Chapter 15 Ethics and Business – CS Professional Governance, Risk Management, Compliances and Ethics Notes is designed strictly as per the latest syllabus and exam pattern.
Ethics and Business – Governance, Risk Management, Compliances and Ethics Study Material
Question 1.
Write short notes on the following:
Code of ethics (Old Syllabus) (June 2014, 3 marks)
Answer:
A code of ethics consists of general statements sometimes altruistic or inspirational, that serves as principles and the basis for rules of conduct.
A code of ethics should reflect upper manager’s desire for compliance with the values, rules and policies that support an ethical climate. The development of a code of ethics should involve the president, board of directors, and chief executive officers who will be implementing the code. Legal staff should also be called on to ensure that the code has correctly assessed key areas of risk and that it provides buffers for potential legal problems.
The six core values or principles that are desirable for code of ethics include:
- trustworthiness
- respect
- responsibility
- fairness
- caring
- citizenship
Question 2.
Write short notes on the following:
(a) Ethical dilemma (Dec 2014, 3 marks)
Answer:
Ethical Dilemma
Dilemma is a situation that requires a choice between option that are or seem equally unfavourable or mutually exclusive.
By definition, an ethical dilemma involves the need to choose from among two or more morally acceptable courses of action, when one choice prevents selecting the other, or, the need to choose between equally unacceptable alternatives (Hamric, spross and Hanson, 2000).
A dilemma could be right vs. wrong situation in which the right would be more difficult to pursue and wrong would be more convenient. A right versus wrong dilemma is easier to resolve.
An ethical dilemma is a situation that will often involve an apparent conflict between moral imperatives, in which to obey one would result in transgressing another. This is also called an ethical paradox.
An ethical dilemma involves a situation that makes a person question what is the ‘right’ or ‘wrong’ thing to do. Ethical dilemmas makes individuals think about their obligations, duties or responsibilities. These dilemmas can be highly complex and difficult to resolve. Easier dilemmas involve a ‘right’ versus ‘wrong’ answer, whereas, complex ethical dilemmas involve a decision between right and wrong.
Question 3.
“An organisation’s structure is a significant factor to the study of business ethics.” Comment. (June 2012, 5 marks)
Answer:
An organization’s structure is important to the study of business ethics. In a Centralized organization, decision making authority is concentrated in the hands of top- level managers, and little authority is delegated to lower levels. Responsibility, both internal and external, rests with top management. This structure is especially suited for organization that make high risk involved decisions and whose lower-level managers are not highly skilled in decision making. It is also suitable for organizations in which production processes are routine and efficiency is of primary importance.
These organizations are usually extremely bureaucratic, and the division of the labour is typically very well defined. Each worker knows his or her job and each has clear understanding of how to carry out assigned tasks. Centralized organizations stress formal rules, policies, and procedures, backed up with elaborate control systems. Their codes of ethics may specify the techniques to be used for decision making.
Because in their top- down approach and the distance between employee and decision maker, centralized organization structures can lead to unethical acts. If the centralized organization is very bureaucratic some employees may behave according to “the letter of the law” rather than the spirit.
In decentralized organization decision making authority is delegated as for down the chain of command as possible. Such organizations have relatively few formal rules, and coordination and control are usually informal and personal. They focus instead on increasing the flow information. As a result, one of the main strength of decentralized organizations is their adaptability and early recognition of external change. With greater flexibility , managers can react quickly to change in their ethical environment. Weakness of decentralized organizations is the difficulty they have in responding quickly to change in policy and procedures established by top management. In addition, independent profit centers within a decentralized organization may deviate from organizational objectives.
Question 4.
(a) “A code of ethics should reflect upon top management’s desire for compliance with the values, rules and policies that support an ethical climate.” Elucidate. (2012, 5 marks)
(b) You are the Company Secretary of Innovative Products Ltd. The Board of directors desires to know the advantages of business ethics. Draft a note for consideration of the Board of directors. (Dec 5 marks)
Answer:
(a) The Chairman XYZ Limited
Sub: Note on code of conduct and Business Ethics in India, Regulation 17(5), 25(5), 26(3) & 16(d) of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 requires that:
1. Regulation 17(5)
(a) The board of directors shall lay down a code of conduct for all members of board of directors and senior management of the listed entity.
(b) The code of conduct shall suitably incorporate the duties of independent directors as laid down in the Companies Act, 2013.
