You are on page 1of 50

ETHICS & CORPORATE SOCIAL RESPONSIBILITY

INDEX

Ethics What are Ethics Types of Managerial Ethics Example 1 Factors that Influence Ethical Behavior Stages of Moral Development Example 2 Ethical Guidelines for Managers ------------------------------------------------------------------------------------2 2 3 5 6 9 10

Corporate Social Responsibility What is CSR Nature of CSR Past Conceptualisation of CSR CSR Management Capacity Model Corporate Social Cost Benefit Analysis Arguments for CSR Arguments against CSR Conclusion Questions -------------------------------------------------------------------------------------------------------------------12 13 15 16 18 19 20 21 22

ETHICS Leading World Organizations like the World Bank and IMF are concerned about the the aid provided being used in the proper manner and that whether the aid reaches the intended affected people. The incidences of such aid being frittered away by corrupt Govt. Officials are on the rise. To monitor and keep a tab on such occurrences organizations like Transparency International bring out yearly ratings for countries on an index of corruption that is intended to serve as a guideline for investors & donor agencies. In the past few years, many newspapers and magazines have reported on ethical problems in business. The term ethics is generally used to refer to the rules or principles that define right and wrong conduct. In Websters Ninth New Collegiate Dictionary, ethics is defined as the discipline dealing with what is good and bad and with moral duty and obligation. According to Clarence D. Walton and La Rue Tone Hosmer, business ethics is concerned with truth and justice and has a variety of aspects such as the expectations of society, fair competition, advertising, public relations, social responsibilities, consumer autonomy, and corporate behavior in the home country as well as abroad. Practically speaking it can be said to be a system of values and is concerned primarily with the relationship of business goals & techniques to specifically human ends, It means viewing the needs and aspirations of individuals as a part of society, it also means realization of the personal dignity of human beings. In the present day scenario it is a major task for the leadership to inculcate personal values & impart a sense of business ethics to the organisation, Managers, especially top-level managers, are responsible for creating an organizational environment that fosters ethical decision-making. Theodore Purcell and James Weber suggested three ways for applying and integrating ethical concepts with daily actions: (1) establishing a company policy regarding ethical behavior or developing a code of ethics, (2) appointing an ethics committee to resolve ethical issues, and (3) teaching ethics in management development programs. These concepts should be applied appropriately taking into consideration the the significant Social, Cultural, Political, Technological, and Economic factors that affect the state of personal values and business ethics within in each industry, especially in a diverse environment like India. Types of Managerial Ethics Archie B. Carroll, an eminent researcher in the area of social responsibility, identified three types of management, depending on the extent to which their decisions were ethical or moral: (i) moral management, (ii) amoral management, and (iii) immoral management (see Figure below). 1) Moral management Moral management strives to follow ethical principles and doctrines. Moral managers strive to succeed without violating ethical standards. They seek to succeed while remaining within the bounds of fairness and justice. Such managers undertake activities which ensure that even

though they engage in legal and ethical behavior, they continue to make a profit. Realizing that moral management calls for more than what is mandatory, moral managers follow the law not only in letter but also in spirit. Moral managers always seek to determine whether their actions, decisions, or behavior are fair to themselves as well as to all the other parties involved. In the long run, the moral management approach is likely to be in the best interests of the organization. Types of Managerial Ethics

Example 1: Unethical Practices at Snow Brand Milk Company An outbreak of food poisoning can bring a food products company to the brink of disaster. The year 2000 spelt doom for Snow Brand, one of Japans premier dairy foods companies. The disaster: On June 27, 2000, a large number of people, especially in Western Japan, fell ill after consuming milk or related products made by Snow Brand. It was later revealed that around 10,000 people had been affected by Snow Brands products. The problem was caused due to the presence of a bacteria, Staphylococcus aureus, on the production line at the Osaka factory of the Snow Brand Company. The bacteria was found in a valve which should have been cleaned regularly. Inspections revealed that production facilities at the plant did not meet the established standards of hygiene. The companys response: The Snow Brand Milk Products Company did not address the concerns of the public immediately. It gave the impression of being more worried about its reputation than about the victims. Instead of voluntarily recalling its products, the company made an attempt to limit the extent of product recall. The Osaka City Health Center issued a recall order for two products, and requested the company to voluntarily recall other products. The company recalled the two products as ordered by the city officials. The company agreed to recall the other products only after being pestered by city officials. It also asked city officials not to announce the recall order publicly so as to give an impression that the company was voluntarily recalling its products. The city officials did not accede to the request and publicized both the recall order and the companys request to the city officials not to announce the recall order. The company also tried to cover up the incident and did not provide full details regarding the nature of the incident. Initially, Snow claimed that the valve which was found to be contaminated was used very rarely. On further inquiry, it was learnt that the valve was used almost everyday. Company officials also claimed that the area of contamination was small, that is, about the size of a small coin; but investigations revealed that the contaminated area was

larger than what the company claimed it to be. The situation deteriorated further because the companys top management also was not completely informed about the incident. The overall impression caused by this incident was that Snow Brand Company was bothered only about its reputation, not about its affected customers. Consequences: As a consequence of this incident, the company was forced to close five of its factories including the one where the contamination was detected. This incident also resulted in erosion of the consumers confidence. Snow Brand reported a consolidated loss of 52.9 billion yens (about $ 430 million) for the year ending March 2001. Prior to this incident, Snow Brand had a market share of about 45%. This unfortunate incident and the poor way in which the company handled it led to a steep fall in the companys market share. Conclusion: Snow Brands response to this crisis was ineffective because it was too slow, because it did not communicate with the public, and because it did not seek to limit the damage by recalling its products quickly. The company gave too much importance to the impact of the incident on its financial performance instead of focusing on the suffering of the people who had consumed the companys products. The Snow Brand Company should have recalled its products immediately and disclosed all the pertinent facts to the public. This incident showed that the company had no proper mechanism for dealing with such unprecedented crises. Also, since top management did not have complete information about the incident, it was caught unawares when it spoke to the media. To make matters worse, Snow Brand Company attempted to cover up the incident. The best way out would have been to reveal all the facts to the public, thereby allaying their fears. Since the company seemed hesitant to do so, not only did customers perceive its products as unsafe, they also lost faith in its management. Recent Events: The Company was still on its path to recovery when it again came into the limelight for the wrong reasons. In October 2001, the Snow Brand Food Company, a subsidiary of the Snow Brand Milk Products Company, was again in the middle of a controversy. Following the outbreak of the Mad Cow Disease in Japan and the consequent decline in beef sales, the Japanese agriculture ministry had started buying back domestic beef. Therefore, in order to obtain government compensation, the Snow Brand Food Company repackaged beef procured from Australia to make it appear as if it had originated in Japan. When the scam came into light, the company President, Mr. Shozo Yoshida admitted the involvement of the company in the scam and promised to repay the government the money it had received as compensation. Alongside this scam, the firm was also implicated in another scandal. It had falsely labeled beef produced in Japans northern island of Hokkaido (where the Mad Cow Disease had been discovered) as beef from the southern city Kumamoto. When this fact came to light, the Japanese ministry of agriculture launched criminal proceedings against the Snow Brand company. These episodes further tarnished the reputation of the Snow Brand Milk Products Company, which had been trying to recover from the setback it had received earlier due to the food poisoning case. The firm now faces the uphill task of winning back the confidence of the public in its products and its management.

2) Amoral management This approach is neither immoral nor moral. It simply ignores ethical considerations. Amoral management is broadly categorized into two types intentional and unintentional. Intentional amoral managers do not take ethical issues into consideration while taking decisions or while taking action, because in their opinion, general ethical standards are only applicable to the nonbusiness areas of life. Unintentional amoral managers, however, do not even consider the moral implications of their business decisions and actions. In a nutshell, amoral managers pursue profitability as the only goal and pay little attention to the impact of their behavior on any of their social stakeholders. They do not interfere in their employees activities, unless their behavior leads to government interference. The central guiding principle of amoral management is Within the letter of the law, will this action, decision, or behavior help us make money?

3) Immoral management Immoral management not only ignores ethical concerns, it also actively opposes ethical behavior. Organizations with immoral management are characterized by: i. ii. iii. iv. Total concern for company profits only. Stress on profits and company success at any cost. Lacks of empathy managers are hardly bothered about others desire to be treated fairly. Laws are regarded as hurdles to be removed or eliminated. Strong inclination to minimize expenditure.

The basic principle governing immoral management is: Can we make money with this action, decision, or behavior? Thus, in immoral management, ethical considerations are immaterial. Factors that Influence Ethical Behavior Complex interactions between the managers stage of moral development and the various moderating variables determine whether he will act in an ethical or unethical manner. Moderating variables include individual characteristics, structural design of the organization, the organizations culture, and the intensity of the ethical issue. Figure 3.3 presents a diagrammatic view of the interaction between these various factors. Individuals are less likely to indulge in unethical behavior if they are bound by rules, policies, job descriptions and cultural norms even if they have a feeble moral sense. But, if the organization structure and culture allows unethical practices, even highly moral individuals may become corrupt. The various factors that influence the ethical behavior of managers are discussed below.

Factors affecting Ethical and Unethical Behavior

Stages of moral development Managers making ethical decisions may belong to any of the three levels of moral development shown in Table below. Each level is further subdivided into two stages. The extent to which the managers moral judgment depends on outside influences decreases with each successive stage. At the pre-conventional level, managers decide whether an act is right or wrong depending on personal consequences like punishment, favors or rewards. At the second level, the conventional level, managers perceive moral values as important for achieving certain benchmarks and living up to the expectations of others. Finally, at the third level, the principled level, managers frame ethical principles without regard to social pressures. Implications of six stages: The following conclusions can be drawn from the study of the six stages of moral development of managers:

Individuals move up these stages in a sequential manner. The moral development of an individual may stop at any stage. Most managers are at Stage 4 of moral development.

