 2021 have laid down the reporting mechanism for companies. Companies to whom CSR is applicable have to prepare an annual report on CSR in the prescribed format and attach it to its board report. Companies exceeding the specific threshold of CSR obligations have to undertake an impact assessment by an independent agency. CSR activities have to be displayed on the company’s website. Over the past decade, the government of India has formulated many regulations and offered great incentives for the promotion of environmental, social and governance standards. On the one hand, there are a multitude of incentives and subsidies in the form of business opportunities encouraging companies to embrace environmentally friendly businesses and practices. On the other, the government has enforced stricter regulations and norms to achieve its sustainability objectives. National Voluntary Guidelines In 2009, India’s MCA published the Corporate Social Responsibility Voluntary Guidelines (the “CSR Guidelines”), recommending that all businesses formulate a CSR policy, and since then sustainability disclosures have formed an integral part of the best practices of any company that wants to develop and demonstrate its green or community-oriented credentials. In 2011, the CSR Guidelines were superseded by the expanded and more detailed National Voluntary Guidelines (NVGs) on Social, Environmental and Economic Responsibilities of Business, containing comprehensive principles to be adopted by companies as part of their CSR activities. This introduced a structured reporting format for business, requiring certain specified disclosures and demonstrating the steps taken by companies to implement the environmental, social and governance (ESG) principles. The NVGs define nine principles of responsible business conduct to be adopted by companies as part of their practices and mandates for preparing a business responsibility report by providing stakeholder information about the initiatives, impacts and future course of action across ethics, transparency and accountability, product life-cycle sustainability, employees’ well-being, stakeholder engagement, human rights, environment, public advocacy, inclusive growth and customer value. In 2019, the NVGs were revised and the MCA formulated the National Guidelines on Responsible Business Conduct (NGRBC). The NGRBC have been designed to assist businesses in fulfilling their regulatory compliance requirements. The NGRBC are made applicable to all businesses, irrespective of their ownership, size, sector, structure or location. These new guidelines containing precise pillars of business responsibility (called principles), accompanied by a set of requirements and actions that are essential to the operationalisation of the principles, referred to as the “core elements”. The principles highlighted in the NGRBC are set out below: • businesses should conduct and govern themselves with integrity in a manner that is ethical, transparent and accountable; • businesses should provide goods and services in a manner that is sustainable and safe; • businesses should respect and promote the wellbeing of all employees, including those in their value chains; • businesses should respect the interests of and be responsive to all their stakeholders; • businesses should respect and promote human rights; • businesses should respect and make efforts to protect and restore the environment; • businesses, when engaging in influencing public and regulatory policy, should do so in a manner that is responsible and transparent; • businesses should promote inclusive growth and equitable development; and • businesses should engage with and provide value to their consumers in a responsible manner. Business Responsibility Reporting In August 2012, SEBI issued the business responsibility report (BRR) norms that made it mandatory for the 100 largest listed companies to publish an annual business responsibility report, capturing the company’s non-financial performances through economic, environmental and social factors. In 2015, this requirement was expanded to the 500 largest companies and to the 1,000 largest listed companies in December 2019. The BRR requires companies to disclose their compliance with the nine principles of business responsibility, which include ESG factors. For Indian companies to attract future investment, they have to disclose their performance on ESG factors along with financial factors, which makes publishing BRR and sustainability reports essential. The BRR requires companies to detail the initiatives taken from an ESG perspective, in a prescribed standard template format which helps companies to publish their BRR in a structured manner. It also helps the government in conducting a comparative analysis across multiple entities. Companies that follow an internationally accepted reporting framework to publish their sustainability reports are not required to prepare a separate report. They have only to furnish the same to their stakeholders along with the details of the international framework under which their BRR has been prepared along with a mapping of how the principles contained in these guidelines apply to disclosures made in their sustainability reports. Stock Exchange Disclosure and ESG Indices In 2018, the Bombay stock exchange published a guidance document on ESG disclosures, which served as a comprehensive set of voluntary ESG reporting recommendations, guided by global sustainability reporting frameworks. This provides 33 specific issues and metrics on which companies should focus. The National Stock Exchange (NSE) of India has launched two ESG indices, NIFTY100 Enhanced ESG Index and NIFTY100 ESG Index to appeal to those parts of the investment community looking to align their investment with ESG goals. The ESG indices cover a company’s: • impact on the environment, such as its carbon intensity, recycling and waste management processes and development of renewable energy; • social factors such as policies and the impact of a company’s activity on working conditions, human rights, health and safety norms and financial inclusion; and • governance factors measuring the effectiveness of processes and policies pertaining to corporate governance, business ethics, fraud, anti-corruption measures and public policy. A company is rated based on three main areas: preparedness, disclosure and performance. Preparedness indicators measure the effectiveness of a company’s policies, programmes and structures; disclosure indicators measure effectiveness of a company’s standards and reporting process; and performance indicators capture the company’s controversies and incidents and its response to them. 3. Management of the Company 3.1 Bodies or Functions Involved in Governance and Management A company is managed by the board of directors, who are appointed by the shareholders. The Companies Act identifies certain officers as key managerial personnel, who are responsible for the day-to-day operations and governance of the company. These are a managing director, a whole-time director (ie, any director who is a full-time employee of the company), a CEO, a CFO and a company secretary (a governance professional licensed by the Institute of Company Secretaries of India). In addition, the board of directors is authorized to appoint specific committees for specific purposes. In public companies, certain committees are mandatorily required. 3.2 Decisions Made by Particular Bodies Generally, the board of directors is responsible for the strategic decisions and day-to-day functioning of the company. However, certain major decisions which affect the rights of shareholders are reserved by the Companies Act (shareholders in closely held companies can also agree to reserve other decisions) exclusively for shareholders to decide, or require a super majority (namely, special resolutions, which require more than three quarters of the shareholders voting in favor). 3.3 Decision-Making Processes In general, decisions in all matters relating to the company are taken by the board of directors of the company by a majority vote of directors present and not disqualified or barred from acting due to a personal conflict of interest in the matter to be decided. In addition, directors may decide urgent matters through a written “circular resolution” (ie, resolutions passed by circulation to directors) outside of board meetings. Decisions by shareholders are taken in the form of an ordinary resolution or special resolution at the general meeting. For convening a general meeting, the company has to provide notice and other relevant information to the shareholders. Decisions such as an alteration of the memorandum or articles of the company, a change in registered office, a reduction in share capital, a change in the objects of a public company, the winding-up of a company, etc, can only be taken by a special resolution. 3. Directors and Officers 4. 4.1 Board Structure Public and private companies are required to have a minimum of three and two directors, respectively, and a maximum of 15 directors. A company’s articles of association may specify a higher minimum number of directors on the board, and a company can appoint more than 15 directors by passing a special resolution. Only individuals can be appointed as directors; corporations and associations cannot be directors. While there is no general residency requirement for directors, every company is required to appoint at least one resident director (ie, a person who has stayed in India for a total period of not less than 182 days in the previous calendar year). However, this requirement is waived off for the financial year 2020-21 due to the outbreak of COVID-19. Listed companies and public companies with paid-up share capital of INR1 billion or a turnover exceeding INR3 billion are required to appoint at least one female director. The structure of the board is primarily one-tier. There is no distinction between the managerial board and the supervisory board, although the Companies Act recognises a category of directors as independent directors. It prescribes that listed companies and unlisted public companies with a certain level of paid-up capital, turnover or outstanding loans should have a prescribed number of independent directors on their boards. This helps to ensure transparency in corporate governance and safeguard the autonomy of independent directors. 4.2 Roles of Board Members Directors play a dual role – one as an agent of the company and another as a person with a fiduciary duty to the company. Contracts entered into by a director are binding on the company only if they are within the actual authority of the director, or if the articles of association of the company or the company’s by-laws provide for the delegation of that power by a board resolution, whether or not that power has actually been delegated. It is a legal requirement for certain classes of companies to mandatorily have the following committees: • an Audit Committee; • a Nomination and Remuneration Committee; • a Stakeholders’ Relationship Committee; and • a CSR Committee. 4.3 Board Composition Requirements/Recommendations First directors are usually named in the articles of association of the company at the time of incorporation. If they are not, the subscribers to the organising documents are deemed to be and become the first directors. The board of directors has the power to appoint additional directors from time to time, or to appoint directors to fill any casual vacancy arising due to the death or resignation of a director, but subject to the overall number specified in the articles of the company. Additional directors appointed by the board hold office only up to the date of the next AGM, at which time the shareholders may either appoint/confirm them as regular directors or appoint new directors. 4.4 Appointment and Removal of Directors/Officers Directors (other than first director, additional director, nominee director, alternate director and a director appointed in a casual vacancy) are always appointed by a company’s shareholders in a general meeting. Generally, vacancies to the board or appointment of additional directors are permitted to be filled by the board itself, but such directors are subject to reappointment by the shareholders at the next general meeting. The Act permits employees to be appointed as directors and, in such cases, they are typically designated as “whole-time” directors. Directors cannot be appointed, until they are first registered in a national database, issued a DIN and have given written consent for the appointment, which must be filed with the RoC. Since October 2019, the MCA has required boards of directors to include the details of integrity, expertise and experience of independent directors hired during the year in their annual reports to the shareholders. Moreover, the MCA has clarified that independent directors have to pass a self-assessment test (with a 50% score in aggregate) to prove their competence, conducted by the Indian Institute of Corporate Affairs (IICA). The test will evaluate the directors based on their knowledge of the Companies Act, securities laws, basic accountancy and other subjects that are required for the individual to perform as an independent director. A director may be removed before the expiry of his or her term of office by an ordinary resolution passed in a general meeting of the shareholders after a special notice has been given. In the case of public companies, the Act requires the CEO, managing director, CFO, company secretary and whole-time director to be designated as key managerial personnel (KMP), which casts specific onus on such KMPs for the governance of the company. 4.5 Rules/Requirements Concerning Independence of Directors The Companies Act prescribes that directors must not involve themselves in any situation in which they may have a direct or indirect interest that conflicts with the interests of the company. Also, directors must not achieve (or attempt to achieve) any undue gain or advantage either to themselves or to their relatives, partners, or associates. If a director is found guilty of making any undue gain, he or she shall be liable to pay the company an amount equal to his or her gain. A director is required to disclose his or her interest in a contract or arrangement with a body corporate in which they hold more than 2% of the shareholding, or with a firm in which they are a partner, owner or member. Prior to appointment and at the beginning of each financial year, every director is required to disclose the list of Indian public and private companies, foreign companies, partnerships, LLPs, trusts and non-trading organisations in which they are directors, partners, members or trustees (or have any other interest). In addition, they are required to disclose a list of relatives, which include, parents, spouse, children and siblings (including in each case step relatives). These disclosures are tabled in the first board meeting of every financial year and are intended to put the company on notice of the personal interests of the directors and the conflicts of interests that may arise due to them. There are many privacy concerns with such information being given to the government, and many companies also question its relevance. However, most are complying, at least for now, because the government marks companies that do not comply as non-compliant, and suspends certain governance activities of such companies. In addition, the Companies Act prescribes specific detailed rules on how contracts with interested directors are to be approved, including the exclusion of the interested director from participation in such board meetings. 4.6 Legal Duties of Directors/Officers The power of directors to manage a company can be restricted by the company’s articles but, in reality, in most cases they can do anything that the company can do, generally acting in good faith and as a fiduciary of the company. The Companies Act lists the specific duties of directors as follows: • to act in good faith in order to promote the objects of the company for the benefit of its members as a whole; • to exercise duties with due and reasonable care, skill and diligence, in the best interests of the company, its employees and the shareholders; • to not be involved in any situation that may cause a direct or indirect conflict of interest with the business or interests of the company; and • to not obtain any undue gain or advantage, either for themselves or for their relatives, partners or associates. 4.7 Responsibility/Accountability of Directors A director owes a fiduciary duty to the company, and not to individual shareholders, creditors or fellow directors. Directors must act honestly, without negligence and in good faith in the bona fide interests of the company. While applying this rule, directors are not expected to act purely for the economic advantage of the company, disregarding the interests of the members, employees or creditors. The assumption is that a director, acting within his or her authority, has acted in good faith, though the act may have been foolish or wrong, unless proved otherwise. The major responsibilities of the board include the following: • to review the annual budgets and business plans, and oversee major capital expenditures, acquisitions and divestments; • to monitor the effectiveness of the company’s governance practices; • to monitor and manage potential conflicts of interest of management and members of the board; • to maintain high ethical standards and take into account the interests of stakeholders; and • to facilitate the independent directors to perform their role effectively as members of the board of directors and also as members of any committees. 4.8 Consequences and Enforcement of Breach of Directors’ Duties Directors are jointly and severally liable for losses suffered by the company on account of omissions and commissions in breach of their duties, and are personally liable to make good the losses suffered by the company. Directors in breach of their duties can be removed or disqualified from the company by shareholders passing a general resolution. The Companies Act prescribes significant fines for breaches of directors’ duties. 4.9 Other Bases for Claims/Enforcement against Directors/Officers Directors of a company can be held personally liable for illegal acts, fraud, willful contribution to tortious action, negligence, conspiracy, misappropriating the company’s funds and assets, breach of trust and duties, false representation, and entering into contracts ultra vires, among other things. In such cases, the company or its shareholders, along with the affected third parties, can sue the directors for such breaches, through class action lawsuits or otherwise. To promote the ease of doing business in India, the government has introduced new amendments to the Companies Act waiving off the criminal sanctions imposed for minor, technical or procedural defaults. The Companies Amendment Act, 2019 recategorized 16 criminal offences to civil defaults. Further, the Companies Amendment Act, 2020 has decriminalized more than 46 compoundable offences where originally imprisonment was a consequence of contravention. In addition to this, various penalties and fines have also been reduced. For example, imprisonment has been waived for contraventions related to a buy-back of shares, disclosure of interest by directors, financial statements and boards’ reports, formation of companies with charitable objects, disqualification of directors and constitution of audit, stakeholder relationship and nomination and remuneration committees. 4.10 Approvals and Restrictions Concerning Payments to Directors/Officers The maximum amount of managerial remuneration by a public company to its managing director, whole-time director or manager cannot ordinarily exceed 11% of the net profits of the company in a financial year. However, in a general meeting the company may authorise the payment of remuneration exceeding 11% of the net profits of the company. A director is permitted to receive remuneration by way of fees for attending board or committee meetings, or for any other purpose to be decided by the board. The amount of sitting fees payable to a director for attending the meetings of the board or committees can be decided by the board or the Remuneration Committee, subject to certain prescribed ceilings. The board may decide a different sitting fee payable to independent and non-independent directors other than whole-time directors. Independent directors are not entitled to any stock options. 4.11 Disclosure of Payments to Directors/Officers As per the Companies Act listed companies are mandated to disclose specific details of the remuneration paid to the directors and officers of the company in their annual financial statements. Listed companies are obligated to disclose in the board’s report: • the ratio of the remuneration paid to each director to the median remuneration of the employees of the company for the financial year; • the percentage increase in remuneration of each director, CFO, CEO, company secretary or manager, if any, in the financial year; • the percentage increase in the median remuneration of employees in the financial year; and • a list of the top ten employees who draw remuneration in excess of INR1.02 million. • 5. Shareholders 5.1 Relationship between Companies and Shareholders Shareholders are the true owners of the company, and the highest governing body within the company structure. Certain types of actions by the company can be undertaken only by a shareholders’ resolution, which can be passed only in a shareholders’ meeting, either by the AGM or by calling an extraordinary general meeting of shareholders. 5.2 Role of Shareholders in Company Management The Companies Act mandatorily requires shareholders’ approval for the following decisions: • a change in the name, registered office or authorised share capital; • a modification of the memorandum of association and articles of association of the company; • the issuance of shares on a preferential basis; • the approval of audited accounts; • a declaration of dividends; • the appointment and removal of auditors; and • the liquidation of the company. In addition, shareholders in closely held companies may agree to or require other actions to be taken only by shareholder approval. 5.3 Shareholder Meetings Every shareholder is entitled to participate in the general meetings of the company, and a certain specified number of shareholders may also request the board of a company to convene an extraordinary general meeting if any urgent matters need to be discussed. A newly incorporated company is required to hold the first AGM within a period of nine months from the date of closing of the first financial year and, in all other cases, within a period of six months from the date of closing of the financial year. The Companies Act requires every company to have its financial year from 1 April to 31 March. However, if a company is consolidating its financial statement with its overseas parent, which may have a different financial year, then the Indian company is permitted to have that different financial year with the prior approval of the National Company Law Tribunal. Every meeting requires a valid notice (in writing or electronic form) to be given to all shareholders, accompanied by a statement that sets out material facts relating to the nature of business to be transacted at such meeting. There are two types of meetings of shareholders prescribed under the Companies Act: • an annual general meeting, which must be held once every year within six months of the close of the financial year and no later than 15 months from the prior AGM (due to the COVID-19 pandemic, companies are permitted to hold the AGM electronically via video conference, subject to certain specific rules being followed); and • an extraordinary general meeting, which can be called either by the board for a specific purpose or at the request of shareholders holding at least one tenth of the voting rights. Meetings are to be presided over by the chairman, who is elected by the members personally present in the meeting. Decisions are taken as either a “show of hands” or a vote. Every shareholder who attends, either in person or by proxy, has the same number of votes as the number of shares he or she holds. Like in board meetings, there is usually a minimum quorum requirement in the articles. A listed company is additionally required to provide the facility of remote e-voting to its shareholders, in respect of all shareholders’ resolutions, and the results of each meeting are to be submitted to the relevant stock exchange within 48 hours of the conclusion of the shareholders’ meeting. Every member of a company is entitled to appoint another person or persons (whether a member or not) as his or her proxy to attend and vote on his or her behalf; however, the shareholders do not have a legal right to be accompanied by legal or other counsel. 5.4 Shareholder Claims A shareholder is entitled to certain information, rights and considerations by virtue of an ownership stake in the business. The company must protect and facilitate the exercise of shareholders’ rights, such as: • the right to participate in decisions concerning fundamental corporate changes; • the opportunity to ask questions of the board of directors, to place items on the agenda of general meetings, and to propose resolutions, subject to reasonable limitations; • effective shareholder participation in key corporate governance decisions, such as the nomination and election of members of the board of directors; • an adequate mechanism to address the grievances of the shareholders; and • the protection of minority shareholders from abusive actions by, or in the interest of, controlling shareholders. The Companies Act contains provisions for shareholders’ litigation and allows class action suits to be filed by shareholders if they are of the opinion that the management of the company is being conducted in a manner that is prejudicial to the interests of the company or its members. However, derivative shareholder lawsuits are not very common, and the law relating to derivative actions in India remains unclear. Under current law, a company (and by extension, therefore, the board of directors) still holds immense power and control over the shareholders. The Companies Act prescribes the minimum number of shareholders required to apply to the National Company Law Tribunal for the protection of shareholders but, in reality, there are still several hindrances that restrict shareholders from filing a lawsuit against the company’s management. 