Chapter 1. Business Ethics: An Overview – Business Ethics and Corporate Governance

CHAPTER 1

Business Ethics: An Overview

INTRODUCTION

The study of ethics has become an important ingredient of the syllabus of management schools in recent years. This is because of ethical issues that have come to the forefront as a result of many well-known failures of corporates. The fraudulent activities of these corporates have resulted in the defrauding of stockholders, consumers, employees, creditors and governments to varying degrees. It has therefore become important that students of B-schools as future managers of business should imbibe ethical values. 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, creditors, and comply with to enact the laws of the land and to protect all these stakeholders.

The word ‘ethics’ is derived from the Greek word ethikos meaning custom or character. The Concise Oxford English 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 covers diverse areas ranging from 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 closest 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 is a branch of philosophy and is considered a normative science because it is concerned with the norms of human conduct, as distinguished from formal sciences such as mathematics and logic, physical sciences such as chemistry and physics, and empirical sciences such as economics and psychology. As a science, ethics must follow the same rigours of logical reasoning as other sciences. Ethics, as a science, involves systemizing, defending and recommending concepts of right and wrong behaviour.1

The principles of ethical reasoning are useful tools for sorting out 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 time of 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 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 might also be called morality, since they reflect general expectations of any person in any society, acting in any capacity. These are the principles we try to instil in our children, and expect of one another without needing to articulate the expectation or formalize it in any way.2 The principles of personal ethics are:

  1. Concern and respect for the autonomy of others.
  2. Honesty and the willingness to comply with the law.
  3. Fairness and the ability not to take undue advantage of others.
  4. Benevolence and preventing harm to any creature.

People are motivated to be ethical for the following reasons:

  1. Most people want to maintain a clear conscience and would like to act ethically under normal circumstances.
  2. It is natural for people to ensure that their actions do not cause any injury, whether physical or mental, to others.
  3. People are obliged to obey the laws of the land.
  4. Social and material wellbeing depends on one’s ethical behaviour in society.
PRINCIPLES OF PERSONAL ETHICS

A profession is a vocation or calling, especially one that involves a specific branch of advanced learning or a branch of science, for example, the profession of a doctor, advocate, professor, scientist or a business manager. A professional is one who is engaged in a specified activity as one’s paid occupation like a salaried business manager who is paid for his specific skill in managing the affairs of the business enterprise he is engaged in.

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; and
  • avoiding potential or apparent conflict of interest.
WHAT IS BUSINESS ETHICS?

Ethics is a conception of right and wrong behaviour, defining for us when our actions are moral and when they are immoral. Business ethics, on the other hand, is the application of general ethical ideas to business behaviour. Ethical business behaviour is expected by the public, it facilitates and promotes good to society, improves profitability, fosters business relations and employee productivity, reduces criminal penalties from public authorities and regulators, 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, competitive pressures on profits, the clash of personal values and business goals, and crosscultural contradictions in global business operations. 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 of ethical behaviour. 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’.3 Business ethics proves that business has been and can be and ethical and still make profits. Until 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 to 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.’4

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 tradeoff between its economic objectives and its social obligations, such as obligations to the society where it exists and operates; to its people for whom it pursues economic goals; to the environment, from where it takes its resources; and the like.’5

Business ethics is based on the principle of integrity and fairness and concentrates on the benefits to the stakeholders, both internal and external. Stakeholders include those individuals and groups without which the organization does not have an existence. It includes shareholders, creditors, employees, customers, dealers, vendors, government and the society.

WHAT IS NOT BUSINESS ETHICS?

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

Ethics is Different From Religion

Though all religions preach high ethical/moral standards generally, 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.

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 United States 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, 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! (The Trends Team, Times of India, Chennai, July 7, 2008). 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.

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.

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 it to be beneficial or if it brings them pleasure, they may make it a habit without feeling any remorse.

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 is not prescriptive and 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; human cloning, for instance.

Ethics Is Not Just a Collection of Values

Values are almost always oversimplifications, 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 sought-after value of employee loyalty. Should employees be loyal to co-workers, supervisors, customers, or investors? Since it may be 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.