2. Regulation 25(5)
An independent director shall be held liable, only in respect of such acts of omission or commission by the listed entity which had occurred with his knowledge, attributable through processes of board of directors, and with his consent or connivance or where he had not acted diligently with respect to the provisions contained in these regulations.
3. Regulation 26(3)
All members of the board of directors and senior management personnel shall affirm compliance with the code of conduct of board of directors and senior management on an annual basis.
4. Regulation 16 (d)
“Senior Management” shall mean officers/personnel qf the listed entity who are members of its core management team excluding board of directors and normally this shall comprise all members of management one level below the chief executive officer/managing director/whole time director/manager (including chief executive officer/manager, in case they are not part of the board) and shall specifically include company secretary and chief financial officer.
In the United States of America, Section 406 of the Sarbanes Oxley Act, 2002 requires public companies to disclose whether they have codes of ethics and also to disclose any waivers of those codes for certain members of senior management.
Section 406 of Regulation S-K which is prescribed regulation under the U/S Securities Act,’requires companies to disclose:
- whether they have a written code of ethics that applies to their “principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions;
- any waivers of the code of ethics for these individuals; and
- any changes to the code of ethics
If companies do not have a code of ethics, they must explain why they have not adopted one. A company may either file its code as an exhibit to the annual report, post the code on the company’s Website, or agree to provide a copy of the code upon request and without charge.
Code of Conduct:
Code of conduct popularly known as code of Business Conduct contains standards of business conduct that must guide actions of the Board and senior management of the company.
The code may include the following:
(a) Company Values.
(b) Avoidance of conflict of interest
(c) Accurate and timely disclosure in reports and documents that the company files before Government agencies, as well as in company’s other communications.
(d) Compliance of applicable laws, rules and regulations including Insider Trading Regulations.
(e) Maintaining confidentiality of company affairs.
(f) Non – competition with company and maintaining fair dealings with the company.
(g) Standards of business conduct for companies customers, communities suppliers, shareholders, competitors, employees.
(h) Prohibition of Directors and senior management from taking corporate opportunities for themselves or their families.
(i) Review of the adequacy of the code annually by the Board.
(j) No authority of waiver of the code for any one should be given. The code of conduct for each company summarises its philosophy in doing business.
To create a code of ethics, an organisation must define its most important guiding values, formulate behavioural standards to illustrate the application of those values to the roles and responsibilities of the person affected reviews the existing procedures for guidance and direction as to how those values and standards are typically applied and establish the systems and processes to ensure that the code is implemented and effective. Codes of ethics are not easily created from boilerplate. Ideally, the development of a code will be a process in which Boards and senior managements actively debate and decide core values, roles and responsibilities, expectations, and behavioural standards.
(b) Advantages of Business Ethics :
Adherence to a Code of Conduct offers the following advantages ;
- Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
- Full, fair, accurate, timely, and understandable disclosure in reports and documents that a company files with, or submits to the commission and in other public communications made by the company;
- Compliance with applicable governmental laws, rules and regulations;
- The prompt internal reporting of violations of the code to an appropriate person or persons identified in the code; and
- Accountability for adherence to the code.
Question 5.
Briefly discuss the following:
Ethical dilemma (June 2013, 3 marks)
Answer:
Ethical Dilemma
Dilemma is a situation that requires a choice between option that are or seem equally unfavourable or mutually exclusive.
By definition, an ethical dilemma involves the need to choose from among two or more morally acceptable courses of action, when one choice prevents selecting the other, or, the need to choose between equally unacceptable alternatives (Hamric, spross and Hanson, 2000).
A dilemma could be right vs. wrong situation in which the right would be more difficult to pursue and wrong would be more convenient. A right versus wrong dilemma is easier to resolve.
An ethical dilemma is a situation that will often involve an apparent conflict between moral imperatives, in which to obey one would result in transgressing another. This is also called an ethical paradox.
An ethical dilemma involves a situation that makes a person question what is the ‘right’ or ‘wrong’ thing to do. Ethical dilemmas makes individuals think about their obligations, duties or responsibilities. These dilemmas can be highly complex and difficult to resolve. Easier dilemmas involve a ‘right’ versus ‘wrong’ answer, whereas, complex ethical dilemmas involve a decision between right and wrong.
Question 6.
