BUSINESS ETHICS AND CORPORATE GOVERNANCE

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BUSINESS ETHICSANDCORPORATE GOVERNANCECORPORATEGOVERNANCE102 III 22/101 VII 33D.D.C.E.Education for AllUTKAL UNIVERSITYDirectorate of Distance & Continuing EducationBhubaneswar

Reprint 2009Copyright Vikas Publishing House Pvt Ltd, 2007All rights reserved. No part of this publication which is material protected by this copyright noticemay be reproduced or transmitted or utilized or stored in any form or by any means now known orhereinafter invented, electronic, digital or mechanical, including photocopying, scanning, recordingor by any information storage or retrieval system, without prior written permission from the Publisher.Information contained in this book has been published by VIKAS Publishing House Pvt. Ltd. and hasbeen obtained by its Authors from sources believed to be reliable and are correct to the best of theirknowledge. However, the Publisher and its Authors shall in no event be liable for any errors, omissionsor damages arising out of use of this information and specifically disclaim any implied warranties ormerchantability or fitness for any particular use.Vikas is the registered trademark of Vikas Publishing House Pvt. Ltd.VIKAS PUBLISHING HOUSE PVT LTDA-22, Sector-4, Noida - 201301 (UP)Phone: 0120-4078900 Fax: 0120-4078999Regd. Office: 576, Masjid Road, Jangpura, New Delhi 110 014 Website: www.vikaspublishing.com Email: [email protected]

D.D.C.E.Education for AllABOUT THE UNIVERSITYFounded in 1943, Utkal University is the 17th University of the country and the first of Orissa. It is the result ofthe efforts of Pandit Nilakantha Dash, Maharaja Krushna Chandra Gajapati, Pandit Godavarish Mishra andmany others who envisioned a progressive education system for modern Orissa.The University started functioning on 27 November 1943, at Ravenshaw College, Cuttack. It originated as anaffiliating and examining body but shifted to its present campus spread over 400 acres of land at Vaniviharin Bhubaneswar, in 1962.A number of Postgraduate Departments and other centres were established in the University campus. There arepresently more than two hundred general affiliated colleges under the University. It has eleven autonomous collegesunder its jurisdiction, twenty-eight constituent postgraduate departments, 2 constituent law colleges and aDirectorate of Distance & Continuing Education. It boasts of a centre for Population Studies, aSchool of Women’s Studies, an Academic Staff College, a pre-school and a high school. The University alsooffers a number of self-financing courses.NAAC accredited since 2003, with B status and a score little over 80%, Utkal University is recognized bythe UGC. It is a member of the Indian Association of Universities and the Commonwealth Association ofUniversities.

DIRECTORATE OF DISTANCE & CONTINUING EDUCATIONUTKAL UNIVERSITY : VANI VIHARBHUBANESWAR:-751007.From the Director’s DeskThe Directorate of Distance & Continuing Education, originally established as the University EveningCollege way back in 1962 has travelled a long way in the last 52 years. ‘EDUCATION FOR ALL’ is ourmotto. Increasingly the Open and Distance Learning institutions are aspiring to provide education for anyone,anytime and anywhere. DDCE, Utkal University has been constantly striving to rise up to the challenges ofOpen Distance Learning system. Nearly ninety thousand students have passed through the portals of this greattemple of learning. We may not have numerous great tales of outstanding academic achievements but wehave great tales of success in life, of recovering lost opportunities, tremendous satisfaction in life, turning pointsin career and those who feel that without us they would not be where they are today. There are also flasheswhen our students figure in best ten in their honours subjects. In 2014 we have as many as fifteen studentswithin top ten of honours merit list of Education, Sanskrit, English and Public Administration, Accounting andManagement Honours. Our students must be free from despair and negative attitude. They must be enthusiastic,full of energy and confident of their future. To meet the needs of quality enhancement and to address thequality concerns of our stake holders over the years, we are switching over to self instructional material printedcourseware. Now we have entered into public private partnership to bring out quality SIM pattern courseware.Leading publishers have come forward to share their expertise with us. A number of reputed authors havenow prepared the course ware. Self Instructional Material in printed book format continues to be the corelearning material for distance learners. We are sure that students would go beyond the course ware providedby us. We are aware that most of you are working and have also family responsibility. Please remember thatonly a busy person has time for everything and a lazy person has none. We are sure you will be able to chalkout a well planned programme to study the courseware. By choosing to pursue a course in distance mode,you have made a commitment for self improvement and acquiring higher educational qualification. You shouldrise up to your commitment. Every student must go beyond the standard books and self instructional coursematerial. You should read number of books and use ICT learning resources like the internet, television andradio programmes etc. As only limited number of classes will be held, a student should come to the personalcontact programme well prepared. The PCP should be used for clarification of doubt and counseling. Thiscan only happen if you read the course material before PCP. You can always mail your feedback on the courseware to us. It is very important that you discuss the contents of the course materials with other fellow learners.We wish you happy reading.(S.P. Pani)DIRECTOR