CODE OF CONDUCT AND ETHICS FOR MANAGERS

Having gone through the definitions of what is and what is not ethics, let us see now how ethics and values should form the bases of the code of conduct that ought to govern the behaviour of business managers. In the exercise of their duties and responsibilities, managers must observe the following ethical values:

  • Integrity: Integrity is the cornerstone of all values. A business manager should be morally upright. It is this characteristic that distinguishes a professional manager from a mercenary.
  • Impartiality: A manager should look at and treat all aspects of an issue in a fair and unprejudiced manner.
  • Responsiveness to the public interest: Though a manager is paid to serve the interests of the stockholders of the company, public interest is no less important. In fact, managers should consider it as of paramount importance, if they have to be successful in their tasks.
  • Accountability: Accountability is one of the basic characteristics of a good business manager. Business managers are responsible for all their actions and are accountable to all the stakeholders—stockholders, creditors, employees, consumers, government and the society at large.
  • Honesty: A cardinal ethical value that a manager should possess is this quality. Managers should be fair, just and sincere both in character and behaviour. They should not indulge in cheating or stealing and should be free of deceit and untruthfulness.
  • Transparency: Good business managers should be transparent and set standards for others to follow. They should be frank and open. Their actions should be easily discussed and understood by others.

What values are to individuals, ethics is to business.

EVOLUTION OF ETHICS OVER THE YEARS

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 the 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 corporate social responsibility (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.’6 Norman Bowie7 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 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 the 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.’8

Parallel to these academic pursuits, around the time from the 1960s to the 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, that is, those who preferred to select one product over another for environment-friendly reasons. The United States followed with 45 per cent, Australia with 27 per cent, Great Britain with 14 per cent, which within one 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, there was a rise of social issues in business and many business practices came under social scrutiny during this period. 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 can see that business ethics as a field of study and research is a fairly nascent subject.

IMPORTANCE AND NEED FOR BUSINESS ETHICS

Ethics is closely related to trust. Most 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 maintain 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 to numberous examples of companies whose top managements are involved in unethical practices, for example, Enron and WorldCom, in 2002 and a host of others including investment bankers Lehman Brothers and Merrill Lynch in 2008.

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 its due importance, the slogan has taken the form: ‘the business of business is ethical business’. Applying ethics in business makes good sense because it induces others to follow ethics in their behaviour. Ethics is important not only in business but also in all aspects of life. The business of a society that lacks ethics is likely to fail sooner or later.

People as investors and members of civil society are concerned about unethical and anti-social development in organizations. The collapse of the Global Trust Bank, the UTI fiasco and the spat between the Ambani brothers caused concern to the investing and general public. A study of business ethics helps us to unravel the underlying forces—Why these things happen? What are their implications and what are the options available to solve the problems that arose? Business ethics enables us ‘to assess the benefits and problems associated with different ways of managing ethics in organizations’.9 It helps us assess the role of business in contemporary society. Even as business contributes to the growth of the society by offering products and services, enhancing incomes and standard of living, providing jobs, paying taxes to the government and being the facilitator for economic development, its functioning often raises several ethical issues such as pollution, environmental degradation, and corrupt practices. ‘That go to the heart of the social role of business.’10 By enabling people to understand these malpractices and the consequent repercussions, business ethics seeks to improve the welfare of the society by offering a social and political platform for remedial, and sometimes proactive action.

There are thousands of companies which, notwithstanding the poor image business community as a whole has among the public, have succeeded in making profit and enhanced public esteem by following ethical practices in their realm of business. Some of such companies are: Johnson & Johnson, Larsen & Toubro, Wipro, Infosys and Tata Steel. They have gained the trust of the public through ethical practices. In India, the House of Tatas, for instance, adheres to, and communicates key ethical standards in several ways. The Tata Code of Conduct affirms that ‘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 that have governed and shall govern the conduct and activities of companies associating with or using the Tata name and of their employees’.11

SIGNIFICANCE OF BUSINESS ETHICS

Events in corporate America, Europe, and in many emerging economies at the beginning of the new millennium and more recently in the fag end of 2008, have demonstrated the destructive fall-outs 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, WorldCom and Adelphia Communications to get themselves into a mess. In India too, we have had several instances of highly successful corporations like ITC and Reliance getting 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 $1 billion from the company as bribe to government officials.