Stages of Moral Development

Source: Stephen P.Robbins and Mary Coulter, Management (Delhi: Pearson Education Inc., First Indian Reprint, 2002) 126. Managers at stage 3 tend to make decisions that will be approved by peers, while managers at stage 4 try to be a good corporate citizen who abide by the organizations rules and procedures. Managers at stages 5 and 6, however, are more likely to question organizational practices which they believe to be wrong. Individual characteristics No two individuals behave in the same manner. They have different values and personality variables. Values refer to the basic convictions held by an individual regarding right and wrong. Each one of us follows certain values which we learnt in our early years of development from our parents, teachers, and friends (and others who influenced us). Thus, the personal values of the different managers in an organization are often quite different. Values, to a large extent, determine a persons ethical or unethical behavior. Personality variables are also known to influence a persons ethical behavior. Two such personality variables are ego strength and locus of control. Ego strength refers to the strength of a persons convictions. People with a higher ego strength tend to do what they think is right. Managers with a high ego strength are more consistent in their moral judgment and moral action than those with low ego strength. The other personality variable, locus of control, indicates the degree to which people believe that they are the masters of their own fate. Based on a persons locus of control, he can be categorized either as an external or an internal. Externals believe that whatever happens to them in life is due to luck or chance. Internals believe that they control their own destiny.

Managers with an internal locus of control are more likely to take responsibility for the consequences of their behavior than managers with an external locus of control.

Structural variables An organizations structural design also influences the ethical behavior of managers. Organization structures that create ambiguity and fail to provide clear guidance to managers are more likely to encourage unethical behavior. Such behavior can be checked by adopting formal guidelines like written job descriptions and codes of ethics. Some organizations focus only on results, and not on the means for achieving them. When people are evaluated only on the basis of their output, they may be compelled to do whatever is necessary to achieve good results. The structural designs of different organizations differ in the amount of time, competition, cost and pressures faced by employees. The greater the pressure on managers, the more likely they are to compromise their ethical standards. This has an affect on the other employees of the organization. Research shows that the behavior of superiors has a very strong influence on the behavior of subordinates. Organizations culture The strength of an organizations culture also has a great impact on the ethical standards of its employees. An organization culture that is characterized by high risk tolerance, control and conflict tolerance is most likely to foster high ethical standards. Such a work culture encourages managers to be aggressive and innovative and to openly challenge expectations which they consider to be unrealistic or personally undesirable. Thus, a strong and ethical organizational culture would exert a positive influence on managers ethical behavior. Issue intensity The most important factor that affects a managers ethical behavior is the intensity of the ethical issue itself. A manager may consider a certain issue ethical or unethical, depending upon certain factors. These factors are greatness of harm, consensus of wrong, probability of harm, immediacy of consequences, proximity to victims and concentration of effect. The intensity of the ethical issue is greater when:

The number of people harmed is large. Everyone agrees that the action is wrong. There are greater chances of the act causing harm. The consequences of the action may be felt immediately. The person feels close to the victims. The action has a serious impact on the victims.

Example 2: Indian Direct Sellers Association Code of Ethics Conduct Towards Consumers Prohibited Practices: Direct Sellers shall not use misleading, deceptive or unfair sales practices. Identification: From the beginning of the sales presentation, Direct Sellers shall, without request, truthfully identify themselves to the prospective customer, and shall also identify their company, their products and the purpose of their solicitations. In party selling, Direct Sellers shall make clear the purpose of the occasion to the hostess and the participants. Explanation and Demonstration: Explanation and demonstration of the product offered shall be accurate and complete, in particular with regard to price and, if applicable, credit price, terms of payment, cooling off period and/or return rights, terms of guarantee and after-sales service, and delivery. Answers to Questions: Direct Sellers shall give accurate and understandable answers to all questions from consumers concerning the product and the offer. Order Form: A written order form shall be delivered to the customer at the time of sale, which shall identify the company and the Direct Seller and contain the full name, permanent address and telephone number of the company or the Direct Seller, and all material terms of the sale. All terms shall be clearly legible. Verbal Promises: Direct sellers shall only make verbal promises concerning the product which are authorized by the company. Cooling-off and return of goods: Companies and Direct Sellers shall make sure that any order form contains, whether it is a legal requirement or not, a cooling-off clause permitting the customer to withdraw from the order within a specified period of time and to obtain reimbursement of any payment or goods traded in. Companies and Direct Sellers offering an unconditional right of return shall provide it in writing. Guarantee and After-Sales Service: Terms of Guarantee or a warranty, details and limitation of after-sales service, the name and address of the guarantor, the duration of the guarantee and the remedial action open to the purchaser shall be clearly set out in the order form or other accompanying literature or provided with the product. Literature: Promotional literature, advertisements or mailings shall not contain any product description, claims or illustrations which are deceptive or misleading, and shall not contain the name and address or telephone number of the company or the Direct Seller. Testimonials: Companies and Direct Sellers shall not refer to any testimonial or endorsement which is not authorized, not true, obsolete or otherwise no longer applicable, not related to their offer or used in any way likely to mislead the consumer. Comparison and Denigration: Companies and Direct Sellers shall refrain from using comparisons which are likely to mislead and which are incompatible with principles of fair competition. Points of comparison shall not be unfairly selected and shall be based on facts which can be substantiated. Companies and Direct Sellers shall not unfairly denigrate any firm or product directly or by implication. Companies and Direct Sellers shall not take unfair advantage of the goodwill attached to the trade name and symbol of another firm or product. Respect of Privacy: Personal or telephone contact shall be made in a reasonable manner and during reasonable hours to avoid intrusiveness. A Direct Seller shall discontinue a demonstration or sales presentation upon the request of the consumer.

Fairness: Direct Sellers shall not abuse the trust of individual consumers, shall respect the lack of commercial experience of consumers and shall not exploit a consumers age, illness, lack of understanding or lack of language knowledge. Referral Selling: Companies and Direct Sellers shall not induce a customer to purchase goods or services based upon the representation that a customer can reduce or recover the purchase price by referring prospective customers to the sellers for similar purchases, if such reductions or recovery are contingent upon some unsure future event. Delivery: Companies and Direct Sellers shall fulfill the customers order in a timely manner. (Source: "Code of Ethics: Conduct Towards Consumers," Indian Direct Sellers Association, http://www.indiandsa.com/Code%20of%20Ethics%20-2.htm)

Ethical Guidelines for Managers: A major task is to create a consistency among the business values and ethics & the proposed strategy. This is done through inculcating the right set of values, reconciling divergent views, and modifying values that are not consistent with the overall strategy of the company. To ensure that their decisions and actions are ethical, managers should strive to follow the guidelines listed below: Appoint an Ethics Officer Involve the employees in developing a mission statement. Evolve a code of conduct. Obeying the law: Managers must ensure that laws are not broken to achieve organizational objectives. Tell the truth: In order to build and maintain long-term relationships with relevant stakeholders, it is essential to state the facts clearly and honestly. Uphold human dignity :People should be treated with respect irrespective of their race, ethnic group, religion, sex or creed. Adhere to the golden rule: The Golden Rule, Do unto others as you would have others do unto you, is often applied when monitoring the ethical dimensions of business decisions. It involves treating individuals fairly and with empathy. Premium non-nocere (above all, do no harm): Some writers regard this principle as the most important ethical consideration. When pursuing profits, organizations should ensure that they do not harm society. Allow room for participation:This principle advocates the participation of stakeholders in the functioning of an organization. It emphasizes the significance of knowing the needs of stakeholders, rather than deciding what is best for them. Always act when you have responsibility: Managers should utilize their capacity and resources to take appropriate action when there is need for it. Also he should facilitate upward communication from employees. Build a ethical culture by example setting: Last but not the least the manager should encourage the employees to follow a culture that is based on appropriate examples.

10

Mechanisms for Ethical Management There is no specific method for making employees behave in an ethical manner. However, there are a number of mechanisms that help managers create an ethical climate. These include top management commitment, codes of ethics, ethics committees, ethics audits, ethics training and ethics hot lines. Top management commitment Through commitment and dedication to work, top-level managers can act as role models for their organization. Their behavior can influence the ethical behavior of subordinates. Code of ethics A code is a statement of policies, principles or rules that guide behavior. A code of ethics is a formal document that states an organizations primary values and the ethical rules it expects its employees to follow. Most of the companies that have a code of ethics agree that it encourages employees to behave in an ethical manner. Ethics committee An ethics committee establishes policies regarding ethical conduct and resolves major ethical dilemmas faced by the employees of an organization in the course of their work. Establishing a code of ethics is not enough; the ethics committee also has to make ethical behavior a part of the organizational culture. Ethics committees perform the following functions: i. ii. iii. iv. v. vi. vii. Organizing regular meetings to discuss ethical issues. Communicating the code to all members of the organization. Identifying possible violations of the code. Enforcing the code. Rewarding ethical behavior and punishing those who violate the organizations code of ethics. Reviewing and updating the code of ethics. Reporting the activities of the committee to the board of directors.

Ethics audits Ethics audits involve the systematic assessment of the adherence of employees to the ethical policies of the organization. They aid in better understanding of the policies and also identify the deviations in conduct that require corrective action. Ethics training The purpose of ethics training is to encourage ethical behavior. It enables managers to align ethical employee behavior with major organizational goals. Ethics hot line: This is a special telephone line that enables employees to bypass the proper channel for reporting their ethical dilemmas and problems. The line is usually handled by an executive who investigates the matter and helps resolve the problems of the concerned employee. Such a facility allows the problem to be handled internally and reduces the chances of employees becoming whistle-blowers. An employee who reports real or perceived misconduct to an external agency (which may be able to take remedial action) is called a whistle-blower. A manager should take the necessary steps to prevent a whistle-blower from going to an outside person or organization since such action can lead to unfavorable publicity or legal investigation.