5.5 Disclosure by Shareholders in Publicly Traded Companies Shareholders in public companies have certain additional obligations when acquiring shares or exercising voting rights. Pursuant to the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (the Takeover Code): • no person can acquire more than 25% of the voting rights of a company without making a prior public announcement of an open offer for shares; • an acquirer holding 25% or more, but less than the maximum permissible limit, can purchase additional shares or voting rights of up to 5% every financial year (called the “creeping route” acquisition), without having to make an open offer; • an acquirer who holds 25% or more, but less than the maximum permissible limit, is entitled to voluntarily make a public announcement of an open offer for acquiring additional shares subject to their aggregate shareholding after completion of the open offer, not exceeding the maximum permissible non-public shareholding; • if the acquirer together with a person “acting in concert” acquires 5% or more shares or voting rights of the target company (together with the existing shares or voting rights held by them), the acquirer is required to disclose this to the stock exchange and the target company within two business days of the receipt of intimation of the allotment of shares or the acquisition of shares or voting rights; and • every person, together with a person acting in concert, holding shares or voting rights aggregating to 25% or more of the voting rights in a target company shall disclose their aggregate shareholding and voting rights within seven business days from the end of each financial year. As of February 2019, the MCA mandated companies to report details of every person directly or indirectly holding or controlling 10% or more of the shares of the company. As with most Indian disclosures, this requires the controlling person to provide his or her father’s name, date of birth, passport number and similar personal information, which will all be stored on a public database. 6.Corporate Reporting and Other Disclosure 6.1 Financial Reporting In the past few years, the MCA has made all forms of corporate governance reporting electronic, and has mandated detailed financial reporting by all companies, whether private, public or non-profit. Almost all of these filings are publicly available in the government database, and can be downloaded for a very small fee. Annually, every company must report its audited financials within six months of the closing of the financial year, and include a Directors’ Report and a Directors’ Responsibility Statement. These reports are required to include detailed information about the company, including the number of board meetings held in the financial year, related party transactions, the performance of subsidiaries and joint ventures, and the appointment and resignation of directors and key managerial personnel during the year. Further, the SEBI Regulations require listed companies to report their financial statements and limited review reports on a quarterly basis to all stock exchanges where their securities are traded. In January 2021, the MCA made changes to the format to be used for the reporting of financial statements whereby companies have to provide following additional information: • disclosure of shareholding of promoters; • maturities of long-term borrowings; • details of immovable property; • ageing schedule of capital work in progress, intangible property and trade payables and receivables; and • disclosure of various financial ratios such at current ratio, debt-equity ratio, return of equity ratio, net capital turnover ratio, return of investment. As per the new accounting rules, effective from 1 April 2022, companies using accounting software for maintaining books of accounts shall ensure that the software is capable of recording an audit trail for each and every transaction, creating an edit log with each change made in the books of accounts along with the date when such changes were made, and companies shall also ensure that the audit trail cannot be disabled. Lastly, the auditor has to certify in the audit report that the company has complied with the above requirements. 6.2. Disclosure of Corporate Governance Arrangements The Directors’ Responsibility Statement must state that the applicable accounting standards have been followed, and that the directors have taken proper and sufficient responsibility for the maintenance of accounting records. It must also provide information on the various stakeholders regarding the performance management of the company and how diligently and ethically they are discharging their fiduciary duties and responsibilities. In addition to above, listed companies have to attach a report on corporate governance in its annual report. This report is required to include the composition of directors, attendance of directors in board and general meetings, number of shares held by directors, and the skills and qualifications of the directors, etc. 6.3 Companies Registry Filings Every company is required to prepare and keep at its registered office, books of accounts and other relevant books, papers and financial statements for every financial year, which give a true and fair view of the state of affairs of the company, and must allow reasonable free access and inspection to all shareholders. There are scores of other compliance and governance reports that have to be filed, which are either periodic or event-based. All event-based reporting or filing is required to be generally completed within 30, 45 or 90 days of the event. However, in the year 2020 all the reporting timelines were extended due to the COVID-19 pandemic. Publicly listed companies also have to report various events to the stock exchanges within 24 to 48 hours (and sometimes even sooner), in accordance with their listing agreement or the SEBI Regulations. 7. Audit, Risk and Internal Controls 7.1Appointment of External Auditors Every company in India has to appoint an external independent auditor to audit its annual accounts. The auditor of a company is required to report to the company’s shareholders on the accounts examined by him or her and on the various financial statements that a company is statutorily required to file at every general meeting. Listed companies, and other companies with certain thresholds of paid-up capital or outstanding loans, can appoint an individual as an auditor, who can hold office for a maximum of one term of five consecutive years, while an audit firm can hold office for not more than two consecutive terms of five years each. Such auditors or audit firms are not eligible for re-appointment to the same company as auditor for at least five years from the time of completion of their previous term. A person cannot be appointed as the statutory auditor of more than 20 companies. Auditors may be removed from their office before the expiry of their term only by a special resolution of the shareholders, and only after being given an opportunity to explain their position. The Companies Act provides for the various eligibility requirements, qualifications and disqualifications of auditors. Only qualified chartered accountants can be auditors and, in the case of audit firms, the majority of the partners of those firms practising in India should be qualified chartered accountants. Auditors are required to prepare the audit report in accordance with the Company Auditor’s Report Order (CARO), 2016, which requires an auditor to report on various aspects of the company, such as fixed assets, inventories, loans given by the company, deposits, cost records, the utilisation of funds and the approval of managerial remuneration. Under the Companies Act, certain prescribed categories of company (including every listed company) are required to appoint an internal auditor to conduct the internal audit of the functions and activities of the company. The Audit Committee of the board, along with the internal auditor, is responsible for formulating the scope, functioning and methodology of the internal audit. The government has also prescribed the Cost Records and Audit Rules, 2014, which require companies in certain sectors meeting certain turnover thresholds to mandatorily appoint a cost auditor and have its cost records audited. These companies include: • those in the telecommunications, drugs and pharmaceuticals, sugar and industrial alcohol, fertilisers and petroleum products sectors, which are required to appoint a cost auditor if their overall annual turnover within a financial year is INR500 million or more and the aggregate turnover of the individual product or service for which cost records are to be maintained is INR250 million or more; and • those in the arms, ammunitions and explosives, iron and steel, tanks and fighting vehicles, port services, aeronautical services, textiles, electronic machinery, ores and mineral products sectors, which are required to appoint a cost auditor if their overall annual turnover within a financial year is INR1 billion or more and the aggregate turnover of the individual product or service for which cost records are to be maintained is INR350 million or more. 7.2 Requirements for Directors Concerning Management Risk and Internal Controls The board of directors must prepare a report detailing the development and implementation of a risk management policy for the company, including identification of any risk elements that may threaten the existence of the company. Further, in the case of listed companies, the directors’ report must contain the Directors’ Responsibility Statement indicating the adequacy and effectiveness of the internal financial control mechanism adopted by the company. The board of directors is also required to constitute the following committees in connection with the management of risk and internal controls in a public company or companies that meet certain thresholds. • An Audit Committee has a minimum of three directors, with the independent directors forming a majority. The Audit Committee recommends the appointment, remuneration and terms of appointment of auditors of the company, reviews and monitors the auditor’s independence and performance, examines the financial statement and the auditors’ report, and has the authority to investigate any of these matters. • A Nomination and Remuneration Committee has three or more non-executive directors, of which no less than one half are required to be independent directors. This Committee identifies persons who are qualified to become directors and who may be appointed to senior management positions. • A Stakeholders’ Relationship Committee is chaired by a non-executive director and such other members as may be decided by the board. This Committee considers and resolves the grievances of stakeholders of the company where there are more than 1,000 shareholders, debenture-holders, deposit-holders and any other security holders at any time during a financial year. • A CSR Committee has three or more directors, of which at least one director has to be an independent director, if a company has a turnover of INR10 billion or more or a net profit of INR50 million or more or a net worth of INR500 billion or more. This Committee formulates and recommends a corporate social responsibility policy to the board, and monitors its implementation by the company. In addition, every company – private or public, and irrespective of its size, capital, turnover or net profit – is required to constitute an Internal Complaints Committee under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act, 2013. This Committee is required to have four members (the most senior female employee as its chairperson, two other female employees or employees who understand women’s issues, and one member from an external NGO involved in women’s issues). This Committee is popularly referred to as the POSH (Prevention of Sexual Harassment) Committee and is required to investigate, report and recommend action on every complaint of sexual harassment it receives, and to organize periodic lectures, workshops or seminars for gender awareness within the company.
- 3.2LESSON 2:The global standards for sustainability reporting The GRI Standards enable any organization – large or small, private or public – to understand and report on their impacts on the economy, environment and people in a comparable and credible way, thereby increasing transparency on their contribution to sustainable development. In addition to reporting companies, the Standards are highly relevant to many stakeholders – including investors, policymakers, capital markets, and civil society. The Standards are designed as an easy-to-use modular set, delivering an inclusive picture of an organization’s material topics, their related impacts, and how they are managed. • The Universal Standards – now revised to incorporate reporting on human rights and environmental due diligence, in line with intergovernmental expectations – apply to all organizations; • The new Sector Standards enable more consistent reporting on sector-specific impacts; • The Topic Standards – adapted to be used with the revised Universal Standards – then list disclosures relevant to a particular topic. Universal Standards Setting a new global benchmark for sustainability reporting The importance of these Standards The revised Universal Standards represent the most significant update since GRI transitioned from providing guidance to setting standards in 2016. The Universal Standards strengthen the very foundations of all reporting through GRI, delivering the highest level of transparency for organizational impacts on the economy, environment, and people. The forward-looking approach that underpinned the revision of the Universal Standards means organizations will be best positioned to use their GRI reporting to respond to emerging regulatory disclosure needs, such as the EU Corporate Sustainability Reporting Directive and the IFRS plans for enterprise value standards. The user-friendly modular system enables all reporting organizations to apply the revised Universal Standards alongside the application of the adapted Topic Standards, and the new Sector Standards. For a detailed overview of how to navigate the new GRI Standards system. The revised Universal Standards are freely available for download. They are in effect for reporting from 1 January 2023, with early adoption encouraged. Reporting with the Sector Standards The GRI Sector Program will develop standards for 40 sectors, starting with those that have the highest impact. As a new addition to the family of GRI Standards, the Sector Standards are designed to help identify a sector’s most significant impacts and reflect stakeholder expectations for sustainability reporting. They describe the sustainability context for a sector, outline organizations’ likely material topics based on the sector’s most significant impacts, and list disclosures that are relevant for the sector to report on. The revised Universal Standards 2021, which have now been released for public use, will remain the starting point for all GRI reporting and for the use of the Sector Standards, thereby increasing transparency and relevancy of the sustainability reporting for organizations in the sector. Oil and gas, coal, agriculture, aquaculture, and fishing are the first sectors prioritized under the Sector Program based on their significant environmental, social and economic impacts. They underpin the design and approach of the GRI Sector Standards
- 3.3LESSON 3: National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business ndia’s National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business (NVGs) [1] were released by the Ministry of Corporate Affairs (MCA) [2] in July 2011 by Mr. Murli Deora, the former Honourable Minister for Corporate Affairs. The national framework on Business Responsibility is essentially a set of nine principles that offer businesses an Indian understanding and approach to inculcating responsible business conduct. “Responsible Business” conduct refers to the commitment of businesses to operating in an economically, socially and environmentally sustainable manner while balancing the demands of shareholders and other interest groups. It’s about managing risks and impacts, which affect business’ ability to meet its objectives. The NVGs are formulated with the objective of creating positive framework conditions to advance the role of business in economic growth which is socially and environmentally sustainable, while also ensuring enhanced competitiveness and integration into the global markets. The NVGs serves as a guidance document for businesses of all size, ownership, sector, and geography to achieve the triple bottom line. In 2012, subsequent to the release of the NVGs the Securities and Exchange Board of India (SEBI), a market regulator, mandated the Annual Business Responsibility Reporting (ABRR), a reporting framework based on the NVGs. The NVGs are unique, not just in what they represent, which is “an India specific comprehensive understanding of business responsibility”, but also in the way they have been formulated. The “process” was premised on widespread intensive stakeholder consultations to bring out the commonly agreed elements of business responsibility in keeping with India’s unique developmental challenges and priorities. Background Drafting process The NVGs are the revised version of the CSR (Corporate Social Responsibility) Voluntary Guidelines 2009, released in December, 2009 by the Honourable President of India, Smt. Pratibha Patil at the India Corporate Week organised by the Ministry of Corporate Affairs (MCA). The CSR Voluntary Guidelines served as a statement of intent by the Government of India to encourage businesses to adopt responsible business practices. The CSR Guidelines provided for review and elaboration which was undertaken by the Indian Institute of Corporate Affairs, a think-tank and capacity development institution set up by the MCA. The Guidelines Drafting Committee (GDC), appointed by the MCA in 2009, started its work on the new mandate for review and elaboration of the 2009 Guidelines. The process was completed in October 2010 and the final draft was presented to the MCA on 3 November 2010. The revised guidelines were the National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business. Stakeholders consulted during the period recommended that since the Guidelines look at a comprehensive framework of responsible business action the title of the Guideline must depict the understanding and hence they were called the NVGs. These were released by the MCA on 8 July 2011. [4] Drafting committee The GDC comprised experts and practitioners from diverse stakeholder groups such as industry associations, regulatory bodies, sector experts, government, financial institutions, etc. It consisted of eleven members who were supported by an anchor team. The drafting process involved extensive consultations, conducted across cities and regions in India: Bangalore (South), New Delhi (North), Kolkata (East) and Mumbai (West). In addition to consultations, written feedback was also solicited. The Indian Institute of Corporate Affairs (IICA), [5] [6] led the entire process. It worked towards developing a consensus on various ideas and perspectives that emerged from various stakeholder groups. The Guidelines were also published on the MCA website for public comments. The brief before the GDC was to develop these guidelines to provide a distinctively ‘Indian’ [7] approach on business responsibility (BR), which is also aligned with international norms and frameworks. Business responsibility Since the 1990s, liberalisation and deregulation have boosted the development of the private sector making it the forerunner of economic growth. Frenetic expansion and growth of the private sector has also therefore thrown up challenges necessitating proactive action towards making it sustainable and equitable. Encouraged by the Prime Minister’s ten Point Charter, the MCA, in the recent past, has sharpened its focus on encouraging businesses to play a proactive role in ensuring sustainable and inclusive growth. While Indian business traditionally stuck to corporate philanthropy, today business leaders understand that practicing responsible business is of strategic importance to their growth, longevity and competitiveness. The NVGs are an embodiment of an integrated and comprehensive understanding of responsible business. The Guidelines encourage and enable businesses to go beyond compliance and embrace sustainability as part of their business ethos. The nine principles and the corresponding indicators encompass all the elements of what constitutes responsible business conduct. It also delineates the fundamentals of implementing the NVGs. These are: 1. Leadership: the commitment and role of leadership, 2. Integration: the weaving in of the principles and core elements into the very DNA of the business, 3. Engagement: continuous engagement with relevant stakeholders, 4. Reporting: measuring the impact of business activities on all the nine principles and communicating these to their stakeholders. Corporate social responsibility in India Traditionally, Corporate Social Responsibility (CSR) has been widely practiced by Indian corporates – taking the form of philanthropic activities. The new CSR legislation under section 135 of the Companies Act 2013 requires companies of a certain size to spend 2% of their net profit [8] on activities as prescribed under schedule VII, which are primarily aimed at community development. The canvas of CSR remains narrow and de-linked from the core-business activities of a company. However, the more progressive businesses view the legislation as opportunity to address the developmental challenges of India through sustainable innovations and creation of shared value. Principle 8 of the NVGs expounds on this very concept, while also acknowledging the need for community development as articulated under the new CSR law. Principle 8 of the NVGs on “inclusive and equitable growth” focuses on encouraging business action on national development priorities, including community development initiatives and strategic CSR [9] based on the shared value concept. Principles on responsible business The NVGs are an aspirational and comprehensive guideline to encourage responsible business behaviour in India. The NVGs, a set of 9 principles, [10] cover a broad array of social, economic, environmental and governance issues and developmental priorities. To actualise the principles a corresponding set of core elements have also been developed. The NVGs also offer guidance on implementation, through its four integral actions – leadership, integration, engagement and reporting. The annexes articulate the business case for adopting the NVGs, existing legislation relevant to the various principles and a set of resources. A special section has been dedicated on the applicability of the principles for Micro, Small and Medium Enterprises (MSMEs), to ensure inclusivity irrespective of scale. The nine principles The NVG Package Principle 1:Businesses should conduct and govern themselves with ethics, transparency and accountability Principle 2:Businesses should provide goods and services that are safe and contribute to sustainability throughout their life cycle Principle 3:Businesses should promote the wellbeing of all employees Principle 4:Businesses should respect the interests of, and be responsive towards all stakeholders, especially those who are disadvantaged, vulnerable and marginalised Principle 5:Businesses should respect and promote human rights Principle 6:Businesses should respect, protect, and make efforts to restore the environment Principle 7:Businesses, when engaged in influencing public and regulatory policy, should do so in a responsible manner Principle 8:Businesses should support inclusive growth and equitable development Principle 9:Businesses should engage with and provide value to their customers and consumers in a responsible manner Adopting the guidelines The NVGs help Indian businesses at multiple levels. They enable businesses to create value, encourage healthy labour practices, minimise operational risks, attract and retain customers, motivate investments and financial markets and stimulate growth. Overall, the NVGs enable companies to leave a positive footprint on the environment and society while remaining competitive. The private sector is the economic engine of India. Poverty alleviation, job-creation, innovation at grassroots, protection of scarce resources are not only impacts of sustainable businesses but cater to nation building. With globalisation and a varied range of stakeholders demanding answers, responsible business action is gaining traction. While the business case was considered to be the biggest motivation for adoption of the guidelines, the guidelines also underscore the importance of ‘values/ethics’ in business conduct as a driver to pursue sustainable management practices as a means to reaching sustainable development goals. Annual Business Responsibility Report Following the release of the NVGs, the MCA reconstituted the GDC as the Disclosures Framework Committee with two additional members and tasked it with develop a disclosure framework based on the NVGs. The disclosure framework, ‘Annual Business Responsibility Report’ (ABRR), was formulated by the Disclosure Framework Committee to ensure wider evidence based uptake of the NVGs. The ABRR is a reporting format that requires principle-wise (NVGs) disclosure by businesses. This reporting framework helps Indian companies implement the NVGs and communicate the same to its stakeholders. It is designed on an ‘Apply or Explain’ methodology and aims at assisting companies to re-examine their processes and align them with the ethos of the NVGs. The ‘Apply-or-Explain’ principle is an enabling measure that encourages companies to do three things: 1. Disclose the current status of sustainability driven performance at whatever stage that may be. 2. Disclose reasons for non-adoption of any of the principles, which may include non-applicability as per their understanding, or future plans of implementation. 