(a) “In a centralised organisation, decision making authority is concentrated in the hands of top level managers and little authority is delegated to the .lower levels.” In the light of this statement, discuss the importance of an organisation structure in the study of business ethics. (2013, 5 marks)
Question 7.
Discuss briefly the following:
Organisation structure and ethics (June 2013, 3 marks)
Question 8.
Briefly comment on the following:
(i) Business ethics play a vital role for an organisation. (June 2014, 3 marks)
Answer:
Business ethics play a vital role for an organisation
Business ethics comprises the principles and standards that guide behaviour in the conduct of business. Businesses must balance their desire to maximize profits against the needs of the stakeholders. Maintaining this balance often requires tradeoffs. To address these unique aspects of businesses, rules – articulated and implicit, are developed to guide the businesses to earn profits without harming individuals or society as a whole. The coverage of business ethics is very wide as it deals with norms relating to a company and its employees, suppliers, customers and neighbors, its fiduciary responsibility to its shareholders. It reflects the philosophy of business, one of whose aims is to determine the fundamental purposes of a company.
Business ethics stands for the saneness or purity of purpose that is upheld through carefully designed actualpractices of a business enterprises. It is an embodiment of conscience concern towards execution of business processes in tune with the nobility of the purpose.
Question 9.
Discuss the importance of organisation’s structure in the study of business ethics. [Old Syllabus] (June 2014, 6 marks)
Question 10.
‘The code of conduct for each company summarises its philosophy of doing business.” In the light of the above statement, enumerate the contents of such code. (Old Syllabus) (June 2014, 5 marks)
Answer:
The exact details of this code are a matter of discretion, but there are some common principles in drafting of the code in most of the companies. Which are given here as under:
- Use of company’s assets;
- Avoidance of unlawful agreements;
- Avoidance of actions involving conflict of interest;
- Avoidance of offering or receiving monetary or other inducements;
- Maintenance of confidentiality;
- Safety at work place;
- Maintaining and managing records;
- Free and fair competition;
- Disciplinary actions;
- Collection of information from legitimate source only.
Question 11.
“Ethics is the study of moral decisions that are made by us in the course of performance of our duties.” In the light of this statement, discuss the concept of business ethics and its advantages. (Old Syllabus) (Dec 2014, 6 marks)
Answer:
Business ethics is a form of applied ethics. In broad sense ethics in business is simply the application of moral or ethical norms to business. The term ethics has its origin from the Greek word “ethos”, which means character or custom – the distinguishing character, sentiment, moral nature or guiding beliefs of a person, group or institution. The synonyms of ethics as per Collins Thesaurus are – conscience, moral code, morality, moral philosophy. moral values, principles, rules of conduct, standards.
Advantages of Business Ethics
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.
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 respoct is essential for the success of the company.
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.
Question 12.
Do you think that an organisation having centralised organisation structure can lead to unethical acts? Why? (June 2015, 2 marks)
Answer:
Because of the top-down approach and the distance between employee and decision maker, centralized organizational structures can lead to unethical acts. If the Centralized organization is very bureaucratic, some employees may behave according to “the letter of the law” rather than the spirit.
Question 13.
Elucidate the following:
(a) Contents of a code of conduct. (June 2015, 5 marks)
Answer:
The code of conduct may include the following:
(a) Company Values.
(b) Avoidance of conflict of interests.
(c) Accurate and timely disclosure in reports and documents that the company files before Government agencies, as well as in the company’s other communications.
(d) Compliance of applicable laws, rules and regulations including Insider Trade Regulations.
(e) Maintaining confidentiality of the company affairs.
(f) Standards of business conduct for the company’s customers, communities, suppliers, shareholders, competitors, employees.
(g) Prohibition of Directors and Senior management from taking corporate opportunities for themselves or their families.
(h) Review of the adequacy of the Code annually by the Board.
Question 14.
What are the causes of ethical dilemmq and how will the senior management handle ethical dilemma? (June 2015, 5 marks)
Answer:
An ethical dilemma involves a situation that makes a person question what is the ‘right’ or ‘wrong’ thing todq, They make individuals think about their obligations, duties or responsibilities. These dilemmas can be highly complex and difficult to resolve, Easier dilemmas involve a ‘right’ versus ‘wrong’ answer; whereas, complex ethical dilemmas involve a decision between a right and another right choice.