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 quite 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 does bring profits to the firm. They think that a company may not be in a position to reap the full benefits offered by the business environment if they were to worry about how ethically they should run the organization. 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, the end justifies the means. There are hundreds of CEOs who hold this opinion and act 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.

Real-life situations have shown that use of ethical practices in business does create high returns for companies. 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 own 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 corporation 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 a 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 like 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 conviction on the ethical soundness of their position, their minds 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.

Professionals like Kenneth Lay, Martha Stewart, Dennis Kozlowski or Bernard Ebbers, the CEO of WorldCom who earned themselves disrepute by paying themselves millions of dollars in compensation while their companies were in dire financial straits were certainly aware of what constitutes ethics.12 They were either too blinded by self-interest or simply did not care that they were not following the standards that they had set for their subordinates.

The top management of organizations, who take personal pay cuts in difficult financial times for their organizations are respected by everyone. Companies should have the flexibility of adjusting cost structures during bad times, replace old factories with new ones, or change technology in ways that would require fewer people to do the work. These decisions should be taken after ensuring that those affected are empathized with and are provided adequate and financial support.

Managers may face situations where they are not sure, or are perplexed about the ethical side of their actions. If a company believes that profits are more important than environmental protection, the decision of its manager to halt a process on account of his concern about its impact on the environment might not be appreciated by the company. It is up to the manager to analyse whether the proposed action would be in terms with the goals of the firm and take a decision accordingly.

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 are taught at an early age by parents and educators.

The innate human belief that ethical, moral or good behaviour will find its reward ultimately is deeply ingrained in people psyche. This is demonstrated in stage plays and films where the ‘virtuous’ hero wins 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 also 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.

HONESTY, INTEGRITY AND TRANSPARENCY ARE THE TOUCHSTONES OF BUSINESS ETHICS

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 their managers 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’.13 There should be transparency in operations leading to accountability, which should ensure safety and protect the interest of all stakeholders.

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 business.

Personal values as we have seen earlier, refer to a conception of what an individual or group regards as desirable. A value is a view of life and judgement 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 what the labour law stipulates. Service-mindedness is a value which when cherished in an organization would manifest 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’s exit.

J.R.D. Tata once said this when asked to define the House of Tatas 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 carries 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.’14 These several values that J.R.D. Tata refers to have been derived from the ideals of the founder of the group, Jamsedji Tata.

Business ethics operate as a system of values relating business goals and techniques to meet specific 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. At one end, values and ethics shape the corporate culture and dictate the way how politics and power will be used and, at the other end, clarify the social responsibility in the organization.

A typical dilemma faced by people in business is to decide whether to reconcile the pragmatic demands of work which often degenerate to distortion of values and unethical business practices, or to listen to 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. For instance, many multinational companies (MNCs) in India indulge in some undesirable practices such as resorting to payment of speed money, bribery, use of substandard inputs, evasion of excise duties and corporation taxes, etc., which they would be wary of doing in their home countries because of the stigma and penalty attached to such activities. Besides, the dire need to make a profit in a fiercely competitive environment also makes them indulge in such malpractices.

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 excellent organizations—besides other values—have explicit belief in, and recognition of the importance of economic growth and profits, and are driven by values rather than avarice. It has been possible for Indian companies such as Infosys, Tata Steel, Asian Paints, Bajaj Auto and Wipro to excel on the basis of super-ordinate 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, management’s collusion with union leadership, FEMA violations, insider trading, lack of transparency, lack of integrity and unfair 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.

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 the immense economic power vested in business organizations by society. However, can managers prevent their personal values from affecting business strategy formulation and implementation? This is a tricky question.

