30. Business Ethics in India – Business Environment

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BUSINESS ETHICS IN INDIA

In this chapter, we study the principles and evolution of ethics. We focus on why organizations need to be ethical—the significance of ethics and the benefits it brings. We analyse the ethical challenges in the current changing business environment. The chapter enables you to comprehend the concept of ethical business and its role in promoting good business and improving the overall welfare of society

Ethics reflects a society's notions about the rightness or wrongness of an act. Ethics also involves the evaluation and application of certain moral values that a society or culture has come to accept as its norms. It is generally described as a set of principles or moral conduct. Business ethics, therefore, is a sum total of principles and code of conduct businessmen are expected to follow in their dealings with their fellowmen such as stockholders, employees, customers, and creditors and comply with the laws of the land enacted to protect all these stakeholders.

The word ethics is derived from the Greek word ethikos meaning custom or character. The Concise Oxford Dictionary defines ethics as the treating of moral questions. But this definition is imprecise and leaves a number of loose ends. Whose morals? Which moral questions? Business ethics are supposed to cover areas as diverse as labour practices, free and fair trade, health concerns, euthanasia to animal welfare, environmental concerns, to genetic modification, to human cloning. Perhaps the definition provided by the Chambers Dictionary comes closer to providing a workable definition: “Ethics is a code of behaviour considered correct”. What the society considers correct may have been arrived by the crystallization of consumer pressure on corporations and governments and regulatory forces. It is the science of morals describing a set of rules of behaviour. Business ethics itself is an offshoot of applied ethics. The study of business ethics essentially deals with understanding what is right and morally good in business.

Ethics, as a science, involves systemizing, defending and recommending concepts of right and wrong behaviour. The principles of ethical reasoning are useful tools for sorting the good and bad components within complex human interactions. For this reason, the study of ethics has been at the heart of intellectual thought since the early Greek philosophers, and its ongoing contribution to the advancement of knowledge and science makes ethics a relevant, if not vital, aspect of management theory.

PRINCIPLES OF ETHICS

Ethics is a conception of right and wrong behaviour, informing us when our actions are moral and when they are immoral.

Personal Ethics

Personal values are the conception of what an individual or a group regards as desirable. Personal ethics refer to the application of these values in everything one does. Personal ethics are often equated with the morality, since they are the reflections of the general expectations of individuals or the society, acting in some capacity or the other. These are the principles we try to inculcate in our children, and expect of one another without any need to express openly or formalize it in any way. The principles of personal ethics include the following: (i) Concern for the well-being of others; (ii) Respect for the autonomy of others; (iii) Trustworthiness and honesty; (iv) Willing compliance to law; (v) Basic justice: being fair; (vi) Refusing to take unfair advantage; (vii) Benevolence: doing good and (viii) Preventing harm to any fellow being.

People are motivated to be ethical in their dealings for the following reasons:

  1. Personal reasons of conscience: Most human beings are by nature conscientious and under normal circumstance will act ethically.
  2. Social need of non-injury: In whatever activity people do, it is their natural behaviour that ensures that their actions do not cause any injury, physical or mental, to other beings.
  3. Legal need to obey the laws and rules of the government: Most people in almost all circumstances will obey the law of the land and be within the confines of government rules and regulations.
  4. Ultimately, one's survival depends on being ethical: The social and material well-being of a person very much depends on one's ethical behaviour in society.

Professional Ethics

There are certain basic principles people are expected to follow in their professional career. These are the following:

  • Impartiality: objectivity
  • Openness: full disclosure
  • Confidentiality: trust
  • Due diligence/duty of care
  • Fidelity to professional responsibilities
  • Avoiding potential or apparent conflict of interest

Business Ethics

Business ethics is the application of general ethical ideas to business behaviour. Ethical business behaviour is expected by public, prevents harm to society, improves profitability, fosters business relations and employee productivity, reduces criminal penalties, protects business against unscrupulous employees and competitors, protects employees from harmful actions by their employer, and allows people in business to act consistently with their personal ethical beliefs. Ethical problems occur in business for many reasons, including the selfishness of a few people, competitive pressures on profits, the clash of personal values and business goals, and cross-cultural contradictions in global business operations. Similar ethical issues, such as bribery and corruption, are evident throughout the world, and many national governments and international agencies are actively attempting to minimize such actions through economic sanctions and international codes. Although laws and ethics are closely related, they are not the same; ethical principles tend to be broader than legal principles. Illegal behaviour by business and its employees imposes great costs on business itself and the society at large.

To be precise, “Business ethics is the art and discipline of applying ethical principles to examine and solve complex moral dilemmas.”1 Business ethics proves that business can be and have been ethical and still make profits. Till the last decade, business ethics was thought of as being a contradiction in terms. But things have changed; today more and more interest is being shown on the application of ethical practices in business dealings and the ethical implications of business. “Business ethics is that set of principles or reasons which should govern the conduct of business whether at the individual or collective level.”2

Ethical solutions to business problems may have more than one right answer or sometimes no right answer at all. Thus, logical and ethical reasoning are tested in that particular business situation. “A business or company is considered to be ethical only if it tries to reach a trade-off between pursuing its economic objectives and its social obligations, i.e., between its obligations to the society where it exists and operates; its obligations to its people due to whom it can even think of pursuing economic goals; to its environment, from whom it takes so much without it demanding anything back in return; and the like.”3

Business ethics is based on the principle of integrity and fairness and concentrates on the benefits to the stakeholders, both internal and external. Stakeholder includes those individuals and groups without whom the organization does not have an existence. It includes shareholders, creditors, employees, customers, dealers, vendors, government and the society. Ethical corporate behaviour is nothing but a reiteration of the ancient wisdom that “honesty is the best policy”. The dramatic collapse of some of the Fortune 500 companies such as Enron and Worldcom or the well-known auditing firm Andersen showed that even successful companies could ultimately come to grief, if they did not practise the basic principles of integrity. For every profession “we would think of a code of conduct or a set of values, which has a moral content and that would be the essence of ethics for that profession”. There should be transparency in operations leading to accountability, which should ensure safety and protect the interests of all the stakeholders.

WHAT IS NOT BUSINESS ETHICS?

It is also equally important to clarify what is not ethics.

  1. Ethics is different from religion: Though all religions generally preach high ethical/moral standards, they do not address all the types of problems people confront today. For instance, cyber crimes and environment-related issues are totally new in the context of most religions. Moreover, many persons today do not subscribe to religious beliefs and have turned agnostics. But ethics applies to all people, irrespective of their religious affiliations.
  2. Ethics is not synonymous with law: Generally, a good legal system may incorporate many moral/ethical standards. However, there are several instances where law deviates from what is ethical. Legal systems may vary from society to society depending upon its social, religious and cultural beliefs. For instance, the US law forbids companies from paying bribes either domestically or overseas; however, in other parts of the world, bribery is an accepted way of doing business. Similar contradictions may be seen in child labour, employee safety, work hours, wages, gender discrimination and environmental protection laws. Law can be corrupted and debased by dictators and made to cater to serve interests of narrow groups. Sometimes, law could be unreasonable and even stupid, as for instance, it is illegal in Israel for a hen to lay an egg on a Friday or Saturday!4 It is also slow to respond to ethical needs of the society. People are often sceptical about the objectives of any legal system and comment “Law is an Ass”, while few people question ethical standards.
  3. Ethical standards are different from cultural traits: The English adage “When in Rome, do as the Romans do”, leads to an unethical cultural behaviour. Some cultures may be ethical, but many of them are not. They may be quite oblivious to ethical concerns. For instance, our system of castes reflects an unethical streak inasmuch as it tends to take for granted that some people are superior to others in God's creation.
  4. Ethics is different from feelings: Our ethical choices are based on our feelings. Most of us feel bad when we indulge in something wrong. But many, especially hardened criminals, may feel good even when they do something bad. Most people when they do something wrong for the first time may feel bad, but if they find that it is beneficial or brings them pleasure, may habituate it without feeling any remorse.
  5. Ethics is not a science in the strictest sense of the term: We draw data from the sciences to enable us make ethical choices. But science does not tell us what we ought to do in certain situations leading to ethical dilemmas. But ethics being prescriptive offers reasons for how humans ought to act under such situations. “Moreover, just because something is scientifically or technologically possible, it may not be ethical to do it,” as for instance, human cloning.
  6. Ethics is not a collection of values: Values are almost always over-simplifications, which rarely can be applied uniformly. Values tend to be under-defined, situational by nature and subject to flawed human reasoning such that by themselves they cannot assure true ethical conduct. Consider the much-discussed value of employee loyalty. Should employees be loyal to coworkers, supervisors, customers, or investors? Since it is impossible to be absolutely loyal to all the four simultaneously, in what order should these loyalties occur? Employers who demand employee loyalty rarely can answer this question completely or satisfactorily.

Alvin Tofler said, “A corporation is no longer responsible simply for making a profit or producing goods but for simultaneously contributing to the solution of extremely complex ecological, moral, political, racial, sexual and social problems. Instead of clinging to a sharply specialised economic function, the corporation prodded by criticism, legislation and its own concerned executives, is becoming a multi-purpose institution.” There may be instances where some managers may fall into the trap of allurements and become “hired killers” in business. They are exceptions and not examples. But the majority of the present-day managers believe that professions cannot serve two masters at once— the classes and the masses, the “propreitorial” and the proletariat, Jesus and Judas, the deprived Pandavas and the grabbing Kouravas and so on. In the exercise of their duties and responsibilities, managers must observe certain ethical values such as integrity, impartiality, responsiveness to the public interest, accountability and honesty. Ethics are to business what values are to individuals.