11

CORPORATE SOCIAL RESPONSIBILITY Corporate Social Responsibility (CSR) today is a hot issue among IT companies and CEOs like talking about what their company gives back to society. CSR encompasses an organisation's commitment to behave in an economically and environmentally sustainable manner, while honouring the interests of direct stakeholders. Realising the importance of CSR, Indian IT firms have earmarked a sizeable portion of their profit for social cause. Polaris Software Labs, for instance, spent Rs 20.94 lakh on social responsibility during 2001-02, compared to Rs 17.39 lakh the previous year. Other companies including NIIT, Tata Consultancy Services (TCS), Satyam Infoway and Congnizant Technology Solutions have also earmarked sizeable sums for CSR. "A leadership role in the technology services sector comes with a certain responsibility, and the most successful organisations are the ones that give back to the community," says R. Chandra Sekaran, Senior Vice-President, Cognizant Technology Solutions. IT firms have realised that socially-responsible business practices not only benefit their employees but also the greater community at large. Social responsibility reshapes the way business should be done, both for profit and when not-for-profit, says an IT company official. CSR is a concept that frequently overlaps with similar approaches such as corporate sustainability, corporate sustainable development, corporate responsibility, and corporate citizenship. While CSR does not have a universal definition, many see it as the private sector's way of integrating the economic, social, and environmental imperatives of their activities. As such, CSR closely resembles the business pursuit of sustainable development and the triple bottom line. In addition to integration into corporate structures and processes, CSR also frequently involves creating innovative and proactive solutions to societal and environmental challenges, as well as collaborating with both internal and external stakeholders to improve CSR performance. What is CSR? Corporate social responsibility is necessarily an evolving term that does not have a standard definition or a fully recognized set of specific criteria. With the understanding that businesses play a key role on job and wealth creation in society, CSR is generally understood to be the way a company achieves a balance or integration of economic, environmental, and social imperatives while at the same time addressing shareholder and stakeholder expectations. CSR is generally accepted as applying to firms wherever they operate in the domestic and global economy. The way businesses engage/involve the shareholders, employees, customers, suppliers, governments, non-governmental organizations, international organizations, and other stakeholders is usually a key feature of the concept. While business compliance with laws and regulations on social, environmental and economic objectives set the official level of CSR performance, CSR is often understood as involving the private sector commitments and activities that extend beyond this foundation of compliance with laws. From a progressive business perspective, CSR usually involves focusing on new opportunities as a way to respond to interrelated economic, societal and environmental demands in the marketplace. Many firms believe that this focus provides a clear competitive advantage and stimulates corporate innovation.

12

CSR is generally seen as the business contribution to sustainable development which has been defined as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs", and is generally understood as focusing on how to achieve the integration of economic, environmental, and social imperatives. CSR also overlaps and often is synonymous with many features of other related concepts such as corporate sustainability, corporate accountability, corporate responsibility, corporate citizenship, corporate stewardship, etc. CSR commitments and activities typically address aspects of a firm's behaviour (including its policies and practices) with respect to such key elements as; health and safety, environmental protection, human rights, human resource management practices, corporate governance, community development, and consumer protection, labour protection, supplier relations, business ethics, and stakeholder rights. Corporations are motivated to involve stakeholders in their decision-making and to address societal challenges because today's stakeholders are increasingly aware of the importance and impact of corporate decisions upon society and the environment. The stakeholders can reward or punish corporations. Corporations can be motivated to change their corporate behaviour in response to the business case that a CSR approach potentially promises. This includes: 1) stronger financial performance and profitability (e.g. through eco-efficiency), 2) improved accountability to and assessments from the investment community, 3) enhanced employee commitment, 4) decreased vulnerability through stronger relationships with communities, and 5) improved reputation and branding. Nature of CSR Challenges and Opportunities There is increasing focus on both the private and public sectors to be proactive in the area of CSR. Various challenges are emanating from consumers, shareholders, non-governmental organizations, international organizations, and other stakeholders. These challenges are increasingly recognized in public policy debates as well as in the marketplace by companies and industry sector associations and they are frequently recognized as opportunities. Stakeholders challenge corporations to play social responsibility roles - at both the domestic and international levels. Challenges usually focus on one or more elements of CSR such as environmental protection, health and safety, corporate governance, human resource management practices, human rights, community development and consumer protection. In many cases, the challenges are framed in an incremental way and on other occasions the challenges are spelled out in a more comprehensive and overarching manner. The challenges often call for voluntary actions by businesses to demonstrate responsible behaviour and effective responses to social and environmental problems - both in the domestic and international contexts. The demands also call upon the public sector to reinforce corporate leadership and to use other policy tools such as economic and regulatory instruments to encourage CSR. The challenges for action can differ considerably from one stakeholder group to another. For example, the demands can range from a call for more disclosure of information to demands for improved stakeholder involvement to requests for changes in management practices to proposals for altering the relationships between company directors, business managers, auditors, shareholders, debt holders, employees, suppliers, customers, community members, and other stakeholders. Some of the challenges are oriented to the ways that businesses manage their internal operations such as human resources management while others are directed at the ways that a business interacts with the rest of the community and society (e.g. human rights, consumers, and supplier relationships).

13

Accountability factor The world-famous business strategy consultant, Peter F. Drucker, in a recent interview in Joel Bakan's new book, The Corporation (2004), says, "If you find an executive who wants to take on social responsibilities, fire him. Fast." Those who believe, or are in favor of, corporate social responsibility (CSR) may be shocked. But, bravery is indeed needed to scrutinize the very heart of business practice, without which we may be misled when addressing the role of business and corporations in our lives today. During the last century, the world witnessed how nations embraced democratic ideals and expanded the government's domain over society and the economy, toward greater public participation and shared humanitarian ideals. Social programs and economic regulations were created by governments to protect their citizens from neglect by the market and from exploitation by corporations. While deregulation has freed corporations from legal constraints, privatization has enabled them to govern areas of society where they have never been before. Today, it can be argued the corporation has become the world's dominant institution, undermining society and governments. As a result, corporations are free to engage in questionable or even criminal behavior often without fear of censure. Research conducted recently by international human rights organizations such as a 2003 study by Amnesty International and one this year by Human Rights Watch found international businesses were involved in many human rights violations in the countries they operated. These violations included torture, forced displacement of people, hostage-taking, violations against the right to form unions, involuntary resettlement, forced or bonded labor, and practices that infringed on the rights of women, children and traditional tribes. The reports have highlighted the importance of corporate social responsibility (CSR) in business; an initiative taken up by many business leaders. Principally, the CSR principal recognizes companies are responsible not only to their shareholders but also to their stakeholders -- all parties affected by a business including workers, suppliers, the local community, government, NGOs and consumers. In recent developments, the environment has also been put into the equation. The new understanding of CSR is known as the triple bottom line -- Profit, People and Planet. That is that (1) business goals are always for profit, and that (2) business and corporations are supposed to take part in the efforts to fulfill people's welfare and this (3) requires active participation in securing the planet's sustainability. There has been much evidence to support this thought. Corporations now highlight social and environmental initiatives on their websites and annual reports. Entire departments and executive positions are dedicated to these initiatives. The oil company Exxon Mobil, for example, is much bigger than the combined revenue of poor 180 countries. Of course, money does not automatically reflect power, but it is certainly parallel to power. About 85 percent of the world's flour stock is controlled by only six TNCs. Five TNCs now control 90 percent of the music industry and seven companies own 95 percent of the world's film industry, as disclosed in this year's Global Inc. written by Gabel and Bruner. This is why "Corporate Social Responsibility" needs a serious rethink. "Corporate Accountability" would be a more correct term, for accountability deals with the control of the exercise of power while responsibility merely counts on individual entities' voluntary action. And unlike the vague CSR, the "Corporate Accountability" concept is clear in its action

14

Past Conceptualizations of CSR: A Brief Overview CSR as social obligation. CSR as stakeholder obligation. CSR as ethics driven. CSR as managerial processes. Given the variety of the viewpoints outlined above, it is evident that no single conceptualization of CSR has dominated past research. The comparison and integration of past definitions is especially difficult because scholars have considered the social responsibilities of different conceptual entities, including (a) businesses in general, (b) the individual firm, and (c) the decision maker (Wood 1991). In addition, while some researchers have examined CSR from a normative standpoint (with a concern for the duties of businesses in general toward society as a whole), others have favored a more managerial approach (how can an individual firm successfully manage CSR?) or an instrumental perspective (how can CSR generate organizational benefits?). Competency in responding ethically and responsibly to societal expectations is a critical issue for public affairs managers in multinational corporations (MNCs). Understanding what comprises socially responsible behaviour and how to manage it is, however, an unresolved issue. MNCs face complex challenges in establishing and maintaining legitimacy, or their 'license to operate', across many host countries with differing social and cultural norms and values. Firms have legitimacy when stakeholders perceive congruence between societal values and the firm's activities and goals (Dowling and Pfeffer 1975), subject to the boundaries set by universal ethical principles (Donaldson and Dunfee 1994). Legitimacy contributes to firms' survival and prosperity by reducing costs associated with stakeholder conflict and improving long-term sustainability and employee satisfaction (Bansal and Roth 2000) The concept of corporate social responsibility (CSR) management capacity to describe the firmwide ability to adapt to the social environment by recognizing and responding effectively to the responsibilities inherent in firm-stakeholder relationships. Because boundary spanning functions such as public affairs or public relations (PR) are used frequently by firms to respond to the social environment, the CSR management capacity tool developed in this paper measures two concepts: a firm's CSR orientation and its PR orientation. This paper addresses two key challenges in social responsibility management: what capabilities firms require to be socially responsible, and how managers can measure the extent to which these capabilities are embedded in their organisations. Developing a model of the capabilities required for social responsibility management, answers the first question, called CSR management capacity. CSR management capacity is defined as the product of two firmwide orientations: a social responsibility orientation and a PR orientation. For answering the second question, it is suggested to develop and test the CSR management capacity index, a measurement tool intended to facilitate social responsiveness capability development.