3. Ideally undertake a process of review to identify and manage sustainability gaps and risks in line with the future outlook of the company. The ABRR reports can be accessed on the website of the National Stock Exchange and the Bombay Stock Exchange. The 100 companies that report are currently the top listed companies based on market capitalization at BSE and NSE. 98 companies have filed their Business Responsibility Reports (BRRs) on the websites of the National and Bombay Stock Exchanges. A linkage document was also developed and launched internationally at the GRI (Global Reporting Initiative) Conference on Sustainability in Amsterdam 2013. The document serves as a tool for businesses to map their performance against the NVGs, ABRR and GRI G3 [11] guidelines. [12] Securities and Exchange Board Of India directive The Guidelines were released by the Ministry of Corporate Affairs, Government of India on 8 July 2011. Soon after, on 24 November 2011, a Board resolution was passed by the Securities and Exchange Board of India (SEBI), wherein they mandated the top 100 listed companies to report on their Environmental, Social and Governance (ESG) performance through a Business Responsibility Report (BRR), [13] :2 [14] :3 [15] which would then form a part of their annual report/filings. The BRR [16] is envisioned as an annual document describing the measures taken by companies against the nine principles of the NVGs. The SEBI directive took effect at the start of the fiscal year 2013/2014 for the top 100 companies. [17] Companies falling under the purview of the mandate have filed their BR reports along with the Annual Reports in the financial year 2013/14 which is available as public knowledge on National and Bombay Stock exchange websites. (See also: Sustainability Reporting) Future plans SEBI encourages all companies to adopt the ABRR. With NVGs now in place, [18] development of sector-specific guidelines on BRR is underway. The IICA in 2014-2015 will offer training of trainer modules on the NVGs and the BRR for multiplier institutions such as academia, industrial associations and other intermediary organisations. The triple bottom line is an accounting framework with three parts: social, environmental and financial. Some organizations have adopted the TBL framework to evaluate their performance in a broader perspective to create greater business value. Business writer John Elkington claims to have coined the phrase in 1994. Corporate social responsibility (CSR) is a type of international private business self-regulation that aims to contribute to societal goals of a philanthropic, activist, or charitable nature by engaging in or supporting volunteering or ethically-oriented practices. While once it was possible to describe CSR as an internal organisational policy or a corporate ethic strategy, that time has passed as various international laws have been developed and various organisations have used their authority to push it beyond individual or even industry-wide initiatives. While it has been considered a form of corporate self-regulation for some time, over the last decade or so it has moved considerably from voluntary decisions at the level of individual organizations to mandatory schemes at regional, national, and international levels. The United Nations Global Compact is a non-binding United Nations pact to encourage businesses and firms worldwide to adopt sustainable and socially responsible policies, and to report on their implementation. The UN Global Compact is a principle-based framework for businesses, stating ten principles in the areas of human rights, labor, the environment and anti-corruption. Under the Global Compact, companies are brought together with UN agencies, labor groups and civil society. Cities can join the Global Compact through the Cities Programme. Social responsibility is an ethical framework and suggests that an individual has an obligation to work and cooperate with other individuals and organizations for the benefit of society at large. Social responsibility is a duty every individual has to perform so as to maintain a balance between the economy and the ecosystems. A trade-off may exist between economic development, in the material sense, and the welfare of the society and environment, though this has been challenged by many reports over the past decade. Social responsibility means sustaining the equilibrium between the two. It pertains not only to business organizations but also to everyone whose any action impacts the environment. It is a concept that aims to ensure secure healthcare for the people living in rural areas and eliminate all barriers like distance, financial condition, etc. Another example is keeping the outdoors free of trash and litter by using the ethical framework combining the resources of land managers, municipalities, non-profits, educational institutions, businesses, manufacturers, and individual volunteers will be required to solve the ocean microplastics crisis. This responsibility can be passive, by avoiding engaging in socially harmful acts, or active, by performing activities that directly advance social goals. Social responsibility must be intergenerational since the actions of one generation have consequences on those following. Double bottom line seeks to extend the conventional bottom line, which measures fiscal performance—financial profit or loss—by adding a second bottom line to measure a for-profit business’s performance in terms of positive social impact. There is controversy about how to measure the double bottom line, especially since the use of the term “bottom line” implies some form of quantification. A 2004 report by the Center for Responsible Business noted that while there are “generally accepted principles of accounting” for financial returns, “A comparable standard for social impact accounting does not yet exist.” Social return on investment has been suggested as a way to quantify the second bottom line. Sustainability reporting enables organizations to report on environmental and social performance. It is not just report generation from collected data; instead it is a method to internalize and improve an organization’s commitment to sustainable development in a way that can be demonstrated to both internal and external stakeholders.Sustainability reports help companies build consumer confidence and improve corporate reputations through social responsibility programs and transparent risk management. Clause 49 of the Listing Agreement to the Indian stock exchange that came into effect from 31 December 2005. It has been formulated for the improvement of corporate governance in all listed companies. The Equator Principles is a risk management framework, adopted by financial institutions, for determining, assessing and managing environmental and social risk in project finance. It is primarily intended to provide a minimum standard for due diligence to support responsible risk decision-making. As of March 2021, 116 financial institutions in 37 countries have officially adopted the Equator Principles, covering the majority of international Project Finance debt in emerging and developed markets. The Equator Principles, formally launched in Washington DC on 4 June 2003, were based on existing environmental and social policy frameworks established by the International Finance Corporation. The Global Reporting Initiative is an international independent standards organization that helps businesses, governments and other organizations understand and communicate their impacts on issues such as climate change, human rights and corruption. ISO 26000:2010 Guidance on social responsibility is an international standard providing guidelines for social responsibility. It was released by the International Organization for Standardization on 1 November 2010 and its goal is to contribute to global sustainable development by encouraging business and other organizations to practice social responsibility to improve their impacts on their workers, their natural environments and their communities. Corporate sustainability is an approach aiming to create long-term stakeholder value through the implementation of a business strategy that focuses on the ethical, social, environmental, cultural, and economic dimensions of doing business. The strategies created are intended to foster longevity, transparency, and proper employee development within business organizations. Socially responsible marketing is a marketing philosophy that a company should take into consideration; “What is in the best interest of society in the present and long term?” Sustainability accounting was originated about 20 years ago and is considered a subcategory of financial accounting that focuses on the disclosure of non-financial information about a firm’s performance to external stakeholders, such as capital holders, creditors, and other authorities. Sustainability accounting represents the activities that have a direct impact on society, environment, and economic performance of an organisation. Sustainability accounting in managerial accounting contrasts with financial accounting in that managerial accounting is used for internal decision making and the creation of new policies that will have an effect on the organisation’s performance at economic, ecological, and social level. Sustainability accounting is often used to generate value creation within an organisation. Stakeholder engagement is the process by which an organization involves people who may be affected by the decisions it makes or can influence the implementation of its decisions. They may support or oppose the decisions, be influential in the organization or within the community in which it operates, hold relevant official positions or be affected in the long term. The Office of the Extractive Sector CSR Counsellor was established in 2009 as part of the Government of Canada’s CSR Strategy for the International Extractive Sector. The mandate of the Counsellor is defined by an Order in Council. Traditionally, market orientation (MO) focuses on microenvironment and the functional management of an organisation. However, contemporary organisations have widened their focus to incorporate more roles, functions and emphasis on the macro environment. Firms have been concerned with short run success and often not taken into account the long-run ecological, social and economic effects from their activities. Despite growth in the MO concept, there is still a need to reconceptualise the concept with a greater emphasis on external factors that influence a firm. Social accounting is the process of communicating the social and environmental effects of organizations’ economic actions to particular interest groups within society and to society at large. Social Accounting is different from public interest accounting as well as from critical accounting. The Indian Institute of Corporate Affairs (IICA) is a civil service training institute under the aegis of Ministry of Corporate Affairs, Government of India for the Indian Corporate Law Service cadre. Handling and dealing with various subjects, matters and affairs in the arena and spectrum of corporate affairs regulation, governance and policy. It was established in 2008 at Manesar, Haryana. It is the sole institution in the country that has been authorised by Insolvency and Bankruptcy Board of India to run its flagship Graduate Insolvency Program. It houses National Foundation for Corporate Social Responsibility, one of the Apex body in India in the area of Corporate Social Responsibility. NFCSR gives policy support to government for CSR and organises various training program in CSR. It also provides various services to Corporates for CSR including Impact Assessment, Need Assessment, Baseline survey, Real time monitoring etc. The Islamic Reporting Initiative (IRI) is an independent not-for-profit organization leading the creation of the IRI standard; the guiding integrated Corporate Sustainability and Social Responsibility (CSR) reporting standard based on Islamic principles and values that works towards achieving international standards of best practice. The framework will enable organizations to inclusively assess, report, verify and certify their CSR and philanthropic programs supporting the United Nations Sustainable Development Goals. Corporate Environmental Responsibility (CER) refers to a company’s duties to abstain from damaging natural environments. The term derives from corporate social responsibility (CSR).
- 3.4LESSON 4 :TOPIC: Corporate Governance Rating What is corporate governance rating? Corporate Governance Rating (CGR) is an opinion on relative standing of an entity with regard to adoption of corporate governance practices. It provides information to stakeholders about the level of corporate governance practices of the entity. Corporate Governance Rating is basically the score which indicate the risk assessment of the corporate firm/company by an independent company. It is an opinion on relative standing of an entity with regard to adoption of corporate governance practices. Why Corporate Governance Rating? The Corporate Governance Rating is used mainly for :- ● Provides information to stakeholders ● Reference and set benchmarks for further improvements ● Provides independent and Credible assessment of Quality and extent of their corporate governance Assessment Criteria of CGR The assessment criteria differ from different rating firm but the board parameters of the matrix remain the same. Some the parameters are ● Audit Board Structure ● Share holder Rights and Compensation’ ● Accounting ● Ownership and Control CORPORATE GOVERNANCE RATING PROCESS 1.Starting the Rating Process The process begins with the applicant company’s appeal to be rated. Employees are notified after the contract is signed. SAHA’s most experienced rating specialist in the relevant sector is assigned to evaluate the status of the company and to start monitoring. Rating specialists of SAHA possess the expertise usually on one or more sectors and to cover all sub-sectors in the industry. 2.Meeting with the Management The purpose of the meeting with management, an important part of SAHA’s rating process, is to review the company’s main operations, management policies and other activities which will have an impact on the rating process. Meetings to be held with management are crucial in order to reach an objective conclusion about the company’s current status and expectations. 3.Participation The company is represented by an authorized signatory manager. The signatory should participate to the meetings on issues of strategic importance (initial meetings in general). Company officials should provide detailed information about their business units. External consultants can assist in preparing an effective presentation. Consultants’ assistance in the preparation of the meetings, or their participation to the meetings is purely a decision of the management. 4.Planning Meetings with management are usually planned 3 weeks in advance to ensure mutual accordance and to allow sufficient preparation time to rating specialists. 5.Visits Visits to the company are important for SAHA to obtain information about the company operations. Most appropriate time for these visits might be during the first phase of the rating process, but it can be referred to later in the supervision process. Preparation to the Meetings After the rating agreement is signed, the company will be asked the following information and documents. Rating specialists will be ready for the first meeting upon examination of these information and documents. 1. External auditor’s report covering the last 2 years. 2. Company’s annual and / or interim (extraordinary) annual reports. 3. Company’s articles of association. 4. Information on dividend distributions for the last 2 years. 5. Information on last 2 years’ income and corporate taxes. 6. The organizational structure of the company based on legal resolutions and changes that took place in the last 2 years. 7. The last 2 years of ordinary and extraordinary general shareholders’ meeting minutes. 8. Meeting minutes for the last 1 year of the corporate governance committee established within the board of directors. 9. Information on new share certificates issued by the company and its subsidiaries. 10. Identities of key shareholders (with shares of 10% or more) and creditors. 11. Records on sanctions on violation of the shareholders’ rights or other abuse or infraction of rules (including the unsettled cases). 12. Declarations on formation and structure of the board of directors and identity and background of the members. 13. Information on the external auditor of the company. 14. Company’s Corporate Governance Compliance Report, ethical codes, disclosure policy and other similar policy documents. In addition to the information on the company, information about the sector in which the company is operating is also useful. Company management can organize information meetings. Such a presentation would be useful in order to ensure the overall layout of the meeting. In cases of an availability of a written presentation, rating specialists of SAHA should have the chance to review prior to the meeting. Trying to answer all questions at the meetings is not required. If additional information is needed to clarify a few points it can be provided after the meeting. When our rating specialists analyze the issues discussed at the meetings they will have additional questions anyhow. 6.Confidentiality The information provided to SAHA specialists is kept strictly confidential. SAHA employees are under oath and each has signed a confidentiality document. Rating results and details requested to be undisclosed by the company will not be shared with any other institution, including other departments of SAHA, for any purpose, without prejudice to legal requirements. Flow of information between the rating unit and other departments is prevented. 7.Meeting Agenda Issues remaining and not clarified by the information and documents provided by the company are dealt with in this meeting or meetings. The meetings may take several days depending on the duration. 8.Rating Committee Rating Committee convenes after the meeting and upon completion of the specialist’s report. The specialist submits a presentation to the committee. This presentation covers the company’s area of activity, the sector it operates in, analysis of the company’s compliance with the corporate governance principles and the rating proposal. Once the rating result is determined by the committee, the company is informed of the result and other main items supporting the rating. The company may appeal prior to the disclosure of the rating result by providing new or additional information. The rating result can only be modified upon presentation of justifications, new data and documents. To ensure the integrity and impartiality of the rating process, the identity of the members constituting the Rating Committee is kept confidential and is not disclosed even to the company’s employees. 9.Supervision Disclosed ratings are kept under supervision until the expiration of the signed agreement. Supervision is carried on by the sector specialist involved in the rating process. The company is under obligation to supply all kinds of information and documents and notify SAHA of any new developments or changes. Our rating specialist should be periodically in touch with the company on its performance and developments. An updating management meeting would be appropriate upon existence of a new planned activity which can affect the rating result. Management meetings are usually planned on an annual basis. These meetings provide rating specialists with the opinion of management on current developments, to be aware of changes in future plans and allows discussions on professional issues which show different performance than initially expected. Issues which should be given importance to are highlighted by SAHA at the initial meetings. Meetings should generally take place in the company headquarters. The reasons for this are to get together with management and staff more than once (mostly with employees at the operating level), to get first-hand information on the critical points and to have more opportunity to examine the company departments in depth. Meetings which are to be held at the company headquarters should be planned in advance by taking into consideration the time and location restraints. Changes on Rating Results Changing conditions may require some re-consideration on rating results. The company will be monitored in this case, followed by a comprehensive analysis, contact with management, and a presentation to the committee. The Rating Committee evaluates the situation, reaches a decision on revision of the rating result and notifies the company. This TOPIC: CAPITAL MARKETS AND ROLE OF CAPITAL MARKETS CAPITAL MARKETS A capital market is a market for securities (equity and debt), where business enterprises (companies) and governments can raise long-term funds. It is defined as a market in which money is provided for periods longer than a year (raising of short-term funds takes place on other markets like the money market). Financial regulators, such as SEBI and RBI regulate and oversee the capital market in their designated jurisdictions to ensure an orderly development of the market and protection of investors. Capital market can be classified into primary market and secondary market. In the primary market, new stocks and bonds are sold by companies to investors. In the secondary market, the existing issued securities are sold and bought among investors or traders through a stock exchange. Capital market development is essential for the economic development of a country. The objective of economic activity in any country is to promote the well-being and standard of living of its people, which depends upon the distribution of income in terms of goods and services in the economy. For the growth process in the economy, production plays a vital role. Production of output depends upon material inputs, human inputs, and financial inputs. Material inputs are in the form of raw materials; plant, and machinery etc., Human inputs are in the form of intellectual, managerial and labor manpower. Financial inputs are in the shape of capital, cash, credit etc. The proper availability and utilization of these inputs promotes the economic growth of a country. The financial inputs, among other sources, emanate from the capital market system. The capital market thrives with investors’ confidence based upon their return on investment as well as from anticipated capital appreciation from their investment. Investors are a heterogeneous group; they comprise wealthy and middle class, educated and illiterate, young and old, expert and lay man. However, all investors need protection; not protection for assured growth of their investments but protection from malpractices and frauds. An investor typically has three objectives: safety of the invested money, liquidity of the invested money and returns on the investments. There can often be conflicts in the objective of allowing raising of capital for economic development on one hand and protection of investors on the other. However, it is beyond debate that unless the interests of investors are protected, raising of capital would be difficult. An efficient capital market should, therefore, provide a mechanism for efficient raising capital as well as have adequate safeguards to protect the interests of the investors. In the Indian scenario, efforts were made right since Independence, to create a healthy and efficient capital market through legislative measures. The Capital Issues (Control) Act, 1947 was the first piece of legislation passed in India to control the capital market. Subsequently, The Companies Act was enacted in 1956. The watershed event in this direction was in 1992 when the Capital Issues Control Act was replaced by the Securities and Exchange Board of India Act, 1992. This Act provides “for the establishment of a Board to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market and for matters connected therewith or incidental thereto.” SEBI has given priority to both the development, promotion and regulation of the capital market and to investor protection. Its greater focus on investor protection has earned it the name of the Watchdog of the capital market. SEBI strongly believes that investors are the backbone of the capital market as they are the providers of the capital for the economic growth of the country and also are the fulcrum around which the trading in securities takes place. SEBI has laid down guidelines for almost all constituents of the capital market-from issuers on one hand to stock exchanges on the other hand and all other intermediaries like stock brokers, merchant bankers and