Steps to Resolving an Ethical Dilemma:
- Considering the options available
- Considering Consequences- positives & negatives of each option
- Analysing Actions
- Decision making and commitment
- Evaluating system.
Question 15.
How academicians, legislators and professionals are joining hands to improve the corporate scenario throughout the affected world ? (Dec 2015, 5 marks)
Answer:
Academicians, Legislators and Professionals are joining hands throughout the world to improve corporate scenario. World over, a consultative stakeholder centric approach is being adopted before introducing any new law or regulation. Companies are encouraged to be more self-governed and professionals are being tasked with ensuring the compliance of laws.
Various for profit and non-profit associations are working in order to ensure good corporate performance. The European Corporate Governance Institute (ECGI), an International Scientific Non-Profit Association has been established to improve corporate governance through fostering independent scientific research and related activities. It provides a forum for debate and dialogue between academicians, legislators ana practitioners, focusing on major corporate governance issues and thereby promoting best practice. Based upon impartial and objective research and the collective knowledge and wisdom of its members, it advises on the formulation of corporate governance policy and development of best practice and undertakes any other activity that will improve understanding and exercise of corporate governance.
It acts as a focal point for academicians working on corporate governance in Europe and elsewhere, encouraging the interaction between the different disciplines such as Economics, Law, Finance and Management. The Institute disseminates research results and other relevant material. It draws on the expertise of scholars and brings from numerous countries and brings together a critical mass of expertise and interest to bear on this important subject.
Question 16.
Briefly comment on the following statement:
(i) Ethical conduct is in the long-term interest of business.
(ii) An ‘ethical dilemma’ involves a situation, when a person is indecisive as to what is right and what is wrong. (June 2016, 2 marks each)
Answer:
(i) Ethical conduct is in the long-term interests of business. A business enterprise that is honest and fair to its customers, employees and other stakeholders earns their trust and goodwill. It ultimately results in customer satisfaction, healthy competition, industrial growth and high earnings. Businesses must balance their desire to maximise profits against the requirements of stakeholders.
(ii) An ethical dilemma involves a situation that makes a person question what is the ‘right’ or ‘wrong’ thing to do. They make individuals think about their obligations, duties or responsibilities. These dilemmas can be highly complex and difficult to resolve. Easier dilemmas involve a ‘right’ versus ‘wrong’ answer; whereas, complex ethical dilemmas involve a decision between a right and another right choice. However, any dilemma needs to be resolved.
Question 17.
“In the globalised world, ethical assessments are based on relativism.” Comment on this statement in the light of business practices adopted by corporates in different parts of the world. (June 2016, 5 marks)
Answer:
In the globalised word, ethical assessments are based on relativism. Some elements or aspects of experience or culture are relative to, i.e., dependent on, other elements or aspects. There are no absolute truths in ethics and that what is morally right or wrong varies from person to person or from society to society. The term often refers to truth relativism, which is the doctrine that there is no absolute truth. The truth is always relative to some particular frame of reference, such as a society or a language or a culture. For example, killing animals for sport (like bull fighting) could be right in one culture and wrong in another.
Adjustments in the holiday calendar, dress code, formality in business dealings, promotional policies adopted by the companies, all vary across regions. Banks in Middle East do not charge interest on housing loans; they buy property and sell at higher prices to be paid in form of instalments. Similarly, Me Donald changes its ingredients in similar products to match worldwide cultural sensitivity.
Question 18.
Elucidate the following:
Code of Conduct. (Dec 2016, 5 marks)
Question 19.
“What is considered ethical behaviour in one society might be considered unethical in another. For example, euthanasia (mercy killing) is permitted in some countries but it is considered strictly unethical in most of the other countries.” In the light of the above statement discuss the common features of ethics. (June 2017, 5 marks)
Answer:
Yes, the statement mentioned in the question, ‘What is considered ethical behaviour in one society might be considered unethical in another’, is correct. The example quoted about the practice prevailing in some of the countries of euthanasia, (mercy killing) is permitted or say ethical, while in other countries it is considered strictly as unethical. In light of the above, the common features of ethics may be listed as follows:
- Ethics is a conception of right or wrong conduct. Ethics tells us when our behaviour is moral and when it is immoral. It deals with the fundamental human relationship, how we think and behave towards others and how we want them to think and behave towards us.