EVOLUTION

If we trace the history of ethics in business, we would realize that ethics had been a part of theological discussions prior to 1960. Before 1970s, there were a few writers like Raymond Baumhart who dealt with ethics and business. Ethical issues were mostly discussed as part of social issues. Men of religion and theologians continued writing and teaching on ethics in business. Professors in B-schools wrote and continued to talk about CSR, the handmaid of ethics. However, the catalyst that led to the field of business ethics was the entry of several “philosophers, who brought ethical theory and philosophical analysis to bear on a variety of issues”.5 Norman Bowie dates the genesis of business ethics as November, 1974, with the first conference on the subject held at the University of Kansas. In 1979, three anthologies on business ethics appeared. They were: (i) Ethical Theory and Business by Tom Beauchamp and Norman Bowie; (ii) Ethical Issues in Business: A Philosophical Approach by Thomas Donaldson and Patricia Werhane; and (iii) Moral Issues in Business by Vincent Berry. In 1982, Richard De George brought out Business Ethics, while Manuel G. Velasquez published his Business Ethics: Concepts and Cases. All these books created a lot of interest on the subject and business ethics courses were being offered in several management schools. The emergence of business ethics, however, was not restricted to textbooks and courses in B-schools. By 1975, business ethics became institutionalized at many levels through writings and conferences. By 1980s, the subject was taught in several universities in the United States and Europe. There were also, by this time, many journals of business ethics, apart from centres and societies established to promote ethical practices.

By the year 1990, business ethics as a management discipline was well established. “Although the academicians from the start had sought to develop contacts with the business community, the history of the development of business ethics as a movement in business, though related to the academic developments, can be seen to have a history of its own”.6

Parallel to these academic pursuits, around the time from the 1960s to 1980s, the Consumers' Association in Britain multiplied its membership and campaigned hard on issues such as consumer rights, quality, safety, price, customer service and environmental concerns. The late-1980s and early 1990s saw increased concern for the environment and by 1989 environment was the issue of greatest concern in Britain. In 1988, more than 50 per cent of the people in West Germany called themselves green consumers, i.e., those who preferred to select one product over another for environmental friendly reasons. The USA followed with 45 per cent, Australia with 27 per cent, Great Britain with 14 per cent, which within a year shot up to 42 per cent.

Simultaneously with these developments or even anticipating them, religion also lent its powerful voice. Catholic teachings such as Papal Encyclicals emphasized the need for morality in business, such as workers' rights and living wages as in Rerum Novarum of Pope Leo XIII. Some of the Protestant seminaries developed ethics as part of their curriculum. During the 1960s, we saw the rise of social issues in business. During this period many business practices came under social scrutiny. President John F. Kennedy's Consumer Bill of Rights reflected a new era of consumerism. During the 1970s, professors teaching business began to write about business ethics and philosophers began to involve themselves in the theoretical evolution of the subject. Businessmen became more concerned with their public image and addressed ethics more directly. From this historical development, we could see that business ethics as a field of study and research is a fairly nascent subject.

NEED

Ethics is closely related to trust. Most of the people would agree on the fact that to develop trust, behaviour must be ethical. Ethical behaviour is a necessity to gain trust. Trust will be used as an indicator variable of ethics. Basically, trust is three dimensional, that is, trust in supplier relationships, trust in employee relationships and trust in customer relationships. In such a situation, the entire stakeholders of the company are taken care of. If the company is able to maintain this trust-relationship with the internal as well as external stakeholders, then we can call that company as an ethical company.

Trust leads to predictability and efficiency of business. Ethics is all about developing trust and maintaining it fruitfully so that the firm flourishes profitably and maintains good reputation. Lack of ethics would lead to unethical practices in organizations as well as in personal life. One wonders why sometimes even educated, well-positioned managers or employees of some reputed companies act unethically. This is because of lack of ethics in their lives. We can point out a number of examples of companies whose top managements are involved in unethical practices, Enron, WorldCom, to name a few.

Earlier it was said that “business of business is business”, now there is a sudden change in the slogan. In the contemporary scenario where ethics has got due importance, the slogan has taken the form “business of business is ethical business”. Applying ethics in business makes good sense because it induces others to follow ethics in their behaviour. Ethics are important not only in business, but also in all aspects of life. The business of the society which lacks ethics is likely to fail sooner or later.

There are thousands of companies which have succeeded in making profits and enhancing public esteem by following ethical practices in their realm of business. Johnson & Johnson, Larson & Toubro, Wipro, Infosys and Tata Steel are some of such companies. They have gained the trust of the public through ethical practices. In India, the Tatas, for instance, adhere to, and communicate key ethical standards in several ways. The Tata Code of Conduct affirms: “The Tata name represents more than a century of ethical conduct of business in a wide array of markets and commercial activities in India and abroad. As the owner of the Tata Mark, Tata Sons Ltd., wishes to strengthen the Tata brand by formulating the Tata Code of Conduct, enunciating the values which have governed and shall govern the conduct and activities of companies associating with or using the Tata name and of their employees”.7

SIGNIFICANCE

In the beginning of the new millennium, events in corporate America, Europe and in many emerging economies have demonstrated the destructive fallouts that take place when the top management of companies do not behave ethically. Lack of ethics has led highly educated, resourceful and business-savvy professionals at mega corporations like Enron, Tyco, Waste Management, World- Com and Adelphia Communications to get themselves into a mess. In India too, we have had several instances of highly successful corporations like ITC, Satyam Computers and Reliance get into severe problems when the top brass misled them to unethical practices. Recently, the chairman of the South Korean automobile giant, Hyundai, Chung Mong-Koo was arrested and jailed for diverting more than USD 1 billion from the company for paying bribes to government officials.

People often wonder why employees indulge in unethical practices such as lying, bribery, coercion, conflicting interest, etc. There are certain factors that make the employees to think and act in unethical ways. Some of such influencing factors are: “pressure to balance work and family, poor communications, poor leadership, long work hours, heavy work load, lack of management support, pressure to meet sales or profit goals, little or no recognition of achievements, company politics, personal financial worries, and insufficient resources.”8 The statistical data given by the US-based Ethical Officers Association in 1997 shows how certain practices or factors contribute to unethical behaviour.9

Balancing work and family 52 per cent
Poor leadership 51 per cent
Poor internal communication 51 per cent
Lack of management support 48 per cent
Need to meet goals 46 per cent

From this statistics it is very much evident that conflicting interests lead to most of the unethical practices. The fact that by and large business has a negative image cannot be overstressed. Books, journals, movies and TV shows invariably depict business in bad light. Although businessmen may not want to be unethical, factors such as competitive pressures, individual greed, and differing cultural contexts generate ethical issues for organizational managers. “Further, in almost every organization some people will have the inclination to behave unethically necessitating systems to ensure that such behaviour is either stopped or detected and remedied.”

If we analyse the reasons as to why such unethical practices take place in corporations, we may come across several dimensions to the discussion on the importance and significance of business ethics. There are quiet a few businessmen and entrepreneurs who are of the opinion that business and ethics do not go hand in hand, as there is no proven evidence that following ethical practices brings profits to the firm. They think that an ethical company may not be in a position to reap the benefits offered by the business environment if they were to worry about how ethically they should run the organization which would also bring them profits. It may not be able to take advantage of the opportunities provided by circumstances if they have to worry about ethical considerations all the time. Besides, the choice of an ethical alternative among many other alternatives and getting due benefits after investing on ethical practices may take time which may act as a constraint. There are others to whom making profit and increasing market capitalization are the only imperatives and yardsticks of efficiency and successful corporate management. To them, end justifies the means. There are hundreds of CEOs who hold this opinion and acted unethically though many of them were proved wrong when nemesis caught up with them as in the cases of top executives of WorldCom and Enron.

However, real-life situations have shown that use of ethical practices in business does create high returns for companies that are run on ethical principles. There have been many empirical studies that have shown that companies that follow ethical practices are able to double their profits and show increased market capitalization compared to companies that do not adhere to ethics. In our country, Tata Steel and Infosys are two classic examples that illustrate this line of thinking.

Running a business ethically is good for sustaining business. Applying ethics in business also makes good sense. The corporate that behaves ethically prompts other business associates, by its good example, to behave ethically as well. Organizations work on synergy and delegation. It is the feeling of the oneness with the company which is called as feeling of ownership that enhances the sincerity of a worker in an organization. Organizations cannot work in a manner where the employees are not given due importance in their affairs. For example, if a management exercises particular care in meeting all responsibilities to employees, customers, and suppliers, it usually is rewarded with a high degree of loyalty, quality and productivity. Likewise, employees who were treated ethically will more likely behave ethically themselves in dealing with customers and business associates. A supplier who refuses to exploit his advantage during a seller's market condition retains the loyalty and continued business of its customers when conditions change to those of a buyer's market. A company such as Sakthi Masala Pvt. Ltd that does not discriminate against elderly or handicapped employees and uses every opportunity to convince them that they are wanted as much as others discovers that they are fiercely loyal, hard working and productive.

There is a cultivated belief in society for thousands of years, may be due to religious influence or an unwavering faith in morality, that a “good man” who steadfastly tries to be ethical is bound to overtake his immoral or amoral counterpart in the long run. A plausible explanation of this view on ethical behaviour is that when individuals operate with a sense of confidence regarding the ethical soundness of their position, their mind and energies are freed for maximum productivity and creativity. On the other hand, when practising unethical behaviour, persons find it necessary to engage in exhausting subterfuge, resulting in diminished effectiveness and reduced success.