15

CSR management capacity model To develop the model of CSR management capacity, the authors put together four theoretical streams: strategic management, social responsiveness, PR and marketing. The contributions of each of these literatures to this model are described next. 1) Core capabilities The strategic management literature suggests that firms develop capabilities that explain firmlevel success or failure (Sharma and Vredenberg 1998; Teece et al. 1997). Capabilities are deeply embedded bundles of complex skills and knowledge that are the product of collective organisational learning (Day 1994). For this reason, capabilities are difficult to replicate (Teece et al. 1997) and, as such, constitute a resource that can deliver competitive advantage (Barney 1991). An organizations capability to be ethically and socially responsive may be a resource that contributes to firm competitive advantage (Litz 1996). Litz suggested that the ability to perceive stakeholder interests, ethical awareness and issues management ability are resources that can help organisations achieve and maintain legitimacy. The authors suggest that firms can develop capabilities that foster socially responsive management, and that these capabilities contribute to competitive advantage by maintaining a firm's social license to operate. Firms wishing to improve their social responsiveness must therefore critically examine and develop the processes and capabilities that are modeled and tested in this paper. 2) Social responsiveness Social responsiveness has been described as the capacity for an organization to respond to social pressure (Frederick 1994), using processes such as environmental assessment, stakeholder management and issues management (Wood 1991). These specialized skills are normally the province of public affairs management; however, for an organization to respond effectively to stakeholders, responsiveness mechanisms must be integrated into operational decision making (Miles 1987) in a proactive manner (Carroll 1979; Sethi 1979). Thus, a firm's ability to be socially responsible relies both on the expert skills of public affairs professionals and the ability of general managers to factor social impacts into their business decisions. Three critical public affairs processes for social responsiveness (environmental assessment or scanning, issues management and stakeholder management) describe how firms manage information, people, organisations and issues in their environment (Wood and Jones 1998). The first process, environmental scanning, is the 'managerial activity of learning about events and trends in the organizations environment' (Hambrick 1981). It is 'the first step in the ongoing chain of perceptions and actions leading to an organizations adaptation to its environment' (ibid.). Scanning takes place in many staff functions and at different levels in an organization. Managers tend to scan as part of strategy making (Bourgeois 1980), whereas public affairs professionals use it to gather social and political intelligence (Post et al. 1983). The intelligence gathered results in identification of issues that need to be managed. Issues arise from expectation gaps between organisations and their stakeholders (Wartick and Mahon 1994), and their management can prevent strategic surprises and facilitate corporate responses to threats or opportunities (Ansoff 1980). Corporations respond to issues of the most powerful stakeholders (Nasi et al 1997); therefore, stakeholder management represents an essential component of social responsiveness. From the instrumental point of view, stakeholders must be managed because they can have an impact on firm success (Frooman 1999). Firms can use both bridging and buffering strategies to deal with their stakeholders (Meznar and Nigh 1995). Typical bridging strategies include adapting corporate practices to changing stakeholder expectations and typical buffering strategies include lobbying governments and advocacy advertising. While Meznar and Nigh noted parallels between

16

their buffering and bridging strategies and responsiveness categories of defence and accommodation, the present authors also identify parallels between bridging and buffering concepts and the competing paradigms in the PR theory of persuasion (buffers) and mutual gains (bridges). From the normative point of view, stakeholders must be managed because they have legitimate interests that give them a moral right to managerial attention (Donaldson and Preston 1995; Post et al. 2002). Thus, stakeholder management requires managerial commitment and learning (Post et al. 2002) that includes identifying and understanding stakeholders and weighing decisions about social responsiveness according to the stakeholder's salience (Berman et al. 1999; Mitchell et al. 1997). Multiple stakeholder interests must be taken into account in policy making through establishing organisational structures and policies (Donaldson and Preston 1995; Jones 1999). This balanced approach to stakeholder management is fairly common among large companies and results in collective gains or losses for stakeholders (Preston and Sapienza 1990). Stakeholder management thus refers to a configuration of activities, managerial orientations (cognitions and values) and ethics (Johnson-Cramer et al. 2003) that are bounded by conditions such as stakeholder autonomy and alignability of firm-stakeholder interests (Heugens and Oosterhout 2002). 3) Public relations The PR literature identifies the need for dialogue with stakeholders as part of a balanced, twoway communication with stakeholders (Pearson 1989). In contrast to the dominant view of PR. as persuasive and manipulative communication (Miller 1989), support for the importance of dialogue arises from the alternative, 'symmetrical' view of PR., which sees mutual understanding and managing conflict as the purpose of PR (Grunig 1989). The symmetrical view of PR holds most promise for informing a model of social responsiveness capabilities because it holds as central the concern for ethical organization-stakeholder relationships. Dialogue requires a particular attitude to and structure for communication. The proper attitude for dialogue is 'an effort to recognise the value of the other - to see him/her as an end and not merely as a means to achieving a desired goal' (Kent and Taylor 2002: 22). The structure for dialogue gives participants equal power over the rules of discourse: paramount are questions such as who can initiate interaction, the frequency of communication, who selects the topics for discussion, how topic changes are handled and the satisfaction of participants with the rules of communication (Pearson 1989). PR scholarship further contributes to our understanding of social responsiveness by emphasizing the need to communicate symbols (Grunig 1993) to achieve legitimacy. For example, symbolic acts of communication such as media releases, reports and special events are necessary to help organisations become familiar and well known to their stakeholders (Aldrich and Fiol 1994), and, thereby, legitimate. It follows that firms can increase their legitimacy by integrating symbolic communication with ethical, dialogic relationships with stakeholders. So far in this paper, contributions have been identified from three streams of literature that structures the assumptions underlying the authors' model of social responsibility capabilities. The strategic management literature explains that capabilities can help to deliver competitive advantage and suggests that the ability to manage firm stakeholder relationships is such a capability. The social responsiveness literature stresses the need for both specialized expertise and embedded capabilities across all aspects of the organization. It also highlights the instrumental and normative motives that may drive firm action and offers three processes for action: environmental scanning, issues management and stakeholder management. The PR literature asserts that both symbolic communication and firmstakeholder dialogue contribute to ethical relationships with stakeholders. It can be assumed, therefore, that: 1) organisations have, or can develop, social responsibility capabilities; 2) these capabilities arise from the interaction between specialist staff and general management and incorporate at least three key processes of environmental scanning, issues management and

17

stakeholder management; and 3) concern for ethical firm-stakeholder relationships underpins responsiveness. Next, the authors turn to the marketing literature, to identify a way in which their model can be operationalised and measured.

4) Orientation The market orientation concept describes a firm's behavioural response to market information (Jaworski and Kohli 1993). It emphasizes the systematic generation and distribution of intelligence about customers to develop a more customer-focused organization. The authors borrow from marketing the term Orientation', to denote a firm's behavioural response to intelligence about stakeholders. They suggest that a firm's orientation towards its social environment has three components. First, orientation implies that there is a goal towards which the firm is oriented. Goals arise in the context of mental models or schemata held by organisational members that serve as a frame of reference for action (Senge 1990; Weick 2001). Secondly, the internal environment or behaviour of the firm must support the goal with structures and processes that can translate goals into action. Thirdly, transactions occur with stakeholders; the firm acts in ways consistent with its goals and internal structures and processes. The authors' framework for classifying CSR management capacity capabilities is therefore based on orientations that comprise goals, behaviours and transactions with stakeholders. Unlike Carroll's (1979) classification scheme for social responsibility orientation, which describes domains of firm activity (Wood 1991), the authors focus on the attributes of a firm-level behavioural response - that is, the goals, internal behaviour and transactions with stakeholders. Corporate Social Cost Benefit Analysis: A corporate should also keep its interest in mind while formulating a strategy for CSR. They are answerable to the stakeholders for all the actions and the consequences. Nowadays the companies are accountable on all fronts of business. These fronts may be the commercial or the social. When spending company funds to further the social cause, a company should also take into consideration as to what is this social cause cost going to give back to the business. It means what kind of a reward would these CSR schemes result into. Corporates now can work out the benefits that can be accrued from these activities. Social Cost Benefit Analysis (SCBA) It is a framework for evaluating the social costs and benefits of any project. This involves identifying, measuring and comparing the private costs and negative externalities of a scheme with its private benefits and positive externalities, using money as a measure of value. These benefits can be arrived at by applying the following steps: Step 1: identify all costs and benefits using the principle of opportunity cost Step 2: measure the benefits and costs using money as a unit of account Step 3: consider the likelihood of the cost or benefit occurring (i.e. sensitivity analysis) Step 4: take account of the timing of the cost and benefit (i.e. discounting). A 1,000 benefit now is worth more than 1,000 benefit in 10 years time

18

a) Identify all costs and benefits A firm deciding on an investment project will only take account of its own private costs and benefits e.g. total cost and total revenue. Firms ignore externalities. CBA will take account of both private and external costs and benefits. b) Measure the benefits and costs Height can be measured using feet and inches. Benefits and costs can be valued using money. Private costs and benefits relatively easy to measure in monetary terms c) Likelihood of the cost or benefit If there is a 50% chance that a life will be saved then the benefit is 750,000 x 0.5 = 325,000 d) The timing of the cost and benefit The major costs of the project occurs straight away. The benefits occur over the life of the project. The bridge may cost 5m to build but consumers benefit by 1m a year. If the expected life of the bridge is 25 years then how do we value now 1m of benefit in 25 years time? Economists discount the future benefit to identify the present value. e) Is a Project worth Undertaking? Yes if discounted benefits outweigh discounted costs. If the government has to choose between competing projects then the ones with the highest positive net present value should be undertaken. Arguments for Social Responsibilities of Business Change in public expectations The needs of todays consumers have changed, resulting in a change in their expectations of businesses. Since businesses owe their profits to society, they have to therefore respond to the needs of society. Business is a part of society Society and business are benefited when there is a symbiotic relationship between the two. Society gains through economic development and the provision of employment opportunities; and business benefits through the workforce and consumers provided by society. Avoiding intervention by government By being socially responsible, organizations attract less attention from regulatory agencies. This gives them greater freedom and flexibility in their operations. Balance of responsibility and power Businesses have considerable power and authority. The exercise of this power should be accompanied by a corresponding amount of responsibility. Impact of internal activities of the organization on the external environment Most firms are open systems, i.e., they interact with the external environment. The internal activities of such firms have an impact on the external environment. To avoid a negative impact on the external environment, firms should be socially responsible. Protecting shareholder interests By being socially involved, a company can improve its image and thus protect its shareholders interests. New avenues to create profits Social responsibility involves the conservation of natural resources. Conservation can be beneficial for firms. Items that had been considered waste earlier (for example, empty soft drink cans) can be recycled and profitably used again.

19

Favorable public image Through social involvement, a firm can create a favorable public image for itself and endear itself to society. By so doing, a firm can attract customers, employees, and investors. Endeavor to find new solutions Businesses have a history of coming up with innovative ideas. Therefore, they are likely to come up with solutions for social problems, which other institutions were unable to tackle. Best use of resources of a business Businesses should make optimum use of the skills and talent of its managerial personnel as well as its capital resources to produce good quality products and services. By so doing, the business will be able to fulfill their obligations toward society. Prevention is better than cure It is in the interests of business organizations to prevent social problems. Instead of allowing large-scale unemployment to lead to social unrest (which will harm business interests), businesses can be sources of employment for eligible youth. Arguments against Social Responsibility of Business Opposes the principle of profit maximization The main motive of a business is profit maximization. Social involvement may not be economically viable for a business. Excessive costs When a business incurs excessive costs for social involvement, it passes the cost on to its customers in the form of higher prices. Society, therefore, has to bear the burden of the social involvement of business by paying higher prices for its products and services. Weakened international balance of payments A weakened international balance of payments situation may be created by the social involvement of organizations. Since the cost of social initiatives would be added to the price of the products, the multinational companies selling in international markets would be at a disadvantage when competing with domestic companies which may not be involved in social activities. Increase in the firms power and influence Businesses are inherently equipped with a certain amount of power. Their involvement in social activities can lead to an increase in their power and influence. Such influence and power may corrupt them. Lack of necessary skills among businesspeople Businesspeople do not possess the necessary skills to handle the problems of society. Their expertise and knowledge may not be relevant to deal with social problems. Lack of accountability to society Until a proper mechanism to establish the accountability of businesses is developed, they should not get involved in social activities. Lack of consensus on social involvement There is no agreement regarding the type of socially responsible actions that a business should undertake.