It is often observed from failed corporations that management executives while working out their business strategy are guided generally by what they personally want to do, rather than what they have been directed to do by the board, or the company policy in the absence of any direct supervision. As a result, somewhere down the line, the right connection between values, ethics and strategy is lost while their managing business. However, it is vitally necessary that business managers should be guided as much by values and ethics as by economic reasons. 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 take business decisions not only on the basis of purely economic reasons but on ethical and moral values as well.

‘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.’15 This will enable the company to maximize profits and enhance the development of strategy and its implementation.

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) may be 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.

ROOTS OF UNETHICAL BEHAVIOUR

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 think and act in unethical ways. Some of the 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’.16 The statistical data given by Ethics Officers Associationin 1997 show how certain practices or factors contribute to unethical behaviour.17

 

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

 

From the above statistics it is very much evident that conflicting interests lead to most of the unethical practices.

WHY DOES BUSINESS HAVE SUCH A NEGATIVE IMAGE?

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. Even though 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 (the ethical egoist) necessitating systems to ensure that such behaviour is either stopped or detected and remedied.’18

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 righteousness 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 of unethical employees and competitors;
  • to protect their own reputations;
  • to protect their own employees; and
  • 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 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 good of the employees, public interest, and the company’s own long-term interest and those of all stakeholders would have been taken into account.

Ethics within organizations is a must. It should be initiated by the top management, and percolate to the bottom of the hierarchy. Then alone, will the company be viewed as ethical by the business community and the society at large. ‘Further, a well-communicated commitment to ethics sends a powerful message that ethical behaviour is considered to be a business imperative.’19 If the company needs to make profit and to have a good reputation, it must act within the confines of ethics. 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 utmost importance. If the employer has properly internalized ethics, then the activities that individuals or organizations carry out will have ethics in them.

ETHICAL DECISION-MAKING

Ethical decision-making is a very tough prospect in this dog-eats-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 Blanchard20 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—‘Though 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.
HOW CORPORATIONS OBSERVE ETHICS IN THEIR ORGANIZATIONS?

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, Dr 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 of their employees. Securities and Exchange Board of India (SEBI), the Indian capital market regulator, Confederation of Indian Industries (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.

CHANGING BUSINESS ENVIRONMENT AND ETHICAL CHALLENGES

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 response of individual organizations. The change that is created by information and technological explosion is such that organizations cannot resist change any more. With these changes, several ethical issues have to be faced and solved to the satisfaction of all stakeholders. Due to the increasing shift in business growth, most of the organizations tend to give more powers to those at the lower levels of hierarchy 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. Such strategic alliances have brought about complex and hitherto unknown ethical conflicts and have caused newer situations to emerge and challenge ethical decisions. With the huge increase in the availability of information coming from all sources such as partners, competitors and buyers, the possibility of unlawful and even illegal use of proprietary information is indeed enormous. When such conflicts of interest arise, companies have to solve them through ethical practices alone, as otherwise they will not in the long-run 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 McCoy21 who thinks 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.’ Apart from these, there are learning ways that bring this ethical reflection directly and fully into the policy-making processes. Increasingly, value-based skills are being recognized as integral components of performance and policy making and as central for effective management in a society and a world undergoing rapid change.

CORPORATE GOVERNANCE ETHICS

Though the concept of corporate governance may sound a novelty in the Indian business context and may be linked to the era of liberalization, it should not be ignored that the ancient Indian texts are the true originators of good business governance as one important sloka from the Rigveda says, ‘A businessman should benefit from business like a honey-bee which suckles honey from the flower without affecting its charm and beauty.’22

Business ethics and corporate governance of an organization go hand in hand. In fact, an organization that follows ethical practices in all its activities will, in all probability, follow best corporate governance practices as well.

The Phoenix School of Management23 defines corporate governance ‘as a set of policies and procedures that the company’s directors employ in their conduct of the company’s affairs and their relationship with shareholders to whom they are responsible as managers’. The OECD, KPMG and the World Bank conceptualize corporate governance as an entire system with well-defined codes, rules and structures in order to direct and control business and non-business organizations.