We can be quite sure that well-endowed business professionals like Kenneth Lay, Martha Stewart, Dennis Kozlowski or Bernard Ebbers, the CEO of WorldCom who paid themselves millions of dollars salary and bonus packages at a time when their companies were in dire financial straits and were laying off thousands of people or encouraging their workers to invest in stocks of their failing companies were aware of what constitutes ethics. They either were too far removed from the ethical standards they expected their subordinates to follow or they were too blinded by their self-interest, or they simply did not care.

More often than not, managers get themselves into a quandary on the ethical side of their actions. For example, the decision of a manager to halt a process in a company due to his concern for the environment may backfire on him, if his company believes that profits are more important than the environment. In this context, the manager will have to make a careful analysis of whether or not the proposed action is in terms with the goals of the firm. If that is not so, he need not follow the advice of superiors because ultimately a man is responsible for his own actions.

The top brass of an organization are expected to share the burden of cost reductions and belt-tightening during difficult times. Senior executives of companies who freeze their salaries or take personal pay cuts in a difficult year rather than lay off employees to cut costs deserve the utmost respect of everyone. However, this does not mean that a company should lose flexibility in adjusting its cost structure during bad times, replace old factories by new ones, or change technology in ways that would require few people to do the work. Such decisions should be made with empathy and financial support to those who are adversely affected by them.

Moral or ethical behaviour can neither be legislated nor taught in a vacuum. Authority, it is said, cannot bring about morality. The best way to promote ethical behaviour is by setting a good personal example. Teaching an employee ethics is not always effective. One can explain and define ethics to an adult, but understanding ethics does not necessarily result in behaving ethically. Personal values and ethical behaviour is taught at an early age by parents and educators.

The innate human belief that is so deeply ingrained in people's psyche that ethical, moral or good behaviour will find its reward ultimately is demonstrated millions of times in stage plays and films by the “virtuous” hero winning over the “wicked” villain. The fact that people would rarely accept the success of evil or unethical forces over the ethical or good ones has been demonstrated time and again by the failure in box office of such plays or films depicting such on unconventional formula.

Ethics are important not only in business but in all aspects of life because it is an essential part of the foundation on which a civilized society is built. A business, as much as a society, that lacks ethical principles is bound to fail sooner than later.

VALUES AND ETHICS IN BUSINESS

Business ethics are related to issues of “what is right” and “what is wrong” while doing business. The constituents of business ethics include adherence to truth, a commitment to justice and public integrity. What values are to individuals, ethics are to businesses.

Personal values refer to a conception of what an individual or group regards as desirable. A value is a view of life and judgment of what is desirable that is very much part of a person's personality and a group's morale. Thus, a benign attitude to labour welfare is a value which may prompt an industrialist to do much more for workers than the labour law stipulate. Service mindedness is a value which when cherished in an organization manifests in better customer satisfaction. Personal values are imbibed from parents, teachers and elders and as an individual grows, values are adapted and refined in the light of new knowledge and experiences. Within an organization, values are imparted by the founder-entrepreneur or a dominant chief executive and they remain in some form, even long after that person exits.

J. R. D. Tata once said this when asked to define the House of Tata and what links that forge the Tata companies together: “I would call it a group of individually managed companies united by two factors: First, a feeling that they are part of a larger group which carriers the name and prestige of Tatas, and public recognition of honesty and reliability-trustworthiness. The other reason is more metaphysical. There is an innate loyalty, a sharing of certain beliefs. We all feel a certain pride that we are somewhat different from others”. The several values that J. R. D. Tata refers to have been derived from the ideals of the founder of the group, Jamsetji Tata.

Business ethics operate as a system of values and “is concerned primarily with the relationship of business goals and techniques to specifically human ends”. This would mean viewing the needs and aspirations of individuals as part of society. It also means realization of the personal dignity of human beings. A major task of leadership is to inculcate personal values and impart a sense of business ethics to the organizational members. While values and ethics, on one hand, shape the corporate culture and dictate the ways how politics and power will be used, on the other, they clarify the social responsibility in the organization.

The Importance of Values and Ethics

A typical dilemma faced by people in business is to somehow reconcile the pragmatic demands of work which often degenerate to distortion of values and unethical business practices and the call of the “inner voice” which somehow prevents them from using unethical means for achieving organizational goals. This dilemma stems from the fact that apparently the value system of the organization has already been contaminated beyond redemption. Some analysts attribute this to the acceptable behaviour in society at a particular point of time or justify it in terms of the rapid transition of a developing society where social mechanisms become obsolete.

Corruption in industry, which is a major by-product of degradation of values and ethics, is also related to the inability of industry to stand up to the discretionary powers of a regulatory system designed and administered by an unholy alliance of bureaucrats and politicians. But repeated observations have shown that it is values, and not avarice, that drive the recognition of the importance of economic growth and profits. The accuracy of these observations have been borne out by several excellent organizations which have explicit belief in values. It has been possible for Indian companies such as Infosys, Tata Steel, Asian Paints, Bajaj Auto and Wipro to excel on the basis of superordinate goals—a set of values and aspirations and corporate culture. Managers, therefore, have to provide the right values and ethical sense to the organizations they manage.

Take, for instance, such issues as consumers being taken for a ride on matters such as warranty, annual maintenance contracts, consumers being asked to pay very high prices for components, discriminating prices, managements collusion with union leadership, FEMA violations, insider trading, lack of transparency, lack of integrity and fair presentation of financial statements, feeding top managements only with information they want to hear, window dressing of balance sheets, backdating of contracts, manipulation of profit and loss accounts, hedging and fudging of unexplainable and inordinate expenditures and resorting to suppressio veri, suggestio falsi, and continuous upward revaluation of assets to conceal poor performance, etc. These are only the tips of the iceberg.

The Distinction Between Values and Ethics

At this point, it is necessary to differentiate between values and ethics. Values are personal in nature (e.g., a belief in providing customer satisfaction and being a good paymaster) while ethics is a generalized value system (e.g., avoiding discrimination in recruitment and adopting fair business practices). Business ethics can provide the general guidelines within which management can operate. Values, however, offer alternatives to choose from. For example, philanthropy as a business policy is optional. An entrepreneur may or may not possess this value and still remain within the limits of business ethics. It is values, therefore, that vary among managers in an organization and such a variance may be a source of conflict at the time of business strategy formulation and implementation.

Managers have to reconcile divergent values and modify values, if necessary. A typical situation of value divergence may arise while setting objectives and determining the precedence of different objectives. One group of managers (may be a coalition) is interested in production-oriented objectives—standardization and mass production—while another group may stress marketing-related objectives—product quality and variety, small-log production, etc. These interests may be legitimate in the sense that they arise from their functional bias. It is for the chief executive to reconcile the divergent values. Obviously, this can best be done in the light of strategic requirements and environmental considerations.

Modification of values is frequently required for business strategy implementation. A particular business strategy, say of expansion, may create value requirements such as stress on efficiency, risk-taking attitude, etc. Implementation may be sub-optimal if existing values do not conform to these requirements. In such cases, modification of values is necessary. But what was said of corporate culture is true for values too; they are difficult, if not impossible, to change. A judicious use of politics and power, redesigning of corporate culture, and making systematic changes in organizations can help to modify values gradually.

Values, Ethics and Business Strategy

Personal values and ethics are important for all human beings. They are especially important for business managers as they are custodians of immense economic power vested in business organizations by society. Having personal values by managers is one thing but is it right to let them affect the considerations for strategy formulation and implementation? This is a tricky question. A more relevant question is: Can managers prevent their personal values affecting business strategy formulation and implementation?

Christensen and others attempt an answer: “Executives in charge of company destinies do not look exclusively at what a company might do or can do. In apparent disregard of the second of these considerations, they sometimes seem heavily influenced by what they personally want to do”. Guided by this, it can be added that “purity of mind”, can come only from having the “right connection between values, ethics and strategy. It is imperative that executives have to take business decisions not only on the basis of pure economic reasons but have also to consider values and ethics”.

“Using ethical considerations in strategic decision-making will result in the development of most effective long term and short term strategies. Specifically, ethical criteria must be included as part of the strategic process in before-profit decisions rather than after-profit decisions in order to maximize corporate profits and improve strategy development and implementation”.10

Why Should Businesses Act Ethically?

An organization has to be ethical in its behaviour because it has to exist in the competitive world. We can find a number of reasons for being ethical in behaviour, few of them are cited below: Most people want to be ethical in their business dealings. Values give management credibility with its employees. Only perceived moral uprighteousness and social concern brings employee respect. Values help better decision making. There are a number of reasons why businesses should act ethically:

  • To protect its own interest
  • To protect the interests of the business community as a whole so that the public will have trust in it
  • To keep its commitment to society to act ethically
  • To meet stakeholder expectations
  • To prevent harm to the general public
  • To build trust with key stakeholder groups
  • To protect themselves from abuse from unethical employees and competitors
  • To protect their own reputations
  • To protect their own employees
  • To create an environment in which workers can act in ways consistent with their values.

Besides, if a corporation reneges on its agreement and expects others to keep theirs, it will be unfair. It will also be inconsistent on its part, if business agrees to a set of rules to govern behaviour and then to unilaterally violate those rules. Moreover, to agree to a condition where business and businessmen tend to break the rules and also they can get away with it is to undermine the environment necessary for running the business.

