'Ethics' are the principles governing an individual or a group.They are an illustration of what is good or bad. And so business ethics refers to applying daily morals and ethical norms to the organization. Business ethics are those principles and standards which determine appropriate and decent conduct and behavior in business organizations. The conceptualization of business ethics was initiated in the 1960s as people were acquainted with the fact that their businesses depended on customers because of a rising consumer-based society. They showed concern for the environment, social causes, and corporate responsibilities. The focus on "social issues" was a hallmark of the decade. Therefore, we can state that business ethics is cultured beyond just a moral code of right and wrong, emphasizing the legal aspects too.
It is based on the notion that corporations are responsible to society for their acts. Business ethics is the conduct bound by laws, morality, and discipline which must be followed in the corporate and commercial world. It studies the appropriate business policies and practices, including potentially controversial subjects such as corporate governance and insider trading.
There are few fundamental ethical principles in the corporate and commercial world that
businesses can follow to gain public approval, which are
I. Integrity is the golden characteristic in any field of work
II. Importance of having an objective for achieving the goal
III. Every individual or group involved in the business must maintain confidentiality.
IV. Finance and accounting professionals need to update their professional skills from time to time to provide competent professional services to their clients.
V. Employees and managerial persons must update their professional skills from time to
time to provide competent professional services to their clients.
To establish ethics, various acts have been introduced to regulate the actions of the employees through which it is made sure that a healthy and peaceful environment and work culture persists, the employees do not break the confidentiality rules by disclosing such facts, powers are not concentrated in the hands of one, and there exists a healthy relationship between the customers and employees. Thus, society derives benefits, and the business prospers when businesses are ethically driven.
What Ethics should a business follow?
1. CORPORATE SOCIAL RESPONSIBILITY
The concept of Corporate Social Responsibility arose when there was an increase in unethical approaches of individuals and groups towards the customers and corporate frauds started taking place in large numbers emphasizing corporate criminal liability.
More prominently, corporate social Responsibility focuses on the legal and economic aspects.
Economic and legal responsibilities incorporate ethical norms about fairness and justice. Ethical responsibilities embody those activities and practices expected or prohibited by societal members even though they are not codified into law. It focuses on the standards, norms, or expectations reflecting concerns for what consumers, employees, shareholders, and the community regard as fair, just, or in keeping with the respect or protection of stakeholders' moral rights. In a sense, changing ethics or values precede the establishment of law because they are the driving force behind the creation of laws as well as regulations.
2. CORPORATE GOVERNANCE
However, Corporate Governance is another aspect of building a safe and ethical platform in
the business world. It is the formal system of accountability and control for ethical and socially responsible organizational decisions wherein the use of resources and accountability displays the competency of the management. Good corporate governance incorporates aligned and apt decisions and actions in the interest of the company, stakeholders, and investors. Few characteristics portraying good corporate governance are:
(ii) Consensus oriented
(vi) Effective and efficient
(vii) Equitable and inclusive
(viii) Follow the rule of law.
In India, Companies (Corporate
Social Responsibility Policy) Rules 2014 lays down rules regarding CSR.
3. OECD PRINCIPLE
OECD stands for Organisation for Economic Cooperation and Development. The guidelines
Which were revised in 2000 are recommendations covering nine areas of business conduct
addressed by Governments to multinational enterprises.
The guidelines cover business ethics on various issues, including Employment, Human rights, Environment, Information disclosures, Combating bribery, Consumer interests, Science and technology, Competition and Taxation.3 Also, the Rights of shareholders, the equitable treatment of shareholders, Role of stakeholders in corporate management governance, Disclosure and transparency and Responsibility of the Board.
4. LAWS GOVERNING ETHICS
Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2018- this made it the businesses mandatory to disclose the financial statements in offer documents for initial public offerings by reducing the volume of disclosures and focusing on what is considered material and relevant to an investor in making an investment decision.
This Act regulates the offers with conditions and also gives guidelines to the issuers as to how it needs to be done.
For establishing good management and maintaining a healthy relationship between the owner and customer, various committees were formulated to give recommendations for better functioning of the corporate and commercial world. Different committees have given suggestions regarding maintaining ethics in business.
Some of them are:-
I) Kotak Mahindra Committee- there were many recommendations given by them. 10
The committee gave mandatory recommendations. These included Gender Diversity,
Minimum Number of Board Meetings, Approval for Non-executive Directors on
Attaining a Certain Age, Separation of the Roles of Non-executive Chairperson &
Managing Director/CEO, Minimum Compensation to Independent Directors,
Minimum Compensation to Independent Directors, Minimum No. of Directors on
Board, Role of Company Secretary.
