Ethics & Corporate Governance

 

Ethics & Corporate Governance

V. Vasudevan,

Indian Institute of Corporate Affairs

Author Note

(Project submitted to IICA in April 2018)

V. Vasudevan, Corporate Governance Professional, Mumbai
viswanathan.vasudevan@smollan.co.in, mob: 9920780095

 

Abstract

The common precept amongst Management professionals is that ethics is a matter of personal values, and beliefs of individuals and their consciences. These professionals tend to look at any wrongdoing as an isolated incident, the work of an unscrupulous employee. This is an absolute farce, as the concept of corporate responsibility is to accept the accountability of any mis-chief as that could invariably affect the business and its stake holders. Ethics, should be integrated with the code of business principles and ways of working by the Board and Key Management, of an organization.

Ethics should be an integrated part of the corporate Code of Business Principles

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 Ethics and morals are an integral part of corporate governance and need to be harmonized and blended with corporate strategy, policy and functioning. Principles of good corporate governance benefit both the corporate and the community by ensuring long term growth of the business entity and lowering its cost of financial and human resources. 

“Enterprise governance is the set of responsibilities and practices exercised by the board and executive management with the goal of providing strategic direction, ensuring that objectives are achieved, ascertaining that risks are managed appropriately and verifying that the organization's resources are used responsibly”CIMA & IFAC 1                         

Legal Compliance Approach

Prompted by the prospect of leniency, many companies are rushing to implement compliance-based ethics programs. Designed by corporate counsel, the goal of these programs is to prevent, detect, and punish legal violations. But organizational ethics means more than avoiding illegal practice; and providing employees with a rule book will do little to address the problems underlying unlawful conduct. To foster a climate that encourages exemplary behavior, corporations need a comprehensive approach that goes beyond the often punitive legal compliance stance (Lynn S.Paine, March-April 1994);

Management Responsibility

An integrity based approach, intertwining the legal compliance, ethics and behavioral culture of an organization is a proven system across global organizations. For Example, Unilever’s Code Policies define the ethical behaviors that its employees at all levels need to demonstrate when working for Unilever and are mandatory. Though this is for their internal use, Unilever has published the policy on their external website[1] and also extended the same to its business partners.

 

 

Let us have a bird’s eye view of the core principles and practice of the corporate government by a few key Industries in India

Company	Code/Policy
ITC	ITC's CG initiative is based on two core principles: (a) Management must have the executive freedom to drive the enterprise forward without undue restraints; and (b) This freedom of management should be exercised within a framework of effective accountability.
Hindustan Unilever	HUL believes that for a company to be successful, it must maintain global standards of corporate conduct towards all stakeholders. The Company's foundation has therefore been rooted to stringent CG principles. HUL has made its Code of Business Principles and the Responsible Sourcing Policy mandatory for all stakeholders including contractors and suppliers.
HDFC Bank	HDFC Bank’s Code of Ethics / Conduct intends to ensure adherence to highest business and ethical standards while conducting the business of the Bank and compliance with the legal and regulatory requirements, including compliance of Sarbanes-Oxley Act, 2002  & the Securities and Exchange Commission of USA and other statutory and regulatory authorities in India .
Infosys	Infosys has been a pioneer in benchmarking its corporate governance practices with the best in the world.  The recent escalations between the Board and its Chief Executive on the enforcement of the Board’s supremacy on governance speaks volumes on the spirit and sustainable practice showcased by its Board

 

Almost all leading industry and particularly listed corporates have similar policies stated and established. Howsoever, it is only the Leaders of the Industry who rise above the short term benefits and ensure longer and sustainable benefits to all stake holders and assert their accountability to the society at large. While writing this, the controversies on the possible conflict of interest between the CEO of ICICI and its stake-holders just got louder and the CBI is initiating its investigations (The Videocon episode). It is worth waiting to see the developments and how does ICICI rise to the occasion, to set an example to the banking industry!

 

Critical Challenges faced by the Global Competitions –

“High Performance Culture” versus Ethical Practices
On one hand, Governments, Regulators and Global Organizations are working towards a liberalized business environment, whereby the industry is driven by maximum corporate governance and sustainable practices. On the other hand, the era of e-commerce, digital framework, opening up of the broad spectrum to private players and the flow of investment opportunities by foreign institutional investors has infused stiff competitions and overzealous performance targets.  This has often compromised the ethical practice over high performance targets and setting individual goals against the interest of the organizations, at will. Organisations of all types and sizes are subject to frauds.

On a number of occasions, over the past few decades, companies have experienced financial reporting frauds, resulting in turmoil in the capital markets. In addition to this there is a loss of shareholder’s value. In some cases, company also goes bankrupt. Therefore, it is imperative that organisations have a clear understanding of the threat that corporate and financial frauds pose. Organisations should also have the strategy to prevent such threats and the right controls and tools to mitigate such threats. Further, continuous evolution of technology is changing the way in which organisations conduct business, sometimes creating opportunities for fraudsters to commit the crime. It is essential that organisations build processes, procedures and controls that do not needlessly put employees in a position to commit fraud and also effectively detect fraudulent activity if it occurs. Finally, the responsibility of preventing, detecting and investigating corporate and financial frauds rests squarely on Board of Directors and this requires Board members to adopt preventive steps. Also, the Board of Directors and management should jointly agree and define their anti-fraud strategy, establish appropriate fraud mitigation steps and train their employees to combat financial and corporate frauds.

Organization	Loss	Modus Operandi
1 Toshiba (2014)	Profits were overstated by more than US$ 1 bn.	Toshiba understated its costs on long-term projects. Toshiba CEOs put intense pressure on subordinates to meet sales targets, which pushed certain employees to postpone losses or push forward sales on accounting
2 Olympus (2011)	US$1.7 bn. accounting fraud- speculative investment losses	Olympus created a Tobashi scheme to shift losses off the Olympus balance sheet. Companies located in Cayman Islands were purchased via exorbitant M&A fees.
3 Satyam (2009)	Falsely boosted revenue by US$ 1.5 bn.	Falsified revenues, margins and cash balance to the tune US$ 1.5 bn.

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Conclusion

As Ms. Vladyslava Ryabota, Corporate Governance Head @ International Financial Corporation professed, A National Corporate Conduct Code (NCCC) is imminent on the cards and will provide impetus for addressing various challenges faced by the industry in corporate governance. The NCCC is generally defined as a non-binding set of principles, standards or best practices, issued by a collective body, and relating to the internal governance of corporations. This is an apt response to corporate governance failures and sought to minimize legislative intervention. It is equally important that instrument for Emerging/Transition Economies to drive the reforms in corporate governance

I take this opportunity to acknowledge the well set syllabus and learning opportunity provided by the IICA and its faculty, to the participants of the Corporate Governance Program, to enhance competency and enrich their knowledge on the field.

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[1] https://www.unilever.com/Images/4394-cobp-code-policies-booklet-external-v13-may-8-17en_tcm244-409220_1_en.pdf