There are some others who define corporate governance as the guiding principle that on one hand tries to synthesize the seemingly conflicting goals among the individual, the corporation and the community, and on the other, between the immediate benefits to the corporation such as profits and the secular ‘and lasting substantive social gains’.24 But more commonly, corporate governance is understood as a set of rules that govern the administration and management of companies. It is considered as ‘an entire system with codes, values, rules and structures to control the goals and goal performance of companies; and also as a method by which to evaluate the working of an organization in terms of how rights of various parties are defined and distributed’.25 In all these facets of corporate governance the underlying goalposts are transparency, integrity, full disclosure of financial and non-financial information, protection of stakeholders’ interests. These tenets are as much ethical practice as they are part of corporate governance.

As a public company, it is of critical importance that company’s filings with the regulators are accurate and timely. The CEO and the senior leadership of the finance department bear a special responsibility for promoting integrity throughout the organization, with responsibilities to stakeholders, both inside and outside of the company. A company, well governed in every aspect of internationally accepted corporate governance norms would put in place the following ethical practices26:

  1. Act with honesty and integrity, avoiding actual or apparent conflict of interest in personal and professional relationships;
  2. Provide information that is accurate, complete, objective, relevant, timely and understandable to ensure full, fair, accurate, timely, understandable disclosure in reports and documents that companies file with, or submit to the regulators;
  3. Comply with the laws of the land, rules and regulations set forth by the different layers of governments and those of the regulatory bodies concerned with your business;
  4. Act in good faith, responsibly, with due care, competence and diligence, without misrepresenting material facts or allowing one’s independent judgement to be subordinated;
  5. Protect the confidentiality of the information provided at the workplace and not disclose it to anyone unless authorized or legally bound to do so;
  6. Ensure confidential information made available in the place of work is not used to promote personal benefit;
  7. Share knowledge and maintain skills important and relevant to stakeholders’ needs. ‘Proactively promote and be an example of ethical behaviour as a responsible partner among peers, in the work environment and the community’; and
  8. Achieve responsible use of and control over all assets and resources employed or entrusted.
HOW ETHICS CAN MAKE CORPORATE GOVERNANCE MORE MEANINGFUL
  1. Corporate governance is meant to run companies ethically in a manner such that all stakeholders—creditors, distributors, customers, employees, and even competitors, the society at large and governments—are dealt with in a fair manner.
  2. Good corporate governance should look at all stakeholders and not just shareholders alone. Otherwise, a chemical company, for example, can maximize the profit of shareholders, but completely violate all environment laws and make it impossible for the people around the area even to lead a normal life. Ship-breaking at Valinokkam, near Arantangi in Tamil Nadu, leather tanneries and hosiery units in Tirupur, have brought about too much of environmental degradation, and along with it untold miseries to people in and around their locations.
  3. Corporate governance is not something which regulators have to impose on a management, it should come from within. There is no point in making statutory provisions for enforcing ethical conduct. There had been dozens of violations of SEBI rules, RBI guidelines, etc. when company managements were not inclined to follow them. On the other hand, there had also been several instances where companies had gone beyond these rules to serve stakeholders since the top management preferred them that way.
  4. There are several provisions in the Companies Act, e.g., (i) disclosing the interest of directors in contracts in which they are interested; (ii) abstaining from exercising voting rights in matters they are interested and (iii) statutory protection to auditors who are supposed to go into the details of the financial management of the company and report the same to the shareholders of the company. But most of these may be observed in letter, not in spirit. Members of the board and top management should ensure that these are followed both in letter and in spirit.
  5. There are a number of grey areas where the law is silent or where the regulatory framework is weak. These are manipulated by unscrupulous persons like Ketan Parekh and Harshad Mehta. In the United States, for instance, the courts recognize that new forms of fraud may arise, which may not be covered technically under any existing law and cannot be interpreted as violating any of the existing laws. For example, a clever conman can try to sell a piece of the blue sky. In order to check such crooks, there is the concept of the ‘blue sky’ law. However, such wide-ranging processes are not available to courts in developing countries like India.
  6. SEBI has jurisdiction only in cases of limited and listed companies and is concerned only with their protection. What about the shareholders and stakeholders of other unlisted limited companies that far outnumber listed companies?
  7. The Serious Fraud Investigation Office (SIFO) in the Department of Company Affairs (DCA) has been investigating several ‘vanishing companies’. By 2003, SEBI had identified 229 ‘vanishing companies’—which tapped the capital market, collected funds from the public and subsequently became untraceable. However, thousands of investors have lost their hard-earned money and no agency has come to their rescue so far.