UTKAL UNIVERSITY SYLLABI-BOOK MAPPING TABLEBusiness Ethics and Corporate GovernanceSyllabiMapping in BookUnit-IEthics and Business Ethics, Concepts Values and Ethics.Unit 1: Introduction to Ethics(Pages 3-25)Unit-IIEthical Corporate Behaviour, Its Development, EthicalLeadership.Unit 2: Organizational Ethics(Pages 27-40)Unit-IIIEthical Decision-making, Ethical Dilemmas in Organization,Social Responsibility of Business and Corporate Governance.Unit 3: Ethical Decisions (Pages 41-111)Unit-IVEthic in Functional Area, Marketing, Finance, Human Resourceand Information Technology.Unit 4: Ethical Issues in the FunctionalArea (Pages 113-131)Unit-VEnvironmental Ethics, Corruption and Gender Issues—GenderEthics, Sexual Harassment and Discrimination.Unit 5: Environmental Ethics, Corruptionand Gender Issues (Pages 133-141)

CONTENTSINTRODUCTIONUNIT 1 INTRODUCTION TO tionUnit ObjectivesEthical Decision MakingEthical Dilemmas in OrganizationSocial Responsibility of BusinessCorporate GovernanceSummaryAnswers to ‘Check Your Progress’Exercises and QuestionsFurther ReadingUNIT 4 ETHICAL ISSUES IN THE FUNCTIONAL nUnit ObjectivesEthical Corporate BehaviourDevelopment of Ethical Corporate BehaviourEthical LeadershipSummaryAnswers to ‘Check Your Progress’Exercises and QuestionsFurther ReadingUNIT 3 ETHICAL ctionUnit ObjectivesEthics and Business EthicsEthical ConceptsEthical ValuesBusiness EthicsSummaryAnswers to ‘Check Your Progress’Exercises and QuestionsFurther ReadingUNIT 2 ORGANIZATIONAL ETHICS2.02.12.22.32.42.52.62.72.81IntroductionUnit ObjectivesEthics in the Functional AreaEthics in MarketingEthics in FinanceHR and Information TechnologySummaryAnswers to ‘Check Your Progress’exercises and QuestionsFurther Reading113-131

UNIT 55.05.15.25.35.45.55.65.75.85.9ENVIRONMENTAL ETHICS, CORRUPTION AND GENDER ISSUESIntroductionUnit ObjectivesEnvironmental EthicsCorruptionGender EthicsSexual Harassment and DiscriminationSummaryAnswers to ‘Check Your Progress’Exercises and Questions;Further Reading133-141

IntroductionINTRODUCTIONFor a very long time, there has been a real and a significant need for a good textbook onbusiness ethics and corporate governance.NOTESThis textbook covers the issues related to corporate governance, business ethics, riskmanagement and ethical decisions.It tries to answer questions like, What is corporate governance? What is ethics and business ethics? How is risk managed in corporate governance?This textbook is primarily intended for students of management in undergraduate, graduateand diploma courses in universities and colleges. However, we know that many suchstudents are already managers anyway, who are undertaking part-time and distanceeducation programmes of study. Hence, this book is written with the manager and thepotential manager in mind.When we look at the general scenario of Continuing Education in our country, we seethat there is a tremendous potential and opportunity for providing flexible forms oflearning, that complement the professional practices of managers and executives. Forinstance, when the learning has to be implanted by stand-alone resources (such as thistextbook), one has to devise innovative means of imparting knowledge and skills. Wehave attempted to do precisely this: by presenting the learning material through a contentexposition approach. In this approach, we begin with an introduction to the topic of theunit; then, we outline the learning objectives of the unit; and then we present the detailsof the contents in simple and easy-to-learn manner. At the end of each unit, we have asummary for quick recollection. Finally, we have carefully posed review questions tocheck your progress as you complete each unit of learning.Obviously, how well a job we have done will be determined by you, the reader, as you gothrough the materials herein. We would be most grateful for critical comments andconstructive suggestions to continually improve and refine the learning resources andeducational value of this textbook.How This Book Is OrganizedThis book is divided into five units:Unit 1This unit explains the ethical concepts and its different models. It also explains thedifferent ethical theories and role of ethical actions in organizations. In addition, this unitdefines the concept of social responsibility.Unit 2This unit discuss ethical behaviour as applicable to organizations. It also explains thesignificance of ethical leadership.Self-Instructional Material 1