Hard decisions which have been studied from both an ethical and an economic angle are more difficult to make, but they will stand up against all odds, because the well-being of the employees, public interest, and the company's own long-term interest and those of all the stakeholders have all been taken into account.

Ethics within organizations is a must, as only then it can be conveyed through the activities they perform. Ethics should be initiated from the top management to the bottom of the hierarchy. “Ethical behaviour starts at the top. Before a company can expect to be viewed as ethical in the business community, ethical behaviour within its own walls too and by employees is a must, and top management dictates the mood. Ethical behaviour of the leaders of an organization will inevitably set the tone for the rest of the company-values will remain consistent. Further, a well-communicated commitment to ethics sends a powerful message that ethical behaviour is considered to be a business imperative.11 If the company needs to make profits and also wants to have a good reputation, it must act within the confines of ethics. The ethical communication within the organization would be a healthy sign that the company is marching towards the right path. Internalization of ethics by the employees is of much importance. If the employer has properly internalized ethics, then his or the organization's activities will have ethics in it.

Ethical Decision Making

Ethical decision making is a very tough prospect in this dog-eat-dog world. However, in the long run all will have to fall in and play fair. The clock is already ticking for the unscrupulous corporations. In this age of liberalization and globalization, the old dirty games and unethical conduct will no longer be accepted and tolerated.

Norman Vincent Peale and Kenneth Blanchard in their book, The Power of Ethical Management, have prescribed some suggestions to conduct ethical business.

  • Is the decision you are taking legal? If it is not legal, it is not ethical.
  • Is the decision you are taking fair? In other words, it should be a win-win-equitable risk and reward.
  • The Eleventh Commandment—“Thou shall not be ashamed when found”, meaning when you are hauled up over some seemingly unethical behaviour, if one's conscience is clear, then there is nothing to be ashamed of.

Organizations have started to implement ethical behaviour by publishing in-house codes of ethics which are to be strictly followed by all their associates. They have started to employ people with a reputation for high standards of ethical behaviour at the top levels. They have started to incorporate consideration of ethics into performance reviews. Corporations which wish to popularize good ethical conduct have started to reward ethical behaviour. Codes promulgated by corporations and regulatory bodies continue to multiply. Some MNCs like Nike, Coca-Cola, GM and IBM and Indian companies like ICICI, TISCO, Infosys, Reddy's Lab, NTPC, ONGC, Indian Oil and several others want to be seen as “socially responsible” and have issued codes governing all types of activities by their employees. SEBI, the Indian capital market regulator, CII and such organizations representing corporations have issued codes of best practices and enjoin their members to observe them. These normative statements make it clear that corporate leaders anxious for business growth should not make plans without looking at the faces and lives of those oppressed by poverty and injustice. In fact, today managers and would-be entrepreneurs are groomed to be ethical and socially responsible even while being educated. The Indian Institutes of Management (IIMs) and highly rated B-schools like Xavier Labour Relations Institute (XLRI) and Loyola Institute of Business Administration (LIBA) have courses in their curriculum and give extensive and intensive instruction in business ethics, corporate social responsibility and corporate governance. Many corporations conduct an ethics audit and at the same time, they are continuously looking for more ways to be more ethical.

ETHICAL CHALLENGES IN THE CHANGING BUSINESS ENVIRONMENT

Companies these days respond to the changing business environment by adopting new and effective tools to communicate their ethical culture. The fast-changing external environment of business necessitates positive changes in the approach of the response of individual organizations. The change that is created by information and technological explosion is such that organizations cannot resist changes any more. With these changes, several ethical issues have to be faced and solved to the satisfaction of all stakeholders. Owing to the increasing shift in the business growth, most of the organizations tend to give more powers to the lower levels of the organization leading to decentralization of powers and decision making. The process of decentralization leads to a number of ethical issues in the organization. Conflicting goals of the individual and of the organization are the root cause of several unethical practices. “As the nature of business competition changes, companies are increasingly involved in a web of partnerships and strategic alliances with other firms and with suppliers. This has raised new and complex ethical challenges especially those around conflicts of interest, and has created the potential for damaging ethical decisions to increase. The sheer volume of information gathered from partners, purchasers and competitors can lead to unethical or even illegal use of proprietary information”. When such conflicts of interest arise, companies have to solve them through ethical practices alone; otherwise in the long run they will not be able to survive in the modern fiercely competitive world.

The ethical implications of a firm's behaviour in a fast-changing business environment were considered by McCoy who thought ethics to be the core of business behaviour. He states: “Dealing with values requires continual monitoring of the surrounding environment, weighing alternative courses of action, balancing and (when possible) integrating conflicting responsibilities, setting priorities among competing goals, and establishing criteria for defining and evaluating performance. Along with these goes learning ways to bring this ethical reflection directly and fully into the processes by which policy is made, implemented, and evaluated. Increasingly, skills in dealing with values as integral components of performance and policy-making are being recognized as central for effective management in a society and a world undergoing rapid change”.

Benefits of Managing Ethics in the Workplace

The following benefits accrue to an enterprise if it is managed ethically:

  1. Attention to business ethics has substantially improved society: Establishment of anti-trust laws, unions and other regulatory bodies has contributed to the development of society. There was the time when discriminations and exploitation of employees were high, the fight for equality and fairness at workplace ended up in establishing certain laws which benefitted the society.
  2. Ethical practice has contributed towards high productivity and strong teamwork: Organizations being a collection of individuals, the values reflected will be different from that of the organization. Constant check and dialogue will ensure that the value of the employee matches to the values of the organization. This will in turn result in better cooperation and increased productivity.
  3. Changing situations require ethical education: During turbulent times, where chaos becomes the order of the day, one must have clear ethical guidelines to take right decisions. Ethical training will be of great help in these situations. Such training will enable managers manning corporations to anticipate the situations and equip themselves to face these firmly.
  4. Ethical practices create a strong public image: Organizations with strong ethical practices will possess a strong image among the public. This image would lead to strong and continued loyalty of employees, consumers and the general public. Conscious implementation of ethics in organizations becomes the cornerstone for the success and image of the organization. It is because of this ethical perception that the employees of TISCO and the general public protested in 1977 when the then Minister for Industries in the Janata Government, George Fernandes, attempted to nationalize the company.
  5. Strong ethical practices act as an insurance: Strong ethical practices of the organization are an added advantage for the future function of the business. It would benefit the organization in the long run if it is equipped to withstand the competition.

Characteristics of an Ethical Organization

Mark Pastin in his report, The Hard Problems of Management: Gaining the Ethical Edge, provides the following characteristics of ethical organizations12:

  1. They are at ease interacting with diverse internal and external stakeholder groups. The ground rules of these firms make the good of these stakeholder groups part of the organization's own good.
  2. They are obsessed with fairness. Their ground rules emphasize that the other persons' interests count as much as their own.
  3. Responsibility is individual rather than collective, with individuals assuming personal responsibility for actions of the organization. These organizations' ground rules mandate that individuals are responsible to themselves.
  4. They see their activities in terms of purpose. This purpose is a way of operating that members of the organization highly value. And purpose ties the organization to its environment.

There will be clear communications in ethical organizations. Minimized bureaucracy and control paves the way for sound ethical practices.

Recognizing Ethical Organizations

There are certain characteristics by which we will able to identify an ethical organization:

  1. On the basis of corporate excellence: Corporate excellence mainly centres on the corporate culture. Practice of such values constitutes the corporate culture. Values of the organization give a clear direction to the employee. Values are found in the mission statement of the organizations. Often these values remain as a principle and are never put into practice. Only the practised values create the organization culture. When values act in tune with the goals of the organization, we call it the corporate culture of that organization. Often we see conflicting interests between the value and the organizations' goal. Organizations must eradicate such impediments to be an ethical organization.
  2. In relation to the stakeholders: Meeting the needs of stakeholders by the activities of the managers determine whether the organization is ethical or not. The top management represents the stakeholders and every decision taken must satisfy the needs of the stakeholder. It need not be stressed here that it was the stakeholders' pressure that has been instrumental in bringing ethical issues into the centre stage of corporate agenda. Consumers in most developed societies want corporations to demonstrate ethical responsibility in every area of their functioning and impacting on treatment of employees, the community, the environment, etc. Companies have been prompted to change their way of thinking and working so that ethical issues and corporate responsibility become an integral part of their business. The management while taking decisions must see that the stakeholders enjoy the maximum benefit of that decision. For example, Marico, the makers of Parachute Oil, discovered a harmless tint in the oil from one of its production lines. The company withdrew the batch from the market, shut down the production line, but kept the workers on payroll and involved them in the investigation of the cause. Shortly, the workers located the cause, rectified it and resumed normal production.
  3. In relation to corporate governance: Managers are only stewards of the owners of the corporate assets. Thus, they are accountable for the use of the assets to the owners. If they perform well in the prescribed manner, then there would not be much question of corporate governance. Such behaviour of the top managers would generate ethical practices or at least would encourage ethical practices in the organization. If only the top management is paid on the basis of their performance, this approach would work.