underwriters. It also regulates the intermediary fund managers like mutual funds, portfolio managers and collective investment schemes. Alert to the changing markets-both domestic and international, SEBI continuously revises its various guidelines and regulations. In the primary market, the focus is on regulation through disclosures. Starting of with the Disclosure and Investor Protection (DIP) Guidelines, SEBI has recently converted these guidelines into the Issue of Capital and Disclosure Requirements) Regulations) (ICDR). These Regulations prescribe detailed norms and directions on disclosures. However, many investors, especially small investors, do not possess adequate expertise/ knowledge to take informed investment decisions. Many of them are not aware of the risk-return profiles of various investment products. A large number of investors are not fully aware of the precautions they should take while dealing with the market intermediaries. Many are not familiar with the market mechanisms and practices as well as with their rights and obligations. In the last decade, far-reaching developments have taken place in the capital market. These have impacted the issuers, the intermediaries as well as the investors. The present capital market is significantly different from what it used to be even in the nineties, leave aside the period prior to that. However, new challenges emerge almost on a daily basis. These are substantially fueled by the huge rewards that the capital market has the potential to offer compared to any other form of investment. At the same time, wrong investment decisions can lead to huge losses too. As such, this market requires considerable skill and expertise, and a higher-than-normal risk profileDifferent securities carry different risk-return profiles. Generally, higher risks carry higher returns and vice-versa. The risks may be in the form of credit risk (counter party may default on payment), return risk (the returns from the investment depends upon several contingent factors) and liquidity risk (it may be difficult to convert the securities into cash]. While the counter party risk has been significantly mitigated by the regulator, the other two risks are market-related risks. Various investment options are available in the capital market and an investor should choose the right products based upon his life cycle stage and upon various parameters like liquidity, safety, returns and taxes, He of course needs to decide whether he has the skills and time for active management of his investments or would he rather pass on this responsibility to a mutual fund or a portfolio manager. Investors do not have any control over the day to day activities of any company. Investor cannot guide the fate or destiny of the money invested. An investor to that extent is quite fragile. Worse, he is exposed to additional risks if the promoters of the company siphon off or mutualize his money. There are, no doubt, laws some of which are adequate to protect the interests of investors, but inadequacies of certain legislative measures have come to light wherein innocent investors have been deprived of their hard earned money. Investor protection” is a very popular phrase which all those concerned with regulation of the capital market use these days, be it SEBI, stock exchanges, investors associations, and even the companies themselves. The term “Investor Protection” is a wide term encompassing various measures designed to protect the investors from malpractices of companies, merchant bankers, depository participants and other intermediaries. “Investors Beware” should be the watchword of all programs for mobilization of savings for investment. As all investments have some risk element, this should be borne in mind by the investors. If caution is thrown to the winds, they have only to blame themselves. ROLE OF THE INDIAN CAPITAL MARKET: The primary role of the capital market is to raise long-term funds for Governments, banks, and corporations while providing a platform for the trading of securities. The member organizations of the capital market may issue stocks and bonds in order to raise funds. Investor can then invest in the capital market by purchasing those stocks and bonds. Capital market has a greater significance in capital formation. For a speedy economic development adequate capital formation is necessary. The importance of capital market in economic development is explained below: – 1. Capital Formation and Saving Mobilization: – In developing countries like India the importance of capital market is self-evident. In this market, various types of securities help to mobilize savings from various sectors of population. The twin features of reasonable return and liquidity in stock exchange are definite incentives to the people to invest in securities. This accelerates the capital formation in the country. 2. Raising Long – Term Capital: -The existence of a stock exchange enables companies to raise permanent capital. The investors cannot commit their funds for a permanent period but companies require funds permanently. The stock exchange resolves this dash of interests by offering an opportunity to investors to buy or sell their securities, while permanent capital with the company remains unaffected. 3. Promotion Of Industrial Growth: -The stock exchange is a central market through which resources are transferred to the industrial sector of the economy. The existence of such an institution encourages people to invest in productive channels. Thus it stimulates industrial growth and economic development of the country by mobilizing funds for investment in the corporate securities. 4. Ready And Continuous Market: – The stock exchange provides a central convenient place where buyers and sellers can easily purchase and sell securities. Easy marketability makes investment in securities more liquid as compared to other assets. 5. Technical Assistance: -An important shortage faced by entrepreneurs in developing countries is technical assistance. By offering advisory services relating to preparation of feasibility reports, identifying growth potential and training entrepreneurs in project management, the financial intermediaries in capital market play an important role. 6. Proper Channelization Of Funds:- The prevailing market price of a security and relative yield are the guiding factors for the people to channelize their funds in a particular company. This ensures effective utilization of funds in the public interest. 7. Source of Acquiring Foreign Capital: – Capital markets makes possible to generate foreign capital. Indian firms are able to generate capital funds from overseas markets by way of bonds and other securities. Government has liberalized Foreign Direct Investment (FDI) in the country. This not only brings in foreign capital but also foreign technology which is important for economic development of the country. 8. Easy Liquidity: – With the help of secondary market investors can sell off their holdings and convert them into liquid cash. Commercial banks also allow investors to withdraw their deposits, as and when they are in need of funds
- 3.5LESSON 5:The global standards for sustainability reporting The GRI Standards enable any organization – large or small, private or public – to understand and report on their impacts on the economy, environment and people in a comparable and credible way, thereby increasing transparency on their contribution to sustainable development. In addition to reporting companies, the Standards are highly relevant to many stakeholders – including investors, policymakers, capital markets, and civil society. The Standards are designed as an easy-to-use modular set, delivering an inclusive picture of an organization’s material topics, their related impacts, and how they are managed. • The Universal Standards – now revised to incorporate reporting on human rights and environmental due diligence, in line with intergovernmental expectations – apply to all organizations; • The new Sector Standards enable more consistent reporting on sector-specific impacts; • The Topic Standards – adapted to be used with the revised Universal Standards – then list disclosures relevant to a particular topic. Universal Standards Setting a new global benchmark for sustainability reporting The importance of these Standards The revised Universal Standards represent the most significant update since GRI transitioned from providing guidance to setting standards in 2016. The Universal Standards strengthen the very foundations of all reporting through GRI, delivering the highest level of transparency for organizational impacts on the economy, environment, and people. The forward-looking approach that underpinned the revision of the Universal Standards means organizations will be best positioned to use their GRI reporting to respond to emerging regulatory disclosure needs, such as the EU Corporate Sustainability Reporting Directive and the IFRS plans for enterprise value standards. The user-friendly modular system enables all reporting organizations to apply the revised Universal Standards alongside the application of the adapted Topic Standards, and the new Sector Standards. For a detailed overview of how to navigate the new GRI Standards system. The revised Universal Standards are freely available for download. They are in effect for reporting from 1 January 2023, with early adoption encouraged. Reporting with the Sector Standards The GRI Sector Program will develop standards for 40 sectors, starting with those that have the highest impact. As a new addition to the family of GRI Standards, the Sector Standards are designed to help identify a sector’s most significant impacts and reflect stakeholder expectations for sustainability reporting. They describe the sustainability context for a sector, outline organizations’ likely material topics based on the sector’s most significant impacts, and list disclosures that are relevant for the sector to report on. The revised Universal Standards 2021, which have now been released for public use, will remain the starting point for all GRI reporting and for the use of the Sector Standards, thereby increasing transparency and relevancy of the sustainability reporting for organizations in the sector. Oil and gas, coal, agriculture, aquaculture, and fishing are the first sectors prioritized under the Sector Program based on their significant environmental, social and economic impacts. They underpin the design and approach of the GRI Sector Standards
- unit 34
- 4.1LESSON 1: TOPIC : Business ethics Business ethics is a social science, whose main aim is to define and examine the responsibilities of businesses and their agents as a part of the general moral environment of a given society. The products of this field of research are sets of rules and codes of conducts, which serve as a means of protection from the possible infringements of moral codes as a result from the general activities and responsibilities of a firm to its stakeholders (e.g. generating profits for shareholders and taxes to the government). Ethics Ethics is a branch of social science. It deals with moral principles and social values. It helps us to classifying, what is good and what is bad? It tells us to do good things and avoid doing bad things. So, ethics separate, good and bad, right and wrong, fair and unfair, moral and immoral and proper and improper human action. In short, ethics means a code of conduct. It is like the 10 commandments of holy Bible. It tells a person how to behave with another persoN MEANING OF BUSINESS ETHICS ‘Business ethics means to conduct business with a human touch in order to give welfare to the society. So, the businessmen must give a regular supply of good quality goods and services at reasonable prices to their consumers. They must avoid indulging in unfair trade practices like adulteration, promoting misleading advertisements, cheating in weights and measures, black marketing, etc. They must give fair wages and provide good working conditions to their workers. They must not exploit the workers. They must encourage competition in the market. They must protect the interest of small businessmen. They must avoid unfair competition. They must avoid monopolies. They must pay all their taxes regularly to the government. Definition of Business Ethics According to Andrew Crane, “Business ethics is the study of business situations, activities, and decisions where issues of right and wrong are addressed.” According to Wikipedia, “Business ethics (also corporate ethics) is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations.” Nature of Business Ethics The characteristics or features of business ethics are:- • Code of conduct : Business ethics is a code of conduct. It tells what to do and what not to do for the welfare of the society. All businessmen must follow this code of conduct. • Based on moral and social values : Business ethics is based on moral and social values. It contains moral and social principles (rules) for doing business. This includes self-control, consumer protection and welfare, service to society, fair treatment to social groups, not to exploit others, etc. • Gives protection to social groups : Business ethics give protection to different social groups such as consumers, employees, small businessmen, government, shareholders, creditors, etc. • Provides basic framework : Business ethics provide a basic framework for doing business. It gives the social cultural, economic, legal and other limits of business. Business must be conducted within these limits. • Voluntary: Business ethics must be voluntary. The businessmen must accept business ethics on their own. Business ethics must be like self-discipline. It must not be enforced by law. • Requires education and guidance : Businessmen must be given proper education and guidance before introducing business ethics. The businessmen must be motivated to use business ethics. They must be informed about the advantages of using business ethics. Trade Associations and Chambers of Commerce must also play an active role in this matter. • Relative Term : Business ethics is a relative term. That is, it changes from one business to another. It also changes from one country to another. What is considered as good in one country may be taboo in another country. • New concept : Business ethics is a newer concept. It is strictly followed only in developed countries. It is not followed properly in poor and developing countries. SCOPE OF BUSINESS ETHICS Ethical problems and phenomena arise across all the functional areas of companies and at all levels within the company. 1. Ethics in Compliance Compliance is about obeying and adhering to rules and authority. The motivation for being compliant could be to do the right thing out of the fear of being caught rather than a desire to be abiding by the law. An ethical climate in an organization ensures that compliance with law is fuelled by a desire to abide by the laws. Organizations that value high ethics comply with the laws not only in letter but go beyond what is stipulated or expected of them. 2. Ethics in Finance The ethical issues in finance that companies and employees are confronted with include: • In accounting – window dressing, misleading financial analysis. • Related party transactions not at arm’s length • Insider trading, securities fraud leading to manipulation of the financial markets. • Executive compensation. • Bribery, kickbacks, over billing of expenses, facilitation payments. • Fake reimbursements 3. Ethics in Human Resources Human resource management (HRM) plays a decisive role in introducing and implementing ethics. Ethics should be a pivotal issue for HR specialists. The ethics of human resource management (HRM) covers those ethical issues arising around the employer-employee relationship, such as the rights and duties owed between employer and employee. The issues of ethics faced by HRM include: • Discrimination issues i.e. discrimination on the bases of age, gender, race, religion, disabilities, weight etc. • Sexual harassment. • Affirmative Action. • Issues surrounding the representation of employees and the democratization of the workplace, trade ization. • Issues affecting the privacy of the employee: workplace surveillance, drug testing. • Issues affecting the privacy of the employer: whistle-blowing. • Issues relating to the fairness of the employment contract and the balance of power between employer and employee. • Occupational safety and health. Companies tend to shift economic risks onto the shoulders of their employees. The boom of performance-related pay systems and flexible employment contracts are indicators of these newly established forms of shifting risk. 4.Ethics in Marketing Marketing ethics is the area of applied ethics which deals with the moral principles behind the operation and regulation of marketing. The ethical issues confronted in this area include: • Pricing: price fixing, price discrimination, price skimming. • Anti-competitive practices like manipulation of supply, exclusive dealing arrangements, tying arrangements etc. • Misleading advertisements • Content of advertisements. • Children and marketing. • Black markets, grey markets. 5. Ethics of Production This area of business ethics deals with the duties of a company to ensure that products and production processes do not cause harm. Some of the more acute dilemmas in this area arise out of the fact that there is usually a degree of danger in any product or production process and it is difficult to define a degree of permissibility, or the degree of permissibility may depend on the changing state of preventative technologies or changing social perceptions of acceptable risk. • Defective, addictive and inherently dangerous products and • Ethical relations between the company and the environment include pollution, environmental ethics, and carbon emissions trading. • Ethical problems arising out of new technologies for e.g. Genetically modified food • Product testing ethics. The most systematic approach to fostering ethical behavior is to build corporate cultures that link ethical standards and business practices. ADVANTAGES OF BUSINESS ETHICS More and more companies recognize the link between business ethics and financial performance. Companies displaying a “clear commitment to ethical conduct” consistently outperform companies that do not display ethical conduct. 1. Attracting and retaining talent People aspire to join organizations that have high ethical values. Companies are able to attract the best talent and an ethical company that is dedicated to taking care of its employees will be rewarded with employees being equally dedicated in taking care of the organization. The ethical climate matter to the employees. Ethical Organizations create an environment that is trustworthy, making employees willing to rely, take decisions and act on the decisions and actions of the co-employees. In such a work environment, employees can expect to be treated with respect and consideration for their colleagues and superiors. It cultivates strong teamwork and Productivity and support employee growth. 2. Investor Loyalty Investors are concerned about ethics, social responsibility and reputation of the company in which they invest. Investors are becoming more and more aware that an ethical climate provides a foundation for efficiency, productivity and profits. Relationship with any stakeholder, including investors, based on dependability, trust and commitment results in sustained loyalty. 3. Customer satisfaction Customer satisfaction is a vital factor in successful business strategy. Repeat purchases/orders and enduring relationship of mutual respect is essential for the success of the company. The name of a company should evoke trust and respect among customers for enduring success. This is achieved by a company that adopts ethical practices. When a company because of its belief in high ethics is perceived as such, any crisis or mishaps along the way is tolerated by the customers as a minor aberration. Such companies are also guided by their ethics to survive a critical situation. Preferred values are identified ensuring that organizational behaviors are aligned with those values. An organization with a strong ethical environment places its customers’ interests as foremost. Ethical conduct towards customers builds a strong competitive position. It promotes a strong public image. 4. Regulators Regulators eye companies functioning ethically as responsible citizens. The regulator need not always monitor the functioning of the ethically sound company. The company earns profits and reputational gains if it acts within the confines of business ethics. To summaries, companies that are responsive to employees’ needs have lower turnover in staff. • Shareholders invest their money into a company and expect a certain level of return from that money in the form of dividends and/or capital growth. • Customers pay for goods, give their loyalty and enhance a company’s reputation in return for goods or services that meet their needs. • Employees provide their time, skills and energy in return for salary, bonus, career progression, and learning. 5. Long-term growth: sustainability comes from an ethical long-term vision which takes into account all stakeholders. Smaller but sustainable profits long-term must be better than higher but riskier short-lived profits. 6. Cost and risk reduction: companies which recognize the importance of business ethics will need to spend less protecting themselves from internal and external behavioral risks, especially when supported by sound governance systems and independent research 7. Anti-capitalist sentiment: the financial crisis marked another blow for the credibility of capitalism, with resentment towards bank bailouts at the cost of fundamental rights such as education and healthcare. 8. Limited resources: the planet has finite resources but a growing population; without ethics, those resources are replete for purely individual gain at huge cost both to current and future generations Ten Companies With Best Ethical Corporate Policies Worldwide It’s not often that companies are celebrated for good behavior. Here are corporations with policies we can support: 1. Google Although some may criticize the company, Google (NASDAQ:GOOG) regularly makes good on its motto: “Don’t be evil.” Through its Google Green Program, the company has donated over $1 billion to renewable energy projects, and has decreased its own footprint by using energy efficient buildings and public transportation. The company is also a staunch advocate of free speech, which can be observed from its frequent conflicts with the Chinese government. Google is also an open supporter of gay rights. Yet all this pales in comparison to Google’s status as a paragon for employee benefits. Just to name a few, Google employees have access to free health care and treatment from on-site doctors, free legal advice with discounted legal services, a fully stock snack pantry and onsite cafeteria (staffed by world-class chefs, no less), and a free on-site nursery. With such a stellar record of social awareness and positive employee relations, Google is easily the best example of ethics in the corporate world today 2. Microsoft Given the fact that it was started by Bill Gates, one of America’s most generous philanthropists, it follows that Microsoft (NASDAQ:MSFT) would do well in following his example. The tech company and its employees donate over $1 billion yearly to charities and non-profit organizations. If that wasn’t enough, Microsoft’s management and employees have also decided to tackle America’s IT professional’s shortage through its TEALS program. Through the TEALS program, Microsoft employees are encouraged to volunteer at local schools to instruct students in computer science, in the hopes that it will inspire them to enter the technology industry. It’s only natural that Microsoft employees would be generous people; in addition to being among the highest paid employees in America, they also enjoy a plethora of perks, including 100% coverage on their health care premiums. 3. Intel Since 1988, the computer chip manufacturer Intel (NASDAQ:INTC) has been trying to bolster its reputation through its efforts to strengthen technological education. Through the Intel Foundation, the company hosts the Intel Science Talent Search and the international Science and Engineering Fair to help encourage STEM (science, technology, engineering, and mathematics) education for young people. Intel is also interested in making these areas more diverse; the company has many donation funds and programs to encourage girls and underprivileged minorities to study in these fields. Employees of Intel also experience the company’s dedication to education through a very strange corporate perk — the company promotes or reassigns them to different fields and areas every 16 to 24 months, in the interest of making sure that workers never become bored with their roles, and encouraging them to explore new fields. Accepted employees are often told, “Welcome to your next five jobs.” The other companies which top in practicing business ethics worldwide are Patagonia, NuStar Energy, SAS Institute, Ultimate Software, Goldman Sachs, Starbucks and Salesforce.com . Two Indian companies among most ethical in the world: 1. TATA Steel 2. Wipro Limited Conclusion Ethics are the building block of our society and thus should be the building block of our corporations. Henry Kravis states, “If you build that foundation, the moral and the ethical foundation, as well as the business…then the building won’t crumble.” It is not essential to let greed cloud judgment. It can be concluded that it is the high time business ethics should be practiced all over the globe in the benefit of the common society as described in the paper. It is not only in the favor of the mass but also has advantages for the corporate.
