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 |
2 |
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. |
s
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.
[1]
https://www.unilever.com/Images/4394-cobp-code-policies-booklet-external-v13-may-8-17en_tcm244-409220_1_en.pdf
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