Case 30.1 Satyam Computer Services Limited*

A brief history

Established on 24 June 1987 by B. Ramalinga Raju and his brother-in-law, D. V. S. Raju, Satyam Computer Services Limited was incorporated in 1991 as a public limited company. In a short time, it became a leading global consulting and IT-services company spanning 55 countries. During its heyday, it was ranked as India's fourth largest software exporter, after TCS, Infosys and Wipro, and was one of the few Indian IT services companies listed on the New York Stock Exchange (NYSE). The 1990s, an era of considerable growth for the company, saw the formation of a number of subsidiaries, including Satyam Spark Solutions and Satyam Infoway (Sify)—the first Indian Internet company to be listed on the NASDAQ.

Satyam acquired a lot of businesses and expanded its operations to many countries and signed MoUs with many multinational companies in the early 2000s. The company signed contracts with numerous international players such as Microsoft, Emirates, TRW, i2 Technologies and Ford, claiming the privilege of being the first ISO 9001:2001 company to be certified by BVQI, and earning the reputation of a global IT company by opening offices in Singapore, Dubai and Sydney. In 2005, it acquired a 100 per cent stake in the Singapore-based Knowledge Dynamix and 75 per cent stake in London-based Citisoft Plc. Satyam was a company on the fast track to success and earned for itself a name in consulting in several key areas, from strategy to implementing IT solutions for customers.

What went wrong with Satyam?

The success-run of the company was halted rather abruptly in early January 2009, when Satyam promoters resolved to invest the company's funds in buying stakes for an amount equivalent to USD 1.6 billion against their book worth of only USD 225 million in two firms, Maytas Properties and Maytas Infra Limited, founded by chairman Ramalinga Raju's sons. In response to the board of directors' decision that such a move would amount to misuse of shareholders' funds, the company's promoters said that the decision did not call for the approval of the stockholders. However, a backlash in the market prompted the promoters to beat a hasty retreat, with the board annulling its earlier decision. Following this, the company's stocks suffered severe mauling both at the Bombay Stock Exchange (BSE) and the NYSE, reflecting the unease and the anger of the investor community.

On 7 January, 2009 Ramalinga Raju confessed to massive fraud leading to the company's stock crashing by more than 80 per cent on a single day. Raju then resigned as the Chairman of Satyam after admitting to major financial wrongdoings, involvement in inflating the profits of the company “for the past couple of years”. As a result of the revelation of the sensational fraud of about INR 80 billion by its promoters, the price of Satyam shares dived from INR 178.95 on 6 January 2009 to INR 3.80 before closing at INR 4.25 on 8 January 2009. Raju was said to have falsified accounts, created fictitious assets, padded the company's profits and cooked up the bank balances, all the time keeping his employees and the board of directors in the dark. In his letter to the Satyam Board of Directors, Raju wrote candidly: “It was like riding a tiger, not knowing how to get off without being eaten!”1 In the next two days, the Government of India arrested Ramalinga Raju and his brother and dissolved the Satyam board. On 19 January, 2009 “finding an apparent ‘nexus’ between events taking place in SCSL and Maytas Properties Ltd and Maytas Infra Ltd, the government … expanded the scope of investigations being undertaken by the Serious Fraud Investigation Office (SFIO)”.2

Why did Raju confess to the crime suddenly?

It is intriguing as to why Raju confessed in early January 2009 to a crime which he presumably had been committing continually, in various forms, for quite some time. It now appears that he was forced to make a confession as a result of whistle blowing by one of the company's former associates. According to a 14,000-page report of the SFIO submitted to the government, an ex-insider, claiming to be a former senior executive in Satyam associated with its contract with the World Bank, under the pseudonym Jose Abraham, acted as the whistle-blower. His e-mail to a Satyam board member triggered a chain of events that ended in Raju's decision to confess to the financial crime. This person had first written to Krishna G. Palepu, one of the company's independent directors, on 18 December 2008—a day after Raju was forced to abort Satyam's plans to buy the two family-owned companies—that Satyam did not have any liquid assets, and this fact could be independently verified from its banks. This information spread like wildfire with Palepu forwarding the mail to the other directors and key people, including S. Gopalakrishnan of PricewaterhouseCoopers (PwC), Satyam's statutory auditor. A copy of the e-mail was also forwarded to Ramalinga Raju, who had been then receiving calls from members of the board's audit committee. The SFIO report added that Raju discussed the issue with the company's CFO and vice president for finance, G. Ramakrishna, between 25 December, 2008 and 7 January, 2009, presumably to devise a plan to hide the colossal fraud.

SFIO's attempts to establish contact with Jose Abraham failed. However, on the basis of the SFIO report, criminal action was initiated against Ramalinga Raju, Rama Raju and Vadlamani Srinivas; S. Gopalakrishnan and Srinivas Talluri of PwC; and two other company finance managers, D. Venkatapathy Raju and C. Srisailan.

According to the investigation report, the falsification of the company's accounts began in the financial year 2001–02 after there was an informal meeting between Ramalinga Raju, his brother Rama Raju and Srinivas, apart from G. Ramakrishna. The scope of the falsification of accounts, which was around INR 2.34 billion in 2001–02, skyrocketed to INR 54.22 billion by 2007–08 and INR 73.33 billion by late-September 2008. But after the unearthing of several hidden records, the CBI, by November 2009, pegged the figure at more than double the amount, as shown in their additional charge sheet.

The modus operandi

Using cyber forensic techniques, the CBI has unearthed the modus operandi of the Satyam fraud in which the company created false invoices to show inflated sales by SCSL. Investigations revealed the use of fabricated invoices to artificially hike sales and the amounts shown as receivables in the books of accounts, thereby, inflating the company's revenues. According to CBI sources 7,561 invoices worth INR 51.17 billion were found hidden in the Invoice Management System (IMS).3

Invoices were generated at SCSL through a regular application flow. This had a series of applications such as the Operational Real Time Management (OPTIMA) for creating and maintaining projects, Satyam Project Repository (SPR) for generating the project ID, an application to key in the main hours put in by the employees called Ontime and a Project Bill Management Systems (PBMS) for generating the billing advice based on the data received from Ontime and the rates agreed upon with the customer. In addition, the regular process flow could be bypassed to generate invoices directly in IMS using Excel Porting. The accused had entered 6,603 of these, amounting to INR 47.46 billion. The computer logs relating to both the IMS application and the computer network of the SCSL were studied. This study was matched with the company's access control swipe card data. The individuals who generated and hid these invoices were identified. The computer server where these allegedly incriminating electronic records were stored was also identified, and the records retrieved. Apart from all these misdeeds, Ramalinga Raju and his associates indulging in crimes against their investors and other stakeholders have forged board resolutions and unauthorizedly obtained loans and advances to the tune of INR 12.2 billion, according to the latest CBI charge sheet. But there were no entries in the company's account books reflecting these unauthorized loans. “This money is in addition to the unaccounted INR 12.3 billion that Raju claimed to have been infused into Satyam by promoters of 37 front companies floated by Raju. Even in this case, there were no entries in their account books”.4

Raju and his accomplices in the Satyam fraud had resorted to a criminal breach of trust and falsified accounts to the tune of another INR 1.8 billion by inflating prices pertaining to the acquisition of shares of Nipuna services Ltd, the ITes arm of Satyam. The CBI also alleged that the fraudsters garnered INR 2.3 billion in the form of dividends on the highly inflated profits. The CBI has stumbled on more evidence that Raju and his accomplices had created fake customers and generated fake invoices against these customers to inflate revenues to the tune of INR 4.3 billion.5

The CBI has further, for the first time, charged in November 2009, the disgraced Satyam founder with siphoning off money from the company to tax havens across the globe. Charges of fund diversion to other countries have surfaced after the CBI team visited other countries to probe allegations about Raju having siphoned off money to tax havens and then having re-routed it back to India to pursue his pet passion, buying of more and more lands. “The re-routing of funds was done through European nations and was shown as investments in nearly 300 fictitious companies floated in the names of Raju's relatives”.6

Money laundering

The Enforcement Directorate of the Income Tax Department has decided to register a case against Satyam and its founder-chairman for alleged money laundering. The ED claims to have found prima facie evidence against Raju and others of violating the Prevention of Money Laundering Act.7

CBI's charge sheet has been filed under Sections 120-B, 420, 419, 467, 471, 477-A and 201 of Indian Penal Code that refer to offences of criminal conspiracy, cheating, cheating by impersonation, forgery of valuable security, forgery for the purpose of cheating, using a forged document as genuine, falsification of accounts and for causing disappearance of evidence.

The charge sheet was also filed against three senior finance executives of Satyam: G. Ramakrishna, vice-president, D. Venkatapathi Raju, senior manager, and C. Srisailam, assistant manager. The three were arrested and sent to judicial custody.8 The supplementary CBI charge sheet field on 24 November 2009 confirms money laundering by Ramalinga Raju and his cohorts. It affirms these men diverted funds obtained by manipulation of accounts to tax havens and were later on brought back to India to buy lands.