- 4.2LESSON 2:TOPIC: Myths About Business Ethics In the field of ethics, values are considered as properties that belong to objects, whether abstract or physical. These properties allow qualifying the importance of each object according to how close it is to what is considered correct or good. If the ethical value of the object is high, it means that the action in question is good and therefore should be carried out or lived. On the other hand, if the ethical value is low, it is a negative issue that should be avoided. Ethical values can be relative (depending on the individual’s perspective or their culture) or absolute (not linked to the individual or the cultural, but it remains constant since it has value in itself). The idea of ethical value is linked to the concept of moral value .Values Ethics are guides that impose how people should act, while moral values constitute the individual as a human being. The two notions, however, are often confused and even combined according to the author. In the same way, we must not forget that ethical values include what is known as a set of rights and duties that we human beings possess. Specifically, according to scholars in the field, it can be said that four are the great ethical values on which it has sustained and we must continue to support the education of the human being. We are referring to responsibility, truth, justice and freedom. Responsibility becomes the power that a man must have to recognize his failures and to assume the consequences that this entails. In the same way, he indicates that this also includes proceeding to fulfill the obligations that have contracted. The truth, on the other hand, is the ethical value of being honest and sincere, of not deceiving or falsifying, because that will make anyone who has the ability to be a person that can be trusted. So important is the same that there are already legendary phrases like “the truth will set us free.” A fundamental ethical value is justice .All people must act fairly so that there is a harmonious and peaceful coexistence in society .Those actions that are far from this ethical value undermines social welfare. freedom is also often mentioned as an ethical value. The acts destined to restrict the freedom of the subjects are not ethical; In any case, people must be held accountable for their actions, since responsibility is another ethical value that governs the functioning of communities; otherwise, freedom could undermine justice, for example. In the same way, we cannot ignore that within the Public Education in Spain there is a subject for ESO (Compulsory Secondary Education) called Ethical Values. As an alternative to the subject of Religion the same is taught in which students study topics such as euthanasia, cloning, the role of the courts of justice, conscientious objection, dignity, equality in interpersonal relationships, justice and politics… 10 Myths About Business Ethics Business ethics in the workplace is about prioritizing moral values for the workplace and ensuring behaviors are aligned with those values — it’s values management. Yet, myths abound about business ethics. Some of these myths arise from general confusion about the notion of ethics. Other myths arise from narrow or simplistic views of ethical dilemmas. 1. Myth: Business ethics is more a matter of religion than management. Diane Kirrane, in “Managing Values: A Systematic Approach to Business Ethics,”(Training and Development Journal, November 1990), asserts that “altering people’s values or souls isn’t the aim of an organizational ethics program — managing values and conflict among them is …” 2. Myth: Our employees are ethical so we don’t need attention to business ethics. Most of the ethical dilemmas faced by managers in the workplace are highly complex. Wallace explains that one knows when they have a significant ethical conflict when there is presence of a) significant value conflicts among differing interests, b) real alternatives that are equality justifiable, and c) significant consequences on “stakeholders” in the situation. Kirrane mentions that when the topic of business ethics comes up, people are quick to speak of the Golden Rule, honesty and courtesy. But when presented with complex ethical dilemmas, most people realize there’s a wide “gray area” when trying to apply ethical principles. 3. Myth: Business ethics is a discipline best led by philosophers, academics and theologians. Lack of involvement of leaders and managers in business ethics literature and discussions has led many to believe that business ethics is a fad or movement, having little to do with the day-to-day realities of running an organization. They believe business ethics is primarily a complex philosophical debate or a religion. However, business ethics is a management discipline with a programmatic approach that includes several practical tools. Ethics management programs have practical applications in other areas of management areas, as well. (These applications are listed later on in this document.) 4. Myth: Business ethics is superfluous — it only asserts the obvious: “do good!” Many people react that codes of ethics, or lists of ethical values to which the organization aspires, are rather superfluous because they represent values to which everyone should naturally aspire. However, the value of a codes of ethics to an organization is its priority and focus regarding certain ethical values in that workplace. For example, it’s obvious that all people should be honest. However, if an organization is struggling around continuing occasions of deceit in the workplace, a priority on honesty is very timely — and honesty should be listed in that organization’s code of ethics. Note that a code of ethics is an organic instrument that changes with the needs of society and the organization. 5. Myth: Business ethics is a matter of the good guys preaching to the bad guys. Some writers do seem to claim a moral high ground while lamenting the poor condition of business and its leaders. However, those people well versed in managing organizations realize that good people can take bad actions, particularly when stressed or confused. (Stress and confusion are not excuses for unethical actions — they are reasons.) Managing ethics in the workplace includes all of us working together to help each other remain ethical and to work through confusing and stressful ethical dilemmas. 6. Myth: Business ethics in the new policeperson on the block. Many believe business ethics is a recent phenomenon because of increased attention to the topic in popular and management literature. However, business ethics was written about even 2,000 years ago — at least since Cicero wrote about the topic in his On Duties. Business ethics has gotten more attention recently because of the social responsibility movement that started in the 1960s. 7. Myth: Ethics can’t be managed. Actually, ethics is always “managed” — but, too often, indirectly. For example, the behavior of the organization’s founder or current leader is a strong moral influence or directive if you will, on behavior or employees in the workplace. Strategic priorities (profit maximization, expanding market share, cutting costs, etc.) can be very strong influences on morality. Laws, regulations and rules directly influence behaviors to be more ethical, usually in a manner that improves the general good and/or minimizes harm to the community. Some are still skeptical about business ethics, believing you can’t manage values in an organization. Donaldson and Davis (Management Decision, V28, N6) note that management, after all, is a value system. Skeptics might consider the tremendous influence of several “codes of ethics,” such as the “10 Commandments” in Christian religions or the U.S. Constitution. Codes can be very powerful in smaller “organizations” as well. 8. Myth: Business ethics and social responsibility are the same thing. The social responsibility movement is one aspect of the overall discipline of business ethics. Madsen and Shafritz refine the definition of business ethics to be: 1) an application of ethics to the corporate community, 2) a way to determine responsibility in business dealings, 3) the identification of important business and social issues, and 4) a critique of business. Items 3 and 4 are often matters of social responsibility. (There has been a great deal of public discussion and writing about items 3 and 4. However, there needs to be more written about items 1 and 2, about how business ethics can be managed.) Writings about social responsibility often do not address practical matters of managing ethics in the workplace, e.g., developing codes, updating polices and procedures, approaches to resolving ethical dilemmas, etc. 9. Myth: Our organization is not in trouble with the law, so we’re ethical. One can often be unethical, yet operate within the limits of the law, e.g., withhold information from superiors, fudge on budgets, constantly complain about others, etc. However, breaking the law often starts with unethical behavior that has gone unnoticed. The “boil the frog” phenomena is a useful parable here: If you put a frog in hot water, it immediately jumps out. If you put a frog in cool water and slowly heat up the water, you can eventually boil the frog. The frog doesn’t seem to notice the adverse change in its environment. 10. Myth: Managing ethics in the workplace has little practical relevance. Managing ethics in the workplace involves identifying and prioritizing values to guide behaviors in the organization, and establishing associated policies and procedures to ensure those behaviors are conducted. One might call this “values management.” Values management is also highly important in other management practices, e.g., managing diversity, Total Quality Management and strategic planning.
- 4.3LESSON 3:KOHLBERG’S SIX STAGES OF MORAL DEVELOPMENT Kohlberg’s theory of moral development is a theory that focuses on how children develop morality and moral reasoning. Kohlberg’s theory suggests that moral development occurs in a series of six stages. The theory also suggests that moral logic is primarily focused on seeking and maintaining justice. What Is Moral Development How do people develop morality? This question has fascinated parents, religious leaders, and philosophers for ages, but moral development has also become a hot-button issue in psychology and education.1 Do parental or societal influences play a greater role in moral development? Do all kids develop morality in similar ways? American psychologist Lawrence Kohlberg developed one of the best-known theories exploring some of these basic questions.2 His work modified and expanded upon Jean Piaget’s previous work but was more centered on explaining how children develop moral reasoning. How did the two theories differ? Piaget described a two-stage process of moral development.3 Kohlberg extended Piaget’s theory, proposing that moral development is a continual process that occurs throughout the lifespan. His theory outlines six stages of moral development within three different levels. In recent years, Kohlberg’s theory has been criticized as being Western-centric with a bias toward men (he primarily used male research subjects) and with having a narrow worldview based on upper-middle-class value systems and perspectives.4 How Kohlberg Developed His Theory Kohlberg based his theory on a series of moral dilemmas presented to his study subjects. Participants were also interviewed to determine the reasoning behind their judgments in each scenario.5 One example was “Heinz Steals the Drug.” In this scenario, a woman has cancer and her doctors believe only one drug might save her. This drug had been discovered by a local pharmacist and he was able to make it for $200 per dose and sell it for $2,000 per dose. The woman’s husband, Heinz, could only raise $1,000 to buy the drug. He tried to negotiate with the pharmacist for a lower price or to be extended credit to pay for it over time. But the pharmacist refused to sell it for any less or to accept partial payments. Rebuffed, Heinz instead broke into the pharmacy and stole the drug to save his wife. Kohlberg asked, “Should the husband have done that?” Kohlberg was not interested so much in the answer to whether Heinz was wrong or right but in the reasoning for each participant’s decision. He then classified their reasoning into the stages of his theory of moral development.6 Stages of Moral Development Kohlberg’s theory is broken down into three primary levels. At each level of moral development, there are two stages. Similar to how Piaget believed that not all people reach the highest levels of cognitive development, Kohlberg believed not everyone progresses to the highest stages of moral development. Level 1. Preconvention Morality Preconvention morality is the earliest period of moral development. It lasts until around the age of 9. At this age, children’s decisions are primarily shaped by the expectations of adults and the consequences for breaking the rules. There are two stages within this level: • Stage 1 (Obedience and Punishment): The earliest stages of moral development, obedience and punishment are especially common in young children, but adults are also capable of expressing this type of reasoning. According to Kohlberg, people at this stage see rules as fixed and absolute.7 Obeying the rules is important because it is a way to avoid punishment. • Stage 2 (Individualism and Exchange): At the individualism and exchange stage of moral development, children account for individual points of view and judge actions based on how they serve individual needs. In the Heinz dilemma, children argued that the best course of action was the choice that best served Heinz’s needs. Reciprocity is possible at this point in moral development, but only if it serves one’s own interests. Level 2. Conventional Morality The next period of moral development is marked by the acceptance of social rules regarding what is good and moral. During this time, adolescents and adults internalize the moral standards they have learned from their role models and from society. This period also focuses on the acceptance of authority and conforming to the norms of the group. There are two stages at this level of morality: • Stage 3 (Developing Good Interpersonal Relationships): Often referred to as the “good boy-good girl” orientation, this stage of the interpersonal relationship of moral development is focused on living up to social expectations and roles.7 There is an emphasis on conformity, being “nice,” and consideration of how choices influence relationships. • Stage 4 (Maintaining Social Order): This stage is focused on ensuring that social order is maintained. At this stage of moral development, people begin to consider society as a whole when making judgments. The focus is on maintaining law and order by following the rules, doing one’s duty, and respecting authority. Level 3. Post conventional Morality At this level of moral development, people develop an understanding of abstract principles of morality. The two stages at this level are: • Stage 5 (Social Contract and Individual Rights): The ideas of a social contract and individual rights cause people in the next stage to begin to account for the differing values, opinions, and beliefs of other people.7 Rules of law are important for maintaining a society, but members of the society should agree upon these standards. • Stage 6 (Universal Principles): Kohlberg’s final level of moral reasoning is based on universal ethical principles and abstract reasoning. At this stage, people follow these internalized principles of justice, even if they conflict with laws and rules. Kohlberg believed that only a relatively small percentage of people ever reach the post-conventional stages (around 10 to 15%).7 One analysis found that while stages one to four could be seen as universal in populations throughout the world, the fifth and sixth stages were extremely rare in all populations.8 Criticisms Kohlberg’s theory played an important role in the development of moral psychology. While the theory has been highly influential, aspects of the theory have been critiqued for a number of reasons: • Moral reasoning does not equal moral behavior: Kohlberg’s theory is concerned with moral thinking, but there is a big difference between knowing what we ought to do versus our actual actions. Moral reasoning, therefore, may not lead to moral behavior. • Overemphasizes justice: Critics have pointed out that Kohlberg’s theory of moral development overemphasizes the concept of justice when making moral choices. Factors such as compassion, caring, and other interpersonal feelings may play an important part in moral reasoning.9 • Cultural bias: Individualist cultures emphasize personal rights, while collectivist cultures stress the importance of society and community. Eastern, collectivist cultures may have different moral outlooks that Kohlberg’s theory does not take into account. • Age bias: Most of his subjects were children under the age of 16 who obviously had no experience with marriage. The Heinz dilemma may have been too abstract for these children to understand, and a scenario more applicable to their everyday concerns might have led to different results. • Gender bias: Kohlberg’s critics, including Carol Gilligan, have suggested that Kohlberg’s theory was gender-biased since all of the subjects in his sample were male.10 Kohlberg believed that women tended to remain at the third level of moral development because they place a stronger emphasis on things such as social relationships and the welfare of others.
- 4.4LESSON 4:Absolutism and Relativism Both absolutism and relativism are philosophical concepts on moral values. These are two of the popular philosophical debates under ethics, the study of morality. Absolutism holds that standards are always true. On the other hand, relativism considers the contexts of situations. Hence, absolutism endorses equality while relativism advocates equity. The following paragraphs further delve into such differences. What is Absolutism? Absolutism maintains that moral values are fixed regardless of time, place, and the people concerned. Under moral absolutism is graded absolutism which views a certain standard as either greater or less than another moral absolute. For instance, the guideline, “Do not lie” is less important than “Do not kill”. Its advantages include the critical evaluation of ethics and observing equality since rules apply to people from different walks of life. For instance, lying is immoral and saying the truth should be practiced at all times. However, it does not seem suitable to measure all individuals using the same moral yardstick as life has gray areas. One popular example of absolutism is Kantian ethics (developed by Immanuel Kant, a German philosopher) which posits that an action is only good if the principle behind it is moral. What is Relativism? Relativism asserts that moral standards are dependent on contexts since nothing is innately right or wrong. This kind of view is more applicable to the current society as the value of tolerance is being advocated. For instance, it is immoral in some countries for women to go outside without covering their faces while it is perfectly normal in most territories. Relativism’s advantages include acknowledging diversity and gray areas. On other hand, its disadvantages include reducing a behavior’s value from being “morally correct” to merely being “socially acceptable”. For instance, abortion is being practiced in some cultures; would it then be ok to tolerate such a practice? One example of a theory under relativism is situational ethics which posits that there should be fair judgment by looking into personal ideals. Its proponents include Jean-Paule Sartre, Simon Lucie Ernestine Marie Bertrand de Beauvoir, Karl Theodor Jaspers, and Martin Heidegger. It specifies that a certain principle may only be applicable to a situation which may not be helpful in a different context. The following are the major categories of relativism: • Moral relativism: diversity in moral standards across various populations and cultures • Truth relativism: what is true is dependent on a certain perspective • Descriptive relativism: the distinctions between groups are simply described; they are not judged • Normative relativism: morality is evaluated based on a certain framework Difference between Absolutism and Relativism 1. Moral Guidelines In absolutism, the moral guidelines are definite while those of relativism are dependent on the contexts of various situations. 2. The Value of Tolerance Relativism is more closely associated with the value of tolerance since the differences in background are considered. On the contrary, absolutism does not look into diversity as it strictly adheres to the moral guidelines; hence, its critics argue that this perspective paves way for discrimination. 3. Intrinsic Values Unlike relativism, absolutism holds that acts are intrinsically right or wrong. For instance, since absolutists believe that killing is intrinsically wrong, a woman who killed a rapist in self-defense is condemned as immoral. On the other hand, a relativist understands the crime of passion involved in the situation and views the woman as moral. 4. Religion As compared with relativism, moral absolutism is more associated with religion since church doctrines often endorse specific ethical guidelines. 5. Advantages The advantage of absolutism includes the ability to critically evaluate the ethics of different situations while that of relativism is the capacity to tolerate diverse kinds of beliefs. 6. Disadvantages The disadvantages of absolutism include the inability to consider the context of situations and value the gray areas of morality while that of relativism is reducing being “morally correct” to merely being “socially acceptable” and that the lines between what is right and wrong may become too vague. 7. Major Categories The major categories of relativism are moral, truth, descriptive, and normative while absolutism does not have major categories. 8. Consequences Absolutism does not consider consequences as its moral tenets are deontological or only based on the specified rules whereas relativism is teleological or values the results of one’s actions. For instance, absolutism views Robin Hood as immoral since stealing is bad; however, relativism sees him as moral since he steals from a corrupt individual and gives money to the poor. 9. Moral Theory Examples A usual example of absolutism is Kantian ethics which asserts that an action is moral if the intention behind it is moral. As for relativism, one of the popular examples is situational ethics which primarily considers personal ideals. Absolutism vs Relativism: Comparison Chart Summary of Absolutism verses Relativism • Both absolutism and relativism are philosophical concepts on moral values. • Absolutism maintains that moral values are fixed regardless of time, place, and the people concerned. • Unlike in absolutism, the value of tolerance is emphasized in relativism. • Unlike relativism, absolutism believes that values are intrinsically right or wrong. • As compared to relativism, absolutism is more connected with religion. • The advantage of absolutism is its ability to critically evaluate a situation’s morality while that of relativism is its capacity to consider gray areas. • The disadvantage of relativism is the possible reduction of what is morally correct to being merely socially acceptable while that of absolutism is not considering the context. • Relativism has major categories while absolutism has none. • Unlike absolutism, relativism considers consequences. • An example for absolutism is Kantian Ethics and that of relativism is Situational Ethics.