IntroductionUnit 3NOTESThis unit discuss the process of decision-making in organizations and the decision makingmodels. It also discusses the ethical dilemmas faced by organizations and the socialresponsibility of business.Unit 4This unit deals with ethics in the areas of marketing, finance, human resource management,and information technology.Unit 5This unit gives a general overview of ethical issues in relation to the environment. Itgenerally discusses the issues of corruption, gender ethics and sexual harassment.2 Self-Instructional Material

Introduction to EthicsUNIT 1INTRODUCTION TO TESIntroductionUnit ObjectivesEthics and Business EthicsEthical ConceptsEthical ValuesBusiness EthicsSummaryAnswers to ‘Check Your Progress’Exercises and QuestionsFurther ReadingINTRODUCTIONEthics is the branch of philosophy that studies the values and behaviour of aperson. Value study of a person is used to determine his positive and negativeattitude towards life. Ethics studies concepts like good and evil, responsibility andright and wrong. Ethics can be distinguished in three categories: normative ethics,descriptive ethics and metaethics. Metaethics focuses on the issues of universaltruths, ethical judgements and the meaning of ethical terms. Normative ethics canbe used to regulate the right and wrong behaviour of individuals. Descriptiveethics, also called applied ethics, is used to consider controversial issues, such asabortion, animal rights, capital punishment and nuclear war.1.1UNIT OBJECTIVESThis unit teaches you about: Ethical concepts, models and values Self-development methods Types of ethical actions Benefits of business ethics1.2ETHICS AND BUSINESS ETHICS1.2.1 Meaning of EthicsThe term ‘ethics’ defines the standards that bear on right and wrong issues ofsociety. Business ethics is thus a set of professional standards, which emphasizeprinciples of honesty and duty to the business and the general public. The othersignificant principles included in business ethics are: Fairness IntegritySelf-Instructional Material 3

Introduction to Ethics NOTES Commitment to e given to human esteem and self-respectResponsible citizenshipAttempt to excelAccountabilityThese principles, if strictly pursued, lead to a decent business environment andcreate healthy relationships in the organization. However, deviations from theseprinciples can occur due to the following factors: Ignorance and indifference to issues Selfishness Imperfect reasoning1.2.2 Concept of BusinessJust like human beings function with limbs, corporations or companies functionthrough their businesses. The term business can be broken as ‘busy-ness’meaning thereby an activity that keeps an individual busy. In the economic sense,the creation of utility is called business while in the commercial sense, theactivities concerned with the purchase and sale of goods and services are calledbusiness. A business includes that part of production, which is equally exchangedand results in mutual benefits to the parties who exchanged goods in thetransaction.Business DefinitionsAccording to Peterson and Ploughman, ‘Business may be defined as an activity inwhich different persons exchange something of value, whether goods or servicesfor mutual gain or profit.’According to James Stephenson, ‘Business is the sum total of those processeswhich are engaged in the removal of hindrances of persons (trade), places(transport and insurance) and time (warehousing) in the exchange (banking) ofcommodities.’According to F.C. Hooper, ‘Business means the whole complex field ofcommerce and industry, the basic industries, processing and manufacturingindustries and the network of ancillary services, distribution, banking, insurance,transport, and so on, which serve and interpenetrate the world of business as awhole.’According to Section 2(13) of the Indian Income Tax Act, 1961, business means,‘any trade, commerce or manufacture or any adventure in the nature of trade,commerce or manufacture’.Nature of BusinessBusiness is a wide term. It includes all occupations in which people are busy inearning income either by production or purchase, sale and exchange of goods and4 Self-Instructional Material