A business organization has to compete for a share in the global market on its own internal strength, in particular on the strength of its human resource, and on the goodwill of its other stakeholders. While its 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 that the organization has to use in its governance. That would enable the organization to establish productive relationship with its internal customers and lasting business relationship with its external customers.

BENEFITS FROM MANAGING ETHICS IN WORKPLACE

Several benefits accrue to an enterprise if it is managed ethically. They are the following:

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 a time when discriminations and exploitation of employees were high, the fight for equality and fairness at workplace ended up in establishing certain laws which benefited the society.

Ethical Practice Has Contributed Towards High Productivity and Strong Team Work

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 the values of the organization. This will in turn result in better cooperation and increased productivity.

Changing Situations Requires Ethical Education

During turbulent times, when 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 those situations. Such training will enable managers manning corporations to anticipate situations and equip themselves to face them squarely.

Ethical Practices Create 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.

Strong Ethical Practices Act as an Insurance

Strong ethical practices of the organization are an added advantage for the future function of the business. In the long run, it would benefit if the organization is equipped to withstand the competition.

CHARACTERISTICS OF AN ETHICAL ORGANIZATION

Mark Pastin27 in his work, The Hard Problems of Management: Gaining the Ethical Edge provides the following characteristics of ethical organizations:

  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 way for sound ethical practices.

RECOGNIZING ETHICAL ORGANIZATIONS

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

On the Basis of Corporate Excellence

Corporate excellence mainly centres on the corporate culture. Values and practice of such values constitute 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 they remain as a principle and are never put into practice. Only the practised value creates the organization culture. When values act in tune with the goals of the organization we call it as 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 identified as ethical.

In Relation to the Stakeholders

Meeting the needs of stakeholders through the activities of the managers determines whether the organization is ethical or not. The top management is the representation of the stakeholders and every decision made 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 in their 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 making 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.

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 as per their performance, this approach would work.

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. And strictly speaking, ethics is not a science.

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.

Prior to 1960, ethics was part of theological discussions. Later on writers like Raymond Baumhart, Richard T. De George, Thomas Donaldson, Patricia Werhane, Vincent Berry and Manuel G. Velasquez contributed their mite to the growth of the subject. Along with academic pursuits, the Church, B-schools and consumer movement also added to the development of business ethics.

In today’s world, business of business is ethical business. With the globalization of business, monopolistic market condition or State patronage for any business organization has become a thing of the past. A business organization has to compete for a share in the global market on its own internal strength, in particular on the strength of its human resource, and on the goodwill of its stakeholders. While its state-of-the-art technologies and high-level managerial competencies of an organization 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. Real-type situations show that use of ethical practices in business creates high returns for companies, for example, Tata Steel and Infosys. Besides, running business ethically is good for sustaining business.

To exist and 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
  • Ethikos
  • Moral values
  • Consumer pressure
  • Regulatory pressure
  • Applied ethics
  • Empirical sciences
  • Personal ethics
  • Reasons of conscience
  • Social need of non-injury
  • Synonymous with law
  • Mercenary
  • Touchstones
  • Collection of values
  • Sustaining business
  • Subterfuge
  • Values and ethics
  • Strategy
  • Unethical behaviour
  • Negative image
  • Ethical challenges
  • Corporate governance
  • Listed companies
  • Ethical organization
  • Corporate governance
  • Listed companies
  • Ethical organization
  • Conflicts of interest
  • Insider trading
  • Credibility
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 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?
FURTHER READINGS

Cowton, C. and Crisp, R., Business Ethics: Perspective on the Practice Theory (New York, NY: Oxford University Press), p. 9.