- UNIT 46
- 5.1LESSON 1:ETHICAL DECISION MAKING What is ethical decision making? Ethical decisions inspire trust and with it fairness, responsibility and care for others. The ethical decision making process recognizes these conditions and requires reviewing all available options, eliminating unethical views and choosing the best ethical alternative. Ethical decisions inspire trust and with it fairness, responsibility and care for others. The ethical decision making process recognizes these conditions and requires reviewing all available options, eliminating unethical views and choosing the best ethical alternative. Good decisions are both effective and ethical. In professional relationships, good decisions build respect, trust, and are generally consistent with good citizenship. Effective decisions are effective when they achieve what they were made for. A choice that produces unintended results is ineffective and therefore not good. The key to making good decisions is to think about the different choices that lie ahead in order to achieve the objectives. For that reason, it is also very important to understand the difference between short-term vs. medium to long term objectives. Making ethical decisions requires a certain sensitivity to ethical issues and a method of examining all the considerations associated with a decision. Having a method or structure for making ethical decisions is therefore essential. After this process has been performed a few times, the method is trusted and it is easier to walk through the steps. Below is a description of ethical decision-making methods. Framework for ethical decision making If ethics is not based on religion, feelings, law, social practices or science, what is it based on? Countless philosophers and ethicists have attempted to answer this critical question. At least five different ethical norms or standards have been proposed. The most important are explained below. The Utilitarian Approach This approach dictates that the action that is the most ethical is the action that produces the most good and causes the least harm. In other words, the decision that strikes the greatest balance between good and evil. In a business environment, it is therefore the decision that yields the most benefits and causes the least damage to customers, employees, shareholders, the environment, etc. The Right Approach The right approach suggests that the most ethical decision is the one that best protects and respects the moral rights of all concerned. This approach argues that people have a dignity based on human nature or their ability to freely choose what they want to do with their lives. Based on that dignity, they have the right to be treated equally by others and not just as a means to an(other) end. The Fairness or Justice Approach All equals should be treated equally. The Greek philosopher Aristotle and others contributed to that idea. Today, this idea is used to indicate that ethical decisions treat everyone equally. If not equal, this must be based on a standard that is explainable. People are paid more for their hard work when they contribute more to the organization. That is fair. But many wonder whether the salaries of CEOs, some 100 times higher than others, are fair. Is this standard defensible? The Common Good Approach The Greek philosophers also contributed to the idea that living in a community is a good thing. People’s actions and actions must contribute to this. This approach suggests that relationships within society are the basis of ethical reasoning and acting. Respect and compassion for all others, especially the vulnerable, are prerequisites for maintaining an ethical way of life. The Virtue Approach An ancient approach to ethics is the belief that acting ethically must be in accordance with certain virtues that ensure the development of humanity in general. Virtues are tendencies and habits that enable man to act with the highest potential of human character. Ethical decision-making process and roadmap Below is a summary of the roadmap for the ethical decision-making process. 1. Gather the facts Don’t jump to conclusions until the facts are on the table. Ask yourself questions about the issue at hand, such as the 5 whys method. Facts are not always easy to find, especially in situations where ethics plays an important part. Some facts are not available or clearly demonstrable. Also indicate which assumptions are made. 2. Define the ethical issue Before solutions or new plans can be considered, the ethical issue is clearly defined. If there are multiple ethical focal points, only the most important should be addressed first. 3. Identify the stakeholders Identify all stakeholders. Who are those primary stakeholders? And who are the secondary stakeholders? Why are they interested in this issue? 4. Identify the effects and consequences Think about the possible positive and negative consequences associated with the decision. What is the magnitude of these consequences? And what is the probability that these consequences will actually occur? Distinguish between short-term and long-term consequences. 5. Consider integrity and character Consider what the community thinks would be a good decision in this context. How would you like it if the national newspaper wrote about your decision? What is public opinion? How does your character and personality influence the decision to be made? 6. Get creative with potential actions Are there other choices or alternatives that have not yet been considered? Try to come up with additional solutions or choices if a small number is considered. 7. Decide on the right ethical action Consider the options based on each option’s consequences, duties, and character aspects. Which arguments are most suitable to justify the choice? How do we incorporate ethics in decision making using our decision making process? Addressing ethics in decision making in business or other large organizations or groups (e.g., government) does point to the need to ensure that key focusing decisions (the decisions highlighted in green) have been made and are in place. In particular, the business decision for core values should be in place to provide the goals/requirements that will be used to create and constrain the criteria used in the network of business decisions. This focusing decision can influence criteria for decisions throughout the network of business decisions (the decisions in blue), directly influencing ethical decision making and organizational conduct. Additional related decisions include choosing the business mission and the code of conduct that will add compliance criteria to decisions across the business decision network. Here are some criteria that can help ensure appropriate ethical considerations are part of the decisions being made in the organization: • Compliance – Does it conform to the company’s values and code of ethics? Does it meet (should exceed) legal requirements? • Promote good and reduce harm – What solution will be good to the most people while minimizing any possible harm? • Responsibility – What alternative provides the most responsible response? Does the solution ensure meeting our duties as a good corporate citizen? • Respects and preserves rights – Does the option negatively impact an individual’s or organization’s rights? • Promotes trust – Does the solution lead to honest and open communication? Is it truthful? Is there full disclosure? • Builds reputation – Would a headline of your decision generate pride or shame? Does your solution add to or detract with the identity you want for the organization? When is the best time to address personal morals versus organization ethics? Future conflict between a person’s moral choices and an organization’s ethical decisions are most easily addressed as someone seeks to join the organization. If a person is ready to join a company or business, it is important that he (or she) be presented with the company’s core values and code of conduct (if available). The prospective new member must then determine if it is possible to reconcile their moral choices with the organization’s ethics as conveyed in the company’s values and code of conduct. Agreement to join the company implicitly assumes that this reconciliation has taken place, but it can be made explicit by requiring agreement to a code of conduct. Given this understanding that should exist between the company and the individual, a change to the company’s values and code of conduct should be given careful consideration. Changing the basis for the organization’s ethics in decision making, in theory, requires a new agreement with each individual to reconcile with their personal moral choices. In practice, this change can lead to conflict as an individual’s morals now lead to choices that violate the company’s decision making ethics. Ethical Decision-Making in Finance Standard neoclassical economics assumes that all companies in the market want to maximize profits. Therefore, all decisions are driven solely by the question “Will it be profitable?” However, ethical decisions are driven by a different set of questions, such as: • Is it a breach of trust? • Is it respectful? • Is it responsible? • Is it fair? • Is it compassionate? • Is it civil? Ethical Framework for Companies Trust • The company should act in a way that inspires trust and positively impacts its reputation. • The company should act with integrity and honesty. • The company should be reliable. • The company should behave in a stable and consistent manner. • The company should keep its promises and take its reputation seriously. Respect • The company should respect its customers. • The company should respect its workers. • The company should respect its competitors. • The company should deal with disagreements and conflict in a respectful manner. • The company should be tolerant of different beliefs and ideologies. • The company should actively try to promote good moral behavior through its business decisions. Responsible • The company should be considerate. • The company should be accountable. • The company should be thoughtful and realize that actions come with consequences. • The company is disciplined and does not behave in a rash and erratic manner. Fair • The company is stoic. • The company accepts that it will not always get its way. • The company takes success with humility. • The company takes defeat with grace. • The company is open-minded and does not react adversely to change. Care • The company cares about its customers. • The company cares about its workers. • The company cares about its own reputation. • The company cares about more than just profits. • The company does not hold grudges and forgives easily. • The company is compassionate. • The company is altruistic. Civil • The company exhibits a sense of civic duty. • The company treats its surroundings with care and respect. • The company protects the local environment. • The company recognizes its debt to the public. • The company respects the law. Character-Based Decision-Making Model The character-based decision-making model was developed by researchers at the Josephson Institute of Ethics. It provides a framework that can be used to decide whether a decision is morally and ethically sound. • The Golden Rule – “Help when you can and avoid harm when you can.” • Ethical principles are morally superior to non-ethical principles and should be used as a guide for all decisions. The company should violate an ethical principle if it means it can promote a greater ethical principle. However, this is an extremely subtle rule and can be abused. In general, the company should make decisions that promote the greatest amount of moral justness.
- 5.2LESSON 2: CODE OF CONDUCT :The culture of each company is different. The code of conduct and the code of ethics help explicitly define the ethical norms of an organization, and they guide employees towards understanding the standards and expectations for behavior. Any business, from small online shops to large corporations, can benefit from publishing a code of conduct and ethics. These documents also aid in establishing the company’s commitment to ethical values. Customers and partners are more likely to engage with businesses that share similar values. The publicized commitment also shows that the company has done its part towards ensuring high standards and professional conduct as a form of risk mitigation. What is a code of conduct? A code of conduct is a set of organizational rules and standards regarding the company’s values, ethics, and beliefs that determine the conduct or action of the organization and its members. It also includes matters of legal compliance. The different rules set out in a code of conduct determine which practices are required or restricted. As a rule, a company’s written or unwritten code of ethics directly influences the code of conduct. The code of conduct specifically sets out actual guidelines with more specific dos and don’ts of action. This document details what is expected of employees. Common scenarios that a code of conduct may discuss include conflicts of interest, acceptance of gifts and bribery, use of confidential information, financial reporting and accounting conduct, and proper use of the company’s property. Employees who want to be part of the company need to adhere to the business code of conduct. Failure to comply with the code repeatedly or intentionally will lead to an appropriate sanction. As such, a code of conduct also usually states the penalties for failure to comply. What is a code of ethics A code of ethics is a company policy statement or document designed to guide employees in decision-making. As a form of a value statement, it views ethics as a guide of principles that help professionals in the business conduct dealings honestly and with integrity. Ethics is not just an intangible concept under corporate culture or an unwritten understanding among members of an organization. The ethical principles embodied within the code are based on the organization’s core values, mission, and vision, as well as any standards imposed on a related professional field, such as medical ethics or legal ethics. A code of ethics will reflect all of these principles and a general guide of how members should approach problems. Thus, most codes of ethics are also disclosed publicly so that interested parties can know how the company does its business. The general guide usually touches on common ethical concerns, such as employer-employee relations, environmental issues, social responsibility, and discrimination. The code will outline the responsibilities and obligations that members have to the organization and its stakeholders for these different concerns. A code of ethics may be largely compliance-based, with guidelines explicitly set out along with penalties for violation of ethical principles. Large companies usually have a compliance officer who checks for ethical misconduct. A value-based code of ethics is more interested in employees self-regulating themselves to follow the standards of responsible conduct. Employees are supposed to be guided by this code when they make crucial decisions. Intentionally or repeatedly breaking the code of ethics can result in dismissal or termination. What are the similarities? Both the code of conduct and the code of ethics are formal documents that organizations create to encourage certain behavior from their employees. They need to be accepted before a member can join the organization. Both outline the standards in which members must adhere to remain part of the organization, including specific scenarios or forms of behavior. The level of accountability is reflected in the sanctions for failure to comply with either code. Both statements are also more effective when top-level management leads by example. What are the differences? The code of conduct and ethics differ in terms of purpose, focus, scope, and content. The code of ethics is an aspiration document designed to influence individual decision-making and the thought process of the employees. On the other hand, the code of conduct is guidelines which are meant to influence the employee’s actions. The code of ethics contains a company’s core ethical values, principles, and ideals, which serve as the foundation for the code of business conduct. The business provides more specific practices and behavior covering many scenarios, and therefore, it has a narrower scope and longer length. Finally, the code of ethics is typically published online for the benefit of customers and shareholders, while the code of business conduct is a more internal agreement. What to include in the code of conduct and code of ethics? Both codes can be in separate forms or combined into one document that blends ethical principles into professional action. The business conduct and the code of ethics contain policies and guidelines which are specific to the company. However, there are several universal elements. Clear introduction The rationale behind the document must be written in clear and inspirational tones to motivate employees towards benefitting the organization. The introduction is sometimes a statement by a high-level executive showing personal commitment and support for the code of ethics and business conduct. Statement of values The statement of values, either within the introduction or as a separate section, outlines the company’s purpose and values. It helps frame the code of ethics and business conduct following a bigger picture. It may also include practical financial objectives and social and organizational goals that require good ethical practices and business conduct. Employees are more likely to adhere to higher ethical values and conduct rules if they have an understanding of the company’s overall goal. Specific laws Certain companies or organizations may be dealing in a profession governed by a particular law, such as those encoding accounting rules or medical ethics. Commitment to government standards and licensing requirements may also be reinforced here. Specific rules of conduct Specific rules of conduct may be divided into separate sections, as discussed later. The focus of the specific rules depends on the interests of your employees, customers, shareholders, suppliers, and even wider society. Diversity rules One of the more important guidelines to include in your code of ethics and business conduct are rules on diversity. All types of businesses must strive to create an inclusive environment free from discrimination. Employee and consumer privacy Employees must feel comfortable in their place of work, so a commitment to employee privacy is one way to show employees that the code of ethics and business conduct is also for them. Stating principles related to consumer privacy helps build confidence in the company. Environmental policies Environmental policies may include adherence to regulations and industry best practices. Labor and fair hiring The code of conduct is an agreement between members of the organization. As such, it also outlines the professional and respectful treatment of employees to employees and managers to employees. Security and safety Companies are required to create and contribute to a safe working environment. Businesses may write explicit dos and don’ts to address specific issues. Implementation of the code The code should detail what will be done to ensure implementation. It includes administrative activities in reporting possible violations, the process for establishing facts, and issuance of warnings. Consequences such as the issuance of warnings, counseling or reeducation, suspension, litigation, and dismissal should be discussed. Code of conduct and code of ethics examples Publishing a code of ethics and business conduct is a way of underlining the company’s commitment to ethical behavior. As smaller businesses grow, ethical hazards and risks will increase, solidifying the need for a clear code for employees to follow. Many well-known companies have their own code of ethics published for the interest of the general public. Here are excerpts from the code of ethics and business conduct from well-known websites. Google’s code of conduct The Google Code of Conduct is one of the ways we put Google’s values into practice. It’s built around the recognition that everything we do in connection with our work at Google will be, and should be, measured against the highest possible standards of ethical business conduct. We set the bar that high for practical as well as aspirational reasons: Our commitment to the highest standards helps us hire great people, build great products, and attract loyal users. Respect for our users, for the opportunity, and for each other are foundational to our success and are something we need to support every day. Amazon’s code of business conduct and ethics In performing their job duties, Amazon.com employees should always act lawfully, ethically, and in the best interests of Amazon.com. This Code of Business Conduct and Ethics (the “Code of Conduct”) sets out basic guiding principles. Employees who are unsure whether their conduct or the conduct of their coworkers complies with the Code of Conduct should contact their manager or the Legal Department. Employees may also report any suspected noncompliance as provided in the Legal Department’s reporting guidelines referred to in paragraph IX below. Twitter’s developers’ code of conduct We believe the Twitter Developer Community should maintain a positive and inclusive experience for everyone. Twitter is committed to providing a friendly, safe, and welcoming environment for all participants and expects everyone to treat each other with respect and courtesy. The following Code of Conduct outlines our expectations for participant behavior as well as the consequences for unacceptable behavior. We require that all participants abide by this Code within the Community and any community-related events. Facebook’s code of conduct Employees of Facebook, Inc., or any of its affiliates or subsidiaries (“Facebook”), and others performing work for Facebook or on its behalf, collectively referred to in this code as “Facebook Personnel”, are expected to act lawfully, honestly, ethically, and in the best interests of the company while performing duties on behalf of Facebook. This code provides some guidelines for business conduct required of Facebook Personnel. Persons who are unsure whether their conduct or the conduct of other Facebook Personnel complies with this code should contact their manager, another Facebook manager, Human Resources, or the Legal Department. This code applies to all Facebook Personnel, including members of the Board of Directors (in connection with their work for Facebook), officers, and employees of Facebook, Inc. and its corporate affiliates, as well as contingent workers (e.g., agency workers, contractors and consultants) and others working on Facebook’s behalf. This code is subject to change and may be amended, supplemented, or superseded by one or more separate policies. If any part of this code conflicts with local laws or regulations, only the sections of this code permitted by applicable laws and regulations will apply. Any policies that are specifically applicable to your jurisdiction will take precedence to the extent they conflict with this code. Spotify’s code of conduct and ethics Being a member of the Spotify band comes with many good things and responsibility is one of them. Our culture, our reputation and the vibe of our work environment are made up of how each and every one of us acts, talks and behaves, every day. So we all answer to the other band members, our stakeholders, artists, Spotify users, and the general public. This is our Code of Conduct and Ethics (the “Code”), it is based on our policies and our values (innovative, collaborative, sincere, passionate, playful). Mostly, it describes our three main rules and how to make sure we live up to them: (1) Do the right thing. Always act with honesty, integrity, and reliability. Keep moral and ethical standards sky-high. (2) Be nice. Treat people with dignity and respect, regardless of who they are and where they came from. Stay decent and courteous in all relationships. (3) Play fair. Don’t cheat. Be careful to balance the interests of all groups (stakeholders, artists, users, employees and the general public) when you go about our business.
- 5.3LESSON 3:Business ethics Business ethics is the study of appropriate business policies and practices regarding potentially controversial subjects including corporate governance, insider trading, bribery, discrimination, corporate social responsibility, and fiduciary responsibilities. The law often guides business ethics, but at other times business ethics provide a basic guideline that businesses can choose to follow to gain public approval. Ethical issues in finance Ethics in accounting are concerned with how to make good and moral choices in regard to the preparation, presentation and disclosure of financial information. During the 1990s and 2000s, a series of financial reporting scandals brought this issue into the forefront. Knowing some of the issues presented in accounting ethics can help you ensure that you are considering some of the implications for the actions that you take with your own business. Fraudulent financial reporting Most accounting scandals over the last two decades have centered on fraudulent financial reporting. Fraudulent financial reporting is the misstatement of the financial statements by company management. Usually, this is carried out with the intent of misleading investors and maintaining the company’s share price. While the effects of misleading financial reporting may boost the company’s stock price in the short-term, there are almost always ill effects in the long run. This short-term focus on company finances is sometimes known as “myopic management.” Misappropriation of assets On an individual employee level, the most common ethical issue in accounting is the misappropriation of assets. Misappropriation of assets is the use of company assets for any other purpose than company interests. Otherwise known as stealing or embezzlement, misappropriation of assets can occur at nearly any level of the company and to nearly any degree. For example, a senior level executive may charge a family dinner to the company as a business expense. At the same time, a line-level production employee may take home office supplies for personal use. In both cases, misappropriation of assets has occurred. Disclosure violations As a subtopic of fraudulent financial reporting, disclosure violations are errors of ethical omission. While intentionally recording transactions in a manner that is not in accordance with generally accepted accounting principles is considered fraudulent financial reporting, the failure to disclose information to investors that could change their decisions about investing in the company could be considered fraudulent financial reporting, as well. Company executives must walk a fine line; it is important for management to protect the company’s proprietary information. However, if this information relates to a significant event, it may not be ethical to keep this information from the investors. Penalties for violations Penalties for violations of accounting ethics laws have increased greatly since the passage of the sarbanes-oxley act of 2002. This legislation allows for harsh penalties for manipulating financial records, destroying information, interfering with an investigation and provides legal protection for whistle-blowers. In addition, chief executives can be held criminally liable for the misreporting of their company. If accounting ethics wasn’t an important consideration before, the higher stakes provided by the sarbanes-oxley act have definitely upped the ante. Unethical issues in finance The unethical practices in accounting are more in proprietary, partnership and private limited companies. It is at lower levels in public limited companies and MNCS. Some of the unethical practices in financing and accounting are as under: I. Deliberate abnormal delays in payments to (a) vendors, (b) dealers commissions and promotion costs. Ii. Delays in paying wages, interest to financiers, incentive, bonus to employees. Iii. Holding up bills of vendors on silly reasons and ultimately buying from others to avoid payment to earlier vendors. Iv. Not prompt in statutory payments of esi, pf, sales tax and excise duties. V. Cheating employees of their dues towards medical expenses, leave travel assistance, children education fees etc., Vi. Opening of current accounts in different banks to avoid adjustments against loans by earlier banker. Vii. Creating bogus bills of purchase to show higher costs and hence losses to avoid bonus payment to employees. Viii. Collecting loans from private financiers at higher rate of interest to help kith and kin and to get kick-backs. Importance of ethics in finance Now that we have discussed the basics of the ethics and finance terms, let us discuss the needs of ethics in the financial and service industry while handling the ethics-related crisis 1. Provides a moral code of standard In the financial market, some barriers range from unequal information, misuse of power and resources, etc. In such cases and those which involve third-party connections, there is a dire need for a proper code to be followed in the industry. From investment to trading to stock to economical activities of the corporate or finance system, all follow an ethical code in all their transactions 2. Ethics in finance channelizes confidence in business/corporate dealings The main objective of the financial industry is to have direct dealings with the industry. These directly connect to their clients in the form of product or service delivery where they look forward to winning their confidence. Despite the primary objective to maintain a competitive stature in the industry, they must do so on ethical grounds. In addition to such practices, being ethically right will gives businesses good returns in the long term. 3. Ethics makes business/corporate behavior and activities harmonious In the financial industry, we can expect many people to be part of an organization. Since these have to work together at different levels and towards a similar core objective, there has to be a set of ethical rules and guidelines that have to be followed. This will help in proper management and higher productivity from the employees. Codes of ethics in finance Different moral codes that are supposed to be followed the finance-related behavior of a company towards its employees, customers, public and other stakeholders- 1. Acting with honesty and integrity while handling dilemmas of the world of finances 2. Not associating with any real/clear conflicts of interest in personal, or company relationships 3. Providing information that is full, accurate, fair, complete, relevant, objective, understandable, and timely in and for different documents and reports 4. Acting in accordance with all the applicable rules, laws, and regulations of governments along with other relevant public/private regulatory agencies 5. Acting responsibly and in good faith with due care, carefulness, and competence without any sort of misrepresentation of material facts 6. Respecting the confidentiality of information which is acquired in the business course and such information should not be used for the personal benefit 7. Promoting ethical behavior among all the associates and stakeholders of a company 8. Adhering and promoting a code of ethics in the company Key terms of financial or business ethics Key terminologies that are an integral part of the information, investment, stock, trading, customers, and transaction sorts of activities of finances are- 1. economical, social, and governance The full form of esg is economical, social, and governance, and their positive impact show if the finances-system and related information are ethical or not. 2. Green finances It talks about finance that focuses on offering measurable and positive environmental results 3. Principles for responsible investment It is a set of six principles that give a global standard for responsible investment 4. Shariah-compliant finances It talks about the finance information and activities that are supported by Islamic-based principles 5. sustainable finances It is commonly used in substitution for ethics finances 6. Un global compact It is a voluntary initiative based ON CEO commitments for the implementation of ten universal sustainability principles such as environmental responsibility, human rights, employee relations, anti-bribery and corruption, and business ethics 7. Un sustainable development goals (sdgs) It covers the 17 key goals that the united nations published by focusing upon the alleviation of poverty, climate, inequality, environmental degradation, peace, prosperity, and justice. Implementation of ethics in finances To deal with ethical problems in finances like those ranging from ethical codes in place for financial professionals to the replacement of the egoistic theory, there are a large variety of domains covered in business ethics. It is not an uncommon practice of applying ethical means in contemporary businesses. These codes adhering to a morally established financial set of ethics are regulated and maintained by self-regulating agencies and official regulating authorities. These are kept in place to ensure ethically and morally responsible behaviour from the various operatives that operate in the financial market. Example of ethical violations in the financial market includes insider trading, investor management, campaign financing, and stockholder interest vs stakeholder interest. Businesses in both financial and general markets have to be wary of loyalty and trust violations in both private and public dealings. Over the years, there have been multiple cases of whistle blowing in the world. People have been involved in cases where just the knowledge of such practices landed them in problems. No one prefers to blow a whistle on their fellow worker or the organization. Still, it is also an essential and ethical duty to ensure that fair practices are being followed in the financial industry or society. ETHICAL ISSUES IN Human resource Hrm can be understood in simple terms as employing people , developing their resources , utilizing , maintaining and compensating their services in tune with the job and organizational requirements with the view to contribute to the goal of the organization , individual and the society. Ethical issues in human resource • Employment issues: hr professionals are likely to face maximum ethical dilemmas in the area of hiring of employees. • Employees discrimination: a framework of laws and regulation has been evolved to avoid the practices of treatment of employees on the basis of their caste, sex, religion, disability, age etc . • Performance appraisal : ethics should be the basis of performance evaluation. Highly ethical performance appraisal demands that there should be an honest assessment demands that there should be an honest assessment of the performance and step should be taken to improve the effectiveness of employees. However , hr managers, sometimes, face the dilemma of assigning higher rates to employees who are not deserving them ; based on some unrelated factors . • Privacy: the private life of an employee which is not affecting his professional life should be free from intrusive and unwarranted actions. • Safety and health : industrial work is often hazardous to the safety and health of the employees. Legislations have been created making it mandatory on the organization and managers to compensate the victims of occupational hazards . Unethical issues in human resource • Employers: (i) creating split in union leader by inducing regionalism , casteism or ego problems.(ii) not caring for just demands of the trade union and not behaving respectfully with union leaders. • Employees: (i) false claim of age , qualification and experience . Some even forge marks cards to claim certain qualifications.(ii) taking decision very slow or very fast to suit conveniences of own kith and kin. • Government agencies : functioning of government employment offices is not transparent , not reliable and in fact its purpose is not well served . • Manpower consultants: by and large manpower consultants do a good job as mostly they are hired by the private organizations. Moreover their services are mostly for official posts and there is no statute to follow rules of reservations. • Discrimination: discrimination is one of the oldest unfair practices going on all over the world in both formal and informal way of working. It is practices in organisations covers unequal treatment between individuals and groups and men and women. Marketing The action or business of promoting and selling products or services, including market research and advertising. Ethical issues in marketing • Market research • Market audience • Ethics in advertisement and promotion • Delivery channels • Deceptive advertising and ethics • Anti competitive practices • Using ethics as a marketing tactics Unethical issues in marketing • Making false, exaggerated, or unverified claims’ • Distortions of facts to mislead or confuse potential buyers. • Sad mouthing rival product. • Using fear tactics. • Exploitation • Spamming • Plagarism of marketing message • Concealing dark sides or side effects of product and services Ethical issues and dilemmas in international business Globalization refers to the increasingly connectedness people and countries across the entire world, especially with regard to work and the economy. Globalisation has overwhelmed the whole world. In some areas it has enhanced the businesses and the standard of life, whereas in other places it has caused mayhem. The benefits have not been distributed fairly within nations. In an attempt to increase profits and maintain competition some organization have ended up in an unethical business practices such as casualisation of employees, which destroyed the interest of employees and violate essential labour laws. With globalization, the international business experts are getting into ethical dilemma. This include whether the enterprise can guarantee the safety and right of their employees while at the same time maintain its profits. Most organization has code of ethics stated in their policy. It includes the organization intention upon which moral principles it works. Ethics are necessary when the line is drawn. And this will help determine what is right or wrong based on the international perception. Generally, some organization especially in the developing world, have a blurry ethical lines. In most organization problems of casualisation have long-standing issues especially in the developing world, multinational and corporations (albrow, 1997). Ethical perceptions across cultures in regards to the ethical situation business principles are products of social and cultural evolution. They exemplify ideas and orientation and enhance decency through conventional practice and historical experience. Thus, it is not easy to make standard ethical strategies that can be legitimized across business organizations. New ethical issues in international business emerged with globalization hence making ethics to vary from one business to another. Thus, different organizations have different measures of attributing ethical status to conduct (anderson, 1991). Risks and consequences associated with this dilemma. Although globalization was meant to boost development across and within the countries, essentially it has also led to economic, social and political problems. It has received both support and opposition from different countries. In the recent time, those who oppose what they see as bad impacts of globalization have criticized the meeting of western leaders. The critics to globalization argued that, it makes the rich countries richer at the expense of the poor countries, and results to the increasing insolvency and segregation of the third world. On the other hand, those for globalization argue that globalization spreads wealth and reduces the inequality existing between poor countries by promoting the world trade. Casualisation is one of the unethical issues that have been widely practiced in most organizations. It has detrimental impacts to workers, for example, in some companies, it is possible to get that about three quarter of their workers are on contract basis.