The public prosecutor in the Satyam case said INR 12.5 billion at the rate of INR 200 million per month was siphoned off from Satyam by Raju over a period of many years. The diversion of the funds was routed mainly through Ramalinga Raju's brother, Suryanarayana Raju and his mother, Appala Narasimha. In all, there were over 400 “benami” land deals running into several thousands of acres. Of these, the maximum were in Ranga Reddy district and were purchased through Akula Rajaiah, a well-known real-estate broker in the district.9 According to the latest charge sheet filed by the CBI on 24 November 2009 in a Hyderabad city court, “A total of 1,065 properties whose documented value is INR 3500 million have been identified and these include around 6,000 acres of land, 40,000 square yards of housing plots and 90,000 sq. ft of built-up area.”10

Insider trading

Satyam investigators have uncovered “systemic” insider trading in SCSL.11 Investigations into the multi-billion fraud in Satyam by the Andhra Pradesh police and Central agencies have confirmed that the promoters had indulged in insider trading of the company's shares to raise money for building a large land bank. It appears Ramalinga Raju and others made a concerted effort to showcase Satyam as a world leader in IT industry by inflating profits so that its share prices surged up. They invested the money earned by selling their shares to buy lands. The prosecution told the trial court that Ramalinga Raju disposed of 92,000 shares in a single transaction and that this was not possible without the connivance of the former CFO, Srinivas Vadlamani. The investigations also established the existence of fictitious fixed deposits in banks to the tune of INR 3.3 billion by forging fixed deposit receipts. Besides, the Income-Tax Department detected a fund flow of about INR 200 million from the Provident Fund and tax deductions of Satyam employees to the Rajus.12

As per the transaction records, CFO Srinivas Vadlamani, has been the most active in offloading the shares. Srinivas offloaded 92,358 shares in two instalments in September 2008. Ram Mynampati, president of Satyam and a member of the board, also offloaded 80,000 shares in three instalments in May and June 2008.13 Interestingly, during this time, none of the top management team of Satyam has purchased its shares. Instead, it is foreign institutional investors who had purchased them.

The heavy selling of shares by the Satyam bigwigs in September 2008 was initially attributed to the developing uncertainty in the economic scenario. However, placed in the larger perspective, the sale could be a case of insider trading. The trend accentuated in December 2008 when 28,500 shares of the company were sold by its senior officials. In May, 250,000 shares were sold, while September accounted for sales of 153,000 shares. The most recent sell-out was done by A. S. Murthy, chief information officer, who sold 21,000 shares between 12 and 15 December 2008.

Sources at the SFIO revealed to the Press that several institutional investors dumped shares in the firm on “large scale” up to 2 days before Ramalinga Raju confessed to “wildly” inflating the company's assets and profitability by around USD 1.7 billion. Most of the sales seemed to have taken place after Satyam failed in the bid to acquire Maytas Infra and Maytas Properties. He later admitted that these deals had been a last-ditch attempt to replace fictitious assets on Satyam's books with real ones. It added that the SFIO had worked with experts from the SEBI to determine whether insider information was used in the share deals.

The role of “independent” directors

According to SEBI, independent directors are meant to protect the interests of the non-promoter shareholders and help promote the cause of corporate governance. At Satyam, whether these directors were “independent” is questionable in view of the fact that each had been allotted significant stock options equivalent to at an unbelievable strike price of INR 2 per share (as against the then market price of INR 500 per share). In addition, all the non-executive directors also earned handsome commissions during 2007–08, as reflected in Satyam's audited results. Table 30.1 shows the details of Satyam's audited results for 2007–08.

 

Table 30.1 Satyam's Sumptuous Gift to Its Non-executive Directors

Non-executive Directors No. of Options Commission (INR in millions)
Krishna Palepu
10,000
1.2
Mangalam Srinivasan
10,000
1.2
T. R. Prasad
10,000
1.13
V. P. Rama Rao
10,000
0.1
M. Rammohan Rao
10,000
1.2
V. S. Raju
10,000
1.13
Vinod Dham
10,000
1.2

Sources: Satyam's Balance Sheet for 2007–08, Satyam Computer Services Limited, Hyderabad.

How can directors who had enjoyed such a huge largesse from the company's promoters be expected to be “independent”? The idea of giving stock options to the independent directors, was perhaps, an intelligent ploy by Raju to successfully implement his plot at Satyam, with little resistance from the so-called independent directors, to whom, he was supposed to report to. It is disturbing that highly respected persons like T. R. Prasad and the former dean of the Indian School of Business, Rammohan Rao received stock options and commissions from Satyam, without wondering how this was acceptable to their status of independent directors.

Satyam's scam is one more proof that the mere compliance of SEBI's rule of the minimum number of independent directors does not guarantee ethical practices. The concept of independent directors, which is relatively new in corporate history inasmuch as it was suggested only in 1940s in the USA to protect the mutual fund investors, does not seem to be a safeguard against frauds that corporate entities are engaged in. There are several instances to prove that the mere existence of independent directors in the boards of companies does not ensure ethical practices, the most prominent one being that of Enron. “Enron had 80 per cent of its board consisting of independent directors, while Tyco had 65 per cent and World com 45 per cent of such outside directors, and yet all of them had collapsed due to fraud and malfeasance”.14 There is no statistical relationship between board independence and financial performance of organisations, as found out by Dalton et al. through a metaanalysis of 54 studies of board independence.15

In an interesting postscript to the Satyam conundrum, seven former erstwhile independent directors of the company that included Krishna Palepu and M. Rammohan Rao pleaded that the investor lawsuits in the United States be dismissed since there were no specific allegations against them and these suits “fail to allege an intent to defraud as required by US securities law”.16

Corporate history of the past decade has more than clearly shown that independent directors have not served their purpose. From this case, it is clear that Indian corporate regulation is inadequate, and its enforcement pathetic.

Auditing failure

There are many observers who opine that Satyam's scam is primarily due to audit failure. An auditor is a representative of the shareholders, forming a link between the government agencies, stockholders, investors and creditors. The objective of an audit of financial statements is to enable an auditor to express an opinion on financial statements which are prepared within a framework of recognized accounting policies and practice and relevant statutory requirements.17

The choice of PwC as auditors for Satyam, especially, has been questioned since they had proved themselves to be untrustworthy in the past both in India and USA.

In Satyam's case, in January 2009, the CID arrested S. Gopalakrishnan and Talluri Srinivas, partners in PwC, for their alleged involvement in the INR 71.36 billion fudging and manipulation of financial statements, as revealed by Ramalinga Raju. According to T. V. Mohandas Pai, Member of the Infosys Board and Trustee of the IASC Foundation, the Satyam fiasco should be looked at more as an audit process failure and not as an accounting failure. He further said “It is a failure of the auditing process. The auditing process says very clearly that you must ask for an independent confirmation of bank balances from the banks. To me it looks as if it has not been done.18

But this line of arguments is refuted by some auditing experts. For instance, Shankar Jaganathan, author of Corporate Disclosures 1553–2007, argues that: “A defined audit process cannot be a defence against frauds. He goes on to add that just as a low tide reveals the rubbish accumulated in a beach, a falling market will throw up frauds. The longer the bull-run, the higher is the duration of the frauds.”19 In most cases, a successful fraudster would have easily overcome the defined audit process.

In one's attempt to balance these opposite views, one understands there is a wide irreconcilable difference between these two. It is the popular perception that auditors exist and are paid to detect fraud and financial wrong doings of unethical corporate managements. On the other hand, according to Samuel A. Di Piazza Jr, the CEO of PwC, “Generally audits are not designed to detect fraud. They are designed to assess the financial position of a company. While doing audits, we look carefully to see if there are things that appear unusual and yes, at times we may uncover fraud. Material fraud like you had in WorldCom, I agree, generally surfaces in an audit.”20 An auditor is seen as a watchdog and not a bloodhound. In that case the judge held, “He is justified in believing the tried servants of the company in whom confidence is placed by the company.” This approach holds true even today.

As late as 21 November, 2009, the CBI arrested Satyam's “internal audit head V. S. Prabakar Gupta for alleged breach of trust, forgery, cheating and fabrication of accounts… Gupta is charged with knowing that the auditing irregularities were perpetrated in a systematic manner and preventing them from coming into the open”. In Satyam's case, its statutory auditor didn't verify the authenticity of the account-books. Irregularities were noted in PwC's handling of Satyam accounts in 2001, but mysteriously, no probe was conducted. Similarly, a complaint was filed with SEBI by Ramdas Athavale, Member of Parliament in 2003. But under political pressure, this was not followed up.

PwC, which has audited Satyam's accounts since 1991, is thus guilty of grave misconduct and is likely to face punitive action from the Institute of Chartered Accounts of India (ICAI) in due course. Ironically, the ICAI disciplinary council has two members from PWC! As a sequel to all these developments, almost a year after it was rattled by the Satyam scam, PwC announced in early December 2009 that Ramesh Rajan, India Operations' chairman based in Singapore, who was at the helm of affairs when the scam broke out and who was questioned by the CBI in Hyderabad, stepped down prematurely to hand over charge to Gautam Banerjee.21

Cracks in India's corporate governance structures

Above all, the Satyam scam has exposed huge cracks in India's corporate governance structures and system of regulation through the SEBI, Ministry of Corporate Affairs and the SFIO. Unless the entire system is radically overhauled and made publicly accountable, corrupt corporate practices will recur, robbing wealth from the exchequer, public banks and shareholders.22 Raju is estimated to have made INR 20.65 billion by artificially jacking up the price of Satyam's shares and selling his holdings (14 percent of the total). Satyam's CFO Vadalamani Srinivas has said the fixed deposits shown in the books were fictitious.23

There are two different opinions about the Satyam scandal—one, our corporate governance standards are not weak and it was a one-off incident, but on the other hand, there are others who point out to the several questions that remain to be answered. One fails to comprehend as to how a company with global presence and professionals of high standard can deceive themselves that they are not aware of what was going on inside their organization for so long. How can one believe that something as solid as cash and bank balances of the company can be fudged and nobody in the accounts department or finance department was simply aware of it for such a long time? What were the internal auditor, statutory auditor and the audit committee doing? Why were they not ascertaining and reconciling balance from the bank statements considered to be a very basic audit tool? In the Satyam fraud, there are many dimensions like these that are yet to be uncovered….the simple suspicion in the minds of foreign investors would be if this can happen when an international auditor can be as gullible and vulnerable as this, what about Indian auditors?