Conclusion

20

Taking into view the recent happenings at Reliance Industries, it can be said that the focus on topics like Ethics And Corporate Social Responsibility is increasing. Nowadays the companies have to keep in view the social benefits of all projects undertaken, they have to keep in mind the well being of the Stakeholders as also issues like the safeguarding of the Environment. These activities are constantly under the microscope of the society. When a corporate undertakes a new project it has to keep in mind how does it portray its image in the market. Any wrongdoings can be potential pitfalls for the corporates; they have to be right all the time, any mistake or shortcoming can immediately result in a loss of market share as also reputation. Thus the companies have to continuously Re Evaluate its goals and Objectives and align them with the Corporate Strategy. They can take this opportunity to inculcate proper Business Ethics & Corporate Values in their employees. Along with the CSR comes the opportunity to convert these social initiatives into tangible results, namely profits. A company should look what amount of value the project can give back to the company. A Social Cost Benefit Analysis can give the company a fair idea about what kind of rewards the initiative can generate for the company. Thus a company can decide on the initiatives taking into consideration these various factors.

Short Answer Questions:

21

1. What do you mean by Corporate Social Responsibility? Quote an example to supplement the explanation. 2. How do Values Related & Ethical considerations affect Behavioural implementation? 3. Suggest practical steps that strategist can take to make a strategic use of politics and power. 4. Why are values and ethics specially important to strategists? 5. How can strategists reconcile divergent personal values among organizational members or modify them to suit the requirements of strategy implementation? 6. Purity of mind is it essential to create an ethical system of strategic management within an organisation? 7. Why is Social Responsibility in business a contentious issue? 8. What is the predominant thinking presently regarding the social responsibility of the business? 9. How can strategist limit the scope of social responsibility? 10. What is meant by aligning social responsiveness to strategic management? Long / Application type of questions: 1. Write a descriptive note on the importance of leadership in the setting up and implementation of Business Values & Ethics. 2. If personal values are indeed personal how can a strategist seek to reconcile or modify these values in terms of strategy requirements? How will business ethics play a part in strategy implementation? 3. Most companies in India feel that professionalising management within and minimizing state controls outside can lead to a better quality of business. Do you agree? Why? 4. Manager A believes in being oppurtunistic in strategic while Manager B relies on managerial opportunism. Which of these managers exhibits ethical behaviour and why? 5. The top manager in a professionally managed company was overheard as saying: I believe responsible only to my boss and the board of directors. Social Responsibility is not my responsibility but theirs. Do you agree? Why? 6. A majority of the Indian companies feel that social responsibility activities do not require specialised skills and could be handled informally. Is this thinking correct? Why?

Corporate Governance

22

Outline
What is Corporate Governance? Principles of Corporate Governance Naresh Chandra Committee Narayana Murthy Committee Kumar Mangalam Birla Committee Euro Shareholders Corp Gov Guidelines 2000 Steps for Good Corp Gov

What is Corporate Governance?

23

Corporate governance is about commitment to values and about ethical business conduct. It is about how an organization is managed. This includes its corporate and other structures, its culture, policies and the manner in which it deals with various stakeholders. Corporate governance has succeeded in attracting a good deal of public interest because of its apparent importance for the economic health of corporations and society in general. However, the concept of corporate governance is poorly defined because it potentially covers a large number of distinct economic phenomenons. As a result different people have come up with different definitions that basically reflect their special interest in the field. It is hard to see that this 'disorder' will be any different in the future so the best way to define the concept is perhaps to list a few of the different definitions rather than just mentioning one definition. 1. "Corporate governance is a field in economics that investigates how to secure/motivate efficient management of corporations by the use of incentive mechanisms, such as contracts, organizational designs and legislation. This is often limited to the question of improving financial performance, for example, how the corporate owners can secure/motivate that the corporate managers will deliver a competitive rate of return", Mathiesen [2002] 2. "Corporate governance is about promoting corporate fairness, transparency and accountability" J. Wolfensohn, president of the Word bank, as quoted by an article in Financial Times, June 21, 1999. 3. Corporate governance deals with the ways in which suppliers of finance to corporations assure themselves of getting a return on their investment, The Journal of Finance, Shleifer and Vishny [1997, page 737]. 4. "Corporate governance - which can be defined narrowly as the relationship of a company to its shareholders or, more broadly, as its relationship to society -.", from an article in Financial Times [1997]. Accordingly, timely and accurate disclosure of information regarding the financial situation, performance, ownership and governance of the company is an important part of corporate governance. This improves public understanding of the structure, activities and policies of the organization. Consequently, the organization is able to attract investors, and to enhance the trust and confidence of the stakeholders. Corporate governance guidelines and best practices have evolved over a period of time. The Cadbury Report on the financial aspects of corporate governance, governance published in the UK in 1992, was a landmark. It led to the publication of the Vinot Report in France in 1995. This report boldly advocated the removal of crossshareholdings that had formed the bedrock of French capitalism for decades. The report had this definition for corporate governance,

24

"Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance" Further, The General Motors Board of Directors Guidelines in the US and the Dey Report in Canada proved to be influential in the evolution of other guidelines and codes across the world. Over the past decade, various countries have issued recommendations for corporate governance. Law does generally not mandate compliance with these, although codes that are linked to stock exchanges sometimes have a mandatory content. In India, the Confederation of Indian Industry (CII) took the lead in framing a desirable code of corporate governance in April 1998. This was followed by the recommendations of the Kumar Mangalam Birla Committee on Corporate Governance. The Securities and Exchange Board of India (SEBI) appointed this committee. The recommendations were accepted by SEBI in December 1999, and are now enshrined in Clause 49 of the Listing Agreement of every Indian stock exchange.

Principles of Corporate Governance


A company's corporate governance philosophy should be based on the following principles: 1. Satisfy the spirit of the law and not just the letter of the law. Corporate governance standards should go beyond the law. 2. Be transparent and maintain high degree of disclosure levels. When in doubt, disclose. 3. Make a clear distinction between personal conveniences and corporate resources. 4. Communicate externally, in a truthful manner, about how the company is run internally. 5. Comply with the laws in all the countries in which it operates. Have a simple and transparent corporate structure driven solely by the business needs. 6. Management is the trustee of the shareholders' capital and not the owner. At the core of corporate governance practice is the board, which oversees how the management serves and protects the long-term interests of all the stakeholders of the company. A good company believes that an active, well-informed and independent board is necessary to ensure the highest standards of corporate governance.

25

Review Questions 1. Define Corporate Governance. 2. What are the various principles used for designing Corporate Governance.

Naresh Chandra Committee (NCC)


The Government of India by an order dated the 21st August 2002 constituted a high level committee under the Chairmanship of Mr. Naresh Chandra to examine the AuditorCompany relationship. The broad terms of reference to the committee was as follows:(a) To examine the entire gamut of issues pertaining to the Auditor- Company relationship with a view to ensuring the professional nature of the relationship; in this respect to consider issues such as (but not limited to) rotation of auditors/auditing partners, restrictions on non-audit fee/work, procedures for appointment of auditors & determination of audit fees, etc (b) To examine measures required to ensure that the managements and auditors actually present the true and fair statement of the affairs of companies; in this respect to consider measures such as (but not limited to) personal certification by directors, random scrutiny of accounts, etc. (c) To examine if the present system of regulation of the profession of Chartered Accountants, Company Secretaries and Cost Accountants is sufficient and has served well the concerned stakeholders, especially the small investors, and whether there is advantage in setting up an independent regulator (along the lines of the recently passed Sarbanes-Oxley Act of 2002 in the USA) and, if so, what shape should the independent regulator take. (d) To examine the role of independent directors, and how their independence and effectiveness can be ensured.

Some recommendations proposed by NCC:


Disqualifications for audit assignment Prohibition of any direct financial interest in the audit client by the audit firm, its partners or members of the engagement team as well as their direct relatives. This prohibition would also apply if any relative of the partners of the audit firm or member of the engagement team has an interest of more than 2 per cent of the share of profit or equity capital of the audit client.

26

Recommendation 1 Prohibition of receiving any loans and/or guarantees from or on behalf of the audit client by the audit firm, its partners or any member of the engagement team and their direct relatives Recommendation 2 Prohibition of any business relationship with the audit client by the auditing firm, its partners or any member of the engagement team and their direct relatives

Recommendation 3 Prohibition of personal relationships, which would exclude any partner of the audit firm or member of the engagement team being a relative of any of key officers of the client company, i.e. any whole-time director, CEO, CFO, Company Secretary, senior manager belonging to the top two managerial levels of the company, and the officer who is in default (as defined by section 5 of the Companies Act). In case of any doubt, it would be the task of the Audit Committee of the concerned company to determine whether the individual concerned is a key officer. Recommendation 4 Prohibition of service or cooling off period, under which any partner or member of the engagement team of an audit firm who wants to join an audit client, or any key officer of the client company wanting to join the audit firm, would only be allowed to do so after two years from the time they were involved in the preparation of accounts and audit of that client. Recommendation 5 Prohibition of undue dependence on an audit client. So that no audit firm is unduly dependent on an audit client, the fees received from any one client and its subsidiaries and affiliates, all together, should not exceed 25 per cent of the total revenues of the audit firm. However, to help newer and smaller audit firms, this requirement will not be applicable to audit firms for the first five years from the date of commencement of their activities, and for those whose total revenues are less than Rs.15 lakhs per year. List of prohibited non-audit services The committee recommends that an audit firm should not provide the following services to any audit client:

27

Accounting and book keeping services, related to the accounting records or financial statements of the audit client. Internal audit services Financial information systems design and implementation, including services related to IT systems for preparing financial or management accounts and information flows of a company. Actuarial services. Broker, dealer, investment adviser or investment banking services. Outsourced financial services Management functions, including the provision of temporary staff to audit clients Any form of staff recruitment, and particularly hiring of senior management staff for the audit client. Valuation services and fairness opinion.