services to satisfy the needs of people and to earn profit. The following pointsmay be discussed to reveal the true nature of a business: Economic activity: Business is an essential economic activity. Profitmotive is the key element that inspires a businessman to work efficiently. Human activity: Business is a human activity. In this sense, business isconsidered to be an economic activity of human beings only. A businessis by the people and for the people. Social process: Business is a social process. All the individuals involvedin a business, such as owners, customers and employees, are an integralpart of society. Business has to fulfil its social responsibilities. System: A system is a combination of things or parts forming a unitarywhole. It is an established arrangement of components for the attainmentof objectives. Similarly, business is a system consisting of varioussubsystems that are operated in a balanced and coordinated way.Introduction to EthicsNOTESTypes of Business ActivitiesAll human activities concerned with earning money are included under the termbusiness. Cultivation by a farmer, teaching by a teacher and treatment taken by apatient from a doctor are also treated as business activities.There are different types of business activities, which may be classified asfollows: Industry: An industry includes the activities connected with theproduction and processing of goods. Manufacturing enterprises areengaged in the production of goods. These kinds of industries can beclassified as follows:o Analytical enterprises: An oil refinery that separates crude oilinto petroleum, kerosene and diesel oil is an analytical concern.o Synthetic enterprises: An enterprise which combines severalmaterials to produce one product is a synthetic enterprise. Allsoap mills and cement factories are synthetic enterprises.o Assembling enterprises: All those plants engaged in theproduction of products, such as radios, scooters and television setsare assembling enterprises. A few enterprises involved in miningare involved in mineral resource production, for example, ironore, coal, gold and silver. Commerce: It is the total of all those activities that are engaged in theremoval of hindrances of persons or trade, places or transportation, risk ofloss or insurance and time, such as warehousing, banking and financingof commodities. Commerce can be divided into two categories: trade andaid to trade. Trade can be further divided into two categories, which areas follows:o Internal: This includes the trade that is done with the country,such as wholesale and retail trade.o External: This includes the trade that is done with variouscountries, such as export and import.Aid to trade can be divided into transport, banking and insurance.Self-Instructional Material 5

Introduction to EthicsFigure 1.1 shows the types of business esAid ailImportTransportBankingInsuranceExportFigure 1.1: Types of Business ActivitiesCharacteristics of BusinessBusiness means the creation of utilities. There are many features of businessactivities and, thus, the business. The essential characteristics of business may besummarized as follows: Exchange or sale: A business includes the sale, purchase and exchangeof goods and services. Creation of utilities: A business creates transfers and utilities of goodsby making them available in proper form at the appropriate time andplace. Social institution: A business deals with the people of society. All thepersons engaged in the business, such as owners, customers, employeesand other professionals, belong to the society. A business has to fulfil itssocial responsibilities towards each part of the community and has tofollow the business ethics as well. Profit motive: Business activities are carried out to make profit. A nonprofitable business cannot continue to exist for long. Profits are essentialfor growth of a business. Risk and uncertainty: There are two types of risks in a business. Thefirst type of risk is floods and thefts. The second type of risk is loss due tofall in demand and labour trouble.Uncertainty arises because of unpredictability of profit in a business.Profit is such an element which cannot be predicted in advance. Customer satisfaction: A business always tries to satisfy its customerwith better quality and reasonable prices.6 Self-Instructional Material

Introduction to EthicsBusiness GoalsThe term ‘goals’ denote what an organization expects to achieve in the future. Agoal describes clearly the activities and tasks to be completed by an individualand a department or an organization. A business has a number of goals, whichdescribe a desired future state for which efforts are directed. The goals are like ameasure to evaluate the success of the business. It helps the management to keepthe organization and the individuals working for it, away from distractiveactivities which come in the way of the success of an organization.NOTESThe characteristics of business goals are as follows: Business goals are derived from mission statements. Business goals are task oriented and,

1.2 Ethics and Business Ethics 1.3 Ethical Concepts 1.4 Ethical Values 1.5 Business Ethics 1.6 Summary 1.7 Answers to Check Your Progress 1.8 Exercises and Questions 1.9 Further Reading 1.0 INTRODUCTION Ethics is the branch of philosophy that studies the values and behaviour of a person.