- 5.4LESSON 4:ETHICAL REASONING Ethical reasoning pertains to the rights and wrongs of human conduct. Each person has standards that are defined by their personal values which come into play when the person faces certain dilemmas or decisions. Commonly, ethical differences occur as a result of individual interpretation of a subject or event, or may be political or religious in nature. To explore this concept, consider the following ethical reasoning definition. 1. Pertaining to right and wrong in conduct. 2. Of or relating to moral principles. 3. Conforming to accepted standards of conduct. What is Ethical Reasoning Most human behavior has consequences for the welfare of others, even for society as a whole. Individuals are able to act in such as way as to enhance or decrease the quality of the lives of others, and generally know the difference between helping and harming. Ethical reasoning holds two roles in life: Highlighting acts that enhance the well-being of other people. Highlighting acts that harm the well-being of other people. When an act enhances the well-being of others, it is worthy of praise from others, when an act harms or decreases the well-being of others, it is worthy of criticism. For many people, the desire to receive these responses from others guides the development of their personal set of ethical standards. Ethical Reasoning and Individual Rights In civilized societies, people have individual rights, but it is vital that these rights coincide with the collective rights of society as a whole. A person being denied personal rights due to the greater good of society may feel the decision conflicts with his own ethical reasoning. While some people believe that a person’s individual rights should be preserved regardless of the benefit or harm to society, others deem it more important that the common good and justice be considered in a civilized society. These opposing beliefs are a result of individual ethical reasoning. Ethical Reasoning and the Law The government creates and enforces laws in order to protect the citizens and the unity of society. These laws carry punishments those who violate them in the form of fines, community service, probation, and imprisonment. Each individual develops his own core values and ethical reasoning according to his view of integrity and honesty, and ability to look past the self-justification and self-deception common to all people. Acts that have been deemed illegal may not coincide with an individual’s personal ethical beliefs, and vice versa. Laws are often created out of widespread social convention, whether they are seen to be fair and ethical by all or not. Some people strongly believe that certain acts are unethical, and should therefore be made illegal. Others find certain laws to be unethical according to their own reasoning, and feel they are a hindrance to their personal human rights. For example, Bob believes that the death penalty is unethical and that is violates human rights. In the jurisdiction in which he resides, however, the death penalty is a punishment occasionally handed down by the judicial system. While Bob does not believe that the death penalty is ethical, the law was made on the belief that it is necessary for the greater good of society. Ethical Decisions in the Legal System On occasion, those who work in law enforcement and the legal system find that the ethical decisions they are required to make on a subject conflicts with the law. This may occur, for example, when a judge finds that the resolution of a case, as dictated by law, conflicts with his personal ethical reasoning. In such a case, the judge must follow the laws of the jurisdiction, even if it seems to create a moral dilemma for him personally. Institutional Ethics In some instances, individual entities can punish or take corrective actions against a person who has breached the company’s ethical code. For example, an accounting firm hires new employees, who are required to read and sign the employee handbook. This handbook states that employees must not let their personal bias interfere in any business transactions. Allowing personal bias or opinion to dictate how a business transaction is done is not necessarily against any law set forth by the government, but it may result in the employee’s termination as it violates the company’s policy and institutional ethics. In serious cases, the employer may be able to recover damages through a civil lawsuit for such a violation. Business ethics Business ethics is the study of appropriate business policies and practices regarding potentially controversial subjects including corporate governance, insider trading, bribery, discrimination, corporate social responsibility, and fiduciary responsibilities. The law often guides business ethics, but at other times business ethics provide a basic guideline that businesses can choose to follow to gain public approval. Ethical issues in finance Ethics in accounting are concerned with how to make good and moral choices in regard to the preparation, presentation and disclosure of financial information. During the 1990s and 2000s, a series of financial reporting scandals brought this issue into the forefront. Knowing some of the issues presented in accounting ethics can help you ensure that you are considering some of the implications for the actions that you take with your own business. Fraudulent financial reporting Most accounting scandals over the last two decades have centered on fraudulent financial reporting. Fraudulent financial reporting is the misstatement of the financial statements by company management. Usually, this is carried out with the intent of misleading investors and maintaining the company’s share price. While the effects of misleading financial reporting may boost the company’s stock price in the short-term, there are almost always ill effects in the long run. This short-term focus on company finances is sometimes known as “myopic management.” Misappropriation of assets On an individual employee level, the most common ethical issue in accounting is the misappropriation of assets. Misappropriation of assets is the use of company assets for any other purpose than company interests. Otherwise known as stealing or embezzlement, misappropriation of assets can occur at nearly any level of the company and to nearly any degree. For example, a senior level executive may charge a family dinner to the company as a business expense. At the same time, a line-level production employee may take home office supplies for personal use. In both cases, misappropriation of assets has occurred. Disclosure violations As a subtopic of fraudulent financial reporting, disclosure violations are errors of ethical omission. While intentionally recording transactions in a manner that is not in accordance with generally accepted accounting principles is considered fraudulent financial reporting, the failure to disclose information to investors that could change their decisions about investing in the company could be considered fraudulent financial reporting, as well. Company executives must walk a fine line; it is important for management to protect the company’s proprietary information. However, if this information relates to a significant event, it may not be ethical to keep this information from the investors. Penalties for violations Penalties for violations of accounting ethics laws have increased greatly since the passage of the sarbanes-oxley act of 2002. This legislation allows for harsh penalties for manipulating financial records, destroying information, interfering with an investigation and provides legal protection for whistle-blowers. In addition, chief executives can be held criminally liable for the misreporting of their company. If accounting ethics wasn’t an important consideration before, the higher stakes provided by the sarbanes-oxley act have definitely upped the ante. Unethical issues in finance The unethical practices in accounting are more in proprietary, partnership and private limited companies. It is at lower levels in public limited companies and MNCS. Some of the unethical practices in financing and accounting are as under: I. Deliberate abnormal delays in payments to (a) vendors, (b) dealers commissions and promotion costs. Ii. Delays in paying wages, interest to financiers, incentive, bonus to employees. Iii. Holding up bills of vendors on silly reasons and ultimately buying from others to avoid payment to earlier vendors. Iv. Not prompt in statutory payments of esi, pf, sales tax and excise duties. V. Cheating employees of their dues towards medical expenses, leave travel assistance, children education fees etc., Vi. Opening of current accounts in different banks to avoid adjustments against loans by earlier banker. Vii. Creating bogus bills of purchase to show higher costs and hence losses to avoid bonus payment to employees. Viii. Collecting loans from private financiers at higher rate of interest to help kith and kin and to get kick-backs. Importance of ethics in finance Now that we have discussed the basics of the ethics and finance terms, let us discuss the needs of ethics in the financial and service industry while handling the ethics-related crisis 1. Provides a moral code of standard In the financial market, some barriers range from unequal information, misuse of power and resources, etc. In such cases and those which involve third-party connections, there is a dire need for a proper code to be followed in the industry. From investment to trading to stock to economical activities of the corporate or finance system, all follow an ethical code in all their transactions 2. Ethics in finance channelizes confidence in business/corporate dealings The main objective of the financial industry is to have direct dealings with the industry. These directly connect to their clients in the form of product or service delivery where they look forward to winning their confidence. Despite the primary objective to maintain a competitive stature in the industry, they must do so on ethical grounds. In addition to such practices, being ethically right will gives businesses good returns in the long term. 3. Ethics makes business/corporate behavior and activities harmonious In the financial industry, we can expect many people to be part of an organization. Since these have to work together at different levels and towards a similar core objective, there has to be a set of ethical rules and guidelines that have to be followed. This will help in proper management and higher productivity from the employees. Codes of ethics in finance Different moral codes that are supposed to be followed the finance-related behavior of a company towards its employees, customers, public and other stakeholders- 1. Acting with honesty and integrity while handling dilemmas of the world of finances 2. Not associating with any real/clear conflicts of interest in personal, or company relationships 3. Providing information that is full, accurate, fair, complete, relevant, objective, understandable, and timely in and for different documents and reports 4. Acting in accordance with all the applicable rules, laws, and regulations of governments along with other relevant public/private regulatory agencies 5. Acting responsibly and in good faith with due care, carefulness, and competence without any sort of misrepresentation of material facts 6. Respecting the confidentiality of information which is acquired in the business course and such information should not be used for the personal benefit 7. Promoting ethical behavior among all the associates and stakeholders of a company 8. Adhering and promoting a code of ethics in the company Key terms of financial or business ethics Key terminologies that are an integral part of the information, investment, stock, trading, customers, and transaction sorts of activities of finances are- 1. economical, social, and governance The full form of esg is economical, social, and governance, and their positive impact show if the finances-system and related information are ethical or not. 2. Green finances It talks about finance that focuses on offering measurable and positive environmental results 3. Principles for responsible investment It is a set of six principles that give a global standard for responsible investment 4. Shariah-compliant finances It talks about the finance information and activities that are supported by Islamic-based principles 5. sustainable finances It is commonly used in substitution for ethics finances 6. Un global compact It is a voluntary initiative based ON CEO commitments for the implementation of ten universal sustainability principles such as environmental responsibility, human rights, employee relations, anti-bribery and corruption, and business ethics 7. Un sustainable development goals (sdgs) It covers the 17 key goals that the united nations published by focusing upon the alleviation of poverty, climate, inequality, environmental degradation, peace, prosperity, and justice. Implementation of ethics in finances To deal with ethical problems in finances like those ranging from ethical codes in place for financial professionals to the replacement of the egoistic theory, there are a large variety of domains covered in business ethics. It is not an uncommon practice of applying ethical means in contemporary businesses. These codes adhering to a morally established financial set of ethics are regulated and maintained by self-regulating agencies and official regulating authorities. These are kept in place to ensure ethically and morally responsible behaviour from the various operatives that operate in the financial market. Example of ethical violations in the financial market includes insider trading, investor management, campaign financing, and stockholder interest vs stakeholder interest. Businesses in both financial and general markets have to be wary of loyalty and trust violations in both private and public dealings. Over the years, there have been multiple cases of whistle blowing in the world. People have been involved in cases where just the knowledge of such practices landed them in problems. No one prefers to blow a whistle on their fellow worker or the organization. Still, it is also an essential and ethical duty to ensure that fair practices are being followed in the financial industry or society. ETHICAL ISSUES IN Human resource Hrm can be understood in simple terms as employing people , developing their resources , utilizing , maintaining and compensating their services in tune with the job and organizational requirements with the view to contribute to the goal of the organization , individual and the society. Ethical issues in human resource • Employment issues: hr professionals are likely to face maximum ethical dilemmas in the area of hiring of employees. • Employees discrimination: a framework of laws and regulation has been evolved to avoid the practices of treatment of employees on the basis of their caste, sex, religion, disability, age etc . • Performance appraisal : ethics should be the basis of performance evaluation. Highly ethical performance appraisal demands that there should be an honest assessment demands that there should be an honest assessment of the performance and step should be taken to improve the effectiveness of employees. However , hr managers, sometimes, face the dilemma of assigning higher rates to employees who are not deserving them ; based on some unrelated factors . • Privacy: the private life of an employee which is not affecting his professional life should be free from intrusive and unwarranted actions. • Safety and health : industrial work is often hazardous to the safety and health of the employees. Legislations have been created making it mandatory on the organization and managers to compensate the victims of occupational hazards . Unethical issues in human resource • Employers: (i) creating split in union leader by inducing regionalism , casteism or ego problems.(ii) not caring for just demands of the trade union and not behaving respectfully with union leaders. • Employees: (i) false claim of age , qualification and experience . Some even forge marks cards to claim certain qualifications.(ii) taking decision very slow or very fast to suit conveniences of own kith and kin. • Government agencies : functioning of government employment offices is not transparent , not reliable and in fact its purpose is not well served . • Manpower consultants: by and large manpower consultants do a good job as mostly they are hired by the private organizations. Moreover their services are mostly for official posts and there is no statute to follow rules of reservations. • Discrimination: discrimination is one of the oldest unfair practices going on all over the world in both formal and informal way of working. It is practices in organisations covers unequal treatment between individuals and groups and men and women. Marketing The action or business of promoting and selling products or services, including market research and advertising. Ethical issues in marketing • Market research • Market audience • Ethics in advertisement and promotion • Delivery channels • Deceptive advertising and ethics • Anti competitive practices • Using ethics as a marketing tactics Unethical issues in marketing • Making false, exaggerated, or unverified claims’ • Distortions of facts to mislead or confuse potential buyers. • Sad mouthing rival product. • Using fear tactics. • Exploitation • Spamming • Plagarism of marketing message • Concealing dark sides or side effects of product and services Ethical issues and dilemmas in international business Globalization refers to the increasingly connectedness people and countries across the entire world, especially with regard to work and the economy. Globalisation has overwhelmed the whole world. In some areas it has enhanced the businesses and the standard of life, whereas in other places it has caused mayhem. The benefits have not been distributed fairly within nations. In an attempt to increase profits and maintain competition some organization have ended up in an unethical business practices such as casualisation of employees, which destroyed the interest of employees and violate essential labour laws. With globalization, the international business experts are getting into ethical dilemma. This include whether the enterprise can guarantee the safety and right of their employees while at the same time maintain its profits. Most organization has code of ethics stated in their policy. It includes the organization intention upon which moral principles it works. Ethics are necessary when the line is drawn. And this will help determine what is right or wrong based on the international perception. Generally, some organization especially in the developing world, have a blurry ethical lines. In most organization problems of casualisation have long-standing issues especially in the developing world, multinational and corporations (albrow, 1997). Ethical perceptions across cultures in regards to the ethical situation business principles are products of social and cultural evolution. They exemplify ideas and orientation and enhance decency through conventional practice and historical experience. Thus, it is not easy to make standard ethical strategies that can be legitimized across business organizations. New ethical issues in international business emerged with globalization hence making ethics to vary from one business to another. Thus, different organizations have different measures of attributing ethical status to conduct (anderson, 1991). Risks and consequences associated with this dilemma. Although globalization was meant to boost development across and within the countries, essentially it has also led to economic, social and political problems. It has received both support and opposition from different countries. In the recent time, those who oppose what they see as bad impacts of globalization have criticized the meeting of western leaders. The critics to globalization argued that, it makes the rich countries richer at the expense of the poor countries and results to the increasing insolvency and segregation of the third world. On the other hand, those for globalization argue that globalization spreads wealth and reduces the inequality existing between poor countries by promoting the world trade. Casualisation is one of the unethical issues that have been widely practiced in most organizations. It has detrimental impacts to workers, for example, in some companies, it is possible to get that about three quarter OF THEIR WORKERS ON CONTRACTURAL BASIS.