II) J.J Irani Committee- This committee made recommendations on Independent directors,
Pyramidal Structure, Power to Shareholders, Single person company, Self-regulation,
Stringent Penalties, Accounts and Audits, Composition and role of the Board of
directors, Institution of independent directors, Board committees, and Enhanced
monitoring of group entities
III) Naresh Chandra Committee- The important recommendations were for the Disclosure of
Contingent Liabilities, there should be a certification by the CEO (either the Executive
Chairman or the Managing Director) and the CFO (whole-time Finance Director or
other person discharging this function), Definition of Independent Director,
Independence of Audit Committee.
IV) Kumar Mangalam Birla Committee- The mandatory recommendations of this
the committee was to make a Board of directors, Audit committee, remuneration committee
of the Board, Board procedures, Management, and Shareholders, and regarding their manner
V) Narayan Murthy Committee – It focused on strengthening the responsibilities of audit
committees, financially knowledge, and accounting or related financial management
proficiency is mandatory, quality of financial disclosures, improving the quality of
financial disclosures proceeds from initial public offerings, and the position of the nominee
6. BOARD COMMITTEES
I) Board of Directors: The Board keeps supervision and strategically functions to protect
and enhance shareholders' value. The strategy aims at accountability and fulfillment of
II) Audit Committee: An important function of this committee is to keep an oversight
of the company's financial report process and the Disclosure of its financial
information, recommending the appointment and removal of the external auditor, fixation
of audit fee and also approval for payment for any other services, reviewing with
management of the annual financial statements before submission to the Board and look
into the reasons for substantial defaults.
III) Compensation Committee: It recommends compensation to Board regarding terms
for Executive Directors and the senior most level of management below the Executive
IV) Nomination Committee: It is to recommend to the Board nominations for membership
of the Corporate Management Committee and the Board and oversee succession to the
seniormost level of management below the Executive Directors. It assists the Board by
identifying prospective directors and making recommendations on appointments to the
Board and the senior most level of executive management below the Board.
V) Investor Services Committee: It redresses the grievances of Shareholders and Investors,
approves transmissions, sub-division of shares, issue of duplicate shares, etc.
VI) Corporate Management Committee: Its primary role is the strategic management of
company's businesses within the Board's approved direction/framework.
VII) Divisional Management Committee: It is to realize tactical and strategic objectives in
according to the Corporate Management Committee.
7. CORPORATE CRIMINAL LIABILITY
A company is an artificial body and, therefore, cannot function on its own. Corporations are an integral part of our society and play a significant role in our economy. They have their own separate legal identity. These corporations and the people working there have often
victimized society and its people in some way or another. Hence, these corporations can be
made liable and convicted for their acts.
Different doctrines established in corporate criminal liability
I) Doctrine of Vicarious liability:
The concept of vicarious liability is based on two Latin maxims- first, Qui facit per alium facit per se, which means that he who acts through another shall deem to have acted on his own, and second, respondeat superior, which means let the master answer. Here, any corporate body can be held liable, and the body will have to bear the fine.
II) Doctrine of Identification:
This doctrine emphasizes that persons in authority are made liable for their actions in the company's name. Its fundamental principle is to detect the men's rea of the company behind such actions, which is the result of its employees in capacity. The fraud or crime committed by a corporation is limited to identifying the guilty mind.
III) Doctrine of Collective Blindness:
The doctrine does not consider a single person but applies a collective approach. Even if an employee is not at fault, he will be made liable along with others as a corporate body.
IV) Doctrine of Wilful Blindness:
This doctrine is applied when any corporate agent backs off or does not take any measures to shun such illegal activity happening in the corporation knowingly.
V) Doctrine of Alter Ego:
The basic concept of this doctrine can be described as someone's personality that others cannot see. The owners and persons who manage the company are considered the Altar. The ego of the company. The directors and other managerial persons administering the affairs of the company can be held liable for the acts committed by or on behalf of the company under this doctrine since the corporation cannot work on its own and does not have a physical body or mind.
Ethics displays our conduct; likewise, business ethics builds reputation and good relationships with stakeholders and customers. These ethics have been unstable and, with time, have transformed in response to evolving situations. Every ethical standard lays an impact on our present understanding of these principles. Despite various regulations and policies, we are familiar with unethical conduct and fraud. The present Covid-19 scenario has accelerated unethical actions and corrupt business practices by alter egos of the corporations for personal gains and to improve their career progression where employees' services have been terminated irrationally. One of the recent examples of this would be the Vishakhapatnam gas tragedy. This article focuses on the vitality of business ethics in the corporate and commercial world. The ethical approach in the corporate and commercial world portrays honesty and integrity, laying the path for the corporation's and society's social and economic growth. Henceforward, it is high time to realize that making and reforming laws is inadequate, and regulations cannot be the only weapon to combat such unethical practices. There's a need for updated mechanisms and monitoring systems that strictly take care of such corrupt business conduct.
This article is written by Vatsal Verma of Global Indian International school.