Compulsory audit partner rotation


Recommendation The partners and at least 50 per cent of the engagement team (excluding article clerks and trainees) responsible for the audit of either a listed company, or companies whose paid-up capital and free reserves exceeds Rs.10 crore, or companies whose turnover exceeds Rs.50 crore, should be rotated every five years.

Auditors disclosure of contingent liabilities


Recommendation The Committee recommends that management should provide a clear description in plain English of each material liability and its risks, which should be followed by the auditors clearly worded comments on the managements view. This section should be highlighted in the significant accounting policies and notes on accounts, as well as, in the auditors report, where necessary.

Appointment of auditors
Recommendation

28

The committee recommends that the audit committee of the Board shall be the first point of reference regarding the appointment of auditors. In discharging this fiduciary responsibility, the audit committee shall discuss the annual work program with the auditor, review the auditor independence and recommend to the board, with reasons, either the appointment/re-appointment or removal of the external auditor, along with the annual audit remuneration.

Auditors annual certification of independence


Recommendation The committee recommends that the auditors before agreeing to be appointed, must submit a certificate of independence to the audit committee or the board of directors of the client company stating that the auditors are independent and have arms length relationship with the client company, have not engaged in any non-audit services and are not disqualified from audit assignments by virtue of breaching any of the limits, restrictions and prohibitions listed in recommendation.

Auditors disclosure of qualifications and consequent action


Recommendations a. Qualifications to accounts, if any, must form a distinct, and adequately highlighted, section of the auditors report to the shareholders. b. These must be listed in full in plain English what they are (including quantification thereof), why these were arrived at, including qualification thereof, etc. c. In case of a qualified auditors report, the audit firm may read out the qualifications, with explanations, to shareholders in the companys annual general meeting. d. It should also be mandatory for the audit firm to separately send a copy of the qualified report to the ROC, the SEBI and the principal stock exchange (for listed companies), about the qualifications, with a copy of this letter being sent to the management of the company. This may require suitable amendments to the Companies Act, and corresponding changes in The Chartered Accountants Act.

Managements certification in the event of auditors replacement


Recommendation The committee recommends that Section 225 of the Companies Act needs to be amended to require a special resolution of shareholders, in case an auditor, while being eligible to re-appointment, is sought to be replaced. Also the explanatory statement accompanying such a special resolution must disclose the managements reasons for such a replacement,

29

on which the outgoing auditor shall have the right to comment. The Audit Committee will have to verify that this explanatory statement is true and fair Not Applicable. This recommendation is applicable only in circumstances where the statutory auditors are sought to be replaced. The Companys Act is yet to be amended by the government to seek special resolution of the shareholders in case of a replacement of an auditor. The audit committee consisting fully of independent directors recommends the appointment or replacement of auditors.

Setting up of independent quality review board


An independent quality board should be set up in the company to review the quality of work that is done in the company

Review Questions

1. Explain terms of references given to the NCC? 2. Explain in brief: Recommendations given by NCC.

30

Narayana Murthy Committee


SEBI, based on the recommendations of the Shri. N. R. Narayana Murthy Committee on Corporate Governance and public comments received on the report, has amended the Clause 49 of the Listing Agreement vide its circular dated August 26, 2003. Background The revised Clause 49 contains both, the sub clauses of existing Clause 49 as well as new sub-clauses. The amendments relates to: Strengthening the responsibilities of audit committees Improving quality of financial disclosures, including those related to related party transactions and proceeds from Initial Public offerings Requiring Boards to adopt formal code of conduct, Whistle Blower Policy, etc. Improving disclosures related to compensation paid to non executive directors.

Some recommendations proposed by the Narayana Murthy Committee:


Board of Directors

Recommendation 1 The board of the company to have an optimum combination of executive and nonexecutive directors. In case of a Non-Executive Chairman, at least one-third of the board shall comprise of independent directors and in case of Executive Chairman, at least half the board shall comprise of independent directors. Recommendation 2 The Board shall periodically review legal compliance reports prepared by the company as well as steps taken by the company to cure instances of non-compliance. Recommendation 3 The board meeting shall be held at least four times a year, with a maximum time gap of four months between any two meetings. A director shall not be a member in more than 10 committees or act as Chairman of more than five committees across all companies in which he/she is a director.

31

Recommendation 4 A director shall be considered to be an independent director only so long as his tenure on the board does not exceed, in the aggregate, a period of nine years, such period to be considered as commencing on or after the date this circular comes into force or the date of his first appointment as a director, whichever is later. After the expiry of the aid period, the director may continue to be a member of the board and be eligible for reappointment on the expiry of his term, but shall not be considered to be an independent director. Recommendation 5 It shall be obligatory for the board of a company to lay down the code of conduct for all board members and senior management of the company. All board members and senior management personnel shall affirm compliance with the code on an annual basis.

Audit Committee

Recommendation 1 The audit committee shall have minimum 3 members. All the members of the committee shall be independent directors. All members of the committee shall be financially literate and at least one member shall have accounting or related financial management expertise. The chairman of the audit committee shall be an independent director. Recommendation 2 The audit committee shall have the powers which should include the following: To investigate any activity within its terms of reference. To seek information from any employee. To obtain outside legal or other professional advice. To secure attendance of outsiders with relevant expertise, if it considers necessary.

Recommendation 3 The audit committee shall review the following information: Management discussion and analysis of financial condition and results of operations. Statement of significant related party transactions submitted by the management.

32

Management letters/letters of internal control weaknesses issued by the external auditors. Internal audit reports relating to internal control weaknesses. The appointment, removal and terms of remuneration of the Chief Internal Auditor.

Recommendation 4 The chairman of the audit committee, or in his absence, a designated member of the audit committee who is an independent director shall be present at the annual general meeting to answer shareholders queries. The audit committee should invite such of the executives, as it considers appropriate to be present at the meetings of the committee. The audit committee should meet at least four times in a year and not more than four months shall elapse between two meetings. The quorum shall be either two members or one third of the members of the audit committee whichever is greater, but there should be a minimum of two independent members present.

Recommendation 5 Where in the preparation of the financial statements, a treatment different from that prescribed in an accounting standard has been followed, the fact shall be disclosed in the financial statements, together with the managements explanation as to why it believes such alternate treatment is more representative of the true and fair view of the underlined business transaction. Recommendation 6 1. The company will establish a mechanism for employees to report to the management concerns about unethical behavior, actual or suspected fraud or violation of the companys code of conduct or ethics policy. 2. The mechanism must provide for adequate safeguards against victimization of employees who avail of the mechanism. 3. The mechanism must also provide, where senior management is involved, direct access to the Chairman of the Audit Committee. 4. The existence of the mechanism must be appropriately communicated within the organization. 5. The Audit Committee must periodically review the existence and functioning of the mechanism.

Subsidiary Companies

33

Recommendation At least one independent director on the board of holding company shall be a director on the Board of Directors of a material non listed Indian subsidiary company. The Audit committee of the listed holding company shall also review the financial statements, in particular, the investments made by the unlisted subsidiary company. The minutes of the Board meetings of the unlisted subsidiary company shall be placed at the Board meeting of the listed holding company. The management should periodically bring to the attention of the board of directors of the listed company, a statement of all significant transactions and arrangements entered into by the unlisted subsidiary company The term material non listed Indian subsidiary shall mean an unlisted subsidiary, incorporated in India, whose turnover or net worth (i.e. paid up capital and free reserves) in the preceding accounting year exceeds 20% of the consolidated turnover or net worth respectively, of the listed holding company and its subsidiaries in the immediately preceding accounting year.

CEO/CFO Certification
Recommendation CEO (either the Executive Chairman or the Managing Director) and the CFO (wholetime Finance Director or other person discharging this function) discharging the function shall certify to the Board that: a. They have reviewed financial statements an the cash flow statement and the directors report and that to the best of their knowledge and belief: b. These statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading These statements together present a true and fair view of the companys affairs and are in compliance with existing accounting standards, applicable laws and regulations.

c. There are to the best of their knowledge and belief, no transactions entered into by the company which are fraudulent, illegal or violative of the companys code of conduct or ethics policy d. They accept responsibility for establishing and maintaining internal controls and that they have evaluated the effectiveness of the internal control systems of the company an they have disclosed to the auditors and the audit committee, deficiencies in the design or operation of internal controls, if any, of which they are aware and the steps they have taken or propose to take to rectify these deficiencies. e. They have indicated to the auditors and the audit committee - Significant changes in internal control during the year. - Significant changes in accounting policies during the year and the same have been disclosed in the notes to the financial statements. 34

- Instances of significant fraud of which they have become aware and the involvement if any, of the management or an employee having a significant role in the companys internal control system.

Disclosures
Recommendation All elements of remuneration package of individual directors are summarized under major groups, such as salary, benefits, bonuses, stock options, pension etc.

Management
Recommendation Senior management shall make disclosures to the board relating to all material financial and commercial transactions, where they have personal interest, that may have a potential conflict with the interest of the company at large (e.g. dealing in company shares, commercial dealings with bodies, which have shareholding of management and their relatives etc.) Review Questions

1. Explain in brief: Recommendations given by NMC. 2. What recommendations are given for CEO, CFO etc.

35

Kumar Mangalam Birla Committee


The Securities and Exchange Board of India (SEBI) appointed the Committee on Corporate Governance on May 7, 1999 under the Chairmanship of Shri Kumar Mangalam Birla, member SEBI Board, to promote and raise the standards of Corporate Governance. The terms of the reference were as follows: a. To suggest suitable amendments to the listing agreement executed by the stock exchanges with the companies and any other measures to improve the standards of corporate governance in the listed companies, in areas such as continuous disclosure of material information, both financial and non-financial, manner and frequency of such disclosures, responsibilities of independent and outside directors b. To draft a code of corporate best practices c. To suggest safeguards to be instituted within the companies to deal with insider information and insider trading.

Some recommendations proposed by the Kumar Mangalam Committee:


Audit Committee
Recommendation 1 The Committee therefore recommends that The audit committee should have minimum three members, all being non executive directors, with the majority being independent, and with at least one director having financial and accounting knowledge The chairman of the committee should be an independent director The chairman should be present at Annual General Meeting to answer shareholder queries The audit committee should invite such of the executives, as it considers appropriate (and particularly the head of the finance function) to be present at the meetings of the Committee but on occasions it may also meet without the presence of any executives of the company. The Company Secretary should act as the secretary to the committee.