Donaldson, T. “Values in Tension: Ethics Away from Home,” Harvard Business Review (September–October 1996).

Drinan, R. F., “Globalisation and Corporate Ethics,” 10th J.R.D. Tata Oration on Ethics in Business, Jamshedpur: XLRI, 21 December 2007.

Ferrel, O. C., Fraedrich, J. P., and Ferrel, L. Business Ethics: Ethical Decision Making and Cases, 6th ed. (New Delhi: Bizantra, 2006).

Fritzsche, D. J., Business Ethics: A Global and Managerial Perspective (Singapore: McGraw-Hill, 1997).

India Less Corrupt Than in 2005: Transparency, Deccan Chronicle, Chennai, 7 November 2006.

Lala, R. M., “The Business Ethics of J.R.D. Tata,” The Hindu, 29 July 2004.

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

Raj, R., A Study in Business Ethics (Bombay, Himalaya Publishing House, 1999), p. 3.

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

(This case study is based on reports in the print and electronic media, and is meant for academic purpose only. The author has no intention to sully the image of the corporate or executives discussed.)

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 of 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 e-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.

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 7561 invoices worth INR 51.17 billion were found hidden in the Invoice anagement 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 On time and a Project Bill Management Systems (PBMS) for generating the billing advice based on the data received from On time 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 6603 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 unauthorized 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 (ED) 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 filed 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 1065 properties whose documented value is INR 3500 million have been identified and these include around 6000 acres of land, 40,000 square yards of housing plots and 90,000 square feet 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 two 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 1.1 shows the details of Satyam’s audited results for 2007–08.

 

Table 1.1 Satyam’s Sumptuous Gift Its Non-executive Directors

Non-execitive Directors No. of Options Commission (INR in millions)
Krishna Palepu 10000 1.2
Mangalam Srinivasam 10000 1.2
T.R. Prasad 10000 1.13
V.P. Rama Rao 10000 0.1
M. Rammohan Rao 10000 1.2
V.S. Raju 10000 1.13
Vinod Dhan 10000 1.2

Source: Satyam’s Balance Sheet for 2007–08, Satyam Computer Services Limited, Hyderebad.

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 malfea-sance.’14

There is no statistical relationship between board independence and financial performance of organizations, as found out by Dalton et al. through a meta-analysis of 54 studies of board independence.15

In an interesting postscript to the Satyam conundrum, seven independent directors of the company that included Krishna Palepu and M. Rammohan Rao pleaded that the investor lawsuits in the USA 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. Prabhakar 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 did not 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 per cent of the total). Satyam’s CFO Vadlamani 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 unanswered. 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 are more dissimilarities, 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 confirmed 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; and (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

I 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 mis-statements 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/her duty in India, he/she 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 USA 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

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 had 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 ‘could not-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 these 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.

KEY WORDS
  • Public limited company
  • Software exports
  • Knowledge dynamix
  • Mayt as properties
  • Bombay Stock Exchange
  • NYSC
  • Skyrocket
  • Investor community
  • Modus operandi
  • Project repository
  • Electronic records
  • Criminal breach of trust
  • Falsified records
  • Money laundering
  • Insider trading tax hovers
  • Independent directors
  • Dissimilarities
  • The Satyam fiasco responsibilities and accountability
DISCUSSION QUESTIONS
  1. Trace the genesis and growth of Satyam Computer Services Limited.
  2. What were the factors that led to the phenomenal growth of Satyam Computers? Also discuss the reasons that had to its downfall.
  3. Write short notes on any two of the following:
    1. Money laundering
    2. Insider trading
    3. The role of independent directors.
  4. Critics claim that the Satyam Scam has exposed huge cracks in India’s corporate governance structures and the regulation of Satyam through SEBI. Do you agree with this view? If it is so, suggest measures to remedy the situation.
  5. It is an indisputable fact that the Satyam scam has exposed the weaknesses in the Indian corporate regulatory system. How can we prevent Satyam like scams in future?