Many experts in corporate governance, however, believe that the Satyam case should be seen as an aberration of the free-market economy and not as being representative of the Indian corporate governance standards.

Which is bigger: Satyam or Enron?

The Satyam scandal has often been compared to that of Enron by several writers and analysts. However, a close scrutiny of the facts relating to both the companies reveals that there is more dissimilarity, than similarities between the two scams: (i) One similarity between the two companies is like Enron, Satyam too had a board with the required quota of independent directors. Enron, for instance, had 80 per cent of its board consisting of independent directors, one of whom, a distinguished accounting professor, chaired the auditing committee of the firm.24 Likewise, in Satyam's case, Krishna Palepu, one of the seven independent directors on its board, was the Ross Graham Walker Professor of Business Administration and Senior Associate Dean for International Development, at the Harvard Business School.25 A specialist in corporate governance,26 Krishna Palepu was an advocate of tougher auditing rules;27 and (ii) Another similarity between Enron and Satyam has been the nexus the heads of both the corporations established with political bigwigs mainly with the view to currying favours from them. Enron's Chairman Kenneth Lay had established very close personal relationship with both President Bill Clinton and President George Bush and also had donated generously to their election funds. “With the political clout they acquired through hefty political contributions, Enron tried to influence public policies, either covertly or overtly, especially in the areas of business they were operating.”28 Likewise, Ramalinga Raju had developed close liaison with the then chief ministers Chandrababu Naidu and Rajesekara Reddy, who were pitted against each other and were heading parties on the opposite sides of political spectrum. Raju obtained several favours from both of them, managed to get out-of-turn contracts for building gigantic infrastructure projects and acquired huge tracts of public lands at throwaway prices.

But the dissimilarities between the two are more telling: (i) Satyam's is a much bigger scandal than Enron. G. Ramakrishna, former SEBI chairman, holds the view that the Satyam fraud was unique for its scale, the period of its perpetration and the number of people involved. For instance, the amount stolen by insiders from Enron was INR 28.66 million at current exchange rates. In the Satyam case, according to the CBI's charge sheet, a much bigger amount of INR 140 billion was involved. Viewed from the Indian context, Satyam scam is by far the biggest. Even globally, it ranks as the largest self-confessed scam. Also greater are the number of defaulting agencies and their failures;29 (ii) The impact of the Satyam scandal had greater ramifications inasmuch as it adversely impacted its 53,000 employees—a number higher than the 40,000 Enron employees. Though initially it was suspected that Satyam had only 40,000 employees and Raju siphoned off the compensations of the non-existent 13,000 employees, a closer scrutiny of the company's records supported by Provident Fund accounts confirm the fact that the company did have 53,000 employees on its payroll; (iii) The Enron fiasco, besides, was almost a stand-alone incident which affected only the immediate stakeholders of the company, while in the case of the Satyam swindle, the entire IT industry was badly hit just when the global economic slowdown has already been severely hurting it. The World Bank's ban on Satyam, Wipro and Mega-soft for unethical practices further aggravated the industry's difficulties; (iv) Satyam's fiasco has caused a lot of damage to the image, credibility, accountability, and trust of India, Indian Corporate Inc., Indian Outsourcing Industry and the Software Industry in the eyes of the shareholders/stakeholders/public, the likes of which nobody had ever seen and probably would never see. The harm cannot be quantified, the extent of the rot, never imagined, and issues which it has raised and the levels at which it has raised are of gargantuan proportions.

Preventing Satyam-like scams

With the view to tightening the regulations and ensuring regulatory compliance, so as to studiously avoiding the recurrence of scams like Satyam's, the Indian capital market regulator SEBI should follow two distinct approaches—preventive and palliative. Palliative measures should aim at detecting similar cases by introducing new processes and additional verification methods. These proactive measures would help build investor confidence. However, preventive measures are more important as they are likely to be more effective in the long run. The Central Government could introduce a simple and brief Act that makes accounting misstatements criminal and impose tough penalty both financial and imprisonment and entrust its implementation to one specified authority with no possibilities of overlapping. The financial penalty should be reflecting the size of the fraud. With a view to enforcing the law and to expedite justice, special courts could be created.

The Satyam fiasco, as indeed all other scams unearthed earlier, make it imperative that corrective measures need to be taken at the earliest to stem the rot. Corrective action is long overdue if corporations are not to cheat stakeholders and the public. Indian corporate promoters often milk their companies by appointing procurement and distribution agents, by under- and over-invoicing imports/exports, evading taxes, indulging in insider trading, and dressing up balance-sheets. Satyam belonged to this category, which is the normal practice in most brick-and-mortar companies.

In this context, some more corrective steps are possible. More than statutory auditors, we need to set up a Board of Audit which, like the Comptroller and Auditor General of India, is empowered to conduct surprise audit suo moto or on complaints of whistle-blowers. Besides, an auditor should not be allowed to continue for more than 3 years with a company. The Department of Corporate Affairs in consultation with ICAI, ICSI and ICWAI should create a pool of independent directors from amongst citizens of high integrity and prescribe them adequate remuneration. Cross-directorships must be banned. All agent employments must be thoroughly scrutinized. Penalties must be made stiffer. The conviction rate in corporate frauds, currently under a pathetic 5 per cent, must be improved. The law and administration should come down heavily on breach of trust and fraud. If an auditor fails in his duty in India, he now faces a ridiculous penalty of INR 10,000 and a maximum of 2 years imprisonment, whereas the US Sarbanes–Oxley Act prescribes imprisonment for 20 years. The United States has greatly improved fraud detection by reforming audit methods and offering incentives to whistle-blowers. We must learn from all this and acknowledge that deregulation promoted in the name of “trusting” CEOs and creating a “favourable investment climate” is dangerous.30

Conclusion

Tech Mahindra's successful bid for SCSL marks a decisive stage in the ongoing process of salvaging India's fourth largest IT company. The acquirer had to pay initially INR 17.56 billion for 31 per cent stake and another INR11.32 billion later, through the mandatory open offer, to pick up 20 per cent more.

The acquisition would be extremely advantageous for Tech Mahindra, a relatively small player in the software segment with a telecom sector focus. There is considerable scope for reaping the synergies between Tech Mahindra and Satyam. Tech Mahindra is strong in Europe, while Satyam's strengths lie in the United States and parts of Asia-Pacific region. The deal is expected to propel Tech Mahindra into the big league along with Infosys, TCS and Wipro.

In its efforts to revamp the company, Mahindra Satyam has appointed Vineet Nayyar, the erstwhile vice chairman as the whole-time director and the Chairman of the company. It has also appointed former SEBI Chairman, M. Damodaran and Gautam Kaji as additional non-executive directors who will be members of the audit committee, effective from 10 December 2009. The company has further selected Deloitte Haskins and Sells as the firm's statutory auditor for fiscal year ended 31 March 2009 as well as fiscal year ended 31 March 2010.31 The size of the board has been increased to eight comprising four independent directors, including two nominee directors of the Central Government, two non-executive and two whole-time directors.32

Even to a casual observer of the Satyam fiasco, the enormity of the scandal is a great eye opener. Corporate scams and frauds committed against unwary investors have been a regular and almost an annual feature in India. But the scale, magnitude, the reach and impact that the Satyam scam had created is unparalleled in the corporate history of India, and as some keen corporate observers point out, the world itself. That the reckless and “couldn't-careless” swindlers were operating with impunity within the company for so long, notwithstanding the army of professional managers, internal auditors, and independent-directors dominated board of directors, the market regulator SEBI, the Company Law Board, the Department of Corporate Affairs and the system of jurisprudence only go to show with what great disdain the scamsters looked at all these institutions and authorities. There is a perception that most Indians, especially the first generation promoters, hardly make a distinction between a proprietary enterprise and a public limited company in terms of their rights and privileges and the corresponding responsibilities and accountability. It is a fact “that a vast majority of Indian corporations are controlled by promoter families which while owning a negligible proportion of share capital in their companies, rule them as if they are their personal fiefdoms”.33 The idea of a corporation, and the values and principles that should guide its governance have hardly been imbibed by theses promoters. Besides, the growth of corporate culture, not only was implanted much later in India than in the Western countries, but also checkmated by the very same forces that make the emergence of ethical business a difficult proportion in the Indian context. A lax administration, ill-equipped regulatory system and terribly delayed justice delivery process only make things easier for the corporate crooks to make a killing. It is not our case that there are more crooks in the Indian corporate world than found elsewhere, but the overall system here is so conducive and even attractive for them to flourish, rather than make lives difficult for them to continue their trail of crimes.

 

Sources:

1“What Went Wrong with SATYAM?—A Brief Note on Satyam Scam”, http://vandit007.blogspot.com/2009/01/what-went-wrong-with-satyam.html.

2 “SFIO Looking into Satyam, Maytas ‘Nexus’”, The Hindu Business Line, 20 January, 2009.

3 Vinay Kumar, “Satyam Fraud: CBI Reveals Modus Operandi”, The Hindu, Tuesday, 28 April, 2009.

4 ET Bureau Hyderabad, “Satyam Fraud Grows by Rs 1,220 crore”, The Economic Times, 26 November, 2009.

5 “CBI Claims Unearthing Additional Fraud of Rs 4,793 cr in Satyam”, The Hindu Business Line, 25 November, 2009.