36

Recommendation 2 The Committee recommends that to begin with the audit committee should meet at least thrice a year. One meeting must be held before finalization of annual accounts and one necessarily every six months. Recommendation 3 The quorum should be either two members or one-third of the members of the audit committee, whichever is higher and there should be a minimum of two independent directors. Recommendation 4 The Committee recommends that the audit committee should possess the following powers: To investigate any activity within its terms of reference. To seek information from any employee. To obtain outside legal or other professional advice. To secure attendance of outsiders with relevant expertise, if it considers necessary. Recommendation 5 The Committee recommends that the audit committees role should include the following: Oversight of the companys financial reporting process and the disclosure of its financial information to ensure that the financial statement is correct, sufficient and credible. Recommending the appointment and removal of external auditor, fixation of audit fee and also approval for payment for any other services. Reviewing with management the annual financial statements before submission to the board, focusing primarily on: Any changes in accounting policies and practices. Major accounting entries based on exercise of judgment by management. Qualifications in draft audit report. Significant adjustments arising out of audit. The going concern assumption. Compliance with accounting standards Compliance with stock exchange and legal requirements concerning financial statements. Any related party transactions i.e. transactions of the company of material nature, with promoters or the management, their subsidiaries or relatives etc. that may have potential conflict with the interests of company at large.

37

Reviewing with the management, external and internal auditors, the adequacy of internal control systems. Reviewing the adequacy of internal audit function, including the structure of the internal audit department, staffing and seniority of the official heading the department, reporting structure, coverage and frequency of internal audit. Discussion with internal auditors of any significant findings and follow-up thereon. Reviewing the findings of any internal investigations by the internal auditors into matters where there is suspected fraud or irregularity or a failure of internal control systems of a material nature and reporting the matter to the board. Discussion with external auditors before the audit commences, of the nature and scope of audit. Also post-audit discussion to ascertain any area of concern. Reviewing the companys financial and risk management policies. Looking into the reasons for substantial defaults in the payments to the depositors, debenture holders, share holders (in case of non-payment of declared dividends) and creditors.

Board of Directors
Recommendation 1 Independent directors are directors who apart from receiving directors remuneration do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the judgment of the board may affect their independence of judgment. Further, all pecuniary relationships or transactions of the non-executive directors should be disclosed in the annual report. Recommendation 2 The Committee is of the view that the non-executive directors, i.e. those who are independent and those who are not, help bring an independent judgment to bear on boards deliberations especially on issues of strategy, performance, management of conflicts and standards of conduct. The Committee therefore lays emphasis on the caliber of the non-executive directors, especially of the independent directors.

Recommendation 3

38

The Committee recommends that the board of a company have an optimum combination of executive and non-executive directors with not less than fifty percent of the board comprising the non-executive directors. The number of independent directors (independence being as defined in the foregoing paragraph) would depend on the nature of the chairman of the board. In case a company has a non-executive chairman, at least one-third of board should comprise of independent directors and in case a company has an executive chairman, at least half of board should be independent. Recommendation 4 The Committee is of the view that the Chairmans role should in principle be different from that of the chief executive, though the same individual may perform both roles. Recommendation 5 The Committee recommends that a qualified and independent audit committee should be set up by the board of a company. This would go a long way in enhancing the credibility of the financial disclosures of a company and promoting transparency.

Management

Recommendation 1 As a part of the disclosure related to Management, the Committee recommends that as part of the directors report or as an addition there to, a Management Discussion and Analysis report should form part of the annual report to the shareholders. This Management Discussion & Analysis should include discussion on the following matters within the limits set by the companys competitive position: Industry structure and developments. Opportunities and Threats Segment-wise or product-wise performance. Outlook. Risks and concerns Internal control systems and their adequacy. Discussion on financial performance with respect to operational performance. Material developments in Human Resources /Industrial Relations front, including number of people employed.

39

Recommendation 2 The Committee recommends that disclosures must be made by the management to the board relating to all material financial and commercial transactions, where they have personal interest, that may have a potential conflict with the interest of the company at large (for e.g. dealing in company shares, commercial dealings with bodies, which have shareholding of management and their relatives etc.)

Shareholders
Recommendation 1 The Committee recommends that in case of the appointment of a new director or reappointment of a director the shareholders must be provided with the following information: A brief resume of the director; Nature of his expertise in specific functional areas; and Names of companies in which the person also holds the directorship and the membership of Committees of the board.

Recommendation 2 The Committee recommends that information like quarterly results, presentation made by companies to analysts may be put on companys web-site or may be sent in such a form so as to enable the stock exchange on which the company is listed to put it on its own web-site. Recommendation 3 The Committee recommends that the half-yearly declaration of financial performance including summary of the significant events in last six months, should be sent to each household of shareholders. Recommendation 4 The Committee recommends that a board committee under the chairmanship of a nonexecutive director should be formed to specifically look into the redressing of shareholder complaints like transfer of shares, non-receipt of balance sheet, non-receipt of declared dividends etc. Review Questions

40

1. Explain terms of references given to the Kumar Mangalum Committee? 2. Explain in brief: Recommendations given by NCC. 3. Compare between NCC, NMC, and KMC.

Euro shareholders Corporate Governance Guidelines 2000


Euro shareholders is the confederation of European shareholders associations, with the overall task to represent the interests of individual shareholders in the European Union. In April 1999, the Organization for Economic Cooperation and Development (OECD) published its general principles on corporate governance. The Euro shareholders guidelines are based upon the same principles, but are more specific and detailed. Recommendation 1 A company should aim primarily at maximizing shareholder value in the long-term. Companies should clearly state (in writing) their financial objectives as well as their strategy, and should include these in the Annual Report. Recommendation 2 Major decisions which have a fundamental effect upon the nature, size, structure and risk profile of the company, and decisions which have significant consequences for the position of the shareholder within the corporation, should be subject to shareholders approval or should be decided by the AGM.

Recommendation 3 Anti-takeover defenses or other measures that restrict the influence of shareholders should be avoided. The company does not have any anti-takeover provisions in its Memorandum and Articles of Association. Recommendation 4a The process of mergers and takeovers should be regulated and compliance with these regulations should be supervised. Recommendation 4b

41

If a shareholders stake in the company passes a certain threshold, that shareholder should be obliged to make an offer for the remaining shares under reasonable conditions, that is, at least the price that was paid for the control of the company. Recommendation 5 Companies should immediately disclose information which can influence the share price as well as information about those shareholders who pass (upwards or downwards) 5% thresholds. There should be serious penalties in case of non-compliance. As per the listing agreement, Indian companies are required to immediately inform stock exchanges about all price-sensitive information. According to SEBIs takeover guidelines, shareholders who hold more than 5% of the equity of the company need to inform the company immediately on reaching the limit. On receiving such information, the company needs to immediately notify the stock exchanges on which it is listed. Recommendation 6 Auditors have to be independent and should be elected by the general meeting. Recommendation 7 Shareholders should be able to place items on the agenda of the AGM. As per the Indian law, shareholders holding not less than one-tenth of the paid-up capital of the company are entitled to requisition a general meeting, and place items on the agenda. Recommendation 8 In addition to the regular channels, the company to provide shareholders with pricesensitive information should use electronic means. The company posts all its financial results, as well as press releases, on its website, www.infy.com. The proceedings of the Annual General Meeting are web cast live on the Internet to enable shareholders across the world to view the proceedings. The archives of the video are also available on the companys home page for future reference to all the shareholders. Recommendation 9 Shareholders shall have the right to elect members of at least one board and shall also be able to file a resolution for dismissal. Prior to the election, shareholders should be able to suggest candidate members of the board. In Indian law, members in the general meeting elect directors, either by show of hands or a poll. Recommendation 10a Membership of non-executives on the board should be limited to a maximum period of twelve years. The current law in India mandates the retirement of one-third of the board members every year, and qualifies the retiring members for reappointment. 42

Recommendation 10b No more than one non-executive board member should have served as an executive member of the company. All the non-executive directors of the company, as of date, are independent directors. Review Questions

Explain in brief: Euro Shareholders Corporate Governance Guidelines.

43

Steps for good corporate governance


A. Board Composition:
1. Size and composition of the board The companys policy should be to have an appropriate mix of executive and independent directors to maintain the independence of the board, and separate the board functions of governance and management. The board size should be in accordance to the circumstances and requirements of the company. The board should periodically evaluate the need for increasing or decreasing its size. 2. Responsibilities of COO, Chairman and CEO There should be clear demarcations between the three designations of the company. The Chairman, CEO, COO other executive directors and senior management of the company should make periodic presentations to the board on their responsibilities, performance and targets. 3. Board Membership Criteria The nominations committee for the board should work closely with the entire board to determine the appropriate characteristics, skills and experience for the board as a whole as well as its individual members. Board members are expected to possess the expertise and skills in strategy, technology, finance, quality and human resources. The members shouldnt have relatives of an executive director or an independent director. 4. Selection of new directors The board should be responsible for the selection of any new director. A nomination committee should be set up which will decide on the prospective candidates. It is good if the nomination and the selection committee consist of independent directors. 5. Membership Term The board should constantly evaluate the contribution of its members, and recommend to shareholders their re-appointment periodically as per statute. Executive directors are appointed by the shareholders for a maximum period of five years at a time, but are eligible for reappointment upon completion of their term. Non-executive directors do not have a specified term, but retire by rotation as per law. 6. Board Compensation Review There should be a compensation committee to determine and recommend the board on the compensation payable to the directors. All board-level compensation should be approved by shareholders, and separately disclosed in the financial statements. Remuneration of the executive directors consists of a fixed component and a performance incentive. 7. Membership of Other Boards Executive directors should be excluded from serving on the board of any other entity, unless these are corporate or government bodies whose interests are germane to the future

44

of the industries business, or are key economic institutions of the nation, or whose prime objective is that of benefiting society.