- 5.5LESSON 5:What is Ethical Leadership? Ethical leadership is the art of leading people and making good decisions based on a defined set of values, such as fairness, accountability, trust, honesty, equality, and respect. In fact, these values form the core foundation of ethical leadership. Ethics is a way of understanding right from wrong by using a set of values or moral principles. By establishing a set of values for yourself and your company, you can practice ethical leadership. Ethical Leadership Principles: FATHER Framework™ Six key Values Form the Principles for Ethical Leadership. The F-A-T-H-E-R Framework. Fairness, Accountability, Trust, Honesty, Equality & Respect. 1. Fairness The principle of fairness is core to the way we humans interact and expect to be treated. By default, we expect to be treated fairly and strive to treat others fairly. As a leader, you should always treat your team, tribe, or followers fairly. Showing favoritism or treating people differently in the same situation can breed contempt among your people. Fairness is also related to disciplining people if they have behaved inappropriately. You need to avoid unequal discipline for the same issue across multiple employees. 2. Accountability Being accountable for bad decisions or mistakes shows your moral fiber. We all make mistakes, but also many of us will not admit our mistakes and move on. It is human nature to blame others, blame situations, or even blame the gods. But accepting accountability shows you are a strong, well-rounded leader with a character that people will respect and follow. 3. Trust Great relationships and great teams are built on trust. If you cannot completely trust your partner, your relationship will eventually fail. If you cannot trust your team’s integrity, your team will ultimately fail and tear itself apart. Your team, your family, and your friendships rely on trust to grow and develop meaning. All high-performing teams, whether in the military, football teams, or teams within your company, will have a strong foundation of trust. 4. Honesty Being able to discuss openly and honestly important issues with those around you is key to the integrity of our relationships. Honesty feeds into trust directly. If you cannot be honest with someone, it means you cannot trust them to hear the truth, or at least your version of the truth. 5 . Equality The principle of equality is core to our global human survival and happiness. There are so many inequities in the world, based largely on the fact that people love to discriminate against others for so many reasons. Be it color, faith, gender, sexuality, height, weight, or even hair color, if you practice discrimination and inequality, you are not a well-rounded person, either intellectually or morally. I remember my first encounter with the word equality. As a child growing up in a poor area in central England in the 1970s, my first school was a very mixed race. I heard other children calling Indians, Pakistanis, and Jamaicans racist names. To me, it was bizarre. I am a person; they are people; why do others mistreat people because of the color of their skin. All types of discrimination are disgusting, and if you practice it, you will only breed contempt among the people around you, and you will never achieve any kind of true enlightenment. 6. Respect Respect has many meanings, but the core meaning of respect is to show regard for the wishes, feelings, and rights of others. You may not agree with other people’s feelings or wishes, but you need to respect that they have those feelings. You need to be able to appreciate that someone is the way they are for a reason. A true understanding of humanity means you will learn to respect the differences in us all. You may not agree with those differences, but you need the ability to consider why those differences exist. With respect comes admiration. There is something to admire in everyone; it may just take time to find it. As you build upon your code of ethics or morals, you will find that as you demonstrate your character, more people will come to respect and even admire the way you conduct your business, your choices, and your life. IT’S NOT ABOUT DOING THE RIGHT THINGS, IT’S ABOUT DOING THE RIGHT THINGS THE RIGHT WAY. Now, you have the FATHER method for easily remembering the rock upon which your values should be built. Now let’s look at the values of your company. Understand Your Company’s Values & Code of Conduct Most large companies have a process and set of stated values, usually referred to as the Standards of Business Conduct (SBC). Many of the highest caliber companies will also ask their employees to take a training course and test to prove they understand the code of ethics and the process by which to uphold and even escalate any breaches of conduct. There is much to be admired by operating these processes and having these standards in place. But in the real world, what is on paper and how people actually behave is usually different. I worked as a manager and leader for Hewlett Packard for many years, and they had a very solid standard of business conduct. But in reality, in 2006, the chair of the board, Patricia Dunn, was in breach of this moral code by initiating unlawful practices by spying on other board members to determine information leaks, also known as the HP Spying Scandal. If an organization’s leaders flagrantly disrespect the codes of conduct, how do you think the staff will interpret it and behave. In fact, Mark Hurd, the CEO of the company who was famous for radical redundancies and cost-cutting at the company, including asking all the staff to take a 5% pay cut, also resigned in 2010 after an investigation found that he himself was cheating on his expenses claims. IN FACT EVERY YEAR THERE ARE ON AVERAGE 4 CORPORATE SCANDALS THAT LEAD TO COMPLETE INSOLVENCY OF THE COMPANY. Recently the Economist reported that: “Boeing faces claims that it sold 737 max planes with dangerous software. It says it is “taking actions to fully ensure the safety of the 737 max”. Criminal charges have been filed against Goldman Sachs in Malaysia for its role in arranging $6.5bn of debt for a state-run fund that engaged in fraud. Goldman says it is cooperating with investigators. A jury in California has just found that Monsanto failed to warn a customer that its weed killer could, allegedly, cause cancer. Bayer, a German firm which bought Monsanto in June, says it will appeal the verdict.” Even corporate leaders do not abide by their codes of conduct, so why should you? Because you are better than that, you stand for something you have integrity, and real integrity gets you a long way. As you can see, there are plenty of examples of leadership without any moral guidance. In fact, research from the Institute of Leadership & Management noted: • 63% of managers have been asked to do something contrary to their own ethical code. • 43% have been told to behave in direct violation of their organization’s own values statements. • 9% have been asked to break the law. We need more ethical leadership, and it starts with you. How to Make Good Ethical Leadership Decisions? To keep it simple, there are two major theories/considerations in ethics that are said to compete, duty and utilitarianism. The duty-based approach establishes right or wrong based on a list of rules such as the biblical rule “thou shalt not kill.” If you break the rule, you are in breach. Most company codes of conduct are duty-based. The utilitarian approach judges a decision to be right or wrong based on the consequences of “the greatest good or the least pain.” In practice, you can dive into the depths of the branch of philosophy called ethics and find a complicated debate, or you can simply use both duty and utilitarianism to work the best solution for any given situation. Ethical Decision Making & Principles Types of Ethical Leadership The Utilitarian “Greater Good” vs. Duty Approach to Solving the Auto Industry Crisis in 2008 The 2007-2010 financial crisis had a huge impact on the auto industry across the globe. Fear and panic, and mass redundancies across the globe had a huge impact on auto sales. This impact gave the two leading car manufacturing countries, the USA and Germany, a very difficult dilemma. If they did not slash costs and ramp down production, they would go bankrupt. The American Approach – Duty Based Approach Because US workers have minimal employment rights, it was easy for the giants of the US auto industry to slash and burn huge swathes of its workforce and ramp down production quickly. Even so, both General Motors & Chrysler needed a government bailout to survive. The impact of the recession and the labor-force reductions led to ghost towns, huge unemployment levels, poverty, and destitution. This was a decision based on duty, duty to the shareholder to keep the company going at the expense of everything else. The German Approach – Utilitarian Based Approach The German labor market is somewhat more protected, requiring employers to pay a severance package based on the social situation of the employee, meaning, depending on how many years you are with the company and how many children you have, you will get a significant payment to help you readjust to new employment. This was probably a factor in the decision-making process for the German Auto industry leaders, and it led to an entirely different outcome during the auto industry crisis. Instead of mass redundancies in the auto industry, the German car assemblers decided to ask people to voluntarily move to part-time employment during the recession. This still achieved the goals of slashing labor costs but did not create the pain of social implosion caused by mass unemployment and the social disintegration of collapsing communities, as witnessed in the USA’s ghost towns. The workers all absorbed a reduction in income and made cutbacks, but it was for the greater good as they did not lose their homes and employment. This can be classified as the utilitarian approach; the decision was effectively for the greater good and the least pain and suffering. The USA experienced a jump in inequality and a decline in the fair distribution of wealth. The German experience was that of social cohesion in a time of difficulty, no poverty, no loss of jobs, no social impact. Simply people coming together in a time of difficulty. The outcome after the recession was that the German automakers were able to bounce back quickly as they still maintained their entire staff, meaning Volkswagen jumped to become the largest carmaker in the world. Now we understand core personal values and two ways of making good ethical decisions, we will now move on to being a great ethical leader. The Most Famous Ethical Leader Great leaders build their foundations on a set of principles; we have discovered the F-A-T-H-E-R principles of fairness, accountability, trust, honesty, equality, and respect. But these principles are a core guideline, but not all-encompassing. We should delve into the details of one of the greatest moral leaders in history to see what similarities and differences they have to the FATHER principles.Abraham Lincoln – The Role Model for Ethical Leadership.
- 5.6LESSON 6:Different Approaches towards Ethical Behavior in Business Different Approaches towards Ethical Behavior in Business: There are different ways of thinking about ethical behavior. Some situations offer clean-cut ethical choices. Stealing is unethical. There is no debate about it. There are other situations where two or more values, rights, or obligations conflict with each other and a choice has to be made. For example, suppose that a police officer attends his brother’s wedding and finds some guests using drugs there, which is against the law. Should the officer arrest the drug users? Should he be loyal to his brother or to his job? It offers a difficult choice. Various approaches to ethical behavior give some guidance in making some choices. Some of these approaches are: 1. Teleological approach: Also known as consequentiality approach, it determines the moral conduct on the basis of the consequences of an activity. Whether an action is right or wrong would depend upon the judgment about the consequences of such an action. The idea is to judge the action moral if it delivers more good than harm to society. For example, with this approach, lying to save one’s life would be ethically acceptable. Some of the philosophers supporting this view are nineteenth century philosophers John Stuart Mill and Jeremy Bentham. They proposed that ethics and morality of an act should be judged on the basis of their ultimate utility. An act would be considered moral if it produced more satisfaction than dissatisfaction for society. It must be understood that this satisfaction or happiness should be for the society in general and not to the people committing the act or the people who are directly involved in the act. For example, not paying the money to someone whom you owe may make you happy but it disrupts the social system of fairness and equity thus making the society as a whole unhappy. Accordingly, this would not be considered as a Similarly, a party who breaks a contract may be happy because it is beneficial to it, but it would damage the society’s legal framework for conducting business in an orderly fashion. Hence, it would not be an ethical act. 2. Deonotological approach: While a “teleologist” focuses on doing what will maximize societal welfare, a “deonotologist” focuses an doing what is “right” based an his moral principles. Accordingly, some actions would be considered wrong even if the consequences of these actions were good. According to DeGeorge: “The deonotological approach is built upon the premise that “duty” is the basic moral category and that the duty is independent of the consequences. An action is right if it has certain characteristics or is of a certain kind and wrong if it has other characteristics or is of another kind”. This approach has more of a religious undertone. The ethical code of conduct has been dictated by the Holy Scriptures. The wrongs and rights have been defined by the word of God. This gives the concept of ethics a fixed perception. Since the word of God is considered as permanent and unchangeable, so then is the concept of ethics. Holy Scriptures like those of the Bible, the Holy Quran, Bhagwad Gita and Guru Granth Sahib are considered to be the words of God and hence must be accepted in their entirety and without question. In similar thinking, though based upon rationality, rather than religious command, Emmanuel Kant, an eighteenth century German philosopher suggested morality as universally binding on all rational minds. According to him, “Act as if the maxim of thy action were to become by thy will a universal law of nature.” This mode of thinking asks whether the rationale for your action is suitable to become a universal law or principle for everyone to follow. For example, “not breaking a promise” would be a good principle for everyone to follow. This means that morality would be considered unconditional and applicable to all people at all times and in all cases. This approach suggests that moral judgments be made on the determination of intrinsic good or evil in an act which should be self evident. For example, the Ten Commandments would be considered as one of the guidelines to determine what is intrinsically good and what is intrinsically evil. 3. Emotive approach: This approach is proposed by A.J. Ayer. He suggests that morals and ethics are just the personal viewpoints and “moral judgements are meaningless expressions of emotions.” The concept of morality is personal in nature and only reflects a person’s emotions. This means that if a person feels good about an act, then in his view, it is a moral act. For example, using loopholes to cheat on income tax may be immoral from societal point of view, but the person filing the income tax returns sees nothing wrong with it. Similarly, not joining the army in time of war may be unethical and unpatriotic from the point of view of the society and the country, but the person concerned may consider war as immoral in itself. According to this approach, the whole idea about morality hinges on the personal view point. An extension of Emotive theory puts focus an the integrity of the person. While the person is looking for his own “long term” benefit, he must have a “virtue ethics perspective” which primarily considers the person’s character, motivations and intentions. Character, motivations and intentions must be consistent with the principles accepted by society as ethical. The advantage of this approach is that it allows the ethical decision maker to rely on relevant community standards, “without going through the complex process of trying to decide what is right in every situation using deontological or teleological approaches.” 4. Moral-rights approach: This approach views behaviour as respecting and protecting fundamental human rights, equal treatment under law and so on. Some of these rights are set forth in documents such as Bill of Rights in America and U.N. Declaration of Human Rights. From ethical point of view, people expect that their health and safety is not endangered by unsafe products. They have a right not to be intentionally deceived on matters which should be truthfully disclosed to them. Citizens have a fundamental right to privacy and violation of such privacy would not be morally justifiable. Individuals have the right to object and reject directives that violate their moral or religious beliefs. For example, Sikhs are allowed to wear turbans instead of putting on a hat as required by Royal Canadian Police, because of their religious beliefs. 5. Justice approach: The justice view of moral behaviour is based on the belief that ethical decisions do not discriminate people on the basis of any types of preferences, but treat all people fairly, equitably and impartially, according to established guiding rules and standards. All mankind is created equal and discriminating against any one on the basis of race, gender, religion, nationality or any such criteria would be considered unethical. From organizational point of view, all policies and rules should be fairly administered. For example, a senior executive and an assembly worker should get the same treatment for the same issue, such as a charge of sexual harassment. IMPORTANCE OF OF SCRIPTURES IN UNDERSTANDING ETHICS Ethical Principles from the Bible We should resist the temptation to construct a pharisaical list of do’s and don’t’s but rather look for biblical ethical principles to guide our decision making. These can be summed up in the commandments to ‘love God with all our heart, soul and mind’ and ‘to love our neighbour as ourselves’ (Mt 22:37-40). While respecting the ten commandments, we should recognise that true Christian morality involves going beyond the mere letter of the law (Mt 5:21-22, 27-28) to the very spirit of love on which it is based (1 Cor 13:4-8). The following principles are based on the ten commandments. 1. The Sovereignty of God You shall have no other Gods before me (Ex 20:3) God is the Creator (Gn 1:1), the Sustainer (Heb 1:3) and the Lord of all life. He is also absolute arbiter of right and wrong and has spoken clearly in history through his word and through his Son Jesus Christ (Heb 1:1-2), in whom all his fullness dwells (Col 1:19). We must always put him first. 2. Stewardship You shall not make for yourself an idol (Ex 20:4-6) God has made us stewards of his creation and guardians of the planet (Gn 1:26,28). This validates scientific enquiry and application but is not a license for exploitation, nor for seeing medicine rather than God as mankind’s saviour. We must always exercise our delegated authority for good, especially for the good of individual human beings. Furthermore we should do it according to God’s revealed standards of right and wrong. The end does not justify the means. 3. Honouring God’s character You shall not misuse the name of the Lord your God (Ex 20:7) We must recognise and acknowledge God as the real source of all good gifts (Jas 1:17; 1 Cor 4:7) upholding his compassion, grace, patience, love, faithfulness, forgiveness and justice (Ex 34:6,7); and not bringing dishonour to his name in our words or actions; nor should we seek glory for ourselves. 4.Work and Rest Remember the Sabbath Day… six days shall you labour (Ex 20:8-11) We have an obligation to work (2 Thes 3:10-13), to serve others in order to provide for our own needs and those of our family (1 Tim 5:8) and to imitate God who is himself a worker. But we must also honour and recommend the Creator’s rule of one day’s rest in seven, recognising that it was made for our pleasure and benefit (Is 58:13-14; Mk 2:27) and as a sign of the rest to come (Heb 4:9-11). 5. Authority and the Family Honour your father and your mother (Ex 20:12) God has established human authorities as his agents to serve and protect us and we should submit to them and not rebel against their authority (Rom 13:1-7). Most important among these is the family which is God’s provision for the protection, nurture and discipline of children (Dt 6:6,7; Eph 6:1-4) and the stability of society as a whole. 6. The Sanctity of Life You shall not murder (Ex 20:13) All human life is made in God’s image (Gn 9:6,7) and is worthy of the utmost respect from its beginning to end. This includes the unborn (Ps 139:13-16; Is 49:1; Jb 10:8-9), the handicapped (Lv 19:14), the vulnerable (Ex 22:21-24) and the advanced in age (Lv 19:32). The heart of Christianity is that we must love as Christ himself loved (Jn 13:34), that the strong should lay down their lives for the weak (Phil 2:5-8, Rom 5:6-8). 7. Sexuality and Marriage You shall not commit adultery (Ex 20:14) Marriage is a life-long, publicly recognised, heterosexual, monogamous relationship (Gn 2:24; Mt 19:4-6; Eph 5:31-33) and is representative of Christ’s own relationship with the church. Sex is God’s good gift for intimacy (Mt 19:4), pleasure (Pr 5:18,19) and procreation (Gn 1:28) but must only take place within the marriage relationship. 8. Respect for property You shall not steal (Ex 20:15) God has blessed human beings materially in order that they may provide for their own needs and those of others (2 Cor 9:8). We should show respect for the property of others and seek to use what he has given us in accordance with his revealed will. 9. Veracity You shall not give false testimony (Ex 20:16) We should ‘speak the truth in love’ (Eph 4:15) at all times, using our words to build others up rather than tearing them down. Lying through commission or omission runs counter to the nature of God himself (Nu 23:19) and leads to injustice. We should be people of our word (Jas 5:12). 10. Contentment You shall not covet… (Ex 20:17) We should be grateful and content with what God gives us (Phil 4:11-12), not being driven by jealousy or desire for the possessions, relationships, gifts or honour of others. Rather we should desire to do his will, to have his gifts to serve others (1 Cor 12:31) and most of all to desire God himself (Ps 37:4), knowing that he will provide us with what we need.