6 Sharang Limaye, “CBI: Satyam Funds Diverted Overseas”, Financial Chronicle, 24 November, 2009, http://www.mydigitalfc.com/news/cbi-satyam-funds-diverted-overseas-399.

7 ENS Economic Bureau, “Rajus Gave Fake Papers to Auditors: Ex-CFO to ICAI”, Indian Express, 06 April, 2009.

8 “Satyam Fraud: CBI Files Charge Sheet Against Nine”, http://www.livemint.com/2009/04/07223402/Satyam-fraud-CBI-files-charge.html.

9 Times News Network, “Satyam Fudged FDs has 40,000 Employees: Public Prosecutor”, The Times of India, 22 January, 2009.

10 V. N. Harinath, “CBI: Raju, Others Forged Resolutions”, The Hindu, 25 November, 2009.

11 “Satyam Investigators Uncover ‘Systemic’ Insider Trading”, 21 April, 2009, http://www.bobsguide.com/guide/news/2009/Apr/21/Satyam_investigators_uncover_%22systemic%22_insider_trading.html.

12 N. Rahul, “Insider Trading in Satyam Established”, The Hindu, 14 January, 2009.

13 Surabhi Agarwal, “Satyam Top Honchos Were Selling Shares from April”, The Financial Express, 20 December, 2008.

14 A. C. Fernando, Business Ethics: An Indian Perspective, New Delhi, India: Pearson Education, 2009.

15 D. Dalton, C. Daily, A. Ellstrend, and J. Johnson, “Meta-Analytic Reviews of Board Composition Leadership, Structure, and Financial Performance”, Strategic Management Journal, 19 (1998): 269–90.

16 Agencies, “Ex-Satyam Directors Seek Dropping of US Suits, a Box Item in ‘Satyam Gets Rs 1,230-cr Claims’”, Times of India, 18 November, 2009.

17 A. C. Fernando, Corporate Governance, Principles, Policies and Practices, New Delhi, India: Pearson Education, 2009.

18 “Satyam, an Audit Process Failure: Pai”, The Hindu Business Daily, Saturday, 17 January, 2009.

19 D. Murali, citing Shankar Jegannathan, “A Defined Audit Process Cannot Be a Defence against Frauds”. The Hindu Business Line, 22 January, 2009.

20 Di Piazza, “Samuel A. Jr, CEO, Price Waterhouse coopers, ‘Auditors Are Not Designed to Detect Fraud’”, Economic Times, Chennai, 18 February, 2003.

21 Times News Network, “PwC India chairman Rajan Quits”, Times of India, 8 December, 2009.

22 Praful Bidwai, “Indian Capitalism Has Always had a Criminal Side”, 16 January, 2009, http://www.rediff.com/money/2009/jan/16-indian-capitalism-has-always-had-a-criminal-side.htm.

23 http://www.in.com/news/business/indian-capitalism-has-always-had-a-criminal-side-7614817-48306-1.html

24 The Economist, 13 June, 2002, http://72.14.235.104/search?q=cache:Eob0zhlwT18J:www.anecdotage.com/index.php%3Faid%3D10345+Enron%27s+aduditing+commitment&hl=en&ct=clnk&cd=1

25 Rhys Blakely, “Family Affair Is a Bid Too Far for Indian Investors”, The Times (London) News International, 19 December, 2008.

26 http://www.slideshare.net/nasscom/how-to-make-corporate-boardmore-effective-prof-krishna-g-palepuharvard-business-school} and http://www.nytimes.com/2009/01/12/business/worldbusiness/12outsource.html?_r=1.

27 “Professor Caught Up in India's Enron”, The Boston Globe, http://www.boston.com/business/articles/2009/01/14/professor_caught_up_in_indias_enron/?page=1

28 A. C. Fernando, Corporate Governance, Principles, Policies and Practices, New Delhi, India: Pearson Education, 2009.

29 http://www.in.com/news/business/indian-capitalism-has-always-had-a-criminal-side-7614817-48306-1.html.

30 Praful Bidwai, “Indian Capitalism Has Always Had a Criminal Side”, 16 January, 2009, http://www.rediff.com/money/2009/jan/16-indian-capitalism-has-always-had-a-criminal-side.htm.

31 “Satyam Ends Upaid's $1 bn Row for $70 m”, Times of India, Chennai, 10 December, 2009.

32 “Vineet Nayyar to Head Mahindra Satyam”, The Hindu, 10 December, 2009, http://www.hindu.com/2009/12/10/stories/2009121051491700.htm.

33 A. C. Fernando, Corporate Governance, Principles, Policies and Practices, New Delhi, India: Pearson Education, 2009.

SUMMARY
  • Ethics involves systemizing, defending and recommending concepts of right and wrong behaviour. It is important to clarify what is not ethics. Ethics is different from religion since it applies to all people irrespective of their religious affiliations. Ethics is not synonymous with law. Ethical standards are different from cultural traits. Ethics is also different from feelings.
  • While personal ethics refers to the application of desirable values in everything one does, business ethics is the application of ethical principles of integrity and fairness, and concentrates on the benefits to all stakeholders. Business managers should have integrity, impartibility, responsiveness to public interest, accountability and honesty.
  • In today's world, the business of business is ethical business. While an organization's state-of-the-art technologies and high-level managerial competencies could be of help in meeting the quality, cost, volume, speed and breakeven requirements of the highly competitive global market, it is the value-based management and ethics in its governance that would enable it to establish productive relationship with its internal customers and lasting business relationship with its external customers.
  • To exist and to be successful in a competitive world, business has to be ethical. Moral or ethical behaviour should come from within and should be driven by examples of the top management. Managers have to reconcile divergent values and modify them if necessary. Organizations should work on synergy and delegation which will bring all round progress. Nowadays, companies adopt innovative tools to communicate their ethical culture as a response to the changing business environment. These changes bring in new issues and problems.
  • Several benefits accrue to a firm if it follows ethical practices: it improves society, enhances productivity and team work, provides cause for ethical education, creates strong public image and insures against any pitfalls the firm may face.
  • An ethical organization can be recognized on the basis of its corporate excellence and its relation to the stakeholders it follows: corporate governance, a set of rules that govern the administration and management of companies. Its goalposts are transparency, integrity, full disclosure of financial and non-financial information, and protection of stakeholders' interests. These tenets are as much ethical practice as they are part of corporate governance. It is for these reasons that value-based management and practice of ethics have become imperatives in corporate governance now, and in the foreseeable future. If values are the bedrock of any corporate culture, ethics are the foundation of authentic business relationships.
KEY WORDS
applied ethics ethical challenges ethical organization
insider trading personal ethics professional ethics
reasons of conscience social need of non-injury sustaining business
unethical behaviour values and ethics  
DISCUSSION QUESTIONS

 

  1. What is business ethics? Describe its nature. Is business ethics a necessity?
  2. What are the major ethical issues that business faces today? Discuss them with suitable examples.
  3. Explain what business ethics is, and what it is not.
  4. What is the importance of ethics in business? Give suitable examples.
  5. Explain the role of values in the making of business ethics. How these can be incorporated in working out a business strategy?
  6. What is corporate governance? How can ethics make corporate governance more meaningful?
  7. What benefits accrue to business if ethics is made part of its strategy?
  8. How would you recognize an ethical organization? What are its characteristics?
SUGGESTED READINGS

Andrews, Kenneth R., Ed. Ethics in Practice. Boston, MA: Harvard Business School Press, 1989.

Drucker, Peter F. Management New York, NY: Harper & Row, 1974. Friedman, Milton. “The Social Responsibility of Business Is to Increase Its Profits”, The New York Times Magazine, Sunday, 13 September, 1970. Reprinted in Leube, Kurt R., Ed. The Essence of Friedman. Hoover Press, 1987.

Fritzsche, David J. Business Ethics: A Global and Managerial Perspective, 12. Singapore: The McGraw-Hill companies, Inc, 1997.

Irwin, Terence, Trans. Aristotle, Nicomachean Ethics. Indianapolis, IN: Hackett, 1985.

MacIntyre, Alasdair. After Virtue. Second edition. Notre Dame, IN: University of Notre Dame Press, 1984.

McCoy, C.S., Management of Values: The Ethical Difference in Corporate Policy and Performance. Boston, Mass.: Ballinger, 1985.

Mulla, Zubin. “Corporates in India Cannot Afford to be Ethical”, Management and Labour Studies 28(1) (February 2003).

Novak, Michael. Business as a Calling. New York, N.Y.: Free Press, 1996.

Novak, Michael. The Catholic Ethic and the Spirit of Capitalism. New York, N.Y.: Free Press, 1993.

Novak, Michael. Toward a Theology of the Corporation. Revised edition. Washington, DC: American Enterprise Institute, 1990.

Pieper, Josef. The Four Cardinal Virtues. Notre Dame, IN: Notre Dame University Press, 1966.

Quoted by Drinan, Robert F., S.J., former U S Congressman and Professor at George Town University Law Center “Globalization and Corporate Ethics”. In Tenth JRD Tata Oration of Ethics in Business, XLRI, Jamshedpur, India, 21 December, 2000.

Raj, Rituparna. A Study in Business Ethics, 3. Bombay, India: Himalaya Publishing House, 1999.

Weiss, Joseph W. Business Ethics: A Stakeholder and Issues Management Approach, 7. Orlando, FL: Harcourt Brace College Publishers, 1988.