- Ethics relates to the formalised principles derived from social values. It deals with the moral choices that we make in the course of performing our duties with regard to other members of society. Hence, it is relevant in the context of a society only.
- Ethical principles are universal in nature. They prescribe obligations and virtues for everybody in a society. They are important not only in business and politics but in every human endeavour.
- There exist no sharp boundaries between ethical and non-ethical. Therefore, people often face ethical dilemmas wherein a clear cut choice becomes very difficult.
- The concepts of equity and justice are implicit in ethics. Fair and equitable treatment to all is its primary aim.
- Ethics and legality of action do not necessarily coincide. What a society interprets as ethical or unethical ends up expressed in laws. The legality of actions and decisions does not necessarily make them ethical. For example, not helping an injured person in a road accident may be unethical but not illegal.
Question 20.
“Companies showing commitment to ethical conduct consistently outperform in comparison to those which do not show.” Comment. (Dec 2017, 5 marks)
Answer:
Advantages of Business Ethics
Companies displaying a “clear commitment to ethical conduct” consistently outperform those companies that do not display an ethical conduct,
A company that adheres to ethical values and dedicately takes care of its employees is rewarded with equally loyal and dedicated employees.
- Attracting and retaining talent
- Investor Loyalty
- Customer Satisfaction
- Regulators.
Question 21.
‘The code of conduct of a company summarizes its philosophy of doing business. The exact details of this code are a matter of discretion.” Enumerate the principles of drafting the code of conduct as followed in most of the companies. (Dec 2018, 5 marks)
Answer:
Code of conduct, which is popularly known as Code of Business Conduct contains standards of business conduct that must guide actions of the Board and senior management of the company.
The Code of Conduct for each company summarises its philosophy of doing business. Although the exact details of this code are a matter of discretion, the following principles have been found to occur in most of the companies:
- Use of company’s assets;
- Avoidance of actions involving conflict of interests;
- Avoidance of compromising on commercial relationship;
- Avoidance of unlawful agreements;
- Avoidance of offering or receiving monetary or other inducements;
- Maintaining confidentiality;
- Collection of information from legitimate sources only;
- Safety at workplace;
- Maintaining and Managing Records;
- Free and Fair competition;
- Disciplinary actions against the erring person.
Question 22.
Describe the following terms:
(i) “Ethical Dilemma”
(ii) “Indian Ethos” (Dec 2019, 5 marks each)
Answer:
(ii) Indian Ethos: Indian Ethos in Management refers to the values and practices that can contribute to service, leadership and management. The essence of good governance and leadership lies not in the paraphernalia of systems and procedures but on the quality of people who create, govern or operate the systems, which is knows as Sanathana Dharma (the eternal essence), and have been influenced by various strands of Indian philosophy.
Question 23.
A ‘Code of Ethics’ and a ‘Code of Conduct’ are often confused or used interchangeably. Discuss. (Dec 2020, 5 marks)
Answer:
Difference between a Code of ethics and Code of conduct
The terms “Code of Ethics” and “Code of Conduct” are often mistakenly used interchangeably. They are, in fact, two unique documents. Codes of ethics, which govern decision-making, and codes of conduct, which govern actions, represent two common ways that companies self-reguiate.
Similarities
Both a Code of Ethics and a Code of Conduct are similar as they are used in an attempt to encourage specific forms of behaviour by employees. Ethics guidelines attempt to provide guidance about values and choices to influence decision making. Conduct regulations assert that some specific actions are appropriate, others in appropriate. In both cases, the organization’s desire is to obtain a narrow range of acceptable behaviour from employees.
Differences
With similarities, comes differences. Both are used in an attempt to regulate behaviour in very different ways. Ethical standards generally are wide-ranging and non-specific, designed to provide a set of values or decision-making approaches that enable employees to make independent judgments about the most appropriate course of action. Conduct standards generally require little judgment; you obey or incur a penalty, and the code provides a fairly clear set of expectations about which actions are required, acceptable or prohibited.
Question 24.
Explain specific additional provisions for Board Members and Management Committee Members in a Model Code of Business Conduct and Ethics. (Aug 2021, 3 marks)
Answer:
The Model Code of conduct is applicable to the Board Members and all employees in and above Officers level. Everyone must read and understand the Model Code and ensure to abide by it in their day-to-day activities. Apart from general moral imperatives and Specific Professional Responsibilities, there are some specific additional provisions for Board Members and Management Committee Members.