B. Board Meetings
1. Scheduling and selection of the agenda items for Board Meetings The board should meet at least once a quarter to review the quarterly results and other items on the agenda, and also on the occasion of the annual shareholders meeting. Every board member should be free to suggest the inclusion of items on the agenda. When necessary, additional meetings should be held. Independent directors should attend at least four board meetings in a year. 2. Availability of information to the members of the board The information regularly supplied to the board includes: Annual operating plans and budgets, capital budgets, updates Quarterly results of the company and its operating divisions or business segments Minutes of meetings of audit, compensation, nominations Investors grievance and investment committees, as well as abstracts of circular resolutions passed General notices of interest Declaration of dividend Information on recruitment and remuneration of senior officers just below the board level including appointment or removal of CFO and company secretary etc.

C. Board Committees
The boards in any organization should have the number of committees as per the requirements. The board should be responsible for the constituting, assigning, co-opting and fixing of terms of service for committee members to various committees, and it delegates these powers to the nominations committee. 1. Audit committee There should be a audit committee set up whose primary objective should be to monitor and provide effective supervision of the management's financial reporting process with a view to ensure accurate, timely and proper disclosures and transparency, integrity and quality of financial reporting. 2. Composition of the Audit Committee The committee shall consist solely of independent directors as defined in NASDAQ Rule 4200 and (ii) the rules of the Securities and Exchange Commission of the Company and shall be comprised of a minimum of three directors. Each member should be able to read and understand fundamental financial statements, in accordance with the NASDAQ

45

National Market Audit Committee requirements. They should be diligent, knowledgeable, dedicated, interested in the job and willing to devote a substantial amount of time and energy to the responsibilities of the committee, in addition to BoD responsibilities. 3. Meetings and reports The Committee shall meet at least four times a year The Committee will meet separately with the CEO and the CFO of the Company at such times as are appropriate to review the financial affairs of the Company. In addition to preparing the report in the Companys proxy statement in accordance with the rules and regulations of the SEC, the committee will summarize its examinations and recommendations to the Board of Directors as may be appropriate, consistent with the committee's charter 4. Delegation of authority The committee may delegate to one or more designated members of the committee the authority to pre-approve audit and permissible non-audit services, provided such pre approval decision is presented to the full audit committee at its scheduled meetings. 5. Audit Committee Report Management should be responsible for the Companys internal controls and the financial reporting process. The independent auditors are responsible for performing an independent audit of the Companys financial statements in accordance with the generally accepted auditing standards, and for issuing a report thereon. The committee's responsibility is to monitor these processes. The committee is also responsible for overseeing the processes related to the financial reporting and information dissemination. This is in order to ensure that the financial statements are true, correct, sufficient and credible. 6. Investor Grievance Committee An independent director should head the investor grievance committee.

D. Code of Ethics
1. Honest and Ethical conduct All Officers are expected to act in accordance with the highest standards of personal and professional integrity, honesty and ethical conduct, while working on the Companys premises, at offsite locations where the Companys business is being conducted, at Company sponsored business and social events, or at any other place where Officers are representing the Company. An honest conduct is one that is free from fraud or deception and an ethical conduct is one that is conforming to the accepted professional standards of conduct. Ethical conduct includes the ethical handling of actual or apparent conflicts of interest between personal and professional relationships.

46

2. Conflicts of Interest An Officers duty to the Company demands that he or she avoids and discloses actual and apparent conflicts of interest. A conflict of interest exists where the interests or benefits of one person or entity conflict with the interests or benefits of the Company. 3. Disclosure to the Sec And The Public The companys policy should be to provide full, fair, accurate, timely, and understandable disclosure in reports and documents that the company files with, or submits to, the SEC and in other public communications. Accordingly, the Officers must ensure that they and others in the Company comply with the disclosure controls and procedures, and internal controls for financial reporting. 4. Compliance with Governmental Laws, Rules and Regulations Officers must comply with all applicable governmental laws, rules and regulations. Officers must acquire appropriate knowledge of the legal requirements relating to their duties sufficient to enable them to recognize potential dangers, and to know when to seek advice from the finance department. Violations of applicable governmental laws, rules and regulations may subject Officers to individual criminal or civil liability, as well as to disciplinary action by the Company. Such individual violations may also subject the Company to civil or criminal liability or the loss of business. 5. Violations of the Code Part of an Officers job and of his or her ethical responsibility is to help enforce this Code. Officers should be alert to possible violations and report this to the HR department or the finance department. Officers must cooperate in any internal or external investigations of possible violations. Reprisal, threat, retribution or retaliation against any person who has, in good faith, reported a violation or a suspected violation of law, this Code or other Company policies, or against any person who is assisting in any investigation or process with respect to such a violation, is prohibited. Actual violations of law, this Code, or other Company policies or procedures, should be promptly reported to the HR department or the finance department. 6. Waivers and Amendments Of The Code The company should be committed to continuously review and update its policies and procedures. Therefore, the Code is subject to modification. Any amendment or waiver of any provision of the Code must be approved in writing by the Companys board of directors and promptly disclosed on the Companys website and in applicable regulatory filings pursuant to applicable laws and regulations, together with details about the nature of the amendment or waiver.

E. Corporate Opportunities

Employees, officers and directors may not exploit for their own personal gain opportunities that are discovered through the use of corporate property, information or 47

position unless the opportunity is disclosed fully in writing to the Companys Board of Directors and the Board of Directors declines to pursue such opportunity.

F. Protecting the Company's Confidential Information


The Company's confidential information is a valuable asset. The Companys confidential information includes product architectures; source codes; product plans and road maps; names and lists of customers, dealers, and employees; and financial information. This information is the property of the Company and may be protected by patent, trademark, copyright and trade secret laws. Every employee, agent and contractor must safeguard it. This responsibility includes not disclosing the Company confidential information such as information regarding the Company's services or business over the Internet. (i) Proprietary Information and Invention Agreement. When an employee joins the Company, he signs an agreement to protect and hold confidential the Company's proprietary information. This agreement remains in effect for as long as you work for the Company and after he leaves the Company. Under this agreement, he should not disclose the Company's confidential information to anyone or use it to benefit anyone other than the Company without the prior written consent of an authorized Company officer. (ii) Disclosure of Company Confidential Information. To further the Company's business, from time to time the companys confidential information may be disclosed to potential business partners. However, such disclosure should never be done without carefully considering its potential benefits and risks. If one determines in consultation with his manager and other appropriate Company management that disclosure of confidential information is necessary, one must then contact the Legal Department to ensure that an appropriate written nondisclosure agreement is signed prior to the disclosure. The Company has standard nondisclosure agreements suitable for most disclosures. One must not sign a third party's nondisclosure agreement or accept changes to the Company's standard nondisclosure agreements without review and approval by the Company's Legal Department. In addition, all Company materials that contain Company confidential information, including presentations, must be reviewed and approved by his manager and other appropriate Company management prior to publication or use. Furthermore, any employee publication or publicly made statement that might be perceived or construed as attributable to the Company, made outside the scope of his or her employment with the Company, must be reviewed and approved in writing in advance by his manager and other appropriate Company management and must include the Company's standard disclaimer that the publication or statement represents the views of the specific author and not of the Company.
(i)

Requests by Regulatory Authorities. The Company and its employees, agents and contractors must cooperate with appropriate government inquiries and investigations. In this context, however, it is important to protect the legal rights of the Company with respect to its confidential information. All government requests for information, documents or investigative interviews must be referred to the Company's Legal Department. No financial 48

information may be disclosed without the prior approval of the Chief Financial Officer.
(ii)

Company Spokespeople. The Corporate Communication and Analyst Policy is established to set out whom in the Company may communicate information to the press and the financial analyst community. All inquiries or calls from the press and financial analysts should be referred to the Chief Financial Officer or Investor Relations Department. The Company should have designated its CEO, CFO and Investor Relations Department as official Company spokespeople for financial matters. All press releases, interviews; media replies should be pre-cleared by the Legal Department.

G. Prohibition against Short Selling of Company Stock

No Company director, officer or other employee, agent or contractor should, directly or indirectly, sell any equity security, including derivatives, of the Company if he or she (1) Does not own the security sold, or (2) If he or she owns the security, does not deliver it against such sale (a "short sale ") within the applicable settlement cycle. No Company director, officer or other employee, agent or contractor may engage in short sales. While employees who are not executive officers or directors are not prohibited by law from engaging in short sales of Company's securities, the Company should extend this prohibition to all employees even though such wider application is not required by the law.

H. Your Responsibility to the Company and its Stockholders


A. General Standards of Conduct

The Company expects all employees, agents and contractors to exercise good judgment to ensure the safety and welfare of employees, agents and contractors and to maintain a cooperative, efficient, positive, harmonious and productive work environment and business organization. These standards apply while working on company premises, at offsite locations where the business is being conducted, at Company-sponsored business and social events, or at any other place where one is a representative of the Company. A1. Workplace free of Harassment The Company should be committed to providing a work environment free of unlawful harassment. Company policy should prohibit sexual harassment and harassment based on pregnancy, childbirth or related medical conditions, race, religious creed, color, national origin or ancestry, physical or mental disability, medical condition, marital status, age, sexual orientation, or any other basis protected by federal, state, or local law or ordinance or regulation. All such harassment is unlawful. The Companys anti-harassment policy applies to all persons involved in the operation of the Company and prohibits unlawful harassment by any employee of the Company towards other Companys employees 49

including supervisors, outside vendors, clients, It should also prohibit unlawful harassment based on the perception that anyone has any of those characteristics, or is associated with a person who has or is perceived as having any of those characteristics. A2. Drug and Alcohol Abuse To meet responsibilities to employees, customers and investors, the Company must maintain a healthy and productive work environment. Misusing controlled substances, or selling, manufacturing, distributing, possessing, using or being under the influence of illegal drugs and alcohol on the job is absolutely prohibited. A3. Safety in Workplace The safety of people in the Workplace is a primary concern of the Company. Each member of the company must comply with all applicable health and safety policies. The company must maintain compliance with all local laws to help maintain secure and healthy work surroundings. Questions about these laws and guidelines should be directed to the Human Resources Department. A4. Dress Code and other personal standards Because each member of the company is a representative of the Company in the eyes of the public, the employees must report to work properly groomed and wearing appropriate clothing. Employees are expected to dress neatly and in a manner consistent with the nature of the work performed. A5. Expense Claims All business related expense claims must be authorized by the manager of the employee before the incurrence. The reimbursement of expense incurred must be claimed within 30 days of incurring the expenditure. Expense claims post the expiry of 30 days will be deemed to be unauthorized. Personal expense will not be reimbursed by the company. To know the individual business expenditure limit employees should contact the Human Resources Department.

50