The following specific additional provisions would be incorporated in the Model Code of Business Conduct and Ethics:
As Board members:
1. They undertake to inform the Chairman of the Board of any changes in our other board positions, relationship with other business and other events/ circumstances/ conditions that may interfere with our ability to perform Board/Board Committee duties or may impact the judgment of the Board as to whether we meet the independence requirements of Listing Agreement with Stock Exchanges.
2. Board members must also undertake that without prior approval of the disinterested members of the Board, we will avoid apparent conflict of interest. Conflict of interest may exist when we have personal interest that may have a potential conflict with the interest of the company at large. Some illustrative cases can be:
- Related Party Transactions: Entering into any transactions or relationship with the Company or its subsidiaries in which they have a financial or other personal interest (either directly or indirectly such as through a family member or other person or other organisation with which they are associated).
- Outside Directorship: Accepting Directorship on the Board of any other Company that compete with the business of Company.
- Consultancy/Business/Employment: Engaging in any activity (be it in the nature of providing consultancy service, carrying on business, accepting employment) which is likely to interfere or conflict with their duties/responsibilities towards the Company. They should not invest or associate themselves in any other manner with any supplier, service provider or customer of the Company.
- Use of Official position for personal gains: They should not use their official position for their personal gains.
As Board Members and Management Committee members, they must undertake to actively participate in meetings of Board, or the Committees thereof and the meetings of management committee on which they serve. ; Space to write important points for revision
Question 25.
Explain the term “Ethical Dilemma” and the mode to come out of Ethical Dilemma. (June 2022, 5 marks)
Question 26.
You are a Company Secretary of the Mentor Products Ltd. You are made responsible for tender filing for the company. Your company is looking forward to win the tender by a government department.
A junior worker joins your company after working with your competitor Genius Products Ltd. for 5 years. The worker informs you that in his previous company he had access to the bids made by the company and that he had knowledge of what standards of cost were set by that company.
He offers for assistance in writing the bid by providing information of the competitor.
How would you resolve the ethical dilemma? Explain with reasons:
(i) Would you take input from him for preparation of the tender?
(ii) Avoid such input and focus on your own standards, or
(iii) Ask him to leave the company for proposing to leak trade secret of competitor as that reflects his integrity.
(iv) If you decide to retain him, how will you ensure that such things do not
happen in future? (Juen 2014, 2 marks each)
Answer:
(i) No, we would not take inputs from him for preparation of the tender because it is against ethics.
(ii) Yes, we will avoid such input and focus on our own standard because if our competitor knows the leakage of information they will ask for re-tendering.
(iii) Yes, we will ask him to leave the company for proposing to leak trade secret of competitor as that reflects his integrity because for some gains we can suffer a great loss by the said employee to leak our secrets to our competitor in future.
(iv) We will post him in any other division where our confidential matters should not be known to him.
Question 27.
Over the number of years Seasons Ltd., fully owned by Calmitech Corporation Ltd., a listed entity, of which you are now the company secretary, has adopted aggressive growth strategy via targeted acquisition together with organic growth plan. Therefore, the disclosure requirements are based upon the listing rules. Recently Seasons acquired Hijobs Ltd., for geographic exposure, revenues and profits. During the negotiation process there were issues regarding management structure, values and due diligence. Post completion the process of acquisition the problems started to emerge like lack of data provided in due diligence, reflected the fact that it either didn’t exist or was incomplete. Now it was time for preparation of the year end accounts. There were issues regarding incomplete accounting records and incorrect exchange rates. In short preparation of the Annual report and the financial statements was a significant challenge. You investigated relatively limited available information on the branch and tentatively concluded that is not material.
(i) What would you do knowing that disclosure of such information to the auditors and the Board may delay the parent company’s result announcement to the market?
(ii) What fundamental ethical principles would you take into consideration for making a prudent decision? (Juen 2017, 5 marks each)
Answer:
(i) The basic principle of Corporate Governance is to maintain the ethical standards, adequate disclosures, transparency and work in the interest of all the stakeholders. Being a Company Secretary of the company, I would act in the best interest of the company and disclose the findings immediately to the Board of Directors, Board of the parent company and the auditors. In addition, I would look for a code of conduct which provides guidance on such matters. Proper qualitative and quantitative assessment on materiality of the new facts can be initiated in the best interest of the company. A team may be formed to expedite correcting the entries and making correct disclosures. Although, the process may defer the declaration of results in the market, but it. is better than declaring the wrong results and then provide significant additional disclosures at a later date. This delay for the broader interest is inevitable.
(ii) The following ethical principles would be considered to form a prudent decision:
- Integrity: Accounts and reports should be prepared in accordance with accounting standards and other principles so that they reflect the true and fair position of the company.
- Honesty: The aim should be to be honest to the company for the interest of various stakeholders. Truthfulness and correct disclosures cannot be sacrificed at any cost for immediate gains.
- Objectivity: Disclosures must be made at adequate places supported by proper annexures and other related evidences. In case there is a delay in making disclosures, it should be justified with proper reasons.
- Professional Competence: Professional ethics and standards including due care and diligence should be maintained in all circumstances.
- Confidentiality: Confidentiality of the company affairs should be maintained. The situation should be controlled to avoid panic in the organisation in order to ensure that the market standing and the stock prices are not negatively affected.
Question 28.
Apex Pharmaceuticals Company Ltd. is a well reputed multinational company dealing in manufacturing and marketing of life saving drugs and formulations. Company’s Research and Development (R & D) Department is actively engaged in development and formulations of new drugs in general and life saving drugs in particular. While experimenting with a chemical molecule, R & D department sees the possibility that a molecule may be developed into a drug that may prove very helpful in the treatment of a rare, painful and life threatening genetic disease, for which no effective drug is available at present in the market, but which afflicts to only one child in one million. However, development of the drug will require investment of huge sum of investors’ money of the company, despite the drug may not have saleability.
The R & D department of the company brings this to the notice of Mr. Ram, who is the CEO of the company.
Taking the above facts into consideration, answer:
(i) What dilemma Mr. Ram is facing?
(ii) As a CEO, in place of Mr. Ram, how you would have acted in such situation? (Dec 2017, 5 marks each)
Answer:
(i) Dilemma is a situation that requires a choice between options that are or seem equally unfavourable or mutually exclusive. By definition, an ethical dilemma involves the need to choose from among two or more morally acceptable courses of action, when one choice prevents selecting the other; or, the need to choose between equally unacceptable alternatives. A dilemma could be a right vs. wrong situation in which the right would be more difficult to pursue and wrong would be more convenient. Easier dilemmas involve a ‘right’ versus ‘wrong’ answer; whereas complex ethical dilemmas involve a decision between a right and another right choice.
Keeping of the fact of the case, it can be said that Mr. Ram is certainly in dilemma. Here in this case, Mr. Ram is required to choose between carrying out the development of a drug for a rare, painful and life threatening disease which afflict to only one in a million and the action of spending huge sum of shareholder’s money. As one can see, both are positive and ethically right choices. As a socially responsible person, he has to think in terms of eliminating a serious but at the same time he must be careful in dealing with shareholder’s money. Thus, it is a classic case of ethical dilemma.
(ii) As CEO in place of Mr. Ram, I would have opted the following course of action to resolve this ethical dilemma.
- Defining the problem clearly;
- Getting the collection of the statistical data across the globe, the previous history of such type of genetic disease and probable cause of its spreading in the coming time;
- Searching and developing all possible options available;
- Evaluating each available option carefully in term of pros and cons oteach of them;
- Taking the senior management (Board of Directors, etc.) in confidence and keep them apprising of the situation;
- Comparing positive and negative consequences of each option;
- Choosing the best available action keeping resources and other prevailing situations of the company in mind; and
- Properly implementing-the decision taken and keeping the follow up of the same.
Question 29.
In a branch of ABC Bank, Branch Manager throughout the year has been under acute pressure to achieve the business targets. At the year-end, he finds that despite his best efforts, he has not been able to achieve the targets given by his team leader. Simultaneously, he found that there are various cash credit limits sanctioned which are not being utilized. On 31S1 March, he makes debit entries as withdrawals in such unutilized cash credit limits and transfers to current accounts of the borrowers and again reverses these entries on 1st April. In addition, to avoid the mounting pressure of reduction in NPAs, he makes credit transfer entries in cash credit limits not transacted since last six months and reverses these entries on next day after year-end, i.e. 1st April.
In this way, he has been able to manage the achievement of his deposits and advances targets. Also, he has temporarily engaged a boy as attendant. As to employ a casual staff, he was required compliance of laid down policy of the bank, he shown payments made to him as water and cleaning charges under different names. He argues that as no loss has been caused to any one, hence he is right.
In the light of above answer the following questions:
(i) Evaluate his actions in the light of ethical practices and mention which types of ethical issues are there at his branch. (Dec 2018, 5 marks)
(ii) What do understand by ‘Ethics in Compliance’? Describe by citing an example and a case study involving issues of ethics in compliance. (Dec 2018, 5 marks)
Answer:
1. In the given case, the Branch Manager, in order to achieve the targets assigned to him adopted the following unethical practices:
(i) Making debit entries in unutilised cash credit limits and transfer to current account of the borrowers.
2. Making credit transfer entries in cash credit limits not transacted since last 6 months and reversing the said entries on 1st April i.e. after the year end.
3. Temporarily engaging an attendant and showing payments made to him as water and cleaning charges.
In light of the above the ethical issues may be summarised as under:
(i) Window dressing of the financials by inflating deposits and to suppress non-performing assets (NPAs), he makes ever-greening of NPAs in violation of RBI directives by manipulating books of apcounts. This amounts to cooking of the balance sheet of the branch without real business. Hence these are issues of Ethics in Accounts and Finance.
(ii) To avoid compliance of laid down procedure to employ a casual worker, he shows the payments as water and cleaning charges in miscellaneous expenses. Hence this is an issue of Ethics in compliance.
(ii) Compliance is about obeying and adhering to rules and authority with letter and spirit. The motivation for being compliant could be to do the right thing out of the fear of being caught rather than a desire to abide by the law. An ethical climate in an organisation ensures that compliance with law is fueled by a desire to abide by the laws. Organisations that value high ethical values comply with the laws not only in letter but go beyond what is stipulated or expected of them.
Ethical compliance helps companies to develop a work culture that abides by the workplace laws and reduces the costs associated with fines and lawsuits. One of the disadvantages of an ethical compliance program is that it requires the comprehensive support of management in order to ensure its effectiveness. If members of the management team decide to apply their own version of corporate ethics to the way they manage their departments, then this clash of principles can cause confusion in the workplace. For example, a manager who tends to compromise when his fellow employees are involved in taking bribe, it may set a precedence of undermining the entire corporate culture.
Business and Ethics Notes
Business ethics:
Business ethics constitute the ethical/moral principles and challenges that arise in a business environment.
Some of the areas related with – and not limited to- business ethics include the following:
1. Finance and Accounting: Creative accounting, Earnings management, Financial analysis, Insider trading, Securities Fraud, Facilitation payment.
2. Human Resource Management: Executive compensation, Affirmative action, Workplace surveillance, Whistle blowing, Occupational safety and health, Indentures servitude, Union busting, Sexual Harassment, Employee raiding.
3. Sales and Marketing: Price fixing, price discrimination, green washing, spamming, using addictive messages/images in advertising, Marketing to children, False advertising, Negative campaigning. .
Business Ethics is the application of ethical principles and methods of analysis to business. Business ethics deals with the topic of study that has been given its due importance in business, commerce and industry since last three decades.
Indian Ethos:
Indian Ethos in Management refers to the values and practices that can contribute to service, leadership and management. These values and practices are rooted in Sanathana Dharma (the eternal essence), and have been influenced by various strands of Indian philosophy.
Ethical Dilemma:
An ethical dilemma or ethical paradox is a decision-making problem between two possible moral imperatives, neither of which is unambiguously acceptable or preferable. The complexity arises out of the situational conflict in which obeying one would result in transgressing another.
Five Bottom Line of the future:
- Economic Bottomline
- Human Bottomline
- Social Bottomline
- Environmental Bottomline
- Evolutionary Bottomline
Four fundamental ethical principles:
- The Principle of Respect for autonomy
- The Principle of Beneficence
- The Principle of non maleficence
- The Principle of justice
Six values that are desirable for codes of ethics:
- Trustworthiness
- Respect
- Responsibility
- Fairness
- Caring
- Citizenship.
Code of Conduct:
A code of conduct is a set of rules outlining the social norms, religious rules and responsibilities of, and or proper practices for, an individual.
Advantages of business ethics
- Attracting and retaining talent
- Investor loyalty
- Customer satisfaction and regulators.